Transparency, Disclosure, and MNCs Disclosure

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  • 1. Transparency, Disclosure, and MNCs
  • 2. Disclosure
    • The qualitative nature of disclosure often renders its format indeterminate.
    • Disclosure can be in the form of financial statements, footnotes, parenthetical information, or statement captions.
  • 3.
    • Disclosure in Corporate Report
    • Amount of information disclosed has increased due to pressure from financial and investment community, government, unions, employees, and the public.
    International Transparency and Disclosure
  • 4.
    • Pressures for Disclosures
    • International financial markets;
    • Awareness of Internationalization of markets and great diversity of accounting principles/ practices fueled demand for more information;
    • Many groups believe improved quantity/ quality are essential;
    • UN, OECD, EU, IASB have and are currently issuing detailed regulations and requirements; and
    • Some groups even demand “tailor-made” reports.
    International Transparency and Disclosure (Cont.)
  • 5.
    • Corporations and regulatory agencies decide who will be provided with information -- Range;
    • Who will will receive this information influences the extent of disclosure -- Depth;
    • Research suggests few users understand the information provided :
      • Direct Users -- small group of experts who can understand and apply information.
      • Indirect Users -- Those who rely on the advice of Direct Users.
    Communicating to Users
  • 6. The Complexity of Information from MNE’s Limits Understanding to Experts
    • Complexity Factors Include:
    • Large Number of Products
    • Multi-Country Locations
      • Different Operating Environments
      • Different Business Cultures
      • Different Accounting and Legal Standards
    • There has been a continuous tension between the needs of the average user and the expert with regard to the extent and complexity of accounting reports
  • 7. The Complexity of Information from MNE’s Limits Understanding to Experts
    • Complexity Factors Include (Cont.):
    • Limiting the scope or simplifying MNE Financial Information may help lay persons but hinder experts,
    • MNE’s tend to favor simplification and broader dissemination over complexity and limited use, and
    • More complex and extensive information may help average investors, because experts can disseminate the information to investors in usable form.
  • 8. The Importance of Information Disclosures
    • MNE’s are motivated to make disclosures to inform and influence investors in increasingly globalized capital markets;
  • 9. Cost of providing information must always be weighed against the potential benefits
      • Benefits
      • Inform Shareholders
      • Inform Potential Investors
      • Forestall Regulatory Action
  • 10.
    • Costs
      • Aid Competitors
      • Invite Action of Unions
      • Provide damaging information to regulatory and tax agencies
      • Cost of production and dissemination
  • 11. Managerial Attitudes To Voluntary Disclosures
    • On the average management perceives voluntary disclosures have a net cost;
    • MNE’s regardless of size or home country generally provide more information than regulations require;
    • Factors influencing the extent and nature of disclosure include:
      • Size
      • Country of Origin
      • Industry
      • International Listing Status
      • Information Type
  • 12. Reporting Trends
    • There are three well accepted categories of disclosure:
      • Corporate Review
      • Operations Review
      • Financial Review
  • 13. Corporate Review
    • A review of the business activities of the corporation as a whole and includes :
      • Chairperson’s Statement
      • Corporate strategy and results
      • External and unusual events
      • Acquisitions and disposals
      • Human resources information
      • Research and Development
      • Investment and Programs
      • Future Prospects
  • 14. Operations Review
    • Operations review includes :
      • Detailed discussion and analysis of operations
      • Business and geographic segment information
  • 15. Financial Review Includes
    • Financial review includes :
      • Discussion and analysis of results
      • Liquidity and capital resources
      • Asset valuations and inflation
  • 16. Frequency and Timeliness of Reporting
    • The dynamic nature of MNE’s requires more frequent updating of information for investors
      • North America generally requires quarterly reporting
      • EU requires abridged half-yearly reports
  • 17. Global Pressures for Transparency
    • Global pressure is growing for greater transparency and disclosure consistent with growing importance of capital markets, global trade and investment.
  • 18.
    • There is a link between expanded disclosure and a firm's cost of capital:
    • In a world of uncertainty, returns from investments are viewed as a probability distribution.
    • Investors use some measure of dispersion of a security's expected returns such that the correlation of those returns with those of other securities as measures of the risk associated with a security.
