8 Keys to Increase Your Disclosure Effectiveness
Public companies are quickly adapting their disclosures to provide better information as regulations and investor sentiments evolve. Traditionally, financial reporting professionals often interpreted better to mean more—more narrative and more tables, in many cases. That led to narrative losing its nuance, turning into boilerplate or repetitive language, and tables failing to bring value to the reader.
Ultimately, disclosure effectiveness suffered.
In recent years, financial analysts and investors have cried, “Enough!” These agents of change have advocated for financial statements that emphasize only relevant information and minimize duplicative and unhelpful disclosures. They challenge public companies to make the most relevant material prominent and easy to find for investors.
The SEC also has helped to drive the push for simplified filings with a number of regulatory changes, policy statements, and speeches, including the modernization of Regulation S-K. Readability and improved navigation are the directives from the SEC, and repetition and immaterial information are frowned upon.
Savvy financial reporting teams have already started revamping their SEC disclosures to effectively deliver information to investors.
8 tactics for more meaningful disclosures
The following are several ways today's forward-thinking public companies are improving their disclosure effectiveness. Applying these best practices will help make your financial reports more accessible, straightforward, and valuable for the investing public.
1. Rethink the routine: organize your disclosure
Where is it carved in stone (or written in SEC regulations) that a proper 10-K must start with a summary of the company’s industry and products or services, then delve into the current market for its common stock, then report on key executive compensation and stock ownership, and conclude with financial statements and exhibits–with lots of subcategories in each section?
Answer: Nowhere. Yet, that approach has long been the default for many companies.
When planning your disclosure content, start with the perspective of the consumers. One of my biggest pain points is poring over a 10-K to find the information I need. Personally, I prefer something more like a binder that lets you very quickly get to the section you need.
Bear in mind, though, that financial analysts are your most important audience. You should organize a 10-K so that the information they value most is at the forefront. For example, here are the topic categories one company chose for its redesigned 10-K:
Give careful thought to what your own audience most wants to know from your 10-K. What topics will make the most logical sense? Here are some quick tips to help organize content for maximum disclosure effectiveness:
- Give your investors the most pertinent information about your company as early in the disclosure as possible.
- Make the document more comprehensible and easier to navigate—for example, leverage section dividers, colored tabs, and an index.
- Show the layout to colleagues outside of your immediate team and ask whether the format is clear to them. Better yet, task them with finding a piece of information and see how quickly they can retrieve the data.
These considerations will help you develop a clean and organized disclosure that focuses on the both the primary interest and ideal outcome for your investors.
2. Eliminate useless redundancy
Financial reporting professionals should avoid the habit of repeating identical or substantially similar narrative (for example, discussion of a specific risk factor) in different sections of the disclosure. The same goes for a narrative about segment numbers already provided in the financial statements, or nearly identical footnotes, such as barely different explanations of what drives an account receivable.
You may be startled how much clarity emerges when you avoid redundancy in a disclosure.
3. Draw focus to the most critical financial information
This can be done through any number of layout techniques: using tables or charts in place of narrative text, varying types of charts, opting for eye-catching colors and larger typeface, using a different type font, showing time-ordered comparative charts and putting a key piece of text inside a box, just to name a few.
See, for example, some approaches Intel Corporation took to bring attention to key information in its Form 10-K:
It is important to note, however, that your company should craft a policy about how to display any non-GAAP financial measures in your disclosures. You may decide that including non-GAAP insights provides your investors with more operational views of your company’s performance, but the way you display those measures is important.
Although non-GAAP measures can tell an insightful story from management’s perspective, the SEC provides guidance on how companies should display these measures in disclosures. Be sure to review the SEC guidelines when changing the way you present different measures in your external disclosures.
4. Use plain-language principles
As a general rule in disclosures, it's best to use brief, declarative sentences whenever possible. Break long sentences into shorter ones, and separate long narratives into multiple paragraphs. Opt for easily understood words over industry jargon. Avoid or limit the use of acronyms whenever possible.
The bottom line: your guiding principle should make the disclosure easier to read, digest, and remember.
5. Let your numbers tell the story
Sometimes a single, well-organized graph of figures can replace multiple paragraphs of words. General Electric, for example, decided that a simple table in their 10-K did a better job describing segment performance than a fairly long section of text:
Next, ask yourself whether a turning your data into bar or pie chart might explain key financials more clearly and effectively than a financial statement-style table.
6. Apply clarity principles to footnotes as well
Don’t ask people to read deep into footnotes to reach the most impactful information if you can avoid it. If your footnotes tend to run long, write them to give the most material disclosures early, and consider techniques like bold-facing, underlining or italicizing to draw attention to key points. Also, replace the strict legal language that typifies many disclosure footnotes with easily understood words and shorter, declarative sentences.
7. Involve your internal stakeholders
Remember, fundamental changes to your disclosures may represent a significant disruption to different parties, internally and externally. Enlist a senior leader to serve as the champion for your company's new standard for disclosures. Continuously review and obtain buy-in from affected business line and functional leaders. Show each iteration of the revised disclosure to their teams for commentary. Your motto should be “No surprises.”
The alternative? Potential chaos when the tax reporting, legal, and compliance staffs discover they were not consulted about a new approach to footnoting.
8. Consult with external stakeholders, too
It is good practice to obtain feedback from certain external stakeholders before you get too far down the road in overhauling your company’s disclosures. A useful exercise might be to reach out to analysts, says Nigel Bunbury, CEO of WorkOps Consulting Inc. Find out which tables and narratives they find significant or most useful, and which they rely on less often.
“One thing a reporting issuer should avoid is clouding its most vital messages with verbose and unimportant disclosures,” Nigel says.
These types of objective insights from users outside your organization can help your team decide to streamline certain disclosures or add to others.
Disclosure fundamentals outlast headlines and hot issues
At present, your company may be wrestling with how to present clear disclosures of Brexit impacts or sustainability issues. These topics may be trending today, but the emphasis on streamlining your disclosure is here to stay.
Following the eight steadfast tactics provided here will equip financial reporting professionals with the tools to deliver more effective SEC disclosures well into the future.