It’s about this time of year that funny things start happening. Two days ago, for example, GBST’s share price rose 6% in a day (the market was barely changed) on higher than usual volume. Yesterday Service Stream’s share price fell 6% on a day the market was up 2%.
Today those two price movements makes some sense. One of GBST’s UK customers, Aegon, has purchased another business with 350,000 customers and a footnote to last night’s Federal budget suggests NBN Co is running out of money, which would be bad news for Service Stream.
Perhaps both of those moves can be explained by good sleuth work, rather than anything untoward. But untoward things clearly happen and my view is that it happens a lot more often in Australia than the US.
Apart from having laws that are generally more lax and harder to enforce, companies also report their results only twice a year, versus quarterly in the US. A lot can change between the end of February and the end of August and it’s not hard for some investors to get wind of that change well before others.
Rarely is that a blatant leak of inside information, but some institutional investors have made a career out of interpreting language in a way that gives them insights that others don’t have. “We should still hit the bottom end of our range”, for example, tells the experienced investor a lot.
I think this is unfair. And the only solution is to make companies report more frequently and bar ASX-listed companies from talking to investors outside those windows. Quarterly reporting would do the trick.
Don’t get me wrong. In the US, the obsession with quarterly earnings “beats” and the short-term focus it creates is a circus that doesn’t help long term decision making. But at least it is a circus that everyone has a ticket to.
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Yep, I’ve noticed a lot of situations where share prices have risen or dropped in advance of news. I’ve always wondered how much was legitimate and how much wasn’t. You’d like to think that larger investors aren’t getting the inside tip, but I suppose it’d be naive to think that it didn’t occur some of the time.
The only problem is that the funny business would probably start occurring on a quarterly basis rather than on a half yearly one!
It’s a great point you make Steve.
I sometimes wonder if the benchmark that should be used in company reporting should be the individual (‘ma and pa’) type investor rather than the larger institutional investors. Certainly the latter carry the weight in terms of dollar value, but they provide a poor check for the market (as your article illustrates).
If ASIC concentrated on focussing on the needs of the small individual investor when they look at corporate reporting etc, it would improve the transparency and disclosure for all parties.
Perhaps, but you would be giving up profits by making management spend more time on reporting and less time growing the business. They should just send a few insider traders off to jail. Should do the trick and a lot cheaper.
How much difference would reporting quarterly vs semi-annually make? In the case that you’re concerned about, an investor that gets whiff of material news is going to trade on it immediately, regardless of a companies reporting schedule. It sounds like a good idea to get more transparency in company results in general, but I’m not sure how that would diminish insider trading?
By no means is it a panacea, but I think it would help.
In the US the companies we own report, talk and then go dark. For a December quarter for example, they tell you the result at the end of January, give you an update as to how the business is performing for the current quarter (of which you are already 1/3 through) and then generally won’t talk to you until the next results are released.
Companies here report in February and then regularly talk to brokers and significant shareholders for months after that (I’m writing about it now for a reason). It’s not blatant insider trading – I want to be clear about that. Obviously a company has obligations if its results are going to vary materially. It’s just lots of little pieces of information, none of which would count as material in a court of law, that give a market edge to the recipient. So I think quarterly reporting would help. And it might actually save them time if they don’t have to constantly deal with investors in between.
I’m not sure I agree though I guess it would throw up more opportunities to buy as there is often a sell off on bad news. It reminds me of a book called “The Number” which basically describes the ‘circus’ the Steve mentions above.
The problem isn’t with the frequency of reporting, it is cultural. The simple fact of the matter is that almost everyone in Australia, from legislators to the judiciary to regulators to average people, view white collar crime as being less somehow serious than other crime.
As an example, Elmo de Alwis and Tom Smith defrauded shareholders when they falsified Sigma’s accounts a few years back. They then further defrauded investors who were gullible enough (myself included) to believe the accounts when they raised $300m at a time when much more honest businesses were selling for a pittance.
Not only were these two not charged with fraud (they pleaded guilty to a much lesser charge), but the maximum sentence that they can expect to receive is two years, which, in practice, means that they would be unlucky to spend more than a few months in custody. Contrast this with what happened to Bernie Ebbers, Ken Lay, Andy Fastow, Jeff Skilling, Dennis Kozlowski, Raj Rajaratnam and plenty of others and it becomes clear that America’s higher standards are at least partially attributable to the fact that Americans take white collar crime more seriously than we do.
