Determining when merger negotiations need to be disclosed to the public can be challenging. Disclose too soon and your stock may be in for a roller coaster ride – a premature announcement can scuttle the deal if the news drives the stock too high, while news of negotiations that are subsequently abandoned can send your stock tumbling. If you wait too long and get it wrong, you may find yourself accused of failing to meet securities laws requiring timely disclosure of material changes. Investor relations professionals can now look to the recently released decision of the Ontario Securities Commission (OSC) In the Matter of AiT Advanced Information Technologies Corporation, Bernard Jude Ashe and Deborah Weinstein for guidance.
Securities legal counsel advise, generally, that merger negotiations need not be disclosed until a definitive agreement is reached. The OSC’s decision, in essence, supports this position and provides some useful guidance as to when merger negotiations must be disclosed as a “material change” under the Ontario Securities Act.
Former Ontario Finance Minister Janet Ecker was the special guest at the CIRI Senior IR Assembly on November 22 in Toronto. Later, she sat down with CIRI President & CEO Ian Bacque for a question and answer session that drew on her life in politics, on television, and in business and corporate communications.
Some investors are pushing for improved disclosure of corporate political donations. Adrian Holliday reports
Should IR thank Jack Abramoff for his corrupt ways? Perhaps, if his lobbying scandal eventually results in standardized disclosure of corporate donations to political lobbyists.
The shamed former lobbyist is now facing nearly six years in jail for a range of offenses including hoodwinking casino-rich Indian tribes, tax evasion and conspiracy to bribe public officials. For now, Abramoff is delaying his time behind bars helping the Feds with their bribery investigation.
The case has created much media and public interest in lobbying, and now experts are weighing in on the long-term impact of the Abramoff affair. Some say it will change America’s political landscape forever, and it has already resulted in the first major change in lobbying rules in the US in over 25 years.
It’s also shaking up the investment community, with some funds highlighting the need for clear disclosure rules on corporate political donations. While it’s accepted that companies must be involved in the development of government policy, the process by which companies shell out donations requires more transparency, some investors say.
‘Any business should have very clear standards on how it engages with lobbying,’ says Karina Litvack, head of governance and socially responsible investment at Foreign & Colonial. ‘Companies should articulate clearly what their policy objectives are and put them on the web, so media, shareholders and others can see where these businesses are putting their financial weight.’
Litvack isn’t against political donations and doesn’t screen out companies for behaving in certain ways, but she is uncomfortable with many aspects of political lobbying. She feels that if companies are contributing to lobbyist campaigns, investors should know. ‘Our view is that it’s not for anyone to tell companies how they should behave,’ says Litvack. ‘But they should behave in a way that is in the interests of their shareholders.’
Better disclosure
This is the root of the issue for investors. If a company is spending money on political initiatives, should shareholders have a say in where that money goes – or, at the very least, should they be told about it?
Surprisingly, there are no requirements for companies to disclose information on their political contributions. ‘There needs to be disclosure not only of the contributions but also of the process a company goes through to determine who receives contributions, and how much,’ says Benny Hernandez, corporate governance adviser to the $3 bn Sheet Metal Workers’ National Pension Fund based in Alexandria, Virginia. ‘Also, they need to disclose their ultimate strategy and how it adds to shareholder value.’ Hernandez is also on the subcommittee for political and charitable donations for the Council of Institutional Investors.
Under pressure from labor, SRI funds, religious groups and pension funds, several large companies have begun to disclose details of political ‘soft money’ donations. This refers to money given to political organizations and advocacy groups as opposed to candidates or political parties. Eli Lilly, PepsiCo and Coca-Cola all post this information on their web sites. These companies have also agreed to have their boards oversee these expenditures.
Loopholes
There have been legislative efforts in the US to restrict political donations. The Bipartisan Campaign Reform Act (BCRA) of 2002 (see A black box, right) attempted to strap a tourniquet on the problem by controlling the flow of unchecked political donations, prohibiting soft money contributions to national political parties and independent political committees. But the BCRA left an opening by allowing soft money to be given to other organizations like the Democratic and Republican governors’ associations, which donate money to state races.
In other words, companies can still funnel money to political candidates and parties via trade associations and other tax-exempt entities. And in the case of trade associations and other tax-exempt groups, neither the donor nor the recipient are required to disclose anything.
A recent report by the Center for Political Accountability (CPA), entitled ‘Hidden rivers’, shows that corporations are contributing millions via trade associations and other organizations. ‘Despite the fact that the precise amount of money is unknown, anecdotal evidence provided by associations indicates it is significant,’ the report reads.
Bruce Freed, co-director at the CPA, says the lack of transparency surrounding corporate political donations stinks of scandal and feeds shareholder anxiety. ‘There is this feeling that something is wrong and that things are out of control,’ he says. Freed thinks the media should do more work tracing corporate political donations.
Not going away
The US Congress continues to debate the campaign donations issue. Despite upcoming mid-term elections, momentum surrounding the issue is likely to slow, according to Timothy Smith, senior VP at Boston-based Walden Asset Management. His firm controls $1.4 bn and frequently takes active positions on social, environmental and governance issues.
There is currently a proposed California legislation that would require companies to ask investors for approval of ballot measures and donations to state candidates. Supported by the California Labor Federation, it would force companies to provide shareholders with a list of donations annually and give them two months to review it and respond. Shareholders could then request a reimbursement of their pro rata share of the donation.
What’s clear is that this is an issue that isn’t going to disappear. ‘We’re now into shareholder season, with lots of stockholder meetings taking place, so there is media coverage of this issue,’ explains Smith. ‘And there is real energy and a real likelihood that many companies are going to take political disclosure more seriously. It’s also a simple good governance issue.’
by Adrian Holliday
Thanks to IR Magazine for allowing us to bring this article to you.
Ben Bland uncovers the sordid saga behind the UK government’s decision to disband the OFR
This is the sorry tale of how an attempt to encourage transparency and fuller disclosure from companies was suddenly scrapped by the government without a proper consultation process.
When the UK government announced its decision to bring in a mandatory operating and financial review (OFR) in May 2004, then trade and industry secretary Patricia Hewitt insisted it was an attempt to ‘promote greater transparency by our companies.’ But last November, just months before the first mandatory OFRs were due, Chancellor Gordon Brown revoked the requirement.
