While Catherine prepares for her well-deserved vacation, I’ll do the honours by posting this for her. Catherine was recently interviewed by CMA Management Magazine regarding corporate disclosure and electronic reporting in Canada. You can read the full article here.
Yesterday I had the pleasure of meeting with John Hughes from Deloitte. John shared some recent findings regarding “Fundamental Investors” that I thought were quite interesting. John said:
All companies make a choice (consciously or unconsciously) in deciding how they will present themselves to the market. The quality of the information provided to the market is a factor that contributes to increasing valuations and lowering cost of capital. This “premium” is not something a company can obtain for itself over night, but even incremental market gains from a long-term investment in building a disclosure “brand” can easily justify the direct cost of that investment.
Recent research by McKinsey, cited in a recent Globe And Mail article, suggests that retail or short-term oriented investors seldom trade enough shares to make a real difference in a company’s long-term share price. The largest shareholders, such as pension funds or mutual funds, also often have little influence over the price of the stocks they hold, because of their emphasis on tracking performance relative to a published index.
McKinsey concludes as follows:
This leaves a group we call “Fundamentals Investors” because they buy or sell stocks based on a long-term perspective of their intrinsic value relative to current market price. They also buy positions large enough to exert influence, as activist investors, on the board and management. These firms typically hold a small number of companies’ stock, and they trade less frequently - but, when they do they trade large enough blocks to affect the stock price.
Fundamentals Investors should be the target audience of a company’s investor relations strategy. Because these investors are more interested in company and industry fundamentals than in short-term performance, communications strategies should focus on the company’s long-range strategy and the industry’s prospects. Investments in growth projects, the pipeline of new products, fundamental profit metrics such as customer profitability, attrition or churn rates, and major market trends are all critical for these investors.
Article from Don Tappscot from the first day of the World World Economic Forum in Davos showed up yesterday. It has an interesting note about transparency that I wanted to share:
One of most insightful for me was with Samuel DiPiazza, the CEO of PricewaterhouseCoopers. PWC has been a leader in the next generation of reporting – they call it value reporting – where the financial report is about al lot more than earnings and financial information. XBRL and the Web 2.0 are poised to transform reporting, where the focus will not just be on compliance but on transparency.
I wonder whether PWC could finally cash in on its leadership position in this area. More important, next-generation reporting could help companies be better understood by their stakeholders, including shareholders, not to mention bring some transparency to financial markets and in doing so possibly avoid crises such as the one we are currently experiencing.
Transparency is certainly a signficant trend in corporate disclosure that we’ll be covering more in this blog over the coming weeks.
Technorati Tags: Q4 Web Systems, Q4, XBRL, Corporate Disclosure, Corporate Reporting, Best Practices, PWC, Tapscott, Davos
If your company is like many others, it may not be maximizing the full potential of its disclosure to generate value. With the right disclosure controls and processes in place, your company could move beyond compliance to a more strategic use of disclosure – an approach that builds value by imparting a greater understanding of your organization.
MI 52-109 and SOX 302 (CEO/CFO Certification) have caused most companies to think more systematically about the processes surrounding their key disclosure documents. However, some officers may be genuinely unsure whether the controls and procedures they have in place are enough to achieve compliance with all disclosure requirements.
For example, the instructions to the Canadian MD&A Form say that a discussion of financial condition should include important trends and risks that have affected the financial statements, and trends and risks that are reasonably likely to affect them in the future.” But there is no clear definition of when a trend or risk becomes “important,” or of what is “reasonably likely.” Many issuers may not have a defined process for identifying and evaluating all their enterprise risks. It may simply be easier to put compliance first, ending up with highly legalistic paragraphs on all risks (“important” or not) that are difficult to make practical use of (and that barely change from one year to the next). Similar challenges and calculations arise with many other disclosure requirements, both in Canada and the U.S.
It’s no wonder that some companies treat the business of disclosure as having little upside, and attempt mainly to do enough to keep out of trouble. But just as the best offense is a good defense, the risk of major non-compliance diminishes quickly for a company that sees disclosure as communication, as a way of creating presence and confidence, and designs its disclosure approach around a clear guiding concept of its stakeholders and their information needs.
Although good disclosure can’t compensate for bad performance, it can surely help steer the market through rough patches: intuitively, investors will be less likely to immediately sell on bad news if they’re better able to place that news in perspective. Of course, many investors seldom access a company’s disclosure, relying instead on the media, or on analysts’ recommendations, or other intermediaries. But research confirms that MD&A and other disclosures assist and provide value to these key groups too. This value may be even greater when the information is clearly provided voluntarily rather than for compliance purposes, because it’s more convincing as a commitment to transparency.
