Notes – IR 2.0 and the SEC
By Dick Johnson, president, Johnson Strategic Communications Inc.
John White, chief of the SEC’s Corporation Finance Division, spoke to the National Investor Relations Institute conference last week (June 9, 2008) in San Diego – urging companies to plan carefully for new technologies that will provide more transparency of performance and change interactions with investors.
White’s message: Get ready for more interactive disclosure. And sooner rather than later.
Companies already are moving forward, on their own and at the SEC’s urging, to bring investor communications into the world of Web 2.0. They are using new technologies to get information out, make it useful and interactive, and create two-way communication channels. Call it IR 2.0.
To help our friends anticipate tomorrow’s issues in investor communication, I’ve compiled notes on White’s overview of what’s coming. These scribblings are not legal advice, or even IR advice – they are food for thought for executives involved in telling the financial story.
White believes the SEC will respond to calls for more regulatory guidance in interactive communications. He describes four initiatives wending their way through the pipeline:
… Interactive data, applying XBRL programming language to financial disclosures, is slated to become mandatory for corporate SEC filings as early as year-end 2008. This will change how investors analyze companies and the information we disclose.
… E-proxy, or Notice and Access, offers online access for investors as a substitute for paper annual reports and proxy materials. Hundreds of companies have implemented e-proxy in 2008, and it is slated to become mandatory in 2009.
… The Advisory Committee on Improvements to Financial Reporting has outlined interim proposals for a new wave of regulation, ranging from quarterly releases to websites. A final report is due in August, and then the SEC will look at rulemaking.
… Websites and blogs are already quite interactive at early-adopter companies. Look for the SEC to provide more guidance in the future on the content and mechanics of company websites, encouraging online disclosure and more two-way communication.
Of course, the SEC has its finger in many other pies – executive compensation proposals, GAAP vs. international financial reporting standards and so on. But these IR 2.0 ideas hold potential for transforming the way investors gather information and make decisions.
More detailed notes from White’s presentation follow (his own ideas, which he disclaimed as not necessarily the Commission’s and we, of course, disclaim as not necessarily ours).
Interactive data. Getting companies to file reports using eXtensible Business Reporting Language (XBRL), a top priority of SEC Commissioner Christopher Cox, will enable investors to mine almost unlimited data covering nearly any investment characteristic.
For investors, XBRL will be a quantum leap beyond today’s EDGAR database. By attaching digital “tags” to some 15,000 types of data fields in financial reports, XBRL allows an investor to automate analysis of companies. With a bit of software, an institution or skilled individual will be able to dig out specific line items, make comparisons across peer groups, time periods or the whole universe of stocks, or apply his own esoteric ratios – without spending days looking up figures from 10-Ks and keying numbers into spreadsheets.
“What interactive data is going to do is open up a whole new world of information about you to your investors,” says White. He compares XBRL to the advent of Internet search engines, making data that once was public but hard to find available easily and instantaneously.
A proposed SEC rule would move XBRL from voluntary to mandatory in a three-year phase-in. For Year One, about 500 of the largest US companies (and foreign firms using US GAAP) with a float of more than $5 billion would post an XBRL file with their EDGAR filings and on their websites. Year Two would extend XBRL filings to all accelerated filers (1,600 to 1,800 companies). Year Three would require all other US companies, plus foreign firms using International Financial Reporting Standards, to enter the XBRL world.
Companies and groups have until August 1 to comment, and a final SEC rule is expected this fall. If the timetable holds, the first batch of companies will have to file XBRL data with their 2008 10-Ks, if they’re on a calendar year (or 10-Qs for the next quarter that ends after Dec. 15, 2008). By year-end 2010, all public companies’ reports will include XBRL.
Says White: “You’re going to be hearing from a whole new category of investors who don’t currently have this kind of analytic ability … You need to start thinking about, what information is now going to be out there for your investors? How are they going to be analyzing it? What kind of new questions are they going to be asking you and your executives? … You’re going to have to anticipate the new issues that are going to pop up, anticipate the new comparisons … and you need to do this in advance, because, again, the moment you post this information, the analysis can be done instantaneously.”
