The directors of a company are responsible for running the company in the interests of its stakeholders, particularly its shareholders.
In most large companies the major shareholders are not also directors, and it is therefore important that there should be good communications between the two groups.
The shareholders need to be informed about how the company is performing, and the directors need to know the views of their shareholders.
Transparency in stock markets and other financial markets means that information about conditions in the markets is clear and well understood. For example, transparency exists when investors understand about the financial situation of companies, and the future plans and prospects for those companies, so that they can make well-informed investment decisions.
Investors need information about companies to make their investment decisions.
Shareholders need information about the companies they have invested in, to assess the financial performance of the company and its future prospects, and to decide whether to hold on to their shares, sell them or buy more shares.
Other investors need information about companies in order to decide which companies they should invest in, and how much to invest.
Disclosure means making information available, so that there is transparency. Companies have the main responsibility for disclosure in the stock markets.
They provide regular reports to shareholders and other investors, and it is from these reports that investors obtain most of their information.
Transparency and disclosure are key issues in corporate governance.
Corporate governance: the need for transparency and disclosure
The need for transparency and disclosures in the financial markets is recognised in codes and statement of principles on corporate governance. Below are some details which companies are advised to look into;
i. The UK Corporate Governance Code includes a principle about the disclosure of financial information by companies, stating that the board has a responsibility to present ‘a balanced and understandable assessment’ of the company’s position and prospects in its financial reporting.
ii. The Organisation of Economic Co-operation and Development (OECD) Principles state the requirement with greater force. They state that companies should provide ‘timely and accurate disclosure’ about their financial performance and position, and also about the ownership of shares in the company and also about other corporate governance issues.
iii. The International Corporate Governance Network (ICGN) Principles emphasise the need for information so that investors can make investment decisions, and state that companies should, on a timely basis, disclose the relevant information about the company to enable informed decisions about the acquisition obligations and rights, ownership and sale of shares to be made by investors.
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