Face up to the scrutiny

By MARK STORY

For most Kiwi managers, successfully handling transparency - the art of revealing company's skirt to the world - has a two-sided payoff.

Businesses offering a clear window into what they're doing are not only much more enjoyable to work with, they're far more likely to succeed.

That may not come as any revelation, admits Barry Akers director with financial PR firm Senescall Akers. But he claims the flipside is a growing tendency to punish companies that ignore the growing demand, after global accounting scandals and reports of exorbitant executive salaries, for greater transparency into company dealings.

Whether they like it or not, Akers believes the level of scrutiny listed companies face is rapidly trickling down to the unlisted variety, which comprise more than 95 per cent of all New Zealand firms. To make matters worse there are moves afoot to impose (in some undisclosed form) the Stock Exchange's (NZX) recently crafted corporate governance code on unlisted firms as well.

At face value, says Jim Scott, executive chairman of small business owner/operator Aquiline Holdings, information sensitivity seems to be a non-issue for most managers. After all, unless they're listed, companies aren't duty bound to disclose anything more than the annual report to shareholders.

But what's making transparency a growing headache, argues Scott, is the need to juggle openness with staff, customers and suppliers with the regulatory transparency enshrined in everything from reporting on accounting standards through to food regulations and health and safety legislation.

"Instead of focusing on creating economic wealth, managers spend too much time reporting on or dealing with compliance-based transparency," says Scott.

One particular problem, he says, comes in the form of accounting standards that require firms to give full disclosure on acquisitions. Key information such as stock, debtors, creditors, goodwill and valuation data becomes a matter of public record.

"We buy a business and immediately disadvantage shareholders by making commercially sensitive data available to the public, particularly the company's competitors," says Scott.

But it simply isn't possible, he says, for managers to get their head around the transparency issue until they've identified what information is really critical to running their business.

"Remember that the information you're obliged to disclose is almost always irrelevant when compared to that needed to successfully run the business."

He believes any company's information-flow stems from identifying key business drivers. For example, every one of the 14 small businesses Aquiline owns has to forecast sales revenue quarterly.

Scott's convinced that constantly revising sales expectations will trigger key drivers such as cash flow management, purchasing decisions or even warehousing requirements. This data, he adds, is the key to developing business plans that deliver results.

"You can't expect to handle information transparency externally, if you don't manage it internally first."

That's why he believes it's critical to keep good records, and insist on having regular reports on how the company's tracking against its business plan.

"The net benefit of giving the market a fuller understanding of the organisation, is highly supporting and more understanding shareholders," says Scott.

And that applies to staff, as well."Part of strategic planning is to explain to staff the relevance of the information to them and its overall value to the organisation. This is where many family-owned businesses typically fall down."

Gilbert Ullrich, co-owner of Ullrich Aluminium, says it's important to remember that even family businesses (with no outside shareholders) have similar stakeholder responsibilities to any other company. And while listed companies are duty-bound to disclose new information to shareholders before they tell staff, he believes transparency for unlisted companies is less a legal issue and more common sense.

Ullrich supports giving the market as much relevant information as possible, and recently advised the market sales would be down 15 per cent this year as a result of the high dollar.

"Transparency is ultimately about credibility so it's important for us to be unscrupulously honest," says Ullrich. "The more you communicate, the better you'll understand the marketplace."

But as upfront as he is with customers, Ullrich says it's important that total access to the truly confidential stuff remains with a chosen few.

"We advise staff on what's expected of them, but you can't stop people talking. That's why maybe only six out of the 600 staff who work for us ever know the full picture."

Scott, like Ullrich, believes transparency helps to create an open staff environment. But he also agrees that if only managers ever know the full picture, it's harder for staff, unwittingly or otherwise, to compromise company data available to them.

He also says all managers must fully understand the power of electronic communications if they're going to turn transparency to their advantage. The company uses its website and email to communicate with shareholders, suppliers, customers, and prospective employees - and receives around 100 website strikes daily.

It does around one webpage release a week, and Scott expects this to grow. Information provided could be on anything of interest to shareholders and other stakeholders, including: shareholder register movements, share price valuations, staff appointments, acquisitions, quarterly results, including a prospectus expected early next month.

So how have heightened transparency and the instantaneous nature of electronic communications altered management practices? One of the net effects, observes Akers, is the recognition that communication skills are essential for business leadership.

What it's also done, says Scott, is to marginalise the significance of the annual report to little more than a confirmation of everything a company's been telling the market throughout the year.

Assuming the requirement for transparency will continue to grow, how can managers and their staff use it to their advantage without revealing too much sensitive data?

Rule number one, says Akers is recognising that a reputation for good and honest information is an asset. What makes transparency a bigger deal for smaller companies than it need be, says Akers, is the resource issue.

"In addition to not having the time to provide good disclosure, too few managers have got a grip on how to release information without tipping their hand commercially."

That's why he says it's important to be straightforward about what you're trying to disclose, and how you plan to execute those disclosures.

"Don't try to take a lip-service approach. Ask yourself, 'If I were an outsider, based on what it discloses, would I have commercial dealings with this organisation?"' says Akers. "Be as responsive as you can to requests for information, and try to emulate companies that have done it well."

To avoid damaging relationships, Akers says it's also important to agree on how the company will handle disclosure before the requirement for people to know becomes urgent.

"Managers have to decide where the responsibilities and priorities for disclosure lie. If you do it in an ad hoc fashion when it becomes urgent for people to know, you'll muck it up."

Rules for handling information should be squared-off within individual employment contracts, advises Akers. Similarly, he says any written company information needs to be adequately labelled, for example internal memos, news releases or confidential information should be identified accordingly.

And the old axiom - that which is managed in advance is generally managed better - applies equally to information as it does other business processes. "Above all, ask yourself, who wants to know what and why? Then develop some kind of plan enabling you to handle and deliver information in a manner that adds value to your business."