Brown’s decision to scrap the OFR was intended to send out a signal that the UK government is business-friendly and anxious to cut down on unnecessary red tape. Instead, the decision prompted a wave of hostile reactions from accountants, asset managers, non-governmental organizations and environmental campaigners.
The most vocal opponent of the decision is London-based environmental organization Friends of the Earth (FoE). In December FoE launched a legal challenge claiming the decision to scrap the OFR was ‘unlawful’ as it was ‘procedurally unfair’.
IR magazine sent a freedom of information request to the Treasury asking for documents related to the decision to do away with the OFR. The request was rejected on the basis that it would compromise the principle of ‘collective cabinet responsibility.’
In February the Treasury agreed to widen an ongoing Department of Trade and Industry (DTI) consultation into narrative reporting and pay FoE’s legal costs. It also agreed to release the documents as a result of FoE’s legal action.
These newly released government documents suggest that, after years of open consultation, the Treasury dumped the OFR following private meetings with Hermes Pensions Management, the Association of British Insurers (ABI) and the London Stock Exchange (LSE). They further show that just days before Brown announced this policy u-turn, neither he nor any other member of the Treasury had seen fit to inform the DTI, which was heading the OFR. Meanwhile, the Treasury had already discussed the move with the Confederation of British Industry (CBI), an influential business lobby group.
So much for collective cabinet responsibility.
Behind closed doors
In a meeting on June 8, 2005, an unnamed Hermes representative commented that the OFR was ‘colossally over-engineered’, the government documents show. A Treasury official then suggested that ‘a radical symbolic stripping-down of the OFR would go down incredibly well [with] big business.’ But with so much work already put into the OFR, the official wondered whether this would be ‘feasible’.
Subsequent memos show that on August 12 an ABI employee told a Treasury official that the OFR was ‘one of those things that gets worse as soon as you put it into law.’ The Treasury official described this meeting as ‘promising’. The government memos then suggest that a meeting with the LSE a week later became the final nail in the coffin of the mandatory OFR.
A Treasury discussion note from September 29 calls for the ‘scaling back’ of OFR requirements. This memo addresses how to handle the decision, but there is little discussion about the consequences of dumping the OFR.
Caught off guard
IR magazine spoke to Hermes, the ABI and the LSE, and all three stress that their position in private meetings with the Treasury was no different from their public statements. But they also emphasize that they were unaware of the Treasury’s intentions and believed these meetings to be informal discussions.
‘There’s always dialogue between stakeholders at the same time as formal consultations,’ says Adam Kinsley, director of regulatory strategy at the LSE. ‘However, nobody was expecting the process to pan out as it did – we didn’t have a sense of an imminent decision being made.’ While Kinsley welcomed the final scrapping of the OFR last November, he doesn’t necessarily agree with the process. ‘We’re not saying that revoking the OFR at the last minute is the right way to do things,’ he comments.
Colin Melvin, Hermes’ director of corporate governance, thinks it ‘unlikely’ that the Treasury’s meeting with Hermes instigated the government’s OFR u-turn. But the Treasury refuses to rule out this version of events. ‘You can see for yourself on our web site the record of our contacts with various groups in which the OFR was raised,’ it says in a statement.
The head of FoE’s corporate accountability campaign, Craig Bennett, believes organizations should be wary of closed-door government meetings as officials can place great importance on what is ‘whispered’. ‘This is why a comment from Hermes got misinterpreted and spiraled into this extraordinary decision to scrap the OFR,’ he says.
Meanwhile, FoE has been criticized for having an axe to grind with the government – but it is not alone in expressing a strong reaction against the demise of the OFR. ‘The strange thing here is that the Treasury put so much weight on such a small number of consultees,’ says Craig Mackenzie, head of investor responsibility at HBOS Group’s Insight Investment, one of the UK’s biggest asset managers with more than £95 bn ($170 bn) under management.
Mackenzie highlights the strong contrast between the seven-year process of formulating the OFR, which involved ‘a massive series of consultations with all investors,’ and the subsequent decision to revoke it. He points out that the latter was based on ‘three informal conversations that the Treasury undertook with who-knows-who from three particular institutions.’
Spin over substance
With Chancellor Brown expected to take over the premiership when Tony Blair steps down, Mackenzie suggests that these government documents offer an ‘interesting window on the way the future prime minister will go about the business of government.’
The UK’s Parliamentary Environmental Audit Committee, which is composed of representatives from both major political parties, has also raised questions about Gordon Brown’s handling of the OFR. In a report released in March, it said it is ‘concerned about the way in which the Treasury took the decision to abolish the OFR,’ stating that the decision suggests ‘an attitude of simply opposing competitiveness and sustainability.’ The committee now wants the government to introduce ‘a new reporting scheme which provides effective incentives for listed companies to act more sustainably.’
Bennett believes the memos released by the government demonstrate a preoccupation with spin rather than substance. ‘Nowhere do they assess whether it’s good or bad for British business to scrap the OFR, except with respect to cost savings,’ he comments. The government estimates that the collective cost of implementing the OFR for UK companies would have come to £33 mn. ‘If 1,300-odd listed companies can’t find £33 mn between them to ensure good corporate governance and basic social and environmental reporting, then we’ve really got problems,’ Bennett continues.
Costs aside, 65 percent of the UK’s largest 350 listed companies plan to produce a voluntary OFR anyway, according to a survey of 124 IROs by financial recruitment consultancy Nigel Lynn. With the outcome of the DTI consultation still unclear, 30 percent of survey respondents say they don’t know what they will do and only 5 percent rule out an OFR altogether.
Given the precipitancy of the government’s actions, it is not surprising that many IROs remain unconvinced. Only 31 percent accept the official line that the OFR was revoked to cut red tape. Forty-six percent say they have ‘no idea’ why it was scrapped, and 23 percent cite other reasons.
Without government regulation, companies are likely to take their lead from investors. ‘Investors will want to see companies producing OFRs, and if those investors make this very clear, companies will have a strong incentive to produce OFRs as opposed to business reviews,’ concludes Mackenzie. ‘Forward-looking statements are missing from the current accounting climate, and there’s pretty widespread consensus in the investment community that the OFR requirements are sensible, well considered and well judged.’
by Ben Bland
Thanks to IR Magazine for allowing us to bring this article to you.
