Recently, the Ontario Securities Commission (OSC) released its findings from a review of issuers’ IFRS transition disclosure provided in 2008 annual and 2009 interim MD&A.

In this article we’ll revisit the requirements for IFRS-related MD&A disclosures for the upcoming year-end, and continue to explore areas where there are significant differences between Canadian GAAP and IFRS.

Some errors slip through while issuers skimp on interactive tools

It’s midway through earnings season and 61 companies (as of 5 pm today) have produced XBRL statements under the SEC mandate for reporting periods ending after June 15. The rest of the first 500 biggest companies should join the interactive data movement in the coming weeks. According to early indications, all’s well with XBRL.

The bad news is few if any issuer websites are giving shareholders more than a basic view of XBRL statements while some errors may reveal the SEC hasn’t fully scaled up its review process.

To read more...

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.

In early January, the Canadian press widely reported the continuing worldwide slide in capital markets. Everyone knows the news has not been good. As reported in the press, the Bank of Canada’s quarterly survey of companies across Canada found that business leaders expect sales growth to slow, prices of products to increase at a slower pace and the workforce to shrink this year. Obviously, company earnings may be negatively affected.

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.

“Perseverance is a great element of success. If you only knock long enough and loud enough at the gate, you are sure to wake up somebody.” – Henry Wadsworth Longfellow

An old Chinese proverb (or curse) reads: “May you live in interesting times.” Researching this phrase reveals that it is generally understood as referring to experiencing much upheaval in life – the implication being that the most difficult times are the most interesting and the most rewarding too. They challenge and test us, and occasionally they can bring out the best in us. And like it or not, we live in interesting times.

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:

As this is my last Newsline article, I am taking the liberty of addressing 10 things that took me (almost) 30 years to learn.

1. There’s never only one cockroach
Rarely do stock prices advance in the face of bad news. And unfortunately, bad news tends to come not in isolated instances but rather through a series of announcements. The sooner an investor can respond, the better. The problem is that due to a number of reasons, investors want to regard bad news as – if not an isolated event – one that should not have implications far into the future. Sometimes, but rarely, this proves to be the case; more often than not, the problems become far-reaching, time consuming and, most troubling of all, costly. Investors can address this by learning from their mistakes, or being disciplined enough to protect their capital by selling when the first piece of bad news becomes public, regardless of the cause.

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.

Ian Chadsey, Vice President, Investor Relations, at Winnipeg-based MTS Allstream, notes that the conventional ‘deep value’ and ‘growth’ labels matter far less in the current turbulent market conditions than they have historically.

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:

"Put it before them briefly so they will read it, clearly so they will appreciate it, picturesquely so they will remember it and, above all, accurately so they will be guided by its light." ~ Joseph Pulitzer

In the extremely hectic world of IR, we are often stretched too thin – consumed with day to day tasks and putting out fires – to even consider adding to our workload with board reporting. Some of us barely make it through year-end with all our faculties intact! But in our constantly evolving profession, it has never been more important to implement some form of report to the board from the IR perspective. New and changing regulations, the advent of additional investment vehicles, laws, and market events – all impact our companies and are growing concerns for our shareholders. And your board needs to hear what you know, since you are closest to shareholders and the Street.

Two significant announcements were made recently that pave the way for Canada’s move to International Financial Reporting Standards (IFRS). The Canadian Accounting Standards Board (AcSB) confirmed that the mandatory changeover date from existing Canadian generally accepted accounting principles (GAAP) to IFRS will be fiscal years beginning on or after January 1, 2011. For companies with calendar year-ends this means that their first quarter results in 2011 will show an additional opening IFRS balance sheet and comparative financials for 2011 and 2010 prepared in accordance with IFRS. The other announcement was made through the release of a Canadian Securities Administrators (CSA) concept paper that considers possible changes to securities rules on acceptable accounting principles in light of the transition from existing Canadian GAAP to IFRS.

The concept paper explores some of the issues surrounding Canada’s transition to IFRS in view of amendments that may be required to National Instrument 52-107, Acceptable Accounting Principles, Auditing Standards and Reporting Currency (NI 52-107). It focuses on some pertinent issues relating to the Canadian adoption of IFRS. Two of these are discussed below.

Use of IFRS by domestic issuers before January 1, 2011
Many companies filing financial statements in Canada are either subsidiaries of overseas companies that have already adopted IFRS, or have subsidiaries already reporting using IFRS. For Canadian companies in either of these situations, adopting IFRS earlier than 2011 has some clear benefits. Currently these groups of companies track differences between Canadian and international reporting standards and need to keep two sets of financial information for local and group needs. The opportunity to align accounting policies of all the companies in multinational organizations would eliminate the need to track and remain up-to-date on two separate sets of accounting standards.

Canadian domestic issuers that are also SEC registrants may also be interested in early adoption of IFRS. The SEC’s elimination of the need for a reconciliation between IFRS compliant financial statements and U.S. GAAP makes the transition to IFRS extremely attractive for companies that must reconcile their Canadian financial statements to U.S. GAAP. Adopting IFRS early would allow these companies to prepare only one set of financial statements using an accounting model accepted in both Canada and the U.S., thereby avoiding the need for reconciliations.

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.

The recent surge in private equity buyouts has some IROs questioning what they’d do if private equity investors came knocking. Already 3,000 private equity funds have raised $500 billion worldwide, according to the Private Equity Council. Some have been particularly aggressive in the Canadian market, including major U.S. buyout group KKR and the Ontario Teachers’ Pension Plan’s private equity arm. The question of what happens to investor relations at target companies largely depends on the private equity buyers but experts say IR should be aware of the options these deals present.

“It is an interesting journey to go through the process of being with a publicly held company and taking it private,” says Smooch Reynolds, Chief Executive Officer of IR-specialized recruiting firm The Repovich-Reynolds Group (TRRG). “But it really depends on whether the private equity firm wants the IR person to stay. If there are bondholders, there is still an investor component and it can be a worthwhile chapter of experience in doing a different type of IR.”

Katherine Vyse has special insight into this unique form of IR. As Senior Vice President, Global Marketing and Client Communications at Brookfield Asset Management, she’s in charge of raising her company’s profile with potential investors in Brookfield’s private equity funds. “My private equity IRO role is still evolving but currently it focuses on bringing some of the traditional IR tools and techniques to the private equity side of the business,” she says.

“Regard your good name as the richest jewel you can possibly be possessed of – for credit is like fire; when once you have kindled it you may easily preserve it, but if you once extinguish it, you will find it an arduous task to rekindle it again. The way to gain a good reputation is to endeavor to be what you desire to appear.”

Socrates Greek philosopher in Athens (469 BC - 399 BC)

This might seem like a dramatic way to begin a column about the art of investor relations, but it is directly on point with regard to my subject for this issue – reputation management. In the forum of public markets, fortunes (and stock prices) rise or fall in reaction to sometimes unforeseen or uncontrollable events.

