Firms can learn from disarming honesty

Friday 18th January 2002

New Zealand reports generally compare well with those produced internationally, especially in design. Where they tend to fall short is in the amount of information revealed, notwithstanding that other countries require much more disclosure.

The local habit of concealing all but the bare minimum about a company under the guise of protecting commercially important information is a bane to investors.

A recent PricewaterhouseCoopers report could help overcome this. This is called "Value Reporting Forecast 2002" and subtitled "Bringing information out into the open."

Now in its third year, the report aims to educate company executives on what and how to reveal information, particularly in their annual reports, to achieve maximum benefits for all parties. It also gives dozens of real examples from the reports of such major companies as Shell Oil, Deutsche Bank, Diageo and Sun Microsystems.

One of its key concepts turns the corporate reporting model on its head. Rather than selecting which information should be disclosed, the report suggests a company starts off by deciding to reveal everything, then choosing which information needs to be withheld.

A foreword by Mary Keegan, chairwoman of the UK Accounting Standards Board, indicates that information hoarding is not just a New Zealand phenomenon. "Historically, companies tended to provide only the reporting data required by regulation, relying on industry analysts to develop estimates of longer-term value. Increasingly, however, management is realising the benefits of talking about value creation in its communications with stakeholders. It makes good commercial sense to do so."

One reason why it makes sense is that open and honest communication can help overcome what PWC refers to as the "value gap" between what managers think a company's securities are worth and what the market is prepared to pay.

That gap appears to stem from investors being unable to obtain all the information they need to value a company. This in turn has five contributing elements, namely:

information gap - between the importance of information and how well companies deliver it

reporting gap - between the measurements executives rely on and those they show to stakeholders

quality gap - between the importance management places on a measurement and the company's ability to produce it

understanding gap - between what executives and stakeholders consider to be important information

perception gap - between how executives and investors view the company's efforts to produce information

Crucially, several studies have found that it is not simply financial information that companies and investors consider important when making investment decisions. Elements such as strategy, market share and new-product developments are rated highly but are less likely to be revealed by a company than stark numbers.

Fortunately, some companies very large companies have determined there are benefits to open and honest communication.

"Leading-edge companies are already communicating publicly on what truly drives value creation - not just information on financial performance, but information on the company's marketplace, its strategy, and the intangibles and nonfinancial performance measures that matter most to investors and other stakeholders," the report says.

Take this comment from a Royal Dutch/Shell annual report, "we recognise the importance of accountability to stakeholders and are learning to be more open, through greater engagement and more transparent communication." One piece of information presented was the discovery of "four incidents of bribery resulting in seven dismissals." Imagine a New Zealand company being so forthright.

Suitably inspired, I would like to nominate 2002 as "Corporate Openness Year." Here's a wish list:

The chairman of a major company that destroys shareholder wealth says, "We stuffed up. Sorry."

A company volunteers to promptly announce to the stock exchange when executives and directors trade its shares, rather than waiting several months for the annual report.

Companies with more than one type of business begin to show segmented figures, instead of hiding behind some catch-all statement like "the company operates in one area only, the provision of goods and services."

Chocolate fish await those willing to take a lead.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's investment report. www.mcewen.co.nz, davidm@mcewen.co.nz

Comments from our readers

No comments yet