The subject of this article poses a rather pertinent question this year as earnings release after earnings release announces that goodwill had been either written down or written off entirely. For some companies the write-downs were particularly hard to take, given that earnings had not been greatly affected by the economic slump that was wreaking havoc for others. For those companies in particular, the market conditions of 2008 have created accounting measurement issues that seemed removed from the economics.

What is goodwill and when is it impaired?
In order to assess whether economics and accounting were in fact divided, the definition of goodwill for accounting purposes needs to be examined. Goodwill is defined in CICA HB 3064 as “…an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized.” Essentially, goodwill is the difference between the amount paid for a company and the fair value of its identified net assets. On the presumption that no one would pay good money for nothing, the residual, or excess, is aptly named ‘goodwill’.

“Good communication does not mean that you have to speak in perfectly formed sentences and paragraphs. It isn't about slickness. Simple and clear go a long way.” – John Kotter

Have you ever read an article and realized, half-way through, that you don’t have the slightest idea what the author is talking about? And your confusion is not from lack of coffee that morning?

Our culture is bombarded by information. People’s attention is constantly being pulled in multiple directions. As a result, you have about three minutes to get your story across before a reader loses interest, so keep your message simple, succinct and effective. A great headline with no meat to it leaves the reader starving.

To create effective messages, you need to thoroughly understand your business, market and economic factors, and company strategy. Seek feedback so that your messages answer the Street’s questions and fix inaccurate perceptions. Listen to and involve management in the process, which helps keep messages consistent.

A recent and important decision of the Supreme Court of Canada provides guidance on certain Canadian corporate law requirements and the duties of directors of public companies in the face of competing stakeholder interests.

Proposed BCE Plan of Arrangement
In mid-2007, BCE Inc. (BCE) announced that it had entered into an agreement with a consortium led by Teachers’ Private Capital and others (collectively, Teachers) following an auction process involving competing acquisition proposals. The objective of the auction, as determined by a special committee of directors of BCE, was to maximize shareholder value while respecting bondholders’ contractual rights.

“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.” – Charles Darwin

It seems that everywhere you turn today, there’s an onslaught of bad news: companies laying off significant portions of their workforces, markets depressed, commodities at low prices, and the economy in peril. There is a high amount of financial and economic global distress, and we’re inundated with it.

IROs don’t have to look very far. It’s affecting our organizations in various ways: credit crunches, difficulty raising funds for operations or new ventures, decreased stock prices, negative media coverage, and layoffs. And always, there is the reality of unhappy shareholders.

The adoption of International Financial Reporting Standards (IFRS) by over 100 countries to date represents a fundamental shift in financial reporting. So far it appears that the world has adapted to the new reporting language, albeit with some vigorous debate on the actual accounting framework precipitated by adopting fair value measurements during an economic downturn. The new language and complexity of the first wave of IFRS implementations took some analysts and investors by surprise.

The Canadian Securities Administrators (CSA) recently introduced amendments to National Instrument 51-102 Continuous Disclosure Obligations, and Form 51-102F6 Statement of Executive Compensation, providing for new executive compensation disclosure rules. In addition to improving disclosure regarding executive compensation generally, the new rules are intended to require comprehensive disclosure of the value of total compensation payable to executive officers and how this compensation is determined. Public companies with financial years ending on or after December 31, 2008 will be required to make disclosure in the upcoming proxy season in accordance with the new rules.

New executive compensation disclosure requirements include:

The effects of the current economic slowdown will, for many, have a significant impact on the preparation of financial statements this year-end. Beyond dealing with the myriad business risks arising from the current market instability, management will also have to assess the accounting implications of the liquidity crisis. Stepping back to consider what financial statement captions might be affected by the current lack of liquidity, it quickly becomes apparent that there is the potential for some form of accounting or disclosure impact for most line items on the financial statements. For some, the issues will be so significant that the statements will need to address the risk that the company may not be able to continue as a going concern, and in some extreme cases it may no longer be appropriate to even prepare the statements on the basis that the company will continue to operate as a going concern.

When it comes to climate change, IROs have a key and increasingly important role to play in effective communication. Step one is recognizing the magnitude of the challenge.

When you think about climate change, do you think about its impact on industries such as insurance, telecommunications, building construction, fishing, agriculture, forestry, or recreation? Or do you think primarily about oil and gas, utilities, mining, manufacturing or automotive industries?

Could severe weather events cause business interruptions, telecommunications difficulties, power outages? Is your company involved in or dependent on transportation or other infrastructure systems? What needs to be done in the areas of building design and retrofitting? What impact will climate change have on trade competitiveness? Will there be a backlash against high greenhouse gas (GHG) emitting industries or companies? Will this be costly? What new capital expenditure decisions need to be made now? What financing will be required to meet these needs? Does your company sell to a customer that is imposing conditions on its suppliers regarding GHG emissions?

There is a need to balance the requirement to provide timely information with the risk of rushing the process so much that it eventually leads to either multiple announcements to the market or, worse yet, multiple restatements because financial information was incorrect.

Managing a Financial Restatement
In recent years there has been a dramatic increase in the number of financial statement restatements, generating significant discussions as to their causes and consequences. This has been particularly evident in the United States, but similar trends are occurring in Canada. Such restatements can have significant consequences for a company, its management and directors, investors and others, and the role of the IRO is critical to successfully weathering a restatement.

“One’s destination is never a place, but a new way of seeing things.”
– Henry Miller

“The world is a book and those that do not travel read only one page.”
– St. Augustine

There’s nothing quite like traveling to broaden the mind and soul…the sights, sounds, and tastes, as you encounter and learn another culture. Of course, when traveling you arm yourself with the appropriate knowledge to make the experience as positive as possible. You buy a guidebook and learn about different customs, languages and expectations – ‘you’re not in Kansas anymore, Dorothy!’ I love traveling – exploring the new sights, relishing the local delicacies and examining ancient culture; but it can also be uncomfortable at times – missing trains, getting lost, dealing with jet lag and the occasional overpriced meal. If you’re a creature of habit, perhaps consider traveling from your armchair at home! In truth, the personal travel experience is not that different from a corporate listing on a foreign exchange. There are some wonderful benefits, yet at the same time, potentially horrendous pitfalls. Whether your company is already listed on several exchanges or is considering additional listings (perhaps as a condition of financing), juggling multiple listings can be a challenge. Many IROs are at least familiar with the rules, regulations and hurdles of a listing in the United States – if not savvy about them. But it’s a different story when it comes to other foreign listings.

In September, as the worst economic panic since the Great Depression unfolded, the CEO of Scotiabank wasn’t minding the ranch and strategizing about coping with turbulent markets. Instead, he was travelling across Asia, discussing potential acquisitions and partnerships.

When people asked about the CEO’s whereabouts, “we answered that we’re focusing on our long-term strategy,” says Kevin Harraher, V.P., Investor Relations. At the same time, Scotiabank’s CFO headed to California to meet with American investors. “When we told U.S. investors that we’re a good place to think about investing, the reception was pretty warm,” adds Harraher. The itinerary for Scotiabank’s executives was no accident. “Our tactic is: Let’s get out there and talk to investors and let them ask questions,” explains Harraher. “We don’t want to be seen as behind the barricades.”

Even some companies outside the klieg lights of the financial services arena are taking a similar tack. “Sitting staring at a screen with nothing but red ink gets pretty depressing,” observes David Carey, IRO and Senior Vice President, Capital Markets, at ARC Energy Trust. “What we try to do is get out on the road and meet more people in times like these.”

For example, given the way in which the funds my team manages at MFC Global are constructed, we consider it significant if we beat the stock market by 20 basis points or so on a particular day. In contrast, a 20-basis point swing for my small-cap counterpart is considered typical. But get a load of this: there was a day in July when we beat the stock market by well over 100 basis points – most likely my best day ever as a portfolio manager – and then, in the very same week, underperformed by well over 100 basis points on another day. Can you imagine having your best day ever and your worse day ever in the same week? The word volatile just doesn’t seem to capture the experience.

In the current economic climate, where the terms ‘credit crunch’ and ‘illiquid markets’ are discussed daily in national newspapers, companies have good reason to reconsider whether their financial reporting is sufficient. Analysts and investors will be poring over your company’s next financial statements and Management’s Discussion and Analysis (MD&A); looking for evidence of how the company is managing through the present market conditions.

Any web search for “business implications of climate change” will bring up hundreds if not thousands of articles, reports, studies and surveys on the topic. Recently introduced guidelines, laws, accords, mandates and commitments aimed at reducing our negative impact on the environment is a major business issue in Canada and around the world. As an investor relations professional, you must be prepared to address this increasing focus on environmental risk and ensure that investors understand the potential effects of your business on the environment and the impact of environmental regulation on your business.

What Investors Want to Know
In a February 13, 2008 news release, the Canada Pension Plan (CPP) Investment Board encouraged Canada’s largest companies to disclose more information on the business risks and opportunities they face as a result of climate change. The CPP Investment Board reported that it is one of 385 institutional investors around the world representing a total of US$57 trillion in assets under management that supports the Carbon Disclosure Project (CDP). The CDP is an independent not-for-profit organization aimed at creating “a lasting relationship between shareholders and corporations regarding the implications for shareholder value and commercial operations presented by climate change. Its goal is to facilitate a dialogue, supported by quality information, from which a rational response to climate change will emerge.”

When Montreal-based CGI Group announced a restructuring in 2006, communicating the news posed a translation headache on an epic scale. “In English,” says Lorne Gorber, Vice-President, Global Communications and IR for CGI, “restructuring means we’re tightening our belts and taking measures to improve things. But when you use the French equivalent−restructuration−it means you’re practically preparing for Chapter 11.”

Therein lies the challenge of translating disclosure documents that many investors will pore over, trying to read between the lines and obtain clues about future performance. Often, says Gorber, a literal translation doesn’t capture the nuances of what’s afoot because words like restructuring carry so much emotional baggage. In the end, CGI abandoned the English word “restructuring” altogether, describing what was occurring as “a competitive position strengthening program,” recalls Gorber.

I’ve been working in this business for almost 30 years now. On many occasions I have observed situations that reaffirm my long-held view: institutional investing should, like jumbo shrimp, be considered an oxymoron. Determining value, reading market fluctuations and acknowledging the conundrums of perception are just a few themes that come to mind.

One obvious example is phone calls from institutional salespeople who work for brokerage firms. These are the people who call every day to share the pearls of wisdom their associates have developed about stocks, bonds, interest rates, earnings forecasts, commodity price forecasts – you get the picture. What is most interesting is that there is a distinct relationship between the direction of the stock market and the volume of calls from these people. As the market rises, so does the number of calls. As the market falls, the call volume shrinks. Shouldn’t it be the other way around?

CSA staff provided guidance on May 9, 2008 regarding the disclosures expected from issuers intending to adopt IFRS before, on, or after January 1, 2011. This guidance applies to disclosure “relating to each financial reporting period in the three years before the first year that the issuer prepares financial statements in accordance with IFRS.” For public companies in Canada, the disclosure will begin as early as the second quarter 2008 MD&A (for companies with developed IFRS changeover plans), and no later than the annual 2008 MD&A. Management and IROs need to focus carefully on the guidance received from the CSA, the expected disclosures, and how best to communicate the change in accounting standards.

IFRS Changeover – a Significant Undertaking
The Staff Notice underscores the significance of the changeover to IFRS. It says that “…changing from current Canadian GAAP to IFRS will be a significant undertaking that may materially affect an issuer’s reported financial position and results of operations. It may also affect certain business functions. Investors and other market participants will need timely and meaningful information about these matters during the reporting periods leading up to an issuer’s changeover to IFRS.”

The CSA notes that since adopting IFRS is a change due to new accounting standards, it falls within the scope of current MD&A form requirements for annual and interim MD&A filed in compliance with National Instrument 51-102, Continuous Disclosure Obligations, as well as MD&A included in a prospectus.

The CSA encourages companies to consider whether any additional disclosure beyond MD&A could inform investors about how a company might be affected by the changeover to IFRS – and if other securities legislation requires the issuer to disclose specific information about the broader implications of its changeover to IFRS.

Incremental Approach To Disclosure
A company’s ability to provide information will naturally increase over time as it rolls out its IFRS implementation plan. The CSA therefore outlines an incremental approach to disclosure. The level of detail and the amount of quantified information increase as a company moves closer to its changeover date.

Key elements of a changeover plan may address, for example, the impact of IFRS on:

• accounting policies, including choices among policies permitted under IFRS, and implementation decisions such as whether or not certain changes will be applied on a retrospective or a prospective basis;
• information technology and data systems;
• internal controls over financial reporting;
• disclosure controls and procedures, including investor relations and external communications plans;
• sufficiency of financial reporting expertise, including training requirements;
• business activities that may be influenced by GAAP measures, such as foreign currency, hedging, debt covenants, capital requirements and compensation arrangements. Following is a summary of the expected annual and interim MD&A disclosures in the years leading up to changeover.

2008 Interim MD&A

• If the company has developed an IFRS changeover plan, discuss key elements and timing.
• If the company is well advanced in its IFRS project, discuss the impact of the changeover on its financial reporting.

2008 Annual MD&A

• No later than three years before the changeover date, discuss the status of the key elements and the timing.
• If the company is well advanced in the IFRS changeover project, discuss the impact on its financial reporting.

2009 Interim MD&A

• Update the progress of the IFRS changeover plan and note any changes.

2009 Annual MD&A

• Discuss preparations for changeover to IFRS, building on aspects discussed in 2008 and interim 2009 MD&A.
• To ensure investors understand the key elements of the financial statements that will be affected, provide a narrative description of the major identified differences between the company’s current accounting policies and those it must/expects to apply in preparing IFRS financial statements, including any assumptions about future changes to IFRS.

2010 Interim and Annual MD&A

• Provide updated discussion of preparations for changeover to IFRS, building on aspects discussed in 2008, 2009, and interim 2010 MD&A.
• Discuss in more detail the key decisions and changes that have been or will be made relating to the changeover to IFRS, including decisions about accounting policy choices under IFRS 1 and other relevant individual IFRS standards.
• When preparing interim and annual MD&A, if a company has quantified information on IFRS’s impact on key line items in its financial statements, this information should be included.

The Staff Notice also outlines the specific requirements for disclosure by investment funds.

Next Steps
The changeover to IFRS is a major undertaking with potentially significant implications for issuers, investors and other market participants. Communicating timely and clearly with shareholders about the company’s progress and the expected impact of the conversion to IFRS on its reported financial position and results will help shareholder understanding and reduce the element of surprise. Many European companies, after their IFRS conversions in 2005, noted that they should have communicated better with their stakeholders in advance about the expected impact. We have the opportunity to learn from their experience. •

Rob Brouwer is a Partner and Mag Stewart is a Senior Manager with KPMG, Toronto.

