Understanding investors: directions for corporate reporting - ACCOUNTANTS FOR BUSINESS
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ACCOUNTANTS FOR BUSINESS Understanding investors: directions for corporate reporting
About ACCA
This report is the second of a four-
ACCA (the Association of Chartered Certified
Accountants) is the global body for professional
part project examining what
accountants. We aim to offer business-relevant, first- investors want from corporate
choice qualifications to people of application, ability and
ambition around the world who seek a rewarding career
reporting and how organisations
in accountancy, finance and management. are responding to their needs.
Founded in 1904, ACCA has consistently held unique
core values: opportunity, diversity, innovation, integrity It outlines the kind of information
and accountability. We believe that accountants bring
value to economies in all stages of development. We aim investors need to make their
to develop capacity in the profession and encourage the decisions, how they now like to
adoption of consistent global standards. Our values are
aligned to the needs of employers in all sectors and we receive that information (both the
ensure that, through our qualifications, we prepare
accountants for business. We work to open up the
format and the communications
profession to people of all backgrounds and remove channels), and their level of trust in
artificial barriers to entry, ensuring that our qualifications
and their delivery meet the diverse needs of trainee
what they receive.
professionals and their employers.
We support our 154,000 members and 432,000 students
in 170 countries, helping them to develop successful
careers in accounting and business, with the skills needed
by employers. We work through a network of over 80
offices and centres and more than 8,400 Approved
Employers worldwide, who provide high standards of
employee learning and development.
ABOUT ACCOUNTANTS FOR BUSINESS
ACCA’s global programme, Accountants for Business,
champions the role of finance professionals in all sectors
as true value creators in organisations. Through people,
process and professionalism, accountants are central to
great performance. They shape business strategy through
a deep understanding of financial drivers and seek
opportunities for long-term success. By focusing on the
critical role professional accountants play in economies at
all stages of development around the world, and in
diverse organisations, ACCA seeks to highlight and
enhance the role the accountancy profession plays in
supporting a healthy global economy.
www.accaglobal.com/ri
© The Association of Chartered Certified Accountants,
June 2013Contents Foreword 4 Executive summary 5 1. A broader range of information sources 8 2. The pressure for speed 11 3. The need for improvement 15 4. Future trends in reporting 19 5. Conclusion 24 References 25 UNDERSTANDING INVESTORS: DIRECTIONS FOR CORPORATE REPORTING 3
Foreword
ACCA has consistently argued that the role and interests of investors need
to be better understood and placed more centrally in policymaking
processes by legislators and standard setters. The investors’ voice is often
not heard strongly enough, which is perhaps understandable given the
range of organisations and interests that can fall under the heading of
‘investors’.
In order to address this need for greater understanding of the investor
landscape, ACCA, in collaboration with Longitude Research, has developed
a four-stage project examining the changing investor universe, post-global
financial crisis, and what investors want from corporate reporting. The
project examines how pressure to respond to the needs of investors may
change the approach taken by companies in reporting their activities and
engaging investor groups.
Over the four stages, the project examines:
• recent developments in the investor landscape, trends and emerging
issues since the global financial crisis
• the kind of information investors need to make their decisions, how they
now like to receive that information (both the format and the
communications channel), and their level of trust in what they receive
• the move towards ‘real-time’ reporting, and how companies are Helen Brand
responding to calls to disclose certain information with much more ACCA chief executive
immediacy, rather than at the end of a quarter or year
• how companies are already changing their investor engagement and
reporting activities to reflect evolving investor demands, and what this
means for the finance function and the CFO.
This report is the second stage of that process. While it uses the UK and
Ireland investor base for its analysis, the trends it identifies have a much
wider resonance, internationally.
4 UNDERSTANDING INVESTORS: DIRECTIONS FOR CORPORATE REPORTINGExecutive summary
ABOUT THE RESEARCH banks and family offices, and 11% other
asset-management firms. A further 9%
This report, which was written by were investment advisers or analysts,
Longitude Research on behalf of ACCA, and the remaining 2% corporate
is based on a survey of 300 investors, treasurers.
conducted in March 2013, and a
programme of in-depth interviews with Respondents were based in the UK
leading figures from the investment (80%) and in Ireland (20%), and analysis
community. of both sets of respondents found that
these two groups differ very little in
Half the survey respondents represent their outlook on the issues covered in
institutions with more than US$500m in this report. More than 50% of
assets under management. There was a respondents were C-level executives.
good spread across sectors: 38% We would like to thank everyone who
represented pension funds, 30% took part in the research.
insurance companies, 10% private
IN-DEPTH INTERVIEWS
In particular, we would like to thank the following, who provided in-depth interviews with our research team.