E-proxy, also known as Notice and Access, was voluntary for the 2008 proxy season and is set to become mandatory in 2009. The core requirement is to make proxy materials available electronically on corporate websites. Companies have options ranging from just posting e-proxy materials to notifying all or some shareholders of online access with the goal of eliminating printed materials for investors who don’t “opt in” to paper copies.
A NIRI member survey early this year found just over half were implementing Notice and Access in 2008, driven by the cost savings of printing and mailing fewer copies. Other companies elected to wait and learn from the early adopters.
How e-proxy will affect the dynamics of shareholder democracy is an open question. White notes that concerns have been voiced about a decline in retail shareholders’ participation, possibly due to confusion. The SEC staff and groups like NIRI and the Society of Corporate Secretaries and Governance Professionals are studying e-proxy and plan potential enhancements. White believes the current rules will hold through the 2009 season.
Advisory committee. In August 2007, the SEC launched a study panel on financial reporting to explore ways to reduce unnecessary complexity and recommend changes to increase the usefulness of information to investors. The Advisory Committee on Improvements in Financial Reporting has 17 members, from Wall Street asset managers to a Motley Fool analyst, CPAs and CFOs to academics.
The advisory group’s acronym, CIFiR, sounds inauspiciously like “cipher” – but the SEC says it points to good intentions for decoding financials, rather than toward creating mysterious new regulations.
Look for a final report from the advisory group in August, after which the SEC will consider writing rules to implement its ideas.
The effort is too wide-ranging to do justice to it here. Four subcommittees laid out proposals in February on topics as diverse as capturing economic realities in reporting on complex business activities; altering US and international accounting standards; auditing and dealing with reporting errors; and delivering financial information.
In the “delivery” category, which seems most applicable to IR professionals, the advisory panel is asking for SEC guidance and industry best practices on issues such as corporate websites; executive summaries in SEC filings; reporting on key performance indicators (or value drivers); content and timing of quarterly earnings press releases; and the MD&A.
Corporate websites and blogs
Websites have become a pre-eminent tool for reaching investors, and moreso every day. Companies should think through their approaches to investor relations via the Web – and expect new regulatory guidance in the foreseeable future.
Says White: “We at the SEC have focused for some time now on the vital role of the Internet as a method of electronic communications – not just for modernizing our disclosure systems but more generally for promoting transparency, liquidity and efficiency in our trading markets. We are very, very supportive of the use of corporate websites.”
Companies’ IR sites have advanced beyond collections of press releases and annual reports to providing webcasts of quarterly calls and other meetings, layering information to meet investors’ differing desires for depth and detail, and more interactive features like blogs.
“We at the Commission are on board with this, we want to encourage it, although, being the lawyer … (I would add) you have do it in a manner that is mindful of the requirements of the federal securities laws, both the word and the spirit of them,” White says. Disclosures on a corporate website or blog, he says, are subject to the same laws as paper disclosures.
On blogs, still a fairly cutting-edge technique in IR, White says, “It obviously is a very useful and potentially attractive way to communicate with your investors. It allows you to do it more in the form … of a conversation, where you can get responses back. But I do think that you should be using blogs – I was going to say with caution, but maybe if that’s too strong for you, I’ll just say that you should use blogs after careful planning on the company’s part. Because, obviously, you’ve got to be focused on the liability issues. Even though blogs can be informal and conversational, don’t forget that law thing.”
The SEC’s advisory committee has asked specifically for guidance in three areas:
… Liability for summary information. When a website is structured with introductory information on a first page, allowing investors to click through and dig deeper into details, can the company be held liable if an investor only reads the summary?
… Hyperlinks on corporate sites. When a website links to outside data such as industry or news sources, can the issuer be held liable for the accuracy of the data on those pages? Exit notices and legal disclaimers may help, but they don’t provide ironclad protection.
… Regulation FD issues. The SEC previously required companies to disseminate “public information” by making it available to the market generally via recognized channels. Does posting information on a website meet the disclosure test for Reg FD?
The last SEC interpretative release on websites was in 2000. White expects an update to address new interactive technologies and issues like these, which have arisen since then.
Bottom line for companies and IR professionals: IR 2.0 is upon us.
© Copyright 2008 Johnson Strategic Communications Inc.