At the end of 1999 the International Accounting Standards Committee (IASC), the Financial Accounting Standards Board (Fasb) and the Canadian Institute of Chartered Accountants (CIAA) all released independent reports saying that online financial reporting needs to be standardized. These reports spelled out in simple terms what IROs have themselves known: The paradigm of electronic disclosure is different from hard copy disclosure; the demand for more timely corporate information is increasing; and the business reporting community has a responsibility to develop a model of electronic disclosure practices.
While many IROs look for ways to maximize their web-based reporting, no-one can agree on best practices. The uncertainty has polarized opinions of what content is acceptable. Give us more, demand the investor communities. The jury is still out, warns legal counsel. To give or not to give – that is the question. And, at last, we are beginning to find some answers.
To some the term internet standards is an oxymoron. The web’s celebrated open structure encourages innovation but also shortens the shelf-life of most standards. The same site that two years ago was cutting edge, today is old school. Investors have come to expect information on IR web sites is the most current data available. Consequently, periodic reporting is declining in favor of a continuous stream of information. Annual reports are shrinking in proportion to the growth of IR web pages.
Hard copy complement
Some companies see their web site as a means of complementing hard copy publications. They want to provide digitized versions of their printed material so investors have the option of getting information without having to wait for the mail truck. The basic sites contain quarterly and annual reports, press releases, SEC filings (or links to Edgar) the company’s financial history and management rosters.
Other companies use their site to replace hard copy publications. They include content such as management presentations and conference calls, analyst estimates, Q&A sessions, and stock quotes. Some ambitious sites also have information-mining software tools and innovative data offerings. The philosophy is answer questions before they are asked.
Unfortunately, the companies with the most aggressive online strategies run the greatest risk of contravening regulations. To a lesser degree, it’s down to reckless IROs. To a greater degree, it’s down to ambiguities in regulation.
According to Fasb’s recent study, Electronic distribution of business reporting information, many companies have developed innocuous electronic financial disclosure practices due, in part, to regulatory ambiguity.
Regulatory attention
Surprisingly, when Fasb released its report at the end of last year, the most popular chapter was the one on regulations. ‘In my mind, this was a report on technology and even though we had a chapter about regulatory stuff, I thought it was kind of a sideline,’ admits Fasb senior project manager Wayne Upton. ‘I thought nobody would be interested in it at all, but that chapter more than any other has really gotten a lot of people’s attention. The observations I get are that [the corporate community] didn’t have readily understandable resources available to them.’
Upton considers ambiguities in regulation dangerous. While many companies take a cautious approach, some of them post material on their web sites recklessly. ‘I think that companies have fairly diligent compliance testing for printed material, though it appears that some people have approached the internet and said, Well, there’s no compliance rule. And that’s obviously wrong. That’s obviously a risk,’ Upton warns. ‘I think the message of that chapter is, Don’t be stupid.’
While Upton maintains the report was never meant to be a guide for interpreting internet regulations, many IROs see it as such. Not only does it contain a list of strategies to reduce legal risks, it is written in plain English, rather than legalese.
Following the guide
Meanwhile, the SEC has taken a giant step forward by publishing its new guidance on the use of electronic media. IROs seeking clarification, take heed.
One big clarification concerns responsibility for web links. Before this release, companies had broadly believed that every web page and all links on that page were to be treated as a single document. The SEC’s new guidance says this isn’t necessarily so. It points out a difference between links that are on the same page as an investor document, for instance, and those that are embedded within it. Links that are near a document – like sidebars or menu bars – are not necessarily part of the document itself. Links embedded within it, however, are indeed part of the document.
‘You have to independently analyze the information that surrounds the document to determine whether or not it’s an offer,’ explains Michael McAlevey, deputy director of the SEC’s corporation finance division. ‘If, however, you do something affirmative, like link from within your prospectus to something outside, then you have an issue.’
Another important topic involves hyperlinks to third-party web sites. Traditionally, companies had assumed a link to outside sources meant they were responsible for the content of those sources. Monitoring all outside links was a task too large for most companies. The result was a chilling effect on the use of hyperlinks.