• Tim Barker, head of credit research, Old Mutual Asset Managers
• David Blood, founder, Generation Investment Management, leading sustainability investors
• Jon Exley, partner, Investment Advisory Practice, KPMG
• Chris Higson, associate professor of accounting practice, London Business School
• Guy Jubb, global head of governance and stewardship, Standard Life Investments
• John Kay, FT journalist, visiting professor of economics at the London School of Economics, chair of the Kay Report
• Samantha McConnell, chief investment officer, IFG Pensions, Investments and Advisory Services, Ireland
• Jonathan Pitkänen and Iain Richards, Threadneedle Investments
• David Stewart, chief investment officer, Santander Asset Management UK
• Robert Talbut, chief investment officer, Royal London Asset Management
• Jean Claude Tanqueray, chief investment officer, Single Family Office
• Harlan Zimmerman, partner, Cevian, activist investors.
UNDERSTANDING INVESTORS: DIRECTIONS FOR CORPORATE REPORTING 5THE KEY FINDINGS Investors are seeking greater Investors have a strong appetite for
assurance. integrated reporting.
Investors have lost trust in corporate Timeliness of information may be More than 90% of investors polled
information since the global financial important, but investors in the survey believe it would be valuable for
crisis. stress that assurance is just as critical – companies to combine financial and
Almost two-thirds of investors say that if not more so. Nearly two-thirds believe non-financial information into an
they place greater value on information that management has too much integrated reporting model. The main
or commentary that has been discretion in the financial numbers benefit, according to investors, would
generated outside the company than reported, suggesting that there is a be an enhanced understanding of the
on traditional corporate reporting. As demand for audit to play a bigger role long-term outlook of a company. More
the speed of investment decision in providing assurance for the than two out of five investors believe
making accelerates, sometimes to rates information that companies provide. that integrated reporting would provide
of milliseconds, investors are constantly Investors are particularly keen for a better explanation of the linkage
looking out for sources of information assurance when it comes to liquidity between sustainability and long-term
that will give them the edge. This and general financial information. With corporate performance; and a similar
means that, increasingly, they rely on other aspects of reporting, such as number believe that it would provide
non-traditional and non-audited emerging risks, speed of information is greater information on how long-term
information, such as analyst presentations, regarded as more important. risks, such as climate change, could
online news and social media. Concerns affect a company’s business model.
about traditional corporate reporting Opinions are sharply divided over
are accelerating this trend, with more quarterly reporting. Almost a half of investors are using
than two-thirds of investors saying that A majority of investors see quarterly XBRL, but not all find it useful.
since the financial crisis they have reporting as the optimal timeframe over XBRL promises to allow companies to
become more sceptical about the which companies should release publish their financial statements so
information that companies provide. audited financial statements. Three- that information can be extracted in a
quarters of investors say that, despite variety of formats to meet the particular
The annual report is still an important its flaws, the quarterly report remains a needs of each user. Among our
information source but criticisms are valuable input to investment decision respondents, 45% are using XBRL,
growing. making. Yet, at the same time, almost although only around half of this group
Asked about the most valuable sources half of investors believe mandatory say that they find it useful. There is,
of input for making investment decisions, quarterly reporting should be however, latent demand for the
more respondents indicate the annual abandoned, while almost two-thirds technology: two out of five investors say
report than anything else, by a think the increase in information and that they are not yet using XBRL but
considerable margin. Yet there remains real-time communication has would find it valuable to do so. The
a significant minority of investors who encouraged ‘hyper-investment’. Many main benefit of using XBRL, say
express reservations about the quality investors interviewed for this report investors, would be the ability to
and relevance of corporate reporting, expressed strong views that quarterly compare performance between
with 45% arguing that the annual report reporting drives short-termism in the companies more easily, although
is no longer a useful tool. A key concern market and consumes management detractors worry that there remains a
is clutter – almost two-thirds of time. This suggests a ‘tragedy of the lack of standardisation in the use of
respondents say that corporate commons’ effect, whereby individual taxonomies.
reporting is now too complex. Asked investors want to consume quarterly
about where they would most like to reporting for their own self-interest,
see improvements to the annual report, despite recognising that this focus on
respondents emphasise the cash flow shortening time horizons is damaging
statement, with information on the for the overall market’s long-term
balance sheet and income statement interests.
coming a close second and third.
