February 3, 2017 Providing certainty and clarity
One of the principles behind the UK corporate governance code is that of ‘comply or explain’; providing clarity to shareholders and investors in order that they are able to make balanced and reasoned judgements about the strength of their investments. Because of this companies aren’t simply required to report on past events, but also look forward and make a best guess about the way in which the company and its marketplace are likely to perform in the future.
It was therefore interesting to see that when the government published their white paper on Brexit, ‘providing certainty and clarity’ was the first principle which the government will use to guide their negotiations. Expanding on this the White Paper comments that the Government recognises “how important it is to provide business, the public sector and the public with as much certainty as possible” adding that throughout the negotiations information will be provided as long as it doesn’t undermine the national interest.
Whilst some might see this last comment as something of a get out clause it does highlight an interesting dilemma which companies also face at reporting time. They may be required to provide robust explanations and indications of future trends which will help inform investment decisions, and yet to do so may well not be in the long-term interest of the company.
For example, the business may be in the midst of negotiations concerning a partnership or collaboration, a merger or an acquisition. Premature reporting may not only breach confidentiality agreements but may also jeopardise the outcome of the negotiations. Alternatively the business may be in the early stages of trialling a new product which if successful could revolutionise the industry; but with trials at an early-stage any positive or negative reporting could lead to inaccurate assumptions about the future course of the business.
The solution is for directors to use their judgement to decide what is in the long-term best interests not only of the company but also its investors and to make disclosure appropriately. Organisations which seek to comply with the corporate governance code, which provide full explanations where appropriate and which engage in a open free dialogue with investors are far more likely to be trusted than those which seek to limit information which should be freely available. There will always be times when providing information is the right thing to do and times when long-term interests will not be served by doing so. Understanding the difference is what good governance is all about.