This article was updated on Sept. 14, 2018.
Financial transparency means making financial information as visible and accessible. But full transparency is difficult because of the many disparate components, the nature of how financial information is gathered across an organization and the different users of that information (owners, boards, shareholders, investors and regulators).
Some information simply must be shared for complete and compliant financial reporting. SEC rules, for example, mandate publicly owned companies disclose specific business and financial information to their shareholders and the SEC.
But not all financial information has to — or should be — shared. After all, confidentiality still plays a big role in a company's success. Common areas where transparency may need to be limited include compensation, forecasts and mergers and acquisitions.
Employees, however, may want to feel that they have a window into everything happening in their organization. But there are areas in which employees can't know everything the C-suite knows. Striking a balance between keeping information confidential and keeping employees from feeling left out of the loop can be tricky.
Many organizations have tight controls over who can access wage and bonus information. In some organizations, payroll registers are under the control of senior human resources staff and finance staff cannot access the details by name.
On the other hand, there are legal requirements for disclosing executive compensation, wage/benefit expenses and pension and bonus details, so finance employees at some level must prepare that information and assist internal and external auditors. Those employees must have a clear understanding of who is allowed access to payroll information and what information is to be restricted.
Compensation is a touchy subject because salary transparency is personal to employees. If pay and bonuses seem secret, employees may overestimate what co-workers and managers are being paid. Open and honest communication between the C-suite and employees about the importance of employee privacy and potential legal risks are important so that everyone understands why full transparency over compensation data may not be possible.
Investors and analysts are very interested in how the C-suite is doing in meeting and beating business forecasts. Every reporting period, public organizations face the pressure of meeting the expectations of Wall Street or their analysts, and they may be asked to explain publicly variances between actual and forecasted results. Financial transparency is further complicated by the level of public scrutiny and disclosure.
The C-suite and certain finance employees are aware of all the details of a forecast as well as the actual results, but many details are not required to be publicly disclosed. Accounting rules permit estimates and assumptions, and different outcomes may have occurred if different estimates were made. Finance employees should apply consistent accounting and disclosure rules in reporting financial results and sharing information with the public.
The C-suite should also share their communication strategies with their employees. Corporate communications and investor relations departments design corporate messaging and work with legal departments to protect organizations while meeting public disclosure requirements. So if employees understand those objectives and trust that their C-suite is being transparent and compliant, there will be more effective reporting and better internal and external morale.
Mergers and Acquisitions
An organization's economic and legal interests must be protected during potential mergers and acquisitions. There can be extended periods of time while deals are in different stages and only certain parts of an organization are involved. Legal departments may be more involved in earlier stages than finance or human resources. The C-suite may choose to involve only a few key employees to help ensure that there is no leak of confidential information to the public.
M&A activity can be high profile and perceived as a desirable project, so it is natural for employees to want to be involved and to feel slighted if they are not privy to pending deals. Full transparency, however, may not always be possible due to confidentiality obligations.
Deciding which financial information to share can be an ongoing challenge for the C-suite. Organizations with a code of conduct that fosters ethical behavior and open communication should be a framework to assist them in making decisions related to financial transparency. Ultimately, your employees want to feel that your processes are inclusive, so whether you can legally inform them about something or not, as long as you keep the lines of communication open and they understand why certain actions are taking place, they won't be left wondering if they are somehow missing out.