Adrian Holliday looks at the effect of Canada’s heightened disclosure penalties
By US standards, Canadian corporate disclosure practices have a relatively clean history. Enron-scale corporate fraud scandals and disclosure failures have been, for the most part, a US phenomenon. So it’s interesting that Canadian IROs now face one of the strictest disclosure regimes in the world.
Canada’s disclosure facelift centers around the new statutory civil liability regime for secondary market disclosures. Otherwise known as Bill 198, this is the Ontario government’s attempt to align Canadian disclosure requirements with US Sarbanes-Oxley legislation. ‘Bill 198 doesn’t change the disclosure regime, but it raises the consequences if there are violations,’ says Jane Watson of Watson Investor Relations.
Bill 198 aims to protect investors by providing them with the right to sue public company executives for disclosure misrepresentations included in press releases, online documents and oral statements. Those who could potentially be liable include directors, IROs and even outside IR counsel. Until the first Bill 198 test cases come to court, however, it’s tricky to gauge just how far the legislation’s tentacles will extend.
Watson says issuers were initially resistant to Bill 198. They feared it would be too easy to be found liable, as plaintiffs would not have been required to prove fraud or intention when the case centered around core disclosure documents. ‘But legislators responded with measures that should prevent frivolous lawsuits,’ says Watson. ‘Most importantly, plaintiffs need to obtain court approval to proceed, demonstrating that the action is in good faith and that there is reasonable possibility that it will succeed. Additionally, there is a cap on penalties and the loser will pay court costs.’
A tight fit
The hope is that a close-fitting disclosure policy will protect an issuer from being found in violation of Bill 198. In addition, courts are expected to be more lenient on companies with solid disclosure policies that happen to break the rules.
How could disclosure quality be upped? Naturally, the best ideas come from large companies that have the resources to beef up their disclosure procedures. Lorne Gorber, VP of IR at IT services group CGI, which has a market cap of C$3 bn ($2.6 bn), thinks getting the numbers right is the first step regardless of who is communicating the message. ‘I might well talk about stats in a conference call but those numbers must be backed up by the finance group that signs off the numbers, and this must be backed up by and consistent with any press releases,’ he explains.
Sounds straightforward enough, but it’s increasingly difficult for disclosure committees to control the flow of financial and non-financial information given the plethora of online venues available to employees to either post information or receive misinformation from unreliable sources.
‘We have 25,000 people at CGI,’ says Gorber, ‘but if any of those people see derogatory stuff about CGI, they might want to respond, which is a dangerous practice. This means you’ve got to have a policy on this enforced by your disclosure committee, and then you’ve got to communicate this policy effectively. You just can’t slap a legally written document on the table and expect employees to soak it up and absorb it.’
Hindsight is everything
Another issue is volume. The sheer range of information that needs to pass through the disclosure committee can seem daunting. For instance, white papers on certain topics could be of interest to current and potential shareholders and can therefore be considered material.
Another challenge is that it’s hard to determine how broadly regulators are going to apply the definition of misrepresentation under Bill 198. This is one of the concerns of lawyer Ross McKee, who is with Toronto-based Blake, Cassels & Graydon. He believes that misrepresentation is usually easy enough to define, but that ‘the application of that definition to a particular set of facts could be very challenging. Cases of outright fraud are going to be few and far between. More difficult to resolve will be cases involving hindsight analysis of past business judgment, or whether a particular misrepresentation was the result of gross negligence or ‘mere’ negligence.’
There are also concerns that companies might not be ready for the potential impact of Bill 198. Bob Tait, president and CEO of the Canadian Investor Relations Institute (Ciri), suspects that some smaller companies may not be digesting the full meaning of the new regime.
Ciri recently conducted a survey of 101 CEOs, CFOs, IROs and other executives to explore the vulnerability of small caps to Bill 198. It shows that 68 percent of CEOs within this group think civil liability will have a significant effect on their job. ‘Even fewer – 46 percent – think non-officer IR spokespeople should be covered by liability insurance,’ reports Tait.
When asked how significant the effects of Bill 198 are in terms of the way they do their job, a full 20 percent of respondents claim not to know. ‘But that could be because there are no cases yet – hopefully not because they are unaware of the potential consequences,’ notes Tait.
Ready, set, go
Still, some IROs are fully aware of what Bill 198 means and aren’t scared off. Janet Craig, ATI Technologies’ former head of IR, now with Angiotech Pharmaceuticals, welcomes the disclosure safeguard. Whether it’s Sox or Bill 198, anything that continues to create confidence in capital markets is a good thing, she says. ‘But the challenge is that a lot of regulations create extra cautionary language for disclosure,’ she adds. ‘This causes people to skip over things sometimes.’
Some see Canada’s tighter disclosure controls as part of a broader global consolidation among stock exchanges that are putting pressure on issuers and regulators to increase the strength of their disclosure standards. This point was made recently by TSX Group CEO Richard Nesbitt, who thinks higher disclosure standards should take priority.
‘Canadians deserve strong national rules contained in a modern, competitive regulatory system,’ he says in a TSX press release. ‘They also deserve rules that generate benefits for investor protection that exceed the costs of the rules themselves. International investors deserve the same when they choose to invest in Canadian companies. Our reputation as a market depends on it.’
by Adrian Holliday
Thanks to IR Magazine for allowing us to bring this article to you.
PR Newswire’s Mark Hynes opines on the history of disclosure and the role of the news release
The heart of disclosure – and investor relations – lies in providing investors with the information they need to make informed decisions about the value of a company. While laws mandate the way in which companies release information, the provision of fast and equal access to material news for all investors, large and small, wherever they may seek it, is the spirit of disclosure.
The information companies share, to whom they tell it, and how they tell it, varies widely around the world, despite regulators’ efforts to create a common standard. What is emerging as a standard across various disclosure regimes, however, is the use of the news release as a way to communicate to all audiences simultaneously.
In the US, disclosure regulation originated in the aftermath of the 1929 stock market crash. The Securities Act of 1933/4 created the SEC and laid the framework for disclosure practices. US disclosure incorporates structured filings like 10Ks and unstructured filings such as the news release.
