Professional accountancy is not for wimps. Drawing on her many years of experience, Alison Thomas offers some light-hearted advice
This article was first published in the June 2018 UK edition of Accounting and Business magazine.
Q What do you think about stakeholder reporting?
A Do you mean reporting to investors about your management of, or reputation with, key stakeholders? Or are you more interested in communicating with various stakeholder groups? Actually, either way, I think it a good idea.
Investors need to understand if your business model is in place. If managing key stakeholder groups is part of the game plan – and unless you operate on the moon, it will be – then providing insight into the health of those relationships gives confidence in the sustainability of your performance.
Similarly, having open lines of communication with key stakeholder groups is a sensible idea too. It helps them to understand where you’re heading and how they can join the ride. It can reassure them about your financial strength and give them the confidence they need to commit resources to your relationship.
But please don’t think this means that you should communicate with everyone through the annual report. Cramming all stakeholder communications into one report will either create a monster document that no one can bench-press, or one that will touch on everything but explain absolutely nothing.
So although some employees, suppliers and maybe even customers will find your report and accounts helpful, don’t think that’s stakeholder reporting all sewn up. Tailored communication makes all the difference. What’s important to each group? Listen, then communicate accordingly.
Q In one breath, investors say they want comparable financial data. In the next, they bleat on about ‘through management’s eyes’. How can I reconcile those demands?
A It does seem like having one’s cake and eating it, but in this case I think the investors are right, and it is the accountants who need to adapt. Professional investors are typically paid to create portfolios that meet certain predefined risk and return objectives – aggressive growth, value and the like. To find companies that fit the bill, they usually start by screening the investable universe (often many thousands of stocks) using financial metrics that reflect their portfolio goals. So, for value names, they may screen using price-to-book or cashflow, or enterprise value to EBITDA)
To screen a universe of stocks like that, you need comparable data. Screening produces a buy-list of contenders for inclusion in the portfolio. This is when the sleeve-rolling begins: when investors build models, see how sensitive those models are to changes in key variables – all the usual valuation tricks. To do this, investors want to see a business ‘through management’s eyes’ – its business model, underlying growth rates, anything that helps to hone those assumptions.
So, frustrating though it may be for the profession, investors might not be as contradictory as they seem.
Q Do you think the new insurance standard works?
A In all honesty, I don’t know. While conceptually, I understand what the IASB is trying to do, in practice, will it deliver the information investors need? I am cautiously optimistic but I don’t think we’ll know for certain until we have a bunch of reports in front of us.
However, in the absence of a unifying standard, the global insurance industry is basically a no-go area for vast swathes of investors. There are simply not enough hours in the day for an international portfolio manager to wade through the rules that govern each territory’s reporting. So for the sake of happy capital markets, I hope that, as implementation approaches, all involved will have a good huddle to make the disclosures as useful as they can be (see also Jane Fuller, AB, May 2018).
Alison Thomas is a consultant
"In the absence of a unifying standard, the global insurance industry is basically a no-go area for vast swathes of investors"