Rumours of the demise of the annual report are greatly exaggerated, if leading Canadian companies are any indication.

It’s true that the traditional annual report may be nearly dead – the kind that served as a ‘tour of the empire’, exhaustively and exclusively describing a company’s projects and properties. On the other hand, annual reports that make a compelling case for investment, discussing sustainability and good corporate citizenship, are popping up everywhere, as leading companies experiment with new formats and approaches to making information relevant to shareholders.

TELUS is a case in point. “We view the annual report as more than reporting our

What’s wrong with promoting your company? Nothing – subject to ‘truth in advertising’ laws and other prohibitions on anti-competitive behavior, that’s what marketing is all about: promoting your company and the goods or services that it sells.

What’s wrong with promoting the securities of your company? Nothing again, so long as you follow the rules – and there are quite a lot of them. Laws relating to the promotion of securities can be categorized in two basic rules – the registration rule and the prospectus rule. These rules reflect key objectives of Canadian securities laws: investor protection, investor confidence and capital market efficiency.

To understand the two basic rules, you need to know the meaning of a couple of important terms used in securities legislation: “trade” and “distribution”.

A “trade” includes:

Year-to-date, the S&P/TSX Composite Index has declined at an almost 11.0% annualized rate, based on the results for the quarter ended March 31, 2008. In addition, due to the uncertainty created by sub-prime mortgage and non-bank asset-backed commercial paper exposure and write-downs, investors are not in a happy mood – and this is certainly unsurprising. Canada’s manufacturing sector is most likely in a recession. The paper and forest products industry? It’s in a multi-year depression! The press has absolutely nothing positive to report and CNN is giving us a constant barrage of disconcerting facts and figures.

As this article goes to print, it is safe to say that so far 2008 has provided investors with more volatility, pain and anguish than all of 2007. (And come to think of it, 2007 was a heck of a lot tougher to handle than 2006, wasn’t it?) The issue facing investors is how much more of this (lousy stock market performance) must we endure and when will it be over.

Alas and alack, I cannot help you there but I am confident that I can assist with one aspect: your upcoming annual proxy circular. When I was hired into this industry over 25 years ago, it was safe to say that we didn’t spend an enormous amount of time poring over these documents. Back then, when you had seen one annual proxy circular, you had seen them all: appoint auditors; approve the slate of directors; and fix management remuneration. In addition, individual shareholder proposals that did make the circular were incredibly rare and institutional shareholders didn’t pay much attention to them because the proposals weren’t taken very seriously. On top of that, it was very rare for a client to quiz us on how we voted on any issue, let alone an extraordinary one.

We’ve all witnessed that annual reports have been getting heavier over the past few years – to the point that some observers expect that by next year-end, only analysts and significant investors will likely be printing full annual reports from websites. In fact, the costs of shipping these large, heavy versions of the annual report are making companies question whether a blanket mailing is the best way to distribute this information. Why the additional increase in girth of annual reports?

The most recent cause of the increasing density is new financial instruments disclosure requirements in CICA 3862, the standard that became effective for fiscal periods beginning on or after October 1, 2007. It is based on International Financial Reporting Standard 7 (IFRS 7), which went into effect at the same time. Companies can adopt the standard early, but many are waiting until it becomes mandatory in the first quarter of 2008 for calendar-year public companies.

Canadian public companies were given a year to transition to the new standard, and many took advantage of the ability to use CICA 3861 for their 2007 year-end, as this disclosure standard was much closer to the existing requirements for financial instruments. The additional disclosures required by the new standard and IFRS 7 were developed in response to risk management concepts and approaches that have evolved in recent years, and new techniques used for measuring and managing exposures to risks arising from financial instruments.

Canadian companies in the mining and oil and gas industries have reason to be particularly attuned to accounting developments internationally and in the U.S. these days. As Canada approaches the transition to International Financial Reporting Standards (IFRS), oil and gas companies are realizing that there is no comprehensive international equivalent to Canadian standards on full-cost accounting.

The International Accounting Standards Board has initiated a comprehensive research project to develop guidance on accounting issues unique to companies in extractive industries, but any new comprehensive standard will not be published before the Canadian transition to IFRS. The move to international standards in their current form will likely mean that exploration and evaluation costs will hit the P&L much sooner than they would have under Canadian GAAP; therefore, some Canadian SEC registrants have been considering moving to U.S. GAAP to defer the adoption of IFRS. Under U.S. GAAP (FAS 19), the successful efforts method is used to account for exploration costs, which allows some costs to be capitalized that may not be permitted under current IFRS.

Portfolio managers know, all too well, that we live in a relative world; in many circumstances, it’s not how well you perform in absolute terms, but in relative ones, that count. If we deliver decent absolute returns for our clients year in and year out, but underperform most competitors, our jobs are at risk. (And heaven help us if the results are poor or even terrible in both absolute and relative terms.)

We also know that clients can occasionally have incredibly short memories. It’s the ‘What have you done for me lately’ syndrome. That is, from time to time, clients forget good past results and focus (in many cases, exclusively) on poor or relatively poor current results. And just in case our clients do not take the time to make sure we are delivering good absolute and relative returns, pension consultants and fund measurement services will graciously inform them of our performance.

In the last CIRI Newsline issue, we discussed the benefits and consequences of being an IRO for a company with predictable earnings. But we only just scratched the surface. In this issue, we’ll discuss some more ‘delicate’ ramifications of being a ‘predictable-earnings IRO’.

As the Hollywood actress Shelley Winters once said: “All marriages are happy – it’s the living together afterwards that causes all the problems.” Winters was not talking about corporate mergers and acquisitions (M&A), although she might as well have been. After all, two firms that decide to spend the rest of their lives together probably have more need of marriage guidance than even the most ill-suited of human couples.

At a time when the world is beginning to face the realities of global warming, investors are also warming up to the idea of one set of global financial reporting standards. In our last Newsline article we examined the transition to International Financial Reporting Standards (IFRS) in Canada. In this issue we are going to present the results of an international survey of investors that is providing some strong and encouraging views that the global convergence of accounting standards is a move in the right direction.

Ian Sax reports on the buy side’s increasing demands for the sell side to provide corporate access

In the aftermath of the $1.4 bn global settlement with major Wall Street firms, sell-side research arms have been forced to reassess how best to provide value to institutional clients. What they’re finding is something that most investors have been saying for some time: they want ‘access.’ Access to senior management at target companies, that is.

This development is hardly surprising. Since the SEC imposed Regulation FD, the buy side has seen its access to company management curtailed. So with companies generally ceasing to grant one-on-one meetings, investors are putting a higher premium on what private access they can gain.

‘With Reg FD, companies provide only certain information. Gone is the practice of selective disclosure, so there’s a perception on the buy side that it gets more from looking management in the face than from reading companies’ releases and 10Qs,’ says Tom Ward, director of IR at La Quinta Corporation.

Old role, new premium
Analysts have, of course, long served as matchmakers between company management and investors. What is new is the premium investors are placing on that role. Some fund managers go so far as to suggest that all of their commission dollars are aimed at corporate access. That’s a sentiment Samuel Jones, CIO of Trillium Asset Management in Boston, says he’s heard over and over.

‘This role for analysts of setting up meetings and tours has been routine for decades,’ Jones notes. ‘What’s new, and what has surprised me, is that all their commissions are really now going to such access. The written research that they provide is just the icing on the cake.’

Alice Lehman, managing director of IR at North Carolina-based Wachovia Corporation, says that, from her perspective, the shift in investors’ tastes came some time ago. However, circumstances – chiefly the bull market – kept the sell side focused elsewhere.

‘When I came into the IR role at Wachovia in 1996, I surveyed investors and sell-side analysts and found that what interested most everyone was access to company management,’ says Lehman. ‘In the mid-1990s, there was a very robust M&A environment picking up speed, especially in the banking industry. So at the same time as investors were looking for more access, analysts were focusing on working with bankers trying to gain more M&A business.’

Gaining access
That sell-side analysts were more closely aligned with bankers in the past is no secret. The buy side was, of course, aware of this dynamic which is why, according to Lehman, it set up its own research arms.

‘If you have your own buy-side research shop, you want to be able to come in and meet with management as part of your assessment of a company,’ she explains. ‘Now what’s happened is that regulators have said to the sell side, You can’t be involved with banking at all. So sell-side analysts have turned back to their roots and now they are being judged not only on their research, but also on their helpfulness to the buy side. And the number one way to be helpful is to provide access to senior management.’

Banks have been quick to capitalize on the demand. Many of the larger firms have set up what are known as corporate access departments, where the goal is rather obvious. ‘The role of corporate access was formalized at Banc of America Securities in early 2004,’ says Brian Tobin, managing director of corporate access at Banc of America Securities. ‘This is a service we provide to our corporate issuer clients and our buy-side investment clients. The sell side is the best place to go for this access because of the relationships we have with the issuer side.’

Typically, the analyst covering the stock will set up a meeting and is nearly always present. But given that some banks have cut back on their coverage, there are many companies without an analyst following their stock. That doesn’t exclude them from such services, however.

‘We do set up meetings with companies where there’s no coverage, though it’s less common,’ notes Tobin. ‘There may be no analyst coverage, but we might have a banking relationship. Banc of America Securities is part of Bank of America, so we have a tremendous number of business relationships with corporate America and those relationships can be leveraged for corporate access events.’

Setting limits
The typical format for analyst-led meetings is either a non-deal roadshow or, more commonly, a field trip meeting to the company’s headquarters where the analyst brings a small group of investors to meet with management.

Gary Flaharty, director of IR at Texas-based Baker Hughes, says analysts often bring groups of investors on bus tours over a two-day period and visit some of the many energy companies in the vicinity. ‘Generally, the analyst is in attendance and asking questions along with investors,’ he explains. ‘The format is anything from a breakfast or lunch to a plant tour, or just a meeting with management.’

Of course, there is a limit to how much time management has to meet with investors. Some firms have strict policies and won’t meet with investors privately, period. Others juggle the requests depending on management availability.

‘We do quite a few meetings where an analyst will bring in anywhere from five to eight investors,’ says Lehman. ‘We try to control the scheduling as much as possible, typically arranging, in advance, four to six all-day schedules every quarter. We have about 30 sell-side analysts, and we rotate them so they get to come in once or twice a year. It’s generally done on a first come, first served basis, but we’ll look at whether or not someone was in the previous quarter, and we may bring in someone who wasn’t in already.’

One concern for smaller sell-side firms – and analysts with a negative or neutral rating on a stock – is that the company will curtail their access. And it’s a real concern. In the recent IR magazine-commissioned Investor Perception Study, US 2005, 38 percent of a pool of 732 sell-side analysts say they felt shut out from a company following a ratings downgrade. Of those, 6 percent say firms have threatened to suspend their banking relationship following a downgrade.

Ward points out that it’s his job to remain independent of the rating an analyst has on his company. ‘We look to the sell side to help communicate our strategy and story to institutional investors,’ he says. ‘It’s our objective to make sure they’re as informed as possible, so I don’t see a difference whether they’re writing research or providing access. Just because an analyst has a negative rating, I’m not going to blackball him or her. It behooves me to make sure he or she has as much information as possible to make the right decisions.’

Following rules
Companies enjoy the convenience of having analysts functioning as concierges, including the handling of logistics. But it’s the firms themselves that bear the burden of complying with Reg FD. This is especially tricky, given that investors are there to gain an edge over the competition with the information they can extract from such meetings.

‘We have fairly strict disclosure guidelines,’ says Flaharty. ‘Either I or the assistant director of IR is present at every single meeting. We state our disclosure policies in our pitch book – one whole page on what we will and won’t talk about. We don’t talk about inter-quarter results, for example. To any guidance questions we receive, we give our answers based on our last publicly given guidelines – so we make it clear we’re only reaffirming.’

Ward says the best way to handle investors who are intent on gleaning non-public information is for management to know exactly what is public and what is not. ‘You have to know exactly and in totality what is public,’ he says. ‘You have to know your story, your strategy and what is publicly disclosed. That way you don’t get tripped up by someone trying to gain an advantage.’

Jones agrees that many investors are looking to ‘pick something up’. ‘Because the cost of facilitating these meetings is high, it’s a small group of investors – such as hedge funds – that can afford it,’ he notes. ‘It falls on the company to be vigilant.’

La Quinta’s investor relations policy is for the vice president of IR always to be present in such meetings. ‘Everyone here is very well informed on what is and what is not public information,’ says Ward. ‘You will always have investors who ask the questions anyway but we will, of course, not answer. For example, we’ve been very vocal about the fact that M&A is part of our growth strategy. So people will ask what we think about this property or that property, and our answer will be that we can’t answer. There is a dance between investors and management that has always existed.’

At Wachovia, Lehman is especially careful with conference calls, which is another format analysts use, especially with international clients. ‘We won’t get involved in sell-side-sponsored conference calls if they’re not going to be webcast or accessible via dial-in, ideally simultaneous to the call, or via a replay that is available for a specific period of time,’ she says. ‘We’ve had requests to participate in private conference calls where it’s been stated that the press is not allowed. We won’t take part in those.’

by Ian Sax

Thanks to IR Magazine for allowing us to bring this article to you.

Hulus Alpay offers wise words on educating analysts about new accounting standards

Q. My company has made the switch to international financial reporting standards (IFRS) and so far we haven’t had many questions about the change from analysts. But I have heard there is a lack of understanding of how these rules affect the bottom line. Should we educate our analysts on how IFRS has affected our reporting?

A. I highly recommend taking the lead and proactively educating analysts and investors on the impact IFRS will have on the financials to ensure the changes are fully understood. It’s easier to buy some insurance against the possibility of the numbers being misinterpreted than to have to address any misperceptions that arise.

Not all analysts are created equal and it’s important to keep this in mind when communicating with the Street. Many firms have professionals working through these changes with their analysts and clients, but some don’t have this luxury, which is another reason to take the lead.

I have also heard many complaints from US analysts following overseas issuers that the change has made it harder to navigate the comparables. Although some countries and early adopters have paved the way for a smoother transition, it’s important to remember that analysts in other countries – like New Zealand, for instance – have until 2007 to fully adopt IFRS. Generally, firms that have proactively addressed the impending changes have had less fallout to deal with after the change and are generating some ‘goodwill’ with analysts.

Q. We’re considering hiring a junior IR person and I am leading the recruitment campaign. What I need is someone to manage requests from smaller investors and analysts so I can focus on targeting and dealing with major institutional investors. Any tips on what sort of skills and experience I should specify for this position?

