Disclosure Requirements

Disclosure requirements relate to the data collection, analysis, and dissemination relevant to specific transactions that is required by law. Disclosure is part of many legal regimes around the world that protect business from the indisputable temptation of corporate insiders to loot business treasuries, a phenomenon that often goes undetected. Disclosure is a way to protect investors and shareholders against self-dealing—the use of corporate assets for personal gain. It is a prerequisite for robust equity markets to develop.

To be efficient and growth-oriented, entrepreneurs require regulatory regimes that give investors such as stock markets, private shareholders, and other financial institutions the confidence they need to provide finance without the need to exercise daily control of the business. They need laws that prevent expropriation and expose it when it happens. This requires protection of shareholders and enforcement of defaults and irregularities. It means that a well-governed business should disclose ownership and financial performance information. Information on financial transactions, on board directors, and on voting agreements among the shareholders must be freely available to current and potential investors. It also means that a director should face legal liability for self-dealing, and that shareholders should be able to sue officers and directors for misconduct.

In a comparative analysis of disclosure requirements, the World Bank's Doing Business (DB) survey comparatively examines national disclosure requirements. For an example using a hypothetical case, say that a Mr. Singh owns 60 percent of Buyer Ltd., a commercial delivery firm, and he owns 90 percent of Seller Ltd., a retailer. Seller Ltd. is facing financial problems, recently shut a large number of its stores, and has trucks for sale. Mr. Singh proposes to Buyer Ltd. that it purchase Seller's unused trucks to expand Buyer's capability. Shareholders then sue Mr. Singh and the parties who approved the transaction. In such a case, one must ask (1) whether and in what detail Mr. Singh must make mandatory disclosures regarding his interest to Buyer's board of directors; (2) whether and in what detail disclosures regarding the Buyer-Seller transaction are legally required to be made immediately to the public, the regulator, or the stock exchange; and (3) whether and in what detail disclosures regarding the Buyer-Seller transaction are legally required in Buyer's annual report.

The World Bank's index ranges from zero to 10, with higher values indicating greater disclosure. Taking the Asia-Pacific region as an example, New Zealand and Singapore have the highest rankings in the disclosure index. In 2007 the United States ranked at seven on this index, and the lowest rating went to Laos, at zero.

Another example of disclosure requirements is often seen in an initial public offering (IPO). In this case, detailed disclosures of the company's affairs must be made public. New-venture firms often prefer to keep such information private. In an IPO, the firm usually must issue a prospectus, which is a formal written offer to sell securities that provides an investor with the necessary information to make an informed decision. If a company is raising capital by offering its shares or other securities to the public for the first time (usually called a “float” or IPO), it will issue a disclosure document called a prospectus.

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