Financial Interest: The Right to Know in Enterprises
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Financial Interest: The Right to Know in Enterprises

The primary purpose of financial accounts and of the annual report of an enterprise is to give the board of directors an opportunity to justify its stewardship to the owners - that is, the shareholders. The major concerns of shareholders are profitability (opening up the possibility of adequate returns on their investment), and long-term growth in an asset values (showing the potential for capital gains on the sale of their shares).
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The primary purpose of financial accounts and of the annual report of an enterprise is to give the board of directors an opportunity to justify its stewardship to the owners - that is, the shareholders.

The major concerns of shareholders are profitability (opening up the possibility of adequate returns on their investment), and long-term growth in an asset values (showing the potential for capital gains on the sale of their shares). The structure of the company accounts has reflected these concerns, in particular with a profit and loss account from which profitability can be assessed, and with a balance sheet which will demonstrate any change in asset values.

Other parts of the annual report and accounts, such as the chairman's report, or director's report, will be more qualitative in nature, drawing attention to future prospects or commenting on past triumphs or disasters.

In small enterprises, the annual report is less important, since the shareholders are often working directors or members of their families, and will therefore be better informed about the financial and commercial prospects of the enterprise. But in large and commercial enterprises, ownership is widely separated from control. There are many thousands of individual and institutional shareholders who are entitled to receive the annual report and accounts, to attend the annual general meeting, to elect directors, and to criticize and question members of the board; but in practice few of them attend the annual general meeting and shareholders are generally content to leave the running of the enterprise to a handful of corporate executives and full-time directors. In these circumstances the annual report and accounts become the essential link between the board and the shareholders.

But of course shareholders are not the only group which has an interest in a particular company and its accounts. There will be creditors. These can include firms which have supplied goods, materials, or services (known as trade creditors), debenture and mortgage holders, finance houses and banks. These institutions will obviously be concerned to see that the enterprise is financially sound and profitable, and that the annual report honestly and conscientiously reflects the economic, commercial and financial position of the enterprise.

Other interested parties include civil servants, particularly those who have been given the responsibility of levying taxation or paying out grants and subsidies. Local and regional officials will also be concerned with the contribution the enterprise can make to the local community.

All these parties have a right to know what is happening to the enterprises in which they have a financial interest. This right is usually backed up by legislation designed to protect the interests of shareholders and creditors.

The other groups of people who have a legitimate interest in the financial affairs of a company are those who are investing at least a part of their working lives in it - that is, the employees. In some countries, legislation gives workers a statutory right to obtain financial and economic information about their enterprises. In other countries this information can be obtained from employers through the normal course of collective bargaining, but of course this depends on the effectiveness of your trade union, on your employer, and on where and in which country you live.

In the case of workers in public companies - that is, companies who sell, or have sold, shares to members of the public - the key financial accounts are available for inspection by any interested party, including workers' representatives.

This means that employees can often obtain a great deal of detailed financial and economic information about their enterprises, but obtaining information is one thing and using it effectively is quite another. Unfortunately, from the employees' point of view, company accounts can seem overwhelmingly technical, full of unfamiliar items such as "debentures", "minorities", "exchange adjustments", "deferred income", "share premiums", and many more. Consequently, information which could be extracted from financial accounts is not as widely used in collective bargaining as it might be.

 

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Comments (1)

Nice briefing.

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