6 UNDERSTANDING INVESTORS: DIRECTIONS FOR CORPORATE REPORTINGTHE CHALLENGES AHEAD Consider the long-term future for the More work needs to be done to
annual report. explain integrated reporting.
The survey reveals a number of findings Most investors in the survey continue to The survey shows near-unanimous
that should provide food for thought for see the annual report as a key source of support for integrated reporting in
accounting standard setters, information, but there are worrying principle, but some confusion over what
policymakers and the audit profession. signs that its value may be declining. it can achieve and how it will work in
The key challenges that they will need The fact that 44% no longer consider practice. There is clearly more work to
to consider over the next few years the annual report to be a useful tool be done by policymakers to educate
include the following. should be cause for concern. The and engage investors and build on
consideration of how the annual report current enthusiasm to create a set of
Address concerns about clutter. can evolve and stay relevant in the long solutions that are practical and
Investors surveyed clearly have term should be a key priority. consistent.
concerns that reporting remains too
complex and that new initiatives tend to Address the quarterly reporting Speed must be balanced against
add to volume, rather than relevance, of dichotomy. assurance.
information that companies provide. Investors are in two minds about Investors clearly value the rigour that
Initiatives to ‘cut clutter’ should be quarterly reporting – a large majority assurance brings and prioritise this over
re-invigorated and debates held over think it helps them make investment speed of disclosure for some types of
how to minimise the burden of decisions, but a similarly large financial information, although there is
information on investors. proportion would like to see it also a desire for a wider range of
abandoned. The concern is that what is information to be received in real-time.
Set appropriate boundaries for good for individual investors is bad for Would auditors have the resources and
management. the market as a whole. Equally, to what capabilities to provide assurance over
The fact that almost two-thirds of extent should companies be allowed to quarterly reports – or real-time
investors think that management has determine their own reporting information? These will be important
too much discretion in how it reports frequency? A careful balance must be issues to consider as the needs of
the numbers suggests that more work struck between the need for timely investors and corporates evolve.
should be done to ensure that there are information and its impact on short-
appropriate boundaries around how termism in the markets.
and what management can report.
There is, of course, a balance to be
struck here – set the boundaries too
tightly and a box-ticking mentality will
ensue, but set them too loosely and
management may look for ways to
obfuscate or embellish the figures.
UNDERSTANDING INVESTORS: DIRECTIONS FOR CORPORATE REPORTING 71. A broader range of information sources
We live in an age of instant information. basis. Investors can unearth new
For now, the annual Google’s CEO Eric Schmidt once
famously claimed that in just two days,
information via blogs and social media,
newsfeeds, as well as from an array of
report remains the the world now creates as much consultants and specialised ratings
primary input for information as it did from the dawn of
civilisation until 2003. So it is no surprise
agencies – and, of course, from the
companies themselves.
making investment that we see a similar phenomenon in
the world of investment. Investors today Despite this proliferation of information,
decisions. have an ever-growing array of research conducted for this report finds
information sources. that, for now, the annual report remains
the primary input for making investment
New technologies, media channels, decisions.
social and mobile media – all have
helped transform the corporate Almost two-thirds of responding
information landscape, creating a investors in the UK and Ireland say that
tsunami of financial data and analysis to it is among the most valuable sources of
support decision making. Moreover, an information that they use (see Figure
increasing proportion of this 1.1). ‘The annual report is the main
information is available on a real-time document we use as an investor to
Figure 1.1: Which of the following sources of information are most valuable for you as
an input for decisions about investing in a company?
