Businesses are disclosing more and more information. It’s being driven by a combination of regulation, shareholder activism and the power of social media. But is it having the intended effect?
The short answer is no. Research published by the University of North Carolina’s Kenan-Flagler Business School suggests that corporate information is actually becoming more opaque. Anyone wishing to read the annual business and financial summaries that public companies have to file in the United States (form 10-K)[1], for example, would need to have accrued 21.65 years of formal education to comprehend them, such is their complexity[2].
Leslie Seidman, a former chairman of the Financial Accounting Standards Board in the United States, has not been alone in pointing out a worrying consequence. As he told CFO.com[3]: “Many senior executives have got to the point where they don’t understand what the key messages are in their own financial statements.”
Nor is this phenomenon confined to the United States. Research by Grant Thornton on the FTSE 350 shows that the average annual report comes in at 300,000 words[4] – half of which is typically historical financial data. It illustrates that companies are struggling to apply the materiality concept – the accounting principle that says trivial matters are to be disregarded and important matters are to be disclosed.
Madeleine Mattera, head of financial services at Grant Thornton Australia, points out that investors don’t always know what they want. She says: “Shareholders are rightly concerned with returns in the mid to long term and the sustainability of those returns. Transparency is often assumed – until a company is on the front pages for something that indicates a lack of transparency – examples include an ecological disaster or being linked to modern slavery.”
Sue Almond, head of assurance at Grant Thornton UK, says: “Greater transparency usually just means more volume. The key to effective transparency is to strike a balance between holding back vital information and swamping investors with too much detail. Providing a huge bank of data effectively says: ‘Here it is – now get on with it’. It isn’t the way you would treat customers, so why should investors get this kind of treatment?”
One sector where there has been pressure for greater transparency from shareholders – prompted by a series of environmental disasters, allegations of ‘greenwashing’ and the growing profile of ethical investing – is the oil industry, with companies such as BP, Shell and ExxonMobil subjected to increasing levels of scrutiny about their environmental, social and governance activities.
In such politically sensitive sectors there may also be those keen to inflict reputational damage. Almond gives the example of an oil company, which might commit to build schools, infrastructure or make one-off payments to the local community in exchange for drilling rights.
She says: “It takes a lot of explaining in documentation and it can be taken out of context. It’s not helpful to the company, or to the investor community, if it gets damaged reputationally in a way that’s unwarranted.”
Businesses need to be aware of the power of social media to twist and distort their disclosures. Mattera says: “Social media provides a platform for an unprecedented number of users to voice opinions with no requirement for responsibility, or even to tell the truth. The role of social media as the banner of community standards is extremely powerful and many companies now build social-media meltdown and the massive reputational crisis that it can cause into their disaster-recovery scenarios and stress tests.”
Yet the openness of online forums is also driving change for the better. Mattera highlights the emerging peer-to-peer finance sector as one that stands out for the way in which it is handling transparency.
Another complication is a variance in terms of what is acceptable – culturally or legally – from one country to another, says Mattera. “There is a need to balance transparent reporting of sustainable returns to stakeholders with constraints enforced by competitive advantage and privacy legislation. For example, the United States is much more open than Australia on salary information,” she says.
“Transparency must come with a corporate culture in which it is OK to speak up, one in which you acknowledge the organisation isn't perfect and foster a culture of identifying and managing risks,” says Mattera.
Almond suggests companies adopt different approaches for different audiences and stratify the level of detail available – with a top tier containing key messages followed by additional levels that provide greater detail. To do this, though, companies need a firm grasp on audiences’ wants and desires.
“There is no one-size-fits-all solution to transparency,” she says. “It depends on the environment in which you operate, the people you’re communicating with, your company values and culture. It requires companies to listen to consumers and shareholders and to give serious thought to how they portray their company culture via their corporate reporting. Companies do a lot of talking, but much less in the way of listening to their providers of finance. They need to engage in dialogue with their shareholders and show that they care.”
Transparency isn’t easy. Too little and you risk the wrath of shareholders, too much and it will lead to confusion and opacity. The rewards though, for those companies that get the balance right, can be substantial with the promise of reputational and revenue gains.
To find out more about how your business can communicate more effectively with shareholders, contact Sue Almond or Madeleine Mattera.
An overhaul meant the 2014 report contained more pages (257) but fewer words (103,484) – it also had 15 introductory pages of charts, on revenues, earnings-per-share growth and employees. Charts are easier for investors to digest than lengthy text, Bornstein reasoned.
This was followed in 2015 by simplifying the annual report’s footnotes, which had stretched to 42,000 words. The 2016 annual report has an introduction and summary that places the company’s financial information in a strategic context, says Bornstein. The report is arranged around topics, with critical information highlighted.
Then, in March 2016, the company launched an annual integrated summary report. This 68-page document gives investors “a comprehensive and concise view of GE” by drawing on information from the company’s annual report, proxy statement and sustainability website.
“When you go online, the fewer clicks you need, the more efficient you are. It’s the same with disclosures. The fewer steps it takes investors to get the necessary information, the better,” said Christoph Pereira, chief corporate, securities, and finance counsel at GE.
[1] https://www.sec.gov/answers/form10k.htm
[2] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2741682
[3] http://ww2.cfo.com/disclosure/2016/04/rethinking-disclosure/
[4] http://www.grantthornton.co.uk/globalassets/1.-member-firms/united-kingdom/pdf/publication/2013/ftse-350-corporate-governance-review-2013.pdf