april 2011
the voice of the investor relations profession
The Tangled Web These Spiders Leave Don’t become yet another victim of automated creepy crawlers. Here’s how to protect your corporate information from premature release.
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The Big-Picture Case for Integrated Communications
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New CD&A Template Makes Reporting Much Easier
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May I Have Your Attention, Please?
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Big
How is Your Picture?
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When all communication employees expand their view of the company picture and integrate their work effectively, messages sent to the investment community as well as other audiences are consistent. And that’s a huge plus.
By Hope Novosad
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APRIL 2011
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The Tangled Web These Spiders Leave
10 How Big Is Your Picture?
14 Describing the Pay and Performance Link
Help or Hindrance?
When all communication employees expand their view Don’t become yet another victim of the company picture and of automated creepy crawlers. integrate effectively, Thea new all the departments “investor relations,” “public Wire &their Cablework Company (HWC), the IR function wears lot of CD&A template Here’s how to protect your relations,” “corporate communications” and “marketing,” hats. Although my the primary relationships are within from the investment messages sent to investment the CFA Institute makes corporate but they’re all information communicationsfrom at the core. So why iscommunity it community, often find asI well as myself otherheavily involved withitcorporate easier to report executive premature release. so difficult at times for the people who staff these departments communications and marketing. audiences are consistent. And compensation policies. to communicate with one another? Surely everyone understands I have managed the annual report process for the past four years, By Margo Vanover Porter that’s a huge plus. that, despite their different audiences, all communication working alongside the finance and marketing teams.By As with anyOrsagh, CFA Matt professionals have a hand in painting a positive and compelling group Novosad project, you can imagine the differing opinions on the design By Hope
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corporate portrait. As I have learned, portraying my organization effectively and consistently requires a level of integrated communications. At Houston
16 Does guidance assist analysts in ways that benefit your firm, or do forecasts hinder the management team? By Tammy K. Dang
layout and content—differences that have delayed the project. Before kicking off the 2010 annual report season, I wanted to take a step back and seek input from colleagues in the IR community
DEPARTMENTS IR
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At The Bell Are You an Attention Getter? By Jeffrey D. Morgan
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NIRI Now • Update on NIRI Strategic Organizational Review • Get a Wealth of Information Online • Take a Poll • Professional Development Calendar
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Spotlight on Chapters
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Innovative Ideas for IR Communications By Lisa M. Hartman
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Letters to the Editor IR Update welcomes letters to the editor. Please send your questions, suggestions and feedback to gromano@niri.org.
President/CEO & Publisher Jeffrey D. Morgan Vice President, Communication & Editorial Director Matt Brusch
About NIRI Founded in 1969, the National Investor Relations Institute (www.niri.org) is the professional association of corporate officers and investor relations consultants responsible for communication among corporate management, shareholders, securities analysts and other financial community constituents. NIRI is the largest professional investor relations association in the world, with more than 3,500 members representing 2,000 publicly held companies and $5.4 trillion in stock market capitalization.
Editor in Chief Gerry Romano gromano@niri.org Art Direction Thor Design Studio
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About IR Update IR Update is published monthly by the National Investor Relations Institute as a service to its members. Annual subscriptions are available to nonmembers: print $175; electronic $75. ISSN 1098-5220 ﾂｩ 2011 by the National Investor Relations Institute. All rights reserved.
For Subscriptions or Change of Address, Contact: NIRI窶的R Update 8020 Towers Crescent Dr., Suite 250 Vienna, VA 22182 phone: (703) 506-3570 fax: (703) 506-3571 amumeka@niri.org www.niri.org
For Advertising, Contact: Kraig Conrad Vice President, Professional Development (703) 506-3575 kconrad@niri.org
Greer Aviv Arrow Electronics, Inc.
Meg Nollen H.J. Heinz Company
Bob Brunn Ryder System, Inc.
Ellen Roberts Wilmington Trust Corporation
Mark Donohue Impax Laboratories, Inc.
William A. Walkowiak Novatel Wireless, Inc.
Amy Goldberg Pitney Bowes
Maureen Wolff Sharon Merrill Associates, Inc.
Bill Koefoed Microsoft Corporation
Brook Wootton Noble Drilling Services, Inc.
NIRI Board of Directors Douglas R. Wilburne, NIRI Chairman Textron Inc.
Barbara Gasper MasterCard Incorporated
Hulus Alpay Medidata Solutions Worldwide
Mary Beth Kissane Walek & Associates
Jane Okun Bomba IHS Inc.
Andrew Kramer Interactive Data Corporation
John Chevalier The Procter & Gamble Company
Nicole McIntosh Waddell & Reed Financial, Inc.
Derek Cole ARCA biopharma, Inc.
Jeffrey D. Morgan National Investor Relations Institute
Ruth Cotter Advanced Micro Devices
David Prichard Spectrum Brands Holdings, Inc.
Sally Curley Cardinal Health, Inc.
Michelle Levine Schwartz JDSU
Don De Laria Regal Entertainment Group
William A. Walkowiak Novatel Wireless, Inc.
Carol DiRaimo Jack in the Box, Inc. 4
APRIL 2011
Robin Kite
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At the bell
Are You an Attention Getter?
