Standard & Poor’s weighs up global corporate reports

In the wake of the 1997-98 financial crisis in Asia, investors' demand for transparency of corporate disclosure has increased. In response to this, the authorities in many emerging markets are introducing regulations to enforce fuller and fairer disclosure. For example, the Novo Mercado stock exchange in Brazil has introduced guidelines on disclosure and the structure of share ownership. With these reforms, non-voting shares are prohibited and companies are required to present accounting reports in accordance with US GAAP or International Accounting Standards (IAS). A further example is in Russia, where the government approved an accounting reform programme in March 1998 with the aim of bringing the national accounting system into compliance with the requirements of the market economy and IAS.

Even in the US, where disclosure standards are generally considered to be high, regulators, investors and analysts increasingly focus on the quality and fairness of accounting disclosure. For example, the Securities&Exchange Commission recently introduced Regulation Fair Disclosure to prevent companies from selectively and unfairly sharing financial information with a few chosen analysts.

There is also an increasing body of evidence that improved disclosure has a material impact on the cost of capital. The Report of the Special Committee of the American Institute of Certified Public Accountants on Financial Reporting (1994) identified lower cost of equity to be the biggest benefit of disclosure. Academic research also supports the contention that greater disclosure reduces the cost of equity through lower transaction costs, reduced error in earnings forecasts, or higher demand for a company's securities. Other research has revealed that greater disclosure also enhances stock market liquidity.

The standard of transparency and disclosure is an integral part of the corporate governance framework and, in Standard&Poor's experience, represents one of the leading indicators of overall governance standards.

In recent years, an increasing number of countries and companies have worked hard to improve overall corporate governance, including standards of transparency and disclosure. Public companies around the world are increasingly under pressure from large institutional investors to disclose all material information.

Transparency involves the timely disclosure of adequate information about a company's operating and financial performance and its corporate governance practices. For a well-governed company, standards of timely disclosure and transparency are high. This enables shareholders, creditors and directors to monitor effectively the actions of management and the operating and financial performance of the company.

Standard and Poor's offers a number of corporate governance related services to investors, companies and other interested parties including investment banks, stock exchanges and regulators.

The flagship product is the Standard&Poor's Corporate Governance Score (with rankings from CGS-1 to CGS-10). This is a detailed analysis of a company's corporate governance standards by reference to global practices. It covers four main areas: ownership structure and influence, financial stakeholder relations, financial transparency and information disclosure, and board and management structure and process.

The Standard&Poor's Corporate Governance Score may be completed on a confidential basis, for use by the company for internal purposes (implementing improvements in standards of governance, benchmarking, etc) or for use externally, allowing companies to present their governance standards to a wider audience.

The Standard&Poor's Transparency and Disclosure Survey has been developed in response to the global financial community's need and draws on Standard&Poor's expertise in several disciplines. Its strength lies in its global dimension, objectivity, and transparency.

The benefits of the disclosure benchmark include the enhancement of investor scrutiny and a better assessment and comparison of investment risks across markets. The disclosure benchmark is designed to add a new dimension to the analyses and assessment of corporate value and the quality of reporting.

The disclosure scores are useful for equity and fixed-income investors, analysts, and brokers. For local regulators and the multilateral institutions such as the IMF, the World Bank, the OECD and the Bank for International Settlements, the disclosure scores provide a valuable monitoring tool.

The companies from Asia and Latin America covered in this first analysis do not score particularly well. No companies from the Asia region make it into the top three deciles - that is, no company includes more than 70% of the disclosure items in its latest annual report - and only a handful score more than 60%. Companies in the Latin American region fare even worse. No company scores more than 60% and only six score over 50%.

In the Asia region Taiwanese companies are by far the largest constituents of the bottom two deciles and fill 26 of the 31 slots. In fact, no Taiwanese company makes it into any of the top six deciles. The scores of companies from other countries are more evenly distributed.

In the Latin American region, of the six highest scores, three are from Brazil, two are from Chile and one is from Mexico. No one country stands out as a clear laggard, although the highest-scoring companies in Argentina and Peru only make it to the fourth decile (score a maximum of 40%).

Methodology

The survey uses the latest available annual reports and assesses the level of transparency and disclosure of companies in emerging markets (Asia, Latin America and central and eastern Europe) as well as developed markets (Europe, developed Asia and US).

Transparency and disclosure is evaluated by searching company annual reports (both English and local-language versions) for the inclusion of 98 possible information items ("attributes") broadly divided into three sub-categories:

• ownership structure and investor relations (28 attributes)

• financial transparency and information disclosure (35 attributes);

• board and management structure and process (35 attributes).

  Each question is scored on a binary basis representing "yes" (included) or "no" (not included) answers to ensure objectivity.

  Companies are ranked 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 each of the three sub-categories are calculated in a similar way by reference to the maximum possible number of attributes for each sub-category.

  Example questions

  Ownership structure and investor relations

  Does the annual report and accounts contain:

• a description of the share classes?

• a review of shareholders by type?

• a description of the voting rights for voting and non-voting shares?

• the number and identity of shareholders holding more than 3%?

  Financial transparency and information disclosure

  Does the annual report and accounts contain:

• information on the company's accounting policy?

• financial information prepared in accord with internationally recognized accounting standards (IAS or US GAAP)?

• information on efficiency indicators (return on assets, return on equity, etc.)?

• consolidated financial statements (if applicable)?

  Board and management structure and processes

  Does the annual report and accounts contain:

• a list of board members?

• a list of board committees?

• is there an audit committee?

• details of directors' remuneration and details of performance-related pay for directors?

  The Standard&Poor's Transparency and Disclosure Survey will eventually cover approximately 1,600 companies covering the Standard&Poor's Global 1200 index and an additional 400 companies representing the leading companies in Standard&Poor's/IFCI emerging markets index.

  The S&P Global 1200 represents leading global companies and includes the S&P500, 150 companies in Japan, and 350 companies in Europe. These 1,600 companies cover over 40 markets and represent approximately 70% of the world's tradable market capitalization.

  Contact: Amra Balic, Standard&Poor's corporate governance service, +44 20 7826 3637, or Sandeep Patel, Standard&Poor's index services, +1 212 438 3917