derek abdinor

Risk Metrics Group provides risk management services and information in many countries around the world. They are also a client of my organisation, in a convulted and irrelevant way.

They recently released their policies around proxy voting: meaning how they will vote or advise voters in any given situation. Not only does it provide rational guidelines as well as promote transparency, it also serves to highlight underlying sentiment amongst professional investors.

The methodology in drawing such guidelines up includes polling the investment community, and the issues that they see as most pertinent are included in the document. Amongst others, they are:

• executive compensation practices
• board accountability and oversight
• the quality of financial reporting

The first point is becoming a part of an amplified chorus; the second is interesting in that it alludes to board members not fully aware of the financial (not business and operational) risks of their enterprises and the lack of accountability to shareholders they therefore exercise; but the third seems to be news. Poor accounting practices? Can that be resolved?

Sasol’s empowerment transaction earlier this year was worth over R25 billion and added about 200 000 new shareholders to the Sasol share register. The impact at the AGM was apparently marked, with new members wanting materials in different languages and different formats. 

From Fin24:

 ”Why are the presentations only in English, when you have many black shareholders represented in the room?” asked another shareholder.

“You ask us to vote for or against directors but you fail to even provide us with a picture or introduce the directors we are voting on,” commented another.

Many black representatives appointed through BEE deals have been criticised for being token representatives to boards of listed companies.

Despite the description of “empowered” companies, people point out that the white directors and CEOs who still represent many of these businesses do all the talking at presentations.

The Sasol AGM took a step to dispel that impression when Benny Mokaba, executive director of Sasol, was pressed into a new role as translator.

Mokaba took responsibility for translating shareholder questions for Sasol chairperson Pieter Cox and Davies. Shareholders who had been frustrated by not having the opportunity to voice their questions in a mother tongue suddenly became confident enough to ask the questions they had sought answers for. 

 

This post first appeared in XBRL Blog 

XBRL deployment is a long river, and you need to keep that in mind regardless if you’re focussed on the (downstream) regulatory filing and analysing components or the (upstream) ERP integration and general ledger design.

I’ve put together a list that takes into account technical, accounting, filing and investor relations. The point is not to compare software or even mention any of the brands out there. To keep this as theoretical as possible, you have to ask yourself:

1. What is the scope of the application?
   If the application reaches right into the CFOs domain and into the enterprise system, it will have affect all parts of the business. Expect a high initial cost, but other functions like filing and internal analysis will (theoretically) be very fast and automated.If the application is for tagging financials for filing, expect low costs and quite a few players in this field.
2. What is the format of the application?
   Is it accessible on the desktop or web-based? Does it accept CSV, PDF, HTML or your proprietary formats? This is of critical importance when it has to fit into your organisation, not your organisation having to fit around it. Check your process flows and your IT systems for compatibility.
3. Is the vendor a thought-leader?
   If the vendor has been developing XML products for some years, and has now created an XBRL product with a tweak here and there, you may struggle with the software down the line. Check the personalities who work at the organisation, read their blogs and white papers, engage them at conferences.
4. Is the vendor likely to be around in a couple of years?
   A tough question to ask. Perhaps their XBRL offering is simply a version of their Edgar offering. We have to accept that while some consolidation will happen in this space, we will get wanderers from the Web 2.0 world (mashups etc) with new and competitive offerings.
   
5. How will future filings/creations happen?
   Either tagging starts from the beginning again, or the system has built-in logic that allows tagging to go much faster from the second time around.
6. Does it have all the necessary tools?
   Taxonomy designers, viewers, analytical tools may appear peripheral to the actual tagging, but no successful xbrl project can occur without them. Determine if they are part of the software or if they require a seperate investment.
7. Does the application offer support?
   You’ll likely have all kinds of questions when you begin using the product. Seperate the accounting, regulatory and business rules from the actual software and see if the company offers support for those. Don’t confuse an accounting issue with a software issue!
8. Is an evaluation version available?
   Video demos are great for initial analysis, but they follow a script. You may have different processes or document formats, and you need to test these. Ask upfront if you can have a limited copy for 30 days.
9. Does it match my existing resources?
   You cannot expect your accounting professionals to use software where they have to delve into the XML side of the code, or your technical staff to make decisions on line items. What works for your team and departmental career development plans should integrate with the software. Again, get an evaluation version on board.
10. What is the cost?
    We all have different requirements and different plans. You have to ask yourself “what is xbrl worth to us?”.

