The Financial Accounting Standards Board may require banks to report sales and profits by business segments - individual divisional and product lines. Financial analysts reportedly welcome this proposal.
Corporate opposition, which previously derailed a similar proposal by the Securities and Exchange Commission, is intense.
One news account quoted the chairman of a large financial services company as complaining that, "It would be very expensive, require us to redo our entire accounting system, and could give away competitive [information]."
One disturbing aspect of this opposition concerns the adequacy of information provided to the investing public.
Many bankers overlook the importance of good investor relations. Some deliberately minimize external communication.
As bank financial statements are misleading in any event, however much they meet FASB and SEC standards, the investing public typically has few clues as to true financial condition and performance.
Moreover, what do these attitude, imply about the adequacy of information available for internal decision-making?
Management performance depends on the relevance and quality of that information. Effective product, pricing, and marketing decisions require mechanisms for measuring their outcomes.
They specifically require allocations of revenues and outlays by market segments, customers, and products.
Management failures to develop that information should warn investors that decisions will be uninformed haphazard.
It may be for good reason that investors have greeted sharply higher earnings with restrained enthusiasm.
Information is essential to economic activity. It obtains substantial value by improving decision-making and by reducing both business and investment risks.
Of course, developing and disseminating information is not without costs.
Information deficiencies alone increase financial risks, eventually breeding investor skepticism and distrust. Consequences include higher costs of debt, reduced earnings. more discounting of investment returns, lower share prices, and more difficulty in attracting and retaining equity.
Correspondingly, more and better investor information ultimately has positive effects on shareholder values.
Resistance to information disclosure involves some important misconceptions:
* Management Objectives: Near-term effects on stock prices often preoccupy managers and directors, encouraging suppression or exaggeration of information, often disguising longer-term consequences.
Current accounting standards provide substantial latitude for management to pursue its own goals. Of course, concealing relevant information becomes counter-productive, exacerbating investor perceptions of information risks.
* Costs: Emphasizing the costs of developing better information while ignoring benefits raises concerns about corporate responsiveness to shareholder objectives, particularly as modern information technologies continue to reduce those costs.
* Competition: Few banking services are so distinctive and innovative that additional financial information of the sort proposed by the FASB is likely to have much competitive impact.
Any benefits are reciprocal, and any net benefit is likely to flow from less to more competitive rivals, fostering a more competitive and innovative marketplace.
Arguments against disclosure are in all cases myopic. Those based on costs and competition are both exaggerated and incomplete. Yet, notwithstanding the public interest, the Office of Thrift Supervision apparently subscribes to the competition argument, endorsing the suppression of important information on deposit composition.
"Information overload" is an issue of more legitimate concern.
The amount of financial information that corporations must report and disclose may exceed the capacity of much of the investing public to absorb it.
Yet, as the additional information is enormously important to some investors and analysts, it is correspondingly important to the functioning of the financial marketplace.
The underlying problem is that bank financial statements themselves have only remote relevance to investment value.
The only alternative to more disclosure is substantial overhaul of accounting standards, generating a host of other problems.
Complaints about costs of more business segment reporting are especially troublesome because they suggest substantially defective internal foundations for management decisions.
Revenue and cost allocations for segment reporting are essential for effective use of modern information technologies.
Without taking that step, management decisions and strategies are unavoidably haphazard and speculative, exacerbating business risks.
What benefits of better decision-making might outweigh against its costs?
Consider the alternatives. Deficient internal information results in unintended and often unfavorable decision outcomes as well as in more risk, impairing achievement of shareholder objectives.
It causes costs of both equity and debt financing to increase as a response to both higher business and higher information risks.
Information costs me continue to decline with adoption of modern information technologies. Some banks have had systems for internal segment and product line reporting for a number of years.
Development of this information presumably was already cost-effective with less advanced information systems than available today.
Indeed, information availability is often less a problem than abilities to use information effectively.
Newer technologies allow bankers to take yet a further step toward meeting their responsibilities to shareholders. Specifically, they enable measuring the direct effects of alternative decisions on shareholder values.
Conventional accounting, with very different priorities, does not provide the necessary linkages.
Apart from failing to classify most expense outlays according to resulting outputs, conventional accounting misstates investment in marketing and product development as current expense. The consequence is to misstate their time periods to which outlays relate.
Overcoming these information shortcomings for internal decisionmaking requires the availability and use of information so as to:
* Identify the income consequences of cash outlays, whether they are current expenses or investment in future income sources.
* Identify the temporal characteristics of decision outcomes as measured by cash flows recognizing that bank customers often represent valuable long-term relationships, and not simply transitory events.
* Recognize the time dimension of decisions by translating the cash flows thus identified to net present values, as in capital budgeting analysis, whereby shareholder value contributions are directly identifiable.
