"Complying with the rules is necessary to achieve effective disclosure, but not sufficient", says today's contributorJohn Hughes, CA.
John is an associate partner in the National Assurance and Advisory group at Deloitte & Touche LLP, dealing with a wide range of securities - and financial reporting-related matters. Areas of particular emphasis include internal controls, executive compensation, and regulatory compliance generally. He is a frequent presenter and panelist on these topics and others. Previously, he was Manager, Corporate Finance for over six years at the Ontario Securities Commission, focusing in particular on the OSC's continuous disclosure review program and on related policy matters. This experience is reflected in Deloitte's Disclosure Check-Up service, which John leads.
If your company is like many others, it may not be maximizing the full potential of its disclosure to generate value. With the right disclosure controls and processes in place, your company could move beyond compliance to a more strategic use of disclosure – an approach that builds value by imparting a greater understanding of your organization.
MI 52-109 and SOX 302 (CEO/CFO Certification) have caused most companies to think more systematically about the processes surrounding their key disclosure documents. However, some officers may be genuinely unsure whether the controls and procedures they have in place are enough to achieve compliance with all disclosure requirements.
For example, the instructions to the Canadian MD&A Form say that a discussion of financial condition should include important trends and risks that have affected the financial statements, and trends and risks that are reasonably likely to affect them in the future." But there is no clear definition of when a trend or risk becomes "important," or of what is "reasonably likely." Many issuers may not have a defined process for identifying and evaluating all their enterprise risks. It may simply be easier to put compliance first, ending up with highly legalistic paragraphs on all risks (“important” or not) that are difficult to make practical use of (and that barely change from one year to the next). Similar challenges and calculations arise with many other disclosure requirements, both in Canada and the U.S.
It's no wonder that some companies treat the business of disclosure as having little upside, and attempt mainly to do enough to keep out of trouble. But just as the best offense is a good defense, the risk of major non-compliance diminishes quickly for a company that sees disclosure as communication, as a way of creating presence and confidence, and designs its disclosure approach around a clear guiding concept of its stakeholders and their information needs.
Although good disclosure can't compensate for bad performance, it can surely help steer the market through rough patches: intuitively, investors will be less likely to immediately sell on bad news if they're better able to place that news in perspective. Of course, many investors seldom access a company’s disclosure, relying instead on the media, or on analysts' recommendations, or other intermediaries. But research confirms that MD&A and other disclosures assist and provide value to these key groups too. This value may be even greater when the information is clearly provided voluntarily rather than for compliance purposes, because it’s more convincing as a commitment to transparency.
Good disclosure isn’t just about good writing though; it depends for its full potential on good strategy, good investor relations, and so on. Prescribed disclosure documents may be supplemented with other less technical materials. The quality of information on corporate websites (and the ease of finding it) continues to increase. But nothing stands still. More companies are hearing from their stakeholders now about environmental sustainability or executive compensation arrangements. Fuller disclosure may only provoke more questions and criticisms. As with most things in life, the best approach to this is usually to define a position and express it as clearly as possible, but to remain alert and adaptable.
It’s not surprising that companies would look to external advisors for input in navigating the disclosure obstacle course. Obviously, advisors like legal or accounting firms have access to much more information than a company can generate on its own . But again, companies often use these resources primarily to help them determine whether they comply with the rules, rather than whether they're maximizing the potential of their disclosure for generating value.
It's appealing to think however that an external advisor could help companies both in assessing the downside of their disclosure practices - areas in which they appear particularly at risk of being asked by regulators to re-file information for example - and in working toward the upside. The right advisor could certainly help check against the requirements, but could also think more constructively about the enterprise's key performance indicators and business risks and how those are reflected in the information. They could assess the overall coherence and focus of the disclosure record - for example whether key strategic priorities are consistently expressed across the MD&A and the compensation disclosure and elsewhere. And they could think about controls and governance at the same time as they identify issues in the disclosure, thus providing a much more comprehensive feedback and commentary.
Using an external service provider is just one way to come at this issue. Whether or not your company obtains that kind of independent input, we think that it will benefit from standing back regularly and assessing the overall value and effectiveness of what it's created. It's about compliance, sure, but it's more about communication. The picture that a company paints of itself for the world is too important to be an afterthought.
