BDO Dunwoody/Chamber Weekly CEO/Business Leader Poll by COMPAS in the Financial Post for Publication November 22, 2004

Transcription

1 : Canada s Business Leaders Want Publicly Traded Companies to Disclose Any Information that Could Affect Revenue or Liability Exposure BDO Dunwoody/Chamber Weekly CEO/Business Leader Poll by COMPAS in the Financial Post for Publication November 22, 2004 COMPAS Inc. Public Opinion and Customer Research November 22, 2004

2 1.0 Introduction In the era of Sarbanes Oxley and increased financial scrutiny of publicly traded companies, Canada s business leaders say that disclosure of financial information does not go far enough. CEOs and business leaders in this business panel say there is good reason to require publicly traded companies to disclose important non-financial information to investors, and hold the management and audit committees subject to law if they do not. Specifically, investors should be notified as soon as possible of any nonfinancial information that could affect a company s revenue or liability exposure. Information on product safety, as in the case of Merck s Vioxx, tops the list followed by information on environment impacts like clean up costs, about the efficacy or quality of products, and information on workplace safety concerns. The only non-financial information respondents do not appear to be acutely concerned with disclosing to investors is information related to internal lawsuits, for example sexual harassment or discrimination cases. These are the key findings form this week s web-survey of CEOs and business leaders for publication in the National Post under the sponsorship of BDO Dunwoody and the Canadian Chamber of Commerce. 2.0 Overwhelming (3:1) Support for Mandated Non- Financial Disclosure Almost three quarter of Canada s business leaders day, non-financial information about product safety, as in the case of Merck and Vioxx, can significantly affect share value and viability so companies should be required to disclose all non-financial information that could affect revenue or liability exposure to investors, as shown in table 1. Only 22% disagree saying, it s 2

3 hard enough to get companies to properly disclose financial information, for example as in the case of Enron and Nortel, so creating additional rules for disclosure of non-financial information would be too difficult and costly to implement. Those who favour mandating the disclosure of critical non-financial disclosure outnumber those who do not by a factor of more than 3:1. As one respondent noted, I have no problems with reasonably full disclosure for publicly traded companies that may impact on earnings and/or shareholder liability - this is only fair and makes for good business practices. Table 1: (Q1) There s been some talk in the media about to what extent publicly traded companies should be required to disclose non-financial information that could affect revenue or liability exposure. Which of the following opinions is closest to your own? [ROTATE] % Non-financial information about product safety, as in the case of Merck and Vioxx, can significantly affect share value and viability so companies should be required to disclose all non-financial 71 information that could affect revenue or liability exposure to investors It s hard enough to get companies to properly disclose financial information, for example as in the case of Enron and Nortel, so 22 creating additional rules for disclosure of non-financial information would be too difficult and costly to implement Don t know/ Refused 7 3

4 3.0 Information about the Safety of Products Most Important to Disclose; Information about Internal Litigation, Least Respondents were asked to score the importance for publicly traded companies to disclose different types of non-financial information. As shown in table 2, 90% of respondents, a near consensus, agree that information about the safety of products, for example verifiable reports of drug side effects or products causing bodily harm, should be disclosed to investors, assigning a score of 5 or better on a 7 point scale. In fact, the mean score for this option is 6.0 and 50% of respondent feel so strongly on this matter they assign the highest possible score, a 7. Information on environmental impacts, for example clean up costs associated with manufacturing or new developments, also receives strong support from 78% of respondents who a assign a score of 5 or better and it earned a mean score of 5.5. Information about the efficacy or quality of products and on workplace safety concerns also receive majority support and mean scores of 4.8 and 4.2 respectively. Information about internal litigation, for example sexual harassment or discrimination lawsuits, as not seen as critical and earned a mean score of 3.8, just below the midpoint of 4. 4

5 Table 2: (Q2) The following are some different types of nonfinancial information that some say publicly traded companies should disclose to investors. Using a 7 point scale where 7 means definitely should be disclosed and 1, the opposite, to what extent should each of the following be disclosed. [ROTATE] Information about the safety of products (ex. Verifiable reports of drug side effects or products causing bodily harm) Information on Environmental impacts (ex. Clean-up costs associated with manufacturing process or new developments) Information about the efficacy or quality of products (ex. Returned merchandise, verifiable reports that products are not meeting company claims) Information on workplace safety concerns (ex. Evidence that staff would likely be or have been seriously injured on the job) Information about internal litigation (ex. Sexual harassment or discrimination lawsuits) MEAN DNK Other non-financial information business leaders want publicly traded companies to disclose include, in their own words, 5

