Transparency in Corporate Reporting

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Transparency in Corporate Reporting

• LUMS/SECP Conference on
• Corporate Governance in Pakistan
• Sunday 30th May 2004

Catherine Martens Malik
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Agenda

• Definition of Corporate Transparency
• Link between Corporate Transparency Corporate
  Governance
• Effects of Corporate Transparency on Economic
  Performance
• Measures of Corporate Transparency
• Conclusions

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• Definition of Corporate Transparency

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What is Corporate Transparency ?

• Corporate Transparency is the widespread
  availability of relevant, reliable information
  about the periodic performance , financial
  position, investment opportunities, governance,
  value, and risk of publicly traded companies.
• Transparency is also related to the issue of
  Trust. When markets lose confidence in the
  integrity of information provided by a firm, or
  feel that they can no longer trust the firm, the
  negative effects are likely to be dramatic.
• The issues of Transparency and Trust relate
  not only to the conduct and principles of
  individual corporations but also to the
  operations of a market as a whole.

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• Link between Corporate Transparency Corporate
  Governance

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Transparency Essential for Good Corporate
Governance

• Corporate Transparency is at the heart of good
  Corporate Governance and it is, together with
  accountability, what any good Corporate
  Governance Code is designed to promote.
• Transparency, good Corporate Governance and the
  trust that they generate, are also key elements
  in the efficient pricing of assets and
  distribution of capital.
• Conversely, poor Corporate Governance, and the
  lack of transparency that invariably accompanies
  it in any market, creates mistrust and
  uncertainty and the consequent risk premium
  demanded by investors in these circumstances will
  be high.

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• Effects of Corporate Transparency on Economic
  Performance

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Channels through which Accounts Information
Affects Company Performance
Economic Performance
2A
Reduced cost of external financing
1A
1B
3
2B
CHANNEL 3 Reduced Information Asymmetries
CHANNEL 1 Project Identification
CHANNEL 2 Governance Role
1
2
3
Financial Accounting Information
Unaudited disclosures by firms
Information collection by private investors
intermediaries
Stock Price
Information Environment
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Positive Effects of Transparency on Individual
Company Performance

• There are 3 main channels through which the
  widespread, regular, and timely disclosure of
  high-quality financial accounting information can
  positively affect the investments, productivity
  and value-added of companies. These channels
  involve the use of this information
• To help managers and investors to evaluate and
  identify promising investment opportunities
  (Channel 1 - Project Identification).
• To discipline managers to direct resources
  towards projects identified as good and away from
  ones that primarily benefit managers rather than
  owners of capital, and to prevent stealing
  (Channel 2 - Governance Role).
• To reduce information asymmetries (Channel 3).

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Positive Relationship between Transparency and
Country Performance

• The conclusions just presented suggesting link
  between corporate transparency and company
  performance at an individual company level are
  based on detailed research and numerous academic
  studies.
• Unsurprisingly, research into this subject also
  points to a positive relationship between the
  quality of an entire industry or countrys
  corporate disclosure regime and its economic
  performance.
• There is increasing evidence that cross-country
  differences in corporate disclosure intensity (as
  reflected in measures like the CIFAR index, for
  example) are associated with differences in
  economic growth, efficient allocation of
  investment, sensitivity of investment to internal
  cash flow, development of financial
  intermediaries, IPO underpricing, and
  concentration of stock ownership.

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• Measures of Corporate Transparency

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Measures of Corporate Transparency

• There are 3 main elements which contribute to
  Corporate Transparency
• Formal Corporate Reporting (mandatory and
  voluntary)
• Information dissemination via the media and
  internet channels
• Private information acquisition and communication
  by financial analysts, institutional investors,
  and corporate insiders

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• Closing Comments

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Conclusions

• Corporate Transparency lies at the heart of any
  good Corporate Governance code and is the
  foundation on which it is built.
• The structures and disciplines imposed by
  Corporate Transparency have positive effects on
  an individual companys economic performance and
  attractiveness to investors.
• There is also increasing evidence that promotion
  of Corporate Transparency in a country as a whole
  significantly improves both the environment for
  growth and capacity to attract investment.
• The elements contributing to Corporate
  Transparency include both formal corporate
  reporting, and less formal communication of
  information via analysts, institutional investors
  and the media.