Opening the Books

The amount of information disclosed by a typical European corporation in its annual report to the stockholders is, by U.S. standards, hardly enough to cover the head of a pin. Final profit or loss figures are given--without explanation about how they were arrived at. Such basic items as true earnings, performance of subsidiaries, executive compensation, method of evaluating assets, and even total sales are treated as top company secrets. As one result, prospective European investors, having little more to go on than intuition, are leary about sinking their savings into stocks. This fact has contributed to the generally depressed state of Europe's bourses and the difficulties that corporations meet in raising capital. Protected by their closed books, European firms get away with operations so inefficient that they would spur American stockholders to instant revolt.

Now that situation is changing.

Country by country, Western Europe is enacting laws and regulations that will substantially improve both the quantity and the quality of corporate reporting.

End of the Guessing Game. In London last week, Parliament was considering a new companies bill introduced by Board of Trade President Douglas Jay. If passed as expected, the bill will require British firms to disclose a host of once sacred details about their financial dealings.

The elaborate, 45-clause bill covers not only publicly held corporations but privately owned firms that are not now required to account for themselves at all. Among the many new figures that British firms would have to report, in addition to profits, are sales (37 of the 100 biggest companies have never done so), a breakdown of sales by product line and subsidiaries, the amount and value of shares outstanding and in reserve, and the earnings of company chairmen. The last requirement promises to end a favorite British guessing game.

First Installment. The proposed law is an important part of the Labor government's campaign to modernize British industrial practices and thus attack the balance-of-payments problem at its source (see following story). But so compelling is the need that the bill also has solid support from Conservatives and in fact may be followed by even tougher regulations. "A first installment," Jay calls it; he promises a second that will cover now-exempt banks and insurance companies.

On the Continent, both France and West Germany within the past year have imposed strict new regulations governing corporate disclosure. Italy has legislation pending. Belgium and The Netherlands have commissions studying the problem. Moreover, it seems that voluntary reporting of detailed information is becoming a corporate badge of status and confidence. In Switzerland, haven of the holding company, where only the loosest laws exist and no new ones are contemplated, the voluntary reports of such companies as Nestle, Geigy, Alusuisse, Sulzer and Landis & Gyr already reflect recognition that fuller disclosure is the coming yardstick for a company's international standing.

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