Are corporations becoming too transparent?
Photo: Chance Agrella. Source: Free Range Stock Photos
Goldman Sachs’s annual report was over 400 pages. GE’s 10-k contained over 100,000 words. Annual reports today are dense, filled with jargon, and longer than a Russian novel. Are these corporate leviathans trying to obscure what they’re doing—trying to hide the truth in plain sight?
Part of the reason annual reports have gotten so big has to do with the complexity of the businesses themselves. Goldman Sachs and GE are much more complicated entities than they were 25 years ago. They have wide-ranging global operations, significant off-balance-sheet activities, and diverse business strategies. Explaining all of these takes a lot of ink.
Second, regulations have multiplied around corporate disclosure. CEOs and CFOs now carry personal legal liability for what goes into their 10-k’s. And the accounting oversight board never seems to reduce the number of reports, schedules, and footnotes required. A kind of regulatory ratchet happens, where it’s always easier to require one more item. It’s like the number of pages in the Federal Register: it always seems to go up, and rarely ever comes down.
Source: George Washington University
Finally, shareholder litigation is a much more serious issue toady. If something bad happens to the business and managers don’t immediately disclose it, shareholders will file a class-action suit. These lawsuits are so common now that there are multiple firms whose sole business is to manage the proceeds from these class-actions on behalf of smaller investors.
It’s easy to look at how complex financial statements have gotten and assume that managers are trying to fog up their disclosures—to make it more difficult to get at the reality behind the numbers. But that would be a mistake. Most managers are trying to do the right thing: to provide useful information to their investors, trading partners, and customers in a way that keeps the company out of trouble. But they’re like Gulliver, tied down by a host of Lilliputian rules.
The solution isn’t more regulation. You can’t add regulations about too much regulation to simplify regulatory disclosure. Only when investors reward simple businesses for their straightforward business plans will financial disclosure become easier to understand. Financial statements used to be communication tools, rather than compliance mechanisms. Let’s hope they can return to that role.
Douglas R. Tengdin, CFA
Chief Investment Officer