Citation
Jones, E. (1998), "Corporate Communications with Institutional Shareholders: : Private Disclosures and Financial Reporting", Accounting, Auditing & Accountability Journal, Vol. 11 No. 5, pp. 649-651. https://doi.org/10.1108/aaaj.1998.11.5.649.1
Publisher
:Emerald Group Publishing Limited
This research report is informative on a subject which has received little attention and yet is of considerable significance for finance research and particularly for the interpretation of the results of research using event study methodology. An appreciation of the relationship between companies and their institutional shareholders is vital in understanding how companies are valued by stock markets. This study explores that relationship and reveals much, not only about the relationship with institutional shareholders, but also with other private shareholders.
John Holland brings to light the prevalence of a much richer information system for communicating corporate investment and financial strategy to its institutional shareholders than might previously have been supposed.
By looking into the “whites of the eyes” of top management, institutions gain private information about the “quality of management” and management is able to understand the objectives of their institutional shareholders. The result is a reconnection of ownership and control. As part of an internal planning cycle revolving around public disclosures, the corporate strategy of the firm is influenced by its institutional shareholders. There appears to be a “competitive market for reputation and credibility in corporate communications”.
The role of the annual report is noted as being of vital importance as the basis for all supplementary private disclosures. Private and public disclosure interact as the firm strives to develop an “anchor of knowledge” in the market by influencing institutional perceptions and minimizing surprises. In Holland’s model, private disclosure dominates public disclosure. The release of private information to a core of institutional shareholders is designed to create a quick and informed market response to company news and other news which impinges on the company. The company informs the core group of shareholders so that they can then lead the market response.
Chapter 1 considers the prior literature, relevant legislation, the research problem and questions to be addressed by the study. The study used semi‐structured interviews with management at 33 large, UK‐listed companies as the basis for model development. Statements from interviewees are used throughout the narrative to illustrate the communications process. The key questions are:
- 1.
How do companies communicate with their institutional shareholders?
- 2.
How does this information eventually flow through institutional shareholders to the market?
- 3.
Why do companies communicate with their institutional shareholders?
The aims and constraints of the corporate communications process are considered in Chapter 2. The primary purpose of management’s communications with institutional shareholders is to create desirable states of knowledge. The core institutions then inform the wider market and lead share price reactions to news affecting the valuation of the company. Corporate financing and management control aims are fulfilled by the management of the information flow about the company. By providing the core institutions with information, companies hoped to gain greater access to investment capital and obtain institutional support against hostile takeovers. Communication with the core group of institutions was used to create a quick informed response to company news and news impinging on the company. By creating an efficient broadcasting system, the company can improve the current set of market information and ensure the share price reflects the economic reality of the company. Private channels could be used to put management’s interpretation on events and reduce the “ignorance discount”.
Companies recognized that it was difficult to influence share prices in a controlled manner. The market was felt to be driven as much by sentiment as by concrete economic information. Case participants also recognised that more information about the company might reveal greater risk and lower returns.
A number of constraints on the form and content of corporate disclosures are identified. These include the legal restrictions and requirements; Stock Exchange guidance on price‐sensitive information; disadvantage of releasing competitively sensitive information; and prohibitive disclosure costs (management time, cost of producing greater documentation). Voluntarily released information was generally perceived to improve the information set.
Chapter 3 investigates the form and content of the information agenda of meetings with institutional shareholders. Holland identifies four basic components of the communications process ‐ financial reports, formal presentations at key points, one‐to‐one meetings with institutions, and continuous contact with analysts. The chapter considers in detail meetings on a one‐to‐one basis, where the basic message conveyed through the Operating and Financial Review (OFR) is expanded upon. The meetings have formal and informal components. By meeting on a one‐to‐one basis, management is able to look into “the whites of the eyes” of top management and make a judgement about the underlying quality of management. Rules of thumb are used to adapt the disclosure process at the margin and modify private agendas through time. While the information released is voluntary in the private meetings, the contact with core shareholders was considered to be unavoidable.
Chapter 4 lists the costs and benefits of disclosure. There is always a cost‐benefit trade‐off when information is released but the trade‐off was unimportant if corporate financial performance is poor. Companies also assessed the cost‐benefit trade‐off of the institutions.
The two‐way process of corporate communications is considered in Chapter 5. The report identifies a two‐way dynamic exchange affecting corporate strategy and fund management decisions. This process involves thinking ahead by management to clarify corporate strategy and testing of strategic thinking by debate with institutional shareholders. This led to an implicit influence on corporate strategy by the institutions and the creation of a dual knowledge advantage. Ownership and control is effectively reconnected by this process. Holland speculates that this may be one basis for semistrong market efficiency.
Chapters 6 and 7 are devoted to the choice of private or public disclosure (voluntary disclosure) and interactions between private and public information. When information is released voluntarily, i.e. the dissemination is not prescribed by statute or regulation, companies must decide whether to use a private or public channel. This decision is based on limitations of public sources, a comparison of private and public channels, the nature of the information and the view of two channels as a single system. Private disclosure was preferred by case participants due to the institutional relationships.
In the conclusions, the two models considered by the report ‐ a static model and a dynamic model ‐ are summarized and assessed. The static model was based on a set of unifying themes:
- 1.
Aims and objectives.
- 2.
Constraints and degrees of freedom within them.
- 3.
An information agenda.
- 4.
Cost‐benefit analysis.
- 5.
Rules of thumb regarding voluntary disclosure.
- 6.
Disclosure channels employed.
In the dynamic model, private information dominates public information but the two elements combine as part of an interactive communications system. Within this system, a dual knowledge advantage is created for the company and its institutional shareholders.
The conclusion is that future research should seek to explore this dynamic interaction rather than merely focusing on marginal improvements to external reporting and other public disclosure requirements. This findings of this research also suggests a re‐examination of a number of policy issues including the separation of ownership and control, corporate governance and insider trading.
The narrative tends to get a bit repetitive from time to time. The same concepts are reworked in different chapters. The various components of John Holland’s underlying model are, however, drummed home and the reader cannot fail to develop a thorough understanding of the model by the end of the report.
The methodology and research questions are clearly presented, although there may be some potential for self‐selection bias since the respondents were likely to be firms with a better developed communications structure and with a more positive view of the value of corporate communications. This does not detract from the findings or applicability of conclusions.