On November 15 last year, about 60 IROs met at IR magazine’s 2006 New York Think Tank to discuss the state of the profession amid a ‘perfect storm’ set to hit the corporate world over the next two years. On the horizon are separate but related developments that will bust open the boardroom: majority voting in director elections, shareholder access to the proxy, electronic proxy distribution and, in 2008, the loss of the broker vote. Against the backdrop of stringent new disclosure of executive pay, it all adds up to what one think tank panelist described as a ‘bloodbath.’ Some participants declined to be identified in what was a mostly off-the-record discussion – here, we present some highlights of the event.
Technology and disclosure
The day’s tech briefing was partly focused on the recent posting by SEC chairman Christopher Cox on Sun Microsystems’ CEO blog, raising the possibility that such blogs could one day be a vehicle for the disclosure of material information. Also discussed were low-level employee blogs that fall foul of Reg FD.
The panel of early adopters then painted a picture of the future of financial reporting with a discussion on extensible business reporting language (XBRL). ‘It’s not a question of if the SEC will make it mandatory, it’s when,’ observed one participant.
A securities analyst on the panel reported the findings of one study showing that 30 percent of corporate earnings data contains errors after being rekeyed from SEC filings by thirdparty vendors for use by the research community. ‘In contrast, you own the accuracy of your XBRL data,’ he said.
A software developer observed that small and mid-cap companies could attract more analyst interest if they filed results in XBRL, since their data can be read more quickly and cheaply. ‘It’s a small investment to get more exposure,’ said Rob Blake, VP of product marketing for Rivet Software.
Targeting the buy side
Barbara Doran, research investment officer for Neuberger Berman, was on hand to represent the buy side at the day’s first session. She listed her peeves and preferences, but IROs got to provide their own point of view. On the subject of face-toface meetings, one large-cap IRO said: ‘We want the big-picture questions. We don’t want to get enmeshed in details we can handle offline.’
Some IROs discussed their fury at sending their CEOs to investor conferences promising one-on-ones with long-term investors only to find the schedule stuffed with hedge fund managers. Brian Tobin, head of corporate access for Banc of America Securities, defended his side: ‘If we put you in front of inappropriate shareholders, we will hear about it. It’s our bread and butter. We don’t want to lose you.’
There was also advice on how companies can sell their stories without intermediaries. Many simply contact institutions via cold calling; another approach is to ask familiar institutional funds for leads about other appropriate investors. ‘You can get extremely helpful responses,’ one IRO said.
Executive compensation disclosure
In perhaps the most spirited discussion of the day, think tank participants looked ahead to 2007, when companies will begin revealing more about how they pay their top executives. ‘It’s going to be a bloodbath when this information comes out,’ said one panelist, representing the corporate view. ‘It’ll be Dick Grasso II.’
Research presented by Reuters Analytics shows that CEO pay has been outstripping earnings growth, but the big shock this year will come with the disclosure of perks. While these aren’t necessarily large, they do ‘get people so angry,’ another panelist said.
A representative from the corporate governance community said she will be searching for stories justifying pay for performance while flagging excessive pensions and cases of escalating CEO pay amid a stock downturn.
A corporate executive on the panel predicted that new disclosures will drive CEO pay down, but the governance advocate took the opposite view: ‘As these numbers come out, the CEO will have the opportunity too see what his colleagues and peers are making and will say, I want some of that, too.’
Dealing with activist investors
Surprisingly, many of the IROs present said they weren’t especially fearful of approaches by activist hedge funds. ‘We don’t have a monopoly on good ideas,’ said one who’d had a recent scuffle.
Others would rather ignore activists, but a panelist experienced with hedge funds warned about shutting them out. At a minimum, he said, a company should engage hedge funds for long enough to determine whether they are short-term vultures or genuinely in it for the long haul. Closing the door can set a company down a destructive path, he said: ‘It’s a foolish response to people just interested in being engaged and being treated like they are owners.’
The lone hedge fund representative, Rob Ladd from Laddcap Value Partners, offered his perspective: ‘The best defense against activists, or insurgents as some call us, is a high stock price.’
A lawyer panelist added that e-proxies will soon reduce the printing and mailing costs associated with activist campaigns. That, combined with likely shareholder access to the proxy ballot, could have far-reaching results. ‘Proxy contests may go from costing millions of dollars to costing tens of thousands or less,’ he observed.
A week in the markets
The host of CNN’s The Bottom Line, Ali Velshi, and Nasdaq’s chief economist, Frank Hatheway, wrapped up the think tank with a one-on-one interview about current business issues.
In a week when news of the potential acquisition of the LSE by Nasdaq hit the headlines, Hatheway wondered aloud about exchange consolidation, asking whether it is an opportunity or a burden to list on multiple exchanges. ‘How many markets do you want to talk to?’ he mused. ‘How many markets does your CFO want to talk to?’
Hatheway said it was understandable that new listings had dried up under the ‘onerous burden’ of regulation, but that he thought the trend would reverse: ‘It’s the aftermath of a bear market. It always takes capital markets a substantial amount of time to recover.’ He also mentioned the promise of redress to overregulation by the (then) forthcoming Committee on Capital Markets Regulation report.
The discussion turned to the matter of whether Sox would relegate fiascos like Enron to the trash can of history. Velshi said he had the sense that it would. ‘Trust has to be there after Enron,’ he asserted.
