Chapter 11
There is no doubt investor relations as a profession will endure more changes in the future. The financial crisis that continues in the United States and around the world draws the attention of activists and legislators to the way financial markets operate. Some of the key changes that will have a significant impact on the profession in the nearest future are the advent of eXtensible Business Reporting Language (XBRL), the evolution of investor relations on the Internet, and the continued globalization of investment markets.
Imagine a press release where each word has an invisible tag. When a person receives this press release, every word is automatically placed in a proper cell—a row for nouns, a row for pronouns, a row for verbs, and so on. Now imagine instead of a press release it is a quarterly financial report. And instead of every word, every number has an invisible tag. When a financial analyst receives this information, numbers are automatically placed into proper cells in the financial analyst’s Excel file, database, or a financial model. This is XBRL in the simplest terms—eXtensible Business Reporting Language. The financial reporting becomes automated and processed by a computer—the data can be streamed from the CFO’s database straight to investors’ or financial analysts’ databases.
XBRL is the foundation for IDEA—Interactive Data Application Registrations. IDEA is the new database maintained by the Securities and Exchange Commission (SEC) with the purpose of providing information submitted by publicly traded companies, to investors, financial analysts, and any other interested parties. IDEA will be a replacement for EDGAR (Electronic Data Gathering, Analysis and Retrieval system), discussed in chapter 2. Since all filings in EDGAR were essentially text based and were primarily accessed as text documents, it was quite a painful process for investors and analysts to locate the information they were looking for. In fact, investors would often complain of information overload when a sentence of really useful information would be buried in pages of text that did not have any significance, such as legal caveats or repeats of previously disclosed information. Securities and Exchange Commissioner (SEC) Troy Paredes exclaimed in his speech, “Ironically, if investors are overloaded, more disclosure actually can result in less transparency and worse decisions!”1
IDEA will simplify this process. XBRL-based documents have the potential to enable advanced search functions as well as automated analysis and data manipulation. Even more, it will allow comparing data across companies and even industries based on the tags submitted within the XBRL documents.
Adoption of XBRL-based reporting causes some concerns as well. For example, no two companies are quite the same. On one hand, having standardized tags not only makes comparing across companies easier but it also may make it more difficult to describe the specific situation the company is in at the moment. On the other hand, expanding the amount and types of tags available for reporting helps each company in describing their specific situation but makes cross-company comparisons more difficult as they may be using different types of tags. Adding textual tags or tags like “other” can make standardization and comparisons between different companies or even between different years completely impossible.
Another issue is reporting of nonfinancial information in XBRL-based documents. Research and development expenses may put a company on a verge of technological breakthrough, but there is no tag in XBRL for a technological breakthrough. Standardization is difficult, if not impossible, in the world of nonfinancials and intangibles, yet as discussed in previous chapters, intangibles are playing more and more important role in the corporate value structure. How ready will XBRL be to deal with this information? How much of this value may be lost in the XBRL-based financial reporting and will be left for conference calls and meetings with the investors and analysts? Today, XBRL providers trying to move beyond the basic financials in XBRL tags meet substantial challenges, even when working on such tags as corporate action tags.
Despite these concerns, XBRL is here to stay and will no doubt change the way investor relations professionals go about their daily routine. XBRL can prove its worth by just increasing the accuracy of corporate disclosures and eliminating intermediary distortion. But investor relations will have to take the lead and help finance and treasury departments at their respective organizations to translate the company’s financial picture into XBRL language in accordance with the latest government requirements. Investor relations professionals will also have to facilitate the interactions with investors and be prepared for any investors’ concerns once XBRL reporting takes place.
Investors’ meetings themselves may also look differently in the near future. Conference calls already cut down the travel budgets, but the next wave of shareholder interaction tools may push the envelope even further. The SEC encourages the use of electronic communications between companies and their shareholders by enacting a number of amendments about blogs, proxies, and electronic shareholder forums. The electronic communication tools allow companies to gain valuable information about their investors and solicit feedback, but they also demand somebody who is very savvy in public relations as the access to information and the speed of communications increase exponentially. It won’t take long before investor relations officers will face negative and even obnoxious postings in their electronic communication channels—visible to everybody and sometimes coming at the worst possible time. How prepared will investor relations officers be to deal with this fast-paced and 24/7 communication challenge
Prepared or unprepared, social media is constantly evolving thus demanding investor relations officers to update their training and evolve with the technology. In addition, investor relations departments should take the lead in developing social media communications with the financial markets. This requires good public relations skills and good understanding of the nature of social media. Although today some see social media as a “large microphone for pushing out information,”2 such approach is not sustained in the social media landscape. Social media is a tool for dialogue and using it for pushing out information can cause more harm than good as the audiences will resist the push, challenge the information, and provide critical feedback.
