SOx? We Don’t Need No Stinkin’ SOx

There’s a hole in SOx.

Yes, even with SOx, management of public companies will continue to do the wrong thing.

And recent articles have bemoaned the high cost of SOx, the enforcement of the Sarbanes-Oxley laws by your friendly auditors, SEC, Department of Justice and assorted other global and local criminal and civil authorities.

But the reality is: SOx is no more than the codification of good internal controls, best practices in processes around financial reporting and financial disclosure and various other practices like whistle blower provisions , anti-fraud statutes, and accountability for reported results that already existed in other forms and in specific industries. It would not have been necessary if the auditors and others, like the Boards of Directors and regulators, had been doing their jobs instead of looking after only their self-interest.

The auditors have taken the most advantage of the formalization, under the force of law, of what companies should have been doing all along and what good, well run companies have done as a matter of course. It’s also the standards auditors should have been auditing against all along…

But as has been discussed before, the audit firms are caught between the need and desire for the next big thing, like SOx and FAS 133 and maybe IFRS and Basel II, that feeds their oligopoly, their government sanctioned franchise to provide assurance to the public company shareholder and potential investor as well as other stakeholders, and their distaste for being scrutinized themselves by new regulators.

Imagine, if you will, that you had just completed your PhD thesis and been awarded your degree. After compiling hundreds or perhaps thousands of sources and staying awake nights analyzing and developing conclusions from data, you read the day after getting your degree that it was all a sham. Half of the reference works used in your dissertation have been found to be plagiarized or based on false data.

That’s how investors should feel when a company announces a restatement. Violated. Taken for granted. Made a fool. Fleeced.

And then there are companies that just keep doing what they do well and lead the way in best practices in their industry and good corporate governance in surprising places. How can a large multinational based in the US or Western Europe instead complain that they have neither the available talent nor the wherewithal to do things right?

How they do it at Cemex

Ian Williams has the story behind this multi-national cement-maker’s IR transformation
March 2004

“The precise chemistry of cement may still be something of a mystery to scientists. But while they wait for more concrete details, Maher Al-Haffar, managing director of corporate finance at Cemex, has been trying to transmute the alchemy of investor relations into a science at the Mexico-based multi-national cement giant…During monthly meetings with the CFO or executive committee, the IR department presents its metrics…This scientific approach to IR provides Cemex’s senior management team with solid feedback. ‘With the contact system we can go to management and say, From the last 100 meetings, these are the major concerns, the major drivers that are causing or will cause investors to buy, sell or hold,’ Al-Haffar says.

He believes the key to successful investor relations is remembering who holds the purse strings. ‘Cemex showed its commitment to do the right things in investors’ minds,’ he continues. ‘Not that we are chameleons, but we cannot forget who we work for.’

Rather than follow the latest disclosure trends in IR, the company follows practices meant to clarify its strategy and financials for shareholders. For example, Cemex relies on old-fashioned Mexican-style accounting guidelines to show the free cash flow it generates. ‘Most American managements want to optimize accounting earnings rather than cash earnings,’ Al-Haffar points out. ‘If they did what we do, many of these recent scandals would have been discovered [sooner].’

The company also pays dividends – and quite big ones – something its original Mexican shareholder base insisted upon. ‘Our dividend payout has been consistently growing about 12 percent a year for the last ten years,’ reports Al-Haffar. ‘It’s been a great help in expanding the retail investor base.’

At the dawn of the new millennium, Cemex’s senior management decided it was time to boost its IR efforts. The company was expanding into new markets and had listed its ADR on the NYSE in 1999. It was then that Rodrigo Treviño, Cemex’s CFO, decided to call in Maher Al-Haffar, a Syrian-born American banker.

‘Our commitment to deliver value to shareholders rests on a clear recognition that, as a public company, we manage and compete for other people’s money in the financial markets,’ says Treviño. ‘As a company that has delivered double-digit Ebitda growth during the past ten years, it becomes extremely important for our growth strategy that we have access to a sufficiently large, liquid and diversified shareholder base. Because of that, and because we firmly believe that investor confidence is built over time on a track record of consistent, accurate, complete and timely disclosure of information, we decided at the beginning of 2000 to enhance and revamp the IR function.’

…With Al-Haffar on board, Cemex decided to do without the external IR consultants it had previously used. ‘[Using them] meant our institutional memory was outside the company, and we have very talented staff in-house,’ Al-Haffar comments. When Al-Haffar initially came on board, the department increased from four to ten IR professionals but is now an efficient half-dozen IROs, each of whom is focused on a particular region or specialization.

Cemex’s IR team carried away a sack-full of honors at last year’s IR Magazine Latin America Awards, including best corporate governance and best communications with the retail market. Still, Al-Haffar isn’t entirely happy with his program’s high standing among Latin American companies. That’s because he benchmarks his IR efforts against international heavyweights like Microsoft, BP, Cisco and Nokia – and is not ashamed of calling them to ask how they do it.

As one of the few Latin America-based companies with a multi-national presence and an international investor base, Cemex has, in effect, outgrown the emerging markets sector. ‘The stock is more closely related to the Dow [Jones] and the S&P because we’re so US-centric now,’ notes Al-Haffar.…Canadians now hold 5 percent of Cemex while US investors have close to 40 percent. Mexican investors hold only around 30 percent, but this might change when Mexican pension funds become free to invest in equities.

Overall, Al-Haffar says the successes of his new millennium IR strategy are ‘greater liquidity, greater transparency, and a much broader and more educated investor base. Our 50 biggest investors are top global investors that have put time into researching the industry and economies, so they aren’t going to behave in a knee-jerk way.’

… At the end of the day, you want to make sure you have satisfied customers – who, in our case, are the investors.’