Disclosure requirements were tightened in the US six years ago with the controversial Regulation Fair Disclosure (Reg FD), which forbids selective disclosure. The main motivation behind the rule was to even the disclosure playing field for retail investors who were not party to private meetings with companies wherein new material information was sometimes shared. Under Reg FD, individual investors should receive the same information, and at the same time, as fund managers, analysts, brokers and traders do.
The more stringent Sarbanes-Oxley Act of 2002 added significantly to the number of material events a US-listed company is required to disclose on a rapid and current basis.
All US stock markets accept a news release sent over a commercial newswire as the means for meeting disclosure
requirements. For IROs this is also an effective way to reach a vast network of millions of investors, both individual and retail, thousands of media contacts including Dow Jones and Reuters, and web sites and financial databases like Yahoo! Finance and Thomson Financial’s FirstCall Network.
In Europe, regulators have been working toward a common standard for disclosure of material news. Under the Transparency Obligation Directive, which will come into effect in January 2007, issuers will be obligated to distribute news releases across the European Union in a manner that is fast, simultaneous and secure.
Our studies show that 97 percent of listed companies in the US use a commercial newswire to meet their disclosure obligations. By embracing this method, European companies and regulators will ensure investors benefit from the full spirit of disclosure. Disclosure regulations exist to create a level playing field for investors and issuers by ensuring material news is released to all audiences simultaneously. Understanding the fundamental aspects of disclosure is as important as knowing how to comply.
Thanks to IR Magazine for allowing us to bring this article to you.
Dea Katel looks at trends in MD&A to watch for in 2006
In every company’s 10K or 10Q, the management discussion and analysis (MD&A) presents an opportunity beyond mere regulatory compliance. It’s meant to present a view of the company ‘through the eyes of management’, as the SEC says. But it’s also a chance for management to really show its cards, no matter what hand it is dealt. What has it learned over the past quarter or year, and what does it expect going forward?
Instead of answering these questions directly, too many companies get stuck in a rut and fail to address new issues – issues that were probably not in the picture when their MD&As first took shape. The themes of MD&As are cyclical, coming and going from quarter to quarter and year to year, points out Brian Lane, partner at Gibson Dunn & Crutcher and former head of the SEC’s division of corporation finance. ‘Don’t keep the same old boilerplate the company has used for its risks for the last ten years,’ he says. ‘Things change.’
Lane believes careful consideration of related risk factors should be a priority for IR people working on the MD&A. They need to ask senior management and operations chiefs: what keeps you up at night? What are you most worried about affecting the company’s business, good or bad? ‘If the IRO gets an answer back that says, Yes, we are worried about something, shouldn’t that show up somewhere in the disclosure?’ Lane asks. ‘Companies have to be cognizant of things that are not only relevant to a company’s present but also to its future.’
This year, with disclosure under tight scrutiny and executive pay receiving particular attention from shareholders, companies are paying a lot more attention to fine-tuning their MD&As. The top themes, according to Lane, are creeping interest rates, high fuel prices and natural disaster recovery.
Fast forward
David Dragics, vice president of IR at CACI, an Arlington, Virginia-based government information technology business, says disclosure is the core of the MD&A, and he has seen improved transparency in MD&As in the past year. ‘It’s a slow process and it’s never going to be all that the SEC wants it to be, but it is going to be more than we have now,’ he notes.
Despite the SEC repeatedly delaying the phasing-in of accelerated filing deadlines, Dragics expects tightened timeframes in 2006. He says investors can expect to see more 10Qs coming out at the same time as earnings releases so they get complete disclosure all at once instead of in two separate steps – a long-term trend that will improve transparency.
‘Questions that you get now on an earnings release would be answered almost simultaneously with the 10Q filing,’ Dragics explains. ‘Why kill yourself to go through preparation of an earnings release and then kill yourself again for the preparation of a public filing? Just do it all at once.’
Another trend to watch out for as the year unfolds is an increase in footnotes about the expensing of stock options and other stock-based compensation. ‘We will begin to see more clarity on explaining stock-based compensation,’ Dragics says. ‘Investors will be taking a hard look at MD&A and all the footnotes to see the impact of any dilution.’
Just the facts
Transparency in the MD&A can take many forms. Andrea Resnick, vice president of investor relations and corporate communications at New York leather goods marketer Coach, cites a focus on plain language as a major and worthwhile MD&A trend in 2005. She is not alone among her peers in feeling that complicated jargon masks holes in disclosure. Simplifying the way the MD&A is communicated lends itself to more meaningful disclosure.
Resnick has also seen more considered MD&As with less boilerplate in 2005, compared with the past when MD&As had a tendency to ‘simply regurgitate prior years.’ She confirms that investors want to read about competitive pressures and risks as well as expansion plans. Other common themes she expects in 2006 include the impact of foreign currency transactions, business interruption and disaster recovery, stock option expensing, gas prices and pension considerations in light of the Financial Accounting Standards Board’s (Fasb) recent focus on calculation of pension benefit obligations.
As you like it
More disclosure of pension assumptions and more reader-friendly MD&As also come to mind for Mark Oberle, vice president of investor relations at Celanese, a Dallas, Texas-based chemical company. ‘These trends are a key part of a commitment to transparency,’ he says. ‘I feel very strongly about improving the quality of non-financial information.’
Celanese’s next 10K will likely delve into the cost of fuel and other related raw materials. That’s a theme expected in many other companies’ MD&As, often associated with those all-too familiar names: Katrina and Rita.
Companies all over the US felt the financial impact of the hurricanes, though few were as hard hit as Entergy, an electric power production and distribution company whose territory includes the worst hit parts of the gulf coast. ‘With both Katrina and Rita, we’ve had financial impacts we’ve never experienced at Entergy from any natural disaster – and we deal with hurricanes and ice storms nearly every year,’ says Paul LaRosa, Entergy’s director of IR.
A lot of the impact came from sheer physical damage, the like of which Entergy had never experienced before. The effect was a lost stream of revenue that was still ongoing by year-end, more than four months after Katrina, because many Entergy customers still didn’t have homes to receive their power in. One subsidiary, serving New Orleans, had to file for bankruptcy because it had lost so many customers while spending around $300 mn to restore power where it could.