A. Traditionally, retail investors and small institutions have fallen to the junior person in the IR department, while larger institutions and the sell side are the domain of the senior IRO. But keep in mind that small institutions can become some of your largest shareholders if they take large positions in only a few firms – so make sure your future largest shareholder is getting the most senior attention it needs.

As for skills and experience, good staffers are born self-motivated and possess a willingness to learn. When dealing with retail investors, patience and attentiveness can make a world of difference, so make sure these qualities come naturally to your candidates.

I have always found it easy to train people who have the basic building blocks of IR and an interest in Wall Street. Knowledge of the company can easily be learned, but an appreciation for the markets can rarely be taught.

E-mail questions to advice@thecrossbordergroup..com. Hulus Alpay is senior vice president of New York-based IR and PR firm Makovsky & Company.,

Thanks to IR Magazine for allowing us to bring this article to you.

Asian ADR issuers aren’t afraid of Sox, reports Neil Stewart

Sarbanes-Oxley may be a cloud hanging over a lot of foreign issuers on US exchanges, but Asia seems hardly to have noticed. Sox certainly didn’t deter the ten Chinese tech stocks that listed American depositary receipts (ADRs) on Nasdaq in the year to September, or the dozen or so still in the pipeline. Section 404 didn’t scare off one of the largest ever venture cap-backed IPOs, Shanghai chip maker SMIC, which last year dual-listed in Hong Kong and on the NYSE, raising $1.8 bn and surpassing even Google. Nor did the type of shareholder litigation faced by China Life and China Mobile stop China’s own version of Google, Baidu, from climbing more than 350 percent on its first day of Nasdaq trading in August.

And no amount of SEC fine print could slow Taiwan’s Chunghwa Telecom, which in August raised $2.56 bn in a secondary offering on the NYSE – the largest ever ADR capital raising from Asia and the second largest from anywhere.

‘Sox actually helped us,’ says Fufu Shen, head of IR at Chunghwa Telecom. ‘We were preparing for years before we listed on the NYSE, so the new requirements developed gradually. I know there are lots of Sox constraints, but the review we conducted gives investors more confidence.’

Christopher Sturdy, managing director and head of the Bank of New York’s depositary receipt division, says US investor interest in Asian stocks has been growing for years, with a substantial inflow of capital continuing through 2005.

‘One reason Asian issuers can’t ignore US investors is that US investors are actively looking for Asian issuers,’ he explains. In part this trend is a result of the quest for growth. ‘US investors may feel they’re overweight in slower-growth European companies and want to get into higher-growth companies in Asia,’ Sturdy continues. ‘Sometimes we can actually see the movement – a fund gets out of a European ADR and the money goes straight into an Asian one.’

Why ADRs?
Some pundits – among them IR magazine – have long sounded the death knell for ADRs as domestic markets have opened up to US investors. The Hong Kong market, for example, is easy and cheap to access, while a growing number of qualified foreign institutional investors (QFIIs) can access China’s A-share market. So why don’t Asian issuers sit tight and let US investors come to them?

Regional domestic markets have also seen large offerings in 2005, and they will continue to do so. ‘But that doesn’t mean issuers will ignore overseas pools of capital,’ notes David Russell, Asia-Pacific director at Citibank Depositary Receipt Services. ‘A Taiwan tech company may be able to raise all its capital locally, but if it has customers, suppliers and employees in the US, why not raise money there?’

Besides, not all US investors are able or willing to trade on Asian exchanges. ‘There are literally hundreds of sector-style fund managers that do not have QFII status,’ says Kenneth Tse, head of Asia-Pacific ADRs at JPMorgan Chase. ‘Even within large global fund families, there are individual funds that are not allowed by their charters to buy non-US listed shares, and buying ADRs is the most economical route for them to get international equities exposure. Even for foreign investors that can buy Asian shares in the local markets without foreign ownership restrictions, many still prefer to trade on the US stock exchanges and in their own time zone.’

Consider two key types of investor that rely on ADRs, and not just the classic example of US pension funds, which can hold only US-listed securities. Separately managed accounts (also known as ‘wrap’ accounts) and hedge funds have been growing in leaps and bounds, and in both cases fund managers prefer US-listed securities over domestically listed ordinary shares. ‘They have to use DRs to be cost-effective,’ Sturdy points out. Rush to Nasdaq Certainly, new NYSE-listed ADRs have been thin on the ground over the last year, continuing a slowdown triggered by delayed though still looming Sox deadlines, but Nasdaq listings have been coming thick and fast. And secondary capital raising has been healthy: Asia-Pacific, excluding Japan, raised $10.8 bn in DR form up to September, compared with $6.7 bn in the whole of 2004, according to Citibank.

Chris Kearns, the Bank of New York’s regional director for North Asia DRs, explains the healthy flow of Asian tech companies. ‘Many of the new listings over the past 18 months have been relatively small entrepreneurial tech companies funded by predominantly US venture-cap firms, and part of the exit strategy is a Nasdaq listing,’ he says. ‘After all, US investors still value tech companies more highly than their counterparts around the world, and the venture-cap firms want the quickest, cleanest way out.’

‘We gave serious consideration to all our options, including a dual listing,’ says Donglei Zhou, director of IR at Shanghai-based online gaming company Shanda Interactive Entertainment, which was one of the two best performing US IPOs in 2004 (the other was China’s 51job). ‘Most of our peers in the Chinese internet space were trading on Nasdaq at the time, and US investors are just more familiar with the concept. In fact they’re more appreciative of technology companies overall, whereas in Asia investors still tend to give tech companies a lower valuation compared with the traditional sector companies that dominate the Hong Kong market.’

For Shanghai’s Focus Media Holding, which raised $172 mn on Nasdaq in July, an ADR does more than just attract investors: it also attracts advertisers to its network of TV screens in offices and other commercial sites across China.

‘One reason we listed on Nasdaq was to raise our international profile and support our business,’ says Jie Chen, investor relations manager at Focus. ‘Companies are somehow suffering from credibility problems in China, but our successful US listing shows that our financials are audited and we have strong corporate governance. That will also help attract more international advertisers to our network.’

Larger Asian companies, swelled by continuing economic growth, also need to be compared with their counterparts traded in the US. ‘These companies are leaders globally, not just in Asia,’ says Tse. ‘It makes sense for these stocks to trade alongside their peers on the US stock exchanges.’

There are other good reasons why issuers from some Asian countries will continue to use DRs. ‘Underwriting rules in some domestic markets are still tipped against mega-offerings,’ explains Russell. ‘Hong Kong, for example, has reasonably standard international underwriting rules but in Korea, Taiwan and India, local underwriting rules can restrict the allocation of stock to foreign institutional investors. DRs can help issuers from these countries target institutional investors with large chunks of stock.’

Sox challenge
Still, Sox has been an obstacle if not a roadblock. The US-listed DR market saw only eight new programs in the first half of 2005 compared with 22 new global depositary receipts (GDRs) listed on the London and Luxembourg exchanges. ‘It’s one of our busiest years ever for GDRs,’ Russell says. ‘But without a doubt, big-ticket US-listed ADRs have had a number of setbacks, largely due to Sox. The China pipeline has been particularly affected.’

Russell admits to hearing some concerns about the costs involved in complying with Sox, but he hasn’t heard of any major problems among existing issuers. ‘Remember, many Asian DR issuers were recently privatized, and there is no more traumatic event in the life of a company,’ he says. ‘It’s the same for firms from other emerging markets: having just started complying with US Gaap fairly recently, they’re saying, OK, we’ll comply with Sox, too. European firms seem focused on Sox, but for Asian companies it’s not a big concern.’

While complaints about Sox from European ADR issuers have been rife, Asian companies, like their Latin American counterparts, have been stoically accepting. ‘There has been much greater acquiescence in Asia than in Europe or the US,’ Sturdy says. ‘Clearly some companies want to avoid US regulations and costs. But others want to demonstrate they can keep up with the highest and most rigorous standards.’

He also expects Sox difficulties to diminish, partly through experience and, perhaps more significantly, because of better Public Company Accounting Oversight Board (PCAOB) guidance for auditing firms, released in May 2005. The second round of Section 404 compliance could cost 40 percent less for some US companies, for example, according to a March 2005 survey by Financial Executives International (FEI).

‘We were aware of Sox and the possible costs when we went for our US listing,’ Chen says. ‘We have built an internal auditing team and appropriate corporate governance system to comply with SEC regulations.’

For that matter, Sox-like regulations – particularly the EU directives – are spreading round the world. ‘GDR issuers will have to meet additional requirements to maintain a listing on an EU stock exchange,’ Tse says. ‘Meanwhile, the adoption of international financial reporting standards (IFRS) by an increasing number of countries means reconciliation to US Gaap should, over time, become less onerous. That’s a positive factor for the ADR market.’

‘Other regulators are raising the bar,’ agrees Sturdy. ‘New ADRs will pick up.’ He predicts that China and India will continue to contribute new ADRs and Korean issuance will pick up as its economy recovers. Japan, he says, is a hotbed of possibilities. Japanese companies have seen US investment growing ‘exponentially’ and they recognize the need for more presence in the US. Kearns adds that the pipeline of new NYSE-listed ADRs from Asia, largely dry for the past year, will resume with programs for Chinese companies in more traditional sectors such as retail, oil and gas, industrials and banking.

As Russell says, don’t write off ADRs yet. Or as Shen puts it: ‘An ADR is something that most global companies aim for. Quite simply, it’s an honor to be listed in the US.’

By Neil Stewart

Thanks to IR Magazine for allowing us to bring this article to you.

Vanessa Theiss finds out what Canada’s main financial centers have to offer

Canada is known for its wide open landscapes, tasty maple syrup and friendly people. This openness applies to its investment communities, too, making Canada’s main financial centers, Toronto and Montreal, welcoming places to visit during a North American roadshow.

Canada’s cities are also attractive because of their density in wealth. For example, Toronto is the country’s biggest financial center, responsible for an impressive $386 bn (C$458 bn) in terms of equity assets. This is distributed among around 200 buy-side institutions, with most residing near Toronto’s famous Bay Street. Montreal is the runner-up, with its buy side managing just under $100 bn in global equities and featuring some 50 buy-side accounts also located closely together.

‘You can certainly spend two worthwhile days in Toronto – there are at least a dozen firms you should do a one-on-one with, and perhaps another 20 or 30 that would attend a group lunch,’ says Brian Lynch, director of investor relations at ING Canada, a property and casualty insurer based in Toronto. ‘In Montreal you probably need only one full day. There are perhaps five institutions you can’t miss, and you can likely get ten to 15 firms to attend a lunch meeting.’

Canadian investors’ growing appetite for international investments is luring more roadshows here. This is mostly because Canadian institutional investors managing deferred tax portfolios for pension funds and personal retirement accounts are no longer constrained to a 30 percent limit for investing in foreign stocks.

‘That limit was lifted in the most recent Canadian federal budget,’ explains Jane Watson, vice president of IR at Toronto-based CGI. ‘Therefore, there is a greater opportunity for foreign issuers to market their securities in Canada.’

Investing styles
Toronto and Montreal offer a wide range of investment styles, but growth and value players are the most common in Canada. ‘In Toronto there is about an equal split between growth and value institutions, but there are also several other firms, including approximately 39 hedge funds,’ notes Susan Herman, managing director at Christensen, an IR consultancy based in the US and Canada. ‘In general terms there are at least four times as many institutions in Toronto as in Montreal, where there are around 26 growth institutions and 16 value, so investors there are more growth-oriented.’

Because pension funds and mutual funds are big players in the Canadian investment market, and hedge funds are a minority, many portfolio managers here tend to take long-term positions in their investments. For instance, the Ontario Teachers’ Pension Plan (OTPP), one of the top buy-side institutions in Canada, is a value player that covers about 200 companies and invests for the long haul.

Montreal buy-side institutions Caisse de dépôt et placement du Québec (CDP Capital Management) Jarislowsky Fraser Letko Brosseau & Associates Natcan Investment Management

Source: CapitalBridge
Brian Gibson, senior VP for public equities at OTPP, explains the fund’s investment style: ‘We have a large global equity program, with about $30 bn invested in traded shares all around the world. We don’t have a sector preference, but what we do is focus on bottom-up company analysis. We analyze and value companies, and where we think the shares are attractive, we will buy them. We have a bit of a value orientation with a touch of long-term vision.’

Aligned with their long-term view, portfolio managers here like to use one-on-one meetings to test senior management’s ability to create value. ‘We do not ask managements about their next quarterly earnings – we have no interest at all in that kind of material,’ says Gibson. ‘What we do talk to them about is what their longer-term strategy is, where they want to move their company to in the next five years, how they are going to execute strategy, and what their strengths or weaknesses are – and how these will influence their ability to achieve that business plan.’

Corporate governance is a real hot-button issue with Canadian investors, which will be looking at top management’s records and are bound to ask questions if they find any red flags. ‘Whether we ask a question [about governance] depends on whether there is an issue dealing with governance,’ explains Gibson. ‘Specifically, we are very focused on executive compensation. What we try to see is whether management’s interests are aligned with our interests as a shareholder or potential shareholder.’

Toronto buy-side institutions
AIM Trimark Investments
BMO Nesbitt Burns
CPP Investment Board
Mackenzie Financial
McLean Budden

Ontario Teachers’ Pension Plan
RBC Asset Management
RBC Capital Markets
TAL Global Asset Management
TD Asset Management

Vital homework Doing your homework on investors before coming here is a must, as they will most certainly do their own due diligence on your company prior to meetings. ‘Canadian investors tend to be very diligent; they do a lot of homework and prepare thoughtful questions,’ points out Herman. ‘They also tend to be timely, and they appreciate when management demonstrates the same level of respect for them.’

Brian McInerney, managing partner at BarnesMcInerney, a capital market communications firm based in Toronto, advises a

survey of investors to find out which institutions would be most interested in a company’s story. ‘There are about 20 serious players interested in European stocks; it’s a select group and you want to make sure you are not wasting senior management’s time,’ he explains. ‘Having a pack of materials to send to investors to help qualify their interest in your company and allow them to do their homework is vital.’

Investors’ general knowledge of your company will vary here, as some portfolio managers will have been following your story for a while, and others will be showing genuine interest for the first time. It is recommended, therefore, that you give investors the option of doing a standard presentation, or just going straight to Q&A. Generally, meetings here should run for an hour, with a maximum of 15 minutes dedicated to a presentation and the rest to Q&A.