The SEC asserts that responsibility for third-party material really depends on a facts and circumstances analysis. It suggests analyzing the context of hyperlinks through a series of questions: Will visitors understand that the link takes them out of your site? Are there any exit notices or disclaimers to emphasize this? Have you drawn undue attention to the link or made it appear particularly enticing?
Bright lines
While the SEC guidelines are by no means conclusive, they are a good start. ‘What this release does is reduce some of the uncertainty about using internet-based technology to communicate with shareholders and the marketplace,’ McAlevey says. It establishes some ‘bright line interpretations’ and proposes an analytical framework to help companies decide what the commission views as permissible web site content.
Douglas Clark of the legal firm Wilson Sonsini Goodrich & Rosati says the SEC interpretive release does a great job of clarifying issues for the investor relations community. Not only does it free up the use of hyperlinks, it underscores material that it considers particularly risky.
‘There are two types of content that generally present the highest risk. The first is analyst estimates and the second is non-safe harbored forward-looking statements,’ Clark reports. ‘Most companies that currently link to analyst estimates don’t comply with the SEC’s guidance on the topic. Companies have to phase into compliance with that because the risks of being responsible for analyst estimates are too high.’
The SEC tells companies what they must do to safeguard their links. This includes the use of jump screens to notify viewers when they are leaving the company’s site and disclaimers for links to third-party material. Furthermore, companies should include a complete list of analyst coverage or no list at all. Linking only to optimistic reports can be risky.
The SEC guide also encourages the use of a safety net in the form of safe harbor statements. It reiterates that material on the web is subject to the same liabilities as printed material and should therefore be accompanied by proper protective notices. Even non-written material, such as audio or video presentations, should have verbal safe harbor. The goal is simple: to release the company from responsibility of material forward-looking statements. It provides a caveat for investors.
Clark hopes that the new SEC guidelines will give companies confidence about posting material on their sites. ‘The internet should be used aggressively for disclosure purposes,’ he advises, ‘but it has to be used correctly.’
Shape of things to come
The end goal for IR sites should be to deliver information that is both timely and relevant. The web’s interactive nature lets users help themselves to information they need, and more IR sites are letting users define the content.
Accordingly, the average IR site is becoming more interactive. With things like e-mail, message boards, the monitoring of web site activity and the publication of frequently asked questions, the corporate broadcast model is quickly becoming a corporate dialog. Not only are companies delivering information they believe the investment community wants, they are getting more investor feedback. In other words, the investment community is having an ever-growing say in the information it gets. Some call this the democratization of disclosure practices. In time, this democratization will likely blur the distinction between financial data that management uses and data the public uses.
Users themselves are getting more sophisticated at mining data. As yet, however, the internet has no standard search engine that gathers user-defined information from company to company. That may be about to change. Ron Gruner, CEO of Shareholder.com, believes financial reporting is on the verge of breakthrough with a computer language called XBRL. Despite its sci-fi-sounding name, extensible business reporting language simplifies the exchange of financial data and allows users to find, sort and compare financial information from different sources according to a universal system. In effect, it will enable average investors to do their own financial analysis.
Pent-up demand
‘I think there’s so much pent-up demand for a way of taking financial information and structuring it in terms of its presentation and publication. The application is going to explode once it becomes available,’ Gruner predicts. The IASC’s recent study highlights the significant need for the universal reporting language and suggests a consortia approach to promoting development of XBRL. The IASC also proposes a code of conduct that would cover both the form and the content of web-based business reporting. The new language may very well be the seminal development of online reporting standards.
Fasb’s Wayne Upton is optimistic: ‘If companies start routinely using XBRL to put up their numerical information, then it’s going to give users enormous power to extract and manipulate data. That, I think, will alter both what companies see and what users demand.’
Meanwhile, IROs must decide for themselves the boundaries of material on their sites. Thankfully, the last six months have provided some encouraging rules of thumb which should help everyone understand the risks and help stimulate a more proactive approach to online disclosure. ‘I think we now have more experience and more guidance from the SEC to help build strong IR web sites,’ Clark admits. ‘I think a company can confidently put up an impressive IR site that complies with all laws and regulations if they work hard at it. And a couple of years ago I don’t think that was so true because the landscape was not as clear as it is now.’
The race between innovation and regulation gets closer to a finish every day.
