For years IROs clamored for a ‘seat at the table’. They yearned to sit elbow to elbow with senior management and have their voices heard. After Reg FD and Sarbanes-Oxley many investor relations professionals got high-level visibility and kept their non-executive status. They gained a seat at the table without having to worry about personal liability if things went terribly wrong.
These days, under the intensive glare of public scrutiny, some of those coveted ‘seats at the table’ are hotting up. High exposure combined with a push for greater corporate disclosure has created a situation where IROs can either bask or burn. Those who disseminate information to investors can, and are, being held accountable for what they say – or don’t say.
‘There is a lot of potential accountability built into our system of securities laws, and the pendulum is swinging towards more accountability rather than less,’ says Karl Groskaufmanis, partner at Fried Frank Harris Shriver & Jacobson. ‘There’s more enforcement and more litigation, and the trajectory is to continue in that same direction.’ While much of the focus in terms of accountability has been at the most senior level, with CEOs and CFOs now required by the SEC to sign off on financial statements, some experts think everyone involved in public disclosure shares responsibility. Recent legislation in Ontario underscores the potential vulnerability of company spokespersons like IROs, who can now be found personally liable for misleading investors.
Potential liability
South of the border, IR professionals have potential civil liabilities, too. ‘US federal securities laws have always had prohibitions against fraud and those prohibitions can result in civil or criminal liability,’ explains Brian Lane, a partner at Gibson Dunn & Crutcher and former head of the SEC’s division of corporation finance.
‘When I say fraud, I don’t mean that you have to embezzle or do something horrific,’ he adds. ‘Not disclosing something fast enough, omitting something that’s material even though what you say is the truth, or knowingly omitting something that could deceive someone, are all violations under Section 10B of the Securities Exchange Act of 1934. What’s more, they could be viewed as potential fraud cases and be subject to class action lawsuits in the US.’
Ironically, IROs may now be awfully grateful for a lower profile because it can protect them. ‘Odds that the SEC would bring an enforcement action against an investor relations person are quite low,’ says Boris Feldman, a partner at Wilson Sonsini Goodrich & Rosati. ‘They are typically concerned with the company. They like to get higher-ups.’ Often investor relations people are not actually corporate officers, comments Feldman. ‘They’re not usually named by the class action; the SEC very rarely goes after them,’ he says.
‘It is rare for IROs to be named because they are usually ordered to do something, or they don’t know that it is misleading,’ agrees Lane. ‘All they’re doing is echoing what the CEO and CFO tells them to do.’
A lesser status won’t shield those who break the law, of course. It’s different ‘if they knew when they were speaking that they were lying or deceiving, but did it anyway,’ notes Lane. In the post-Enron environment, the SEC is ‘more inclined to name individuals in addition to the company’. Sure enough, the SEC brought civil action against a number of HealthSouth executives after discovering alleged widespread fraud.
Disclosure exposure
It’s unlikely that concerns about accountability will cause IROs and public companies to clam up. ‘Fortunately or unfortunately, there is a prescribed amount of information that you must disclose under the law and you really have no choice in that,’ advises Lane. Those worried about disclosure and their own exposure will tend to be more careful about what’s said or written and ‘make sure that it’s absolutely true and that people understand them.’
‘At the end of the day there is a market imperative to tell the company’s story,’ says Groskaufmanis. ‘People really have had to learn how to balance the litigation risks against the basic business of getting the story out.’
As companies let loose a deluge of information in these days of heightened disclosure, experts are calling attention to the difference between volume and clarity. Lou Thompson, president and CEO of the National Investor Relations Institute (Niri), draws a distinction between disclosure and transparency. ‘You can disclose a lot of information and comply with all of the rules and regulations but until you present information in a clear and understandable manner, it is not transparent,’ Thompson comments.
Amid pressure to get the message out fast, mistakes will happen. New regulatory requirements combined with a push for real-time disclosure have put IROs in the hot seat. ‘The good news is that it is not really likely that the IR person would have individual liability as long as they are acting in good faith,’ notes Feldman.
A good offence
As rules get more complex, the best defense is a good offence. Disclosure committees ensure that public companies act in good faith, as they provide timely, accurate and clear information to investors.
These committees can establish internal review procedures, safeguards and controls for the release of material information. More and more public companies are setting them up.
A typical disclosure committee might include the CEO, CFO, president, board of directors, internal and external auditors, internal and external counsel and others, including the IRO.
John Rogers, vice president of investor relations at Calgary-based Suncor Energy, explains how his company’s disclosure committee works. ‘After all of the financial information is compiled we go back and go through due diligence once again on our own and check the numbers that have been generated,’ says Rogers. ‘It’s kind of like a second check,’ he adds. ‘And nothing gets reported externally without the audit committee having a thorough review of those numbers and assurance from our auditors that the numbers as far as they can tell have been reported accurately.’