Keep in mind that analysts and portfolio managers here take what CEOs and CFOs have to say very seriously. Make sure no absolute promises are made by senior management, as Canadian investors will call you on it in follow-up meetings. ‘We often see investors coming to one-on-ones with notes from past meetings. They tend to follow up on these notes and look for delivery on milestones,’ explains Lise Hébert, vice president of corporate communications at Neurochem, a Laval-based biopharmaceutical company. ‘Investors here call me for financial status, clinical trial updates and so on, especially as they apply to my sector.’

Getting around
Toronto’s financial center is quite easy to navigate, as most buy-side institutions are within walking distance of each other in the Bay Street area. Toronto also has an extensive underground infrastructure called the Path, which lets you walk around without a coat during the harsh winter. This is not to say you shouldn’t hire a car service while here, as lugging around presentation material on foot can be difficult.

Montreal’s financial center is more spread out than Toronto’s. Between the subway and subterranean shopping malls, you can get away with walking, even in the dead of winter. But it’s best to hire a car service here, too, as a time-saving measure.

Both Toronto and Montreal have extensive underground infrastructures. They’re safe and clean and connect to all the major offices and buildings, which house the majority of the financial institutions. Therefore, when selecting venues, make sure they link to the underground network, as local investors appreciate this convenience when traveling to meetings.

You can fit in five or six one-on-one meetings and one group lunch meeting in a day while in Toronto or Montreal. Meetings before 8 am are not very popular in Canada, and dinner meetings or cocktail parties are unusual. It’s best to schedule lunch gatherings to achieve the highest attendance when doing group presentations.

Most institutions here really appreciate meeting with senior management on a one-on-one basis, building a strong relationship over time. Therefore it is best for senior management to go to Canada at least once a year – if not twice – to meet with portfolio managers. ‘When we decide to follow a company, we make a real commitment to it,’ says Gibson. ‘We follow it for a long time, so a company would be seeing the same people here time after time. At least twice a year is a good average for touching base with companies.’

Montreal may be in French Canada but the language of business is largely English. Still, it is wise to extend a little courtesy to the French speakers here. Saying bonjour and au revoir is the least you can do, and quality translation of some of your handout materials may well be appreciated.

Finally, don’t be too fooled by Canadians’ friendly nature, as they are just as tough as any investor across the border. ‘Because the Canadian audience is so polite and demonstrates a high level of preparedness, sometimes companies can mistake a general good nature for genuine interest,’ explains Herman. ‘Management may think the investor is interested to the point that it will take a position, whereas it is simply its nature to be that attentive.’

Visitor information
Toronto
Where to present:
Fairmont Royal York
100 Front Street W
+1 416 368 2511

Le Royal Meridien King Edward,
37 King Street
+ 1 416 863 3131

Where to eat:,
La Maquette
111 King Street E
+ 1 416 366 8191
Terra
8199 Yonge Street
+1 905 731 6161

Montreal
Where to present:
Fairmont Queen Elizabeth Hotel
900 René-Lévesque Blvd W
+1 514 861 3511

Montreal Exchange
800 Victoria Square
+1 514 871 2424

by Vanessa Theiss

Thanks to IR Magazine for allowing us to bring this article to you.

As public scrutiny and regulation intensify, Carolyn Iglesias reports on the new require-ments for today’s chief financial officer

CFO badge The CFO job is evolving: from number cruncher to business partner and people motivator, from chief accountant to strategic thinker and keeper of the corporate conscience. Today’s CFO is being asked to be all of these things and, as a result, new demands are being placed on IR.

‘If I were to go back about 15 years, the CFO role was more of an administrative function,’ comments Steven Springsteel, SVP of finance and administration and CFO at Sunnyvale, California-based Verity, a small-cap business software company. ‘It then evolved into more of a strategic role, [for] more of an operations business type of person.’ With the advent of Sarbanes-Oxley and the complexities of revenue recognition, Springsteel points out, ‘the pendulum started swinging toward CFOs with more of a technical, accounting background.’

Now that companies are past the first year of Sox 404 compliance, the pendulum may be swinging again.

‘The CFOs who are going to be in high demand are those who can provide that operational and strategic insight,’ Springsteel observes. ‘For a CEO to be successful you need to understand all aspects of the business. The CFO’s role is really to provide the cross thread of the functional groups of the company and tie them together as they pertain to the business model, as well as the day-to-day operations of the company.‘ The corporate conscience

‘The job has become a lot more demanding,’ agrees Dave Murray, CFO at Longview Solutions, which provides business performance management software and solutions. ‘You have to be proficient in a lot of different areas.’

Today’s CFO must be up to speed on regulations and, in a sense, become the corporate conscience. ‘There’s a ton of legislation out there,’ says Murray. ‘Before any new initiatives are taken on or a company tries to do something it hasn’t done in the past, the CFO has to be actively involved to ensure no-one’s running foul of any regulations.’

According to Murray, the line between acceptable and unacceptable behavior is ‘more black and white’ today. Even so, companies are looking to CFOs to help them identify where that line is and avoid stepping over it. ‘This is where the CFO has to be visible and active,’ states Murray.

Given the high visibility CFOs have today, many people view the job as the most important corporate spot after the CEO post, and close interaction with the CEO goes with the turf. ‘I’ve always been the CEO’s right hand person,’ says Springsteel. ‘We’ve always conversed on a multitude of initia-tives. [The CEO is] probably the person with whom I’ve always had the tightest relationship. But you have to be able to get along with your peers and develop relationships with all the other functional groups [as well].’ Sanity check

As expectations for CFOs change, so do the demands on IR. ‘[When running a company, it’s easy] to drink your own Kool Aid,’ says Springsteel. This is likely why he looks to IR officers to provide a ‘sanity check’ with direct feedback from the company’s investor base.

‘You really want a sounding board,’ Springsteel adds. ‘As you put together your business model, your earnings call script, and so forth, you want someone who’s going to tell you how your stakeholders will perceive [this information]. Investors will tell an IR person a lot more than they’ll tell the CFO or the CEO, so the [IROs] can say, Here’s the feedback that I’m hearing from our investors; here’s what their concerns are.’

However, CFOs are looking for IR not only to identify stakeholder questions and concerns but also suggest solutions and responses. In his 15 years as a CFO, Springsteel says he’s seen IR evolve from a ‘purely administrative function’ to a ‘much more strategic role.’

Before IROs can provide strategic insight, though, they need to develop a thorough understanding of their company’s business. ‘The more informed [IROs] are about the competitive landscape and the value their company and their products bring, the more value they can add,’ says Melissa Cruz, former EVP and CFO at Massachusetts-based Concord Communications, which was recently acquired by Computer Associates. ‘The mantra in my shop was always to be a business partner first and a functional expert next.’

For Cruz’s IRO at the time, Ray Ruddy, that meant collabo-rating with the company’s marketing and engineering teams to understand what a product does and how to position it. It also meant spending time with the company’s customer base and learning what customers really think. This enabled Ruddy to add value and speak credibly with institutional investors.

Making sure analysts are educated and well informed about regulatory changes is a valuable service IR can provide to support the CFO, says Colleen Cunningham, president and CEO of Financial Executives International (FEI), the New Jersey-based organization for financial executives.

‘Briefing analysts in advance about Sox 404, the internal control reports and what the management assessment of internal controls would mean, rather than have the CFO do that during the quarterly earnings call, are good examples of how IROs can be proactive and support the CFO,’ Cunningham notes. ‘It’s important to have that knowledge and be able to impart it to the analyst community without involving the CFO.’ Beyond the numbers

Like IROs, today’s CFO also has to interact with other employees to get a real sense of how the business is performing beyond the numbers.

Quote Dave Murray: The CFO role has become more demanding‘The reality is that none of us is Merlin the magician,’ explains Murray. ‘You need to interface with the people who are down at the line to understand where the business is going and put some sense to the numbers you’re seeing. People have to know that you’re both trustworthy and dependable. They have to be comfortable having a conversation with you and believe that you’re genuinely trying to get to the right answer, and not necessarily trying to hang them out to dry.’

CFOs need to interact effectively with a growing number of individuals external to the company as well. ‘Confidence and integrity, plus the ability to garner the respect of a wide circle of other stakeholders is a must,’ says Cunningham. ‘In addition to shareholders, the board, the audit committee and senior executives and staff, there is a whole organization perspective that stretches beyond finance.’

Audit committees have new responsibilities under Sox and are much more interested in understanding the compliance effort and the internal control environment, Cunningham adds. As such, the CFO has a responsibility to educate and inform the audit committee. ‘The biggest challenge CFOs face these days is really the resource issue,’ she notes. ‘You have to make sure you have the right staffing and the right people motivated to continue to do that type of work.’

Cunningham believes training along with retaining and motivating staff has become a much bigger facet of the CFO’s position. ‘In the past, people skills might not have been as important as deal-making skills and the ability to interact with Wall Street,’ she says. ‘Now, however, you really need to be an authentic leader.’ CFO credentials

CFOs with leadership skills are expanding their responsibilities. ‘We’re seeing more companies move away from [the chief operating officer] position and the CFO is taking on that role as well, particularly as the compliance effort and the internal controls are such a big piece of the operations of the organization,’ explains Cunningham. ‘We are also seeing more and more [CFOs] move into the CEO role.’

The American Institute of Certified Public Accountants (AICPA) believes a certified public accountant’s (CPA) reputation for objectivity is among the reasons why CPAs make desirable candidates for the CFO job. This makes CPAs ideal for looking at a business through different eyes and asking tough, probing questions.

‘[CPAs] can say, Are we doing things the right way; is that the right strategy for us?’ says John Morrow, CPA and vice president

of AICPA. ‘Gone are the days when the CPA is considered to be wearing a green eyeshade, a pocket protector and a calculator hanging from his or her belt.’

According to Morrow, today’s CPAs are strategic professionals who have a strong work ethic and a commitment to quality. Cunningham agrees. ‘Certainly, having a CPA in this new environment gives you an advantage,’ she says, noting that many CFO job searches today stipulate ‘CPA and MBA’ rather than ‘CPA or MBA.’

Not everyone agrees that having a CPA is the best path to the CFO post, however. ‘The [CFO] job is much broader than just accounting,’ comments Cruz. ‘The chief accounting officer component is certainly important, but it’s not the whole job. It’s not that someone couldn’t have a CPA qualification and also have a broader role, but it’s not just a job for CPAs.’

With all the new demands on the role, some wonder whether the CFO role – which is a logical career move for IR – will be harder to fill in the future. ‘The CFO used to be a role that people coveted,’ comments Murray. However, given increased scrutiny of CFO behavior and the public disclosure of the post’s compensation, he wonders ‘how attractive’ this role will be in the next five or ten years: ‘It’s going to take some people with lots of guts to want to step into the line of fire. Fear is pervasive out there.’

Thanks to IR Magazine for allowing us to bring this article to you.

IR for a multi-billion-dollar IPO is no easy task. Ben Bland finds out how this US insurer hit the ground running

Google might have been the biggest IPO of 2004 in terms of hype, but Genworth Financial was the biggest in terms of capital raised: $2.8 bn to Google’s $1.7 bn. While Google’s founders were busy talking to Playboy and running the gauntlet of the SEC’s quiet period rule, Genworth was spun off from General Electric (GE) in a less controversial – though no less successful – manner. Since the IPO in May 2004, GE has raised another $5.6 bn in two secondary offerings of Genworth stock, leaving it holding 27 percent of the shares.

The new, NYSE-listed insurance holding company was a subsidiary of giant conglomerate GE until it was sold off as part of a plan to streamline GE’s businesses. Although Genworth was considered a somewhat minor part of GE, in its new guise it has become one of the world’s leading insurance companies, with 15 mn customers and operations in 24 countries. But while Genworth had no problem gaining recognition from its customer base, the same was not true of an investor base that knew little about it.

‘At the time of the IPO, we had a business that was not broadly known and had not been taken to investors on its own footing,’ explains Jean Peters, senior vice president of investor relations and corporate communications at Genworth’s headquarters in Richmond, Virginia. ‘An investor’s first decision point is to ask, How believable is that story? So we spent a great deal of time building a story as a company that would execute its growth plans.’

IR from scratch Before Peters and her colleagues could hit the road selling the Genworth story, they had to set about constructing an IR mentality within the company. And in Peters, who has years of experience at a number of leading insurance companies including John Hancock Financial Services (acquired by Canada’s Manulife Financial in 2004), Allmerica Financial and Providian Financial (since merged with Washington Mutual), Genworth secured the perfect candidate for the job. Peters profited from her well-developed understanding of the requirements of IR in the insurance sector. Specifically, she was aware of the need for a detailed quarterly financial supplement to help explain the accounting methods behind the company’s diverse range of financial products. ‘

We have built an arrangement at the organization so each of the business segments goes through a quarterly assessment of what the Street is writing about the industry, about our competitors and about us, then building messages that speak to the issues that are most important to investors,’ Peters explains. ‘We do it in a very disciplined way.’ And the Street certainly seems to agree, judging by the number of analysts who have heaped praise on Genworth’s quarterly supplements.

Working in unison Disciplined planning and a targeted approach are behind Genworth’s IR. As Peters points out, ‘We’ve sold $9 bn of stock for GE in the past 16 months and we’ve had better subscriptions in each subsequent sale as a result of clarifying the message and gaining the support of investors and analysts.’

This impressive performance has been achieved by a reasonably small group of people. Peters, who reports to the CEO, is responsible for corporate communications and investor relations; Alicia Charity is vice president of IR. Charity, who also worked alongside her boss at John Hancock, is assisted by two analysts but, Peters highlights, the IR team is only one part of the process of communicating with investors. ‘We work hand in glove with the CFO and the finance team on issues of planning and control,’ she says.

‘Part of what allows us to operate is the way we manage throughout the organization on a matrix basis,’ Charity says. ‘We work very closely with our finance team and our business units, and really embed ourselves in their financial review process, their operations and their strategy sessions. That level of understanding within IR and the support we get by putting ourselves within the financial review structure allow us to have the knowledge we need to communicate effectively externally but also to leverage work that’s already been done in the organization.’

Peters and Charity have put these strong links with senior management to good use on roadshows in the US, Canada and Europe. Given the obvious time constraints on the top brass, they like to piggyback meetings. ‘When our leaders are in Europe doing business reviews, we use those opportunities to meet with investors,’ Peters explains.

The IR team has also clocked up the miles in North America. ‘We’ve done three roadshows in a little under a year and a half,’ Charity notes. ‘For the first couple of offerings we were really focused on the large cities. But for the latest offering [in September 2005], we split into two teams and were able to cover a lot more geographic diversity, hit some middle-market cities, hit Canada, and spend a little more time with investors we hadn’t touched before to give them another level and depth of knowledge. It was good from our perspective because we were able to bring in some great new names.’