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started off 2011 talking in IR Update about constant change in investor relations, and a quarter into the year, I’m still struck by this new norm. From visiting with many of you at NIRI events and discussing issues on the phone and via e-mail, I feel certain that accepting change gracefully is a key IRO success factor. Consider each change confronting our profession an opportunity for you to evolve your IR practices for the benefit of your organization. A related success factor I hear about consistently is the ability to manage time demands. As IROs, you’re under enormous pressure to meet unlimited demands on your time while maximizing your efforts. You frequently tell me about juggling requirements and trying to prioritize. I challenge you to tip the matter of time on its side and look at it a different way.
Ask yourself, “how can I use this information to increase the attention of those outside the company so they can better understand my organization’s financial and strategic story?” While we consider time to be one of our scarcest resources, I believe that our real issue is not time, but attention. As financial communicators, we strive to employ the right communication media, say the right things and make wise use of our C-suite to get the attention of the time-starved people who use our information. If we can generate attention for our organization’s financial and strategic story, we’re likely to experience additional long-term investment, more accurate analyst reports and possibly even more effective external media coverage. We will, thus, ultimately increase our value to the organization. So here’s another challenge: Think about all the value you receive from NIRI in the form of the annual conference,
IR Weekly, IR Update, webinars, Executive Alerts, eGroups and chapter functions, and ask yourself, “How can I use this information to increase the attention of those outside the company so they can better understand my organization’s financial and strategic story?” I believe this focus will help you better prioritize your time and help make even more sense of all the change that swirls around IR.
Paying Attention to You Similarly, NIRI continuously examines the value you receive from the association by considering your reaction to the products and services offered. As we hear your feedback, we respond, reshaping and revitalizing membership benefits to keep pace with your current needs and anticipate your future needs. We always seek to increase the value you receive. As reported earlier, we are now in the midst of a strategic review of NIRI’s value drivers. We’re considering the best ways to keep NIRI positioned to meet the future challenges of the IR profession.
Returning to Normal I hope that the temporary change in the color of my column has done its job: grabbing your attention and demonstrating the importance of this concept. When “At the Bell” reverts back to white next month, please remember the positive power of change. In closing, I’d like to say thank you for your membership. For those serving as NIRI volunteers, thank you for giving your time to the IR profession. NIRI is the IR community, and your contributions benefit the profession and make this a great organization.
Jeffrey D. Morgan President/CEO & Publisher NIRI jmorgan@niri.org
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The Tangled Web These Spiders Leave Don’t become yet another victim of automated creepy crawlers. Here’s how to protect your corporate information from premature release. By Margo Vanover Porter
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Arachnophobia alert. Spiders are—at this very minute—crawling through the Internet, searching for their next victim, perhaps an unsuspecting company that posted earnings information on a website without password protection, doing so in advance of the intended release. It happened to Disney on November 11. Just a week later, NetApp fell victim when Bloomberg spilled the beans about the earnings report. In both cases the market reacted negatively, and the companies’ stocks dropped. What lessons can IROs learn from these unfortunate web-crawling episodes? “One is obvious,” says Andrew B. Moore, partner in the law firm of Perkins Coie. “Don’t let this happen to you. From a technological standpoint, IR departments— particularly if they are managing their own IR websites—need to ensure that they are taking advantage of available technologies to keep information confidential and inaccessible until it’s ready to be released.” Nicholas J. Percoco, senior vice president and head of Trustwave’s SpiderLabs, says IROs should not be surprised when a human or an automated crawler discovers earnings information on a publicly accessible website. “The web crawlers and the spiders are doing their jobs,” he explains. “They’re not there to find confidential information. They’re there to find all information. They can’t distinguish between sensitive or confidential information. They don’t discriminate. They just bring back everything and index it so it can be searched. “It’s not that Google or Yahoo or Bing is programming their crawlers to find specific information,” he continues. “They’re just trying to be the most comprehensive search engines. So if your information is sensitive, it should not be out there until you’re ready to release it. That’s the takeaway.” Mary Beth Kissane, principal, Walek & Associates, reminds IROs that reporters are hired to find breaking news. “In this day and age, companies like Dow Jones, Reuters and Bloomberg are all competing over who has the best and fastest data feeds,” she says. “The press is no longer just selling newspapers. They’re selling data to computerized trading systems. Fractions of seconds on news make a very big difference when people are trading—or machines are trading—based on that news. Increasingly, investor feeds are where publications get a big chunk of their revenue. These are high-paying, high-value clients. Publications are highly motivated to break news. It’s your job to make sure you don’t break it for them.”
