Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Friday, May 26, 2006

XBRL – the way of the future, and for some, the way of the present.

The use of the XBRL format in presenting accounts has been proposed for many years. Has its time finally come, and what is driving it?

For those who missed it, XBRL is a language for the electronic communication of business and financial data which is revolutionising business reporting around the world. Its adherents claim it provides major benefits in the preparation, analysis and communication of business information.

The basic idea is that companies would prepare their accounts, and then attach a ‘tag’ to each item of data. The tags are pre-agreed through a taxonomy, and each tag tells a computer what the item of data is. This allows automatic processing of, for example, report and accounts by sell side analysts.

Such is the load at the moment on analysts simply rekeying numbers, that one major sell side firm has estimated that if all firms were to adopt XBRL, they would be able to double the number of companies they cover.

Some very heavy hitters are among those who are pushing its use. Christopher Cox, the Chairman of the SEC is a sincere believer. The SEC is now referring to the data that has been tagged as “interactive data”. They announced last week that the number of companies filing their mandatory SEC filings in XBRL has doubled – to 20, and includes General Electric Company; PepsiCo, Inc.and Banco Itaú Holding Financeira S.A..

Other examples of success in the use of XBRL. The Bank of Japan said that more than 500 financial services companies had been reporting to it in XBRL since March. It is already seeing a significant reduction in the burden of data validation. The Shanghai Stock Exchange announced that following the successful launch of its XBRL system for company reporting, covering data from more than 800 companies, it was extending its use of XBRL to cover fund information. The Spanish Securities Regulator CNVM has already received more than 12,000 company financial reports in XBRL, while more than 400 banks, some 90% of the banking sector, are now reporting in XBRL to the Bank of Spain.

So what is needed to make information available in XBRL? The biggest challenge for a company is the initial creation of the taxonomy. There are several software companies out there who will help, such as Rivet Software. And the news distribution services such as PR Newswire and others are geared up to file the XBRL document appropriately.

XBRL has still a long way to go. There are 3 areas of difficulty: the preparation of XBRL statements is still perceived to be difficult. Second we have not yet seen large growth in demand for XBRL information by the investor community. Third the taxonomies for companies across the world need to be evolved and developed, which will take resource.

Nonethless, there are some powerful forces – especially the regulators – who believe that interactive data in general, and XBRL in particular, is a great opportunity to help investors take full advantage of the information they are given, and to improve the efficiency of the financial markets. And with the ever increasing adoption, its time has surely come.

Friday, May 19, 2006

Companies face changed takeover regime from May 20th

20 May will see important changes to the UK takeovers regime, many of which have implications for the Investor Relations Officers of UK Plc. Mainly these follow from the implementation of the EU Takeovers Directive, which under EU rules must be applied tomorrow. They will apply through an interim measure, but will eventually be part of the Company Law Reform. In addition, the Panel has been consulting on various issues – especially the SAR’s – and is changing these rules at the same time. What are these changes that apply?
From tomorrow, the Panel will have greater powers to enforce Code Rules (such as applying to the Courts for enforcement, and compelling people to provide any bid-related documents). It will also be a criminal offence for an offer document or defence circular not to contain all the information required by certain Code Rules.
Where an offer involves a 'special deal' with favourable conditions for some shareholders (such as the management in an MBO), shareholders will have to vote on the arrangements at an EGM. In certain circumstances the company’s employees will be able to submit a written opinion on the implications of an offer, and the board will have to circulate this opinion to their shareholders with the offer document or defence circular.
UK companies with shares quoted on the Official List - but not AIM or Ofex - will have to include in their directors’ report information about their share structure, the rights and restrictions attaching to shares, and any rules or arrangements which could affect the success of a takeover bid, such as share schemes, concert parties.
More controversially, the Substantial Acquisitions Rules (SARs) will be abolished, restoring the likelihood of market raids to acquire up to 29.9% of a company in one fell swoop.
And, as Transparency Matters has commented before, all dealings in CFD’s and other derivatives and options will be defined as material interests in the underlying shares, requiring disclosures. This contrasts with the current proposals under the FSA’s implementation of the Transparency Obligations Directive AND the Company Law review – which exclude derivatives from these disclosures.

Wednesday, May 10, 2006

DTI proposals “good news” for directors, issuers – and institutional investors?

So the 7 year saga is coming to an end. The UK's Department of Trade and Industry has published the new corporate reporting requirements and proposals for directors’ ‘safe harbour’ provisions, which replace the hard-won Operating and Financial Review (OFR). Hard-won because of the long consultation process, and the work that many issuers had done to prepare themselves to produce a mandatory OFR.

This long, familiar story had as background the EU’s Accounts Modernisation Directive which required companies to produce an annual business review, albeit a less prescriptive one than an OFR proposed by the DTI. The problem was that for a Business Review to be meaningful, it required some form of protection for Directors, from inaccuracies, failure to identify risk etc. Without a safe harbour protection, companies would resort to Business Reviews written by lawyers, and shorn of any value to investors.

So the (probable) acceptance of a safe harbour protection – probable because of the week long consultation on the issue – is good news. Whilst not as supportive as the US PSRLA, the new rules should help companies produce forward looking commentary on their prospects. They will be liable only if they have acted recklessly or in bad faith.

So everyone is now happy – yes? Not quite. At least 2 letters from institutional investor groups are circulating among the Chairmen of quoted companies, asking them to “commit to a voluntary OFR”. Companies will therefore have a choice to make. The value of a good quality business review should not be underestimated. It encourages precisely the kind of long-termist outlook that US issuers favour, in the aftermath of their decisions NOT to provide earnings guidance.

Tuesday, May 09, 2006

Earnings guidance – major companies pulling out

Earnings reporting season in the US has this year been marked by the number of companies that have ceased providing guidance on future earnings. 2 sets of information have shed some light as to why this is.

Provision of guidance dates from the protection that was offered to companies and their directors with the passage of the1995 Private Securities Litigation Reform Act (PSLRA). Initially, many companies did not take advantage of the protection by publishing a safe harbour statement, however by the late 90’s and early noughties, many – most – companies were doing so.

However, that now seems to be on its way to change.

The House Committee on Financial Services held a meeting 3 weeks ago entitled "Fostering Accuracy and Transparency in Financial Reporting.", at which Candace Browning, head of global research at Merrill Lynch, noted "This process drowns out investor debate and distils what should be a complex message about performance into a single number--dictated by the company itself."

Supporting this, the National Investor Relations Institute, the professional association of investor relations officers in the US, found that the share of companies giving guidance has dropped from 71% in 2005 to 66% this year.

It is also worth noting that several of the SEC prosecutions under Regulation Fair Disclosure have been connected to the manner in which guidance has been made available to analysts.

Critics of the process of providing guidance on future earnings highlight the need that accompanies this, for companies to focus on hitting the target – at the expense, argue the critics, of longer term thinking about their businesses.

Supporters however argue that the process of providing earnings guidance is one of the few legal ways of meeting Regulation Fair Disclosure, which requires that material information is delivered simultaneously to all sections of the market.
Meantime, the trend towards ceasing the provision of earnings guidance continues – with significant names such as Coca-Cola, AT&T, McDonald's, Ford and Google declaring that they will not provide guidance.