5 ways to make disclosures more effective for investors in 2021

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The Securities and Exchange Commission formally adopted amendments in November to modernize financial disclosure requirements to ease the compliance burden for SEC registrants and make disclosures more meaningful for investors. The updates focused on federal securities law Regulation S-K and are intended to “improve the quality and accessibility of the disclosure that companies provide their investors, including, importantly, giving investors greater insight into the information management uses to monitor and manage the business,” then-SEC Chair Jay Clayton noted at that time. Amendments aimed at similar goals have been made to Regulation S-X.

The rule changes are indeed helpful and provide registrants more flexibility to tailor their disclosures. CFOs, however, should always be looking for ways beyond regulatory action to improve the way they communicate to investors. And some leading organizations are taking the SEC’s cue and tightening up their filings to provide stakeholder with better clarity, focus and insight. Here, at a high level, are some initial actions organizations can consider:

Remember, the SEC’s updates are concurrent with updates from the Financial Accounting Standards Board to U.S. GAAP. It may be appropriate to evaluate filings broadly — financial statements and the information outside of them — for user friendliness and regulatory compliance.
Reevaluate the push for disclosure effectiveness in light of a principles-based approach. Prescriptive rules may not be popular and are sometimes ineffective, but they do provide a level of certainty. As regulatory bodies ease away from them, however, organizations likely will have to evaluate how they want to maintain the spirit of each underlying rule.
Finally, consider engaging internal and external assistance, including the management team, to nail down what’s important to the company and investors.

Take the reins on disclosure effectiveness

Although the SEC’s disclosure modernization effort results in specific rule changes, it can also be thought of as a challenge to rethink how corporate filings can become sleeker, more intuitive and more attuned to what investors want while confirming that all material information is provided to investors. And by placing some extra attention on disclosure goals and presentation, CFOs and their organizations can meet them halfway with more focused, insightful stories of their visions and results.

To further assist CFOs, we have identified the following five steps that may help improve the effectiveness of their disclosures:

Evaluate disclosure goals

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Disclosure goals are typically informed by how the company communicates with its stakeholders, and the information needs of those stakeholders. Some view periodic reports as a regulatory obligation and communicate with investors primarily through other means, such as press releases and earnings calls. To others, periodic filings are the primary vehicle for explaining financial performance while providing a cross-section of stakeholders with much-needed context.

Stakeholders also have preferences about how companies communicate and may be interested in different aspects of a company’s current performance or future outlook. For instance, equity investors may be more concerned about growth opportunities, but debt investors may want more information about the company’s ability to service and repay its obligations. Understanding the specific needs of the company’s stakeholders and how the company communicates with them are important to achieving disclosure goals.

Analyze peer disclosures

Analytics tools are a powerful way to take a data-driven view of disclosure effectiveness. Analytics can reveal how investor communications, such as specific sections of a filing (e.g., footnotes to financial statements and management’s discussion and analysis) or earnings releases, compare with peers. Results that are outliers may point to opportunities for improvement.

Word count is one area where analytics can have an impact. A high word count and low readability score compared to peers might indicate the section could be shorter or the information could be written more simply. But this might not always be the case. A section could deviate from the norm if it describes a transaction that is much more complex than those in the peer filings. Either way, analytics can bring an objective, fact-based element to an informed effectiveness review.

Reduce repetition

There may be other opportunities to streamline documents, even for companies that already take a minimalist approach to SEC filings. Wordy or rambling disclosures not only add length but can also confuse or distract investors from what’s important.

Some techniques for paring down extraneous information are straightforward but underutilized, such as reducing text that duplicates information from a table or chart, leveraging footnotes to the extent they are relevant, and using hyperlinks as appropriate, either as cross-references within the document or to link back to previous filings.

Focus on what matters

In the context of disclosure goals, consider what matters most to investors, such as questions that come up frequently during investor outreach or issues analysts prioritize as they develop their assessments. Disclosure documents should match up with what stakeholders expect to learn, so if content is light on a key area of interest, that may need to be expanded. Similarly, information that is immaterial to your audience or out of date may not warrant discussion at all.

Lean into visuals

Visuals can be just as impactful as text, if not more so, in communicating to investors — as the saying goes, a picture is worth a thousand words. Charts, tables and other visuals can help investors home in on key financial and nonfinancial information in MD&A. Likewise, structured text, such as text boxes and bulleted lists, can lend crispness to information that may not be well-suited to visualization, and when combined with visuals can provide further explanation and nuance.

Investor relations and public relations teams typically have robust experience with visuals, making them a good source of inspiration for disclosures — plus, borrowing from them can help keep messaging consistent across the organization.