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Securing Your Website Perhaps another lesson is that “selfpublishing is not as easy as it appears,” says Neil Hershberg, senior vice president, Global Media/Business Wire. “It’s a lot more complex. There are risks involved.” He adds that companies, such as Business Wire, that specialize in disclosure can—and do—regularly invest in security to prevent this kind of situation. Of course, not all companies have the resources to outsource their websites to a more secure server, says Kanika Chander, an associate with Perkins Coie. For those that decide to self-post, she offers a word to the wise: Ensure that your corporate disclosure policies require your IR website to have time stamping and date stamping as well as firewalls and password protection for materials that are posted early. “You can at least say you have made an effort to protect the privacy of this information until it is scheduled for release,” she says. Password protection is nothing new and is not negotiable, Percoco insists. “The ability to password protect a directory or
“These disclosures are not the result of some sophisticated technology or snooping by news outlets or investors,” says communications consultant Gary Tiedemann. control access to a directory on a website has been around for a decade or longer,” he says. “This isn’t something that was implemented in the past couple of years.” In addition to password precautions, Percoco suggests that you specify that your confidential document be linked to the Web server just prior to its intended release. “There are mechanisms out there for you to say, ‘Send this file at 2:59 on Thursday.’ One minute beforehand won’t cause a problem.” Another recommendation is to keep the file invisible until the time of release.
Hacking Away Could Bloomberg’s grab and release of earnings information be considered hacking? “No,” says Nicholas J. Percoco, senior vice president and head of Trustwave’s SpiderLabs. “By placing an unprotected PDF file with your quarterly results on your public website—whether you have a link to it and whether you publicize it—your file becomes accessible. You may not have a link from your homepage that says, ‘Check out our quarterly results,’ but the file is still there. There are people who have tools and automated search engines and automated web spiders that crawl the Internet to find information.” Hacking occurs when someone circumvents a security control to obtain information, he continues. “If you place information on your website that is password protected or has security in front of it, and someone is able to guess the passwords and retrieve that information or they brute force the passwords—which means they try every combination they possibly can in order to extract the data—that would be considered hacking,” he says. “That would fall into the realm of someone attacking an organization to retrieve confidential data.” Passwords, by the way, should not be obvious. For example, if you select the name of your company as the password, “shame on you,” says Percoco. “Your organization is the custodian of information that is supposed to be timed and protected. Customer data and financial data are the crown jewels of an organization. Your information security program should ensure that these data are not leaked out of their environment.”
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Percoco has seen Web content systems where you can say, “Make this file available at 3:00 p.m. on Thursday.” Until then, he says, “the file is in the system, but you can’t find it on the Internet. It’s invisible until 3:00 p.m.”
Other Steps to Take To keep your company out of webcrawling headlines and regulatory hot water, experts recommend these steps: Get creative on file names. “The crux of the issue is that organizations like Bloomberg—and I’m sure they aren’t alone—are sending out crawlers, hoping to gain access to information before official release,” says Hershberg. “A large part of the problem is lack of imagination in naming these files. That’s how some of these companies have been victimized. They’re doing an earnings report and simply change a number or another intuitive character. That’s how Bloomberg—and others perhaps—have gained access to the information.” Gary Tiedemann, consultant, Rampart Communications, agrees. “Companies have to get smarter and stop making these very simple mistakes. These disclosures are not the result of some sophisticated technology or snooping by news outlets or investors. They are happening because IR teams are
not aware of the weakness in their reporting procedures or are not working with their vendors or internal tech staffs to understand the issue. At this point, it is clearly up to companies to get it together and stop using predictable URLs to post their quarterly earnings releases. Pretty simple stuff.” Invest in your website. Kissane considers websites to be a work in progress. “The Web has been a wonderful tool for investor relations,” she says. “The amount of money that companies are saving in terms of being able to communicate with investors is remarkable, but the reality is that we’re all continuing to learn about the technology. We live in an ‘if it ain’t broke, don’t fix it’ world. That’s the way we look at regulation, and that’s the way many look at their websites. So until something goes wrong or there is a cautionary tale from somebody else, we don’t budget for technology changes, because we don’t see the cost-benefit analysis. Then we come to the realization that there’s a real risk that must be mitigated.” Train your technical staff. Explain your goals and objectives with respect to investor disclosure to the people who are working on the website, Moore advises. Education can help prevent inadvertent violations of public company disclosure obligations under Regulation FD and under the exchange on which your company is listed. “Sensitize them to these issues,” Moore says. “The best practice is to have a robust disclosure policy that is widely disseminated within the organization and appropriate training for the people engaged in communications to the public and the investing community in particular.” In the Disney and NetApp cases, Percoco thinks that someone just handed the earn-
Another Incident Another recent incident highlights the need for vigilance when posting information. Microsoft’s earnings release was pre-posted to its website 70 minutes prior to the planned public release time of just after the 4:00 p.m. market close. According to news reports, Selerity, a market data firm, found the release and published the information on its website. Microsoft ultimately moved up its public release to a few minutes before the 4:00 p.m. close, but traders who saw the news had about an hour to trade on the information before it became publicly available. Selerity makes information like this available as part of its feeds to customers and social media outlets, such as StockTwits. Mark Murray, a spokesman for Microsoft, reports that the company’s “pre-production work” is done on computer servers that are not connected to the Internet and not accessible to search software. “It appears there was a human error and that one document was inadvertently moved to a publicly facing server,” he says. According to a Microsoft statement, media outlets posted a pre-production draft of its earnings release to the Web before the market closed. After consulting with NASDAQ OMX, the company then posted its official numbers. Microsoft is now taking steps to ensure that such a situation doesn’t recur.
