FINAL-EY-Risk-Disclosure-Study

FINAL-EY-Risk-Disclosure-Study - The Corporate Risk Factor...

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January 2016 The Corporate Risk Factor Disclosure Landscape
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The risk factor disclosure landscape | 1 The Investor Responsibility Research Center Institute (IRRCi) wishes to thank Ernst & Young LLP, which was the primary research entity for, and the primary contributor to, this report. The copyright for this report is held by the IRRC Institute. The material in this report may be reproduced and distributed without advance notification, but only if attributed. If reproduced substantially or entirely, it should include all trademark and copyright notices. For more information, please contact: Jon Lukomnik, Executive Director IRRC Institute 40 Wall Street – 28 th Floor New York, NY 10005 [email protected]
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The risk factor disclosure landscape | 2 The corporate risk factor disclosure landscape Contents Introduction ..................................................................................................................................................................................... 3 Executive summary ...................................................................................................................................................................... 3 Key findings ................................................................................................................................................................................. 3 Background ................................................................................................................................................................................. 4 Overview of disclosures ................................................................................................................................................................ 5 Requirements ............................................................................................................................................................................... 5 Disclosure by the numbers .......................................................................................................................................................... 6 Characteristics of risk factor disclosures .................................................................................................................................... 8 Risk factor categories .................................................................................................................................................................. 8 Prevalence of risk factor categories, by sector and category ..................................................................................................... 12 Word search .......................................................................................................................................................................... 14 Disclosure of company-specific risk effects ............................................................................................................................... 15 Specificity in disclosure .............................................................................................................................................................. 17 Disclosure of risk management efforts ....................................................................................................................................... 19 Disclosure of risk factor trends ................................................................................................................................................... 21 Comparison of disclosure language ........................................................................................................................................... 22 Conclusion .................................................................................................................................................................................... 23 Appendix: Approach, methodology and key definitions Approach ................................................................................................................................................................................ 24 Methodology and key definitions .................................................................................................................................. 25 Caveats to the research .................................................................................................................................................... 27
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The risk factor disclosure landscape | 3 Introduction Executive summary Risk factor disclosures provided by companies in their Form 10-K and other Securities and Exchange Commission (SEC) filings are supposed to serve an important role in the capital markets by offering investors an understanding of the risks faced by the individual companies. Instead, we find in our review of the risk factor disclosures of 50 large companies that disclosures often are generic and do not provide clear, concise and insightful information. The disclosures typically are not tailored to the specific company. Instead, they tend to represent a listing of generic risks, with little to help investors distinguish between the relative importance of each risk to the company. In addition, the language is often repetitive and written with legal language and a compliance-oriented approach (instead of using plain English to help investors better understand and evaluate company-specific risks). Based on our study, there is an opportunity for companies to streamline language around common risk factors and to offer more insightful, company-specific information. For risks that are particularly important, a company could enhance its disclosures by providing more descriptions of its risk mitigation efforts. Companies could also consider including more company-specific detail; descriptions of how the nature, intensity and likelihood of key risks have changed or might change; and explanations of how significant risks can affect the company’s business. Such changes could go a long way toward providing investors with more effective risk factor disclosures.
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