Have you seen the TV ad in which an investor at a company?s shareholders? meeting stuns the management by his in-depth knowledge of the company?s annual report? The ad is interesting because it suggests-quite correctly, I believe-that businesses routinely hide or obscure information that they are required to reveal. Companies are supposed to reveal a great deal of information but the sheer quantity makes it easy to hide or disguise facts. Even if the information is not actively obscured, its sheer mass means that selecting what is relevant is a task.
Whether it is the offer document for a company?s IPO or a new mutual fund, the issuer complies perfectly with the rules of disclosures but the final effect is mostly useless. To see proof of this, just get hold of a dozen people who have invested in IPOs or mutual funds lately and ask them if they have read the offer documents. If these are typical retail investor then the number of investors who have read the document will inevitably be zero. To my mind, this is the fault less of the investor and far more of the way such documents are written and the regulations that govern them. The focus seems entirely on the quantity of information that is revealed, rather than the way it is presented and prioritised. It?s a bit like the difference between Altavista and Google. Old Internet hands would remember a search engine called Altavista which, for a brief period, was very popular before Google dethroned it around 1997 or 1998. Altavista was all about quantity and was good at throwing up a huge number of pages in which your search term existed. Google, on the other hand, was all about quality and its real ability lies in being able to put the most relevant links right on top of the first page. When it comes to providing information, what really matters is not quantity but the way things are prioritised and presented. Offer documents-and other mandatory disclosures-need to be designed with the focus not on how much information can be stuffed into them but how easy it is for the relevant information to be found and understood.
It is interesting to see that the Securities and Exchange Commission (America?s security markets regulator) has just released a model executive summary of the offer document for mutual funds that is just three pages long. These three pages have only a small amount of the most relevant information that is presented in easy to understand language in an easy to read print size. What is most interesting is that the design of this document is clearly based on the idea that when it comes to information, the way to emphasise what is important is to leave out what is not important. Full disclosure is also available, but in a separate detailed document. There?s no reason why such a principle cannot be applied in India, not only to the offer documents and prospectuses of company and mutual funds, but also to financial results and annual reports. I think the structure, content and design of such documents should be specified to the last detail with the actual language, prioritisation of information and even the fonts and font sizes laid down with nothing but the ease of understanding and comparability in mind.
Investors, analysts and media persons often talk admiringly of experts who can understand such documents. I think the fact that experts are needed to read such documents is the real problem.
?The author is CEO, Value Research