ings releases to the Web development staff and said, “Place this on the website now so we can test and make sure it’s available, but don’t link to it until this time on this date. “The people who were putting it on the website had no idea of the business impact if this information was released early,” Percoco continues. “They just did what they were told. To avoid this, I recommend that IROs align their activities with their computer information security officers. Explain your process and find out the most controlled way to release this information. Know that if you place information on the Internet without protection, it can and will be found.” Develop and adhere to strict procedures. Most companies should have Reg FD disclosure policies, Moore says. “Clearly, these policies should cover the issues surrounding the disclosure and posting of materials to the company’s website or its hosted website.” He adds that the publicity surrounding the Disney and NetApp leaks should give a heads-up to other companies to get their procedures
in place—or risk potential consequences from regulators. “If it happens again in the future, regulators may have less sympathy,” he predicts. Kissane concurs. “You need to employ the same level of caution and process around your everyday disclosures as you do around deal news or crisis news. The natural inclination is for people to say ‘Gee, Bloomberg did something wrong,’ but I don’t think that’s the way that regulators or the courts would look at it,” she says. “They look at the companies and ask, ‘What was wrong with your procedures that reporters were able to ferret out the information?’ Making sure you have your internal procedures buttoned up and you have a handle on technology are incredibly important riskmitigation issues for companies.” The risk of leaks may take on new meaning, Kissane notes. “In the past, leaks occurred because of loose lips,” she says. “Now it’s because of loose technology procedures.” IRU Margo Vanover Porter is a freelance writer based in Locust Grove, Virginia; m.v.porter@comcast.net.
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Big
How is Your Picture? When all communication employees expand their view of the company picture and integrate their work effectively, messages sent to the investment community as well as other audiences are consistent. And that’s a huge plus.
By Hope Novosad
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all the departments “investor relations,” “public relations,” “corporate communications” and “marketing,” but they’re all communications at the core. So why is it so difficult at times for the people who staff these departments to communicate with one another? Surely everyone understands that, despite their different audiences, all communication professionals have a hand in painting a positive and compelling corporate portrait. As I have learned, portraying my organization effectively and consistently requires a level of integrated communications. At Houston
Wire & Cable Company (HWC), the IR function wears a lot of hats. Although my primary relationships are within the investment community, I often find myself heavily involved with corporate communications and marketing. I have managed the annual report process for the past four years, working alongside the finance and marketing teams. As with any group project, you can imagine the differing opinions on the design layout and content—differences that have delayed the project. Before kicking off the 2010 annual report season, I wanted to take a step back and seek input from colleagues in the IR community
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about working collaboratively with other communications functions. I reached out for ideas by starting a NIRI eGroups discussion. Here’s what I learned from eGroups contributors and from additional peers I contacted for advice.
Who Should Initiate Integration? A key question for discussion was: Is it the role of IR to foster integrated communi-
others that you’re not looking to redo their work. Rather, you just want to check for disclosure implications…that might affect your constituency.” My first reaction was power struggle, but Grant was right. Rapport is so important to the success of professional and personal relationships. My mother often told me, “You can catch more flies with honey.” It drove me crazy as a child, but apparently she was right.
My primary attention has been on the C-suite and the board of directors, yet i should increase communication efforts companywide to ensure consistency. cations? Is another department better suited to take the lead in encouraging all communication employees to keep in mind the full picture of the company? One piece of advice I received was to “step up to the plate” and take responsibility for consistent messaging, but that is easier said than done, as most companies have a hierarchy. My 15 years at the organization have merit, but convincing others with more tenure and rank can be challenging. James Grant, director, investor relations, at Collective Brands posted a note that fostering positive relationships with the departments in question would be a good start. “I’ve worked in a collaborative setting and an everyone-do-theirown-thing setting, and the latter creates a lot of surprises and firefighting,” Grant said. “I think you could build bonds and credibility internally if you assure the
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Communicating the Value of Investor Relations If people do not understand the IR function and how it benefits the organization, how will they understand the need for IR to foster integrated communications? Elizabeth Corse, principal, Torbay Advisory Group, provided insight: “I make a point of including PR and MarComm in all my executive IR training and in appropriate phases of the planning for major events such as quarterly calls and investor days. That way, [executives] feel engaged with my world, understand the investor audience a bit better, learn about the hazards of inappropriate communications and have a regular view into the messages that management is sharing with investors.” My primary attention has been on the C-suite and the board of directors, yet I should increase communication efforts
companywide to ensure consistency. Reminding colleagues about disclosure implications is only one step; explaining how the constituency could be affected is another challenge. Oftentimes I feel that IROs are so focused on keeping information quiet that we forget how important it is to inform all stakeholders, especially employees.
Take Training Even Further A side conversation with Katharine Kenny, vice president, investor relations, at CarMax convinced me that I could benefit from taking IR training even further. In fact, the entire company could benefit from such an effort. Here are several ways in which Kenny fosters integrated communications and a big-picture view at her firm: • IR visits branches and affiliate locations not only to learn more about the organization but also to teach IR companywide. • IR writes a quarterly story for the intranet, bringing employees up to date on IR initiatives. • IR provides talking points for the management team. • Staff involved in IR, corporate communications, public affairs, public relations, media relations and marketing meet monthly to review messages and ensure that everyone is on the same page. Another champion of integrated communications is Frank Milano, director, investor relations, at Belden. He told me that he felt “fortunate to learn early in my career to rely on my PR counterparts.” Milano said that he appreciates the varied responsibilities that public relations have with respect to suppliers, customers, distributors, the media and employees. “The ability to synchronize our key messages for each of these audiences has repeatedly proven to add value to the firms where I have worked.”