Disclosure matters now rank higher on the senior executive radar screen. Four or five years ago the scripting of earnings releases was handled, in many cases, at a lower level, recalls Geoffrey Buscher, president of Seattle-based SBG Investor Relations. Today as companies ‘understand the potential impact of anything that they say,’ Buscher sees more management involvement at the highest levels. More eyeballs now peruse press release drafts. More bureaucracy now pursues greater accuracy. ‘Do we really need to double or triple check everything?’ asks one attorney. ‘The answer today is yes.’
Despite what some bemoan as an extra level of bureaucracy, the disclosure committee can be a good sounding board to help ensure that the company and the investor relations officer comply with the law and build shareholder confidence. If a situation arises that isn’t ‘cookie-cutter’, one way for IR people to protect themselves is to go to the disclosure committee and ask for their advice, notes Feldman.
Insurance for IROs
Executive liability insurance affords another kind of protection. D&O (directors and officers) insurance ‘fundamentally protects the personal assets of directors and officers of a corporation,’ states Susan Miner, executive vice president of Carpenter Moore Insurance Services. The product evolved because people who hold these positions ‘can take on personal liability with no protection afforded by the corporate veil,’ Miner explains. If you serve on the board of directors, ‘You are exposed to personal liability for alleged negligent acts arising from your fiduciary duties as a director.’
Since IROs aren’t usually corporate officers or directors, they may not automatically be included in D&O coverage. But it’s a good idea to investigate where you stand. For example, Miner points out that sometimes specific positions can be added without additional charge and newer policies usually extend coverage to all company employees for securities claims.
D&O insurance doesn’t indemnify bad behavior. Policies typically exclude personal conduct such as ‘fraud, illegal remuneration and personal conflict.’ In today’s tough market, D&O premiums are soaring and exclusions are getting even stricter. Miner reports that ‘written evidence, an admission or a plea’ may be enough to trigger the exclusion in newer policies, while a final court determination of fraud is needed to invoke the exclusion in earlier policies.
‘At the end of the day, it all comes down to the integrity of management and how morally strong your organization is,’ says Suncor’s Rogers. Disclosure is something the whole organization has to take very seriously. IROs will significantly lower their disclosure exposure if they sit with a management team that strives not only to disclose by the rules, but also to go above and beyond what’s required.
Civil liability for IROs
‘It’s kind of like Goldilocks and the three bears – you have to be just right,’ explains Ross McKee, a partner at Blake Cassels & Graydon. He uses that analogy to describe the balance companies and IROs must achieve in written and oral corporate disclosure to meet the requirements of new legislation passed by Ontario in December 2002. Those who get it wrong could have fines to pay and foreign public companies with interests in Ontario could be liable too.
Once the civil liability part of Bill 198 is officially proclaimed, it will have a ‘huge impact on what companies say and how they say it,’ says the Toronto-based attorney. The bill encourages companies to disclose more information immediately because they don’t want to be accused of having failed to make timely disclosure of material change, explains McKee. At the same time ‘it prompts them to be more cautious about what they say so they’re not misrepresenting what the actual facts are.’ Those who misrepresent run the risk of a lawsuit. So the big challenge for IROs and companies will be to ‘act quickly with caution,’ he says.
Some highlights of the bill:
– extends civil liability to the secondary market, providing shareholders with a right of action
– imposes civil liabilities for companies who mislead investors in written and oral statements, or who fail to disclose material change in a timely manner
– identifies those with potential liability: the issuer, the issuer’s directors, officers, control persons, promoters, insiders, investment fund managers (if applicable), spokespersons, and other experts
– eliminates the need for investors to prove they relied on, or used, information disclosed by the company
– imposes penalties: individual liability – up to C$25,000 or 50 percent of the person’s yearly compensation from the issuer, whichever is greater; issuer liability – up to C$1 mn or 5 percent of its market capitalization, whichever is greater
– applies to any issuer with a substantial connection to Ontario, with publicly traded securities, even if not a reporting issuer in Ontario.
‘The new law prompts IROs and companies to review their disclosure more carefully and allow more lead time on routine items like the MD&A and annual report,’ states McKee. It induces IROs to ensure that disclosed information receives a ‘good, thorough review and consideration’ and that it ‘isn’t just handled at the lowest level or at the last minute.’
Due diligence counts. Companies may need to prove they made a reasonable effort to review information before it went out, cautions McKee. They can protect themselves by establishing a formal disclosure policy and applying it with rigor. ‘The main thing is due diligence – get a system and pay attention,’ he counsels.
Should IROs lose sleep worrying about liabilities imposed by the new law? Not if their companies follow the rules, act in good faith and have a strong disclosure system in place.
‘For companies that do the right thing, nothing in this bill should be of concern,’ says Dick Wertheim, managing partner at Wertheim & Co, an IR and PR consultancy in Toronto. As he sums up, ‘If you don’t intend to break the law, then you don’t need to worry about the law or the consequences of breaking it.’
