Dominic Jones, who writes the highly regarded IR Web Report blog and is a leading voice in the investor relations field, kindly agreed to do an interview with us. He is a principal of Clarity! Communications of Canada and has more than 15 years of experience in journalism, investor education, and online investor relations communications. The first part of the interview appears below; the second part will be published next week.
 
(1) What is your overall view of the SEC’s interactive data initiative? Was Chairman Cox right to make XBRL implementation an important priority of the agency? 

I do think it is an important strategic initiative when you look at it in a global context. Other countries have already moved to mandatory XBRL, including major economic powers like Japan and China. At the same time, the rest of the world is moving to a single accounting standard. And with investors easily able to invest anywhere in the world, there was a risk that US companies could be disadvantaged. I believe companies in countries where XBRL has not been championed by regulators to the same extent could find it harder to attract investors in the future.

Of course, Chairman Cox has basically had to ram XBRL down the throats of a reluctant audience, and he may need to do a lot more convincing. There have been few volunteers for the XBRL pilot program, which in itself should be instructive to the SEC about the lack of initiative that US companies take in communicating essential information to their shareholders. Our own research of how companies use the web in their investor communications has been consistent in finding that US companies are not leaders on the global stage.

The XBRL mandate will help US companies to catch up and take the lead over corporations in other countries. And I hope it will prompt companies to give more thought to how they are using technology to keep their investors informed and engaged on a broader scale.  

(2) Under the SEC’s proposed rule, about 500 of the largest US firms will be the first to submit XBRL exhibits, and other companies will be phased-in over time. Which comes closer to your point of view: (a) Good move. The big firms have the resources to do this with the least pain – let them go first. The smaller companies will learn from their experience. (b) Bad idea. This limited universe of only the biggest companies means whatever XBRL data there is will be mostly useless to analysts and investors. Implement it in one feel swoop for everyone.

I see the proposed implementation schedule as a political rather than a technical decision. It is a compromise designed to avert a backlash from issuers who already feel there is too much regulation that imposes unnecessary expense on companies, especially smaller ones. The SEC has shown it is very sensitive to smaller companies, as we have seen with the repeated delays in Section 404 of SOX.

From a public company’s perspective, there is nothing to prevent them from adopting XBRL earlier than required and making sure their data is included along with the first wave of companies. But I’m not sure how much there is to gain from being early because it’s not clear yet how and when data vendors and analysts are going to use XBRL.

Obviously, it would be better for investors to have access to data on the full universe of US companies much sooner. Even after the third year when all companies are filing parts of their 10-Qs and 10-Ks in XBRL, I think investors will still see it as only a small step towards what they really need, which is all corporate disclosures – especially earnings releases — tagged in a machine-readable format, and faster reporting of that data.

(3) There’s been much discussion about whether assurance should be required for XBRL statements. Do you think analysts will ignore interactive data if it doesn’t have an auditor’s imprimatur? Or do you think analysts believe tagged data doesn’t require additional assurance and will happily use XBRL exhibits? 

Most of the people who are calling for third-party assurance over XBRL are connected to auditors and I think that makes people suspicious. I’m in the camp where I think it only becomes a big issue when something goes wrong and people start looking for ways to correct the problem. The fact is no amount of assurance from a third-party will be completely foolproof. People who want to commit fraud will find ways to do it with or without XBRL or an audit.

Some have argued that if you don’t have some kind of audit, then companies will play fast and loose with their data because there will be no one looking over their shoulders. I don’t fully buy that argument. I think they are overlooking the huge penalties that the market exacts on companies that issue unreliable information, and that is enough of a disincentive for firms to be sloppy in applying XBRL.

Finally, I see auditor assurance as a barrier to widespread adoption because it will impose additional, unknown costs. But if a company decides it wants to have its auditors give their stamp of approval on its XBRL data, then they should be free to do so. This will likely give investors greater confidence in the data, the benefits of which could more than offset the cost of the audit.

(4) Thus far, most IR professionals have not shown great interest in XBRL. What do you think are the main reasons for their indifference?

Most US investor relations officers (IROs) are not directly involved in disclosure technology and have a very poor understanding of it. This is mostly because about 75% of investor relations sections on US corporate websites are outsourced to hosting services. IROs have generally been entirely hands off when it comes to these sites so they’ve lost out on a lot of important learning over the years. They don’t understand what HTML is, so XBRL is even more alien to them.

And because their clients are oblivious, the two major firms that host investor relations websites have had little reason to innovate or implement best practice. I don’t expect this will change much because IROs mostly will not be directly responsible for implementing XBRL inside their companies, although they may be part of the decision-making around which tags the company is going to use.

Of course, once XBRL data is in the hands of investors and analysts, IROs will be on the frontlines dealing with the questions. But until that day comes, IROs don’t have an incentive to pay attention to XBRL. Unfortunately, a lot of IR departments are probably in for a rude awakening when analysts start asking more detailed questions once they have XBRL data to work from.
 
(5) Overall, how do you see the role of IR professionals changing because of interactive data? What difference will it make in their day-to-day activities? Do you think XBRL adoption will create greater opportunities for IR practitioners, or will it reduce the need for their services?

In the short-term, there will probably be a lot more need for IR practitioners who can explain their companies’ accounting decisions to analysts and investors. I expect that there will be a lot more questions of a technical accounting nature.

In the longer-term, however, my view is that XBRL will commoditize historical financial data. There’ll be less reason for analysts and investors to devote time and resources to formatting and analyzing data from the past because there will be little to gain from doing so if everyone has the same information and the same ability to analyze it using computers and software.

At this point, the focus will probably turn to external factors and to more analysis of a firm’s future potential. IROs will be under greater pressure to explain their companies’ strategies and the context in which their businesses operate. The ability to communicate these soft factors to investors will become much more important. They will need to become more proactive communicators.

I guess I am saying that by making data easier to analyze, XBRL will make data somewhat less valuable while factors that are not easily measured, such as management credibility or innovation, will become much more valuable.  

(6) How does XBRL adoption change the education and experience requirements for IR professionals? How would you suggest both new recruits and experienced IR pros prepare for an interactive data mandate?

I don’t think it changes the requirements much by itself. But as part of a broader trend of increasing use of technology in disclosure and communications in general, I expect that IROs will need to become much better communicators and much better at understanding how to use technology to ensure that their companies’ stories are reaching investors.

XBRL is going to give analysts and investors more time to research what others are saying about companies. And much of what is being said about these companies will be online. IROs are going to have to understand more about how to use new media and how to monitor and respond to what is being said.

However, the basic requirements of a good IRO will remain the same: a good understanding of how investors make decisions; a solid understanding of accounting; and outstanding communication skills.

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