Collaboration, Not Control An eGroups post by public relations counselor Sally Evans was blunt: “When in doubt, talk to one another—not by e-mail or text, but by phone or face to face. And think collaborate, not control. Keep [all] disciplines in the loop consistently,” she continued. “When all parties understand how the others work, the problems will lessen and the benefits will multiply.” While letting the collaboration advice sink in, I thought again about the question of who should start the process. I was amazed that, while nearly everyone who contributed to the eGroups discussion had a perspective on which department should govern communications, overall IR was the preferred department. I began to think that the results were biased since so many participants in the discussion were involved in IR, so I chose to incorporate feedback from my company’s marketing department. Julie Oehl, corporate market manager, has been with HWC for more than four years and is responsible for a marketing function. With her 17 years of experience in sales and marketing, I thought she could provide a different perspective. After she quit laughing, her response was, “It’s similar to the advice you receive prior to getting married or having your first child. Everyone thinks they have the best advice on how to make something work. You simply smile, thank them for the advice and then decide which approach works best for you and your family.” Oehl hit the nail on the head: Each company is different, and
Input From eGroups If you have a question and would appreciate input from your peers, connect with NIRI members through eGroups. Go to http:// community.niri.org.
Each company is different, and while integrating communications works well for some larger corporations, perhaps the smaller organization needs a more specialized approach. while integrating communications works well for some larger corporations, perhaps the smaller organization needs a more specialized approach. You have to face the situation with an open mind and research best practices, then tailor practices to your organization’s culture.
Problems Created by AnyoneCentric Messages I still feel strongly that IR is responsible for consistent messaging, as customercentric messages can be misinterpreted by the investment community. An example would be our discussions about products. We prefer to say that some lines are alternatives to competitor lines, because if we said replaces the competitor lines, the message could be misinterpreted. On the flip side, in the eGroups conversation, George Stenitzer, vice president, corporate and marketing communications, at Tellabs raised a good point that investorcentric messages can be equally misread. He cited the example of the Charter Communications executive who told investors that they would “extract more revenue” from customers. “The message spread through the media,” Stenitzer relayed, “leading to a downturn in sales from Charter customers who didn’t want to feel used.” That said, investor relations, corporate communications and marketing are equally important and should consider working together on all forms of communication.
Big-Picture Progress Since the eGroups discussion, HWC has added staff in our marketing department, and we are working together on the annual report. The project has been treated as an educational experience as the marketing team is learning the Securities and Exchange Commission rules and regulations while I’m obtaining a better understanding of design concepts. The resulting report will tell our company story in a more memorable way. Thus far, the project has been stress-free and enjoyable. Collaboration and communication have been key to our success. In addition, the valuable insight I received from touching base with peers prompted our organization to revisit other communications practices. Based on a suggestion from Elizabeth Corse, we will soon be including IR information in new employee training handouts. Our employee intranet is the preferred method of communication for our team members, and I am working with marketing to revamp the system for all facets of our business. As I continue to make progress with integrated communications at my company, I hope other IROs can benefit from all the perspectives posted in response to my online request for help. IRU Hope Novosad is manager, investor relations, Houston Wire & Cable Company; hnovosad@ houwire.com.
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e h t g n i b i r k n i Desc l e c n a m r o f r e p d n a pay
The new CD&A template from the CFA Institute makes it easier to report executive compensation policies. By Matt Orsagh, CFA
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f you’ve ever felt overwhelmed while filling out the compensation discussion and analysis portion of the corporate proxy statement, imagine what investors think when they read it. The CD&A has been a source of frustration for investors, issuers and iR professionals since the Securities and Exchange Commission adopted the current format in 2006. Many investors complain
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about the length and complexity of the typical CD&A disclosure, which often reads as an exercise in legal compliance and misses the opportunity to communicate effectively with shareowners. With “Say-on-Pay” now the law of the land, issuers know that investors are scrutinizing compensation plans as never before to ensure the proper alignment of manage-
ment incentives and shareholder interests. Unfortunately, the CD&A section of many proxy statements falls short of helping investors understand how a company links executive pay and performance. Complying with the letter of SEC rules has left many CD&As bloated with boilerplate legalese that is difficult to analyze and fails to effectively communicate a company’s compensation strategy.
Addressing the Issues To address these issues, the CFA institute, in partnership with a blue-ribbon working group of issuer and investor representatives including NiRi President/CEO Jeff Morgan, recently developed a compensation discussion and analysis template. The template is a concise blueprint for transparent, succinct and user-friendly disclosure. Amid heightened public concern about executive pay, and with advisory votes on pay becoming the standard at publicly traded companies, the CD&A template is a timely tool for telling your company’s story. A handful of companies have already received significant negative “Say-on-Pay” votes from shareowners. For example, we saw a majority against vote at Jacobs Engineering and Beazer Homes and only 62 percent support at Monsanto—and more surprises are sure to come. To exert their new right to an advisory vote, investors must analyze what companies disclose. it, thus, becomes even more imperative that iROs clearly communicate to investors the link between pay and performance and offer investors the most appropriate context in which to understand compensation strategy. Preliminary post-mortem analysis of the “Say-on-Pay” votes reveals investor displeasure due to confusing disclosure about certain portions of executive compensation and no clear connection between pay and performance.
