For journalists reporting on companies, it can be easy to miss signs of fraud, theft, waste and abuse of power beneath the barrage of press releases and financial documents.
A recently released guide from the International Finance Corporation (IFC) Global Corporate Governance Forum and the International Center for Journalists offers tips on covering corporate governance. The 76-page guide is also available as a PDF file.
Here are five ways that understanding corporate governance--how companies are governed and controlled--can help unearth stories:
Know the board of directors
Journalists should carefully examine a company's management team, but it's equally important to monitor the board of directors, according to the report. Warning signs include absence of key committees, a board that deviates from the standard nine or 10 members, or several non-independent members with additional company ties.
Connect the dots
Journalists should be wise to a company's related party transactions -- deals between parties who are joined in a notable way. For publicly traded corporations, these must be published in the annual report. "Red flags for journalists include ties of board members to other companies that are vendors; family members in key positions of the companies doing business with one another; and disproportionately high costs for supplies of goods and services," the report says.
Don't dismiss activist shareholders
It can be useful for reporters to connect with "gadfly shareholders"—activists who push for change within a company. "Some journalists shy away from gadflies, seeing them as more likely to be pests than sources, but gadflies often shine a light on questionable practices and board failings," the report says.
Track cash flow
Journalists often focus on income statements to determine revenue and profit, but the cash flow statement is considered by many analysts the most telling financial document, the report says. "A company may be making a profit but still show negative cash flows from operations," according to the report. "Continuing negative cash flows from operations is a red flag."
Watch family businesses
Many issues can arise from the mingling of personal and professional relationships in family companies, which the report says create 70 - 90 percent of the annual global GDP, citing figures from the Family Firm Institute Inc.’s 2010 global data survey. "Stories about such businesses are often dramatic, featuring outsize personalities that are part of powerful, wealthy—and highly secretive—families. However, for journalists, family companies may pose difficulties because of their lack of transparency," the report notes. Journalists should watch for insufficient qualifications among management, family influence on the board and succession issues.
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