This article was first published in the July 2012 International edition of Accounting and Business magazine.
There are many stakeholders with an active interest in corporate reporting. Companies, governments, banks, credit-rating agencies, academics and the media, to name a few, all rely in part upon an effective reporting model for their decision making.
However, from all these stakeholders, the investment community stands out. These are the individuals who most closely scrutinise corporate reports. They are the hungriest for information and, in many respects, the most demanding.
Over this series, I will reflect on some of the key issues in corporate reporting today, focusing on the investors’ perspective.
Why is the investors’ perspective important?
Fundamentally, if an investor or analyst can’t get the financial information they need, they can’t make effective decisions. These decisions drive the capital markets and have a real impact on companies and economies. In today’s difficult economic times, it is more important than ever for companies to communicate effectively with investors, to take the guesswork out of their analysis and to give themselves the best chance to access ever-scarcer capital.
Yet time and again, investors tell us they are frustrated with elements of current corporate reporting practice. Throughout my career as an investment professional, academic and latterly corporate reporting specialist at PwC talking to the investment community, I have pulled together a picture of the simple things companies could do to improve their communications with the capital markets – both in how they communicate financial performance and how that performance is set in the context of the business and its operating environment.
It’s not always more, more, more
Companies frequently complain that the investment community always wants more: more disclosure, more detail and more insight. But this isn’t necessarily so. Investors are often in favour of cutting clutter and showing only pertinent information. Volume, they tell us, is no substitute for quality. I will touch on some of the areas most frequently identified by investors as prime candidates for streamlining in later articles.
We need to speak the same language
We all know that there is some jargon inherent in financial reporting, but we should remember that investors are rarely technical accountants. If management can get ‘back to basics’ and explain the underlying economic substance of the accounting in the financial statements, it would significantly help investors in trying to analyse the entity’s performance.
We’ve been consulting with investors for some time to understand where improvements could be made. Some of these ‘quick wins’ are summarised in our ‘Investor view’ series (see link below) and provide some great insight into the concerns and focus of the investment community.
An investor recently told us: ‘I can’t guarantee that good disclosure would get you a higher share price, but I can guarantee that bad disclosure will get you a lower one.’
The message from investors is loud and clear: good financial reporting and high-quality contextual data is critical to market confidence and lowers the cost of capital for companies that provide it.
Alison Thomas is a corporate reporting specialist at PwC