Disclosure Management and Equity Management: Why You Need Both

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May 9, 2022

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Disclosure Management And Equity Management Why You Need Both

Growing companies rely on equity-based compensation to attract and retain top talent. They must also comply with stringent regulations regarding financial reporting and disclosures.

It’s common practice in many startups–and even in some more mature public firms–to make do with manual processes and low-cost solutions for managing disclosures and cap tables. As a company grows, however, the complexity surrounding these processes increases. For many, that means hitting a brick wall as those methods reach the limits of their utility.

This article explores both disclosure reporting and equity management, covering some of the common challenges associated with these functions and ways that corporate finance leaders can bring order and efficiency to these processes as they become more and more complex.

What Is Disclosure Management?

Disclosure management involves everything required to organize and maintain the financial disclosure process internally within your organization. For public firms in the US, for example, the Securities and Exchange Commission (SEC) filings are a routine requirement. Those reports get a lot of scrutiny. Any errors can have profound implications, so it’s critical to get things right.

Disclosure management isn’t just about producing financial statements. Regulatory filings also require narrative explanation. Management must tell the story behind the numbers. That makes disclosures somewhat more complicated than internal financial reports. Additional regulatory requirements, including the mandate to render filings in XBRL format, add further to the challenges.

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Challenges of Disclosure Management

Most organizations have systems in place to collect, aggregate, and crunch the numbers for internal reports. These generally fall short of what’s needed to deliver financial disclosures. They lack the narrative element, are not designed with XBRL tagging capabilities, and are poorly suited to organizing information in ways that meet regulatory requirements.

Companies face three fundamental challenges with disclosures. The first is the problem of manual processes. Because existing enterprise resource planning (ERP), corporate performance management (CPM), and general ledger (GL) systems aren’t designed with disclosure reporting in mind, many organizations rely on manual processes to piece together the information they need into a single document or collection of documents.

Often, they use a combination of word processing tools, Excel spreadsheets, and presentation software to pull together the narratives, numbers, and graphics they need for disclosures. There is quite a lot of copying and pasting involved, which can introduce errors. There’s little or no automation, which renders the whole process very time-consuming. The fact that this is a recurring requirement means that through the course of time, this inefficiency is multiplied many times over.

The second challenge has to do with regulatory mandates dictating that companies must add XBRL tags to their financial disclosures. The European Securities and Markets Authority (ESMA), The European Single Electronic Format (ESEF), the SEC, and other agencies around the globe have issued XBRL requirements. Companies have two options for handling this. The first is to outsource it, but that comes with longer reporting cycles, higher costs, higher risks, and more. The second option is to implement internal systems with native XBRL tagging capabilities. This is faster, carries substantially lower risk, and costs a lot less in the long run.

The third challenge in disclosure management involves narrative reporting. It can be especially difficult to get this right while still operating efficiently. When information is copied and pasted from previous reports, you usually need to modify some small but important details.

Last-minute changes can be especially onerous. About half of analyst calls involve questions about discrepancies brought about by a last-minute change in the disclosures. If a late-breaking tax change leads to lower stated profits, for example, that will show up in the income statement, but if the update isn’t also reflected in the narrative statements, it reveals a discrepancy that can be embarrassing to top management. Situations like this often lead to decreased confidence in the company, negatively impacting the stock price. Accuracy is crucial.

What Is Equity Management?

Equity management involves all the processes associated with managing ownership shares within a company–everything from awarding grants and tracking share purchases and redemptions to regulatory compliance and stakeholder communications.

Businesses use equity management software, sometimes referred to as cap table management software, to track and manage the complex processes involved with issuing equity, maintaining compliance, receiving 409A valuations, and staying on top of capitalization tables. It also facilitates communication with equity plan participants, enabling them to understand the number of shares they own, the value of those shares, the number of options they hold, when those options vest, and so on. The best equity management software includes employee and investor self-service capabilities that enable stakeholders to view this kind of information, accept award grants, and access tax documents.

Equity administrators, HR personnel, and other stakeholders use equity management software to manage equity compensation plans, communicate with shareholders, generate financial reports, and manage any regulatory compliance requirements.

Challenges of Equity Management

Just as with disclosures, equity management comes with some unique challenges. It’s not uncommon for early-stage startup companies to start out with manual processes, maintaining their cap tables in a spreadsheet. Unfortunately, it usually isn’t ‌long before things ‌get complicated. As new employees come on board, or as others leave the company, finance teams must adjust cap tables to reflect those changes. This complexity often shows up ‌when rapid growth companies can least afford to divert their attention to it.

As the growth of the company continues, this complexity grows exponentially. Many companies resort to low-cost equity management software to solve this problem. Unfortunately, that typically leads to another dead-end because so many equity management solutions simply aren’t built for scale. It’s important that companies find equity management software that can grow with them over the long term.

Regulatory compliance often involves significant amounts of paperwork. Low-cost software offers less flexibility and automation than a more robust, scalable equity management solution. Manual processes carry substantial regulatory compliance risk. Errors can lead to financial penalties, additional effort to file corrected reports, and a loss of confidence from investors and employees.

Finally, there is the question of where equity plan administrators can turn when they need help. Many low-cost equity management products are supported by offshore personnel or new hires with little or no domain of expertise. Look for a provider who offers equity management services to supplement your internal personnel and provide expert advice when you need it.

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Growing Companies Need Both

As an organization grows, it’s more important than ever to streamline and automate processes. This saves time by eliminating manual effort and removes many of the common points of failure associated with financial disclosure reporting and equity management. Copying and pasting information is a common source of errors, and mistakes can be especially costly in both ‌areas.

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