6 Potential financial liability associated with environmental requirements, for example, climate change. Assumptions about renewals of long-term contracts where significant Legal records of company officers (i.e. criminal or civil charges) Discoveries and future news Information verifying the independence of directors Unusual executive compensation arrangements Any instance of fraud, potential loss of key accounts, significant product recall issues or a serious lapse of internal controls. Disclose any information with the potential of a material impact along with a management estimate of the probable outcome. Work related Executive experience and comparison analysis with competitors. Cash flow projections for the next fiscal business quarter and a comparison of those figures to realistic market competitor's figures. Layoff and/or downsizing history of business compared to profit margins and graphs. Pending litigation and class action suits. Pending lawsuits. I would like to see Governance Regulations that [state that] a company is required to print any comments that a departing Director might care to make to shareholders. Often those being given the bums rush have a story to tell. 6

7 4.0 Hold Management and Audit Committee responsible and subject to Law Should Important Non-financial Information Not be Disclosed Respondents were asked to score a series of possible ways to ensure important non-financial were disclosed to investors. Holding management and the audit committee responsible and subject to law emerged as the leader, earning a mean score of 5.1 out of 7, as shown in table 4. Respondents are equally predisposed towards releasing this information quarterly or continuously, with each earning a mean score of 4.7. Creating a a non-financial version of SOX earned a mean score of 4.1 while having an honour system where management and the audit committee use their own discretion to evaluate which information requires disclosure earned a failing grade of 3.6 out of 7. Table 3: (Q4) The following are various ways to compel companies to disclose non-financial information. Please score each using a 7 point scale where 7 means definitely should be implemented and 1, the opposite. [ROTATE] Hold management and the audit committee responsible and subject to law should important non-financial information not be disclosed Require important non-financial information to be disclosed continuously, for example as soon as the company learns of it Require important non-financial information to be disclosed quarterly MEAN DNK

8 Create a non-financial reporting version of Sarbanes Oxley that would include a control report, and independent audit advisers to help ensure important nonfinancial information were being disclosed Have an honour system where management and the audit committee use their own discretion to evaluate which information requires disclosure MEAN DNK Those respondents cautious of ineffective regulations or potentially costly burdens to companies offered the following thoughts: This type of disclosure should not include the impacts of the threat of war or change of political climate in a country that the company operates or the impact of currency instability, for example. Disclosure of the extent of operations in these areas should be sufficient without further comment. Competitive disadvantages resulting from technological obsolescence are also something interested parties should have to evaluate for themselves. Only material items that cannot be ascertained by an outsider should fall under this type of disclosure requirement. While increased timely disclosure is welcome, the burden (both time wise and financial) would be substantial on public companies. A major concern is to what extent is such information relevant and who is responsible for the interpretation of the same. 8

9 My organization is a subsidiary of a U.S. company and bound by SOX. The cost to organizations is high and that cost is passed on to customers in higher prices or to shareholders in lower returns. Unfortunately, all companies are being painted with the ENRON/ Worldcom brush when in reality only a few have serious issues. It is a very complex issue in which the answer will be found somewhere between our current state and SOX. The bottom line is that for companies with integrity, rules are not important as they will do whatever is reasonable to report information. Conversely for companies that have no integrity, rules do not matter because they will not follow them. Disclosure is required, but a test or guideline of materiality should guide the requirement. Always bear in mind materiality. Disclosure is critical but if annual and other reports become too lengthy and complex, the benefit would be lost. Maintain a balance between required disclosure and materiality but when judgment is exercised, make those responsible for exercising that judgment legally liable for failures. Remember that famous man on the Clapham Omnibus [Latin, trans: the reasonable man]. The test is would that gentleman consider the issue to be material? 9

10 5.0 Methodology The National Post/COMPAS web-survey of CEOs and leaders of small, medium, and large corporations and among executives of the local and national Chambers of Commerce was conducted November 16-19, Respondents constitute an essentially hand-picked panel with a higher numerical representation of small and medium-sized firms. Because of the small population of CEOs and business leaders from which the sample was drawn, the study can be considered more accurate than comparably sized general public studies. In studies of the general public, surveys of 157 are deemed accurate to within approximately 7.8 percentage points 19 times out of 20. The principal and co-investigator on this study are Conrad Winn, Ph.D and Tamara Gottlieb. 10