    • Investors prefer a higher expected return for any level of risk or a lower level of risk for a given expected return
    • A security's value is positively related to its expected return streams and inversely related to the risk associated with those returns.
  • 19. MNC Accountability Seems to be Growing to the Public at Large for Both their Policies and Actions
    • Reasons for this may include:
    • The development and growth of the influence of trade unions in most developed countries. Labor unions are interested in the terms, conditions, security, and location of employment.
    • The increase in what has been called the democratic imperative with the demand for recognition of the view that those who are significantly affected by the decision made by institutions in general must be given the opportunity to influence those decisions.
    • The postwar rejection by many governments of classical economic premises such as the belief that the unregulated pursuit of private gain maximizes societal welfare.
    • The substantial growth in industrial concentration, which has given rise to corporations large enough to assert a significant influence on national economic and social policies of host countries.
  • 20. At Least Two Issues Remain Unresolved
    • 1. There is no commonly accepted framework for providing information to users who are neither investors nor creditors.
    • 2. Unlike most of the costs of disclosures, the benefits of disclosures are difficult, if not impossible, to assess.
  • 21. Voluntary Disclosure
    • Forces for voluntary disclosure
      • “bad” news? vs. “good” news?
    • Is information disclosure neutral?
    • That is, is it objectively interpreted by all users?
    • What may be the influence of the relative power of sides in the bargaining process?
    • What about conflicts of interest?
  • 22. Voluntary Disclosure
    • Direct costs of information publication:
    • Gather
    • Process
    • Audit
    • Communicate
    • How does this relate to INTERNAL information needs?
  • 23. Financial Reporting and Disclosure
    • Some companies have embraced expanded disclosure requests as a positive dimension of their external relations programs.
    • Others have been less than enthusiastic.
  • 24. Financial Reporting and Disclosure
    • Those opposed to greater corporate transparency argue that such requests are often:
    • (a) discriminatory
        • (e.g., discriminate against MNCs versus purely domestic concerns),
    • (b) premature
        • given the absence of a demonstrated need for suggested disclosures,
    • (c) costly
        • not only in terms of preparation
        • but also in terms of competitiveness whenever required disclosures deprive a company of an existing competitive advantage, or give a competitive advantage to others.
  • 25. Financial Reporting and Disclosure
    • Notwithstanding arguments to the contrary,
    • Information demands of the corporation's enlarged reporting constituency cannot be ignored if the corporation is to continue to enjoy the degree of freedom it has been granted in the past in managing a significant portion of any nation's scarce resources.
    • A number of international organizations have adopted operating postures aimed at increasing their regulatory grip on transnational disclosure practices.
  • 26. Financial Reporting and Disclosure
    • This include but are not limited to:
    • United Nations Center on Transnational Corporations
      • an information gathering agency of the UN Economic and Social Council
    • Organization for Economic Cooperation and Development
      • a 24 nation body that provides a framework for harmonizing national policies in many fields
  • 27. Financial Reporting and Disclosure
    • EU
    • IASB
    • International Confederation of Free Trade Unions
      • one of several multinational labor organizations.
    • International Organization of Securities Commissions (IOSCO)
      • an organization comprised of securities regulators or stock markets in various countries interested in corporate financial disclosure standards.
  • 28. Financial Reporting and Disclosure
    • While competition for capital will continue to be a motivating force, management must increasingly weigh the negative sanctions of government controls in the corporate disclosure decision.
  • 29. Regulatory Disclosure Requirements
    • Listing securities on foreign exchanges increases capital opportunities but also increases a corporation's international image and avenues for future financing.
    • As a basis of investor protection, most securities exchanges impose disclosure requirements for both domestic and foreign companies seeking access to their securities markets.
    • Disclosure requirements in the US are generally considered the most stringent in the world.
  • 30. Regulatory Disclosure Requirements
    • Periodic reports to the SEC (Form 20-F) which requires specific disclosures about the issuer's business, including financial statement that have been reconciled to US GAAP.
    • Form 6-K, which incorporates whatever information the non US issuer discloses in its country of domicile, files with a foreign stock exchange, or distributes to its stockholders.
  • 31. Regulatory Disclosure Requirements
    • Disclosure pressures work both ways
    • firms are being pressured to disclose more;
    • regulatory agencies are being pressured to require less disclosure.
