Disclosure - how much is too much?
- Herman Schoeman, MD of Guardrisk

In the wake of the Enron debacle a host of legislative and regulatory changes came into effect around the world, all aimed at business's new Holy Grail: full and transparent disclosure in terms of International Financial Reporting Standards (IFRS). While no one would contend that increased disclosure is not a necessary and good thing, companies now face the challenge of defining the boundaries of what is an acceptable (and meaningful) level of disclosure.

It goes without saying that legislative and regulatory requirements are the minimum standard for any company, but there are increasing expectations of disclosure beyond these limits. This form of "disclosure on demand" could actually harm businesses by forcing them to divulge information that could effectively diminish their competitive advantage.

Unfortunately, recent large international corporate scandals have put business in a bad light; underpinning the growing trends of shareholder and consumer activism is the premise that businesses should have to "tell all" and it is at this point that the tightrope walk begins for business.

Good corporate governance dictates that companies should disclose to their clients the details of related and some third party transactions that are conducted in the pursuit of their business. But should that detail include the minutiae of the recipe? that ultimately defines the company's competitive advantage?

Alternative risk transfer (ART) insurers face a particular challenge in this area. The structures of ART vehicles are inherently transparent, and often this leads to even greater expectations of disclosure. But the success of the ART insurer - and its clients' facilities - relies on the insurer's skill to conduct the orchestra of disciplines that form the ART offering. And it is this proprietary information that must be guarded, albeit within a transparent environment because, in terms of current disclosure requirements, it is easy for someone in the industry to work out fee structures and product mixes.

Disclosure, as set out in IFRS, is a costly business, and the jury is still out as to whether the new scale and complexity of reporting is adding commensurate value. In its "IFRS - standing up to scrutiny" report, PricewaterhouseCoopers points out that some IFRS annual reports have more than doubled in length; and asks "as detailed as they are, are these new reports any more useable and informative than before?"

The report also highlights the fact that the varying styles and approaches deployed by insurers within the new disclosure framework are making comparison between peers more difficult.

Against the background of "information overload" that plagues our society, one has to acknowledge that there seems little point in producing masses of information that will largely be ignored (or that is so complex that it is difficult to understand). Another problem is that different consumers of information have different needs, which necessitates even greater masses of information being produced in order to service various user groups.

But it is not just the financial cost of disclosure that is a headache for business: the considerable amount of management's time that needs to be invested in the process of disclosure can stifle growth and innovation of the business. And for a small company with limited sources this threat is even more relevant.

Ideally, the natural forces of supply and demand that work so well in a free market economy will ultimately regulate disclosure. But, until then, companies will continue to walk the tightrope; exploring the boundaries of disclosure without harming the business.

For further information please contact:
Herman Schoeman, MD of Guardrisk
Telephone: 011 669-1001

Issued by:
Melanie Davis, PR@Work
Telephone: 011 615-3309 / 083 225 7450