Along with additional line items on the balance sheet, and a new statement of other comprehensive income, the enhanced disclosure and presentation standards provide more qualitative information about the risks that companies manage. By the first quarter of next year, that information will grow to include quantitative measures of risks managed by the company. Here is a brief description of some highlights.

CICA Handbook Section 3855, Financial Instruments – Recognition and Measurement,

Investor relations professionals from all sectors should be communicating their companys’ climate change efforts to investors and analysts, CSR experts say. “The more clearly you can communicate how your company is preparing for a carbon-constrained world, the better,” says Toby Heaps, Editor of Corporate Knights. “Most competitive companies now recognize that responding to climate change is part of identifying risks and opportunities,” adds Wesley Gee, CSR Advisor and Member Development Manager for Canadian Business for Social Responsibility (CBSR).

Companies in high-emitting sectors like oil and gas, utilities and automotive industries have long been aware of investors’ growing interest in climate change. In recent years, companies like Nexen, Petro-Canada and Imperial Oil have received shareholder proposals requesting information on their greenhouse gas emissions (GHG). This year U.S. shareholders filed more than 40 climate-related proposals compared to 27 in 2006, with the majority targeting high-emitting industries, according to PROXY Governance.

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’.

Canadian generally accepted accounting principles (GAAP), as we currently know them, will cease to exist as Canadian GAAP for all public companies on a target date of some time in 2011. Subsequently, publicly traded companies will be required to report under International Financial Reporting Standards (IFRS).

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.

Regular readers of this article know that I am a fan of companies with predictable earnings. We all have a general idea as to what that means – companies that are blessed with this characteristic tend to generate quarterly results that fall in line with expectations, time and time again – but, specifically and from a statistical perspective, predictable earnings mean that the standard deviation of the historical earnings are smaller (and here one can also substitute ‘better’) than others. And what this means is that you and I have a better chance of ‘predicting’ what the next quarters’ earnings are going to be – by constructing an elaborate earnings model and spreadsheet, or even by laying a ruler along a graph of the pattern of previous earnings.

Companies with defined benefit plans should prepare themselves and the investment community for what could be a dramatically different looking balance sheet as early as this December. The CICA has proposed revisions to HB 3461, Employee Future Benefits, which will require presentation of the funded status of all defined benefit plans on the balance sheet. The funded status of the plans is currently only disclosed in the notes that accompany the financial statements.

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.

Today most investor relations professionals are actively targeting investor pools outside their domestic market and there are plenty of theories on the best way to pursue shareholders beyond your home terrain. Some IROs claim a secondary listing is the best strategy to tap into foreign institutional dollars while others say a single listing on a high profile exchange is enough to provide the liquidity and speed of execution that global institutions require.

Dea Katel on what to look for in this year’s crop of annual reports

The annual report is not new on the menu of IR tools, but this year it’s being served up with a combination of simplicity and spice that gives it a new flavor altogether. In the US, Sarbanes-Oxley and its rules around reporting on financial controls have had a big impact. Luckily, production can be speeded up to meet tight reporting deadlines, but the pressure for companies to achieve maximum transparency has never been higher.

This year a lot of companies have thrown away the management discussion and analysis (MD&A) boilerplate and taken a fresh look at this section of their 10K, often redesigning it to meet the SEC’s ideal of plain English and transparency. This has changed the look of a lot of books, with MD&A and other sections getting sharper and more concise. In terms of web reports, companies are moving away from PDFs of the print version and toward navigable HTML reports. As always, a lot of attention is paid to the chairman’s letter, and designers keep coming up with ways to make their book stand out from the pile.

Once you take care of the minimum disclosure necessary for a 10K or 20F, there’s virtually no limit to what can be added to an annual report. But Robert Grupp, VP of corporate communications for Pennsylvania-based Cephalon, which uses Baker Brand Communications for its annual, has noticed a trend towards smaller annual reports over the last few years as many companies have taken the simple route with a 10K wrap. However, he thinks this trend is on its way out. Cephalon decided against a bare-bones 10K wrap because, like many companies, it wants its annual to explain the company, its offering, its strategy and its results to a lot of different stakeholders.

‘It is becoming increasingly difficult to communicate intangible assets, and the annual report is the flagship opportunity to do that,’ Grupp says. ‘Our audiences have very little time to read long narrative, and through the nature of our book, the hope is that investors or other important audiences will page through and take away a few important messages.’

Wrap party
By contrast, Tanya Jernigan, VP of IR for California’s Impac Mortgage Holdings, is a 10K wrap believer. ‘In terms of technology, most people have access to financial information the day it’s filed,’ she says. ‘So why spend all that money and time printing a document that comes out later? The focus should be on sending a message to shareholders, which can be done just as effectively with a 10K wrap.’ Design company Mentus helped Impac cut costs in half by coupling the 10K with the annual report, resulting in one document instead of two separate ones as in the past. Also, in an effort to make the company easy to understand, all charts and copy have been simplified.

At one of Mentus’ new clients, AtheroGenics, manager of corporate communications Donna Glasky has a different view. She thinks annual reports are getting more creative in both cover design and narrative. Since AtheroGenics went public in August 2000, she’s made sure her company’s annuals are no exception.

After winning top awards from the League of American Communications Professionals (LACP) for the past four years, AtheroGenics wanted to do something even better with this year’s annual. Glasky went on the LACP web site and looked at her favorite reports. When she realized that all her picks led back to Mentus, Glasky decided to move her business there.

‘The writing and concept for the narrative has gotten jazzier and a lot more fun to read, which helps folks who don’t know the industry that well,’ Glasky says. ‘We have to make sure all of our messages are in there, and we have to make sure it’s clean and neat and aesthetically pleasing while including the company’s milestones.’

Graphic power
Having worked on Camden Property Trust’s annual report for six years, VP of marketing and communications Trish Hoffman has noticed a recent trend toward powerful graphics. Pictures communicate a message the second you pick up a book, before words even come into play, she says. A less-is-more approach to the shareholder letter is appropriate for an audience that typically has little time to read a report.

Camden decided a couple of years ago to forgo including all the company’s accomplishments in the chairman’s letter. Instead, some are displayed graphically right at the front of the book while others are included in the text of the letter.

How does Hoffman measure the success of Camden’s annual? ‘Sometimes we measure our success in awards, but sometimes those doing the awarding are not our target audience,’ she says. ‘We have been recognized by the International Association of Business Communicators, among others, and coupled with feedback we get directly, that is how we evaluate how we are doing. Our real priority is to develop a synergy with a designer and come to an understanding about particular styles we like.’

Deborah Wasser, senior VP of IR at Veeco Instruments, has cost conservation on her mind when planning the annual report. Today Veeco spends about half as much on its annual report as it did five years ago. That’s because it has switched to a glossy 10K wrap from a full book. Wasser says Veeco will not get rid of its print annual report, even if the SEC passes its proposal to let shareholders opt in to print versions rather than opt out as they do today.

