After millions of citizens were duped out of their pensions by a handful of greedy executives, US politicians scurried to come up with broad-reaching legislation. What they came up with is the whopping 140-page Sarbanes-Oxley Act that addresses everything from corporate governance to insider trading. The question is: how will the IR role be affected by this mammoth Act?
One assumes the accelerated deadlines for quarterly and annual reports – from 45 to 35 days for the 10Q and from 90 to 60 days for the 10K – will have the most impact on the IR role. Even though the SEC decided to phase in the new deadlines, companies will likely have problems getting their results certified internally and preparing this information for the financial community in a timely manner.
‘The real issue for IROs is being constrained in terms of your time to write the earnings release and disclose that information,’ says Howard Christensen, co-chairman of Christensen & Associates. Even beyond the earnings release, ‘it will be tough to get your numbers in for your conference call script and your webcast slides,’ adds Susan Herman, executive VP at Christensen.
IROs will undoubtedly experience delays in getting the final numbers from the CFO because of the new certification requirements under Section 302 and Section 906 of Sarbanes-Oxley. Companies are now in the process of setting up internal controls and certification procedures to comply with certification requirements. ‘What CFOs are doing is asking their controllers in the field to certify the accuracy of the numbers they are submitting,’ notes Christensen.
Companies are also forming internal committees to ensure compliance with the certification process and other changes resulting from the Act. As David Dragics, director of investor relations for Virginia-based CACI International, says, ‘We have a small working group that consists of myself, the general counsel and the CFO to monitor and comply with Sarbanes-Oxley.’
Aside from accelerated disclosure deadlines, IROs may feel some residual effects from new SEC rules regarding the disclosure of insider transactions. Senior executives, directors and other corporate insiders have to report transactions in their companies’ stock within two business days of the trade, under new SEC rules.
‘From the IR manager’s perspective, the difference is that information on insider transactions is available a lot sooner,’ notes Karl Groskaufmanis, a partner with Fried Frank’s Washington, DC office. Groskaufmanis thinks information on insider buying is more compelling for the marketplace than insider sales. ‘You could sell because you have to buy a house, pay tuition or are in a divorce, but you buy for one reason – because you think you can make money,’ he says.
IR professionals are undoubtedly getting calls from the media and possibly investors following the disclosure of an insider trade. Responding to questions regarding insider transactions is somewhat of a delicate area that each company has to address internally. Some senior executives are informing investors that they are going to be selling stock on a regular basis. Some companies are choosing to formalize the process by setting disclosure policies for individual stock-sale plans. ‘But,’ as Groskaufmanis says, ‘it has to be an individual and corporate decision as far as the disclosure goes.’
Right now companies are cleaning up, tidying or simply codifying their internal structures to comply with the deluge of SEC regulations that have resulted (and will result) from Sarbanes-Oxley. Some IROs will take an active role in heading up corporate governance and accounting reforms that are included in the Act but have yet to be made into rules by the SEC. Experts are predicting that IROs will take a more active role in informing boards of directors on what the Street thinks of a company.
In fact, as Howard Christensen suggests, some boards are forming IR committees that work to inform other board members of the outside perceptions of management, the stock and the board. CACI International’s board, for example, has an IR committee made up of four independent directors. ‘Their mission is to oversee the strategic direction of the IR program at CACI,’ says Dragics.
Over the next few months, as SEC regulations continue to pour in, IR professionals will have the opportunity to expand their role internally by spearheading compliance efforts. Meanwhile, the question on everyone’s mind is: will compliance with this legislation send a positive message to the Street and to those millions of individual investors who lost their shirts? That remains to be seen, but if you were to ask Coca-Cola – the first company to expense stock options – there is a real advantage to being a trendsetter in transparency right now.
