For companies to optimize their market value, compliance and ethics transparency is fundamental. Not only do organizations need ethics and compliance programs in place, but they must provide more detailed compliance and ethics program information to investors. They must demonstrate that they not only have an anonymous externally provided hotline in place, but that the results are vetted through the board audit committee and external counsel. These steps are part of an overall program to maximize company value.
Based on the large corporate fraud of the past several decades, investors must wonder about an organization’s financial statement accuracy when reviewing publicly released information. While financial statement analysis is a key part of determining an organization’s worth and investment potential, non-financial information has become even more important. Investors are placing a higher value on non-financial information in the absence of absolute faith in traditional financial information.
According to an E&Y study, for 70% of investors, at least 30% of their decision is attributed to non-financial performance. These criteria are already being used as predictors of financial performance and already have an impact on share price.
To quantify the value of this non-financial performance, investors ranked the relative performance of eight nonfinancial categories on a scale of 0 to 10 units. A one-unit improvement in the perception of strength of market position could represent a 9.3% price premium on share value. A one-unit improvement in shareholders’ perceptions of the quality of management, for example, is “worth” $1.3 billion in additional share value for a major pharmaceutical company like Merck. A one-point improvement in management quality, including trust that the organization is acting ethically, may also yield a lift in brand power. (Measures That Matter, E&Y LLP)