‘There is a big open question about whether more annual reports will be distributed electronically,’ Wasser points out. ‘Ultimately, regulations may end up letting companies distribute only electronic reports, and then we will obviously have to make decisions about what makes sense for our company. For now, though, regardless of what regulations tell us we can do, we will continue to do a printed book because it serves many purposes.’

Focus finding
Veeco’s recent strategy has been improving its operational performance. The company has restructured its book so it tells a very different story than it has for the last ten years, moving the focus from Veeco’s technology to operational efficiency and profitability.

‘Insight into management strategy is the most important thing investors want to read about. The strategy for the future of the company should be clear. If all the book does is report on the past year, there’s probably no point in producing it,’ says Wasser.

Tom Glover, director of public relations for ITT Industries, is on the same page. While working on ITT’s annual report with design firm Addison, he’s aware that the annual report is still one of the first sources of information anyone turns to when they’re looking into a company.

‘We keep in mind that our employees probably read our annual report as closely, if not more closely, than anyone else,’ Glover says. ‘For global, multi-industry companies like ITT, the annual is another channel we can use to educate all kinds of key audiences about who we are and what we do.’

According to Natalie Cox, director of corporate communications at Nova Chemicals, the SEC’s shortened 60-day filing deadline has sent companies using the annual report as both a financial document and a corporate branding vehicle into a spin. And she believes elaborate annual reports are disappearing.

‘There will be a more basic approach to required filings – 10K wraps instead of four-color books, for example,’ Cox predicts. ‘Companies will provide their MD&A and financial statements in a basic format, then perhaps produce a separate narrative or promotional piece, which may include substantial background on the company.’

Like Wasser, Cox believes paper will survive. ‘The electronic version of the report is used more and more each year. However, the printed version will always be a viable and necessary alternative, just as face-to-face communications and one-on-one customer relationships remain an important element of doing business,’ she says.

Providing answers
For Dan McCarthy at PPL Corporation, the top priority in creating the annual report is still to provide answers to shareholders’ questions in the most transparent way possible. As PPL’s director of corporate communications, McCarthy is responsible for setting the tone of the annual report. He believes the chairman’s letter is emerging as the focus of most reports produced by his company and its peers, especially with shareholders seeking assurances about company strategy and direction in addition to financial information.

‘Reports are now less about glitz and more about delivering important messages in memorable ways,’ McCarthy concludes. ‘Good photography and design are very important, but a no-nonsense message is what will really win the day with today’s investors.’

by Dea Katel

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

Dea Katel looks at trends in web sites and online annual reports

In the online world, less is sometimes more. Many IR teams, however, are taking the opposite approach, aggressively adding new features such as video webcasts, interactive annual reports and RSS feeds to their web sites. The result is often a more complete company story than plain black-and-white financial data can provide.

In the early days of online annual reports, most companies would simply make a PDF version of the print annual and make it available for downloading. The majority of companies still do this, despite the lengthy download time and lack of user-friendliness that this approach entails. But many have moved toward an interactive version of the annual report, complete with search capabilities, hyperlinks and an ease of navigation that lets users get to any page of the document in two clicks or less.

According to Steve Chuck, VP at Rivel Research Group, much of the annual report’s evolution has to do with its effectiveness as a true marketing tool, not just an historical record. ‘It is one of the few times that investors can really take a look and understand what the corporate vision is, and investors these days are looking for that,’ he says.

Thomson Financial’s most recent annual web site study, surveying 304 US analysts and investors, shows not only retail investors but also analysts regularly using IR sites to download presentations and video webcasts and get non-financial information in areas like CSR and governance.

Thomson’s David Bairstow says fatter 10Ks and proposed SEC rules for the online distribution of proxy materials are driving the trend toward interactive annual reports. ‘We will see a significant pickup in how things are done online over the next couple of years. As more and more users are pointed to the online environment instead of hard copy, companies will continue to upgrade what they are doing online to make the experience richer.’

IR magazine’s Investor Perception Study, US 2006 also shows analysts and investors across the board using online resources intensively, with over 70 percent of retail investors citing the internet as a source for finding potential investment targets. The study also finds sell-side analysts spending almost 18 hours a week on the net, with the buy side not far behind at 17 hours.

San Jose, California-based Cisco Systems has started to provide MP3 audio files and PDFs for most of the presentations on its web site. And there are a lot – the tech giant is famous for an educational speaker series that drives a lot of traffic to the webcast section of its site.

‘Back in the day, when we had hotlines and people were making phone calls, there was a big delay in getting information to the investor in real time,’ says Lisa Magleby, Cisco’s IR web communications manager. ‘New technological developments are all about meeting investors’ needs. We now have a lot more investors who are traveling and we need to give them access to information remotely.’

Hotline or not?
With a lot more investors wanting a lot more information than in the past, many IR departments struggle with the decision of whether to include direct contact information on their sites. While most companies, like Cisco, provide general contact IR information on the web, Nokia goes a step further: it believes anybody should be able to contact IROs directly without getting stuck in a queue or voicemail limbo. The Finnish company’s web site provides direct contact information for everyone on the large and international IR team.

‘These days a good corporate IR web site is like hygiene: people would be disappointed if it did not provide everything they wanted, so they expect it to be there and to be adequate,’ says Bill Seymour, Nokia’s US-based vice president of investor relations. ‘The purpose of Reg FD and other such legislation is for companies to serve a broad investor base equally. With a good corporate web site, a retail investor can just go to the web site and get access to everything the institutional investor has access to.’

Seymour believes shareholders come to the IR web site with firm ideas about what they want, and he wants them to be able to find it fast. According to Seymour, topping the priority list for shareholders are contact information, the last conference call, other recent presentations, the last earnings release and the latest filings.

About 45 percent of Nokia’s investors are US-based, with most of the rest spread out across the major western European countries. Nokia, like many international companies, posts its 20F (the annual report filed with the SEC by foreign companies listed in the US) in different languages.

An end to print?
Sallie Cooke Pilot, communications director for UK marketing and communications firm Black Sun, says future legislation may threaten the survival of the print annual report in the UK. As early as 2007, companies may be able to communicate with shareholders entirely via the internet unless shareholders specifically opt to receive printed copies of materials like the annual report. A similar rule has been proposed by the SEC in the US: companies could ask shareholders to opt in to print rather than opting out of it, as the current rule stipulates. Black Sun’s research finds that every FTSE 100 company posted an annual report online last year, with 38 percent presenting the report in interactive HTML format.

‘Demands are being made for more detailed and comparable information to be made more accessible, more quickly, to more people. Against this backdrop, the pursuit of fresh ideas and original thinking in shaping corporate communications is more important than ever before,’ Pilot says.

According to a Nasdaq official, pre-recorded presentations covering quarterly or semi-annual results, posted online as a precursor to a conference call, represent a rising new international trend. Nasdaq also sees a global increase in companies following traffic and gathering information on web site visitors, allowing IROs to communicate more effectively with their existing and prospective shareholders.

