Editor's Note: This will be the final column for Lou Thompson, who has written a monthly column for Compliance Week since September 2006. Lou plans to focus his energy on writing a book on the role of the corporate board in shareholder relations. The editors of Compliance Week would like to thank Lou for his years of insight and service to our readers, and we wish him success in his future endeavors.

For this last column I'd like to reflect on the major changes that have taken place in the way that companies communicate with shareholders over the last several years and how those changes will likely affect the future relationship between companies and shareholders.

When I began my 24-year tenure as president and CEO of the National Investor Relations Institute, my 12-member board was mostly made up of vice presidents of corporate communication with responsibility for investor relations. IR has moved from a communication function to where it is today—an integral part of corporate finance with the majority of investor relations officers reporting to the chief financial officer.

Investor relations officers have been seeking a seat at senior management's table for some time and I've stressed in my columns, and through other efforts, the importance of IR  expanding its role to encompass board oversight, expanded disclosure, and corporate and investor communications. In my view, the reporting relationship of IR to the CFO has restricted this effort in that CFOs do not seem to have embraced this more expanded view of the IR and corporate communication role.

In the early 90s, I sensed that many IR professionals at companies were selectively disclosing material information about their projected quarterly earnings to their favorite analysts and portfolio managers. At NIRI we conducted a confidential survey in 1994 and found that over two-thirds of respondents admitted they were practicing selective disclosure. I went to the Financial Analysts Federation (now the Chartered Finalists Association) and created a joint task force to determine how we could resolve this issue. The result was a 1985 handbook on corporate disclosure policy urging companies to provide equal disclosure to all audiences.

 In 1988, as a member of former Securities and Exchange Commission Chairman Arthur Levitt's task force, his executive assistant sent a draft of his now famous speech calling companies to task for the “game of winks and nods” with analysts that was the forerunner for Regulation Fair Disclosure, known as Reg FD, in 2000. I reviewed his draft speech and realized he was right about his observations, and the SEC would soon look to adopt new regulations on how companies communicate with shareholders.

In crafting Reg FD, the SEC staff was very skeptical about the ability of corporate officers to engage in one-on-one discussions with analysts without giving away the store on earnings estimates and considered stricter regulations to govern the communications between them. I brought before the staff a former financial analyst and then NIRI chairperson, a corporate IRO, to discuss with those at the SEC drafting the new regulations how companies could still communicate with analysts, shareholders, and others without providing material non-public information.

In addition, an Iowa State University graduate student (and, coincidentally, a recipient of a scholarship from my foundation) conducted a survey of individual investors showing a strong demand for the use of corporate Websites to gather information to make investment decisions beyond advice from brokers and other sources.

The resulting Reg FD included some cautionary language about one-on-one discussions, but allowed broad dissemination of material information to all investor audiences.

Sarbanes-Oxley and Dodd-Frank Acts

The next challenge to shareholder communications was the 2002 passage of the Sarbanes-Oxley Act, signed by President George W. Bush in July of that year, which was brought about by the failure of Enron and other companies. The law put new emphasis on disclosure and the quality of corporate reporting.

Not long after the Sarbanes-Oxley Act was implemented, the SEC came forth with the rule creating the Compensation Discussion and Analysis as part of the 10-K filing.

IR has moved from a communication function to where it is today—an integral part of corporate finance with the majority of investor relations officers reporting to the chief financial officer.

The intent of the regulation was to shed more light on the process the board went through to determine the total compensation for the five top executives. Additionally, boards were to define the compensation goals for these executives and tie them to the company's performance over the period of compensation. The rules required an additional table as part of the CD&A to lay out the details of the components of compensation, including cash, options, warrants, and perks. I tried to urge in my columns that IROs partner with the corporate counsel and secretaries to meet with major investors prior to the proxy season to discuss what the company was doing to address these issues and to listen to the analyst and portfolio manager's concerns.

Among my top concerns was whether CFOs were embracing these needs when their primary focus was on the bottom line. NIRI is now attempting to raise the profile of the IRO by creating a certification program. It is forming a certification task force to create a body of knowledge of the IR profession. I worked on a similar initiative in the early 90s that became the source that the University of Michigan used to develop a one-week professional development program. But, what we created will probably look quite different from what NIRI will come up with in an effort to get IROs in other countries to adopt the certification program. The Michigan program was broad based, incorporating corporate governance, disclosure, and financial analysis, and over time it brought an increasing number of participants from foreign countries. If it works, I wish NIRI well.

Sarbanes-Oxley, of course, was followed by the passage of the Dodd-Frank Act, which requires companies to disclose more on board oversight of management, particularly in relation to senior executive compensation, board composition to avoid conflicts of interest, and greater disclosure in the proxy statement of these factors. That the say-on-pay provisions have further encouraged boards to reach out to shareholders is a positive development and I hope that line of communication will only strengthen.

Finally, I want to express my deep gratitude to the staff at Compliance Week for such wonderful support as well as to you, the readers. I hope I have provided some insights and spurred some good discussions in your organization as you work on the compliance and risk challenges that come with the regulations discussed above.

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