Disclosure Strategy – Anticipating and Managing Reporting Needs

While “reporting” is not the most exciting CEO Topic we could have chosen for mid-summer reading, it is one that is well worth consideration as the expectations and regulations associated with company disclosure continue to become more extensive and often onerous. This is particularly the case for public companies, but private companies must also have effective disclosure processes in place. Moreover, there continues to be heightened regulatory attention on the extent of company guidance and forecasts and its impact on corporate governance. There are several factors to consider when evaluating how to develop appropriate internal reporting packages and the content and frequency of publicly disclosed information. A far-sighted and thoughtful reporting/disclosure strategy can avoid many pitfalls faced by companies as they grow and particularly as they consider operating in a public environment. In this CEO Topic, we will discuss ways to develop a sound reporting strategy by anticipating the needs and requirements of several key constituencies while keeping in mind the parameters and intent of financial disclosure and segment reporting rules.

As Jeff Immelt is quoted in a recent HBR article, Growth as a Process, “Every initiative needs a metric.” The challenge is to develop the appropriate metrics for a company’s target audience including management, the board of directors and shareholders. To manage and ultimately satisfy the expectations and needs of these constituencies in a consistent and appropriately detailed manner, management must provide the right information at the right time. Internal management reporting should include the key operating metrics that management needs for strategic and tactical decision making. These metrics have to be consistent with company strategy and must have a direct relationship to financial results. Developing the appropriate metrics and having this information available to management on a timely basis leads to better decision making and overall management.

Once internal management systems are in place, developing the reporting package for the board of directors involves streamlining and analysis of management information. Board packages should be succinct yet sufficiently detailed to allow directors to fulfill their fiduciary responsibilities. They should include a high level analysis of business performance as well as key financial metrics and projected performance. The financial package should include the appropriate segment reporting and other necessary disclosures in addition to the income statement, balance sheet and cash flow statements. In addition, management may include summary information related to current clients, sales pipeline, market conditions, competitive environment, technology initiatives, R&D, legal affairs, financial systems and marketing/PR activities.

Private companies are effectively managed with strong internal reporting packages and solid reporting to directors. However, disclosure issues become more complex in a public environment. The best way to determine expectations of external shareholders is to analyze other companies in similar industries and of a comparable size. This analysis is helpful not only for the IPO, but is also important for ongoing disclosure and reporting requirements. If no one in your industry sector is providing revenue detail by sector, there is less of an obligation to do so for your firm. If all others include segment detail by geography, then there will be an expectation to see this for all firms.

In some instances, comparables analysis is insufficient to make a determination on some key reporting issues. Management judgment is especially critical as rules and expectations continue to evolve regarding several issues including quarterly guidance, segment reporting, third party revenue breakouts, etc. The movement away from quarterly guidance allows management a longer term orientation that is critical to maintain competitiveness. Companies are increasingly choosing to provide annual rather than quarterly estimates regardless of their peers. Segment reporting can be especially tricky and can result in very different views and analysis of business operations. Management must decide the relevance of reporting by business segment and/or geographical segment, which can be point of sale (client location) or by point of delivery (where services are performed). Similarly, reporting on related party transactions is non-trivial. Establishing a practice of providing an exact figure for related party revenue sets very different analyst expectations and future inquiries than indicating that related party revenue is within a certain range. Thinking carefully about the frequency and content of reporting is essential as it sets precedents and creates expectations for consistency.

In today’s climate, reporting and disclosure require extra attention and management focus. All constituents - management, analysts, investors and regulators - benefit from companies divulging better and more relevant information with a longer term orientation. We have found a strong correlation between having the right information available and effective management. Developing the right reporting and disclosure systems significantly and positively affect internal decision making, allow for high quality corporate governance and favorably influence analysts and investors. For more information on reporting/disclosure strategies, please feel free to contact your GA team. For additional CEO topics: CEO Topics Archive