Insurers Urged To Emphasize Corporate Governance, Transparency

The climate has definitely changed and it is time insurance companies woke up to the strident demand among investors for greater transparency in financial reporting, she said.

Large-scale business failures have made the investor much more focused on corporate governance and auditor independence issues, Guinn said.

Insurers can earn the trust of the investment community if they clearly lay out what they regard as the drivers of shareholder value and the risks associated with those drivers, she said.

Guinn said investors are also questioning the financial soundness of companies whose operations they dont understand, and analysts are rating company stocks accordingly.

Concerns about the size and complexity of operations may, in part, be responsible for recent drops in share price for a number of large multinationals, she said.

However, she emphasized, that companies are changing, noting that a review of year-end financial disclosures to the Securities and Exchange Commission (form 10-K) for several large financial services companies revealed that companies are disclosing more information than they have in the past, Guinn reported.

"Our analysis indicates a clear trend toward greater financial disclosure, particularly in the areas of special purpose vehicles and new accounting standards," she said. "This trend has primarily affected companies that are currently under intense scrutiny by analysts and the financial press."

But mere increase in disclosure does not necessarily increase the transparency of the financial reporting, she observed.

Some companies have tried to satisfy investors by providing more information, Guinn said, noting, however, that more numbers do not necessarily mean greater transparency.

"A vital element of transparency is understandability, for example, whether the information presented clarifies exactly how a large, complex organization has achieved its earnings and whether it will be able to continue to do so," she said.

It is not enough for companies to be transparent in terms of the risks they are facing and the stakeholder value they are creating, she said.

"Success in this volatile marketplace will require, among other things, a comprehensive financial reporting system that lays bare the actions that drive a companys financial results, Guinn said.

"For senior management to make optimal strategic decisions, companies must also develop internal reporting methods that provide a more comprehensive understanding of what drives the expected level and volatility of future profits," she said.

The use of more transparent financial metrics, both externally and internally, is essential, Guinn added.

"Companies that make the external reporting of their financial results and expectations more transparent to stock analysts and the investment community will have a better likelihood of being valued appropriately," she said.

Reproduced from National Underwriter Life & Health/Financial Services Edition, August 12, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.