Guidelines fail to dispel confusion in Square Mile

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The Independent Online
LONDON International Group, maker of Durex condoms and Marigold rubber gloves, must be one of the most unpopular companies on the stock market this weekend, writes William Kay.

Unpopular with other company directors, that is. For when an overzealous LIG executive took it upon himself to phone round some institutional shareholders and stockbrokers' analysts a little over a year ago, he started a sequence of events that has now burdened every quoted company with heavy- handed guidance explaining how - or how not - to deal with analysts, journalists and anyone else who comes prying.

As Tim Clement-Jones, finance director of Kingfisher, put it: 'The guidance is pretty murky. But I would not like mine to be the first company that steps over the line.'

The LIG underling was told by the board to tell analysts and big investors that their profit forecasts for the company were too high. The main reason was LIG's photoprocessing division, which was badly hit by the recession. As the phones were put down, the LIG share price began to fall, ending 22p down at 248p.

In an unusual measure, the Stock Exchange decided last May to make an example of LIG, publicly censuring the company. The rest of the City rightly saw this as heralding a wider crackdown. But many quoted companies and their lawyers reacted in panic, asking aloud what they could or could not say to the outside world without following LIG into the pillory.

So last July, the Stock Exchange pulled together a working party to draw up guidance. Apart from Exchange officials, the committee included representatives of the Hundred Group of Finance Directors, the Association of British Insurers, the Institute of Investment Management and Research and the Institutional Fund Managers' Association. Michael Lawrence, former finance director of Prudential Corporation and since February 1 chief executive of the Exchange, was a member. The result, published last week, has been widely criticised. Peter Cowap, head of compliance at Nomura, said: 'It seems full of platitudes and recommends motherhood and apple pie.'

Mr Clement-Jones pointed out: 'If you cannot nudge or steer, or raise your eyebrow, if analysts are misinformed, the market will not know what to expect. The whole thing is pretty fraught.'

Slaughter & May, the lawyers, added: 'It leaves unclear the circumstances in which companies are not required to announce price-sensitive information to the market. The suggestion that there is in certain circumstances an obligation on companies to correct analysts may have unforeseen adverse consequences.'

But Martin Hall, the Stock Exchange's head of policy and a member of the working party, defended the document, saying: 'There was pressure on us to publish it before the insider dealing law changes on March 1, and there is an international trend towards greater all-round disclosure. This is an attempt to produce the maximum flow of information from companies.'

But while the advice does much to protect company officials from inadvertently breaking the new laws on insider trading and traded securities disclosure, it is surprising how many flaws have survived the six-month deliberation.

The key principle of the guidance is that price-sensitive information - the sort that can move a company's share price - should be sent to the Stock Exchange before anyone else is told, whether they are journalists in a pub or shareholders at their annual meeting.

As far as possible, company officials should confine themselves to directing inquirers to information that is already published, such as the annual report or industry statistics. However, the guidance still seems to leave open the possibility of a repeat of the LIG episode.

The document says: 'If analysts' comments or views appear inaccurate, companies can consider what public information is available to be drawn to their attention.'

While that would deter anything quite as blatant as the LIG exercise, experienced public relations officers will not find it difficult to drop the right sort of hints if they feel that an analyst is forecasting too high or too low.

But perhaps the most bizarre edict is that companies should make 'a proper announcement' if they are approached by journalists with accurate but hitherto unpublished price-sensitive information - otherwise known as a scoop or an exclusive in the newspaper world.

It does not seem to have occurred to the distinguished members of the working party - one of whom is an ex-journalist - that journalists prize such information and are simply not going to share it with a company that might blurt it to the world at large before publication.

As journalists are protected if they do not deal on the information before they publish and companies are legally safe if they are not bothered with prying phone calls, the legal niceties will be observed. Except that newspapers will be deterred from checking facts and companies will have the infinitely more difficult task of putting out bush fires after rumours have been published.

(Photograph omitted)

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