Disclosure Requirements Financial disclosure is a concern of many business owners. Shareholder rights to receive information differ for companies whose securities are registered with the SEC versus privately held companies.
Publicly traded companies must periodically disclose financial information to their stockholders. For a private company, the state in which it is incorporated and the registration or exemption requirements for the particular equity plan being used will determine the amount of information that must be given to employee shareholders. In many states, the company is not legally required to give shareholders regular financial information.
With a private corporation, the company needs to balance the minimum standards against the goal of having employees improve corporate performance. Without knowing and understanding some measures of financial performance, employees will have little ability to judge the impact of their efforts on overall corporate performance. Ideally, employees should be able to see how their own contribution affects the company's bottom line.
With regard to qualified plans such as ESOPs, federal regulations require that employees receive a summary plan description and annual statements detailing the value of their personal account in the plan and the value of the shares of employer securities within the plan.
Dilution
Regardless of the requirements, information disclosure is a very important ingredient in building an ownership culture. Even when the news is somewhat negative -- for example, if an equity program is being implemented along with salary reductions to cut costs -- it is better to be frank with employees about the situation.
In terms of the types of information to communicate, employees first of all need information on the equity compensation plan itself. Why did the company do it? What is it meant to accomplish? How will the plan work? Very simply, how do the employees gain equity in the company?
In addition, each employee should be provided with written materials that explain the program, including a copy of the formal plan document. It is also helpful to develop and distribute a companion document that provides an easy-to-understand summary of the mechanics of the plan. Employees generally want to understand how they will be personally affected by having equity in the company, particularly relative to any tax ramifications they may incur.
Regarding the sharing of financial information, the fact is that many employees, regardless of their level in the company, do not understand financial statements. Many companies go beyond the legal requirements for financial disclosure and provide frequent and easy-to-understand financial information along with an explanation of the trends, abnormalities and problem areas so employees can understand the meaning behind the numbers. Employees with a basic understanding of the "corporate scorecard" are in a better position to understand the impact of their actions on corporate performance. In a larger company, it helps to provide employees with information on their division's or business unit's performance as well and the way that contributes to the big picture. Employees are most concerned about their own work environment and need to know how their work affects the overall company. It is critical to keep people informed of the financials and the stock price and the ways in which their performance is connected to those measures.
The most successful employee ownership companies tie all this together with communication about company initiatives, such as new market thrusts, policy changes, or organizational restructuring. This helps employees better understand the company and plan for its success.
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