Rising interest rates added to the hurt for Entergy as it borrowed money to rebuild. ‘Higher borrowing at higher interest rates obviously has an impact on us,’ LaRosa says. ‘Utilities are typically interest rate-sensitive, and we are no different.’ Even the higher cost of natural gas hurt Entergy because it uses gas to generate electricity and is limited in how much of the inflated cost it can pass on to customers.
For other companies facing such issues, LaRosa suggests the MD&A should provide information that is relevant, detailed, digestible and helpful to the reader in understanding the overall financial picture. In fact, that’s good advice for any company, at any time – not just in hurricane season.
by Dea Katel
Thanks to IR Magazine for allowing us to bring this article to you.
Dea Katel looks at the past five years of changes in disclosure and explores what lies ahead
The SEC launched Regulation Fair Disclosure (Reg FD) on October 23, 2000 and opened a new era of information dissemination by public companies in the US and globally. Less than two years later came the Sarbanes-Oxley Act of 2002, reinforcing the message that we’re living in a whole new world of corporate disclosure.
Arthur Levitt, chairman of the SEC from 1993 to 2001 and now senior adviser at the Carlyle Group, says Reg FD exceeded his expectations. ‘I thought there would be a lot of resistance, mostly from the brokerage community,’ he says. ‘And I didn’t think the corporate community would be as supportive as it has been. Companies have begun to respect the principles behind Reg FD rather than merely going along with the rule. They’ve embraced the underlying philosophy of making relevant information available to everybody at the same time.’
According to Lou Thompson, president and CEO of the National Investor Relations Institute (Niri), which worked with the SEC on Reg FD, the rule eliminated a formerly prevalent fear that the exchange of information between companies and other companies – or between companies and the Street – wasn’t as open as it should be.
Fears about the rule itself – that Reg FD would chill the dialogue between companies and the investment community – proved unfounded. Of the more than 2,200 companies represented by Niri’s membership, 97 percent still hold one-on-one meetings with investors and analysts. ‘After five years, Reg FD is well incorporated into companies’ disclosure policies and practices, and IROs are careful to avoid that trap,’ Thompson says.
Along with a 2002 investigative report against Motorola, the SEC has made six Reg FD enforcement cases against listed companies: Siebel Systems, Raytheon and Secure Computing in 2002; Siebel Systems again in 2004; Schering-Plough in 2003; and Flowserve in 2005. In an interesting turn of events, federal Judge George Daniels dismissed the most recent SEC case against Siebel Systems on August 31 after deciding the regulator was too aggressive in its interpretation of Reg FD.
Along came Sox
If Levitt was the father of Reg FD, Brian Lane was the architect as head of the SEC’s division of corporation finance. He’s now a partner at Gibson Dunn & Crutcher.
‘One of the toughest issues I’m tackling these days is non-Gaap measures,’ Lane says. ‘The greatest push-back I have often comes from the head of IR who may feel the SEC is out of control. The argument is that people won’t understand the business without these non-Gaap measures and the market will punish the firm.’
In some ways, the Reg FD ‘chill’ that never materialized instead came with the debate over non-Gaap or pro forma numbers. Lane recalls that in 1999, well before the advent of Sox, SEC officials were speaking about how non-Gaap numbers could be misleading when included in earnings releases and other announcements.
In January 2002 the SEC hit Trump Hotels & Casino Resorts with a cease-and-desist order for announcing a pro forma profit number without revealing that it excluded one-time charges but not one-time gains. ‘That was the first benchmark for the regulatory changes that would follow,’ Lane says.
Those rule changes came with both Sox in mid-2002 and, in January 2003, Regulation G, which dictates that any non-Gaap number in an earnings release has to be accompanied by – and reconciled to – the closest possible Gaap number.
The debate is still going on. The SEC says non-Gaap measures are misleading to investors because they can make a company’s situation look better than it really is. Companies want to be able to come up with alternative measures that better gauge their real performance. ‘There will always be this shadow, as there should be, of government authority on IR professionals in deciding what to disclose,’ Lane comments.
Beyond the numbers, companies are being strongly urged by the SEC and the exchanges to disclose anything and everything that could affect their performance, from creeping interest rates and high fuel prices to property casualty given the high rate of natural disasters in recent years. ‘IROs have to be cognizant of how issues relevant to their company now and in the near future will affect their businesses,’ Lane observes. ‘Doing a better job on the MD&A involves helping investors understand the trends and uncertainties that are facing the company.’
An IRO needs to be able to ask the senior management team what has it worried and these worries, along with coping tactics, need to be discussed and disclosed to shareholders. In the last few years the SEC has been cracking down on accounting, with few enforcement cases directly affecting IR. Now, says Lane, keep an eye out for pending SEC investigations into disclosure. ‘If something isn’t disclosed right, your friendly SEC will be happy to teach you the error of your ways,’ he concludes.
by Dea Katel
Thanks to IR Magazine for allowing us to bring this article to you.
Internal Control: The Next Wave of Certification - Helping Smaller Public Companies with Certification and Disclosure about Internal Control over Financial Reporting is now available on the CICA web site. This useful, straightforward publication is designed to help smaller Canadian TSX and TSX-V exchange listed companies comply with the certification and related disclosure requirements that became effective in 2006 regarding the design of internal control over financial reporting (ICFR). It focuses in particular on situations where management’s assessment of ICFR design has identified one or more unremediated ICFR design weaknesses, and the CEO and CFO are therefore faced with important certification and MD&A disclosure decisions.
Click on the link below to access and download the document:
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
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.
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.
There has been much progress made in the corporate governance arena, except in one aspect: executive compensation disclosure. There is much work that remains to be done until investors can describe executive compensation programs with only a crayon (to borrow and modify Peter Lynch’s description of what stocks to buy – only buy those you can describe with a crayon).
NEW YORK -- Just shy of its fifth anniversary, the most restrictive disclosure rule in US history was dealt a blow yesterday when a Manhattan judge dismissed an SEC claim that California-based Siebel Systems violated Reg FD.