0 10% 20% 30% 40% 50% 60%
Annual report 63
Quarterly earnings reports 36
One-to-one conversations 35
Investment advisers 35
Analyst presentations/reports 27
Media coverage and interviews 23
Interim report 20
Investor roadshows 6
8 UNDERSTANDING INVESTORS: DIRECTIONS FOR CORPORATE REPORTINGunderstand a business’, says Jonathan The annual report may be the primary
Pitkänen, head of investment-grade
research at Threadneedle Investments.
source of information for investment
decision making, but it is far from being
63% of investors say
This finding is consistent with previous the only one. As Figure 1.1 shows, they place greater
research, (ACCA 2011), showing that half
of investors used the annual report as
investors in the UK and Ireland today
make use of a wide variety of different
value on information or
their main information source, and information sources, including one-to- commentary generated
hence underlines the importance of one conversations with companies,
policymakers satisfactorily addressing feedback from investment advisers, and
outside the company
criticisms of the annual report. analyst presentations. ‘The annual rather than as part of
report is simply the opening of a
Investors are also relatively traditional in conversation’, says Pitkänen. ‘It provides corporate reporting.
their preferred formats. The online information and raises questions that
static report is seen as the favoured need to be answered, which, in turn,
format for receiving information from enable investors to form an opinion
companies, with printed reports not far about a company.’
behind. More recent developments,
such as webcasts and XBRL, receive less This reliance on a diverse range of
support (see Figure 1.2). inputs reflects investors’ desire to build
Figure 1.2: In which of the following formats would you most like to receive
information from a company?
0 10% 20% 30% 40% 50% 60%
Online static reports 53.5
Printed reports 44.5
Interactive online reports 38.5
Live presentations 38.5
Webcasts 17.6
XBRL 8.6
UNDERSTANDING INVESTORS: DIRECTIONS FOR CORPORATE REPORTING 9as complete a picture as possible of a understanding of the business’, says
company’s profile and prospects. In a David Blood, co-founder with Al Gore
notable finding, 63% of investors say of Generation Investment Management,
they place greater value on information a leading sustainability investment firm.
or commentary generated outside the ‘That may be anything from looking at
company rather than as part of traffic in retail stores, to learning about
corporate reporting (see Figure 1.3). the background of the management
‘Investors value a wide range of team. All these little nuggets of
information sources, first and second- information build up a more complete
hand, to help them develop a richer picture.’
Figure 1.3: Please indicate whether you agree with the following statements.
0 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
We place greater value on information or commentary that
has been generated outside the company rather than as part 4 8 25 40 23
of corporate reporting
The increase in the level of information and real-time
communication provided by companies has emcouraged 2 9 26 38 25
‘hyper-investment’
We have become more skeptical about information from
companies since the financial crisis 3 8 20 43 26
We do not always have confidence that information being
reported is extermally aligned with the information being 6 11 25 38 21
used to manage the business
We would apply a bigger discount to a company
if its corporate reporting lacked clarity 9 9 19 36 26
The annual report is no longer
a useful tool for investors 18 18 19 27 18
Corporate reporting is too complex 3 11 23 34 29
Management has too much discretion 5 8 24 31 32
in the financial numbers it reports
Disagree Disagree Neither Agree Agree
strongly slightly agree nor slightly strongly
disagree
10 UNDERSTANDING INVESTORS: DIRECTIONS FOR CORPORATE REPORTING2. The pressure for speed
In addition to wanting more information
to guide their decisions, investors
increasingly want it more quickly.
Only 51% of investors are satisfied with the
Technology has dramatically increased timeliness of company information.
the speed of information flow in recent
years, as more and more of people’s
lives have taken on a ‘24/7’, around-the-
clock pace. This phenomenon also
affects financial markets, in terms of
both the speed that information is can process trades in just 740 trades are taking place in timeframes
released by organisations to the market, nanoseconds (Millar 2011). measured in the billionths of seconds, it
and in the speed that trades are does raise questions about whether
completed. Fixnetix, a company that The result is that investors now have traditional corporate reporting provides
provides outsourced trading services, access to information on a much information quickly enough to be
claims that is has produced a chip that timelier basis than ever before. When valuable for investors.
Figure 2.1: How satisfied are you with the following aspects of the information that companies provide as it relates to your
investment decision-making?
0 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Transparency 5 12 25 33 25
Level of assurance and reliability 4 11 27 35 23
Useability 2 12 30 39 17
Relevance of information 2 14 30 38 16
Overall quality 5 8 35 38 14
Suitability of formats 2 13 33 40 12
Timeliness 3 15 31 34 17
Level of detail 4 13 33 38 12
Very Quite Neither Quite Very
dissatisfied dissatisfied satisfied nor satisfied satisfied
dissatisfied
UNDERSTANDING INVESTORS: DIRECTIONS FOR CORPORATE REPORTING 11interim management statements fell
Almost half the investors believe that mandatory into the category of useless or
misleading information’, notes the
quarterly reporting should be abandoned. report. ‘They took the view that this
frequency of reporting was excessive
for many businesses.’
