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After a series of scandals that have rocked the financial markets -- and shaken investor confidence in Corporate America -- investors may want to have an easy way to size up just how well a company disseminates critical information. That has prompted financial-information provider Standard & Poor's (like BusinessWeek Online, a unit of The McGraw-Hill Companies) to launch a service aimed at giving investors rankings, evaluations, and customized research related to how companies disclose information. The new service can also help corporations benchmark and communicate their internal governance practices to the public.
"Credibility and high governance standards are essential factors in a company's efforts to attract and retain investors in global capital markets," said Leo C. O'Neill, president of Standard & Poor's, in a press release announcing the governance services offering on Oct. 15.
Up to now, said S&P, investors have had no universal benchmark to evaluate levels of disclosure. So it launched a major study of the largest and most liquid companies in the world. These companies include members of the S&P Global 1200 index and an additional 400 that represent the leading companies in the Standard & Poor's/IFCI emerging markets index.
NEARLY 100 ATTRIBUTES. In connection with this study, S&P released a white paper containing the U.S. component of a global transparency and disclosure (T&D) survey that shows dramatic differences among companies in how they disclose financial and nonfinancial information. Included in the Oct. 15 press release is a table of T&D rankings that provide an evaluation of the public-disclosure practices of companies in various markets throughout the world.
S&P evaluates transparency and disclosure by searching company annual reports and standard regulatory filings (both English and local-language versions) for the presence of 98 possible items of information, or attributes. The 98 attributes were selected by examining the annual report and accounts of leading companies around the world to identify the most common disclosure items. S&P grouped these attributes into three subcategories:
• Ownership structure and investor relations (28 attributes)
• Financial transparency and information disclosure (35 attributes);
• Board and management structure and process (35 attributes)
Each attribute is scored on the basis of "yes" (included) or "no" (not included) answers to ensure objectivity. Each yes answer is equal to one point. After the scores are tabulated, S&P ranks the companies in decile order. An overall ranking reflects the total number of the 98 possible attributes included in a company's annual report and accounts. Individual rankings for the three subcategories are calculated in a similar way by reference to the maximum possible number of attributes for each subcategory.
WIDESPREAD UTILITY. The overall rankings in the initial study of S&P 500 companies ranged from a high of 9 (scored by three companies, Baker Hughes, Bausch & Lomb, and Progress Energy) to a low of 6 (recorded by three companies, American Power Conversion, Apollo Group, and Sanmina SCI). The rest of the companies in the 500 scored 7 or 8.
According to S&P, the T&D rankings can be useful for equity and fixed-income investors, analysts, brokers, and regulators to determine the disclosure practices of public companies. Companies with more transparent practices enable shareholders, creditors, and other interested parties to more effectively monitor management's actions and the company's operating and financial performance.
In the U.S., S&P found significant differences in the amount of disclosure provided in annual reports. It concluded that domestic companies could do a better job in providing more information on ownership structure, investor rights, and board and management structure and process.
PATTERNS OF DISCLOSURE. The report's most telling findings, according to S&P, suggest that companies voluntarily disclosing more in their annual reports than is required may command a higher stock price and that such additional disclosure may be a best practice.
However, S&P points out that its T&D rankings do not, and are not meant to, provide an overall indication of a company's governance standards. Although the study covers important aspects of corporate governance, S&P said the T&D focus is exclusively on disclosure patterns. A company's T&D ranking isn't meant to be taken as a proxy for its overall corporate governance.
Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
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