When issuing a profit warning, IROs can temper the market’s reaction by thinking ahead. Adrian Holliday reports
Although markets have generally recovered from 2001’s abysmal performance, companies are still regularly giving out bad news in the form of profit warnings. The UK technology industry has been especially susceptible, with profit warnings from this sector tripling in the first three months of this year according to Ernst & Young. The sector is also issuing the highest number of profit warnings, with 14 percent of UK tech companies disclosing this news in the first quarter of 2006.
The concern for IR is how best to handle this negative news. Richard Davies of London-based IR consultancy RD:IR is sympathetic to the IRO’s admittedly exposed position when it comes to dishing out difficult material facts. ‘IROs aren’t in control of finance, but they are in control of financial reporting, so they’re caught between what they can report and what they are expected to report,’ says Davies. ‘At the same time, you can have a lousy business and a great IRO.’
Davies says IROs should try to steer away from a black/white or good/bad news model and instead focus on explaining effective risk management to investors before hitting black ice. ‘Risk management is an intrinsic part of the IRO’s job,’ explains Davies. ‘It’s foundational, and fund managers are increasingly looking to hear from management about how risk is managed. If you’re upfront about risks to contracts, for instance, you protect yourself against major share price volatility.’
Prone to bad news
IROs working in the tech sector need to hone their skills for profit warnings as this market is particularly vulnerable to this type of announcement. James Bennet, technology director at Ernst & Young, says a mixture of contract delays and an increasingly fickle client base is driving the current profit warning phenomenon among UK tech companies. ‘The main reason cited for these problems is a delay in contracts and projects,’ he notes. ‘It’s taking longer than expected for companies to sign contracts, and for smaller companies dependent on fewer big deals, this is an issue.
‘Customers are also becoming tougher and more sophisticated purchasers,’ adds Bennet. ‘They’re putting suppliers under pressure by negotiating slowly and demanding a last-minute change in price to coincide with the end of a significant accounting period for the supplier.’
‘Many contracts in the tech sector are now large, one-off deals, so if it’s big and something goes wrong, it’s very bad news,’ adds Bear Stearns analyst Jonathan Dann.lsquo; You’ve also got two types of tech consumers: business and retail. In the retail market we’ve had three years of a bull market with broadband and mobile phone penetration – broadband is now in 40 percent of UK homes. So it’s a much more mature market than in 2002.’ A matured market is a negative sign as high multiples are premised on strong future growth.
Be a skeptic
IROs working in this sector will continue to feel pressure to warn ahead if analyst estimates are to be missed. ‘Investor relations professionals in the small-cap sector in particular have to make a Faustian pact with analysts, for example, because the reality is that their companies have limited visibility,’ says Mark Klamer, a lawyer with St Louis-based Bryan Cave. ‘There’s this immense pressure to give a lot of guidance, but this can all too easily be upset because of sales lumpiness – just one or two contracts can make or break a quarter.’
IR needs to be a bit skeptical of the numbers coming out of the finance department, says Reg Hoare of London-based communications firm Smithfield. ‘You have to be absolutely on top of all the trading news,’ he says. ‘If you’re an experienced and savvy IRO, then one of the first things you must ask the finance department is, Are you sure? What about the budgets? Are they realistic?
‘Analysts and investors always want more info and detail, so you should resist any temptation to keep the bad news short and sweet,’ adds Hoare. ‘And you must make sure that when your statement comes out, you’re focusing not just on the bad news but also on what you’re doing about it. It helps if you have plenty of forward commentary to go with it.’
Keep the lines open
Access to management is another consideration. Analysts, financial journalists and investors often want to see management face to face so they can pick up on body language. Sometimes a webcast conference call with a Q&A session is sufficient. ‘This is certainly more effective than a terse press release with no follow-up,’ says Brian Bushee, assistant professor of accounting at the Wharton School of Business. ‘It’s about uncertainty. A conference call does let key investors and analysts dig deeper into the sources and implications of a profit warning than a press release can ever hope to do.’
Failure to answer questions on profit warnings can further depress stock price, adds Bushee. While no manager wants to face a crowd of unsettled analysts and investors, it’s best to deal with their queries in an upfront manner.
The ideal way to handle a profit warning is not to wait for the bad news to hit before establishing clear, consistent communications with analysts and investors. The IR role is aided by regular news flow in good times and bad, says Peter Bradley of law firm Stephenson Harwood. ‘The London Aim market is particularly price-sensitive and a lot of these companies don’t make sufficient use of financial PR, so the share price can languish because there’s little news about the company,’ he explains. ‘Clever use of financial PR can help active trading in a stock and prevent people from complaining about a lack of liquidity. The key here is telling your story, rather than repeating market noise or what other people think.’
‘Sometimes there is too much focus from companies on quarter-to-quarter results,’ says Neil Matthews, a lawyer with London-based Eversheds. ‘Effective communication is not just about having lunch a few times a year with analysts and journalists. It’s about the bigger picture.’
by Adrian Holliday
Thanks to IR Magazine for allowing us to bring this article to you.
Ian Sax on the SEC’s new rules for executive compensation disclosure
The sweeping changes to the rules on executive compensation disclosure adopted by the SEC on July 26 have stirred up a spirited response – so much so that the consultation period generated more response letters than any other proposal in the commission’s history.
In addition to providing greater detail on executives’ pay and perks, companies also face new rules on the disclosure of stock option grants – no surprise considering the ongoing backdating scandal. Other aspects of the new rules hew closely to the original ones proposed back in January.
At the heart of the new rules, according to SEC chairman Christopher Cox, is the new compensation discussion and analysis (CD&A), which must be filed in the proxy statement, and a new compensation committee report, which only has to be ‘furnished’. Companies must also provide a summary compensation table showing the total yearly compensation for the CEO, CFO and next three highest-paid executives.
Two topics that drew criticism in the original proposal were deferred compensation and the so-called Katie Couric clause, a requirement to disclose the pay details of as many as three non-executive employees whose individual compensation exceeds that of any of the company’s top five execs.
‘I was surprised the SEC didn’t kill the Katie Couric proposal but instead reproposed it,’ explains Broc Romanek, editor for TheCorporateCounsel.net and a former member of the office of chief counsel of the SEC’s division of corporation finance. ‘As reproposed, this rule would carve out non-executive officers with no responsibility for significant policy decisions and would only apply to large accelerated filers,’ he adds.
