Transparency Isn’t Enough

Every public company could be considered transparent. Because of Sarbanes-Oxley and other regulations, they’re required to disclose information about revenues, profits, forecasts, performance, holdings, capitalization, and executive compensation.

Edgar, the Securities Exchange Commission’s public document database, catalogs 200 gigabytes of filings each year. That’s roughly 15 million pages of text. Public companies must issue annual reports, but nothing requires them to be easy to read and understand.

All that information must equal transparency, right?

In 2005 the “Rittenhouse Candor Rankings” found corporate jargon, spin, and opacity were more rampant in annual reports’ letters to shareholders than before Sarbanes Oxley was passed in 2002. Only 24 percent of the reports got high marks for clarity and candor.

Transparency means more than just complying with regulations or providing the requisite information.

Transparency is about providing executive perspective so that shareholders and other key audiences have a clear picture about the company and where it’s going. It’s about explaining the challenges the company faces instead of trying to “spin the story” or saying “no comment” – remember Enron and, more recently, AIG.

The Internet allows companies to spread their investor relations news farther than ever before. Some companies are posting transcripts of earnings conference calls to their Web sites, archiving Webinars, or alerting subscribers to SEC filings and news releases.

For example, Morningstar, which went public in May 2005, actively solicits questions from investors through the company’s Web site and other promotions. Morningstar posts the answers to the site monthly and includes them in the company’s 8-K filings. No regulations require them to do this, but they choose to have an open dialog with investors because they see the value in communicating in straightforward, understandable language.

Transparency helps business

Interestingly, the Rittenhouse report found companies that excel at transparency also excel on the market. The 25 top-ranked companies in candor outperformed the bottom 25.

Public companies should embrace transparency and communicate openly with their key audiences. It’s much easier to get—and keep—people on your side if they trust you and know you’re not playing games or distorting the truth. Companies that work with their shareholders to create an environment of teamwork stand a much better chance of success than those that don’t.

Think about it: Aren’t you more likely to invest in a company that updates developments frequently? Aren’t you more likely to invest in a company that solicits input from shareholders?

Being transparent doesn’t mean that CEOs have to tell everyone what they’re thinking every minute of the day. But it does mean thinking about shareholders and how they would like to receive information, then delivering.

Comments are closed.