Looking ahead
Although its initial focus was the institutional market, Genworth is now planning to shore up its retail investor base, which currently accounts for less than 10 percent of the shares. ‘We’re going to be developing a program targeted specifically at retail shareholders and building that out as we go into 2006,’ Charity says.

A substantial proportion of Genworth’s business comes from overseas so another goal for the coming year is to bring in more foreign investors and push cent mark. ‘We see this as an important activity in the coming year now that we have a much broader liquidity and shareholder base,’ Peters says. ‘After all, GE is becoming a less significant factor and will eventually be out of the stock entirely.’

Talking to a selection of Genworth’s analysts, it becomes clear the IR team’s deep understanding of the company’s various businesses continues to underpin the IR effort. One analyst even suggests that Peters ‘would be a qualified CFO at any of Genworth’s peers’. While she might not be about to switch jobs just yet, Peters agrees that, in IR, proactive engagement with your own business is as crucial as proactive engagement with your investors.

‘My philosophy is that we have to understand the businesses to be able to communicate effectively with investors,’ she concludes. ‘We have to understand their competitive issues, their finances, so I don’t want a lot of layers between myself and the businesses. I want to be able to go out there and see what’s going on, learn it first hand – and then be able to communicate it.’

by Ben Bland

Thanks to IR Magazine for allowing us to bring this article to you.

A cloud of uncertainty surrounds options expensing, with analysts and companies taking different approaches. Ian Sax reports

If there was any thought that incoming SEC chairman Christopher Cox would undermine the much-anticipated mandatory expensing of stock options, forget it. A long-time critic of the plan to expense stock options, Cox quickly ruled out any interference with the implementation of Financial Accounting Standards Board (Fasb) Statement 123R, which once and for all treats stock options as an expense on the income statement.

Depending on their fiscal year-end, most blue-chip technology companies – a group that provided the stiffest opposition to the rule change – will be expensing when the new rule kicks in on January 1, 2006. The change is by no means US-centric, as companies reporting under international financial reporting standards (IFRS) are already expensing share-based payments.

‘Everyone understands these payments represent a cost, and a recurring cost at that,’ says Roger Taylor, CFO of the Carphone Warehouse, a UK mobile communications retailer. ‘So people are taking it as part of the normalized cost of running their business. We started prepping the investment community about 18 months ago, giving guidance on what the cost would be.’

Companies may be resigned to expensing, but many in the investment community are not. While firms prepare to expense the cost of options, many analysts are ignoring the cost altogether. Consider what happened to Google, which announced earnings of $343 mn, or $1.19 a share for the quarter ended June 30, 2005. Thomson’s First Call, the leading compiler of earnings estimates, published a consensus number of $1.25 a share, which made it appear as though Google had ‘missed’ its number. The First Call number was higher because the majority of analysts covering the company had stripped out the options expense, even though Google included the cost in its income statement.

Not minding the Gaap
‘It does not surprise me that analysts are ignoring the impact [of options] – traditionally, investors have not paid attention to corporate governance,’ says Sarah Wilson, managing director of UK proxy voting agency Manifest. ‘There are also many companies experiencing good performance only because the related index is rising, so even analysts of corporate governance are not looking at the issue. We’re definitely in a period of transition, but I’m troubled that people are ignoring these things.’

Analysts’ reactions to options expensing is by no means uniform. In Carphone Warehouse’s case, for example, most analysts following the firm are using the company’s reported figures, without issuing pro-forma numbers that exclude the cost of options.

‘In terms of analysts, there seems to be confusion about the impact of IFRS and the implications of what to do to get to normalized earnings,’ says Taylor. ‘In our case, all our consensus numbers for next year are including the cost of the options as a normalized cost. We tell people what it is – in our case, £3 mn to £4 mn ($5.3 mn to $7.1 mn) a year.’

But it is precisely the uneven response that is causing confusion. Of course, much of the response is predicated upon the impact of the expense. Many European firms, for example, have not relied heavily on options as a compensation tool.

‘I am including the cost of options, which is pretty standard practice here in Norway,’ says Tore Ostby, a senior analyst at Handelsbanken Capital Markets in Oslo. ‘I only follow Norwegian companies, and the rule change has had a pretty small impact. It is true that if you look at consensus figures, you don’t know whether analysts are including it or not, which is a problem. But most of the companies I follow give guidance, and most did it as a comment when they changed their accounting earlier this year.’

Tom Vermeiren, who covers global technology companies at Fortis Bank in Brussels, has a different observation. ‘My impression is that much of the market is disregarding the cost of options,’ he notes. ‘People were looking for figures that were closer to the past in order to have comparable numbers, so the companies are giving both figures.’

Vermeiren expects to back out the expense of options for both European and US companies, though most US firms are not yet officially expensing. ‘It’s the very large companies that could influence how everyone else responds to the rule change,’ he says. ‘The impact of the expense from options is greater for them, so it’s too early to tell what will happen when they start officially expensing.’

The same assessment is offered by Chad Bartley, equity research analyst at Pacific Crest Securities in Portland, Oregon. Bartley follows internet companies, which have relied heavily on options to recruit top talent. Because virtually none has adopted the rule change as of yet, he isn’t sure exactly how he’ll treat the expensing issue.

‘Company managements have been prepping analysts for the change, but most have not guided us on what the expense will be,’ notes Bartley. ‘Some have modest expensing in the income statement, but the rule change on January 1 will lead to a much bigger number. I suspect analysts will look at the results both ways: Gaap and on a pro-forma basis.’

No consensus
Some of the loudest criticism has been aimed not at securities analysts or the companies themselves, but at those firms that track and publish earnings estimates. First Call was singled out in a New York Times article in August for its policy of taking the analysts’ estimates as is – so that those excluding the cost of options are published as such, alongside estimates that take the cost into account.

First Call is by no means alone in facing a difficult situation given analysts’ widely divergent methods for treating stock options expensing. Nor is there a consistency in the inconsistency, such as a uniform treatment of options expensing by industry or across individual research firms.

‘We are finding that there is a mix in how it is treated even on a company-by-company basis,’ says Steve Scala, VP of operations at Zacks Investment Research. ‘We thought it would perhaps differ only by industry, or that brokerages would have a policy, but it’s mostly on a company or analyst basis. I’ve even seen some analysts include on a quarterly basis and exclude on an annual basis.’

Scala adds that Zacks is waiting to see the different models analysts are using. In the meantime, the firm is taking a company-by-company approach as it compiles the estimates. ‘For now we’re taking a look at what the majority of analysts are doing for each company,’ he says. ‘We don’t have a set policy yet, though I’m getting calls all the time asking whether we do. We’re hoping the companies or the Street will go one way or the other, though I think the analysts don’t want to be the first to make the call. Our policy is to include and normalize the numbers rather than exclude any analyst, but we just can’t do that yet.’

This lack of consistency is frustrating, even for professional investors. ‘It would certainly be better if there was a stronger standard at this point where everyone does it the same way,’ says Bruce Geller, a portfolio manager at Dalton Greiner Hartman Maher in New York City. ‘Even First Call and Zacks don’t have a standard to apply across the board. It makes it confusing, as the analysts don’t always tell you what they’re doing.’

Time will tell Just which interested party will be the first to blink, so to speak, is still an open question. Will analysts begin following a uniform set of rules, or will companies try to proactively address the issue by demanding analysts include the expense in their forecasts? Or will it be a First Call or Zacks that reacts first?

Some organizations have already taken steps toward standardizing the treatment of options expensing. For example, First Call recently announced it will publish the majority and minority consensus estimates, rather than just the majority.

‘Events have already advanced rapidly,’ says Rebecca McEnally, director of capital markets at the CFA Centre for Financial Market Integrity. ‘You have the First Call decision. A second event is Merrill Lynch saying its analysts will include the expense of stock options in their estimates. UBS, Credit Suisse and a few others have announced similar policies, but Merrill’s move adds considerable weight because the company is a major player in sell-side research.

Then there’s Microsoft, which has stepped forward and said if you issue a forecast for us, we expect you to include expensing.’

For now, Microsoft is a rare minority – and, given its clout, it stands a better chance of chiding analysts taking a particular direction. But the issue is one many IROs are grappling with. ‘We believe in transparency,’ says Jeff Lilly, senior manager of IR at Citrix Systems in Fort Lauderdale, Florida. ‘Regardless of what sell-side firms do, we want to provide as much data as possible to the analyst community so it can decide what to do with the numbers. We don’t want to tell analysts what to do.’

Lilly has been busy talking to other IROs, trying to sort through how best to deal with the expensing rule change. Citrix is not yet expensing but will commence in March 2006. Lilly expects, given the existing level of disclosure, that analysts will look at earnings both ways, with the expense and without. ‘Each sell-side firm is unique in how it handles expensing – it’s really too early to tell how this will play out, ‘ he says. ‘But I imagine over the next couple of quarters this will be sorted through.’

For proponents of options expensing, including McEnally, the long road to a conclusion is nearly over. ‘We’re optimistic the current situation – the ambiguity over how the expense is going to be treated by the Street – will change,’ he observes. ‘It’s going to be business as usual soon, and everyone will move on to the next issue.’

by Ian Sax

Thanks to IR Magazine for allowing us to bring this article to you.

Investors increasingly want companies to line their pockets rather than reinvest in growth or pay down debt. A recent study by Merrill Lynch reveals that 53% of 223 global fund managers would like companies to give money back to shareholders through share buybacks and dividends. Investors even think companies should issue debt to free up cash, the study shows. “The thinking is that companies are underleveraged and shareholders want them to take out debt to issue cash,” says David Bowers, Independent Consultant to Merrill Lynch.

If you have been an IRO for any length of time, you have likely crafted both good news and bad. Delivering the good news is usually easier. When you have bad news, you have typically had some considerable time to mull it over with colleagues and to figure out the best way to position it to investors. If the bad news is of your own making (that is, if it relates to your business performance and internal factors that lead to less than stellar results), you can likely clearly explain it and can give some 'upside' to assure investors that things will look up again soon.

What happens when some external force drops a bomb on you, literally or figuratively, and you have to communicate its impact? For instance, your plant burns down, you have a product recall, or the Federal Government announces a change to the Income Tax Act that essentially wipes out your raison d'être? On October 31, 2006, the Federal Government did just that when it announced it would “level the playing field” between income trusts and corporations.

Most people claim to have been truly shocked by the announcement, and therefore I assume that most IROs working for income trusts were shocked, and went to work on November 1 wondering what they could or should say to avoid a unit price meltdown. Given the rapid market response, clearly the answer was most likely 'nothing'. Markets have a life of their own in the face of this type of bombshell, and I do not think any words could have been crafted to mitigate what did in fact happen, at least not in the immediate term. However, most communications professionals felt compelled to say something, particularly since the timing of the announcement meant that most IROs were on the verge of a quarterly earnings release.

With 74 income trusts in the S&P/TSX Income Trust Index, 56 said something on the subject in the first press release after the Government's announcement. Among the 18 that said nothing, five were REITS, that, depending on structure, may not be affected by the tax changes. The most common theme from income trusts making this statement was, 'we are not sure we like this and we are examining its possible consequences. We'll get back to you.' I've been following up on the 'get back to you's', and many income trusts have not said much more on the subject since. Of course, this is not true of the energy trust sector, which became downright militant, formed a coalition, and paid a lot of money to produce a 233-page report to discredit the Government's action. This monumental effort has had little or no effect and the Government announced on December 19, 2006 that it is standing its ground. Granted, trying to change the course of a Government once the Minister has appeared on The National may have been more difficult than changing the course of the Bow River, but the coalition had to try.

As an aside, I have to ask, and not altogether facetiously, should we have been so surprised by the announcement? I'm not prescient, but the announcement was only a matter of time. Remember that income trusts are the brainchild of a few particularly smart lawyers (and maybe an accountant or two) who figured out how to structure mature cash-cow businesses to reduce tax paid at the corporate level. Of course, the tax effectiveness was widely publicized by new 'income trust departments' in major law firms, and over the last seven to eight years we have seen the conversion of all kinds of businesses to the structure, many of which are not exactly cash cows. The shareholders of these businesses were getting tired of waiting for growth in value through improved operations and therefore took the lure to bump it up on conversion. (Read here that I am not entirely sympathetic to the shareholders who are now crying foul).

The Income Tax Act is as thick as the Toronto phone book for one reason: the CRA eventually catches up to the smart lawyers. When assisting your CFO in drafting MD&A, I suggest you take a fresh look at “Risk Factors” and ask yourself whether you have addressed any competitive advantage that arises from some kind of external condition, such as a law, that could swiftly and arbitrarily change. Ensure you have thought about 'plan B'.

So what are some of the types of messages that income trust IROs have crafted since October 31 in an attempt to recover unit value, and are they working? I have very simplistically analyzed them, and have arrived at what should not be a surprising conclusion: if the underlying business is sound, if growth prospects are good, and there really is a cash cow – the message is simple: we are disappointed, but we have a strong business that will continue to make money, whether we or our holders are paying the tax. For these types of trusts, unit price dipped post October 31, but is rallying. For some, unit price has reached a 52-week high due to outstanding business results and future prospects. Several have had lots of good news to deliver since the initial reaction, including increased distribution rates and vigorous 2007 business plans. It's easy to spin that story.

For the businesses that were likely never suitable for the income trust structure or that have underperformed since conversion, the messages can be paraphrased: we're not sure what we will do, but please hang in there for the four-year tax holiday. If tax planning emerges as your number one growth opportunity, there are some real flaws in your underlying business model, and perhaps a going-private transaction should be considered. The alternative would be to use the four years to help senior management come up with a viable business model that, on an apples to apples comparison, will be as attractive an investment as the best equities in your sector. Then you will have a story to tell.

The lesson from this: in the face of an unexpected IR crisis, no message can change your fortunes if your underlying facts and circumstances make it unbelievable. Crisis communication requires a cool head, a sober assessment of the facts and their potential impact, and a commitment to avoid any unjustified reassurances. Apply the same integrity to your crisis communications as you do to your routine disclosure.
Claire Milton, General Counsel and Secretary, High Liner Foods Incorporated

The pace of governance regulation slowed down considerably in 2006. In light of the frenetic pace of change in the prior two years, this was welcome news for many issuers. Among the most significant developments was the decision of the Canadian Securities Administrators in March 2006 not to adopt a Canadian version of the much criticized SOX 404. The widely held view that the benefits derived from SOX 404 have not been commensurate with costs of compliance contributed to the decision of the CSA to proceed with Proposed Multilateral Instrument 52-111 in March 2006. Some form of reporting on internal controls is expected to be introduced in the future and, in the meantime, the requirement that the CEO/CFO certificate speak to the design of the internal controls remains in place. The CSA Staff Notice 52-316 addresses certain questions on this provision.