    • Increased competition from other capital markets, cross-border and multijurisdictional offerings, and the institutionalization of the US capital markets.
    • Capital markets are growing in other countries, and these markets are increasingly being deregulated or restructured, providing attractive alternatives to the US markets
      • eg. development of a unified capital market in the EC.
  • 32. Regulatory Disclosure Requirements
    • SEC response
    • effective regulatory structure for an international securities market system should include, among other things, sound disclosure systems that protect investors while simultaneously balancing costs and benefits for market participants.
    • HARMONIZATION efforts
  • 33. Regulatory Disclosure Requirements
    • Two possible approaches:
    • Reciprocity based on some substantially equivalent minimum threshold
    • Common prospectus
      • adoption of a uniform set of disclosure standards for a prospectus that would be filed simultaneously with the regulatory authorities in each national market where the securities will be offered.
    • SEC seems to have opted for a hybrid of the two approaches.
    • SEC's credo seems to be changing from investor vigilance to caveat emptor.
  • 34. Voluntary Disclosure
    • Firms often exceed required disclosure minima if they feel it will lower their capital costs or enable them to stay abreast of competitive disclosure practices.
    • Variety of of Reporting Models:
    • 1. Convenience Translations
    • 2. Special Information
    • 3. Limited Restatements
    • 4. Primary - Secondary Statements
  • 35. Convenience Translations
    • Expects investors in other countries to fend for themselves as far as transnational reporting goes.
    • In other words, companies will make copies of annual reports available to investors whenever they happen to have a mailing address, but no special efforts are made to assist such foreign users with understanding and interpreting financial reports prepared on a basis often significantly different from what the reader may expect.
    • Some may translate at least the language portion of their reports for major concentrations of stockholders.
  • 36. Convenience Translations
    • Sometimes monetary amounts are translated as well
      • usually at the year-end foreign exchange rate throughout
      • sometimes using dual columns.
    • Convenience translations lend an international appearance to primary statements and may offer some public relations benefits, but they may also mislead.
    • Language and/or currency translations may give the foreign reader the impression that accounting principles underlying the convenience statements have been translated as well.
  • 37. Convenience Translations
    • Even financial analysts and others in the financial community tend to interpret convenience-type statements as comparable in substance to domestically prepared statements for purposes of financial comparisons and securities analysis.
    • Differences in underlying independent auditing standards and practices may lead to a misinterpretation of the degree of third-party reliability that may be placed on convenience statements.
  • 38. Convenience Translations
    • Disclosures that specifically identify the national accounting principles, reporting domicile, and auditing standards underlying convenience statements would help.
  • 39. Special Information
    • A small number of MNCs have made an effort to explain to readers in other countries the particular accounting standards and practices forming the basis for their reporting.
    • For instance, MNCs domiciled in Sweden now typically include a copy of the most recent information book entitled Key to Understanding Swedish Financial Statements with each copy of their financials mailed to non Swedish addresses.
  • 40. Special Information
    • Underlying the explanations in accounting principles booklets is the presumption that foreign readers possess the technical expertise to quantitatively reconcile disclosed accounting differences.
  • 41. Limited Restatements
    • Phillips Company estimates what earnings adjustments would be required if accounting principles generally accepted in the US rather than in the Netherlands were followed.
    • Dutch investors see earnings and per share numbers that are consistent with local accounting practices, while their US counterparts are at least provided with earnings numbers that are readily understood and can be used comparatively.
  • 42. Limited Restatements
    • Disadvantages of partial restatements:
    • rate of return comparisons are hardly meaningful when earnings are restated to US GAAP are compared with total assets and other financial statement categories that reflect Dutch accounting norms.
    • Some also restate shareholders' equity as well as earnings for GAAP differences.
  • 43. Primary - Secondary Statements
    • Accountants International Study Group recommended that two kinds of financial statements be recognized as part of formal (or official generally accepted accounting standards and principles).
    • Primary financial statements would be prepared according to financial accounting principles generally accepted in a company's country of domicile and in that country's language and national currency.
    • Secondary financial statements would be prepared specifically for financial reporting audiences of interest in other countries.
