Joseph W. Bartlett, Council, Reitler Kailas & Rosenblatt LLC
Various attacks are mounted against the boards and managers of U.S. publicly held companies based on alleged deficiencies in the disclosure of financial results, the prosecution’s case buttressed by a emails discovered in the cloud from disgruntled insiders. The legal issues have been analyzed ad infinitum by the media and legal commentators. There is no effort from this corner to add to that enhanced commentary.
One point, however, strikes me as a prudent prophylactic for public companies and their managers who are reporting valuations and other material information to the marketplace, including but not limited to existing shareholders and creditors.
My advice goes along the following lines. Indeed, it is consistent with advice I have given when the issue has had to do with FAS 157 (now Topic 820) valuations in a landscape where there are few bright lines, a large amount of “gray” and reasonable people can disagree reasonably on how valuations, opinions and forecasts should be computed and reported.
Assume a public session with the analysts is on tap for the managers of the company having to do with valuations, forecasts, opinions on current and future operating results, etc. The first place I recommend we look at is the stock disclaimers which one sees today whenever, for example, tax advice is being given. The boiler plate runs:
“Communications from our firm may contain or incorporate federal income tax advice. Under recently promulgated US Internal Revenue Service (IRS) standards, we are required to inform you that only formal, written tax opinions meeting IRS requirements may be relied upon by taxpayers for the purpose of avoiding tax-related penalties. Accordingly, this communication is not intended or written to be used, and it cannot be used, for the purpose of avoiding tax-related penalties under the Internal Revenue Code. Please contact a member of our law firm’s Tax Department if you require a formal, written tax opinion that satisfies applicable IRS requirements, or if you have any other questions regarding federal income tax advice.”
The trick it seems to me for the next generation of managers of companies and assets is to start, in similar fashion, each such conversation or disclosure with a statement to the following effect.
“We are pleased to be able to give you our considered view of the financial condition of Pubco as it currently exists in today’s difficult market, plus its future prospects. Before we, however, express an opinion and open the floor for questions, let me caution all hands that the judgments, opinions and statements you will hear from us, as Pubco’s management, are the product of collective decisions reached after discussion amongst the executives of and advisers to Pubco but do not purport to represent a unanimous view. We have often spirited meetings and discussions amongst ourselves and it is fair to say that, again in today’s difficult market, there is a spectrum of opinion on each conclusion we reach. Thus, there may well be within our organization valuable and knowledgeable employees who take a different view of the current state of play and have expressed their opinions at internal meetings and in internal email traffic. To put a little bit of a humorous, but indeed serious, cast on our give and take, I am confident that there is an email here and there that is quite salty. We have taken those contentions into account and reached what we believe are the best positions, all things considered. But, we do not require our people either to keep quiet and hold their opinions to themselves and/or to fall in line behind the consensus. We encourage spirited discourse inside the organization and want to make sure that everybody has their say on how we go about our business and how we reflect to the marketplace our views on current and future prospects.”
If that caution were announced in public I can see no reason why it wouldn’t be received in the spirit in which it is given. It may, of course, prompt some questions as to who the dissenters are and what they say which, in my view, can be dealt with; indeed, I think of the responses the politicians give to the media when they don’t propose to get into specifics. With that disclaimer, I suggest the chances of a successful prosecution for intentionally misleading the marketplace will become extremely remote particularly if such a display of temporary candor is adopted universally … and, of course, in good faith.