A $300,000 bank robbery does a tiny fraction of the damage to the country that a $300m fraudulent capital raising does, but a bank robber can realistically expect a ten year sentence for an aggravated robbery in which no one is hurt, and 25 years is the maximum sentence. At the very least, white collar crooks like de Alwis et al ought to be put on a parity with their blue-collar brethren.
A recent example:
the Dick Smith float at what turned out to be an exorbitant price, justified by some fancy footwork with the bookwork. This was followed by total bankruptcy. Except by the principals, who are sipping Krug from their ocean going sloops.
A current example: MGC Murray Goulburn Cooperative which last week dropped 40%, followed by the resignation of the CEO. There is talk of a class action by shareholders.
The moral of the story: be afraid, be very afraid, of new floats. Treat the prospectus as something worthy of a Booker Prize for Fiction.
I think you have ‘hit the nail on the head’ SG. Well said.
Unfortunately the hope for any sort of remedy (at least in the short term) is pretty dim given that Greg Medcraft’s contract as boss of ASIC has just been extended. Arguably he has overseen one of the weakest periods in corporate regulation in Australia. A major culture change at ASIC is needed before any of these types of initiatives to improve just basic matters like corporate reporting will occur.
Many of the professional gatekeepers (yes, those legal and accounting firms who we rely upon to ensure the audits provide a ‘true and fair view’, and that company accounts and governance are compliant with the law etc) and the gatekeepers gatekeepers (such as the professional bodies like ICAA, CPA and the Law Society etc) seem to be ‘laughing all the way to the bank’ in the current environment.
One of the under publicised matters, for example in relation to the Dick Smith ‘heist’, was the involvement and financial reward of the professional gatekeepers. Perhaps we need some new benchmarks or ratios to ‘get a handle’ on the relationship of these supposedly noble professionals’ involvements and rewards in the corporate world.
I look at my own professional organisation (CPA) and they seem more focussed on plastering pictures of their CEO (Alex Malley) across the land than dealing with the arguably questionable professional behaviour of their members involved in some of these shenanigans, or even in lifting the standards. No, they prefer to spend their members money on TV shows to conduct lovely soft interviews with people like Ms Triggs from the Human Rights Commission.
So, keep making the suggestions Steve, because our professional organisations ( mine anyway) seem too distracted with other matters.
Good point Steve,
It also happened with Surfstitch – Chairman Howard McDonald told the AFR that rather than “go dark” he’d had more than 30 meetings with shareholders last week (during which the share price sank 9%) before the shocking update came out on the ASX this week.
No word on how many meetings the company had had with shareholders in the week before, when the share price fell 14%.
That may just be coincidence, but 30 meetings in a week also seems like a massive waste of time for executives. And a lot can be gained from body language and questions that might go ‘unanswered’ – something other shareholders aren’t privvy to.
Firstly, I think the Surfstitch debacle would have played out exactly the same had they been made to report quarterly.
I am in agreement with Steve that private briefings with large shareholders are problematic and do give a very substantial and material edge to a selective section of the market. Ultimately, if nothing of substance to a company’s investment merit/thesis is going to come out of these meetings, then why bother wasting everybody’s valuable time?
Another big step in the right direction would be to outlaw directors’ indemnity insurance.
The ancient Romans had a rule that the engineer building a bridge would need to stand directly underneath the bridge as the scaffolding came off. The fact that so many of those same bridges have remained in continuous use in the twenty or so centuries since (and will probably still be around for many more centuries) is a testament to the power of incentives.
Indemnity insurance, which is ironically paid for by shareholders, effectively, for a fee, shifts the financial onus of good governance from the directors to their insurer.
I wonder how many Roman bridges would still be standing if the engineers were allowed to pay someone else to stand under the bridge in their stead.
Practically it would possibly mean no directors would be willing to act as directors, of public companies anyway.
But it does bring to mind two things that your comment raises SG
Firstly that directors indemnity insurance can create a moral hazard in that it can remove the incentive/or compulsion for them to comply with their legal duties. Without it they might not be quite so ‘gung-ho’ or carefree, and were a little more circumspect with their decisions. Have a read of the business section of any daily paper and you can this hazard confidently disregarded with many directors.