The survey finds some level of concern synonymous with short-termism. This Almost half the investors believe that
about the currency of information that report defined short-termism as ‘the mandatory quarterly reporting should
companies provide, with only 51% of excessive focus of…investors and be abandoned (see Figure 2.2). Again
investors saying that they are satisfied analysts on short-term quarterly and again in interviews, long-term
with its timeliness (see Figure 2.1). ‘The earnings and lack of attention to the investors stressed that quarterly reports
delay between the full-year end or the strategy, fundamentals and do not help them make decisions.
half-year end to the actual publication conventional approaches to long-term
date is excessive’, says Pitkänen. value creation’. ‘We’ve been quite clear in talking to
policymakers and others that we would
What about frequency of reporting? In 2012, the Kay Review of UK Equity prefer to move away from quarterly
The practice of quarterly reporting has Markets and Long-term Decision- reporting, and the whole reporting
been implicated in the increasing making, (BIS 2012) set up to examine framework that seems to be heading
short-termism in the stock markets. the impact of UK equity markets on the towards feeding information to high-
Indeed, in an important early report on long-term performance of companies, frequency traders’, says Pitkänen.
short-termism in the US in the 1980s – came down clearly on the side of less
Breaking the Short-Term Cycle, by the frequent information flows: ‘A large This is not to say, however, that all
Business Roundtable Institute for majority of respondents, whether they investors have such a long-term focus.
Corporate Ethics (CFA Institute 2006), represented companies or investors, Momentum and high-frequency traders
– quarterly reporting was seen as considered that quarterly reporting and will inevitably base their models on
Figure 2.2: Please indicate whether you agree with the following statements.
0 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Companies should have the flexibility to determine the
appropriate frequency of their corporate reporting 2 6 17 38 31
Despite its flaws, the quarterly report remains a valuable
input to my investment decision making 6 16 34 43
Mandatory quarterly reporting by companies should be
abandoned 3 11 17 19 27
Disagree Disagree Neither Agree Agree
strongly slightly agree nor slightly strongly
disagree
12 UNDERSTANDING INVESTORS: DIRECTIONS FOR CORPORATE REPORTING‘No business should be managed on the basis of REAL-TIME REPORTING
what it’s going to do over the next three months.’ The next report in this series will
return to the concept of real-time
reporting but it is worth
highlighting here that this is a
development that presents
short-term information and, for them, For others, it is the earnings guidance
companies, investors and
the quicker information can be that is the problem. ‘Our concern is the
policymakers with some
released, the better. whole dance around giving guidance to
challenging decisions. On the
your quarterly numbers and having
one hand, there is clearly appetite
Some investors worry that company research analysts in the market trade
for more information to be
management spends too much time on around that guidance – that’s what
provided in real time: investors
quarterly reports. we’re uncomfortable with’, says Mr
say that greater adoption would
Blood. ‘We believe it fosters and
help them to react more quickly
‘No business should be managed on encourages short-termism as studies
to information and improve
the basis of what it’s going to do over the have shown (and anecdotal evidence
investment returns. The wider
next three months’, says Robert Talbut, confirms) that companies often end up
impact of real-time reporting on
chief investment officer of Royal London managing towards quarterly guidance
financial markets is, however,
Asset Management. ‘We suspect that numbers as opposed to building a
viewed less favourably. Real-time
management end up spending so much business for the long term. So, if you’re
reporting would, investors say,
time managing their earnings either required to or you choose to
increase a tendency to short
expectations on a quarterly basis that it provide quarterly information, then so
termism, increase market volatility
actually takes them away from their real be it – but don’t provide guidance.’
and even increase the cost of
job building longer-term success.’
capital for companies.
Figure 2.3: How frequently do you think companies should release audited financial statements?
