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A Smarter Way to Address Disclosure Overload

Stephen Davis and Jon Lukomnik | October 6, 2015

for DeAnn“I have never met a piece of information that investors don’t want,” the respected audit committee chair said, more in exasperation than in anger.

We had been having a conversation that ranged over the current ideas to improve corporate reporting, from the Securities and Exchange Commission’s concept release on audit committee reporting to the Public Company Accounting Oversight Board’s proposed new standards for auditors’ reports to the non-governmental Sustainability Accounting Standards Board’s proposals. And then there are the various rating agencies—credit, environmental, social, governance—and their questionnaires. And regulatory agency requests. And on and on and on.

Even as investor advocates, we have to admit that our exasperated audit committee chair has a point. But the reality of more demands for more information isn’t likely to change anytime soon.

As a result, corporate officials have a choice. They can curse the inevitable prospect of more disclosure as creeping regulation, or they can channel the torrent of information so that it is a strategic asset.

Before understanding how to turn a compliance headache into a strategic communications advantage, first we have to understand why, despite more information being available than ever before, investors want even more. And how that opens an opportunity for companies that choose to take it.

Investors live and breathe information. How investors access and analyze information is the heart of their investment process. There are tens of thousands of variables in those processes. Literally. Every investor has a slightly different emphasis, from what information he looks at to how he weighs it to expected time frame for the information to be relevant.

At the extreme, high frequency traders need short duration (millisecond) price information, while long-duration buy-and-hold investors focus on corporate fundamentals and quality of management as they seek to divine trends that will last years. Then there are socially responsible investors, mutual funds engaged in quarterly relative return battles, liability-driven investors, quant investors, and a host of other types of investors. Each wants different data, and each analyzes that data through different sets of lenses.

With such heterogeneity, it’s no wonder that no single cookie-cutter template of disclosures will satisfy all. Moreover, every one of those investors consumes incrementally more data every day: The omnipresence of computers and communications networks means they have the ability to analyze mass quantities of information.

Defining “your story” and crafting your disclosure both to meet regulatory requirements and to focus on the company’s key performance indicators seems not only straightforward, but also beneficial to investors, stakeholders, and the company.

Think about it: Barely a quarter century ago, investors were limited to accessing paper-based regulatory reports and sell-side research. Perhaps they added some of their own research, which tended to be a few telephone-based interviews. Even if they had access to more data, they probably couldn’t analyze it all to turn it into actionable analyses.

It’s hard to remember, but computers and the Internet didn’t even exist when many of the current reporting requirements were established. Now we’ve advanced to the point where some investors use big data techniques pioneered by Google and Amazon. Today, information-processing technology is key for most institutional investors.

In such a world—tens of thousands of investors, each focusing on a slightly different set of data, and all with the ability to analyze it—we should not be surprised that the demand for data would explode.

And that is just the data demand from investors. Other stakeholders, from regulators to activists to local communities to workers to customers to suppliers, also want data so that they can analyze how a company is responding to their specific concerns.

Given such a diverse demand, the information requestors seek is sometimes in conflict as to form, time frame, and even substance. Companies aren’t falling to paranoid hallucination when they feel caught between myriad competing demands for information. They are truly caught.

Perhaps it’s for that reason that so much disclosure is anodyne: lawyerly and designed to fulfill compliance regulations without revealing too much. The problem is that such un-particularized information leaves investors and other stakeholders feeling that they know little about how a company actually makes decisions. So a vicious circle is established. The more companies disclose defensively, the more information investors demand.

There is another way. Instead of trying to avoid picking favorites among the competing demanders of disclosure, companies could, in fact, do exactly that.

Setting Disclosure Priorities

Enter Harvard Professor Robert Eccles. He is calling for companies to issue a “Statement of Significant Audiences and Materiality,” which would identify which stakeholders and which time frames a board of directors prioritizes in making its decisions. While we may not agree with some of Eccles’ proposal, we do think it represents a common-sense approach to corporate communications. As super-lawyer Ira Millstein counseled some 25 years ago, “Tell your story.”

For example, Sir Richard Branson of Virgin Group fame has a philosophy of “staff first, your customer second, and shareholders third,” believing that everyone profits from such a hierarchy. A company practicing that credo might well feature extra disclosure—above that required by law—regarding worker training, employee benefits, turnover, and so forth. That is not to suggest that Sir Richard’s philosophy is the only one, or even a preferred one. But the point is that he has an explicit set of normative guidelines that inform corporate decisions. That, in turn, allows investors and other stakeholders to understand corporate actions and achievements against an expectation of what the company stands for.

The truth is that every board and executive team has a philosophy to help them make decisions. Which constituencies do they prioritize? What is the time frame the board thinks about in making capital allocation decisions? How much does the company care about quarter-to-quarter earnings opposed to a multi-year total return targets? The list of such corporate preferences is long, and the last thing we want to do is add to the disclosure burden by suggesting a checklist. But understanding those corporate preferences can help you refine your disclosure regimen.

Investor relations professionals often talk about a company trying to select its investors. Letting markets know, for example, that a company is being run for long-term economic profitability, and that it is tolerant of interim market volatility, may attract similarly minded shareholders. Suggesting that capital allocation is paramount attracts a different type of investor than top-line growth focused companies. Stakeholder relations are also affected: A bank that is about growth will attract a different regulatory focus than one which doesn’t innovate and is capitalized far beyond the regulatory minimums.

Adopting Eccles’ suggestion in concept, even if not in his precise form of execution, could provide corporate officials with a “true north” in drafting disclosure. Defining “your story” and crafting your disclosure both to meet regulatory requirements and to focus on the company’s key performance indicators seems not only straightforward, but also beneficial to investors, stakeholders, and the company.

Focusing disclosure that way would have one more benefit to companies, which our poor audit committee chair would appreciate. Much as a well-designed project management plan defines what is in or out of scope, to focus on what’s important by eliminating certain things from consideration; having an explicit guiding disclosure philosophy would help companies know where to focus their reporting resources and where to say “being just compliant is good enough.”

That may not mean that investors will stop demanding more and more information. But it would certainly provide companies with a starting point on which demands to meet.