Anne MacMicken, manager of IR and employee relations at BFI Canada Income Fund, says feedback about the firm’s web site shows just how important a tool it is. ‘We get a lot of e-mails asking about information on our site, so I know investors are really using it,’ she explains. ‘Use of the net is definitely increasing, and people are going to the web for their initial investment research. With new disclosure regulations, it’s crucial that information is kept up to date and that companies have enough information on their IR web sites for investors to make investment decisions.’

For BFI’s IR web site, MacMicken uses integration software so she can manage information on her own without having to do any complex web design. Like many companies, BFI also provides e-mail alerts that blast information out to the investment audience the moment an update is made to the site.

BFI’s latest online annual, created by PrecisionIR, is designed so investors can view parts of it without having to download everything. Instead they can jump to any section, and there’s a print option for individual pages.

Toronto Stock Exchange guidelines against participating in chat rooms make Canadian IROs like MacMicken hesitant about the newer technology of blogging. RSS, on the other hand, is likely to spread further and faster. This XML application lets users sign up for a ‘feed’ of information as it’s updated on a web site. A lack of familiarity with RSS, though, means IROs are unlikely to adopt it for their sites unless they’ve used it themselves elsewhere. The primary misconception about RSS is that it needs to be understood in order to be used. Bairstow says Thomson’s survey showed that ‘the number of analysts who said RSS was their preferred way to receive information was not huge, but RSS was not even on the map last year.’

RSS, podcasts and blogs – they’re just the latest new twists in the exciting story of the internet, following the plot of webcasts, interactive annuals and other past innovations. Most companies are playing ‘wait and see’ with the new technologies, but their attention, like the attention of many investors and analysts, is on those pioneers bringing innovation to their IR web sites and online annuals.

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

Wallace Partners’ Michael Wallace tracks the growing demand for CSR reporting

Over the past several years we have been hearing more and more about corporate responsibility. Corporate scandals and regulatory responses such as the Sarbanes-Oxley Act of 2002 are keeping phrases like corporate governance and corporate responsibility in the headlines of financial, technical and industry journals. Influential market participants such as institutional investors, rating agencies and corporations are creating a convergence of these terms into what is generally labeled corporate social responsibility (CSR).

An increasing number of experts agree poor CSR performance can pose risks and cause costly interruptions to business operations. Traditional financial institutions are asking companies to measure and disclose information on sustainable development policies, their triple bottom line performance and corporate citizenship initiatives.

Corporations are taking notice of these shareholder demands and responding. A recent study by KPMG reveals that more than 50 percent of the world’s largest firms are voluntarily publishing CSR information. Corporate disclosure on these issues comes through either an addition to traditional financial reports or publication of printed and/or web-based annual reports.

The demand for CSR information is primarily being driven by institutional investors. Increasing numbers of them are requesting and – in some cases – demanding disclosure and transparency on a much wider range of seemingly non-financial issues. Investors pushing for this disclosure include some of the world’s largest institutional investors such as Universities Superannuation Scheme, Calpers and the California State Teachers’ Retirement System.

These investors believe attention to CSR issues can reduce operational costs, minimize unexpected losses and enable companies to foresee and more effectively manage long-term global trends. Using rigorous financial analysis and shareholder resolutions, these groups are wielding their collective influence to increase corporate disclosure on CSR performance.

They are also aligning their interests and developing coalitions, initiatives, strategic shareholder resolutions and legal strategies to address what they deem to be high-priority CSR issues. The market influence of these groups and the amount of investment leverage they wield is significant enough to influence the behavior of many companies.

Although companies spend millions of dollars managing their financial reputation through traditional channels, few realize they’re actively tracked and judged on CSR performance by a wide variety of influential shareholders. A number of third parties are collecting data on CSR disclosure and performance and providing it to interested buy-side fund managers – so it is in the best interest of companies to be in control of that data.

The bottom line is that regardless of the timeliness, accuracy or reliability of CSR information, it is reaching the public domain and being used by a variety of stakeholders to assess CSR performance. Investor relations professionals may not have encountered questions from investors on CSR yet but it is definitely one of the intangible assets used by some to measure long-term performance prospects, and IR needs to be aware of how it’s being viewed by these investors.

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.

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:

http://www.rmgb.ca/3/3/5/0/5/index1.shtml

The 'Halloween massacre' has come and gone, but the discussion regarding the taxation of income trusts continues. Why is this happening? Will anything be accomplished? And, more importantly, do unitholders care?

As most of our readers should be aware, the Canadian Accounting Standards Board (AcSB) has announced a significant strategic decision to adopt International Financial Reporting Standards (IFRS) for all public companies, with a target date of 2011. What readers may not appreciate, however, is that the transition to IFRS represents the single largest change in financial reporting in the last 20 years. While many accountants will welcome the return to a conceptual accounting framework that relies more on professional judgment and less on the American style of prescriptive rulemaking, the transition itself will present some major challenges.

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

Base metal stocks are rocking (pardon the pun) but it wasn’t always so. In the 80s and 90s, base metal stocks were generally poor investments because the underlying commodities didn’t do anything. However, during that time frame, Noranda was one of the best performing base metals companies, if not the best. It was 50% owned by Brascan Financial and paid the parent company (as well as the rest of the shareholders) a massive quarterly dividend, far in excess of its competitors’ payouts (or those of any rational resource company, for that matter). As a result, Noranda did not have the necessary resources to finance grassroots exploration and development and, unlike its peers, did not undertake the capital expenditure programs that provided poor returns. Consequently it didn’t fritter away precious financial resources. Ironically, Noranda was a great performer because its (financial) hands were tied. In other words, it was the best stock in a very bad sector.

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.

When do you need outside help? Dea Katel looks at how companies work with IR and financial PR agencies

The scope of IR consultants’ relationships with both clients and the investment community is now broader than ever before. The hot competition for capital means more companies are seeking market intelligence like peer research, while others are doing more with less by outsourcing IR chores. Whether a company needs to get creative, diversify its shareholder base, go global with its message or survive a crisis, help isn’t far away. IR magazine talked to seven companies about how they use consultants.

Hedge funds are famous for being illusive and cunning asset managers that lurk in the shadows, digging for insight into stocks beyond what’s been disclosed. They’re also gaining a reputation as activists that buy up stakes in companies and publicly press for management to make changes. It’s imperative, however, that IROs not let these stereotypes taint their perceptions of the industry. Many hedge funds are long-term, loyal holders that can serve as sources of market intelligence for investor relations.

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.'

NEW YORK -- UK companies continue to lead the way in terms of best practices in corporate governance and Canadian firms are a close second, according to recent ratings from New York-based Governance Metrics International (GMI).