I have 10 questions simply because it makes for a nice headline; please comment on the evaluation criteria you have used or are using.

The news du jour is that BHP Billiton has declined to pursue its offer for Rio Tinto. Whilst on the one hand the story has flummoxed the investor community, the back channel is that millions of pounds were spent consulting with the professionals who were drafting up the paperwork, dotting the i’s and twisting the fountain pen nibs. I quote heavily from The Times:

BHP infuriated its shareholders by revealing that it had spent $450 million (£291 million) on the failed deal, running up vast bills for the arrangement of financing and advice from investment banks, lawyers, accountants and public relations firms.

Rio Tinto, meanwhile, is estimated to have spent about £120 million on the six investment banks, two law firms, one accountant and one public relations company that it used to help to fend off the unwanted suitor.

With few sizeable global mergers and acquisitions mandates on the horizon, the collapse of the bid is a bitter blow to the many advisers.

Of the BHP fees, it is understood that about $75 million is for the $55 billion committed lending facility involving Goldman Sachs, Barclays, HSBC and others that the miner secured to help to fund the prospective $147.8 billion takeover bid last year.

Of BHP’s other fees, it is believed that the bulk will go to legal and tax advisers who charge by the hour and billed for thousands of hours worked, particularly on regulatory clearance. Goldman Sachs pocketed a significant success fee in February, when BHP initiated a formal bid, but since then will have been paid only relatively modest sums. Rio will reveal the cost of its defence next year.

This is the year when investors have begun rallying around executive compensation, dithering CEOs, slack risk management and financial oversight. I’m sure we’re headed for an age of corporate reform driven by the shareholders, although if it came chiefly from investment banks it would be a severely ironic age.

*disclaimer: I think BHP Billiton has the most attractive investor relations website, and has been for the last 4 years. I also admit to laughing out loud at the Rio Tinto url the first time it was sent to me without knowing it was a company.

Institutional investors of British banks have got more powerful over the years, at the expense of the retail investor. This power has been somewhat diluted by the weighing in of government in the form of bailouts.

Further evidence of executive compensation becoming the most scrutinised aspect of financial reporting is also revealed in the article, where majority investors expect to vote on pay and perks at the AGM.

From the Times online, 19 November 2008:
The City’s leading institutional investors are gearing up for their biggest assault on corporate Britain by demanding the right to vote out the board of every listed company each year.

Fund managers have been spurred to act after seeing their rights eroded during the Government’s £37 billion bailout of the banking sector and in the wake of a controversial £7.3 billion capital-raising drive by Barclays. The bank attempted to win over angry shareholders yesterday by offering its entire board for reelection next April. It also sought to mollify investors by promising that executives would not be paid bonuses this year.

Leading investors say that they want to extract more accountability from executive directors of British companies as they brace themselves for a severe recession. Peter Montagnon, director of investment affairs for the Association of British Insurers (ABI), said: “The annual election of directors is a desirable thing because it increases their accountability. A number of companies already do this and have found that it works. It adds to stability at companies because directors are more circumspect about the consequences of their actions.”

Companies must have individual directors reelected every three years, according to the Combined Code on Corporate Governance. That tends to entail a third of a given board being voted on each year.

Mr Montagnon said that annual elections would be especially useful when there were tensions over directors’ pay and perks. “The fact that they are prepared to stand for reelection could mean that shareholders could allow them greater latitude in designing remuneration policies. These could then become less formulaic and better tailored.”