Weaknesses in the Design of Internal Control over Financial Reporting Should be Disclosed CEOs and CFOs are required to certify the design of internal control over financial reporting (ICFR) for financial years ending on or after June 30, 2006. These new certification requirements are in addition to the company’s requirement to disclose in its MD&A its conclusion as to the effectiveness of its disclosure controls and procedures (DC&P). In September, the CSA issued a notice communicating staff’s views regarding the ability of the certifying officers of a reporting issuer to certify the design of the issuer’s ICFR if the certifying officers are aware of a weakness in the design of the issuer’s ICFR that has not been remediated.

The notice indicated that there are circumstances in which the certifying officers can conclude that they are able to certify on the design of the issuer’s ICFR as required even though they have identified a weakness in the design. In the CSA’s view, the certifying officers can certify the design of ICFR provided the issuer’s disclosure in the annual MD&A about the identified weakness presents an accurate and complete picture of the condition of the design of the ICFR. This may be the case for a small company where the CFO prepares all journal entries related to complex matters. In this situation, the CFO may be able to conclude that disclosure controls and procedures are effective because of his or her direct knowledge of the transactions, despite ineffective internal control procedures.

“The Halloween massacre” is how Anne-Marie Buchmuller describes the day Finance Minister Jim Flaherty changed the tax rules governing income trusts. The head of IR for Calgary-based Sound Energy Trust had only been on the job for two weeks when the Minister dropped his tax bombshell and sent the market into a tailspin. The surprise announcement translated into a $20 billion drop in the S&P/TSX composite index on November 1 with sharp losses for the trust sector, which has yet to recover.

“We have had many calls from investors, mostly retail, who are very upset – they lost a lot of money,” reports Buchmuller. “Shock and outrage is the best to describe how our investor base has reacted,” adds David Carey, Senior Vice President, Capital Markets for ARC Energy Trust. “We lost 25% overnight and are still down 20% a month later. A lot of people were caught unaware; our phone lines lit up and email system overflowed with questions from unitholders.”

Mike Reilly looks at the ‘other’ over-the-counter market as the Pink Sheets launches a US version of Aim

There’s a new wrinkle in the fabric of the markets – one that may bring an alternative for US investors hungry to own more international shares and for foreign issuers eager to raise their profile but unwilling to take on the costs of SEC registration, exchange listing requirements and Sox compliance.

The Pink Sheets – or the Pinks, as it is known on Wall Street – dates back almost to the beginning of the 20th century. It has traditionally been seen – and still is by many today – as an outdated paper-based quotes arena for a wide array of shares – and mostly dicey penny stocks at that.

But under the stewardship of a savvy New York area native named R Cromwell Coulson, the Pink Sheets has become a robust contender for the attention of many companies, including western Europeans who have recently shied away from the US.

With a snappy internet venue for its now all-electronic quotations, the Pink Sheets has steadily added features to make the market attractive to all constituents – issuers, market-makers and, most importantly, investors. Its quotes are distributed by all the major vendors, from Reuters to Bloomberg. Now it plans an elite quotation that will require high levels of disclosure, though not as high or as extensive and expensive as those required by SEC registration.

Here comes OTCQX
The Pink Sheets’ new OTCQX is touted as being similar to London’s Alternative Investment Market (Aim) in its structure, and Coulson has created a chart on the new web site (www.otcqx.com) showing the parallels. The chart also shows how the new service will stand out from both the Pink Sheets and the OTC Bulletin Board, on which many over-the-counter stocks are posted under the aegis of NASD.

The bottom line for non-US companies is that by backing a US quote of their stock listed, say, in London or Frankfurt, a ready market is presented for US investors. Such quote generation is done by market-makers, typically broker-dealers, who simply begin to make a market in a given stock and then post their bid and ask prices. This may come from their own belief that interest is out there, or it could be generated by institutions that let the dealers know they want to see prices.

Companies like Nestlé, Roche and Heineken already trade on the Pink Sheets and enjoy US visibility without the high costs of Sox regulations or registration and listing fees. ‘Look at consumer brands with US employees, with big US customer bases,’ says Coulson. ‘If you are Volkswagen, you want people who buy your cars to be able to buy the shares easily. It increases the number of repeat customers.’

The overall move in European markets toward greater transparency and best practice in disclosure plays directly into the new OTCQX proposition. By offering a venue that guarantees only companies with strong disclosure habits and regular financial reporting that meets its listing standards, the OTCQX hopes to attract more investors and well-regarded issuers, regardless of size.

More varied IR
The new service will create three tiers of companies, with the highest level of well-qualified firms having to hit several marks in addition to regular financial reporting and good disclosure. Added criteria include management certifications, quarterly reporting and the appointment of a ‘designated advisor’ – a kind of monitor to ensure compliance.

Since there is no exchange listing and the requirements of SEC filings are limited to matching those of companies’ home countries, there can often be a certain relaxation of IR among Pink Sheets stocks. There is no retail component to IR for Roche, for example, since its shares are mostly owned by institutions and it does not seek retail investors in the US. Then there are the special situations, which abound on the Pinks. Owens Corning, driven to bankruptcy by asbestos lawsuits, moved over to the Pink Sheets while working itself out of its problems.

Sox pushed some US companies onto the Pinks along with foreign ones. Moving off the American Exchange shortly after Sox came over the horizon was a strategic choice for the Ziegler Companies, a Midwestern financial services firm with billions of dollars in business and billions more under management for clients.

‘I immediately perceived Sox as highly problematic from an expense and management point of view,’ says Ziegler CEO John Mulherin. ‘Requirements for new board committees, Section 404 compliance, extra auditing – all these combined to create a task we could not afford. We decided to de-list and deregister.’

But unlike Owens Corning and others who almost seem to be hiding on the Pinks, Ziegler cares a lot about its shareholders and their perception. ‘We made a lot of calls, wrote letters and had conversations with shareholders, clients, employees and other constituents. We spent a great deal of time explaining to people how to use the Pink Sheets,’ Mulherin recalls. ‘It was important we be very clear about our views on corporate governance and transparency.’

Did the move to the Pinks pay off? ‘The effort was endorsed by shareholders, who saw that we were saving capital and guarding profits. The stock price appreciated by 10 percent,’ the Ziegler CEO states.

Foreign companies unwilling to take the expensive and rules-strewn path of a full exchange listing may be encouraged by the new ‘premium’ OTCQX. After all, Federal Reserve figures show non-US stocks represented just shy of 16 percent of US portfolios at the end of 2005 – a record level, but one that leaves a lot of room for growth.

by Mike Reilly
Thanks to IR Magazine for allowing us to bring this article to you.

The Chinese government’s hand in business makes IR in China a complicated affair. Caroline Thomas reports

As Western companies, particularly internet firms, look to expand operations into China, the issue of government interference and control is something IROs need to understand.

In September, the Canadian Securities Administrators (CSA) issued a report on findings and recommendations arising from its second targeted continuous disclosure review of business income trust issuers. The report posted some rather dim results, given that of the 45 income trusts issuers reviewed only seven had no identified deficiencies in their continuous disclosure. The CSA once again identified the presentation of non-GAAP measures as a significant issue. The report followed on the heels of the publication of a revised staff notice on Non-GAAP Financial Measures. The revised staff notice narrows the definition of what is acceptable disclosure of non-GAAP financial measures. This article will explore the impact of these revisions so that IROs can better evaluate the use of non-GAAP measures in their MD&As.

WASHINGTON – With state-run Chinese firms raising increasing sums in US markets, there's growing speculation that US regulators may step in to protect investors.

The tech market meltdown of recent years was one of the comparisons made at this month's hearing on China and the capital markets, held by the US-China Economic and Security Review Commission (USCC).

One worry is that China continues to experience financial scandals in its banks, even as it rushes to overhaul and list state banks such as the Bank of China and China Construction Bank to meet the WTO’s financial market requirements by late 2006. Citing poor transparency and other problems at banks and other state-owned firms expected to list in New York, USCC chairman Richard D'Amato warned of a prospective China 'bubble'.

USCC members have suggested the Securities Exchange Commission (SEC) could scrutinize new China offerings for risk and standards of corporate governance. But what steps might US regulators take? According to Commissioner Michael Wessel, who co-chaired the hearing, 'Sarbanes-Oxley and other securities laws on the books provide substantial authority to the SEC and other authorities to ensure greater scrutiny of Chinese banks seeking to raise funds in the U.S.' And, he adds, 'If the law does not provide adequate authority, the SEC should provide guidance to Congress about what additional tools they may need.'

It was suggested at the hearing that US regulators avoid driving Chinese companies to list elsewhere. Still, says Wessel, 'The SEC has the duty to ensure that US investors have the information they need to make informed decisions – and they need to ensure that any material information is available and scrutinized.'

One wild card is the expected shift of SEC policy now that Republican congressman Christopher Cox has been confirmed as head of the Securities and Exchange Commission (SEC). Many predict a much more relaxed regulatory regime than under predecessor William Donaldson.

Even if this is the case, the SEC may not relax when it comes to China listings. 'It's too early to prejudge what the SEC will do under Chairman Cox,' cautions Wessel. 'He has a strong record on China as it relates to economic and national security. I have confidence that he’ll use the legal authority and tools available to ensure that investors have the information they need or – if he needs additional authority – that he will ask for it.'

LONDON -- UK listed companies must complete an Operating and Financial Review (OFR) report for annual reports published after April 1, 2005. The report is the responsibility of the board of directors and must present a clear picture of a company's future prospects as well as review its financial and non-financial metrics. Some companies are looking for guidance in preparing the document for the first time and certain organizations are meeting this demand.

Yesterday, the Institute of Practitioners of Advertising (IPA) in association with the Workshipful Company of Marketors and the Marketing Society released an OFR checklist. The list offers an easy-to-follow format for verifying and preparing the OFR report. Divided into three general sections, the list details all the essential elements of the report including key performance indicators used by the board to assess the company's performance; sources of cash flow and relationships with key stakeholders.

'We all have a strong interest in supporting the OFR and [the IPA] felt it would be constructive to support the checklist,' says Hamish Pringle, director general at the IPA. 'A vast amount of paperwork is being generated in preparing the report and we wanted to try to make it as easy as possible for companies.'

Pringle notes a general lack of awareness among companies surrounding the OFR and its preparation. Many boards are not informed about the intangible drivers underlying a company's performance, he claims, which complicates the OFR task that demands a strong knowledge of non-financial assets including brand valuation.

For investors in the world’s second-largest capital market, it should be a historic summer. In fact, the year has already been historic thanks to developments sparked by Livedoor’s hostile takeover bid for Nippon Broadcasting System in February. After dominating business news for months, anti-takeover plans are dominating the agendas of shareholder meetings, which, in Japan, tend to be scheduled for the first half of summer.

Whenever you try to launch a major new process, unexpected issues arise – and Sarbanes-Oxley Section 404 proved no exception. As public companies and their auditors grappled with the complexities of the new internal control rule the first time around, some things got way out of control – especially costs and resources.

Washington, DC -- The SEC has filed changes against two former Kmart executives for providing misleading information a few months before the company filed for bankruptcy.

LONDON -- Many of the largest companies in the UK are stifling their key messages in annual reports, according to a recent study by London-based consultancy Merchant Group.

The study shows that 37 percent of FTSE 500 companies neglect to define a clear or measurable strategy in their annual report. Merchant defines a clear strategy as a statement including a quantifiable or measurable factor that allows investors and analysts to measure a company's progress. 'It comes back to the old adage: what do you use the book for?' explains Merchant's Ben Hardy. 'Do you want to communicate with shareholders and investors, or is it just a statutory document?'

LONDON -- A growing number of UK large-cap companies are webcasting their annual general meetings via their corporate web site, while others are using video and dedicated web sites to offer stakeholders a richer multimedia experience.

SYDNEY -- In an unprecedented move, the Australian Securities and Investments Commission (Asic) has announced it is investigating Australia's largest company, the national telecommunications carrier Telstra, for alleged breaches of continuous disclosure.

The announcement has shocked the Australian market, which is still reeling from a comment by one of the company's top executives, Phil Burgess, that he 'wouldn't recommend them [Telstra shares] to my mother.'

In a statement released to the market yesterday, Asic said it was 'investigating Telstra's compliance with its continuous disclosure obligations following its announcement to the market yesterday signalling an earnings downgrade.'

Asic also confirmed it is working with the Australian Stock Exchange in relation to this matter. The alleged breach being investigated by Asic concerns a briefing document Telstra released to its major shareholder, the Australian government, before the wider announcement of its earnings downgrade to the market.

Leaked extracts of the document appeared in newspapers before Telstra issued its downgrade last week, prompting the investigation. However, it is likely to be some months before Asic releases findings from its investigation.

Under new powers it was awarded on January 1 this year Asic can now issue fines to companies in breach of continuous disclosure laws.

SINGAPORE -- Shaken by recent scandals, Singapore's business community sees a need for higher standards of corporate governance here. That's the central message from a survey of senior executives at Singapore's listed companies.

San Francisco, CA -- After much speculation in the media, shareholders of Providian Financial approved its merger with Washington Mutual (WaMu) on Wednesday. The deal was the subject of much debate with one of Providian's biggest shareholders publicly opposing the merger and the company's proxy firm, Institutional Shareholder Services (ISS), being criticized in the media.

The media frenzy tipped off when Putnam Investments, one of Providian's major holders with 7.5 percent of shares outstanding, went public with its stance against the deal. In a very unusual move, Putnam published a press release saying the bid price was too low. 'In a consolidating industry and in light of the recently announced Bank of America/MBNA transaction, mono-line credit card companies such as Providian represent an increasingly scarce asset that should command a higher price,' wrote Putnam on August 1 about WaMu's offer.

SYDNEY -- A major shareholder in Australian cotton manufacturer and marketer Namoi Cotton has publicly criticized the company's board for not treating the interests of capital investors the same as those of grower investors.

An unnamed spokesperson for Warakirri Asset Management, a small Melbourne-based investment house, condemned Namoi's board in the Australian Financial Review this week for not doing enough to increase liquidity in the stock and not encouraging investment from institutional shareholders. 'This is the weakest board of any enterprise we've ever invested in,' the spokesperson wrote.

The comments come in the wake of a takeover bid for Namoi from Queensland Cotton at 71 cents a share that was rejected by Namoi's board. Namoi's shares traded between 45 cents and 55 cents prior to the offer.

As a grower-controlled entity, Namoi faces a number of challenges more mainstream listed vehicles don't have. The share structure is designed so only cotton-growing members can vote on company resolutions, with capital investors unable to access these special voting rights.