Turn to the Template for Help When drafting your company’s CD&A, you can turn to the template for a readymade outline of the pay disclosure components that investors say are important. Here are the main segments of the template: • Overview of previous-year performance and compensation. • Simple explanation of compensation elements.
amid heightened public concern about executive pay, and with advisory votes on pay becoming the standard at publicly traded companies, the CD&a template is a timely tool for telling your company’s story. • Discussion of performance targets for the previous performance period (which may include performance periods longer than only the past year). • Compensation decisions made in the past performance period. • The company’s compensation framework (policies, process and risk considerations). • Concluding discussion about the company’s employment and termination agreements.
Built-in Flexibility The template aims to help issuers simplify and shorten CD&A disclosures, some of which have run more than 50 pages. You can use this tool as a guide to write a more straightforward CD&A in plain English. You need not worry about falling out of compliance with 402(b) disclosure standards, as
Get the Template To access the CD&A template, go to cfapubs.org/doi/pdf/10.2469/ccb .v2011.n1.1.
all SEC requirements are addressed in the disclosure recommendations. The working group emphasizes that there is no one-size-fits-all disclosure model; the CD&A template gives you enough flexibility to meet your company’s unique needs and put the compensation strategy narrative in the appropriate context. Each section of the template simply states the issues that a company should address. The wording of the narrative and the order of its elements are determined by each issuer. Out of a discussion among issuers and investors with diverse interests, we hope a useful tool has emerged that addresses many concerns and increases CD&A disclosure quality. investors and issuers alike will no doubt learn more from each other as the “Say-on-Pay” rules take hold. We’re optimistic that the CD&A template will foster meaningful dialogue based on an enhanced understanding of a company’s compensation strategy. IRU Matt Orsagh, CFA, is director, capital markets policy, at the CFA Institute, New York City; matt.orsagh@cfainstitute.org.
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Help or Hindrance? Does guidance assist analysts in ways that benefit your firm, or do forecasts hinder the management team? By Tammy K. Dang
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et ready for another round of the great guidance debate. On one side, critics argue that earnings guidance has created a short-term viewpoint, with managers fixated on the quarterly number when the focus should be redirected towards management of the firm and its long-term prospects. And although these critics concede the value of providing guidance, they argue that other disclosures exist to fill in possible communication gaps. investors, analysts and other market players agree that guidance is not the only answer. They believe, however, that it serves as a cornerstone of the communication process. Guidance provides a starting point to help them understand what management is thinking and provide a context with which
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to incorporate other disclosure information. With both sides making valid points, the Committee on Capital Markets Regulation, an independent and nonpartisan 501(c)(3) research organization, turned to academia to try to answer the question. On a NiRi webinar panel moderated by Kraig Conrad, vice president of professional development, Greg Miller, a professor at the University of Michigan, presented his findings in a research paper entitled “Should Managers Provide Forecasts of Earnings?” Miller, who serves as co-faculty director of Michigan’s Theory and Practice of investor Relations executive education program, looked at research from the 1970s through 2009 and categorized it into four areas to understand the impact of guidance.
Short-Term Impact The first and most direct area where guidance makes an impact is in the shortterm response. “When managers provide a forecast, in general the market adjusts to that forecast,” Miller said. Prices go up with good news and down with bad news, which indicates the market is using that information. “When people provide guidance, analysts revise numbers,” he said. Volume trading patterns are also consistent with this belief-revision theory. FedEx Corporation, a company with a $30 billion market cap, provides quarterly EPS and annual guidance. Providing guidance is part of the FedEx brand and reputation. “We actually believe that if we were to, for whatever reason, withdraw guidance,
it would definitely increase the volatility in our stock price,” said panelist Mickey Foster, vice president of investor relations. “There is an important value to the broader economy and the capital markets embedded in our earnings guidance.” The company’s chief economist is part of the Blue Chip Panel and the Wall Street Journal Panel giving estimates of GDP, industrial production and related matters. FedEx is a complex business in 220 countries and is affected by significant seasonal cyclical elements. “The company is really an economic bellwether with an out-of-cycle reporting schedule,” Foster said. He also pointed out that providing guidance helps in complying with Regulation FD because guidance is public and disclosed to everyone at the same time. “it creates a level playing field for all investors,” he said.