The ABI represents powerful professional investors that, among them, own more than a fifth of the stock market. The National Association of Pension Funds (NAPF), a similarly influential lobby group, echoed the call. David Paterson, of the NAPF, said last night: “It is standard practice in the US and other parts of Europe [to select boards annually] and a number of our members think it is a good model for the UK. We would encourage the boards of all UK companies to offer themselves for reelection each year, and this will form part of the review of our corporate governance policies in 2009.”

The ABI welcomed the move by Barclays, which will give investors the right to oust members of the 17-strong board. However, Mr Montagnon lambasted the bank for failing to consult its shareholders before offering preferential terms to Middle Eastern investors, who could end up owning about a third of the bank. Despite the bank’s concessions, the ABI issued its most serious alert on Barclays’ capital plan yesterday. Fund managers said that they were furious over the bank’s handling of its fundraising but were unlikely to vote it down at an emergency meeting on Monday because of the risk of causing instability.

Alistair Darling, the Chancellor, also suggested that there would be a heavy price to pay for any successful rebellion, saying that any bank requiring government assistance in the future would not receive terms as generous as those already reached. Analysts said that that also represented a warning shot against any effort to derail the merger of HBOS and Lloyds TSB before a vote by Lloyds shareholders today. They said that it also implied that the present round of government aid may not be enough.

At present share prices the Government faces a loss of £10.4 billion on its £37 billion investment in the banks – equivalent to 3p on income tax or more than the cost of the 2012 Olympic

The rise of activist shareholders and government regulators will require cogent communication, and the loss and merger of investment firms may impact coverage.

The small guy

“Why do I need to communicate more than I have to with minority shareholders? If I want to talk to the market, I pick up the phone and call six investment houses.” A year ago this was the prevailing thought in investor relations. I sincerely hope it’s changed: retail investors are less likely to move shares around and tend to be loyal, also becoming informal marketers for your brand. Direct communication with them is building trust. Trust is the magic of the markets.

Earlier in the year, the regulators of the US markets mentioned a movement toward “reversing the deretailisation of our markets”. Before that had a chance to be implemented, the “governmentisation of our banks” seemed to be the trend. Cheap shots aside, expect direct communication to shareholders to be strategically, if not politically, endorsed in South Africa.

The board

I was recently in Washington DC for a financial reporting conference while the markets were diving like European centre-forwards. News of the AIG executive spa session on bailout money kept featuring. People throughout the reporting chain seem to be generally annoyed at the levels of board oversight employed in corporate America. How could one be on the board of Fannie Mae/Freddie Mac/Investment Banks and not see that one was leveraged dozens of times over? The days of non-executive board members giving the financials a cursory thumbing-through while they race from AGM to board meeting number 12 will come to pass. Perhaps the JSE could extend the AltX directors induction courses to other shores?

There needs to be internal assurance that the full financials are presented in the most accessible way to decision-makers as possible. PDFs of reports and access to the ERP system are not enough: the technologies are there or nascent and need to be employed to full effect. It’s a great truism that the information online is a double-edged sword: tools exist to compare executive compensation across companies.

The tactics

Communication and relationship-building will be key for the duration. Now is the time to work on your image to investors; huddle up and get the things done that you couldn’t when you were shuttling between Jozi and Cape Town and doing roadshows and analyst presentations. Linda Kelleher of the US National Investor Relations Institute urges one to use the corporate website to its full effect, and use related technologies where applicable.

More by Derek Abdinor

• Investor relations from here on in – 31 Oct 2008
• Investor relations online: it’s a niche thing – 30 Apr 2008
• Hypersonic advertising is pitched – 30 Jan 2008
• Paying attention – 25 Oct 2007
• An economy of attention – 25 Sep 2007

Ofttimes, people come up to me and say “please stop taking pictures” or “get off my lawn”. Othertimes, I talk to them about communicating to their stakeholders in an online fashion.

