The Devil’s in the Details

financial-disclosureRegulations requiring companies to divulge more financial information to investors have contributed to lengthy filings that can make it harder for investors to identify important information.

The Compensation Discussion and Analysis portion of annual proxy statements are ballooning. The average length of a S&P 100 company’s CD&A proxy segment increased by 705 words in the last five years to 9,121 words in 2015, according to a study by Equilar Inc., an executive data provider. Last year’s largest CD&A proxy segment, at 19,288 words, was filed by Pfizer Inc.PFE -1.18%, Equilar said. “If the old way of hiding information or making it less prominent was to put it in the footnotes, the new way is to leave it in the text,” said Ron Schneider, Director of Governance Services for R.R. Donnelley RRD +10.07% & sons Co., a printing company which operates EDGAR Online and annual files more than 166,000 documents with the SEC. Securities and Exchange Commission Chairwoman Mary Jo White said last week that “disclosure effectiveness” remains a priority for the agency. The agency continues to work on simplifying disclosure requirements without making them less stringent.

Still, the pursuit of a streamlined financial reporting process for corporations must be balanced with ensuring investors aren’t overwhelmed by those disclosures, said former SEC Commissioner Troy Paredes following Ms. White’s comments. “It’s about the way in which investors can be actually worse off when they’re overwhelmed with a lot of information that’s not particularly useful to making an informed investment or voting decision,” he said. The length of CD&As — in terms of word count –  is expected grow by at least 20% or more in the next two years, as new disclosure requirements go into effect, according to John Ellerman, a Partner at Pay Governance LLC, an executive compensation advisory. The Securities and Exchange Commission last year enacted a rule requiring public companies to disclose the ratio of its chief executive pay relative to the median compensation of its employees. The Commission is considering additional rules surrounding whether executives can hedge their stock awards using derivatives, and is pushing companies and auditors to disclose more detailed analysis of business risks under existing regulations.

One way companies are helping investors navigate the tsunami of disclosures is by adding proxy summaries to their filings, similar to an executive summary found in other kinds of reports. While fewer than 5% of S&P 100 companies had a proxy summary in 2011, 73% included one in their most recent year, according to Equilar.