Long-Term Understanding FedEx consistently communicates its five long-range financial goals of 10-15 percent EPS growth rates, 10-plus percent operating margins, increasing return on invested capital, cash flows and revenues over the long term. This type of long-term communication is exactly what Miller recommends iR should do with the market. Building long-term understanding is the second area of his research. “When you look at firms that forecast and you take their stock price,” he said, “almost at any point in time, as long as they have been actively forecasting, what we see is that their current prices are more correlated with the true future performance of the firm.” The best correlation of this is where short-term and long-term guidance are provided. Analysts are taking these different periods of guidance and putting them together to build a better model and under-
standing of a company. That way, they can make more accurate predictions and recommendations. Forecasted firms also have more analysts following and institutional investors who stay with the company. With more than 30 analysts covering FedEx, the company continues to grow internationally. Providing guidance is an important validation of both its strategy and its management acumen, which attracts incremental investments over time. To
Loews is a multi-industry holding company. its three publicly traded subsidiaries include 90 percent of CNA, a commercial property and casualty insurance company; a little more than 50 percent of Diamond Offshore, one of the largest deep-water drilling companies in the world; and 66 percent of Boardwalk Pipeline Partners, a natural gas pipeline company. The two wholly owned subsidiaries are High-Mount, a natural gas exploration and production company, and
Providing guidance helps in complying with Reg FD because guidance is public and disclosed to everyone at the same time.
assist in its guidance practice, FedEx has implemented the “guess process.” All the CFOs of the operating companies prepare a weekly financial update, which projects out the month, quarter and year going forward so that adjustments can be made to the business and how it is operated. The quarterly guidance provided is then an output of that guess process, and no incremental time is given to the guidance process.
Opting Out of Guidance At Loews Corporation, the investor base is not overly concerned with results in any given quarter. its top shareholders consist of value and GARP funds. “Our investor base is interested in the underlying business trends and capital allocation decisions we make,” said panelist Darren Daugherty, director of investor relations. “They want to discuss big-picture strategy.” Loews is not typically valued on the basis of earnings multiples, and analysts tend to care more about cash flow than earnings. With a market cap of $17.8 billion,
Loews Hotels. Loews also holds approximately $4.5 billion in cash and investments at the holding company. Given the diversity of its subsidiaries, Loews does not provide guidance. “Any number of strategic or operational decisions the company might make during the year could affect revenue or EPS numbers,” Daugherty pointed out, “so having a guidance range out there could potentially impose a constraint on the decision process.” With five subsidiaries, a fixed-income investment portfolio, and volatile oil and gas prices affecting its three energy subsidiaries, there are too many moving parts to accurately forecast results for a particular time period. According to Daugherty, if a company provides financial targets, the need will inevitably arise to explain nonrecurring items that create noise in the results. Discussion of these “one-timers” tends to divert attention away from key messages for the quarter. Loews does provide its viewpoint, however, on the economy, energy markets,
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pricing trends and things of that nature, but providing earnings guidance would not meaningfully benefit the analysts covering the company. “Every company must carefully assess its own guidance practices,” Daugherty said, “but this guidance policy has worked for Loews.”
Managerial Opportunism, and Myopia For companies that do forecast, this powerful tool can lend itself to managerial opportunism, Miller’s third area of study. Some empirical evidence shows that managers do time their trades around forecasting. This just means companies need to implement appropriate trading policies for managers to prevent managerial opportunism. The final area is myopia and forecasting. is forecasting creating short-term pressure
and leading managers to do things they shouldn’t do? Research shows that when firms stop forecasting, they keep to their investment policy. This indicates that forecasting is not triggering the investment policy, but the fact that others care about the short term is what pushes managers to be shortsighted. “While there may be a little more pressure on a manager that forecasts, it doesn’t seem to make a huge difference,” Miller said. “We don’t have a lot of evidence in favor of forecasting and myopia.” Miller recommends that every company figure out its forecasting policy, explain the thought process with specifics on its website, and be prepared to talk about decisions with stakeholders who disagree. Encourage discussion, and help people understand the firm’s commitment to transparency. in wrapping up the webinar, Conrad
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Learn More For more information, go to www.niri.org and access the archived webinar and research paper: • webinar—University of Michigan Research: To Forecast or Not? (January 20, 2011) • paper—“Should Managers Provide Forecasts of Earnings?” (August 14–19, 2011)
underscored the diverse viewpoints of the guidance debate. He noted that FedEx and Loews “both have complex businesses to ultimately communicate and model, yet they came up with two very different answers as to why they do or do not provide any guidance.” IRU Tammy K. Dang is manager, professional development, at NIRI; tdang@niri.org.
2011 NIRI Annual Conference
June 12-15 JW MARRIOtt GRANdE LAKEs, ORLANdO, FL
Leadership in a changing world. Outstanding speakers include: George S. Barrett, Chairman & CEO of Cardinal Health, Inc. Adam Bryant, The New York Times columnist and author “The Corner Office” Michael T. Darda, Chief Economist, MKM Partners Jan Hargraves, noted body language expert
Targeted conference content: Industry breakout discussions – now with 30+ industry groups Global IR sessions – for all IROs with non-domestic activities Tiered learning – from “basics” workshops to senior-titled events
The world’s premier IR education and networking event www.niri.org/conference
Terranea Resort, Los Angeles
Address your unique challenges and distinct professional needs…
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i ExpEriEncE—the prestigious Senior Roundtable Annual Meeting
• November 29–December 1, 2011, Terranea Resort, Los Angeles
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i connEct—with the member-only online community i attEnd—special SRT-member in-person events
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NIRI NOW
Update on NIRI Strategic Organizational Review NIRI continues to make progress on an important 2011 initiative, the Strategic Organizational Review. This assessment will ensure that the association continues evolving to support current and future members. More than 200 members participated in an online survey in January. Discussions and interviews were conducted with NIRI
stakeholders, including chapter leaders, past and present national leaders and service providers. Additional discussion forums are planned. As part of the review, chapter and national leaders will participate in strategy meetings at the annual conference. Look for more information and developments in IR Update as the review continues.