Secondly the Corporations Act does specifically negate such insurance if they are in wilful breach of their duties and/or contravene sections 182 or 183 of the Act (improper use of position or information for their own gain). This one makes me laugh when I read it. Have you ever seen ASIC act on it? The Act is clear but I would suggest the actual enforcement of it makes it almost an extinct or phantom provision. All these law abiding directors improperly using their position or information for their own gain!! How dare a suggestion be even made.
Mmmmm. I’ll have to have a reread of that article in todays paper about……..
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Coincidently was thinking the same thing today. You can pick the inside trading a significant portion of the time in some of the smaller cap companies when they make a large move in one direction for no reason. Typically the ones with inside information (random order sizes) will be buying/selling indiscriminately into retail investors (order sizes in lots of 1000). One I am watching at the moment with this type of move is Beacon Lighting (ASX:BLX) which I strongly suspect will have a very poor upcoming result. Another recent example is a large holding of Forager that seemed to move correctly in anticipation of an upcoming negative announcement.
BOOM! Bad trading update just released as expected. Insider trading examples such as has occurred with BLX the last few weeks demonstrate precisely why Steve Johnson is right and companies need to report quarterly.
Great call Frank. Maybe the govt should give their $150m ASIC funding to you.
Kudos Frank, well spotted!
Great call Frank. I was watching Prophecy (PRO) recently and had similar suspicions. Four times they guided for revenue of $20 million (last year’s result, AGM, recent half year result and then a presentation 2 months ago). But the share price action was not reflecting this and finally they came out with a downgrade, revenue now expected be in the range of $15.0 – $17.5m. Sometimes the share price action is more helpful than the management.
FLT falls about 10% the week before the downgrade, mmm it’s catching.
What was the 6th May guidance announcement about? It sure proved a very good rally to sell into. Anyone else like to see the list of professional money managers that have visited or spoken to FLT in the last few weeks?
Agree with you Steve. My frustration is that short sellers can play with stocks and if you are long you have no idea if they are right, the vacuum of information for 6 months is too long. To me, the more transparency the better, investors can then do valuations and make their judgements. Clime has written about quarterly reporting as well.
The companies don’t even need to give commentary, just the income, balance sheet and cash flow statement is needed.
In an ideal world, what I would also like from companies, if you are giving guidance, give EPS guidance. When they give revenue or EBIT or EBITA, I have to try to work out the profit and EPS. I don’t always know what their tax will be, will they raise capital, etc, shouldn’t they know that better than me? CCP give clear EPS guidance, I wish more companies would do this.
Blackmores are one of the few companies that give quarterly profits, not just sales, I appreciate that (but they don’t give the full financial statements).
By the way, I noticed SSM dropped 18% intraday on 4 May (from 74.5c to 61c), I had no idea what was going on, I didn’t know if there was a major problem or whether it was just having a “flash crash”.
Only explanation for SSM that I know of is that there was something in the budget about the NBN Co running out of money by the end of 17.
Steve et al thanks for this great service. Your suggestion to adopt qtrly reporting in my opinion would be terribly short-sighted and cause further impost on smaller cap stocks that struggle with the reporting burden as is. Furthermore, the adoption of such measures would fail to curtail the insider trading that is taking place in these instances. I must admit such a suggestion on your part seems incredibly selfish. Effectively you want the whole system to change for you and the funds management community because on these two occasions you copped a loss. The whole business of paying attention to the tone and language of communication is part and parcel of being an analyst. Sorry to come on the front foot here but your suggestion is offensive and lacks full understanding of the implications and reeks of selfishness and seems far removed from instigating a discussion to elevate standards in the industry. Sincerely, Keith Be Real
Steve, I understand your frustration but believe that improving incentives to ensure management act responsibly could bear fruit, whilst more enforced reporting will not. Some of the ideas discussed, such as banning directors’ insurance and increasing jail terms for fraud and other malpractice, would concentrate management’s mind. Increasing the workload of all management would not.
If Berkshire Hathaway was to start reporting only half-yearly, rather than quarterly, do we think the quality and integrity of its management would suffer? Absolutely not. It would simply lighten the burden of if its famously-small headquarters. Quarterly reporting is a cost that has to be borne by all businesses, with the small firm bearing the greatest burden.
