Impact of funding risk

Interesting material our way comes! Watson Wyatt has had a close look at the funding status of Fortune 1000 companies 2004 - 06 with effective numbers becoming available for 2006 thanks to FAS 158. WW has developed a Pension Risk Index, which estimates the loss of the pension plan in percent of the corporate's market cap at a 5% probability of unfavourable market conditions, given the plan’s asset allocation, liability structure and sensitivity to interest rates.

An excellent article in the current issue of the Financial Analysts Journal goes an important step further: The author estimates the correlation between pension fund deficits and associated credit spreads. The results are statistically significant and show interesting characteristics: The sensitivity of spreads to unfunded pension liabilities is about five times larger for junk bonds than for investment grade bonds. Also, the sensitivity to pension liabilities is much larger than to ordinary long term debt - double for investment grade, triple for junk. The model was also run for samples from the UK and Japan, but those results only confirmed a generic sensitivity.

This is where the relevance of pensions for corporate finance becomes evident. We expect that the relevance will increase thanks to better, more relevant accounting information and increasing market attention.

Sustainability investing

In its 2007 Business in Society Anthology, The McKinsey Quarterly has - among numerous other interesting articles - an interview about Socially Responsible Investing with upcoming Nobel laureate Al Gore and David Blood, partners in Generation Investment Management.

In related news, the World Bank has identified impact and source vulnerabilities of the world's countries in order to delineate country stakes in upcoming climate negotiations. Countries with high source vulnerability face above average negative consequences of climate change measures, while countries with high impact vulnerability are expected to suffer most from the consequences of climate change. As shown on the map, the two types of vulnerabilities are far from congruent, which means that negotiations will be very difficult.

A directive formerly known as portability

The Commission has presented a revised proposal for what was known as the Portability Directive. The project for the portability of pension rights has met opposition from several quarters and therefore had to be tuned down considerably, especially removing portability and harmonisation.

Revised SWX Corporate Governance

The self-regulated Swiss Stock Exchange SWX has issued a revised commentary re Corporate Governance Directive that is binding for all companies listed on SWX. The most important changes are:

The comply or explain rule has been extended to contain a substantiated explanation of why the conflict of interest between the public interest in disclosure and the secrecy interest has been decided for the benefit of the latter. This explanation requirement weakens this important option substantially.

Principles and Elements of compensation or share-ownership programmes are explained and substantiated to make management compensation more transparent.

CFA Institute podcasts

The CFA Institute is revving up its web based offering with interesting educational audio content that you can subscribe to, a.k.a. podcasts. Right now, it's only the audio stream of presentations and articles, but I hope that the presentations will soon be complemented by the slides that the speakers talk about. Here are the links to the RSS feeds in iTunes: Conferences and Events, CFA Institute generated items, CFA Institute Pubs.

Getting to know XBRL

The following is the first guest contribution on this blog. Bob Schneider, its author, is the editor of Data Interactive, a blog sponsored by Hitachi to help financial professionals stay informed about developments in the world of XBRL (eXtensible Business Reporting Language).

In a recent survey by the CFA Institute, some 59% of respondents said they were “not aware” of XBRL. Even if that understates CFA Charterholders' acquaintance with the data standard, it’s undoubtedly true that many financial professionals still have little knowledge of XBRL or – as SEC chair Christopher Cox calls it – “interactive data.”
As recently as within the past few weeks, XBRL taxonomies have been completed and widespread XBRL adoption is coming into view. Analysts and accountants are eager to gain an understanding of what XBRL is and what it can do.
Where can they turn to for help? Here are five resources that go beyond mere definitions and give users true insight to what XBRL can be.
An excellent place to start is Cheaper, Smarter, Faster: Benefits to Analysts from XBRL written by Christian Dreyer, who writes this blog, and Mike Willis, partner at PwC and a leading XBRL authority. Specifically directed at financial analysts, the article clearly and imaginatively describes XBRL, discusses its progress in various countries, and describes interactive data's various benefits. Although it doesn't contain the latest XBRL developments – it was published about a year ago – it is still the single best article on XBRL for financial professionals who are new to interactive data.
One of my favorite XBRL speakers is Liv Watson, VP of Global Strategies at EDGAR Online. Liv is one of those rare speakers who makes the dull seem interesting, and the interesting, exhilarating. In her presentation at the Third Annual XBRL Canada Conference, she uses war stories and fun asides to describe the benefits of XBRL for both external and internal reporting.
For the past year or more the most notable proponent of XBRL has been SEC Chairman Christopher Cox. In March the Commission held an Interactive Data Roundtable that included many key XBRL players, including representatives from companies participating in the Voluntary Filing Program. Ably moderated by Chicago Sun-Times journalist Terry Savage, the webcast provides listeners with an understanding of what implementing XBRL may entail and describes key XBRL issues going forward.
Interactive data comprises both XBRL-FR (for financial reporting) and XBRL-GL (for global ledger). The latter is the subject of the webcasts at GaLaPaGoS (click XBRL GL Webcasts). Two that are especially noteworthy are XBRL and SOA, a superb presentation by Walter Hamscher on why companies will need to adopt XBRL to fulfill their compliance requirements, and Eric Cohen's self-explanatory What Is the Global Ledger Good For? Uses of XBRL GL.
Finally, one more resource I'd like you to be aware of is the recently created archive of XBRL conferences at XBRL.org. Listening or reading the speeches made at these gatherings is perhaps the best way for newcomers to the field to gain an appreciation of what XBRL has to offer, as well as the most important issues in interactive data adoption.