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Disclosure and Corporate Governance.

It is often understood that Corporate Governance is highly connected to “transparency and disclosure”. But there is a need to clarify the actual relationship between the two, not only in one direction, but in both.

Adrian Fong from the Faculty of Law, Chinese University of Hong Kong, in his working paper “ Practicing Corporate Governance Through Corporate Disclosure?”, does a good contribution to this effort. (1)

As he points out, “Corporate disclosure is the timely and accurate release of all material matters regarding the [company], including the financial situation, performance, ownership, and governance of the company”. “The purpose of corporate disclosure is to release ….. information to shareholders, employees, possible investors, and the broader community about the company”.

Mr. Fong numbers the benefits of disclosure, making the difference between those related to the Securities markets, such as the increase in efficiency stemming from information dissemination and the reduction of asymmetric information, and those related to Corporate Governance. Does disclosure enhance the way the company devotes itself to satisfying the shareholders`s aims? Disclosure reduces the possibility that board and management act in their own interests, and allows shareholders to make informed decisions about proposals and about the need to replace board and/or management, Mr Fons asserts.

Consequently, Mr. Fong asks if companies wanting to improve their Corporate Governance should increase disclosure. The answers points out that disclosure will not be enough if shareholders are not empowered by the Corporate Governance structure to use the information to effectively exercise their rights. That is, shareholders:

a)      …need to have full access to the disclosed information,

b)      …understand the information and are able to assess its impact on their interests,

c)         can use it to build their view of the company,

d)      …and are able to make an impact on the company, as a result of their built company view.

As Mr. Fong affirms, the need for a better global Corporate Governance structure is even more needed in markets such as the Hong Kong and Spanish ones, where a lot of companies are controlled by families or majority shareholders.

Mr Fong`s recommendations include:

a)      Creating an Investor or Shareholders Relations Department, charged with:

  1. effectively communicating information, through consolidated information websites, electronic means for Shareholders Meetings, and doing all these efforts in “plain language” so that materials are actually understood by shareholders;
  2. receiving shareholders`s views: implementing an engagement policy, a stakeholder committee, feedback forms, surveys and all kinds of contact channels with shareholders.

b)      Turning engagement into better Corporate Governance, that is making those views, (even if they are backed by a minority), known to board and management, and disclosing both the views and the company`s reactions to it; impact by shareholders would be assured this way.

In a recently published article, (2) Jordan Schoenfeld, PhD candidate in the University of Michigan, exposes a different perspective on Corporate Governance and disclosure, as he depicts a way in which institutional investors govern companies through disclosure requirements, that is he shows better disclosure as a consequence of better governance.

It is widely known that institutional investors don`t usually have incentives to monitor firms in which they invest nor in exercising their shareholders`s rights responsibly, even more in the case of index funds, (they can`t even vote with their feet). Mr Schoenfeld states that these funds can actually improve monitoring activities by other stakeholders by using their influence to require higher ot better disclosure by companies in which they invest.

Moreover, the author argues that an entry of index funds would increase disclosure, even if other controlling or large owners lose power; as those other large shareholders`s interest in disclosure is according to Schoenfeld biased in favor of good news, which is not the case of index funds. This study is nevertheless connected to the one by Fong, as it tests the hypothesis that entrenched boards are less likely to accept further disclosure requirements and be disciplined by disclosure; as Mr. Fong points out, if governance structures are not adequate, disclosure will not have such an impact in favor of shareholders interests.


(1)     http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2342480, by Adrian Fong, Chinese University of Hong Kong.

(2)     http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2350181, by Jordan Schoenfeld, University of Michigan; see also the Harvard Law School Forum post dated May 15th, http://blogs.law.harvard.edu/corpgov/2014/05/15/shareholder-governance-through-disclosure/.


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