And, if it is any consolation, hedge funds and other institutional investors that rely on insider information are using an unsustainable strategy that provides sub-par results. Insider trader is not a successful long-term strategy as it requires constant streams of new information, and for that information to always be reliable. Conversely, as a long-term investor, if I was unsure whether a management might be leaking information – albeit just with winks and nudges – that is a good indicator that I do not trust the management. That in turn is a good reason to avoid investing in that company. I am looking for the managers I can trust the most, not those that provide the most information.
As ever, an interesting conversation.
I think Keith you are being a bit tough. I hardly think it is selfish to expect management and the board to keep the shareholders of a company properly informed on how the company is going. After all one of the primary reasons companies are public is to provide them access to cheaper/easier/possibly greater sources of funds (equity) with the ‘cost’ to them being that they have to make sure those fund providers (shareholders) are adequately informed on how the company is going.
I think Steve’s comment is saying perhaps 6 monthly reports may leave shareholders open to being kept out of the loop of developments in between. Lets not be naive to the realities of management and boards motives. Oftentimes company reports can be used to conceal rather than reveal. Hence the need for corporate analysts.
The auditors are now being required to report on major issues and critical matters because of the failure of the simple ‘true and fair’ declaration. I would think a little bit more consideration of some more frequent reporting is not such a bad thing. If management are not already preparing internal monthly reports for the board (and them) to keep tabs on the company I would think something is amiss. This is the 21st century in terms of financial reporting. Most companies have ‘live’ financial reports now. All that is needed is a simpler version of the more comprehensive annual report with some details on major issues, strategic changes etc.
I reckon Steve’s idea is a good one. How you see it as selfish defies me. After all his job is to look after the shareholders who’s money he invests. That’s the sort of thing I would want from a fund manager. Is this company in strife? Is it going okay?
If a funds manager has to rely upon ‘tone and language’ it sounds more like a smokes and mirror exercise and I’d be giving them the heave ho pretty quick.
I would guess Keith you need to perhaps think about what the shareholders should be getting in terms of information to invest in a company, and then ask how you can meet that need? (I am presuming you are one of the people responsible for preparing the reports of a company). My apologies if I am incorrect.
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In Australia, company directors are a bit of a club (just look at all the names that come up again and again, especially at the big end of town).
Now the thing about a club is – nobody wants to mess up the club, because it ruins the fun for everyone.
Company directors LIKE the minimal accountability, and have been pushing over recent years for less of it (eg – concise reports, then reports sent only be email [who reads those?]). There was a push a while back to try and abolish the AGM.
More accountability in general is a good thing. A well set up company – even a small one – should have accounting software than can generate its reports INSTANTLY on any day, so what’s the big deal in quarterly reporting.
Internally, if management only manage based on the half yearly reports – wow what trouble would that make. OF COURSE THEY DON’T DO THAT. Management accounts are constantly updated and can be view at any time (thats what management accounting systems are for, after all).
So the whole thing about extra impost, etc, is rubbish. It’s all about preserving the exclusivity of the club, keeping the trotters in the trough, and sponging off shareholders are long and as much as possible.
Well said Wally.
They always say we want to reduce costs or improve efficiencies whenever they talk of minimising reporting etc. Some day it would be refreshing for a board to come out and say the reasons they are going to for example, introduce quarterly reporting, is to increase our accountability and transparency to the shareholders.
What normally happens is that they will do whatever is mandated (and which Blind Freddy, even perhaps the Drovers Dog, could see needs to be done), and only after they have paid a swag of dollars to one of the large legal and accounting firms to ensure they just comply with the minimum.
Their instructions are ‘what do we need to do to stick with the letter of the law?’.
The shareholders are screaming ‘we want you to be upfront and honest and transparent with us, after all that is your job. The spirit not the letter of the law is our brief to you’.
EVERY AGM, coming voting time, I always vote.
I vote for NO REWARD for directors and management – no options, no share issues, nowt, zip, nada.
Like Buffett, I think that if they want to own shares then they can use their salary to buy some.
The idea of minimal accountability as well as being rewarded at shareholders expense is just obscene.
Pick the one below which makes a mockery of common sense, and hoe deluded we have become to accept it as okay.
