Mark Hynes - thoughts on corporate disclosure

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

Wednesday, April 25, 2007

Another consultation: this one has big IRO liability implications.

We have seen a wave, nay, a torrent of consultations and comment letters in the last few years. As the EU realigns its financial services marketplace, as the SEC embarks on an ambitious programme of reform, regulators have wanted our views on everything from accounting to unbundling.

Now however the Davies Review of Liability is raising the issue of liability for (among others) investor relations professionals. The review looks widely at liability of issuers in respect of damage or loss from inaccurate, false or misleading information disclosed by issuers - or their managements (my italics) - to the market or of failure to disclosure relevant information promptly or at all.

Prosecution of IRO’s is not new – at least in the US. Back in 2004 the SEC charged Siebel Systems’ senior vice president Mark Hanson, who at the time was in charge of
investor relations, for violation of his company duty to maintain adequate disclosure controls to ensure compliance with Reg FD. The case was eventually dismissed, but it raised the spectre of an IRO carrying personal liability for his or her actions in disclosure.

Now Professor Davies’ enquiries are examining – in the context of changes made to FSMA 90A and B recently - the extent to which the liability for making false statements to the market should be extended to managers.

The consultation (see )
includes the following: Question 7 Should statutory liability for fraudulent misstatements be extended to those who make the statement on behalf of the company?

In many companies the IRO is the gatekeeper in terms of communicating with the market. In many (most?), internal company documents on the control of inside information, the IRO figures heavily. They have the market knowledge, the expertise and judgement to know what to say and when.

However, will they have the visibility of the preparation of information, or the access to management to be able to question the potential “fraudulence” of information being sent out?

The opportunity to comment remains open for the rest of this week. Transparency Matters will keep eyes open for any developments.

Wednesday, April 18, 2007

Regulation and best practice demands non financial metrics; why are boards not getting it?

In quiet moments, many IROs will admit that the most challenging part of their job is ‘managing’ the CEO and FD. Board involvement in IR is not only best practice; it’s
also common sense. And since a key component of the job is 2 way information flow with senior management, many will be concerned about a new report from Deloittes.

This report highlights that many board members and senior executives are still in the dark about the overall health of their organisations because they lack high-quality non-financial information.

According to the survey, four fifths of the CEOs surveyed say that financial indicators alone do not adequately capture their company’s strengths and weaknesses. Those surveyed admit they need, and are under increasing pressure, to measure these indicators information on non-financial performance indicators, but their ability to monitor these remains inadequate.

Where is the pressure coming from to communicate non financial information? Most respondents say that the market itself is increasingly emphasising non-financial performance measures. Also, a growing number of companies are creating significant value for their organisations by understanding their underlying performance drivers through the use of non-financial measurements. Customer satisfaction, innovation and employee commitment are identified as key drivers of performance among the companies interviewed by Deloittes.

Despite the growing recognition that non-financial performance data is important, tracking it remains a problem. CEOs and senior executives generally describe their ability to track financial performance as excellent or good, while only a third describe their non-financial communications record as excellent or good.

And with UK companies wrestling with the obligations of the Enhanced Business Review, managing non financial data both in terms of the needs of the market, and of senior management will be high on the agenda of IROs.

Thursday, April 05, 2007

Beginning of the end for US GAAP reconciliation?

And what about US domestic issuers?

IRO’s in the UK will have a rueful smile at the antics in the US on IFRS. Bearing in mind the communications challenges that many companies faced in introducing IFRS in 2006, the conversations with analysts unfamiliar with IFRS, the reconciliation documents that had to be created, European IRO’s will be watching the proceedings at the SEC workshop held on March 6th on IFRS with interest, for 2 reasons.

First, for those (foreign) companies with an obligation to reconcile the numbers in the 20F to US GAAP, there is growing hope that Regulation G will be amended or even ended. At the SEC workshop, there were contributions from all sides of the capital markets industry.

For example, investors pointed out that they were not really using the reconciliation and in some sense preferred IFRS to U.S. GAAP. And many noted that they had already moved to analytic models that do not use the reconciliation. They pointed out that for many industries and peer groups, IFRS is the most common accounting standard and so in order to understand that industry or sector, analysts must know IFRS. Indeed institutional investors sometimes "reconcile" U.S. GAAP financial statements to IFRS in order to make their comparisons and investment decisions.

And timing is key. Foreign private issuers are not required to file their annual reports on Form 20 F until six months after their fiscal year end. This compares to the filing deadlines for U.S. issuers which range from 60 to 90 days, so investors frequently rely on issuers home country disclosures – in IFRS.

And, the SEC was told, reconciliation to US GAAP is costly, not only in monetary terms but also in terms of resources and personnel as well as lost investment opportunities for U.S. investors, who can lose out on being included in rights offerings and other investment opportunities.

The CFO of AXA, the global insurance and asset management company headquartered in Europe, reported that the annual reconciliation for AXA's Form 20 F cost his company approximately $25 million.

Second the big one; should U.S. issuers also be able to use IFRS for their financial reporting?

Phillip Jones, Director of External Reporting and Accounting Policies and Procedures at Dupont, believes it should. At the workshop, he spoke of the benefits and appeal of being able to report in IFRS. Many US companies are already using IFRS for various reasons, whether at their international subsidiaries or for reporting purposes with various regulators in other jurisdictions. It could improve their disclosure and reporting processes overall, in terms of transparency and internal consistency, if they were allowed to file with us using IFRS.

At minimum U.S. issuers would like the choice. And IRO’s on my side of the Atlantic will empathise with the change if it does happen.