Coca-Cola's trailblazing move paved the way for more transparent accounting
The Coca-Cola Company recently engineered a media coup. In a year when the mainstream press has been relentlessly beating up big business because of a series of corporate scandals, the Atlanta-based beverage conglomerate scored a high-profile pat on the back from The New York Times on Monday, July 11.
The newspaper's off-lead was a story about how Coke had taken the initiative on closing a controversial accounting loophole. After prodding from folksy billionaire and company director Warren Buffet, Coca-Cola announced it would list its employee stock option awards as an expense on its income statement.
Some critics have said that not forcing companies to acknowledge option grants as expenses has allowed corporations to mask the true cost of the gargantuan compensation packages that many executives have received in recent years. The move was one many reformers had demanded from corporate America for months, and by doing it voluntarily, Coca-Cola came out looking like a hero.
"God Bless Coke, read a quote in the article from former SEC chairman Arthur Levitt, a noted advocate for the small investor.
The article also had praise for Coca-Cola's leadership from the former chairman of the Financial Accounting Standards Board, as well as from a Wall Street analyst. And it gave the chairman a forum to declare that his company would now provide investors with a clear earnings picture that was reflective of "economic reality."
Following Coke's lead
In short, it was the kind of article IR and financial communications pros dream about. Nevertheless, it stands as a clear demonstration of how getting out in front of the current crisis confidence in American accounting and corporate governance can pay quick reputation dividends. It was a move that experts say many companies are trying to pull off.
"What we've seen is increased interest from management about how to handle these issues, says Howard Zar, head of IR at Porter Novelli. "At this point, most managers now realize - if for only purely selfish reasons - that if corporate governance issues aren't handled properly, it can create havoc with their stock price and credibility."
The fact that an announcement about a seemingly esoteric accounting treatment worked its way onto The New York Times' front page speaks volumes about the new environment companies are facing subsequent to recent scandals.
While much of the media frenzy over corporate fraud has centered on executive malfeasance, there has been an equally strong emphasis on the acute failure of the corporate governance system to provide the necessary oversight to prevent such behavior from happening.
Now, once mundane aspects of corporate oversight are playing an important role in how firms are valued within financial markets. And not only are companies seeing their stock prices swoon, but many are finding access to credit is getting harder to come by if even the merest hint of impropriety reveals itself.
This climate presents a new challenge to financial communications professionals looking to help their company or their clients communicate shareholder value to the market.
"There are now corporate governance and management issues that every company has to address, says Al Bellenchia, head of Fleishman-Hillard's financial communications practice. "The bottom line executive management needs to focus on is not the stock price, but their business value, and how to communicate beyond the myopic market-valuation issues that the last generation of management has been told to fixate on."
Among the loudest outcries from investors is the demand that each firm has a board of directors that is truly independent of management. The cozy relationship between top brass and the board at several companies has been cited as the leading contributor to the most egregious examples of corporate insider dealing.
For instance, even before WorldCom announced that its executives may have committed accounting fraud, the firm stunned Wall Street when it told investors that the board of directors had signed off on more than $400 million in loans to its former chairman and founder Bernard Ebbers.
The loans were ostensibly made to help Ebbers pay for his personal investment in 460,000 acres of Canadian timberland.
In another bemusing case, the board of Adelphia Cable appears to have stood by idly while the firm's founding family dipped into Adelphia's coffers to pay for a series of personal expenses and ventures, including the construction of a private golf course. Experts say that securities analysts are now taking a hard look to make sure there is a proper amount of board oversight.
"I think what you see happening is a sea change, as buy-side and sell-side analysts are looking at governance structures inside corporations to help determine their ratings on stocks, said Richard Torrenzano, founder of financial communications firm The Torrenzano Group. "There was a point where the credibility of management emerged as important, and obviously it still is, but now the credibility of the board's makeup is coming in second in terms of importance."
Investors getting involved
Institutional investors are among those turning up the heat on companies, as some of the nation's largest investors are demanding more of a say in the way corporate America keeps house.
In April, months before the now infamous WorldCom accounting debacle came to light, the pension fund behemoth California State Teachers Retirement System (known as CalSTRS) announced that it was seeking several key reforms involving directors and auditors. CalSTRS is the third largest pension fund in the US, and with assets of over $100 billion, it is one of the nation's leading shareholders.
Experts say that for the financial system to regain the credibility it has lost in recent months, such calls from the institutional investors must be taken seriously. Some even suggest a larger role for such investors.
"I'd like us to move to a system where directors are chosen by institutional investors, says Ted Pincus, founder and chairman emeritus of the Financial Relations Board. "No group is more knowledgeable about - or has a bigger stake in - companies than institutional investors. In true democratic capitalism, the people with the most at stake should have the most to say about who directs the company."
To many in corporate America, the biggest concern is the unease with which foreign investors are viewing the current corporate governance scandal.
Many have attributed the recent slide in the US dollar to a flight of foreign capital from American capital markets. Those with a view from the other side of the Atlantic say the remedy is clear.
"I don't think there's one answer for any company, says Richard Jacques, head of The Brunswick Group's Brussels office. "I think firms should take a mirror to themselves, and ask if they feel comfortable with all of their practices."
Nevertheless, the current crisis might be a good opportunity for the financial communications industry to demonstrate to clients what a critical resource they can be in such a time of upheaval. The crisis has also helped to pick up some of the slack in an otherwise tough economic environment, where IPOs and M&A activity have slowed to a trickle.
"We spend our time worrying about things that keep CEOs up at night," says Hollis Rafkin-Sax, head of financial communications at Edelman. "So in that sense, it helps keep us busy."
Corporate governance stories in the media
By Hugh Clifton
Revelations of its aggressive accounting practices and off-balance-sheet partnerships forced Enron to swiftly spiral out of control and declare bankruptcy in December 2001. In the months since, Enron has been joined in its fall from grace by a number of once-high-flying companies. With each successive company that flames out and evaporates shareholder value and investor trust, financial markets, investors, and regulators have devoted more and more attention to corporate governance matters, as they find that the credibility of the entire business community is at risk.
The media's interest in corporate governance has grown in inverse proportion to the performance of the leading indices for equity markets. Interest has reached a peak in July for five of the most influential business publications - The Wall Street Journal, The New York Times, BusinessWeek, Forbes, and Fortune. An analysis of their reporting during just the first 15 days of the month reveals that all three of the magazines have already published more articles on corporate governance than in any other month in the past year. At the same time, the two dailies are on track to set new records for the most stories on corporate governance in the past year.
The data also reveals that for all five titles, July isn't just a fluke month. There is clearly a growing trend toward more corporate governance coverage. The message to corporate America is that it should be prepared for increased scrutiny on how companies' boards of directors and senior management organize their affairs.
SOURCE: CARMA International. Based on reports appearing July 1, 2001 through July 15, 2002.