Twice a year GMI looks at the corporate governance practices of 3,200 companies worldwide and rates them on scale from one to ten. As was seen in March, which is the last time GMI did this study, UK companies hold the top position with an overall governance average of 7.33. Similarly, Canadian firms continue to rank second with an average score of 7.31 and US companies come in third with a score of 7.

Notably, GMI's rankings suggest a link between good practices in corporate governance and shareholder returns. It finds that top-rated companies outperformed the S&P500 index by 15.19 percent in terms of total shareholder returns over a five-year period ending September 1, 2005.

The agency also compares the performance of US companies that received top grades (nine or above) to poor performing companies (three and below) in four out of the six studies they have conducted over the last three years. GMI discovers that firms that are consistent low scorers had an average shareholder return of 8.7 percent whereas well-governed companies achieved an average return of 15.9 percent over three years. During the same time period, the S&P500 had an average return of 11.9 percent.

Gavin Anderson, GMI's CEO, explains that companies with poor governance scores were more likely to have restated earnings and been subject to accounting investigations by regulators. 'These firms reported more related-party transactions involving senior officers and directors,' he says. 'They were more likely to have multiple classes of voting stock and their boards had fewer independent directors than companies with consistently good ratings.'

As part of this research, GMI also looks at the governance practices of controlled companies, which are identified as firms where a single entity holds at least 50 percent of the voting power. For this section, GMI analyzes 390 controlled firms including 152 from North America, 156 European companies and 82 headquartered in the Asia-Pacific region. It finds that, as a group, controlled companies achieve an average rating of five, significantly lower then the average score of widely held firms (6.5).

GMI also shows that controlled companies with the poorest results are mostly located in Asia and Europe. Out of the controlled firms achieving a rating of four or lower, 65.4 percent were from Europe, 25.6 percent from Asia Pacific, and 9 percent from North America. The most common governance issue for controlled firms is lack of independent directors on the board.

Some controlled companies strive to attain best practices in corporate governance, GMI finds. Examples from its rankings include Talbots (8.5), UnionBanCal (8.5), Genworth Financial (8), Interactive Data (8), Kraft Foods (8) and Telstra (8.5).

IROs should take note of findings linking best governance practices to shareholder returns, says Anderson. 'It is clear that there is some correlation between governance and performance and while corporate governance screening is not number one, and should not be the most important aspect of investment research, it is nonetheless an area that should be looked at as part of the overall research process,' he concludes.

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.

NEW YORK -- Companies choosing to send out financials using the XBRL (Extensible Business Reporting Language) format may be interested in a new XBRL Smart Release service launched by Business Wire. The service essentially incorporates the XBRL format into the newswires' releases, which already have the ability to add multimedia elements such as video and audio clips.

'The XBRL standard can be applied to a wide range of business and financial data, including internal and external financial reporting, and to all types of regulatory documents,' says Michael Lissauer, Business Wire's senior vice president of marketing and business strategy. Regulators and exchanges around the world, including the SEC and the Tokyo Stock Exchange, support XBRL formatting in corporate reporting.

'Since XBRL has the potential to revolutionize business reporting as we know it by providing significant benefits in the preparation, analysis and communication of this information, we created the XBRL Smart News Release to make it easier for Business Wire members to send their XBRL news release to myriad sources,' adds Lissauer.

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.

There is a lot of confusion among companies about what sort of information they should be providing investors and analysts on climate change. Some companies have never been asked for this data by shareholders so the buy side’s expectations can seem obscure. ‘No-one ever, and I really do mean ever, has asked us about this,’ one IRO from a Eurotop 300 company said recently. ‘Not once. Not one fund manager or analyst has ever brought this up.’

His company is taking climate change and other corporate responsibility issues seriously. It tries hard to communicate what it is doing in this regard to its investors. But it is not convinced that more than a minority is at all interested in knowing about what the firm is doing in this area. So are climate change and other corporate responsibility matters really of relevance to IR? Or are these still marginal issues of interest only to parties with certain agendas and pro-socially responsible investment (SRI) groups?

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.

LONDON -- There are strong concerns that a new move by European securities regulators to ensure consistent application of international financial reporting standards (IFRS) could result in price-sensitive information leaking out to the market.

Within weeks, the Committee of European Securities Regulators (CESR) is planning to launch a pan-European database where local regulators will be able to record details of IFRS enforcement actions for future reference. The idea behind the move is to encourage a uniform enforcement of the standards by enabling European regulators to see how their peers have resolved comparable enforcement cases.

However, one senior technical partner and IFRS expert at a top global accounting firm has expressed strong reservations about how the database would be protected and confidentiality ensured. 'In principle, it's a good idea for CESR to help IFRS enforcement be as consistent as possible, and to have a level playing field for all,' says the expert, who declines to be named. 'My concern is how it's going to ensure this information will be kept confidential and not fall into the wrong hands.'

The size and reach of the database would make it extremely difficult to monitor who has access to it at a national level. 'If you consider that price-sensitive information is going to be made available across 25 countries, we can imagine how difficult it will be to keep this information confidential,' adds the expert. 'This could result in enormous damage to companies.'

NEW YORK -- A recent study from Mercer Human Resource Consulting reports that corporate director pay in the US rose 18 percent in 2004. Additionally, between 2000 and 2004, median director pay rose 50 percent from $105,000 to $155,000, the study shows. Mercer claims the rise in pay is related to new responsibilities and risks faced by directors. It studied the proxy statements of 350 of the largest public companies for this research.

'Sox, NYSE and Nasdaq listing requirements, along with all the work going into 404 compliance this past year, has really just driven an enormous amount of work for directors where they didn't have those types of requirements before,' says Mercer's Peter Oppermann, author of the study.

Companies are also changing the way they compensate board members for committee meetings, choosing to pay directors a retainer rather than fees. This change addresses the additional preparation and oversight committee members have under new governance regulations.

'Directors are being held responsible for having good oversight and giving good advice,' says Oppermann. 'Right now we are looking at a shift in how they are paid because instead of being paid for showing up to meetings, they are being paid for doing a lot of work that probably doesn't happen in meetings. They are being paid to emulate how shareholders feel which is about owning shares versus just getting a reward when the stock price goes up.'

Majority voting is taking off as the ideal model for director elections. The American Federation of State, County and Municipal Employees (AFSCME) Pension Plan recently submitted the first binding resolutions seeking majority voting at Paychex and Sysco.

The move is a significant change of strategy for AFSCME, which has been a major supporter of the SEC's proposed shareholder access rule. With that rule appearing to be dead in the water, the pension group is now pursuing the majority-voting path.

'We consider proxy access and majority elections as compatible. The problem is that, for the moment, we are not able to get proxy access on the ballot,' says Richard Ferlauto, AFSCME's director of pension investment policy. Non-binding shareholder resolutions calling for majority vote standards have become common place this past proxy season and over 20 companies have adopted some form of the scheme after a majority of shareholders voted in favor.