Another contentious issue is that of earnings on deferred compensation. Under the original proposal, these payments were to be included in the summary compensation totals. Even early adopters of the proposed guidelines balked at this, however. Pfizer released a 29-page compensation committee report in its 2006 proxy but didn’t include earnings on deferred compensation in its summary compensation tally.
Double trouble
Like many critics, Pfizer’s corporate secretary and VP for corporate governance, Peggy Foran, points out that the SEC was in effect suggesting companies should double-count compensation: ‘We left it out of the tally sheet because the earnings are at or below the market. I can see the SEC’s point of view; some companies may have given sweeteners or alternative investments to executives with regard to the deferred compensation, so the SEC wants to see that.’
In fact, the SEC did what many critics had hoped. In the summary compensation table, companies are required to include only above-market or preferential earnings on deferred compensation, as opposed to all earnings.
The new rules also clarify whether the new CD&A will fall under CEO and CFO certifications. Professor Allison Garrett of Faulkner University’s Thomas Goode Jones School of Law had hoped the SEC would address the problem, but in fact, the CD&A must be ‘filed’ as opposed to ‘furnished’, putting it under the certifications.
‘Everyone agrees that the compensation rules needed attention, and most of the changes that have been made should help lay readers comprehend that section of the proxy statement,’ says Garrett, a former VP and general counsel of the corporate division and vice president of benefits at Wal-Mart. ‘However, after spending the past decade teasing apart the roles of the chairman and the CEO, the SEC has now inserted the CEO and CFO into compensation committee practices.’
The new rules and IROs
Just how much attention IROs are paying to the new rules depends on the company they work for. Those whose companies have relied more heavily on options or that have drawn investor scrutiny are more susceptible. For many, however, it’s business as usual, with at least three IROs contacted by IR magazine saying they haven’t paid much attention to either the proposal or the final rules.
IROs who are familiar with the new rules say Wall Street isn’t interested. ‘Our corporate secretary’s office is handling this, but the fact is, our transparency has been quite good in terms of disclosure for our top five executives,’ says Jerry Kircher, VP of IR at Lockheed Martin. ‘The issue doesn’t come up with analysts. To date, I haven’t had one call on the topic. So I think it’s going to be pretty simple in terms of adoption.’
‘We haven’t gotten questions at this point from investors,’ agrees Katie Sullivan, manager of IR at Staples. ‘I don’t see much of an impact for us. Last year we got a head start and made a lot of changes to our disclosure. We’ll have to change the packaging, but the information is there as of last year. For investors, the new rules make it easier to digest the information. More importantly, they make it easier to compare compensation from one company to the next.’
Richard Sinise, executive VP and portfolio manager at Kennedy Capital, says the new rules aren’t on his radar. He is interested in the new disclosure for stock options, but he notes that most of the information was already there, although perhaps less readily accessible. ‘We’re mostly interested in the total figure for options, as option-heavy companies are problematic for us,’ he says. ‘For us it isn’t necessarily an option timing issue, though of course it’s nice information to know.’
Early adopters
Companies that did not see the writing on the wall and proactively move to improve their disclosure in anticipation of the rules may face problems adapting. ‘I think there will be a lot of companies that will be sorry they didn’t pay attention to some of the inevitable changes that were set forth in the proposing release,’ says Anne Plimpton, counsel in the Boston office of law firm McDermott Will & Emery.
‘We told our clients not to wait to put in place the kinds of processes they’ll be required to disclose in next year’s proxy statement, since they would be more than halfway through the year that they will be required to describe by the time the final rules are published,’ she continues. ‘Some companies made changes in their 2006 proxies in anticipation of the new rules. Many started by trying to take the boilerplate disclosure out of the compensation committee report.’
Plimpton believes that compensation committees will struggle when it comes to preparing the new CD&A: ‘It’s a report of the company, but it’s based on what happened at the committee meetings. We’re telling committees that they need to make sure their minutes are comprehensive enough to provide a roadmap for what they actually did. Otherwise it will be very hard to write the CD&A.’
As Romanek points out, it will take time for the dust to settle on the rule changes. ‘Until we see the adopting release, we don’t know the full extent of the changes. Consider Sox – people didn’t complain about 404 for almost a year because they were focusing on the current rule-making at the time.’
Thanks to IR Magazine for allowing us to bring this article to you.
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:
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• 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.
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.
BUDAPEST -- The online corporate data provided by listed companies in Greece and Turkey is on par with that obtainable from their counterparts in Central & Eastern Europe (CCE), according to a new survey by the Budapest-based Partners for Financial Stability (PFS) Program.
LONDON -- Hedge funds are becoming the new face of activism. This week investors praised a group of US hedge funds for orchestrating the takeover of Medidep, a French operator of retirement homes. The group found the right buyer for the firm after unseating a board member at the company's annual meeting, allowing shareholder to obtain the best gain on their holdings.
LONDON -- In an effort increase accounting transparency, international accounting standards are now in play. While new International Financial Reporting Standards (IFRS) tighten up some formerly confusing and convoluted reporting standards, it's also causing confusion in some areas.
VIENNA -- The number of Austrian listed companies making detailed corporate governance declarations has risen sharply, indicating that firms are improving transparency levels. So says a survey of 2004 annual reports from Vienna Stock Exchange companies by Aktienforum, a local capital markets promotion group.
SYDNEY -- The Australian Securities & Investments Commission (Asic) has issued its first fine and infringement notice to a publicly listed company for being in breach of continuous disclosure obligations. Asic was given the power to issue fines for continuous disclosure breaches from January 1 this year.
IROs who have been through major transactions offer these five practical tips on handling shareholder communications in an M&A situation:
“You have to make sure you have control of the pen as your operating environment will change overnight,” cautions Greg Martin, Vice President and CFO of Vancouver-based Zincore Metals. This is Martin’s advice to an IR person suddenly thrust into a hostile takeover bid, which is exactly what happened to him last November when Barrick Gold went after Placer Dome, where he headed investor relations. “You are used to working with a select group of people, and all of a sudden you are sitting at the table with 25 people who are all trying to prove their worth,” Martin adds, referring to the entourage of legal, banking and communications advisers that accompanies a sizable deal.
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 Third Edition of CIRI's Standards and Guidance for Disclosure - including the Model Disclosure Policy template - was mailed to all members in May.
