Disclosure and Transparency : Importance
Corporate governance regulations and codes should be built on the principles of disclosure and transparency. Business organizations should communicate their financial and operating results to their shareholders and other stakeholders so that they are aware of the nature of their operations, their current situation, and their development plans going forward.
Most nations currently mandate that listed firms utilize the International Financial Reporting Standards (IFRS) as a reporting framework or guideline for financial reporting.
In order to provide investors with a thorough knowledge of the board and management’s business judgment, the board of directors should also disclose the inherent risks and estimations utilized in generating the financial and operating results.
Advantages from Disclosure
The corporation gives stakeholders, regulators, and the general public a peek of how the company functions and the state of its finances by revealing and making its corporate governance principles and structures transparent. This raises the organization’s legitimacy and fosters public faith in it.
Disclosure To the Public
The majority of nations have laws requiring listed firms to report their financial and operational results annually, semi-annually, or quarterly.
A company must quickly report any important developments that have an impact on how it operates so that all interested parties are fully informed.
According to the OECD Principles of Corporate Governance, disclosures should contain important information on the following-
The company’s financial and operational results
Generally speaking, audited financial statements illustrating the company’s financial performance and financial status should contain:
- Financial Statement
- Statement of profits and losses
- Flow of Funds Statement
- A financial statement’s notes
- corporate goals
Public firms should ideally declare policies regarding business ethics, the environment, and other commitments to public policy in addition to commercial statements and aims.
The goals, nature, and structure of ownership, as well as the shareholder composition, are made transparent through these disclosures. Companies must reveal ownership information if they reach a certain ownership threshold in a number of different nations.
Pay scale policy
It is important to make public the board’s and key executives’ compensation schedule. Around the world, the issue of executive pay is becoming more and more divisive, and several governments are working to enact legislation that might place a cap on how much compensation executives are allowed to get.
Additionally, there should be disclosures regarding board members’ backgrounds, selection procedures, prior directorships at other companies, and whether or not they are independent members of the board.
Transactions between related parties
Whether the transactions were carried out at a distance and under standard market conditions, the corporation should fully disclose to the market any significant linked party transactions. This is essential because the market should be able to tell whether a business is being managed with the interests of all of its investors in mind.
Predicted risk variables
The risk variables taken into consideration while creating financial statements and operational reports must be disclosed to stakeholders and the general market. These potential risk elements or significant concerns could be:
- risks particular to the sectors or regions where the organisation operates
- dependence on goods and services
- currency risk and interest rate risk are examples of financial market hazards.
- Derivatives and off-balance sheet transactions-related risk
- Environmental liabilities-related risks
- Concerns involving the workforce or stakeholders
Companies must provide information on important matters to employees and other stakeholders who may be impacted by the company’s performance in some nations as a matter of law.
These details could consist of:
- Employee-management relations
- relationships with stakeholders, including local communities, suppliers, and creditors
Governance policies and structure
Companies should make its governance structure and any corporate governance policies or codes, such as an ethics code, available to the public. It should also be made known how this code or guideline is put into practice.