AFSCME is pushing for a stronger solution. Its position at Paychex and Sysco calls for a binding resolution requiring a majority vote rule. The pension group will get to test shareholders' appetite for the proposal at Paychex's AGM this fall. The company is encouraging shareholders to oppose the proposal on grounds that it is evaluating the idea and the changing legal environment relating to the principle.

The Council of Institution Investors recently submitted a letter to the Delaware State Bar Association asking it to press the state to alter Section 216 of the Delaware General Corporation Law to make majority voting the presumptive choice for Delaware corporations. The American Bar Association is currently examining the issue in a separate inquiry.

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.

KUALA LUMPUR -- It's been less than a month since the government released guidelines demanding strong performance and good corporate governance from local firms, but foreign investors are already impatient for results.

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.

Dea Katel reports on IR’s involvement in the transition to IFRS

Since January 2005 around 7,000 listed companies across the EU have had to adopt international financial reporting standards (IFRS). This has been a topic of much controversy and, in some cases, confusion as European issuers make the transition from national reporting standards to IFRS.

The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (Fasb) are working to combine their standards with the ultimate goal of eliminating differences between IFRS and US Gaap. That project is ongoing, but North American companies have also had to adopt many of the new reporting standards laid out in IFRS.

While the move to international reporting standards is meant to increase transparency, the transition period is currently causing some concern in the market because companies are adopting the new rules at different times depending on their reporting cycle. While not intrinsically involved in the accounting changes, IR can play an important role by clarifying the switch for investors and analysts.

Over the last 18 months, companies have been educating investors, analysts and employees about the transition in an attempt to avoid any confusion. ‘I am happy to say the issue that proved to be key was to communicate early and on a regular basis with investors, so there were no surprises when the numbers were finally published,’ says Darren Jones, an investor relations representative at Vodafone.

Spelling out the difference But the move from local Gaap to IFRS needs to be very clearly explained in order for these audiences to understand the differences between the two standards. ‘Quality of disclosure and reconciliation from previous Gaap figures has varied greatly and in some cases has left certain questions unanswered or unclear,’ notes Steven Brice, head of IFRS at London-based accounting firm Mazars.

One issue is that there is a lack of consistency in the interpretation of IFRS across EU countries, Brice explains. ‘Also, some firms – particularly UK property companies – have continued to emphasize Gaap numbers instead of IFRS numbers,’ he adds. ‘Overall, however, the transition has largely been smooth for companies that have worked hard on conversion.’

One sure sign of good IFRS communication efforts is the lack of adverse share price reactions when earnings announcements come out, notes Peter Elwin, head of accounting and valuation research for London-based Cazenove.

On the whole, bigger companies have done a better job of explaining the change. ‘Larger companies have obviously been able to devote more time and resources to the communication process than smaller ones,’ Elwin observes. Brice agrees, noting that some of the larger pharmaceutical companies, such as GlaxoSmithKline and AstraZeneca, have strong and informative communications on the issue of IFRS.

Ofex, the UK-based independent market that serves small and mid-cap companies, generally supports IFRS but will not be mandating it for member companies. ‘There are some serious disadvantages for smaller companies of the type we serve,’ explains Simon Brickles, Ofex’s CEO. While having a universal accounting standard may simplify things, Brickles feels smaller companies generally have a harder time with regulatory and accounting changes, and IFRS is no exception.

Beyond the cost issue, smaller firms may not wish to disclose additional information about geographic turnover, as required under the new standards. ‘The Quoted Companies Alliance (QCA) has already heard concerns on this,’ Brickles says. ‘In particular, such disclosures may not suit certain businesses that have to highlight where their profits are made to their larger competitors.’

Word on the Street
Philipp Mettler, an equity analyst with SAM Research, says most companies have done a good job in communicating the change. ‘One should also remember that this is merely a change in accounting practice – the underlying business and cash flows do not change,’ he points out.

‘Investors are likely to punish companies only where unexpected bad news comes to light, not for the usual expected IFRS adjustments,’ notes Brice.

Still, when companies fail to explain the transition, problems may arise. ‘There is no information [about the change] in some cases,’ says Mettler. And, when information is scarce, there is a possibility analysts and investors will misinterpret a company’s financials. ‘Transparency in this respect is very important, as market participants do not like uncertainty and surprises, especially negative ones,’ Mettler adds.

Elwin notes that there have been cases where the market has responded to IFRS changes. ‘While it is difficult to isolate the impact of IFRS from other factors, the market reaction to IFRS announcements by Cattles and Compass Group both illustrate the potential for an adverse share price reaction following an IFRS announcement that was not well understood by the market,’ he says. ‘Compass announced its results and outlined the impact of IFRS on May 18; its shares fell 5 percent on the day, from 235p to 220p. It subsequently recovered all these losses but has recently fallen back to similar levels.

‘As for Cattles, it announced results and outlined the impact of IFRS on March 18. Its shares fell 20 percent over the following month, and remained within a depressed range until the end of September. It has still not recovered to its previous value and the true impact of converting to IFRS will not be seen until it reports results next year.’

According to Elwin, investors and analysts are well aware the switch to IFRS is an exercise in presentation and standardization that has no impact on cash flows or business strategy. As such, he says, most are unlikely to sell based on an IFRS change, and some investors may even view an adverse reaction to IFRS as a buying opportunity.

While IROs don’t calculate the numbers for IFRS, they may get questions from analysts and investors about the new standards. The best advice is to be prepared by learning how the transition affects their company’s financials.

Brice feels IR’s biggest challenge with IFRS has yet to surface. ‘We are still only at the interim [reports] stage and full audited year-end accounts may still bring a few late surprises,’ he notes. ‘Many of the IFRS adjustments reduce earnings per share but don’t actually impact cash flow, so how the IRO presents things is important.’

‘The scale of change is rather large and therefore demands a good understanding from IR,’ adds Mettler. IR practitioners are wise to pay attention to additional disclosures under IFRS as well as the move to a fair value-style accounting under IFRS, which basically values assets at current or market value.

‘Some of the rules under IFRS will be very different from the local Gaap rules IROs are used to, and getting to grips with the new standards will take time and effort,’ says Elwin. ‘To some extent, analysts and investors will be looking to companies and, therefore, IROs for guidance on how to interpret IFRS figures, particularly in comparison with old, non-IFRS figures from previous periods. There is significant potential for confusion during the transition phase, and the IRO is a key figure in preventing this.’

Growing pains
Another issue IR needs to be aware of, according to Elwin, is that analysts aren’t all switching their estimates to IFRS figures simultaneously, so consensus estimates are a mix of IFRS and non-IFRS numbers.

One of the challenges for analysts is that they can’t switch to IFRS without a detailed IFRS restatement from companies. ‘One analyst may have some models that incorporate IFRS while others for companies in the same sector might not,’ says Elwin. ‘In many cases analysts will be running IFRS numbers behind the scenes but will defer switching their formal estimates to IFRS or will provide two sets of figures to ensure they are comparing like with like.’