There are many tools to accomplish this. The variety becomes a problem because clients may see it as a shopping list. The real issue is the usability. If you do NOTHING online, do you expect an analyst to go to the stock exchange or regulator, or your company’s head office, and ask there for a report at reception? Of course not.

Its a continuum, stretching from extreme discomfort at getting public information, to extreme ease of use. The client has to decide where to jump off this line. As it is all really low-cost technology, the question should not be solely around cost.

continuum of investor information

What one must bear in mind, is that we live in a multi-channel world. By making all the formats in the graph available, some will still choose to have a printed report, others a PDF, others will only concern themselves with the Excel while some will have scanned the newspaper.

You can’t be all things to all people, but you can give all the options to all people.

I find the standard way of explaining XBRL using the barcode analogy doesn’t quite work for me. A barcode is a complex display with arguably more information encoded on that “tag” than exists for the object label itself.

I think of financial statements locked in a PDF or book as a flock of birds an ornithologist is studying. They all congregate at the right time, have some structure to their flight plan, and unnervingly know how to calculate themselves to arrive at a destination

The guy studying the evolution of the flock would do well to tag each bird with details like name/gender/status etc. Then individual movements would allow for greater analysis and data would be accurate and clean.

After deciding on how you’ll tag them, you attach the tag and thus begins the filing flying process…

Dealstream Securities traded derivatives on the JSE Securities Exchange, specialising in listed single stock futures and CFDs. Alleged problems with its trade in CFDs led to them running out of liquidity with its clearing memberand they were pulled off the markets a few days ago.

Assuming that the investment/trading community is probably griping about this topic in the Bull Run or bottling it all up is not the case anymore. Social media is mostly cheap and free, and it makes the information that only a few people have (in this instance, that offices were locked up) go viral in a short space of time.

I listened to the guys who set up TroubleAtDealStream on the radio last night. They were angry about their margins losses through the sudden disappearance of Dealstream, so they sent each other SMS messages and got together. Some of them decided to set up the website at the above address. Sure its not a blog or wiki in the true sense, but its a really helpful resource and embodies collaboration and many-to-many publishing. See also Dealstreamfraud

What do we take away from this? The investment community realises that publishing and making their voices heard is easy, too easy if you’re using existing websites or properties. Does your IR deparment have a social media strategy?

Appendix:
Other examples of chatter around Dealstream:

Twitter mentions
Fin24 blogs
Forums
Comments on news articles (Moneyweb)
Technorati tags
Customer forums (HelloPeter)

The US SEC (our JSE equivalent) announced on Tuesday late August that the format for financial statements to the regulator, Edgar, will be superseded by a format that has more in common with the social media tools today’s users have come to enjoy.

You had to see the webcast (and followed the liveblog): The president-appointed chairman who oversees America’s $26-trillion investment management industry was talking mash-ups, RSS and the T-word, Twitter!

Twitter, corporate websites and corporate blogs will be used to disseminate financial information. Corporates will use those channels to communicate to the market and to shareholders. Using PR wire services is going to be phased out, heavily affecting that lucrative business. That’s the reading between the lines here, and it’s brewing into an ugly storm.

David Blaszkowsky, director of the SEC’s Office of Interactive Disclosure, said: “After 75 years of document-based static financial reporting, whether in paper documents or in electronic equivalents, it is exciting to see the SEC poised to cross the ‘data threshold’ and help investors receive financial information that is dynamic, usable and ready to go as they make their investment decisions. And when the investor wins, so does the public company, fund, or other filer who simultaneously benefits from greater transparency and trust in our markets. By tapping the power of interactive data to tear down barriers to quick and meaningful investment information, markets can become fairer and more efficient while investors can possess far better quality data than was ever possible before.”

IDEA allows for slicing and dicing of financial information and comparisons much like XBRL, which I mentioned here. It will be used to enhance Edgar filing for the next three years, and then replace it entirely.

post first published on TechLeader