1. Do you think as the pilot that if I ‘take off and land’ this A380 on the next flight from Sydney to LA that I should be entitled to a bonus of say $5,000? No wait, that’s not enough, how about $20,000.
2. If I rent this property from you for five years and look after it so no damage is done, will you give me a 5% equity in the property?
3. I’ll build this house for you but I want another $50,000 above the contract just to make sure I ensure the foundations are stable?
4. Yes as a nurse, I’ll look after you as a patient in the hospital but if you give me $10,000 I’ll make sure I don’t neglect you?
5. Yes, I’ll take the position of CEO of Northranchers Limited on a salary of $2 million but if you want me to do a good job I would like options and superannuation on top of $7 million?
You know all these people who quote Buffett about accountability and remuneration fail to remember that when he first started his Buffett Partnership he reported semi-annually and charged a 0% mgt fee but a whopping 25% performance fee over a paltry low hurdle rate of 6%. Now you think about that. Do you really think it’s fair for Buffett to take a broad swipe at the hedge fund industry for their egregious fee structure? And all these journos quote how he gets paid the lowest salary for any CEO out of the Fortune 500. Simpletons just blindly swallow what Buffett is saying now. But the more astute observer really sees the WHOLE picture. Wally, Brett – you both need to do the same on this issue. If you maintain a balanced mindset I’m sure you’ll arrive at a similar conclusion. Enjoy the process of accumulating that knowledge.
Brett, Wally another topic here for your consideration. I haven’t seen anyone question this seriously yet, What do you think the probability of Berkshire Hathaway being able to even maintain it’s centralised capital allocation for another 50yrs? Berkshire Hathaway is akin to a centrally planned economy from a capital allocation function. Now what happened to socialism? So what do you think is going to happen to Berkshire over time? Berkshire Hathaway is highly likely to be one of the greatest unwindings in history. Over time the CFOs of the individual businesses are going to ask themselves what the hell am I doing have to ring some bloke in Omaha or wherever to make a decision on how I allocate my profits. The likelihood is that structure is going to yield an extremely inefficient operating structure full of dysfunction and unhealthy politics. Buffett’s overarching desire to create a legacy on such grand scale flies in the face of sheer practicality no matter how cleverly designed the safeguards. Whilst I no longer follow Buffett as closely as I once did I don’t think anyone has fully grasped this. Buffett’s overarching desire to preserve this structure flies in the face of the nature law of creative destruction. Now when you think about that how really benelovent is that for society? Granted he has been extremely generous in his commitment to donating the majority of his wealth to charity upon death for which he should be fully applauded. But at the same time, his childhood dream to be one of the richest men in the world will actually over time leave a giant hangover for the administration of BRK that is almost certainly destined to fail eventually. In some respects BRK will be a giant lag on productivity of the American economy. And why, for one man’s megalomania. I know that sounds incredibly socialist but this is a stark reality that I don’t think anybody has dared raise. Anyone who thinks that BRK can operate successfully for the next 50yrs or probably even 30yrs as is really doesn’t have a good appreciation for the harsh realities of corporate history. So that’s a massive SELL on BRK coming down the line. No LTCM, but I expect it to be the greatest unwind in history. And oh how will people’s perceptions of Buffett change I wonder. He’ll still be the same man. It’s just people will more clearly see what he has done and just as equally not done. For all his bragging about working til 100 his twighlight years would be better spent breaking up the canvas and selling it in parts. But even Buffett is susceptible to hubris and ego. It’s just nobody understands it yet. Perhaps those who’ll gain the best appreciation will be those toiling under 100% ownership of the BRK structure. I hope I’m wrong. But the capitalist forces will almost certainly prove me right.
Hey Keith Be Real, what is all this about getting stuck into Buffett when we haven’t mentioned him at all in our (mine anyway) comments?
Oh, I get it. How silly of me.
You have a problem with Buffett. Both in his investing strategy, his observations on the market, and clearly his lack of success by “Keith Be Real” measures. And of course any sort of comment which resembles any of Buffett’s insights on the market such as the need for more improved reporting, or the need to be ‘on guard’ with much corporate reporting, is automatically lacking the (how do you put it) astute observations of a person who sees the whole picture. Mmmm.
And it hardly goes without saying that anyone who analyses and invests in a company utilising any of the value investing insights of Buffett is just not up to the task of being a good fund manager.
