Speech by SEC Chairman:
Videotaped Remarks at the Annual Meeting of the National Investor Relations Institute
Chairman Christopher Cox
U.S. Securities and Exchange Commission
San Diego, California
June 9, 2006
Good morning. It’s a pleasure to join you in San Diego. As a Southern Californian, I can’t tell you how dearly I wish that my participation this morning were physical rather than virtual. But at least my electrons are now enjoying your fantastic setting on the San Diego Bay.
The National Investor Relations Institute and the Securities and Exchange Commission have a good deal in common. Like you, our focus is on investors. As the investor’s advocate, we start out with the firm conviction that an informed investor will make the best decisions. Your work to keep investors informed makes us partners in a common effort.
Your work is also keeping you busier these days than ever before. As the business and financial media have so frequently reported, investment research is drying up for many small and medium-sized issuers. I imagine that some of you may be feeling that your office is the only one left to tell your company’s story to the shareholders.
Of course, no one knows your company better than you do. But the responsibility of an investor relations officer is a heavy one. As the IRO, you have the opportunity and indeed the responsibility to become your company’s conscience.
Conscience, of course, is what H.L. Mencken described as the inner voice that warns us: someone may be looking. And without a doubt, many people in the markets and in the press – not to mention your own investors – are watching everything you do.
It is not that CEOs and other senior executives can’t make the right choices without a professional conscience – though of course, there is a small minority that might be charitably described as ethically challenged. But for most honest corporate leaders, it’s rather having to deal with issues such as the framing of a certain bit of news this way or that, to make sure it is both truthful and ethical. And in those frequent decisions, top management can benefit from expert assistance.
Your job is to help them clearly see the water’s edge.
In your work to promote transparent financial statements, I hope that all of you are aware of the SEC’s pending proposal on executive compensation. We’re acting in this area because shareholders are demanding more information. And it’s not just greater disclosure, but also greater clarity, that we’re after. The information has to be understandable to investors, and provided in a form that they can use.
As you work with others in your company to produce the information that shareholders are asking for, you’ve got plenty of strong arguments to make – not least of which is, “it’s the law.” But there are powerful economic incentives as well. It’s a fact that companies with strong corporate governance enjoy higher multiples and lower volatility. The cost of capital drops when companies are transparent about their activities.
For that reason, companies and investors alike should be concerned about the reports that research is drying up. Not all the data is in yet, and some of what we have is anecdotal. But it does appear there has been a decline in the research on stocks that is available to retail investors.
According to press reports, research budgets have dropped significantly since 2000 at the seven largest Wall Street firms. Some investment banks have scrapped their research altogether. And the new independent research systems that resulted from the 2003 Global Research Analyst Settlement are still working out their kinks.
But research products have picked up recently. And some of that recent surge includes products aimed at retail investors. And over the long run, it’s almost certain that we’ll see a resurgence of research of all kinds – because the truth is, investment research is too important a business to disappear. And many people are willing to pay for it.
But while the new business models are still being developed that will lead to an increase in the research available to retail investors, you’ll have to be proactive in finding creative new ways to get your company’s message out to investors. One way to stimulate more independent research on your company is to take advantage of interactive data.
Interactive data is made possible by a computer language known as XBRL. This computer language is used to put a tag on every number in your financial statements, identifying it as gross sales, interest, net income, and so on. Think of it, if you will, as every piece of data having its own GPS homing device.
Investors who download your financials will then discover that they’ve become interactive. They’ll be easily downloadable into spreadsheets like Excel, and instantly searchable.
And let me tell you another way this technology can help you in your job as Investor Relations Officer. You can be in contact with your investors any time you want.
You know better than anyone that we live in a world of constant change, 24/7/365. Why should your investor contacts be limited to a 10-K once a year and a 10-Q three times? Using interactive data, information that is relevant to your shareholders can be relayed to their computers or handhelds on demand, or even on a constant basis if they so choose. XBRL already works perfectly with Internet technologies and Web services such as RSS and ATOM. Together, they can transform the way your investors receive financial information.
At the SEC, we’ve set up a voluntary program for companies that want to experiment with interactive data. Part of this pilot program is the availability of RSS feeds for all filings with XBRL documents. That will allow users to be notified of new filings the moment they occur, and to have access to the data in real time.
I’m sure you can imagine how the combination of interactive data and Internet delivery mechanisms like RSS can fuel instant updates of research analysis models, or risk screens based on user defined criteria.
And here’s a secret almost nobody knows: XBRL isn’t limited to numbers. It can just as easily be used to tag narrative information.
I’m convinced that this new technology could be of real benefit for IROs and for the shareholders you serve. If you are interested in joining our pilot program, let me know. Just go to our website, sec.gov, to get the details.
Oh, and one other thing. There are significant benefits for companies that sign up for our interactive data program. For example, we’re offering expedited reviews of your SEC registration statements and annual reports. The list of participants is growing PepsiCo and GE just joined last month.
Of course, technology is not a substitute for good governance, or for what we all understand as simply good character. But well-governed companies with executives and employees of high integrity have every reason to want to share their story. The new technology of interactive data can help you bring the good news about your operations to the whole world. And in this undertaking, the SEC is with you all the way.
Thank you for letting me share these thoughts as you all are focused on the important questions of how best to inform our nation’s investors. Thank you for your integrity and your leadership. I know you’ve got a great set of panels ahead of you – best wishes for a successful annual meeting.