INDUSTRY & BUSINESS
Financial reporting: disclosure key issue "When in doubt, disclose," says New York Stock Exchange president, but "what," "when," and "how" still uncertain Corporate financial officers have been getting a lot of guidance and advice lately on the "what," the "when," and the "how" of the disclosure of company information to the investing public. Although there are still many cross-currents among the Securities and Exchange Commission, the courts, the business community, and the financial press, it seems certain that America's 24 million investors will soon be receiving more information than ever before on which to base their stock market investments. Some of these crosscurrents were highlighted at the 37th International Conference of the Financial Executives Institute ( F E I ) in New York City late last month. SEC chairman Manuel F. Cohen told the meeting he hopes that "long delayed," but still controversial improvements in the financial reporting of diversified companies "will soon become a reality." New York Stock Exchange president Robert W. Haack suggested to the 1500 meeting attendees that "when in doubt, disclose" is a good rule of thumb to apply to any uncertainty arising from recent court actions concerning release of corporate information to the public. And the financial editors of the New York Times and the Wall Street Journal both pleaded for greater availability of company officials to the press to fill in the gaping holes so often left in company news releases. On Sept. 4 of this year SEC published amendments it is proposing to its current regulations on the registration of securities. These changes would mean that, for the first time, companies would have to report both sales and earnings for each segment of their operation that contributes 10% or more to the company's total business. The approximate amount of assets employed by each of these segments would also be required as would revenues and earnings from foreign sources, government procurements, and major single customers. Under present regulations, companies have to identify only segments of their business representing 15% or more of the total. And there is no requirement that they give any further financial details of these segments, not even their sales. If these new regulations do go into 24 C&EN NOV. 4, 1968
effect, they will make a lot of difference to the financial reporting of chemical companies. Of the Big Seven chemical producers, only Dow currently reports both sales and earnings by industry segment. Starting with its 1967 annual report, the company breaks out three segments— chemicals/metals, plastics/packaging, and bioproducts/consumer products. Allied, American Cyanamid, Celanese, Monsanto, and Union Carbide break out sales, but not earnings for their major product groups. Of the seven
F E I claims it is in agreement with the objectives of SEC and that it has "a continuing interest in improving financial reporting and full disclosure wherever it can be intelligently accomplished . . . ." But the institute bases its opposition to the proposed SEC amendments on the findings of a research study on the financial reporting of diversified companies completed earlier this year by Dr. R. K. Mautz, professor of accountancy at the University of Illinois. At the New York meeting, chair-
companies, only Du Pont gives no financial breakdown among its major product areas. These proposed SEC changes, however, are not universally liked. FEI, for one, has vigorously protested them in a letter to the commission. It is encouraging its 6700 members to do likewise. The institute claims, among other things, that disclosure of the extra information may be harmful to a company and its stockholders, that this new information could be misleading, that the new 10% cutoff is not supportable, and that the present 15% cutoff should be retained. F E I also claims that company managements should be allowed to separate their companies into realistic components for reporting purposes—instead of the arbitrary breakdown implied by the proposed changes.
man Cohen appeared unimpressed by these and other arguments. He said, "The need for improved disclosure is clear. The feasibility for improved disclosure has been demonstrated." He spoke of a "prompt solution" to this and other reporting problems. One chemical industry financial executive pointed out to C&EN that the commission may be anxious to put the amendments into effect before the new Administration takes over in January. Mr. Cohen argued at the meeting that the amendments are necessary because of the increasing number of acquisitions and mergers involving companies in widely different businesses. This trend is "changing the face of industry in the U.S. and abroad." But all too often the investor is left in the dark when these diversified companies publish financial state-
for abandoning the effort for improved disclosure." He adds that many companies are already voluntarily breaking earnings down into segments and that much more can be done by others. As to the complaints about dropping the limit from 15% of the total business to 10%, he comments that some of these companies are already reporting on segments that account for less than 15%. In dealing with the argument that disclosure of profitability of separate business lines will place a company at ADVICE. New York Stock Exchange president Robert W. Haack suggests that on information disclosure, companies "should lean over backwards" to ensure that no market advantage is created for anyone
CRYPTIC RELEASES. Charles N. Stabler (left), of Wall Street Journal, and Thomas E. Mullaney, of New York Times echo claims that since TGS decision firms issue cryptic releases that give barebones of corporate developments
HOPES. Securities and Exchange Commission chairman Manuel F. Cohen hopes that "long delayed" but still controversial improvements in financial reporting by diversified companies will soon become a reality
ments only on an overall basis. In claiming that one overall earnings figure for such a company is not enough, chairman Cohen told the meeting that corporate earnings, unlike dollars, have a quality as well as a quantity. A dollar per share earned by a wildcat oil company does not have the worth or significance of a dollar per share earned by General Motors. The value of earnings is based on risk, profitability, and growth potential, he explains, and with a highly diversified company these factors cannot be assessed if only a single earnings figure is reported. Mr. Cohen admits that there are problems, such as allocation of indirect costs, in the proposed new disclosure rules. However, he claims, this and other reporting problems "are not insoluble. Nor do they provide a reason
a competitive disadvantage, the uncompromising chairman Cohen, who has been with SEC for nearly 30 years, says that such protests are "similar to those which greeted the required disclosure of sales and cost of goods when the securities acts were adopted and implemented over a generation ago." President Haack of the stock exchange took a similar line of encouraging greater corporate disclosure in discussing the ramifications of the recent appellate court decisions in the Texas Gulf Sulphur case. This decision found that some TGS officials had violated security laws by trading in the company stock without disclosing to the public their knowledge of a major minerals find. In warning against any overreaction by corporate officials to the case, Mr. Haack said any reduction in the flow
of corporate information to the investing public would "constitute a step backward in a century of progress in shareholder relations." One of the key questions involving disclosure is what and when to tell the public about pending corporate developments, such as merger negotiations, new products, expansion plans, and other matters that could influence investment decisions. Mr. Haack stressed at the meeting that the stock exchange takes the position that "once word of a material pending development has gone beyond the top management of a company and their individual confidential advisers, the company takes an unwarranted risk in not making prompt disclosure." According to president Haack, a company should "lean over backwards" to ensure that no market advantage is created for anyone. He adds that "the risks incurred by not disclosing important information which could be expected to materially affect the price of securities are far greater than the risk of disclosure." In deciding what information to disclose, Mr. Haack told the meeting, the acid test is "would you buy or sell securities for your own account on the basis of this information?" In expressing some of the views of the press in its role in getting meaningful company information to the public, Charles N. Stabler, financial editor of the Wall Street Journal, told the meeting that financial executives should be willing to elaborate on the basic facts put out in a company news release. But he noted that since the TGS decision there has been some tendency for companies to issue a cryptic release giving just the bare bones of a corporate development, and then refuse to elaborate on it. Thomas E. Mullaney, financial/business editor for the New York Times, echoed this complaint. He pointed out that most company releases never get into the "why" of a development. He opined that the answer to the "why" behind, say, a drop in earnings or a big expansion is of real importance to shareholders. He also agreed with his WSJ colleague that so far the reaction to the TGS case has been one of greater reticence, not greater disclosure, by companies. NOV. 4, 1968 C&EN
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