Archive for the ‘Governance’ Category

Disclosure committees and IR

November 24, 2014

With ever-growing regulatory requirements and the complexity of global business, disclosure committees are playing a crucial role in ensuring accurate and useful reporting to investors, according to “Unlocking the Potential of Disclosure Committees,” a new report by the Financial Executives Research Foundation and Ernst & Young LLP.

And investor relations officers – in most companies – play an important role with the disclosure committee.

In more than 100 companies surveyed, some 65% of disclosure committees included the head of investor relations as a member – along with the controller or chief accounting officer, general counsel or equivalent, CFO and assorted other executives (usually not the CEO).

The study says having multiple functions represented in addition to finance and accounting – such as general counsels, heads of communications and IROs – adds value because diversity brings to the table insights on the business from multiple points of view:

“It’s a cross between finance and non-finance,” said one of the executives, a senior director of corporate accounting and reporting. So it’s important, she continued, to “make sure the right representation of the business is there … I think we have pretty good coverage.”

As a non-accountant and occasional participant in disclosure committees, I try to ask big-picture questions and challenge insiders to explain the business more clearly … because what investors need most from disclosure is clarity and perspective.

Advertisements

Can companies think & act long-term?

September 26, 2014

CEO at windowWhen former Merck & Co. CEO Ray Gilmartin sat down with a governance guru to reflect on “The Board’s Role in Strategy” for the National Association of Corporate Directors’ Directorship magazine, the topic turned to the conflict between short-termism and the sustained commitment that executing a strategy demands.

Gilmartin waxed philosophical when asked about encouraging CEOs to act strategically, even under pressure from short-termist investors:

What’s happened is that there is confusion between stock price and creating firm value. I don’t believe investors are short term-oriented, but boards and management can be. Investors will reward investments in R&D, for example, because they recognize it will create long-term value. Therefore, if you’re lowering your earnings growth or you missed a quarter because you don’t want to cut back on R&D, if you have good relationships with your investors and they have confidence in your operating capability and your ability to deliver, then even though you’re falling short on the quarter or you’re going to lower your earnings to invest in research, they will still reward you for that.

Well, OK. This seems a bit theoretical. The ex-CEO is nearly 10 years out from the corner office, having taught at Harvard Business School and served as an outside board member in the intervening time. It’s been awhile since he sweated Merck’s stock price dropping 12% in two days, or its blockbuster drug going off-patent. Maybe it’s more accurate to say investors will eventually reward investments in R&D, but they may deliver a thrashing in the quarter(s) when EPS falls short. So get ready.

For the here-and-now, I would add two things to Gilmartin’s opinion that boards and CEOs can think and act strategically for the long term:

  • Communicating clearly is essential. A big part of the CEO’s job, as well as the CFO and IRO’s, is to explain that the wheels are not falling off the bus – we’re investing in the future. Then we must show concrete evidence of progress, step by step, in R&D or gross margins or whatever.
  • It takes guts to think and act for the long term. When earnings go the wrong way, the whole team needs to toughen up and be bold about interfacing with investors. Hiding doesn’t help, it hurts.

That’s my two-cents’ worth. What do you think?

 © 2014 Johnson Strategic Communications Inc.