The rush to escape the tyranny of the shareholder will close the few windows of transparency independent shareholders and analysts have into these firms.
Imagine for a moment that Microsoft is a private company. As a privately held firm, it would not be required to file substantial disclosures with financial regulators like the Securities and Exchange Commission.
These disclosures, such as as the yearly 10-K filing, are intentionally intimate — giving readers a very frank and in-depth look at the company — so investors and analysts will know exactly what’s going on in the company. In light of scandals from the likes of WorldCom and Enron, the level of disclosure required by the SEC is seen as a commitment to high transparency so investors would have the best information possible when making investment decisions.
A company’s filings, such as the quarterly 10-Q or the yearly 10-K, are one of the few places it must be completely truthful, as the corporation’s officers sign off that the information presented is correct and accurate to the best of their knowledge.
One particularly interesting part of the 10-K for company-watchers is the “Risk Assessment” section. Here, the company must disclose to readers what it believes are the biggest threats to the company. There are some recurring themes: terrorism, war, acts of God, economic calamities. But there are also assessments on the company’s operations and sometimes its competitors latest offerings. For example, last summer Microsoft said in its 10-K that the Surface might sour its relationships with OEMs. Sure enough, that happened. Over the years a number of AMD 10-Ks have made reference to its reliance on GlobalFoundries, and the harm that a supply chain interruption might do. Sure enough, that also happened leading to a shortage in 32nm parts and a shortage of chips as a result.
Transparency mandated by regulators allows all of us to see inside the on-goings of the company, and is one tool to assess a company’s health of the validity of its claims. When companies mislead investors and the press with these disclosures, it’s a big deal that leads to lawsuits and fines. Microsoft, as one shareholder of the company alleges, lied on its disclosure about the success of the Surface and is paying the price with a nasty shareholder suit.
Another example: last year the social media giant Hootsuite was given sweet deal by the City of Vancouver on a city building to use as its headquarters. Presumably, Hootsuite had threatened to leave Vancouver to one of its suburbs as it was outgrowing its current nest. As Vancouver’s often navel-gazing media wasn’t asking the hard questions, I sent a number of Freedom of Information requests to City Hall asking for information as well as to the province to see what other perks the company might have been getting.
The province refused to respond to my request, citing the Privacy Act that protected this corporation since it was privately held. Vancouver’s city government got back to me with a 300-page document that presumably outlined the discussions held between city council, planners, and the Mayor’s office on the cost-benefit analysis of giving Hootsuite a deal on the property — except it was nearly entirely redacted. You can read that story about my quest to find out what happened here, on The Georgia Straight’s blog.
The point is, the transparency mandated by regulators is a good thing. Let’s look at the Finnish example: as Futuremark’s president Oliver Baltuch mentioned in an interview with VR-Zone August, the law of Futuremark’s homeland requires that all corporations disclose their books to the government and these books be available for inspection at a government office. Futuremark can easily rebut claims that they take cash from manufacturers for better benchmark scores by saying, “look at our books”.
Understandably some companies want to go private to escape the short sighted and often tyrannical nature of activist shareholders. Dell and Blackberry are both going down this route, and more struggling companies may follow. When these companies go private we will lose one objective window into their inner workings.