Disclosure obligations greater than ever

AIRA CEO Ian Matheson navigates the maze of COVID-19 uncertainty.

As COVID-19 wreaks havoc on global economies and financial markets, boards of ASX-listed companies have another challenge: ensuring their organisation meets its continuous disclosure obligations during a period of high volatility.

ASX Listing Rule 3.1 says: “Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell the ASX that information.”

ASX-listed companies are also required to disclose if their earnings will be materially different from market expectations – a challenging task given COVID-19 uncertainty. The Australian Securities Exchange on 31 March 2020 released a Compliance Update that provides regulatory relief and updated guidance to support listed companies and investors during the COVID-19 pandemic. The Update includes practical guidance on disclosure obligations, including earnings guidance and decisions not to pay a dividend or distribution.

Kevin Lewis, ASX Chief Compliance Officer, said in a statement: ‘ASX is providing this package of temporary relief and updated guidance to assist listed companies manage their disclosure obligations and to help investors remain informed during this challenging time.”

The impact of COVID-19 on the economy has been so great that more than 100 ASX-listed companies had withdrawn their earnings and/or distribution guidance, much of it issued at the half-year FY20 result only weeks earlier, as this story was written.

Others have informed the market of temporary store closures, employee standdowns and other responses to COVID-19.

A small group of companies have announced equity capital raisings to support their balance sheet – an emerging, potentially contentious issue for boards that have to approve capital raisings that can be issued at a large discount to the current share price.

Other investor relationship challenges include: investor briefings and roadshows; annual general meetings; annual reports and other communication that might have to be modified after COVID-19; changing share register composition; and disclosure issues around COVID-19 contraction and fatalities.

As fallout from the 2008-09 global financial crisis showed, companies that breached their continuous disclosure obligations during that crisis were the target of litigation funders and law firms seeking to construct shareholder class actions for aggrieved investors. The Governance Leadership Centre asked Australasian Investor Relations Association (AIRA) CEO, Ian Matheson, about the investor relationship implications of COVID-19 for boards. Here is an edited extract of that interview:

GLC: Ian, how do listed companies balance the needs of stakeholders, who want more information during this crisis, with continuous disclosure obligations?

Ian Matheson: It is not easy. Shareholders and other stakeholders want reassurance that their company has crisis management and business continuity plans in place. They want to know that appropriate risk-management initiatives are being implemented to ensure organisation sustainability.

The S in ESG (environment, social and governance) is incredibly important. Companies have to balance the best long-term interests of shareholders, employees, customers, suppliers and the community in their response to COVID-19 and keep the market informed.

At the same time, it is hard for companies to disclose detailed information on their response because business conditions are changing so quickly and many organisations have low visibility on their outlook.

Overall, we have seen a large increase in the number of company announcements during COVID-19. It is a very challenging period for investor relations professionals.

GLC: What general investor relations advice would you give boards regarding COVID-19?

IM: Boards must be vigilant that the organisation is meeting its continuous disclosure obligations. They must be satisfied that the market is fully informed at all times regarding developments that are material to the company’s share price.

If it has not already, the board should have a strong line of sight to the organisation’s investor relations manager, to ensure market announcements can be made swiftly if needed, and also to gauge feedback from key investors on issues they have regarding the company.

Clearly, providing information is difficult in such a volatile market but companies should err on the side of too much, rather than too little, information.

My advice would be to stick to the facts and draw the market’s attention to them, rather than speculate on the outcome of company initiatives.

GLC: What have been the key disclosure trends so far during COVID-19?

IM: ASX-listed companies began withdrawing their guidance on earnings and/or distributions from mid-February. The trading uncertainty that COVID-19 created meant there was a risk the company could misinform the market if it retained previous guidance.

Many ASX-listed companies, particularly smaller ones, do not provide forward-looking statements in their earnings results, and some companies have confirmed their guidance during this crisis. Overall, there has been a significant increase in guidance withdrawals.

Companies that unfortunately have had to temporarily close stores and stand down workers have disclosed that to the market; others have outlined their broad response on issues such as employee health and safety or changes to their operations.

Face-to-face investor roadshows here or overseas have been postponed or held online. Meetings with the Chair and key institutional investors in the organisation would be by teleconference or videoconference now.

Many companies would be cancelling venue hire for the annual general meeting later this year as they are held online and considering how COVID-19 will affect commentary in their annual report and other communications.

GLC: The Australian Securities and Investments Commission (ASIC) issued guidelines on AGMs on March 20, 2020. How do you think AGMs will change because of COVID-19?

IM: We will see a number of virtual AGMs that meet ASIC’s guidance and hybrid AGMs where a small group (for example, the Chair, CEO and auditor) attend physically, and shareholders watch it, ask questions and vote online.

GLC: Should companies disclose if a member of the board or executive contracts COVID-19?

IM: There is no one-size-fits-all approach. Certainly, if the CEO or Chief Financial Officer is diagnosed with COVID-19, that should be disclosed to the market. So, too, if the Chair or the head of a key committee such as audit, is infected. I would think companies would have to disclose if several directors are infected and the board’s ability to operate is affected.

GLC: What about disclosure of employee fatalities from COVID-19?

IM: The market has very high expectations on disclosure of workplace fatalities, but COVID-19 is a unique issue. It would depend on the circumstances of the fatality. These are terrible disclosure decisions to have to make.

GLC: Do you expect a significant change in share register composition of listed companies and what does that mean for boards?

IM: Boards should pay close attention to their organisation’s share register and ask for reports on it. Extreme volatility in global sharemarkets will influence share-register composition as funds buy and sell stock in response to COVID-19. In Australia, there has been an increase in announcements regarding changes in substantial shareholdings in the past month.

Boards could find the make-up of their company’s ownership has changed significantly during and after this crisis and that the Chair has to communicate with new institutional shareholders. Or that a shareholder who could have intentions to acquire the organisation at a low price through takeover has emerged on the register and its ownership is creeping higher.

GLC: Do you expect boards to be more visible during this crisis as stakeholders look for reassurance on organisation sustainability?

IM: The Chair has a key role in the organisation’s ESG communication to the market, so I would expect he or she to have more meetings with key investors on COVID-19-related issues and be more visible if needed. Generally, I would not expect directors to become more engaged in investor relations activities.

It is important that the CEO and Chair have a co-ordinated approach to investor communication at all times and especially now. Having other directors speaking risks blurring the message.

Boards should understand the organisation’s investor relations strategy during COVID-19 and be satisfied the strategy is appropriate and being implemented.