2019 volume 12 issue 4

Disclosure Committees: What IROs Need to Know

CEOs and CFOs have long been required to certify the integrity and fairness of their interim and annual financial reporting to shareholders and have faced civil and quasi-criminal liability for misrepresentations and lack of timeliness in making corporate disclosures.

Since the Ontario government passed Bill 198 (C-SOX) in 2003 and the CSA introduced Multilateral Instrument 52-109 in 2004, millions of dollars have been meted out in fines for failing to comply and millions more have been spent by executives defending their actions.

As a result of the risk faced by directors and officers and the realization that better disclosure leads to greater investor understanding and confidence, smart public companies began using Disclosure Committees of management to support their disclosure process.

In this issue of IR focus, we investigate the role of Disclosure Committees (DCs) and their importance in addressing increasing demands for transparency and fairness in all company disclosures – whether normal course or in response to a corporate crisis.

DC Purpose

Prior to the implementation of C-Sox, few public companies had disclosure policies, let alone DCs. Today, DCs and the associated disclosure policies they supervise appear to be a fixture for most corporate issuers even though they are not a requirement under law.

The reason for the popularity of DCs is that they assist CEOs, CFOs and audit committees of a company’s Board of Directors in meeting their obligations. In fact, some companies might go as far as to say that the mere presence of their DCs creates the basis for a legal defense in the event officers and directors are sued for misleading disclosure. This is an exaggeration since a poorly organized, resourced or ineffective DC will not stand up to scrutiny. However, as one IRO told IR focus, if properly constituted a DC does “represent a tool to improve the effectiveness of disclosure” and it “provides some assurance to our Board that management understands and is taking the disclosure review process seriously.”

Leading IROs and regulators in both Canada and the U.S. are all of the mind to recommend public companies operate with DCs and that DCs themselves should operate with a written charter that clearly states the committee’s objectives and responsibilities. (See links to examples in the Resources section below.)

While it is hard to generalize about the content of such charters, a DC is typically responsible for:

  • developing and monitoring the effectiveness of the company’s disclosure policy;
  • ensuring appropriate systems, controls and processes for disclosure are in place, including systems to retrieve and analyze information to be disclosed;
  • reviewing/evaluating proposed financial and other disclosures made in both core regulatory filings (interim/annual reports, earnings releases, earnings guidance, management information circulars, etc.) and outside these filings in materials such as conference call scripts, investor presentations and websites, in advance of public release;
  • debriefing following investor presentations/conference calls to determine if unintended selective disclosures were made that require the issuance of a news release;
  • educating directors, management and selected employees about disclosure issues and the disclosure policy; and
  • updating its own policies to ensure compliance with regulatory changes.

The most organized DCs operate with an agenda (circulated in advance when possible) and keep meeting minutes.

DC Composition

Given the important role DCs play in the disclosure process, it is imperative that executives chosen to serve on them have the right skills, knowledge and experience to perform their duties, and sufficient time and resources to do so.

In common practice, a company’s CFO or his/her designate chairs DC meetings and organizes the disclosure support process on a day-to-day basis. However, to provide the right tone from the top, it is recommended that CEOs serve on DCs. It is also considered best practice for permanent members to include a company’s chief legal officer, chief risk management officer and chief IRO.

Beyond this core group, companies may elect to have other officers or employees present, either as members or observers, such as internal audit, tax, treasury and HR. Depending on the nature of content to be discussed, some companies also invite their external auditor and their IR consultant as observers. In instances when an executive outside the DC has particular knowledge of the information covered in a planned disclosure document, the DC will ensure that this person reviews the disclosure in advance.

The IROs IR focus spoke to indicated that while it is harder to organize meetings involving larger committees, such committees bring broader perspectives to bear and are better than smaller ones in suggesting disclosure improvements. These IROs also reasoned that by their nature, larger committees are better resourced.

IRO Participation

To be an effective DC member, it’s a given that IROs need to understand what type of information needs to be disclosed and relevant materiality thresholds. It’s also important for the IRO – and all DC members, for that matter – to be aware of macro-level issues affecting the business. On this point, IROs can play an important support role in helping the DC carry out its mandate by:

  • vetting disclosure content to ensure plain language is employed at all times and the use of excessive embellishment/promotion is avoided;
  • assisting in the design/collection of questionnaires that are used to solicit written information from divisions/subsidiaries as part of the ‘reporting up’ process that feeds relevant disclosure information to the DC;
  • participating in training employees on the company’s disclosure requirements and the consequences of disclosure failures;
  • comparing the company’s disclosures to industry peers to determine differences in the use of non-GAAP financial measures; and
  • staying abreast of changes or expansions in disclosure requirements.

Not a One-Size-Fits-All Operation

The size, complexity and culture of a company will often determine how a DC carries out its mandate.

IR focus found that some companies prefer that their full DCs meet each and every time a material event/disclosure is to be considered. For other companies, DCs tend to operate with subcommittees comprised of specialists who are charged with reviewing specific items. For example, to review website and social media disclosures, some companies operate a DC subcommittee, chaired by its IRO and populated by representatives of its legal and marketing teams. The choice of how to structure the committee or subcommittees is an individual one but the outcome must be the same: accurate, timely and fair disclosure that is consistent across all platforms.   

DCs During Times of Crisis

DCs not only control planned disclosures, they also provide oversight during unplanned or one-time events that may trigger timely disclosure obligations, whether good news such as receipt of a large order, or the announcement of an acquisition, or bad news such as the loss of a key customer account or other crisis. Accordingly, effective DCs are able to convene, review materials and respond quickly. Does this make them suitable to carry out their responsibilities during an urgent corporate situation? The answer to that question depends on the preferences of a company’s Board of Directors and the nature of the crisis.

More specifically, Boards will – and should – require the CEO to adopt a crisis management plan that, among other things, identifies key officers (and external advisors) who are best positioned to take action on the various aspects of a crisis.

These officers – or a subset of them – would typically assume the role played by the ‘normal’ DC. For example, if a food company faced a product recall, a smaller, quick-reaction DC might be formed for faster decision making to include the CEO, CFO, chief science or safety officer, chief legal officer and IRO. In such cases, a quick-reaction DC might also include a crisis expert as an observer. A Board may also designate one of its own members, with crisis management experience, to assist directly in the communications/disclosure process. Care should be taken that principal members of the normal DC are included in order to benefit from their experience, consistency of standards and judgement developed in the usual practice of the DC, applied in this case to a short notice situation. Of course, if certain executives (such as the CEO) are implicated in the crisis, the Board may make other arrangements to ensure disclosure control activities of management are carried out appropriately.

Bottom Line

DCs play an important role in the design and implementation of the disclosure and certification process by providing comfort to both a company’s senior executives and Board that disclosure requirements are being met based on informed, efficient fact gathering and sound judgment. As CIRI’s Guide to Developing an Investor Relations Program states: “appointing a disclosure committee to promote effective disclosure controls and procedures also supports annual and interim reports that CEOs and CFOs are required to certify.”

While it is up to your company to decide which corporate officers serve on your DC, it is commonly accepted (and recommended by the SEC, no less) that IROs should be permanent members.

Where To Get More Information