Although Warakirri has expressed disappointment in Namoi's share structure, it was aware of the arrangement when it bought into the company.

Tim Powell, a director of Cox Inall Communications, says shareholders who buy into agri-business stocks need to understand the unique situation these companies are in. 'These stocks generate good dividend returns and capital growth over time,' says Powell. 'While 'farmer boards' are bound by the Corporations Act, there is an unspoken tug on them from their political base; this makes them unusual boards to deal with.'

Namoi's board comprises a majority of grower directors, who are elected by cotton growers.

LONDON – Recent media reports suggest UK property companies are 'sidelining' IFRS results by emphasizing UK Gaap results. But are companies really undermining the new standard or simply reporting additional information to help the market deal with the transition?

Hammerson, Slough Estates, and Liberty International are some of the property companies resorting to their traditional ways of reporting earnings. While they are disclosing the new numbers as required under IFRS, they are also highlighting key data in UK Gaap. The move is meant to help readers have a better understanding of the new numbers.

Property companies are mainly affected by IFRS standards when accounting for changes in valuations of properties, and the requirement to provide in full for deferred tax on revaluations.

For instance, under the standard 'IAS 40' companies take investment property revaluation movements through their income statement, as opposed to reserves via the statement of recognized gains and losses as currently required under UK Gaap. Also, under IFRS, companies will have to start providing deferred tax on any revaluations of properties, which was previously prohibited in UK accounting.

Steven Brice, head of the IFRS taskforce at European audit firm Mazars, says companies believe that by highlighting information under UK Gaap or other adjusted earnings figures, investors will have an easier time understanding results.

'Investment property revaluations under the old UK rules are perceived as a balance-sheet adjustment while under IFRS this movement is taken through the income statement and therefore impacts reported profits each year. Results of companies with investment property portfolios are certainly going to be a lot more volatile than we have previously seen, since valuations fluctuate according to market conditions,' he says. 'I am not surprised companies are refocusing on old UK rules, because they certainly want to adjust for items that are causing volatility and which are not seen to relate to the operating performance of the company.'

Brice also says it will be interesting to see if companies continue this trend in next year's reports after investors have adapted to the new standards. 'It is a new trend. I would not go as far as to say it is misleading. For me the issue is: is this something they are going to continue to do every year or is it one-off in this transition period?,' he asks.

MUMBAI -- 'Alternate' directors appear to be a growing phenomenon in India's boardrooms. While other countries have them, the latest annual reports suggest they have become exceptionally common here. In fact, the Economic Times of India reports that there are now alternate directors at 65 companies on the Bombay Stock Exchange's BSE 500.

LONDON -- Misys, a Worcestershire-based software and services group, is planning to pay two of its top executives 'retention bonuses' of £1.2 mn ($2.16 mn) each to prevent them from resigning if they are passed over for the company's CEO position. However, major institutional shareholders are rebelling against the unusual compensation package.

Misys fears it will loose its top divisional directors Tom Skelton, head of healthcare, and Ivan Martin, head of banking, if it doesn't chose them for the CEO post. Misys' CEO Kevin Lomax, who is also founder and chairman of the board, is to become a non-executive chairman by 2008.

As the proxy season dust settles, John Wilcox is zeroing in on the governance issues he thinks companies need to work on. One month into his new role as senior vice president and head of corporate governance at TIAA-Cref, he’s charged with setting the pension heavyweight’s governance agenda. Wilcox spent almost three decades at proxy adviser Georgeson Shareholder Communications and is well known in the IR world for his governance expertise.

IR magazine recently sat down with Wilcox to get his inside view on majority voting, institutional transparency and life inside one of the most influential pension funds.

How are you settling into your new role at TIAA-Cref?

During the past five years, after Georgeson merged with Shareholder Communications, I increasingly devoted my time to the International Corporate Governance Network (ICGN), which drew me closer to the institutional investment community. In a sense, I had been moving in the direction of this job without realizing it. I am happy here and it has been a very natural transition.

At Georgeson, you were an advocate for shareholder transparency. Have your feelings changed about institutional disclosure now?

I have not had any discussion with investment management people here about disclosure. We file 13Fs like everybody else and we do the disclosure required by law.

I have never advocated disclosure of trading information. What I have advocated is the disclosure of ownership information at the time of record dates and that there be disclosure of more ownership information than is currently made available.

Our securities laws are schizophrenic on this point in that they impose very comprehensive disclosure requirements on issuers and, at the same time, they deprive issuers of essential information about the people to whom they owe this disclosure information – that makes no sense. In the way our proxy system now operates, all shareholders, whether they want privacy or not, pay the cost of privacy. My view is those shareholders who want to use privacy should pay for it themselves.

What were the most controversial issues over the course of this proxy season?

The majority vote resolutions were very hot and I don’t know what the voting results are yet but I think they are going to make a big splash. With respect to stock plans, I think that is another big issue. It’s always hard to compile information on that but I think shareholders are exercising a tighter rein on issuance of shares for equity compensation plans.

Clearly this has become another form of the engagement model of governance – we kind of backed our way into it. We are looking at our 2006 campaign: TIAA-Cref does not generally throw out a whole lot of shareholder resolutions but we’re certainly going to continue our campaigns with respect to executive compensation. The use of withhold campaigns really changed the way shareholders think about the power of the vote.

What are your thoughts on majority voting as an alternative to the SEC’s controversial shareholder access rule?

Well, it’s not an alternative to the access rule. The access rule made the issue of majority voting acceptable to a wider group of people, especially corporations, because the access rule proposal caused everybody to think more deeply about how company directors are elected.

My experience is that many sophisticated people really didn’t understand how plurality voting works. They didn’t understand that votes withheld from directors are not deemed to be votes cast and, therefore, you could have an anomalous situation in which more votes are withheld than cast for directors – and they still get elected.

A lot of people who might have felt this was kind of a fringe matter realized it’s a core issue for the fundamental workings of shareholder democracy in the US. They also realized that our use of plurality voting in the election of directors is an anomaly when you look at international practice: almost every other country in the world requires a majority vote.

Why do you think there is so much debate around majority voting?

The reason there is so much caution in adopting it is that there needs to be clarity about what happens if and when a majority is not achieved for either a single director or a group of directors. There are no clear answers to that under state law – and we have to have some answers.

Where does the move to majority voting currently stand?

The American Bar Association’s committee on corporate laws is in charge of the model act [for majority voting] and it is looking at the whole question of implementation of majority voting for directors. It’s working on the legal issues with respect to majority voting and is going to have a preliminary paper out in July.

I feel very good about this. Lots of people from all sides of the governance spectrum are sitting down in a reasonable way, having discussions, analyzing the issue and working toward a solution. I think this is an unprecedented example of collaborative governance in action.

What is TIAA-Cref’s position on majority voting and other key governance issues?

We have not yet taken a formal position on majority voting outside of saying we are in favor of it. We want to wait and see what kind of detailed proposals are made; then we may be in a position to act. And I’m not certain TIAA-Cref would take a public position on the NYSE’s ten-day rule.

We are very interested in proxy reform but that is not very far along. Corporate governance principles are very important but if you cannot implement them, they are useless. Proxy voting is the primary governance tool so the system has to work well. We are very interested in making sure it does. These systems were developed under circumstances that existed at the time and we can do better.

As a result of Bill 198, Investor Relations professionals need to ensure their company’s existing disclosure policies, controls and procedures comply with current regulations to adequately safeguard the company from Civil Liability.

Having good corporate disclosure practices in place early on is something Eleanor Fritz, Director, Compliance & Disclosure at Toronto Stock Exchange (TSX), supports. “TSX has been working closely with relevant bodies to create awareness for good corporate disclosure practices” says Fritz. “Adhering to TSX’s Timely Disclosure Policy goes a long way to ensuring credibility from the investment community. And it’s certainly wise for pre-IPO companies to execute their due diligence and put appropriate procedures in place at the earliest possible stage”.

John Hughes, Manager of Corporate Finance Branch, Ontario Securities Commission (OSC), recently stated, “Companies need to look at their particular situation in collaboration with professional and legal advisors to determine what standards, procedures and instruments will best manage the company’s exposure to Civil Liability. Specifically, they need to ask questions such as ‘what is a good way to promote good corporate culture and good internal processes?’”

Appoint Authorized Spokespeople
A starting point is to create written policy which designates authorized spokespersons to respond to enquiries from investors, stakeholders or business media. The key for companies is to assess in practical terms what is required under current securities legislation and public expectation when going public. How will the company respond to issues in a timely, factual and accurate manner? Who will answer the calls and be authorized to speak on behalf of the company?

Audit and Disclosure Committees
Securities legislation now requires newly listed companies to have an Audit Committee in place at the outset. Another equally important internal authority for companies to contemplate is the creation of a Disclosure Committee.

Public issuers today commonly use a multi-disciplinary approach by having representatives from various areas of the company sit on their Disclosure Committees. Areas such as IR, Finance and Corporate Governance are typically represented. This approach ensures that all competing views present within a company are equally represented, resulting in a more balanced view whenever there is a need for disclosure of material information.

Core Disclosure Documents
Good quality disclosure builds street credibility. Therefore, giving careful consideration to core disclosure documents like quarterly filings is another area where companies can benefit from some forward planning. Ensure that documents are of good quality, in accordance with Generally Accepted Accounting Practices (GAAP), and include a well balanced Management Discussion and Analysis (MD&A). Newly-listed companies should avoid situations where incomplete quarterly filings in the first few quarters after going public are filed on SEDAR.

Communications Strategy
In addition to implementing a credible disclosure practice for your company, Tom Enright, President and CEO of CNW Group, believes that the execution of a multi-platform communications strategy is crucial to the success of a company. “Companies need to view communications as a significant contributor to the bottom line and a tool to minimize exposure to civil liability,” says Enright. “Producing results is not enough; a company’s goal should be to use effective communications to deliver a company’s message to stakeholders and shareholders.”

It is important for a company to communicate in good times and bad, and to begin building relationships with stakeholders and business media before they are needed. Ensuring that an authorized spokesperson is always reachable by stakeholders and the media will go a long way in building up trust and credibility for a company.

Resources
Besides seeking assistance from professional and legal advisors, there are resources available to assist companies in putting good disclosure practices in place:

• TSX Group’s website www.tsx.com, one of Canada’s busiest financial websites, contains several useful resources for TSX issuers, including the TSX Timely Disclosure Policy and Electronic Communications Disclosure Guidelines.
• Canadian Securities Administrators’ National Policy 51-201: Disclosure Standards is a good reference document on corporate disclosure. The policy document can be accessed on the OSC website at www.osc.gov.on.ca.
• An online presentation by John Hughes, Manager of Corporate Finance Branch, OSC, entitled “Leveraging Continuous Disclosure and Civil Liability” is available for download at http://www.newswire.ca/en/extras/custom/bmail_030/.
• The Research and Guidance section of the Canadian Institute of Chartered Accountants website, www.cica.ca, is another useful resource. The Performance Reporting Resource Centre section contains publications and guidance on Management Discussion & Analysis. The Risk Management and Governance section has information on disclosure controls and procedures.
• The Canadian Investor Relations Institute (CIRI) has several useful publications for IR professionals. “Standards and Guidance for Disclosure and Model Disclosure Policy” helps public companies avoid selective disclosure and includes a disclosure policy template that companies can use to draft their own disclosure policies. More information can be found on the CIRI website, www.ciri.org.
• CNW Group offers a comprehensive range of disclosure communication solutions within CNX Marketlink. CNX Marketlink is a TSX-endorsed and CNW-delivered suite of services that includes unsurpassed reach into Canadian, US and International news and financial communities via newswire, webcast, podcast, regulatory filing, transcription, translation, conference calls, IR websites and more. For more information visit www.cnxmarketlink.com.

Melody Firth is a Corporate Communications Manager at CNW Group, Canada’s leading newswire since 1960 and most relied upon source of full-text, time-critical news and information for the media and financial communities. The views, opinions and advice provided in this article reflect those of the author and do not necessarily represent the views or opinions or advice of TSX Group Inc. or its affiliates.

This article originally appeared in TSXtra Newsletter, September 2006, Vo. 5, Issue 3. We thank TSXtra for allowing us to bring this article to you.

Early in the year, Section 404 compliance hung like a weighty yoke around the necks of US listed companies. It sucked up resources, diverted the finance department’s attention and, in some cases, put pressure on earnings. It consumed far more dollars than anyone ever imagined – an average of $4.36 mn per company, according to a survey by Financial Executives International (FEI), a leading professional organization for CFOs and senior financial executives.

On March 16 thousands of companies breathed a sigh of relief. Having completed their first round of internal control certifications on time, their yoke had fallen. However, some companies still bear the awesome weight of impending Sarbanes-Oxley Section 404 compliance. Among them are several hundred companies that requested filing extensions, non-calendar year companies, and those dubiously ‘lucky’ small caps and foreign issuers that won a reprieve from the SEC and don’t have to file until 2006.

Mixed results
Not only does Section 404 require companies to identify, test and certify their internal controls over financial reporting, it also requires their public accounting firms to evaluate and attest to the effectiveness of these internal controls. With companies and auditors bound to report material weaknesses that come to light during their intensive 404 reviews, there was much speculation about how the market would react to such news.

For the many IROs like Don Washington, whose company passed the certification, the experience was almost a non-event. ‘Our investors have had very little curiosity about the results of the certification,’ recalls Washington, director of IR and corporate communications at EnPro Industries, a diversified manufacturer of capital goods. ‘The only question we have gotten has been about the cost of the whole effort. We never had any concern expressed about our ability to meet the requirements.’

Lori Barker, director of IR at SanDisk, a major supplier of flash memory data storage card products, had a similar experience. ‘SanDisk passed 404 and I had very limited questions from Wall Street,’ she reports. Barker says her company spent an ‘enormous’ amount of time and money on the process. ‘For companies that failed, or delayed [their] earnings release due to 404 work, stocks were penalized,’ she adds.

Other companies found their valuation affected after reporting in line with Section 404. Credit Suisse First Boston (CSFB) tracked the stock price performance of 74 companies that announced a material weakness between October 2004 and February 2005.

‘We looked at their stock price performance for the 20 trading days before the announcement and the 20 trading days after the announcement,’ comments David Zion, accounting analyst at CSFB. ‘The day after the announcement was – for this group of companies – the worst-performing day in that entire trading period.’

As many of the companies included in the study were small caps, CSFB compared their relative returns to stocks in the S&P 600 Small Cap Index. ‘If you look at that group of companies, stocks were sort of heading down before,’ Zion points out. ‘With the announcement of the material weakness [stocks in the study] headed down even more the next day, and 20 trading days after did not recover.’