It’s not surprising that companies would look to external advisors for input in navigating the disclosure obstacle course. Obviously, advisors like legal or accounting firms have access to much more information than a company can generate on its own . But again, companies often use these resources primarily to help them determine whether they comply with the rules, rather than whether they’re maximizing the potential of their disclosure for generating value.
It’s appealing to think however that an external advisor could help companies both in assessing the downside of their disclosure practices - areas in which they appear particularly at risk of being asked by regulators to re-file information for example - and in working toward the upside. The right advisor could certainly help check against the requirements, but could also think more constructively about the enterprise’s key performance indicators and business risks and how those are reflected in the information. They could assess the overall coherence and focus of the disclosure record - for example whether key strategic priorities are consistently expressed across the MD&A and the compensation disclosure and elsewhere. And they could think about controls and governance at the same time as they identify issues in the disclosure, thus providing a much more comprehensive feedback and commentary.
Using an external service provider is just one way to come at this issue. Whether or not your company obtains that kind of independent input, we think that it will benefit from standing back regularly and assessing the overall value and effectiveness of what it’s created. It’s about compliance, sure, but it’s more about communication. The picture that a company paints of itself for the world is too important to be an afterthought.
Improving Disclosure Controls and Procedures
In our discussions with North American issuers over the past 12 months, we have noticed a consistent and increasing trend in their desire to improve their disclosure controls and procedures. In addition to streamlining processes, a key objective is improving the results of CEO/CFO certification under SOX 302 or in Canada, MI 52-109.
Disclosure controls and procedures (DC&P) include, but are not limited to the information processes designed by companies to ensure that material information is accumulated and communicated to management, including certifying officers, as appropriate to allow timely decisions regarding disclosure.
Documentation Important in Certification
In our experience, some companies have certified based primarily on interviews, checklists and questionnaires. Although this approach provides some degree of visibility into how controls and procedures are being executed, it relies heavily on individuals answering questions regarding their own performance in the process. This leaves cause for concern regarding the accuracy of the submission.
Consistent and accurate documentation of disclosure processes (created in a timely fashion, as processes are being followed) is the only way that companies can know if their DC&P are actually adhered to and are working effectively.
Design Vs. Execution
A challenge that has been expressed to us many times, is that although companies are currently certifying, they have a limited view into how their controls and procedures are actually executed vs. how they were designed. This is largely because of inconsistencies in disclosure process documentation and partly because of the difficulty in organizing and reporting on this information.
In an attempt to improve this, many companies are trying to capture and maintain more detailed records of their disclosure process.
In many cases, Investor Relations is at the center of this requirement and are being asked to provide detailed records on how the process is being conducted. The challenge of course, is that in order for these records to be accurate, they really should be created in real time - as processes are being followed.
In the heat of a time-sensitive situation, such as the preparation of an earnings release, documenting processes can seem in conflict to the greater objective of getting the information out on time. Reconstructing processes after the fact often falls to relying on memory, if deadlines have taken priority over tracking.
Often the task of filing this information falls to the coordinator of the disclosure process (again, usually within the IR department). Filing, archiving, search and retrieval are all challenges associated to this task.
Areas of Interest in DC&P Improvement
Many of the companies we’re spoken with, who are looking to improve their DC&P, feel that processes and systems surrounding their internal controls over financial reporting are firmly in place and working. Consequently, attention has returned to refining their existing DC&P. Interests include:
How Companies are Documenting Information
Based on our experience in the market, we’ve found that most companies use a patch-work approach to documenting disclosure processes, which includes:
Although workable for some, most of the organizations that we have spoken with expressed problems in this scenario, either in terms of the effort required to maintain the data, the reliance on specific people in the company or the cost and time needed to provide this information during an audit or regulatory enquiry.
Streamlining DC&P Through Technology
During our numerous interviews with issuers we learned that a number of key concerns are driving the need for improved software solutions:
We also learned that the ideal solution should allow a company to follow their unique processes while providing a disclosure control framework. The right system should:
These considerations have formed the basis for the design of our products. To find out more about the research and development that has gone into our software, please contact us. We’ll be happy to discuss this in more detail, as well as walk you through real world examples of how software can increase efficiency and reduce risk.
Technorati Tags: Bill 198, Sarbanes Oxley, MI 52-109, CEO and CFO Certification, SOX 302, SOX 404, Risk Management, Compliance, Disclosure controls, Disclosure, SEC, OSC