0 10% 20% 30% 40% 50%
Quarterly 41
Annually 34
Biannualy 17
Monthly 9
UNDERSTANDING INVESTORS: DIRECTIONS FOR CORPORATE REPORTING 13VALUE OF QUARTERLY financial statements, you have a
INFORMATION ‘There can be commercial substantial – and unsatisfactory – delay,
as the audit can take months and
Despite the strong views of detractors, pressure to focus on months. So how are you going to audit
many investors in the UK and Ireland
undoubtedly believe that quarterly
the short term.’ your quarterly information and get it
out in a timely manner?’
reporting provides valuable
information. A key challenge with this time lag is that
information the better, although we other, unaudited, sources of information
Three-quarters of investors say that sometimes run out of time in the day to become available, which means that
despite its flaws, the quarterly report process it all.’ information in quarterly reports will
remains a valuable tool for investment already have been priced in by the time
decision making (see Figure 2.2). In addition, in a period of considerable they are released. ‘Certainly you do
Indeed, when asked how frequently economic uncertainty, the extra need assurance that the figures you are
they think companies should release information may provide comfort for getting are correct’, says McConnell,
audited financial statements, the investors. ‘If you ask investors in ‘But the market is quite a leveller and
preference among 41% of investors is isolation would they prefer short-term market prices tend to move way ahead
for companies to release audited clarity rather than uncertainty, they are of the fundamentals. So by the time
financial statements on a quarterly basis going to say they prefer short term you’ve got your assurance, the market is
(see Figure 2.3). Larger investors, with clarity – even the ones that view probably priced on something else.
assets of more than $1bn, valued themselves as long-term investors’, says
quarterly earnings reports more than David Stewart, chief investment officer Even if the audited accounts aren’t out,
other investor groups. of Santander Asset Management UK. there will be some information out there
‘But there is a cost – I don’t think there’s in terms of how the company is trading.
So what is the explanation for this sharp any doubt that quarterly reports are You may not have got it from the
divergence in views? For Talbut, it all something of a distraction.’ company itself, but you’ll get it from the
depends on whom you ask: ‘If you were suppliers or from customers.
to ask people whose livelihood is based Peer pressure is also a factor. ‘There can Information gets out.’
upon high turnover and trading be commercial pressure to focus on the
mentalities, and potentially momentum short term’, adds Mr Stewart. ‘This There are cost implications, too.
players, then they may well see the comes from the sales force and senior McConnell adds: ‘For a lot of smaller
benefit in more and more reporting, management who look at the quarterly companies you’ve also got the cost
because that provides more and more or monthly performance figures, involved. If you wanted to be a publicly
opportunities for trading activity and whereas most fund managers’ listed company and you’re weighing up
for mispricing to occur, but if you talk to investment strategies are not focused the costs, you have to weigh in the fact
genuine longer-term investors, they do on what will happen over the next that you now need to get your quarterly
not see the benefits of quarterly month, but the next one to three years.‘ statement audited.’
reporting.’
The prospect of quarterly audited
More generally, this desire for audited figures clearly raises a lot of questions,
quarterly information also reflects an about not just policy, but also timing.
innate desire for more information and For example, when would audited
for assured information. ‘I would
certainly value having access to
quarterly figures actually be released?
Samantha McConnell, chief investment
‘So how are you going
quarterly audited figures’, says Tim officer at IFG Pensions, Investments and to audit your quarterly
Barker, head of credit research, Old
Mutual Asset Managers. ‘As an analyst, I
Advisory Services in Ireland, struggles
to see how this would work. ‘Look at it
information and get it
tend to have an unlimited desire for purely from a timing perspective’, she out in a timely manner?’
information – so for me, the more says. ‘When it comes to yearly audited
14 UNDERSTANDING INVESTORS: DIRECTIONS FOR CORPORATE REPORTING3. The need for improvement
The fact that investors in the UK and
Ireland consume a wide variety of
information in order to build up a
A key problem is complexity – almost two-thirds
picture of a company does not, in itself, of respondents think that corporate reporting is
suggest dissatisfaction with current
corporate reporting. Yet investors
now too complex.
surveyed for this report do have their
reservations about the current model. It
is notable that, when asked about their
level of satisfaction across a range of Investors’ confidence in company of people within the company, including
different metrics, the proportion reporting has fallen – almost 7 out of 10 board members. But you need to
expressing satisfaction is, on average, investors say they have become more remember that management has an
only around 50% (see Figure 2.1). sceptical about information from agenda, and you should not take
companies since the financial crisis (see everything they say at face value.’
