IR Best Practices: Assessing how disclosure could improve

Mylene Kok
Vice President, DR Advisory - J.P. Morgan

The theoretical advantage of providing more information than required

As a public company, an issuer must comply with the information disclosure requirements of securities regulators, principally national government agencies, such as the U.S. Securities and Exchange Commission (SEC), and stock exchanges. In addition to the various types of information that must be publicly disclosed by a company, regulators require that financial and operating results be reported with certain frequency, such as quarterly or annually. In the U.S., an example of the latter would be the Form 20-F that is filed each year with the SEC by a foreign private issuer.

Interestingly, some companies elect to publicly disclose more information than required by regulators. The senior management and boards of directors of these companies typically choose to do this because they believe that incremental disclosure can improve the financial community's understanding of their business and thus value it more accurately. In other words, they believe that increasing investors' and analysts' knowledge of their company will translate - over the long term - into a market valuation that more closely reflects its growth potential and economic value. This philosophy hinges, in part, on the theory that providing more information can lower the risk premium that investors assign a company. It means that investors would be willing to pay higher multiples of earnings and cash flow when purchasing a company's stock or depositary receipts, resulting in a higher market valuation.

Of course, a company's competitors also might like to see it disclose more information publicly, as they could potentially use the additional information to their advantage. Any company contemplating increased disclosure should consider this potential drawback.

Methods to identify incremental information for disclosure

There are two principal methods that can be used to determine what additional information a company could make public. The first is to simply ask shareholders and analysts what other information they would like to obtain from the company that would benefit their analysis, and then compile their feedback to assess which additional metrics could be disclosed. An investor relations officer (IRO) can either ask them informally during a conversation or via email, or pose the question as part of any formal means of obtaining feedback from the investment community, such as a perception study.¹

Another method is to perform a disclosure benchmarking analysis. Here the IRO compares the company's disclosure with that of its sector peers. It is generally recommended that the universe of peers includes companies from around the world, particularly those domiciled in countries known to maintain high disclosure standards. You can also ask investors and analysts which companies they believe offer the best levels of transparency. Each line item in the company's financial and operating statements, and in other forms of information disclosure, is compared with those of the chosen peers, in order to identify information gaps. An example would be discovering that a peer or several peers disclose EBITDA at a division level versus just the corporate level at your company.

A comparison is also made with regard to the frequency with which peers provide certain information. For example, a number of peers might publish a particular measure or all of their financial and operating results on a quarterly basis even though regulations only require them to do so bi-annually. In addition to reviewing peers' earnings press releases and annual reports, be sure to examine all of their regulatory filings to get a complete picture of what they disclose and with what frequency.

How to conduct the benchmarking analysis

One way to perform the benchmarking analysis is to use a spreadsheet to compile the findings from reviews of the peers' disclosure documents. Place each financial and operating measure at the beginning of each row of the spreadsheet and place your company's name at the top of the first column followed by the names of each peer at the top of each column to the right. For your company and each peer, place an 'X' in the corresponding cell where each performance measure is disclosed; using the income statement as an example, place each line item at the beginning of each row, starting with revenue, moving down the income statement, and ending with earnings measures. After completing this process for each disclosure document, you can easily compare what information your peers disclose with what your company makes publicly available. It should be noted that you might discover that your company is more transparent than its peers.

Using the results of the analysis

Either of the above methods can be revealing, although employing both would likely produce the most insightful results. The findings of the disclosure analysis are presented to the chief financial officer and may be presented to the board's audit committee, which is responsible for overseeing a company's financial reporting process, among other activities and processes related to ensuring the accuracy of financial information. As is the case with any decision regarding the public disclosure of company information, be sure to consult qualified legal counsel.

¹ To learn about perception studies, please refer to our DR Advisor Best Practices primer on this subject.

Please note that this article is a summary presented for general informational purposes only. It is not a complete analysis of the matters discussed herein and is not intended as legal advice, and may not address issues or take into account facts relevant to any particular issuer. Each Issuer should consult with its own legal advisor regarding the factual and other considerations applicable to its depositary receipt program and the disclosure requirements summarized herein as they relate to its own particular situation. JPMorgan Chase Bank, N. A. and its affiliates disclaim liability for any and all claims or losses associated with use of or reliance on the information provided herein.