Investors do not have all the information they need to make the most reasoned judgments on how to value companies, a task force chaired by School of Management Dean Jeffrey E. Garten concluded in a study.
The task force, made up of leaders from business, banking and academia, was established at the suggestion of the U.S. Securities and Exchange Commission (SEC) in April 2000. In its report, the group suggested ways to improve the system of financial reporting for companies, which included urging the government to create a better environment for companies to voluntarily disclose information.
"At a time when our stock markets loom so large in the economy, we need to close large gaps in the quality of information that companies disclose," said Garten. "A lot of studies have been conducted on these issues, and now it's time for concrete measures."
As part of the SEC-inspired study, Garten and the other members of the task force looked specifically at two categories of information: intangible assets and operating performance measures. The group offered two principal recommendations.
First, it called for the existing accounting system to be supplemented to provide more information on intangible assets (such as patents, technology licenses, customer lists, airwave spectrum rights, skills of employees and business alliances) and on operating performance measures (such as revenue per customer, inventory turnover, order backlog, speed of introducing new products to the market, etc.). In addition, the group called upon the government "to take as many actions as it can to create an environment that encourages innovative disclosures" without the companies' risk or fear of litigation -- so long as such information is clearly labeled and there is no intentional deceit.
"Many members of the group felt that the litigious climate in the U.S. has discouraged companies from experimenting with supplemental disclosures, despite existing 'safe harbor' provisions," Garten wrote in an executive summary of the task force's report.
In its report, the task force also outlined specific suggestions to accomplish recommended goals.
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