  • 44. Primary Statements
    • Independent auditors would express opinions on primary financial statements
    • Again, according to both the generally accepted financial accounting principles and the generally accepted auditing standards of the domicile country.
  • 45. Secondary Statements
    • Such secondary financial statements would have one or more of the following characteristics:
    • 1. The reporting standards of a foreign country would have been followed
    • 2. The statements would have been translated into a foreign currency.
    • 3. The statements would have been translated into a language that is not the language of the reporting company's country of domicile
    • 4. The independent auditor's report would be expressed in a form not commonly used in the reporting company's country of domicile.
  • 46. Secondary Statements
    • Secondary statements have notably been embraced by Japanese multinationals such as Hitachi and Honda in reporting to their North American readers.
    • Advantages:
    • full recognition of national points of view,
    • increased information content,
    • reduced degree of generality,
    • likelihood of more useful relevant information entering economic and decision channel would be greater.
  • 47. Secondary Statements
    • Disadvantages:
    • Production costs,
    • runs counter to the so-called single domicile for financial statements point of view
      • single domicile viewpoint holds that financial statements can present only a single representation of financial decisions and results of operations
      • only for a given time, under a given set of rules, and for a given purpose.
      • When business decisions are made under these conditions, they ought to be reported only in terms of the same conditions.
  • 48. Secondary Statements
    • Potential reader confusion
      • business and financial mores that govern the interpretation of accounting based financial statement ratios may vary internationally
      • eg. high debt ratios, viewed with alarm in the US, are an accepted part of business in South Korea and Japan.
    • The solution to the reader confusion problem must be in terms of disclosure
    • Several Japanese companies have begun to provide such disclosures in their registration filings with the US SEC as a result of past misunderstandings.
  • 49. Social Responsibility Disclosures
    • Corporations, both domestic and multinational, are being called upon to account for social responsibilities to stakeholders
      • i.e., shareholders, lenders, employees, customers, governments, and other interest groups that transcend purely "bottom-line" concerns.
    • Social Accounting here refers to the measurement and communication of information about a firm's effects on employee welfare, the local community, and the environment.
    • Social responsibility disclosures embrace nonfinancial as well as financial performance measures.
  • 50. Social Responsibility Disclosures
    • Society grants corporations the freedom to manage a significant portion of its scarce resources.
    • In return for this privilege, corporations have the responsibility to render periodic accountings to society on its effectiveness and efficiency in managing those resources.
  • 51. Employee Disclosures
    • Information on employee welfare has long been of interest to labor and its representatives.
      • working conditions
      • job security
      • equal opportunity
    • Also of interest to investors:
      • labor relations, cost, productivity
  • 52. Employee Disclosures
    • Information regarding number of employees has proved to be of great interest to national governments
    • aggregate employment base
    • industries and activities that are deemed economically attractive
    • employment practices of transnational corporations consistent with local norms
        • (e.g., fair hiring practices, seniority, salaried vs. non salaried employment patterns)
  • 53. Employee Disclosures
    • At the national level, employee disclosures perhaps find their greatest expression in France.
    • France requires all enterprises employing more than 750 employees to supply their works councils union representatives with an annual social report covering in detail such matters as employment, wages, social costs, working conditions, and training and industrial relations.
    • These reports do not have to be furnished for external use, but there is a growing practice for French firms to supply their shareholders with social data.
  • 54. Value Added Disclosures
    • Value added disclosures are of fairly recent vintage and are predominantly observable in the annual reports of European companies.
    • Value added is the difference between the value of a firm's output and the value of its input (materials and services obtained from other enterprises).
    • It is a performance measure for a larger corporate stakeholder group than just investors
      • based on increased value, who gets what?
      • What goes to employees, lenders, governments, etc.
  • 55. Value Added Disclosures
    • Disclosure requirements with regard to value-added are virtually nonexistent.
    • The UN has formally endorsed the usefulness.
    • It has been observed in countries where the role of labor tends to be very visible.
  • 56. Environmental Concerns
    • If appeals to moral responsibilities do not alter stockholder decisions and corporate policies, the negative hits to earnings and ultimately dividend, from environmental litigation will.
    • Exxon Corporation in 1989 charged more the $1 billion to earnings as a result of its oil spills (primarily Valdez)
    • Environmental disclosure requirements are minimal.