In other words, there is no consensus on how analysts are treating the new rules. ‘Generally, IFRS is being taken into consideration but analysts will continue to make adjustments to results,‘ says Brice. With analysts updating their models at different times, investors may be confused when comparing companies in the same sector.

Because fair value adjustments do not represent cash flow and can’t be forecast, analysts are excluding them from underlying earnings estimates. ‘As most analysts previously excluded goodwill amortization from their underlying earnings estimates, the switch to a US Gaap-style impairment approach, where goodwill is no longer amortized, has not had any impact on analysts’ estimates,’ explains Elwin. ‘Amortization of other intangibles is also generally being excluded. Stock option expenses are generally being included as an operating expense and thus are depressing underlying earnings in some cases.’

Analysts and companies will have to adjust to this new accounting method. ‘In my experience, many analysts still have a lot to learn on IFRS but should remember that the underlying business has not changed,’ Brice says. ‘It is only potential new information that could change their interpretation.’

There are still challenges for the market as companies make the transition to universal accounting standards. For IROs, the primary goal is to continue to communicate the effects of the change to analysts and investors to avoid any concern or adverse reactions in the marketplace. As with any change that affects how companies report financials, being proactive with investors and analysts is key. By delivering timely, concise information to these key audiences, IR will likely avoid any adverse reaction to IFRS.

by Dea Katel

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

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.

Despite all the painstaking work that goes into producing an annual report, the average reader takes just three minutes to flick through their copy, according to German consultancy Strichpunkt. With this in mind, IR magazine and London-based 35 Communications put together a panel to trawl through 40 annual reports from a select group of US and European companies and determine whether their investment story could be understood in three minutes. Reports were then ranked on their ability to communicate the ‘three-minute investment story’.

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.’

Institutional activists got serious about curbing CEO paychecks last year and, as a result, the number of shareholder proposals related to executive pay was down this past proxy season. What’s happening is that CEO pay is being aligned more to performance indicators like share price. This doesn’t mean their pay is shrinking, though; it’s just dispersed across various forms of compensation.

Executives in the financial services industry took home bigger paychecks in 2004, according to a recent survey of 1,800 banks, thrifts, real estate investment trusts (Reits), insurance companies and other financial institutions put together by SNL Financial.

Large companies with more than $5 bn in assets saw executive compensation increase significantly from 2003. However, large company executives’ base salary remained relatively unchanged. This means top executives were receiving more compensation from bonuses, restricted stock, long-term incentives and health and life insurance, as well as other forms of compensation. On the flip side, total compensation was down for smaller companies with less than $250 mn in assets.

Across the board, a larger percentage of CEO compensation came in the form of bonuses, restricted stock, stock options and other compensation items compared with base salary last year (see chart, left). This trend is attributed to the fact that other parts of their compensation package are tied to their company’s financial performance, so the better the firm does, the more ‘other compensation’ they take home.

Life is still pretty good for CEOs: their median base salary in 2004 was approximately $300,000, a 16 percent increase on 2003. Total median compensation for CEOs totaled more than $500,000, a 17 percent increase on 2003. Stock options comprised 43 percent of total compensation for CEOs in 2004, compared with 30 percent in 2003.

Salary and total compensation for other senior financial industry executives in 2004 outpaced CEO compensation. In fact, the median percentage increases in CEO total compensation was less than for CFOs. Why? The increased burden of regulation has increased demand and compensation for skilled senior management. Also, corporate boards and compensation committees are increasingly scrutinizing CEO pay to ensure it doesn’t get too far ahead of other key employees.

The median CFO total compensation for 2004 was $290,000, including a base salary of $187,000. That’s up 6 percent on 2003. And the bigger the asset size of the financial institution, the bigger the CFO’s paycheck. Median total compensation for chief operating officers was $514,000 in 2004, up 15 percent on 2003. Median base salary for chief operating officers was $260,000, up 4 percent on 2003.

The trend toward compensation plans that include a wider variety of pay components is being used by financial institutions to attract and retain talented executives. The rationale is, of course, that by retaining top talent, a company is better able to deliver strong returns to shareholders.

Negative earnings surprises or downward changes in guidance from companies often cause stocks to suffer an almost instant and sometimes significant loss in value. While these falls can just be transitory, sometimes they signal a longer lasting change in the rating of the stock and consequent cost of capital for the firm.

It is, therefore, in the interests of company directors to reduce the risk of such an event. There are four basic steps they can take to minimize risk. First, identify what the possible risks are and assess their consequences. Second, decide whether the potential risks are acceptable. Third, if they are acceptable, decide on a strategy for managing the risk. Finally, communicate the process well to the investment community.

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.

Annual report writer Mary Lowengard counts the ways.

Caroline Thomas looks at different ways companies make the most of teleconferencing.

Daniel Gross takes a look at the corporate scandal that keeps on giving.

UK companies make their own rules on guidance, while European issuers mimic US best practice. Adrienne Baker reports

Adrienne Baker looks at a sample of the best and worst letters to shareholders from 2005’s annual reports.

SUNNYVALE, CA -- In a recent conference call, John Gifford, CEO of Maxim Integrated Products, a California-based tech company, said he doesn't care how the company is going to expense stock options. On the company's earnings call on August 1, an analyst asked how options expenses would be sprinkled through the company's income statement from a Gaap point of view and Gifford said: 'I don't even care. I'm going to report earnings per share, cash flow and do what whatever they require us to do for Gaap, but I don't pay any attention to it.'

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?

LONDON -- Carl Rigby, former chief executive of Aim-listed software company AIT, was convicted yesterday of making misleading statements to the market in what is widely viewed as a landmark case. It is the first time the UK's Financial Services Authority (FSA) has brought about a criminal prosecution under the Financial Services and Markets Act.

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.

NEW YORK -- The movement behind adopting Extensible Business Reporting Language (XBRL) appears to be gaining steam. Michelle Savage, vice president of IR services for PR Newswire, is now vice chairperson of the steering committee and chairperson for XBRL-US, which includes over 300 companies that support the adoption of XBRL as a global financial reporting standard.

SINGAPORE -- As shareholders react to corporate scandals, companies listed on the Singapore Exchange (SGX) may find directors' and officers' (D&O) insurance harder to access.

Accounting standards have, since 2004, required companies to fully accrue a liability for the future costs associated with retiring a long-lived asset, such as property, plant and equipment. The liability is recorded as the estimated fair value of the future retirement costs, including costs such as demolition and environmental remediation. The liability is required to be recorded in the period in which the company becomes legally obligated to incur future costs associated with the retirement of a long-lived asset.

By their very nature, every business has related parties. Transactions with related parties are often a normal and necessary part of the operations of many enterprises, and this is particularly the case with smaller, growth-oriented public companies. Shareholders in a public company, however, need to know about any transactions between the company and related parties; in part so that investors can assess the extent to which the company’s results may have been impacted by these relationships and transactions, and in part to enable them to reach their own conclusions about the appropriateness of the transactions. Despite the fact that accounting and disclosure standards concerning related party transactions have existed since 1979, identifying, measuring and reporting related party transactions can be very complex and often confusing to preparers of financial statements.