Triennially–29% Undecided–32%
Think Like the C-suite (member benefit webinar)
12
May Think Like an Analyst (member benefit webinar)
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FEBRUARY 2011
the voice of the investor relations
June
profession
Cornering
Finance Essentials for IR seminar, Orlando
11
SuCCeSS
Adam Bryant, “Corner Office” columnist for The New York Times, talks about the role that communication plays in a leader’s success.
NIRI Annual Conference, Orlando
12-15 Start planning for the NIRI Annual Conference, June 12-15, in Orlando. Keynoter Adam Bryant and additional outstanding speakers will focus on leadership for IROs.
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Attending an Educational Event? How to Engage to the Max!
14
Communicate Your Earnings Effectively
18
July
Reg FD: Learnings From the Office Depot Case
Media: Who Will Carry Your Voice the Loudest (member benefit webinar)
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• Best Practice Guidelines Governing Analyst/Corporate Issuer Relations, developed by the CFA Centre for Financial Markets Integrity and NIRI. • IR glossary of terms—especially useful to professionals who are new to IR, this resource includes definitions of terms and jargon.
August Working With Retail Investors (member benefit webinar)
9
September Fundamentals of IR seminar, Boston
11–14
20 What Makes a Great IRO (member benefit webinar)
The New Capital Markets seminar, Seattle
29
32%
36%
30 Regulations 101 seminar, Seattle
Annually–36% Biennially–3%
April Think Like a Lawyer (member benefit webinar)
Take a Poll In a recent poll, NIRI asked members: How often does your company plan to hold a “Say-on-Pay” vote, as required by DoddFrank? Here’s what the 94 respondents said.
For program information and registration, visit www.niri.org/learn.
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Get a Wealth of Information Online As the largest investor relations professional association in the world, NIRI is the definitive source for information that can help you on the job. All of these resources are available online, free of charge to members: • IR Update—the premier IR monthly magazine, with information on new developments, trends and best practices. • IR Weekly—an outstanding e-newsletter that covers key industry news, events and legislative updates. • Executive Alerts, which provide breaking information on regulatory and compliance issues. • NIRI research—analysis of practices most relevant to IROs; studies include the 2010 Annual Report Survey. • Standards of Practice for Investor Relations—NIRI’s reference for guidance and disclosure.
Professional Development Calendar
October
29%
Ethics Today—Avoiding Trouble (member benefit webinar)
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3%
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spotlight on chapters
Innovative Ideas for IR Communications
C
ontinually improving the way we communicate with Wall Street is essential for every iRO. The Silicon Valley chapter learned new communications techniques during a recent program that focused on earnings. Panelists Deborah Crawford, vice president of iR at Netflix, and David Gennarelli, director of iR at Autodesk, discussed innovative ideas from their iR programs. Autodesk and Netflix have implemented earnings practices that go beyond the norm. Both companies provide guidance on the
although netflix and autodesk have taken similar paths, the companies differ in their disclosure formats and in how they conduct earnings calls. business outlook and include this information in a press release one hour prior to the earnings call. in addition, they lead pre-call disclosure by providing the management commentary and detailed financial results on their websites in advance of the call. Although Netflix and Autodesk have taken similar paths, the companies differ in their disclosure formats and in how they conduct earnings calls. While both publish management comments prior to the call, the Autodesk commentary is formatted
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in a fashion similar to a press release, and Netflix publishes an actual script for the call.
Two Approaches During an Autodesk call, Gennarelli operates in a traditional manner, with prepared remarks followed by a Q&A session. The prepared remarks are limited to 10 minutes, however, including the safeharbor statement. At Netflix, Crawford does not provide prepared remarks during the call other than safe-harbor language, and she follows a strict Q&A format. Crawford accepts questions from analysts via e-mail only; she reads the questions, and the management team responds. Both iROs have found that their processes allow several more questions to be taken during the call. Gennarelli and Crawford noted that the quality of the questions is better because the analysts have had time to review all earnings results in advance.
Empowered to Think Creatively When asked about the key to improving processes, Crawford responded, “We, at Netflix, are not afraid to fail.” That’s good advice for all companies and individuals. To be a leader and an innovator, one must be willing to take some risk. Also required:
conducting due diligence, surveying constituents, and assessing the pros and cons of various techniques before determining which one is most likely to succeed. Gennarelli advised iROs to “stop doing nonessential activities.” Think about the value of what you are producing. if a report is not being consumed, it is not worth your time to write it. This thinking can be applied to seemingly untouchable efforts as well. After considering the value of the annual letter to shareholders, Autodesk reached out to key analysts and investors to ascertain whether this message was actually still read. The feedback was a resounding “no,” and Autodesk stopped including a letter in its annual report. Any complaints about this change? Not a one. Contributed by Lisa M. Hartman, vice president of programs for the Silicon Valley chapter and senior investor relations manager, Juniper Networks,
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