Social media is perhaps a better monitoring and diagnostic tool rather than a microphone as it enables the company to constantly scan shareholder forums, blogs, and microblogs for the issues relevant to the corporation and identify such issues early before they grow beyond repair and spill over to newspapers, TV news, and the professional investment community.
Social media can also allow the scope of the dialogue between the corporation and its shareholders to expand. As noted earlier, investors are increasingly concerned with issues of environmental sustainability, fair treatment of employees, and social accountability. Although these issues do not always make it into traditional corporate disclosures, companies are using other channels to communicate their commitment to corporate social responsibility. The amount of companies producing stand-alone corporate social responsibility reports is growing. Yet since there are no standards in accounting for corporate social responsibility, social media enables companies to explain and discuss their actions in this arena as well as listen to the concerns from the interested audiences from around the globe.
Indeed, the globalization of the investment markets is at its highest point. In fact, investment globalization from largely one-directional phenomena becomes truly global. Just 10 years ago, companies from all over the world could not envision a better outcome than listing on New York Stock Exchange (NYSE). The programs of American Depositary Receipts that allowed foreign issuers easy access to U.S. capital markets were flourishing.
Today, however, investment market looks more like a two-way street. U.S. companies are now also looking for foreign investors. A U.S. company may choose to conduct initial public offering of securities in Europe or list their securities on London Stock Exchange instead of NYSE or NASDAQ. Even the companies trading domestically on NYSE or NASDAQ have increasing amount of shareholders from all over the world. Now combine it with electronic shareholder forums and XBRL. An investor in Asia will wake up to a fresh data set received through the XBRL-enabled channel and posts something erroneous at company’s electronic forum at 1 a.m. EST. By the time an investor relations officer has a chance to react, half of the world read that posting on the company’s own investor relations forum, no matter how offensive, negative, or erroneous that comment might have been. Too much moderation or premoderation won’t solve the problem either—Dell learned it the hard way when the discussions of Dell’s customer service moved from Dell’s official site to an independent blog. Shareholders could also find their ways of communicating to each other independent of the corporate oversight—across the world and instantaneously.
This calls for even more proactive shareholder research. It would become truly important to know owners of company stocks and the way they would react to company and market events. Yet more and more shares today are owned in the name of various brokers: “Most shares in public companies (roughly 85 percent) are held in ‘street name’—legally owned by brokers on behalf of their customers, the beneficial owners.”3 As a result, companies often do not even know who the real owners of their stock are. To know the shareholders, investor relations officers will need to acquire information on the real beneficial owners of their stock.
The SEC considers several measures to help investor relations officers learn about the company’s true shareholders. One of such proposals actively discussed now is Shareholder Communication Coalition Plan. This proposal, if adopted, will allow corporate investor relations officers to move beyond nominal holders of their securities to indentify the actual beneficial owners of stock and to establish direct streams of two-way communication with them. Needless to say, the beneficial investors will be located all over the globe and require more international efforts on behalf of the company and its investor relations officers.
Corporations’ global commitment will increase even more as a result. Today, Pfizer CEO Jeff Kinder organized a teleconference at 2 a.m. EST. The timing of the teleconference, seemingly inappropriate just a few years ago, allowed Kinder to communicate with Pfizer and Wyeth employees in Australia and Asia more effectively. Showing employees of remote branches the dedication of corporate headquarters is essential for a global company to operate successfully. There is no doubt that companies of tomorrow will be required to teleconference at 2 a.m. EST with investors and analysts from the remote locations as well, as such locations produce more and more investors daily.
Today, financial analysts, investors, and investor relations officers face a problem of different accounting standards as they enter global financial markets. American financial market participants used to U.S. GAAP (generally accepted accounting principles) might have to reevaluate adoption of international financial accounting standards. Significant differences exist between international and U.S. standards, and the costs of conversion or reporting in both standards may be quite high. Yet access to an international investment market may require American corporations to implement the change. In addition, government and nongovernment agencies are also considering changes to U.S. GAAP itself including making it more compatible with international accounting standards.
Certainly, the future of investor relations will require the profession to change to meet the demands of tomorrow. It is, however, unlikely that the main goals of the profession will change. The investor relations professionals will still be required to build mutually beneficial relationships between corporations and their shareholders based on open, two-way communications.