Zion describes what goes through an analyst’s mind when a company says it has trouble with Sox 404 compliance: ‘When a company announces a material weakness in internal controls, the initial thought process is, That’s not a good thing. Analysts wonder, Can it continue to put the same reliance on the numbers in the financial statements?’

Take control
However, Zion warns that the focus should be on the plans a company makes to correct the situation, not on the problems themselves. As he points out, when a company announces a weakness, it usually lays out a remediation plan. ‘You can take that as a positive,’ he stresses. ‘The weakness has been there, but it is getting fixed so, going forward, that’s a positive.’

Barker believes this is where clear communication is absolutely essential. ‘Each circumstance is different, but it is hard for investors to have time to investigate the specifics,’ she notes. ‘IROs owe it to the investor to make sure they clearly articulate the impact of the material deficiency and the fix.’

In evaluating companies’ Sox 404 announcements, investors need to consider the level of risk and uncertainty, according to Zion. ‘Investors should ask themselves a number of questions to try to get a feel for whether or not the company now appears more risky,’ he explains. ‘You need to ask questions like, Has the company had accounting problems in the past? What is the weakness? What line items does it affect? Does it, in fact, affect key performance metrics? Is it company-wide, or is it one item on the balance sheet? Now that it’s been fixed, would you argue that maybe there’s less risk? We would recommend that investors focus on the remediation efforts the company has laid out and how clearly it has laid them out.’

Zion’s approach also involves looking at what a company is saying about the material weakness and thinking about it in terms of how much uncertainty comes along with what it is saying. ‘[The biggest uncertainty is] when a company can’t comply with Section 404 and the auditor disclaims opinion – then the company has an incomplete 10K,’ he points out. ‘[The least uncertainty occurs] when both the company and auditor agree controls are effective and the auditor provides a clean opinion.’

For Zion, market reaction boils down to transparency. ‘The market doesn’t like uncertainty,’ he says. ‘To the extent a company can explain clearly how it is fixing these problems, I think that goes a long way to assuaging investor reaction.’

The bright line
Analysts, credit rating agencies and investors have received praise by some for how they’re approaching 404 results. ‘What I find very encouraging is that the investment community has been broadly sophisticated in its attempt to understand why companies have material deficiencies,’ says Paul Reilly, CFO of Arrow Electronics, which passed its 404 hurdle. ‘Remember, 404 is dealing with your system of internal controls. It does not mean your numbers are incorrect. It may be an indication that you need to invest more time, effort and better resources into a more efficient system of internal controls. But it also means you have the opportunity to ensure your numbers are correct through substantive testing.’

First time around, the learning curve has been pretty steep for everyone involved. There’s been some griping from companies about auditor inflexibility and lack of communication. Auditors have complained about companies getting started too late, or not placing oversight of 404 at a high enough level. And boards, management and investors have scoffed at the astronomical cost of compliance.

After the first round of Sox 404 filings, public company representatives, investor advocates, auditors, audit committee members, US regulators and other experts aired their comments at a roundtable convened by the SEC. Other stakeholders submitted comments for posting to the SEC’s web site. There seems to be a determination on everybody’s part to make the process go more smoothly next time around.

‘I’m encouraged by a sense of everybody understanding that the blame doesn’t fall squarely on any one party,’ says Robert Dohrer, partner in the national office of audit and accounting at McGladrey & Pullen and the firm’s co-national director of auditing services. ‘You know, management could have done a better job. There could have been more implementation guidance. The auditors could have used more judgment and more flexibility in determining the amount of work they had to do. There will be a lot of progress made to make this process more efficient going forward.’

Washington is hopeful his company has everything in place to make Section 404 compliance easier next year. ‘We thought it would probably be a one-person job with maybe a little bit of outside help, and it ended up being pretty much full time for three people with more outside help than we anticipated,’ he recalls. EnPro Industries has since added one person to internal audit. ‘We’ve got the process in place,’ Washington adds. ‘The people are here. It will be a question of continuing the things we did first time around.’

Reilly says that although his company’s Sox champions tested key controls at over 95 percent of the company’s operations around the world, he anticipates doing some streamlining next year. In April, while Sox 404 was still fresh in their minds, 25 high-ranking finance and IT executives at Arrow Electronics participated in a two-day summit for what Reilly calls a ‘did well – do better’ debrief.

The summit also provided a forum for the team to consider how it can be more definitive in identifying key financial controls and reducing the amount of testing.

Integrating 404
‘Sox 404 is not a one-off event, or something that companies can focus on late each year,’ notes Reilly. ‘It’s something you need to live each and every day. We’ve now aligned Section 404 with how we actually operate the company, with how we make strategic decisions around initiatives we’re carrying out in the company to make us better or more effectively streamlined. One of the really important lessons learned is that this really needs to become part of your living culture and how you drive the business forward.’

At the same time, Reilly acknowledges the somber side of Section 404, the side that’s causing the buzz. ‘We have to be very honest with ourselves and recognize that the processes required by Sox, especially Section 404, are a bit burdensome for companies, and a bit costly,’ he concludes. ‘What we are trying to do is drive it forward to ensure we get something more than just an opinion from our auditors. But it will be difficult to get those benefits from a financial point of view [to] be the same amount of money that it costs us to do Sox 404 compliance.’

In the ever-evolving corporate arena, the weight of new disclosure rules is leading many companies to realize they have to do more than just provide their shareholders with endless pages of dull financial and legal information. Designers and creative consultants are helping companies turn their IR web sites and annual reports into effective marketing, advertising, recruiting and PR tools as well.

According to the IR magazine-commissioned Investor Perception Study, US 2005, company IR web sites continue to be the primary information source for retail investors, while institutional investors put more stock in the printed annual report. But companies are moving beyond a bare-bones compliance approach to one that seeks to maximize the potential of their communications.

Mike Reilly studies the impacts of faster, cheaper stock trading.

From spinster to supermodel is some makeover. But the once dowdy mining and metals sector has thrown away its safety specs and become sexy – fast. In March this year the Reuters CRB Commodity Index – one of the most respected bellwethers of commodity futures – came close to doubling since 2002. And natural commodity money has not just been shoveled into mining and gold stocks, but also into energy and agriculture. Commodities prices cooled recently, but many think mining and metals – after the current breather – will race forward again and keep going hard for several years.

LONDON – CEO remuneration at large-cap companies is growing faster than company profits, thanks to a surge in 'performance related' pay this past year. So concludes a recent survey conducted by Independent Remuneration Solutions (IRS), a London-based executive compensation advisory and Manifest, an independent corporate governance and proxy-voting specialist in the UK.

Q. We’re concerned about the growing cost of servicing our thousands of retail shareholders, given their negligible holdings (below 5 percent). It makes better business sense in the long term for us to buy back as many shares as we can at a premium, but what factors should we consider before moving ahead with such an offering?

WASHINGTON, DC -- The SEC is to hold a September 21 meeting that will likely result in the granting of a one-year extension for small companies to comply with Sarbanes-Oxley's rule on internal controls: Section 404

SYDNEY – A recent Australian Federal Court decision could give shareholders financial recourse in instances in which listed entities are placed into administration. In his decision, Justice Arthur Emmett found that Luka Magnetic, a former shareholder of defunct mining company Sons of Gwalia, was entitled to make a claim against the company in the same way other creditors are able to.

Rarely has there been as intense focus on public company financial reporting as exists today. Investors and regulators demand transparency and are increasingly intolerant of accounting errors and abuses, even as the accounting rules and the transactions they are addressing become ever more complex. One area of growing concern to investors and regulators is earnings management. IROs need to understand the issue of earnings management – and the distinction between techniques that are appropriate and ones that are not – in order to ensure that true financial results are reported in a transparent way.

“The convergence of financial and non-financial worlds is now under way…the number of reporting companies has exploded.” So says Risk & Opportunity: Best Practice in Non-Financial Reporting, Sustain Ability’s 2004 global reporting survey, conducted in partnership with the United Nations Environment Programme and Standard & Poor’s. Sustain Ability is a U.K.-based consultancy and independent think tank that specializes in the business risks and market opportunities of sustainable development.

So where is Canada – at the cutting edge or lagging? It depends on what you measure.

KPMG’s 2005 International Survey of Corporate Responsibility Reporting found Canada’s CSR reporting to have “improved significantly”, and ranked Canada third among 16 nations for dedicated CSR reports.

Ceres, a U.S. network of investment funds, environmental organizations and others promoting environmental stewardship by businesses, teams up with the Association of Chartered Certified Accountants to acknowledge exemplary disclosure, in the Ceres-ACCA North American Awards for Sustainability Reporting. In 2004, Vancouver-based VanCity Credit Union finished a close second behind winner Hewlett-Packard, and topped North America’s financial services sector. More tellingly, a third of the 18 short-listed reports were from Canadian firms: Dofasco, Enbridge, Placer Dome, PotashCorp, Talisman and TransAlta.

A similar ratio was reflected in SustainAbility’s 2004 global rankings of companies’ non-financial reporting. Only Suncor made the top 50 (at 36). Yet when you add the six other Canadian firms in the top 100 (Alcan, BC Hydro, Hydro-Quebec, PotashCorp, Talisman Energy and VanCity), Canada had seven compared to 17 for U.S. firms. That suggests that Canada is pulling more than its weight in North American CSR reporting.

But other CSR reporting experts see Canada’s performance in a different light. First of all, the leading edge isn’t in North America, it’s in Europe – and the U.K. in particular. Pushed by legislation and competition, Europe dominated Sustain Ability’s latest Top 100. “Europe is definitely leading,” says Julie Pezzack, Project Director for Ottawa-based Stratos Inc.’s biennial survey of Canadian CSR reporting. Stratos provides strategic advice, implementation solutions and accountability approaches for businesses, governments and international institutions. “The U.K. has the highest number of [companies reporting on CSR]. But overall numbers are increasing, as well as quality of reporting.”

Quality is up in Canada too, according to the last Stratos report, Building Confidence: Corporate Sustainability Reporting in Canada (2003). But Canada may not be keeping pace with Europe. Pezzack can’t say yet, since Stratos is still collecting data for its 2005 report, due in November. But she’s hesitant. “Europe is developing a lot of innovations that they’re building into their reports,” she says.

Allan Willis, a judge for the sustainability category of the CICA awards, sounds even more cautious. “In Canada, the trend of late is not very good. It’s looking better in Europe and some parts of the States. There are some major investor initiatives in the States to call upon companies to do more.”

While noting much progress, Building Confidence called for more verification and integrated reporting. But at the CICA’s 2004 Corporate Reporting Awards (where PotashCorp won for Sustainability), judges noted positives such as the emergence of climate change reporting across all industries, use of Global Reporting Initiative (GRI) guidelines, and the start of ‘warts and all’ reporting.

Canada’s main challenge now – aside from keeping up with Europe – may be increasing the depth of the field. Most of Canada’s CSR reporting still comes from larger firms in certain sectors. Financials lead the pack here, says Willis, then oil and gas, and mining. He also sees interest from forest products, refining (steel and aluminum) and regulated energy utilities. “In both the U.S. and Canada, energy utilities are now into this in a big way.” Despite its environmental impacts, manufacturing is largely absent.

In Stratos’ last survey (2003), Pezzack’s team found only 22% of the TSE 300 publishing sustainability or integrated annual reports. This included only 34 of the top 100 Canadian companies by revenue. And the team found only 100 companies reporting on sustainability across the country. Substance is also lacking, according to the research. While the survey found 60% of TSX Composite Index firms reported some sustainability information, nearly half reported in less than two pages.

Barring big changes in Stratos’ 2005 survey, it seems the majority of large Canadian firms are still not onside. Nor do Pezzack or Willis see much yet from small firms, though Pezzack lists exceptions, such as BC’s Novex Couriers. The first courier in Canada with hybrid vehicles, Novex has an “interesting web-based” approach to reporting, Pezzack says.

How can small companies find resources for CSR reporting? Anne-Marie Palma, Novex’s Manager, Marketing & Business Development, says Novex’s online report is “absolutely made easier” by use of See-it, a `triple-bottom-line’ reporting software program that measures a company’s economic, social and environmental returns. “If we can be an inspiration for others,” says Palma, “that’s great.”

So how do you start – regardless of your company’s size or resources? “Don’t try to do everything at once,” says Joanne Westwood, VanCity’s social audit manager, advising a “stepped approach” over time. Start with what’s easiest and least costly to measure, she says. Address stakeholders in order of priority. Build on existing data collection systems, adding CSR content to current surveys, forms and databases. Try a two-year reporting cycle. VanCity has supplemented biennial CSR reports with six pages of key performance indicators in annual reports. And, though Westwood feels VanCity’s operations benefited from immediate use of external verification, this too can wait. “External verification shouldn’t be a barrier to reporting.”

As for transparency, Westwood says that for each reporting cycle, “All our measures are approved [by the board] up front. We have no idea what the results are. I think that adds a lot of credibility, because you’re less likely to cherry-pick what you’ll report on.” Westwood’s current challenge is integration.

And merging disparate reports isn’t easy, says Willis. “It’s an issue of size versus usefulness. But personally, I think it’s important that CSR and environmental and sustainability disclosures be viewable in the context “of the business as a whole.” He cites Dofasco’s recent annual reports as examples of this “more holistic approach.”

Kathryn Humber, Senior Vice President, Investor Relations at CIBC, recalls “good response from all stakeholder groups” after merging the CSR report into the latest annual report. “We integrated our reports because we thought it was the best representation of our activities and overall performance.” Still, she admits, “we’re not sure yet if they all see why they should focus much on non-financial factors.”

Try using existing frameworks to ease integration. “An MD&A,” says Willis, “if prepared and presented in accordance with the recommendations in the CICA’s MD&A guidance, will readily accommodate the SEE (social, economic, environmental) disclosures that reasonable mainstream investors may sooner or later find necessary to incorporate in their decision-making.”

Finally, for best results, Westwood suggests imbedding reporting into daily operations, with clear assignment of accountability for data collection and performance. “Begin imbedding right from the get-go,” she says. “If you do it later, it’s a lot more difficult.” Mainstreaming gets you to the real objective: to grow the ‘triple bottom line’.

Socially Responsible Investing (SRI) has started to garner more and more attention from the media, investors, clients, analysts, and research and rating firms. Today, if you Google 'Socially Responsible Investing', you'll get nearly 150,000 results, which provides a sense of the increasing interest in this subject.

In the wake of earnings manipulation scandals and criticisms of excessive compensation packages, employee stock options continue to be a very hot topic.