One piece in the puzzle: the role of technology in the disclosure debate

By Charles Goldfinger*, Managing Director, Global Electronic Finance

Technology has a massive part to play in improving corporate disclosure. But it would be a mistake to think that technology holds the key for all of our future disclosure problems. It doesn’t. Technology is part of the solution - not the whole solution. 

The first thing to realise about technology and its impact on disclosure is that it can cause almost as many problems as it solves, It can, for example, create a false sense of security and precision that unscrupulous managers might use to their advantage. People believe that simply because information can be provided quickly and more efficiently than ever before that the information itself is more reliable. Yet, to the extent that the actual control of reporting remains with managers, the increase in confidence among investors creates a greater risk of information manipulation.

Dual role

Technology can be used to obfuscate and confuse just as much as it can be used to clarify and enlighten. The Internet has fundamentally changed the economics of distributing information making it easier and cheaper for companies to make a much greater amount of information available to investors. This creates information overload and indigestion. In turn, technology can help investors search through that information overload. However, it also allows companies to hide information that they do not want people to find within a mountain of useless and irrelevant data - just because you make something available on the company web site does not mean that investors will be able to find it easily and quickly.

Sometimes, technology is referred to as only a ‘tool’. But it is a very powerful tool, the impact of which is far reaching, going far beyond the area of its immediate use. The idea that it is simply a ‘tool’ is a fallacy. Take cars, for example. Cars could be viewed as simply a tool to get from A to B. But the cumulative impact of everyone deciding that cars are a good transportation tool and all wanting to drive at the same time can - and does - significantly transform the face of our cities and environment. Similarly, cumulative use and ubiquity of information technology transforms not only the information itself but also its broad systemic environment. In the financial sector, it has had a deep impact upon the nature of markets and investor behaviour.

Single access point

A good understanding of both the potential and the limitations of technology should help us to assess where and how it can improve corporate disclosure in Europe. The first and potentially one of the simplest uses of technology should be to create a single point of access for corporate information on all European-listed companies. An equivalent of the US SEC’s EDGAR (electronic data gathering and retrieval) system would raise the disclosure levels of European companies while making it much easier for investors to access the information they need and to facilitate cross-border comparisons among companies in the same sector.  

Such a system can only work if electronic filing is made compulsory. A voluntary system would be afflicted by adverse selection, whereby only the best-behaved companies would file reports or companies would choose not to file should they have something to hide. This may seem self-evident but there are frequent suggestions that a voluntary system might work or that smaller companies should be subject to a less rigorous reporting environment. If anything, the smaller the company, the more they should report since an investor will view them as a riskier proposition. Once again, we can see that a technological solution, to be fully effective, needs to be accompanied by other measures.

Further questions

A European EDGAR raises other issues. Who will monitor or run it? Unlike the US, we do not have a centralised regulatory authority that has jurisdiction over all European markets. We may very well move towards a pan-European regulator in the years ahead but there are enough obstacles to make this movement arduous and protracted.

The main obstacle is the existence of national regulatory authorities. Somehow, it is now acceptable not to have a national airline but no-one can yet bear the thought of not having a national regulatory commission. The pressure is building, however. Belgium, for example, has integrated its national market into a transborder entity in the shape of Euronext, yet it has kept its national regulatory commission.

Clearly, setting up a pan-European regulatory framework will not happen overnight. On the other hand, competition between regulators can help ensure that standards are kept high and efficiencies gained. Yet Europe needs a common electronic filing system now.

The resulting assumption has to be that nationally-based regulators will run

it. This is feasible to the extent that the various systems run by national regulators are technologically compatible and follow the same standards. In other words, they should be inter-operable. Furthermore, European companies should be allowed to choose the filing point. Electronic filing should be brought under the scope of a common European passport, subject to minimum disclosure criteria. Thus, while it may be difficult to create a single electronic filing system for regulatory reporting, it is feasible to create an electronic filing network, connecting national systems.

The challenge of an electronic filing system is its asymmetry between filing and dissemination aspects. On the one hand, when companies file their information they want to be assured that they have an absolutely secure, single channel protected by passwords, encryption keys and the like so that there is no risk of any outsider hacking into the system and posting false information.

The dissemination side of things is completely different: there you want a wide but differentiated access to the information. It needs to be able to support various categories of investors accessing the information in relation to their requirements for urgency and degree of detail.

Lessons learned

There are two clear lessons from these discussions. Firstly, understand technology in its context. Shareholders and managers alike know that wider disclosure is a good thing; they know that it will be likely to lower their company’s cost of capital. So why doesn’t it happen? Because insiders also have a short-term interest in hiding information, keeping it under wraps until it turns into the story that they want to tell. This market failure lies at the core of the system and technology will not necessarily solve that issue in itself.

Secondly - and this is intrinsically linked to the first issue - there needs to be a public-private partnership to achieve the best possible disclosure with the help of technology. Disclosure needs to be mandated, it needs to be regulated, and it needs to be enforced. Yet often the most efficient means of achieving disclosure will lie in a privately-financed or developed project or business. Regulatory agencies do not necessarily have the required technical skills and competition between several suppliers can be highly beneficial. EDGAR in the US operates through such a partnership. The UK’s recent decision to move towards a competitive solution for the dissemination of price-sensitive news shows just how effectively a public-private partnership can work when it comes down to regulatory information.

Whatever Europe tries to achieve in improving its disclosure systems in the years ahead will have to be done by a combination of proper regulation and private business. In that environment, the advantages that technological innovation can bring to the disclosure table will be allowed to flourish.