How to Prepare a Proper Disclosure Plan for Shareholders

Nicholas J Price
5 min read
The SEC regulates disclosure requirements. The disclosures require reports on the company's financial condition, operating results and management compensation. The Securities Act of 1933 and the Securities Exchange Act of 1934 are federal laws that outline the requirements for disclosures. The Sarbanes-Oxley Act is another federal law that was enacted in 2002 that extends public company disclosure requirements.

While the Securities and Exchange Commission (SEC) provides the proper form and the guidelines for the information that publicly traded companies must disclose, companies can encourage trust with shareholders when they're more forthcoming than the normal requirements stipulate.

Diligent Corporation provides a secure online platform where boards can work on disclosures in person or remotely. Diligent Boards files and stores board documents securely in the cloud. The platform also provides a secure platform for virtual data rooms to ensure confidentiality for committees working on disclosures.

SEC Requirements for Shareholder Disclosure

Around the time of the 2008 financial crisis, the vast majority of shareholders became concerned about whether boards were performing due diligence in overseeing the company, its finances and its operations. They sought protection against fraud and insider trading. The SEC requirements were in response to the shareholders' concerns about holding boards of directors accountable for overseeing companies. Having accurate and truthful information levels the playing field for investors and helps them make the best decisions for their investments.

At the initial public offering, companies must submit a two-part registration. The documents should include a prospectus and a document that contains other information such as a SWOT analysis of the competitive environment supplied by the company. Investors use the SWOT analysis as a benchmark for decision-making.

All publicly traded companies must prepare and issue two annual reports ' one for the SEC and one for the shareholders. The SEC form is the 10-K form. The SEC also has certain other requirements, such as the requirement that company officers of investment banks must make personal disclosures about the securities both they and their family members own.

Financial reports have historically been difficult to decipher. Shareholders have expressed their desire for clearer and more understandable disclosures. In response to shareholder requests, many companies have modified the language and started using graphs and charts to help make their data clearer.

Relevance of 'Say on Pay'

'Say on pay' has become a notable issue with many investors. Shareholders expect quality and clarity on financial reports. Companies give shareholders the opportunity to vote on whether their say on pay votes will be held every three years, every two years or annually. The vote isn't binding, or even required, but it sets the tone for the company's perspective on say on pay.

The Compensation Discussion and Analysis (CD&A), which is part of the Executive Summary, contains the information on the Say on Pay Vote. The summary also contains additional information, such as:

  • Concise statement of the key compensation decisions for named executive officers from the most recent fiscal year.
  • Concise statement of the comparison between the company's financial performance and how it corresponds to executive pay.
  • A summary of key compensation decisions as they related to the company's chief executive officer, including highlights of key achievements over the most recent fiscal year.
  • Information about any changes in compensation practices or policies that the company revised or implemented after the last annual meeting of shareholders.
  • A summary of the business's performance for the last fiscal year.
  • A highlight for the shareholders in the summary is an analysis of the annual and long-term compensation plans and arrangements so they can assess executive pay as it relates to their long-term investments.
  • The executive summary should also address severance pay policies, post-employment compensation and change-in-control policies.
Shareholders appreciate getting company information that is accurate and truthful, even when the results don't meet the company's expectations. For this reason, companies should state problematic pay policies upfront. It won't help to minimize problem areas. Companies that aren't able to present the best results can reduce shareholder concerns by providing an explanation for problem areas and presenting their best case for making improvements moving forward.

Example of a Proper Disclosure Plan

A good example of a proper disclosure form is Target Corporation's Fourth Quarter and Full-Year 2017 Earnings investor report. The report is clear, concise and easily understandable. Target Corporation highlighted positives such as its after-tax return-on-invested capital (ROIC). The finance committee also included additional disclosure to explain the figures and to reduce confusion among shareholders. This disclosure explains the limits of non-GAAP financial measures and provided a schedule that included how the company calculated the company's ROIC.

Disclosures on Climate Change and Cybersecurity

In 2010, the SEC issued a release that addressed the issue of disclosures on the topic of companies' impact on the climate. The release didn't formally change any existing SEC disclosure rules. The intention of the release was to connect the issue of environmental impact and climate change to the mandate to disclose any risks that are material to the company. This was a move by the SEC to provide additional clarity and consistency of information to shareholders, as many shareholders prefer to invest in companies that are committed to green policies and practices.

With the multitude of reports of hacking, ransomware and hacking incidents that negatively affect companies and shareholders, cybersecurity is a hot topic in the financial realm. In February 2018, the SEC provided information on its views related to cybersecurity disclosures. The SEC encourages companies to disclose risks associated with cybersecurity incidents, including the potential for risks that result in connection with acquisitions. The SEC specifies that companies should disclose issues, such as:

  • Previous or ongoing cybersecurity incidents
  • The cost of cybersecurity efforts
  • Costs and consequences of cybersecurity incidents and remediation
  • Cybersecurity incidents that materially affect the company's products, services and relationships with customers and vendors
  • Legal proceedings related to cybersecurity issues
  • Impact of cybersecurity issues on financial statements
  • The board's role in overseeing cybersecurity risks
  • Disclosures on internal controls to prevent insider trading in response to cyberattacks
Environmental impact and cybersecurity issues are two examples of how boards can provide shareholders with the information they desire in order to solidify investments with their companies.

In conclusion, boards must first look to the SEC mandates, requirements and timeframes to create their disclosures. Wise boards of companies heed the advice of additional SEC releases to inform and guide them as to the types of disclosures that investors value most. Being honest and upfront about the company's financial results and how they address challenges creates trust and loyalty with shareholders.