In an era of heightened public scrutiny and distrust, it is not surprising that the issue of corporate transparency has catapulted to the forefront. This new environment, fueled by increased media attention on corporate malfeasance, greater regulatory pressure on financial disclosure and accountability, and technologies such as social media, has made it especially easy to uncover questionable practices. As a result, companies must be more transparent about how they do business and their financial results in order to generate trust with shareholders, the investment community, employees and all stakeholders. Yet many companies are struggling with what true transparency means in today’s culture.
What is true transparency?
True transparency is the act of disclosing all relevant information to stakeholders in a clear and concise manner. With this in mind, executives need to revisit financial disclosures to ensure that they aren’t just including the bare minimum required by the U.S. Securities and Exchange Commission (SEC).
To be truly transparent, companies must tell their whole story—good or bad—in a way that is easy to understand and retain. In fact, according to a recent study, more than 80% of Americans find corporate transparency more important than ever. But despite the growing need for transparency, many companies continue to struggle with the concept. For some, there are concerns about sharing information with competitors or that investors may misunderstand. For others, they aren’t sure how to build a compelling story and what to include. And for many, changing their procedures seems daunting.
However, the case for increased reporting transparency is strong as it:
• Leads to greater accountability and better governance practices
• Encourages more responsible risk-taking among employees because they can clearly see how their actions affect company performance over time
• Builds trust with shareholders and reinforces investment decisions
What to Do: Six Steps to Transparency
Though there is no one-size-fits-all solution to corporate transparency, there are steps companies can take to improve their financial disclosures.
1. Be clear and concise: When disclosures are too vague and lack clarity, they lead to a loss of investor confidence that can have serious financial consequences over time. Investors are likely to assume that lack of clarity results from trying to hide something. Be honest, open and accountable. Show investors you’re willing to put yourself out there by providing details even if it may hurt the company’s performance in the short term.
2. Ensure accuracy: Investors need to trust that the numbers you are providing are accurate and reflect reality. This means being truthful about your company’s performance and avoiding creative accounting tactics.
3. Think sustainability: Even though companies may produce impressive financial disclosures in the short term, they often fail to provide an overview of their long-term business strategy. This can be a significant red flag for investors who also want to see a long-term plan that demonstrates how the company will be successful in the future. Avoid overemphasizing one-time boosts or successes and instead focus on sustainable growth over time.
4. Be accountable: Companies need to be accountable for their internal and external disclosures. Internally, this means making sure everyone within the company knows what’s expected of them when it comes to disclosing information about their performance—no spin. Externally, it means working with investors directly to make sure they understand your business operations as well as how you generate revenue from those operations.
5. Enhance understanding: Balance compliance and accuracy with readability and simplicity to attract and build strong relationships with readers. Feature jargon-free plain language and easily, understandable graphics and other visuals elements to communicate information clearly and help draw readers’ attention to main ideas. Consider adding a summary overview to ensure that even those who skim will absorb some information.
6. Include ESG reporting: A recent trend in corporate transparency is the inclusion of environmental, social and governance (ESG) reporting. While the SEC has not yet issued any rules mandating ESG reports, many companies are voluntarily providing this information to their investors as a way of building trust. According to recent research conducted by Gartner, 85% of investors incorporated ESG criteria into their investment decisions in 2020. With the growing interest in this type of reporting, more companies are going to start including ESG metrics to differentiate themselves from their competitors.
What Not to Do: Five Common Mistakes
Companies also need to be mindful of the mistakes they should avoid when writing financial disclosures.
1. Don’t overpromise: When companies overpromise on future performance, they set themselves up to fail when their performance falls short of that promise. This can also negate the effectiveness and belief in the information provided across all corporate compliance and disclosure documents.
2. Don’t underestimate uniqueness: Each company has a unique story to tell. Companies that only report the bare minimum in their financial disclosure documents as required by the SEC, miss out on the indirect sales opportunity to highlight important competitive differentiators.
3. Don’t make assumptions: Many companies mistakenly believe their investors understand the business model behind their revenue sources and operations. The often do not provide a company overview or share strategy, losing the opportunity to reinforce the brand messaging and image. While you might assume everyone knows how an oil company or bank operates, this isn’t always the case. Be sure to include plenty of detail in your documents so that investors can understand how you operate and generate revenue.
4. Don’t neglect to educate: Don’t just share what happened. Spell out why something happened and what it means to the company’s overall short- and long-term financial picture. Provide a frame of reference, to help investors put drastic changes or dips in perspective. Especially if results are less than optimal, include information that speaks to the company’s strategy moving forward. If implementing ESG reporting for the first time, make sure readers understand the importance of this and what the company is focused on in the near and long-term. Further, if there are any terms or acronyms that might be unfamiliar, provide explanations for each one.
5. Don’t let one department dictate: Transparent corporate disclosure documents require a coordinated team effort. Cross company collaboration will yield a more robust, complete picture of the organization and will also demonstrate the importance of this reporting to all internal stakeholders. While it’s essential to ensure these documents adhere to industry standards and regulations, they should also reflect the needs of your shareholders in a way that makes sense for your company.
In brief, to ensure transparency and build investor confidence, companies need to be aware of the best practices for financial disclosures. By following these tips, companies can begin to create financial disclosures that are accessible and enhance investor understanding. Transparency builds trust, and trust is essential for a healthy, functioning relationship with all stakeholders.