By Vipal Monga And Emily Chasan
General Electric Co.'s chief financial officer was taken aback
by the industrial conglomerate's 246-page annual report.
The 10-K and supporting documents his finance team and others at
the company produced was meant to give investors a comprehensive
picture of GE's businesses and financial performance over the
previous 12 months. It did everything but.
Packed with text on the company's internal controls, auditor
statements and regulator-mandated boilerplate on "inflation,
recession and currency volatility," the 2013 annual report was
109,894 words long. "Not a retail investor on planet Earth could
get through" it, let alone understand it, said GE finance chief
Jeffrey Bornstein.
Companies are spending an increasing amount of time and energy
beefing up their regulatory filings to meet disclosure
requirements. The average 10K is getting longer--about 42,000 words
in 2013, up from roughly 30,000 words in 2000. By comparison, the
text of the Sarbanes-Oxley Act of 2002 has 32,000 words.
The finance department at GE, as well as Athenahealth Inc. and
Abercrombie & Fitch Co., among others, spend several weeks
every quarter updating filings to comply with securities rules,
which they say is a costly undertaking.
Athenahealth, a provider of electronic health records, has three
full-time employees to help with the increased disclosure
requirements, said Karl Stubelis, chief accounting officer and
controller of the Watertown, Mass., company. That's up from just
one two years ago.
Some companies wonder whether investors benefit from the
additional information. Their question: How much is too much?
Regulators at the Securities and Exchange Commission and the
Financial Accounting Standards Board say they are working on
projects to reduce the volume of useless information in company
filings, while increasing transparency.
SEC Chairman Mary Jo White has made " disclosure effectiveness"
a priority since taking office in 2013. And this year, agency
officials met with representatives of several companies to discuss
specific ways to cut the fat out of their corporate filings, said
Keith Higgins, director of the SEC's Division of Corporation
Finance.
Part of the reason for the ballooning filings: More U.S.
companies are operating internationally, exposing their investors
to new geopolitical risks. In addition, many also use abstract
financial instruments such as derivatives and sophisticated hedging
tactics to protect themselves from swings in currency and
commodities markets.
"Complexity is a reality we have to live with," International
Accounting Standards Board Chairman Hans Hoogervorst said in a
February speech in Zurich. In 2013, the organization, which sets
accounting rules outside the U.S., began working on a plan to
eliminate some boilerplate disclosures that it believes aren't
valuable to investors.
Few individual investors read SEC filings cover to cover. "The
retail investor isn't going to read a 10-K filing," said Joseph
Amato, chief investment officer at Neuberger Berman, which manages
$251 billion of assets. He isn't eager for companies to reduce
disclosures.
Roughly-two thirds of all stock in the U.S. is owned by
institutional investors such as pension funds, mutual funds, and
insurance companies, according to research from the University of
Pennsylvania's Wharton School.
Some of these big investors want companies to disclose even more
information. Mr. Amato said he would like for companies to provide
more details about their expenses and the profitability of
individual business lines.
On the other hand, he said he finds some of the SEC-required
disclosures about a company's general "risk factors"
unrevealing.
Tim Loughran, a finance professor at the University of Notre
Dame's Mendoza College of Business, said companies "are doing data
dumps" on investors who, in turn, struggle to wade through the
filings' to find what they view as truly relevant. But at the same
time, he said, he worries that some companies might back a
simplification campaign to avoid publishing unflattering
information.
At clothing retailer Abercrombie & Fitch, based in New
Albany, Ohio, 20 people review each filing, or disclosure document,
before it travels up the ladder to management. General Counsel
Robert Bostrom said much of the information in filings is aimed at
plaintiffs' attorneys who might consider suing the company on
shareholders' behalf.
The risk-factors section in 10-K filings, mandated by a 2005
overhaul of the Securities Act of 1933, "may be less rational" than
it could be, Mr. Bostrom said. "It becomes a way to create the most
defensive compliance document that you can," he added.
At GE, compiling information for annual reports takes the
finance department about two months, requiring either input or
attention from about 200 people. Then, CFO Mr. Bornstein signs off
on it, along with controller Jan Hauser, and ultimately Chief
Executive Jeffrey Immelt.
Forty percent of GE's roughly five million shareholders are
individuals, rather than big funds, Mr. Bornstein said.
But just a handful of investors called GE's investor-relations
department with questions about the company's 2013 annual report,
he said. That year's report was downloaded 800 times from GE's
website. Mr. Bornstein said both were signs that many investors
didn't read the 10-K in depth.
So, the following year, Mr. Bornstein sent his finance team back
to the drawing board. He told them to give investors the GE story
as simply and clearly as possible.
The team came back with an annual report that included 15
introductory pages of charts, on revenues, earnings-per-share
growth and employees. Charts might be easier for investors to
digest than lengthy text, he said.
GE's 2014 10-K--at 103,484 words and 257 pages--was downloaded
from its website 3,400 times, he said. Next, for 2015, Mr.
Bornstein hopes to simplify the annual report's footnotes, which
stretched to 42,000 words last year.
Write to Vipal Monga at vipal.monga@wsj.com and Emily Chasan at
emily.chasan@wsj.com
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