Stéphane Milot is dwelling on guidance. As Director of Public and Investor Relations at printer and publisher Transcontinental, Milot has been discussing his company’s EPS guidance with analysts and investors since 2001. But that may change. “The new regulations are making us question whether we should continue to provide guidance and, if so, what type,” says Milot, referring to Ontario’s Bill 198 on continuous disclosure. “There is a risk that [giving guidance would expose us to civil liability] and we have to ask ourselves how we will manage it.”
Following extensive review and consultation and in view of the delays and debate underway in the U.S. over the rules implementing section 404 of the Sarbanes-Oxley Act of 2002, the Canadian Securities Administrators (CSA) announced last week their decision not to proceed with proposed Multilateral Instrument 52-111 Reporting on Internal Control over Financial Reporting (MI 52-111).
Get ready for sweeping changes to Ontario’s Securities Act. From December 31 of this year, IROs and other officers will be civilly liable for corporate disclosure inadequacies in the secondary market.
On December 31, 2005 amendments to the Securities Act (Ontario) (included mainly in “Bill 198”) come into effect, introducing a statutory civil liability regime for disclosures in the secondary market where some 90% of securities trades take place. The amendments extend the civil liability regime beyond primary market disclosures. The amendments apply to all Ontario reporting issuers (which include all TSX listed companies) and to any company with publicly traded securities that has a real and substantial connection to Ontario (which includes some, but not all, TSX Venture listed companies).
Effective June 30, 2005, the British Columbia Securities Commission along with most Canadian Securities Commissions adopted National Instrument 58-101 Disclosure of Corporate Governance Practices and National Policy 58-201 Corporate Governance Guidelines. The adoption of NI 58-101 and NP 58-201 fundamentally alter the manner in which reporting issuers must conduct and report their corporate governance practices and procedures.
The Ontario government has proclaimed legislation that implements civil liability for secondary market disclosure. The announcement came in a news release.
For your information a new release and backgrounder was issued by the Ontario Government indicating the proclamation date for the secondary market civil liability regime and the prohibitions against fraud and market manipulation and making misleading or untrue statements. These amendments were passed by the Government under former Bill 198 (with technical changes made under Bill 41) but had yet to be proclaimed in force. The proclamation date for these amendments is December 31, 2005.
How has your company been affected by National Instrument 51-102? At CCNMatthews, we have noticed two distinct trends since this new “Rule” came into effect on March 30, 2004
Ontario and British Columbia have passed legislation introducing statutory civil liability for continuous disclosure (CLCD),but the provisions remain subject to proclamation by the respective provincial Cabinets.In Ontario’s case,this was prior legislation put back on track.In B.C.’s case,the government delayed the implementation and has not given a proposed implementation date.The timing of the proclamation into effect remains uncertain.
Companies should prepare for the heightened risk of class action securities litigation in Canada.
The Canadian Securities Administrators (“CSA”) have released a proposed national policy containing new corporate governance guidelines (Proposed NP 58-201) together with a proposed national instrument containing disclosure requirements of corporate governance practices (Proposed NI 58-101). These CSA proposals replace the two competing corporate governance proposals that were circulated last year, one supported by British Columbia, Alberta, and Quebec, and the other by Ontario and Alberta.
They’re Baaack!
Newsline January 2005 Volume 15 Issue 1 Update on Securities Regulation
Financial Executives International (FEI) Canada, in conjunction with Microsoft, is pleased to announce their next National Breakfast Seminar series in February. Expert speakers will explain how Extensible Business Reporting Language (XBRL) is being used around the world and how it will permanently change the nature of financial reporting, disclosure and risk management in Canada.
Companies have been asking whether the new accelerated deadline for filing annual financial statements and annual MD&A affects the date for sending meeting materials and the date of the annual meeting. Staff of the Ontario Securities Commission has advised us that for this proxy season, Canadian securities regulators will not object if a company continues its past practice - that is, sending the meeting materials and the glossy annual report to shareholders in one meeting within 140 days of its financial year-end. The annual financial statements and the annual MD&A must, however, be filed within 90 days of the end of the financial year (120 days for venture issuers).
January 14, 2005 – Toronto, ON -- The Canadian Securities Administrators (CSA) issued guidance today on disclosure of retirement benefits that goes beyond the disclosures required in securities regulation. The guidance was issued to assist issuers that choose to provide additional disclosure in identifying items that could be disclosed, as well as the assumptions used to derive the information, in a form that is clearly presented for the benefit of investors.
January 7, 2005 --Calgary, AB-- The Canadian Securities Administrators (CSA) are proposing to streamline the short form prospectus system to more fully integrate the disclosure systems for the primary and secondary markets and to update the current rules. The proposed changes are designed to allow issuers to efficiently access the capital markets by depending increasingly on their existing continuous disclosure record. The proposed rule also contemplates broadening access to the short form prospectus system to allow more issuers to benefit from the streamlined system.
Financial statements prepared in accordance with Canadian Generally Accepted Accounting Principles (“GAAP”) do not always provide the complete picture.
Canadian IR Practitioner column from Newsline Volume 14 Issue 4 – July 2004
Disclosure Matters – An IRO’s Perspective
Update on Securities Regulation column from Newsline Volume 14 Issue 4 – July 2004
Stock-Based Compensation
In the wake of earnings manipulation scandals and criticisms of excessive compensation packages, employee stock options continue to be a very hot topic.
A number of significant changes in disclosure rules will take effect in 2004. As the year begins, here is an update on the status of these measures, which have been gestating for a very long time.
Canadian securities regulators are implementing a new rule, National Instrument 51-102 Continuous Disclosure Obligations, that stipulates faster reporting deadlines; additional MD&A and AIF requirements; the elimination of mandatory delivery of financial reports to shareholders; and the filing of business acquisition reports, among other things.
Canadian securities regulators in mid-January announced proposed guidelines for corporate governance best practices (Multilateral Policies 58-201 Effective Corporate Governance and 58-101 Disclosure of Corporate Governance Practices) for comment by April 15, 2004. Once finalized, they will replace the TSX corporate governance guidelines and related disclosure requirements. They are being considered by securities regulators in all jurisdictions except B.C., while Quebec plans to provide its own guidelines.