Oh well, each to their own ‘Keith Be Real’.
I’ll take the performance results of Forager any day.
Brett, I’m going to take you to task again on the Alex O’Malley thing. It’s great to have a questioning mind and I don’t want to detract from that. You sound very intelligent and aware of the issues which is great. If only more people were. Alex O’Malley I think could be one whom might overreach in his position. I’ve taken the CPA to task on a matter before. The sudden impost of their late fees for late payment of membership fees. I thought this was a perfect illustration. I don’t agree that an organisation such as CPA Australia should do that to its members. But in fairness if you read his book and read some of the articles about him he is actually a God send for the staid, boring, conservative accounting world. CPA Australia had a terrible public image and he single-handedly has helped revitalise the brand. You’re a CPA and you benefit from that. It’s simply to easy to be cynical all the time. Not everyone is out to get you. Alex O’Malley had a mother that was mentally ill and institutionalised at a young age. He struggled until his mid-30s to really start hitting his strides. Once he became an accounting tutor he suddenly found his calling trying to teach accounting in an interesting manner. No easy task! He set out to mentor kids who otherwise might have been for want of inspiration. Yes he’s plastered all over the tv and CPA Australia is no doubt dropping a lot of dough on this. But so what? All you’re really doing is hating on his success for flawed underpinnings. How does that really help?
I think Keith Be Real we can leave out the personal background details on Alex Malley for obvious reasons.
But let me take you up a bit on the CPA matter. I’m not fussed whether accountants are seen as boring or staid etc., that’s irrelevant to their main role and reason for being. You can think about that one a bit to consider what that might be.
But I would suggest it is not to fund the self promotion campaign of Alex Malley, and this almost mythical line that it is to lift the CPA brand. That is akin to Telstra’s branding strategy being to spend their marketing budget promoting the person of David Thodey (woops, that was a waste now its Andy Penn). The Telstra board would need their ‘head read’ if they did that. But apparently not for the CPA board. You might be happy to have the CPA brand tied to one person but I suggest it is a very misguided (and very expensive) exercise in folly.
I estimated that 18% of CPA revenue is spent largely on promoting Alex Malley (under the pretence of promoting the CPA brand). You don’t need to be that smart to question the wisdom of that – in any business context.
Let me provide a couple of excerpts from Joe Aston’s more humorous but telling comments about him from his column in the AFR recently.
“His most lofty gig yet is as current head of a run-of-the-mill professional membership organisation – the poor ugly sibling to the more prestigious Institute of Chartered Accountants – in an enforced duopoly.
“No doubt he has explained to his board of directors how their members’ interests are being served (first and foremost, no less) by their subscription money being spent plastering their CEO all over massive airport billboards; and advertising his book; and paying the Nine Network to air his own talk show where he interviews celebrities on daytime television (for which they front an approximate $35,000 of advertising per episode for the privilege – even before they fund production costs). Billboards alone are costing CPA Australia at least $170,000 per month”.(2/2/16)
“You can’t walk past a bus station or drive through a major intersection these days without being bombarded by the image of Alex Malley, the head of the suburban accountants’ union CPA Australia – although you might know him better as “the suspended schoolboy who became a disruptive CEO”.
Major Australian airports are awash with billboards advertising his returning talk show on Channel Nine – seven episodes, two of which are interviews with Channel Nine staff!
Malley’s ad campaign – for his campaign, not Nine’s, it most assuredly is – sports the tagline “Alex is back”. Which is oddly comforting. I wondered why my life had felt so empty and pointless since the last time I watched repeats of The Bottom Line.
According to CPA’s last annual report, it reported revenues (ie: membership subscription) of $157 million and spent $30.5 million of it on “marketing, promotion and publications” – a fair bit of which seems to have been spent on marketing Malley himself.
An illustrative comparison: Australia’s leading supermarket chain, Coles, brought in revenues of $38.2 billion (that’s billion, not million) and spent $53.6 million of it on marketing.
Coles, whose business is actually selling stuff to people, spent one-seventh of 1 per cent on marketing, while an obscure professional standards body with no consumer sales pitch spent 20 per cent of its revenue on marketing … its Naked CEO”.(3/2/16)
You can google up the others if you want a clearer picture.