Transparency and disclosures: how far is too far?
Michael Brozzetti is a speaker and consultant on a variety of governance and audit topics. He recently conducted a survey on LinkedIn; the question was “Do you think public companies should disclose their Chief Internal Auditor compensation package?”
Now, I must admit this question would never have occurred to me for a couple of reasons:
- It’s not required by any law or regulation, in any country, as far as I know
- I can’t see why it would be material to an investor, so why do it?
- The top internal auditor is rarely, if ever, among the highest paid executives
But, it occurred to Michael and the results are shocking – at least to me. 67% (162 voted) said that public companies should disclose the compensation package for the chief audit executive (CAE)!
A review of the comments might shed some light:
- “The only reason not to report the auditor’s salary and compensation package is if you are paying for the result. How independent or objective can he be when he reports to the very people who set his salary.”
- “I voted YES because another question has arisen in my mind: When you don’t have it clear: are there any chances that you ‘buy’ your auditor’s work results, directly from him? (I think the verb is ‘to bribe’) and the answer was – also – YES!”
- “I think publicly traded companies should disclose the compensation package. The public has a right to know if the company is “buying” the auditor’s work results. Since no one would admit when this is going on, it should be required to be disclosed. Transparency should always be a priority.”
- “Transparency is the name of the game today. Don’t draw attention to yourself by hiding what everyone will find out in the first place, so your company doesn’t end up in last place?”
I will agree that the independence of the internal audit function is very important. However, is it fair to say that if the CAE’s compensation is high that this is an indication that he or she is being bribed? I suggest that the best CAEs provide great value and that is why they are well paid.
Will an investor be able to make a judgment of the internal auditor’s independence and objectivity if given details of the CAE’s compensation package? I really don’t think so. It would be better to support a statement, included in the Audit Committee report in the annual 10-K filing with the SEC, that the internal audit function reports directly to the Audit Committee, is adequately resourced, and is independent from management.
But, the comments go further. They support disclosure for the sake of transparency. And they support transparency on, as far as I can tell, general principles: disclosure is good for you.
But is transparency and disclosure that goes beyond legal and regulatory requirements always healthy? Should companies report everything that is remotely interesting?
I like the standard that companies should disclose anything that is required by law/regulation or might reasonably be considered material to an investor and their decisions/actions. Companies should also give thought to disclosing information that might be ‘expected’ of them by the society they operate in, where it might positively influence their reputation. For example, I would put some of the corporate social responsibility reporting into this voluntary disclosure bucket.
But there are downsides to voluntary disclosures that need to be considered as well:
- They might give competitors information they could use to their advantage
- They might give potential customers and trading partners an unnecessary edge
- The information might help the company’s opponents in current or anticipated lawsuits
- They might expose the company to unnecessary risk, should a disclosure later turn out to be inaccurate
- Every additional disclosure has a cost: the resources required to develop and validate the information
- The disclosure sets the expectation that it will be continued in future filings
- Too much information can confuse. Just look at the average 10-K; how many investors read it all?
In my view, companies should always hesitate and ensure there is a good business reason before making any voluntary disclosure. While investors and regulators may have the power to obtain the CAE’s compensation package, I don’t see why anybody would disclose it every year.
Transparency when it makes sense. But not for transparency’s sake.