How much should you say?

How much should you say?

Historically, businesses played their cards very close to their chests (there were no requirements to communicate strategic plans or key performance indicators, or indeed spell out biographies for the Board of Directors - let alone the management team). Corporate reporting was predominantly reporting on historical information and whilst corporate governance and legislation played a part in reporting, it was not the extended requirement of today.

Fast forward to today, a society demanding more transparency, a need to divulge the nitty gritty on corporate responsibility, with a marketplace opened up by the internet and social media, with us as individuals demanding more and more information and expecting virtually immediate response. So where does that leave corporate reporting? Corporate governance and the legal framework dictates a certain level of legislated information that needs to be included within your corporate reporting plan. However, transparency encourages you to go the extra mile to open out communications, to highlight your strengths and also your weaknesses, and to explain your plans to deal with the riskier areas of your business in order to improve liquidity and give a true representation in terms of share price. So where do you draw the line between broadcasting your entire strategy (and opening out opportunities for competitors to steal competitive advantage) and communicating a boilerplate document that neither attracts nor inspires? This is the key to corporate communications, and whilst this briefing article may not come up with the definitive answer, it will open up the debate and highlight areas that warrant deeper consideration.

This article will cover the research and theories behind how much information should be disclosed above and beyond the legal framework, how best to communicate value and corporate governance and how content is best structured, narrated and displayed.

Corporate Governance incorporates disclosures that are mandated and regulated by law in terms of corporate reporting as well as some more 'voluntary' disclosures such as strategy development and Corporate Responsibility. However, there is little guidance as to how corporate disclosures are best attained, yet there is a wide diversity of content and presentation of such information in both the Annual Report and on the investor website.

How much information should be disclosed above and beyond the legal framework? This question is intrinsically related to the issue of the extent to which corporate disclosures (voluntary or otherwise) add value to the organisation. The dominant perspective on Corporate Governance is Agency Theory and this underpins most definitions. Agency Theory highlights that the interests of managers and shareholders are essentially divergent. Corporate Governance encompasses the mechanisms to ensure that managers act in the best interests of the company's owners, and maximise shareholder value, by allowing owners to monitor, control and direct management. (This description is more of a shareholder perspective.) More recent descriptions of Agency Theory surround the broader view that managers, shareholders and stakeholders interact to monitor company performance and add value to the corporation. (This is more of a stakeholder perspective.) Both definitions share an element of common ground in that they view some sort of value creation to be an outcome of Corporate Governance. However, these are mainly economic/financial benefits accruing to shareholders (described in terms of performance and/or shareholder value). This has a narrow focus on economic and financial returns, and there are arguments for a more comprehensive framework for ascertaining and measuring value creation with a broader spectrum of internal and external processes, strategies and behaviours (including tangibles and intangibles) that sustainably promote successful business growth in the long term.

How best to communicate value and corporate governance?

The world today demands instantaneous information in abundance; furthermore, failure to deliver the right information at the right time can damage reputations and negatively impact investor relations. Websites, announcements and, in some cases, blog sites and social media are assuming their role in corporate communications. In the US, there is a system of governance and reporting based on mandatory versus voluntary disclosures. Mandatory disclosures are classified as the legal requirements surrounding the production, publication and dissemination of the report and accounts. Voluntary disclosures cover a variety of non-financial information announcements that companies make to provide investors with lead indicators on future performance and also to supplement mandatory accounting disclosures. In contrast to the US, the UK has more of a 'comply or explain' approach to corporate governance and reporting. Companies can currently choose to comply with the UK Combined Code or opt out of recommendations and associated disclosure provided they legitimately describe the reasoning behind their opt-out. This has lead to a tendency towards boilerplate statements being referenced in Annual Reports, as opposed to referencing the individual circumstances as to why it is inappropriate for the company to apply with the code in that instance. In reality, the UK system allows for greater flexibility than the US in providing governance disclosures to investors, the downside being that companies have not taken full advantage of this flexibility (perhaps due to the perceived risks associated with fuller and detailed disclosure). It is, however, worth noting that the Corporate Governance Code replaces the UK Combined Code for all companies whose year end starts from June 2010. The aim of this new code is to address boilerplate governance reporting, and it will be very interesting to see the impact of the Corporate Governance Code on companies reporting after the year end of June 2010, so watch this space. . .

Summary of UK Corporate Governance Code

The following 'at a glance' outline of the UK Corporate Governance Code may help as a quick-reference guide. (Please note that this code applies to the full year starting after June 2010.)

Greater emphasis on the 'spirit' of the code
Chairman to include how the principles of the code have been applied in his statement
All Directors of FTSE 350s to have annual re-election
Can comply with code or not comply and explain why existing arrangements are appropriate
Closer link between performance and remuneration
Stronger requirement to explain strategy and business model
Define time commitment of all Directors
New principles for Non-Executives and Chairman
Chairman to have regular development reviews with each Director

How content is best structured, narrated and displayed

The connotation associated with 'disclosures' is that of one-way communications from companies to current or potential investors. However, 'corporate communications' are not solely about what information is being conveyed to shareholders/stakeholders (the traditional disclosure approach), but also about how and why companies communicate. Indicators of effective communication indicate issues such as channels of communication (print versus online), communication quality (credibility, timeliness, presentation, accuracy, etc.), communication context (development of media, market for corporate communications), and communication processes (directionality, scope for dialogue with investors). In addition, corporate culture and specific strategic context help to explain how and why companies communicate.

Graphic to illustrate indicators of effective corporate communications

Diagram: Indicators of effective corporate communications

To demonstrate this further, Parum (2006) identified the following types of companies based on an analysis of their motives and content of corporate communications.

Type of company Characteristics

Arrogant companies

Compliance with statutory requirements but no communications beyond short compliance statement.

Selective communications companies

Communications 'close to the heart' of management and shareholders, that go beyond statutory requirements but on the whole are one-way ('telling not listening').

High quality communications companies

Full and meaningful communications on corporate governance, with provision of feedback loops enabling dialogue with investors

Arrogant companies	Compliance with statutory requirements but no communications beyond short compliance statement.
Selective communications companies	Communications 'close to the heart' of management and shareholders, that go beyond statutory requirements but on the whole are one-way ('telling not listening').
High quality communications companies	Full and meaningful communications on corporate governance, with provision of feedback loops enabling dialogue with investors

Corporate governance concerns how companies are directed to create value. Statutory financial requirements describe how firm value was dispersed in the past. However, non-financial information, such as reputation, innovation and business strategy, indicate the company's potential for future value creation. Corporate communications goes beyond what information companies provide and incorporates how effectively and efficiently they communicate.

In summary

If you take a moment to step outside of your day-to-day roles in corporate reporting and consider the broader context of disclosure in the form of corporate communications, your approach to investors and stakeholders may need restructuring. I'm not suggesting a complete overhaul overnight, but a step by step plan to address your communications. You should consider reviewing the way you address corporate governance through the new Corporate Governance Code to ensure you move away from those boilerplate statements. You may like to address some of the broader aspects of communications, such as communicating strategy, brand and reputation and integrating these with some of your statutory disclosures to give a broader context and an improved investment proposition. Furthermore, corporate communications are most effective if they are easy to access and use and allow for two-way communication.

If you would like to talk to Jones and Palmer about defining a roadmap to improve your communications, please do not hesitate to contact me.