New U.S. legislation causes corporate CEOs to clam up, and the net effect isn't good for investors.

You may not have noticed it but a kind of hush has fallen over the boardrooms. Executives who normally spend a lot of their time on the speaking circuit have clammed up. Corporate news has dwindled to a relative trickle. As a matter of fact, most of the fourth quarter results being released are accompanied by terse comments, even when the numbers are good. For example, Great-West Life’s CEO announced a staggering 76% year-over-year increase in profits and then muttered: “I am pleased”. Many companies are refusing to provide guidance about their prospects and have stated that in future only designated senior managers can speak to the public. Why the sudden shyness? The answer is simple. We now live in the world of Sarbannes-Oxley!

It was not supposed to be like this. After all, the Sarbannes-Oxley Act, or SOX as it is known, is all about full disclosure. Introduced last July, this U.S. legislation was designed to prevent a reoccurrence of the recent corporate scandals by requiring companies to be totally transparent. They now have to give shareholders a full accounting, complete with comprehensive explanations. The idea is to inform the public.

Executives, however, see things slightly differently. They are alarmed: SOX has real teeth. People can go to jail for violating the Act. And to make matters worse, Sarbannes-Oxley has reinforced the Fair Disclosure regulations that prohibit selective or biased disclosure. Theoretically, CEOs must now provide any information about their companies unedited to everybody at exactly the same time. No wonder they are gun shy. Better to say nothing. Let the numbers do the talking.

In some ways, we have come full circle in corporate reporting. Twenty or thirty years ago, companies kept their cards close to their chests, afraid that they might provide competitors with ammunition. Analysts scrounged for information. If a CEO deigned to speak at an analyst luncheon, you had to stand in line to get a ticket. Then somebody hit on the idea that executives could quite literally talk up their stocks by briefing analysts and turning shareholder meetings into pep rallies. Companies hired public relations experts and spin-doctors to package their financial results, as well as their increasingly optimistic forecasts, like an advertising campaign. Analysts were fed earnings estimates and dumped on if they failed to toe the party line. Not that many complained. Some analysts, such as Jack Grubman, even went on the payroll.

Now the shutters have come down again. In recent weeks Gillette, Coca-Cola, AT&T, and McDonalds have joined the growing list of companies that no longer provide earnings guidance. RadioShack refuses to discuss its revenue projections. Jean Coutu has drastically reduced its meetings with institutions and analysts. Even Canadian CEOs are realizing that they could be held liable for misleading disclosure as provinces scramble to come in line with SOX. Air Canada has already had its knuckles rapped for providing selected investors with information. Goodbye spin-doctors.

This is not to say that we are going to be starved of information. Quite the contrary, thanks to Sarbannes-Oxley, and increasing pressure from the Canadian Securities Commissions, investors are now inundated with data, as opposed to news releases. Companies agonize over their numbers and presentations. Many were days, even weeks, late with their fourth-quarter results. Doubtless the lawyers needed time to study them intently and make sure they complied with the new rules. For example, in future accompanying notes must be comprehensive and written in understandable English. Now there’s a change! Also, the numbers have to be unvarnished. So somebody has to edit out the usual corporate chest-beating.

Unfortunately, this move to factual reporting comes with some short-term pain. SOX, for the time being, is another negative factor in a market already being buffeted by concern over Iraq. To put it simply, we have lost our cheering section. Jack Welch, John Roth, and the others, whatever their shortcomings, radiated confidence. Under the old system, they would have packaged and sold those relatively good fourth-quarter results. With Sarbannes-Oxley on the books, however, companies are playing it safe. They see danger in raising expectations. To give you an example, Enbridge reported a profit of $3.60 a share in 2002, up from $2.91 the previous year, and increased its dividend by 9%. Company officials celebrated by warning everybody that profits would likely be lower in the early part of 2003. Talk about a downer.

Taking their cue, analysts are also becoming much more cautious. With less access to the companies, they are being forced to do their own homework and, minus the invariably enthusiastic guidance, are coming up with more sober forecasts. Keep in mind, too, that CEOs are now inclined to write off everything in sight and make provisions for things like pension deficits, items they would have fudged a year or so ago. As a result, year-over-year comparisons are going to suffer. The analysts have a right to be cautious.

Long term, Sarbannes-Oxley and comparable Canadian legislation now on the drawing board should rekindle investor confidence. Also, as time passes, executives will become more comfortable with the legislation and start speaking more freely once more. For the moment, though, we have to live with another weight on the market. It’s the last thing we need. However, this is not a fundamental problem, more of an administrative glitch. So just take all these somber statements being made with a grain of salt. I’m not saying that 2003 is shaping up as rip-roaring winner. However, the prospects are a lot better than many of these executives, with one eye on the new legislation, are suggesting.