CSA HAS PUBLISHED FOR COMMENT PROPOSED CHANGES TO NI 51-102 REGARDING DELIVERY OF ANNUAL AND INTERIM REPORTS TO SHAREHOLDERS

The Accounting Standards Board (AcSB) of the Canadian Institute of Chartered Accountants took a significant step toward the global convergence of accounting standards when, earlier this year, it proposed to converge Canadian GAAP for public companies with International Financial Reporting Standards (IFRS). This proposal is part of a broader draft strategic plan that calls for fundamental changes to the basis on which Canadian accounting standards will be established in the future. If adopted, the strategy will have pervasive and significant effects on the financial reporting practices of Canada’s approximately 4,000 public companies.

The trend of income trust offerings in Canada has sparked keen interest from investors, regulators and standard-setters alike.

Public ownership of operating assets has increasingly been achieved through royalty trusts, real estate investment trusts and business trusts, often referred to as income trusts. Although certain types of income trusts have been around since the 1980s, in recent years their prevalence in Canada has spread across a range of industries. Their presence in the equity markets continues to grow; income trusts currently represent approximately 8% of total TSX market capitalization and 13% of TSX issuers.

Income trusts are evolving in both type and structure. The growth in income trusts in Canada has sparked keen interest not only from investors (although there may be some recent indications of waning interest), but also from regulatory and accounting standard setters. In this article, we explain the typical structure of an income trust and recent developments affecting financial reporting by income trusts.

Typical structure of an income trust
Income trusts are structured to reduce, defer or substantially eliminate corporate income taxes attributable to the underlying business profits. An income trust typically uses cash raised from a public offering of its trust units to acquire a combination of debt and equity in an entity owning or operating the business. The profits derived from the assets or operations in this entity are then transferred to the trust through regular interest (or royalty, rent, etc. as the case may be) payments, which are generally deductible by the operating entity for income tax purposes. The income trust then distributes this income to the trust’s unit holders, and the trust itself typically pays virtually no income taxes. As a result, the distributed profits are taxed in investors’ hands at their personal income tax rates rather than at the corporation’s higher business income tax rate.

A variation of this structure has evolved in recent years whereby the income trust will invest in a commercial trust that, in turn, holds an interest in a partnership that operates the business. This structure may eliminate all corporate tax in the income trust structure, as there is no corporation in this model.

Clearly, there are tax advantages to an income trust structure. However, a company needs to weigh the benefits gleaned from the tax advantages of an income trust against alternative strategies designed to increase shareholder value. An income trust is effectively required to distribute its operating cash flow, which is thus not available for re-investment for growth. Additionally, as a publicly traded entity, the ever increasing costs of public entity compliance and reporting requirements of the income trust need to be considered.

Disclosure requirements
Income trusts have attributes distinct from other publicly traded entities. In order to ensure that investors have sufficient information to make an informed decision, income trusts should clearly disclose these attributes and adopt disclosure practices similar to those of other public companies. Accordingly, in December 2004 the CSA issued National Policy 41-201, Income Trusts and Other Indirect Offerings, which provides guidance and clarification regarding disclosures that income trusts and other indirect offering structures are expected to include in prospectus offerings.

The policy provides guidance on disclosure with respect to the structure of income trusts, the nature of an income trust’s indirect offering, and the unique aspects of income trusts that are expected to be disclosed to investors in a simple, clear and readable manner. The policy also provides guidance on the continuous disclosure obligations applicable to income trusts and describes the information that must be included in such disclosures concerning the income trust’s underlying operations. Regulators are also increasingly concerned with the determination of distributable cash and have indicated that they intend to publish a notice related to this in the near future.

Recent Financial Reporting Matters
A particular financial reporting issue arises when an income trust acquires less than 100% ownership of a business. In such situations, the selling shareholders often retain a non-controlling equity interest in the business acquired by the income trust, which may be in the form of exchangeable securities issued by the newly acquired subsidiary. The issue is how these exchangeable securities should be presented on the consolidated balance sheet of the income trust. Previously, such securities had been presented as unit holders’ equity.

In March 2005, the Emerging Issues Committee of the CICA clarified the consensus reached in EIC-151, Exchangeable Securities Issued by Subsidiaries of Income Trusts. The EIC noted that exchangeable securities issued by a subsidiary of an income trust should be presented on the consolidated balance sheet of the income trust as debt if the securities have the characteristics of debt as defined by CICA Handbook Section 3860. If not so defined, and both of two specific conditions are met when the exchangeable securities are issued, the exchangeable securities should be presented as part of unit holders’ equity. Otherwise, the exchangeable securities should be presented as non-controlling interest (“minority interest”).

This is a major change in practice that will reduce the reported unit holders’ equity for affected income trusts. The EIC is also currently considering the need for more detailed guidance on the values at which such exchangeable securities should be reflected in the financial statements of the trust.

The structures used for income trusts are becoming more and more complex. With the increasing prevalence of income trusts in the Canadian capital markets, there will undoubtedly be greater demand from standard-setters and investors alike for financial information concerning the underlying business [see Report on Business July 26 for related remarks by OSC Interim Chair, Susan Wolberg-Jenah]. IR professionals involved with income trusts should ensure that they understand, and can clearly articulate to investors, the unique characteristics, tax benefits, and risks attributed to this form of investment vehicle.

CGA-Canada, in cooperation with the CGA-Canada Research Foundation, has released a new report on the emerging field of corporate sustainability reporting.

Requirements for companies to assess and report on their internal controls over financial reporting are coming to Canada, and largely mirror those already enacted in the U.S. This article sets out some of the basic terminology and concepts of internal control reporting.

New continuous disclosure requirements were effective in 2004, the first year for the CEO and CFO certifications in Canada.

Newsline Volume 15 Issue 2 – March 2005 - Update on Financial Reporting

Staff at the OSC has advised 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 mailing within 140 days of its financial year-end. The annual financial statements and annual MD&A must, however, be filed within 90 days of the end of the financial year (120 days for venture issuers).

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).

Congratulations to all the CIRI winning members at the CICA Corporate Reporting Awards held December 1 in Toronto. The full list of winners is attached.

Financial statements prepared in accordance with Canadian Generally Accepted Accounting Principles (“GAAP”) do not always provide the complete picture.

Newsline lead article Volume 14 issue 5 September 2004

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

Update on Financial Reporting column from Newsline, Volume 14 Issue 2 - March 2004
In December 2003, National Instrument 51-102, Continuous Disclosure Obligations, was released as final. Although this rule pertains to all continuous disclosure documents, some of the more substantial changes relate to quarterly reporting.

The Globe & Mail ran a series of articles today regarding Investor Relations. Ann Kerr's article on annual reports may be found online at GlobeInvestor.com