Our study looks at the information regarding risk disclosed in Indian and German annual reports. From a corporate perspective, the regulations in Germany and India strive for clarity of information for the board to enable sound decision making, improve transparency to stakeholders, and aide in quantifiable risk management. From an investor’s perspective, these regulations strive for trust enhancement by making the board accountable through their commentary in the annual report, and therefore boost investor confidence vis-a-vis the risk management abilities of the board. This helps investors to develop faith in the thinking and expertise of the board members, and to trust the judgement of the auditors to attain well balanced insights.
Data and Methodology
We look at how this translates into concrete information given in the annual reports of the companies in the Indian National Stock Exchange (NSE) index and compared them with the companies included in the German Deutscher Aktienindex (DAX) index for the annual reports of 2015 (2014/15 respectively). The analysis was done with the help of an evaluation scheme based on previous studies and with the current regulations in both countries acting as a guideline for the qualitative content analysis. A disclosure index was then constructed to be able to quantify the information quality given in the reports.
Results
With disclosure requirements oscillating between mandatory and voluntary, we found that while companies of both indices comply with the mandatory requirements, voluntary information, especially on numerical concrete risk reporting, could be improved (marginally more so in the Indian context). In general, companies provide information on risk policy basic procedures, but only describe it qualitatively. Graphical displays, ratios, risk metrics or concrete numbers on the impact and probability of risks are rarely used. However, some companies in both economies have shown the way in comprehensively categorizing risk related information, which can be adopted, where possible, by other companies in their respective indices.
Policy implications
The study shows that companies comply with the basic regulations but are not disclosing more information voluntarily. We would argue for a balanced regulation with strict specifications for some risk areas, severe risks or the overall level of risk to be reported, and strict regulation regarding the structure of such reports.