A key problem is complexity – almost Figure 1.3). ‘You always tend to see
two-thirds of respondents think that increasing scepticism amongst investors In general, it seems as if the reporting
corporate reporting is now too complex in the aftermath of a financial crisis’, model works well, and indeed has
(see Figure 1.3). Moreover, a sizeable says Stewart. ‘What was different about improved over recent years. According
group of investors – two out five – the global financial crisis was that it was to Chris Higson of London Business
believe the annual report is no longer a unprecedented both in severity and School, ‘The accounting model has
useful tool. This suggests that, while still speed, and also the fact that it hit increasingly focused on giving us a
the dominant source of information everything at once; the greater the comprehensive account of income, and
about a company, the annual report is crisis, the greater the subsequent on providing a balance sheet that is
not meeting the needs of investors as increase in investor scepticism.’ complete in assets, and in the claims
well as it should. against those assets. That’s what we
Dissatisfaction with traditional need and, with one or two exceptions, it
‘In the UK, we now lay out in front of corporate reporting is a key factor that is what we get. But the continuing
people every piece of information and is driving investors to look more broadly debate is whether all of this should be
then just let them get on with it’, says at other information sources, such as measured at cost, or at value.’
Talbut: ‘I think we’ve lost sight of the analysts and industry experts. ‘This is
idea that financial reporting should be really a second-best solution because I The area where investors see the
about informing longer-term providers think investors would rather have a greatest need for improvement is the
of capital to a company to reach a report and accounts that was a much company’s cash-flow statement – a
decision about how well the company’s more useful document’, says Talbut. shortcoming that was highlighted
management are actually performing in during the crisis. When asked about the
managing the assets over time.’ Even face-time with management is not aspect of the annual report that they
a panacea. Although this is valued by thought was most in need of
more than one-third of investors polled, improvement, the most common
they need to be careful about how they response – given by half the investors
interpret the management information – was the cash-flow statement (see
presented to them in one-to-one Figure 3.1).
Investors’ confidence in meetings.
‘The cash-flow presentation at the
company reporting has ‘Dialogue with management is an moment involves far too much
fallen and scepticism important touchstone’, says Mr Blood. aggregation’, says Barker. ‘For each line
The picture you build up year after year in the cash flow statement you may have
has risen since the talking to management is invaluable – in three or four different notes to the
global financial crisis. addition to talking to a broader group account and references, so you have to
UNDERSTANDING INVESTORS: DIRECTIONS FOR CORPORATE REPORTING 15MORE COMMUNICATION ON RISK
‘I worry about the off balance-sheet risks that Interestingly, investors in the UK and
companies are running.’ Ireland do not seem overly concerned
with risk reporting. Only 30% of
investors identified key risks and
opportunities as the area of the annual
work backwards from that to try and get for example, to get any idea about defined report that needed greatest
to the figures that might be more benefit pensions from the annual report improvement. Risk does feature more
useful. In general, the problem is that and accounts. There’s lots of content prominently when investors are asked
there is just too much netting off.’ that potentially should be highlighted about improvements needed in
more that doesn’t get the attention.’ narrative reporting. Indeed,
Investors would also like to see respondents cite key risks to the
improvement in the company’s balance Barker echoes this perspective. He says: business as the type of information that
sheet – an area identified by 46% of ‘There are several different ways of is most important to include in the
respondents. Debt, leases and pensions looking at total debt, even if it’s split up narrative reporting section (see Figure 3.2).
are a particular concern. between long and short term. It would
be better perhaps for companies to be
‘I worry about the off balance-sheet risks a little bit more explicit with their other
that companies are running, which you long-term liabilities, with regard to what
don’t get a clear handle on in the annual the pension proportion of that is, for
report’, says McConnell. ‘It’s very hard, example.’
Figure 3.1: In which of the following areas do you think the annual report needs
greatest improvement?
0 10% 20% 30% 40% 50%
Cash flow statement 50
Balance sheet 46
Income statement 45
Reporting of key performance indicators 37
Business unit reporting 36
Sustainability and environmental reporting 34
Corporate governance information 32
Key risks and opportunities 30
Narrative reporting 22
Regional reporting 21
16 UNDERSTANDING INVESTORS: DIRECTIONS FOR CORPORATE REPORTING‘I think we have made a lot of progress In interviews conducted for this report, are willing to provide. McConnell
in terms of narrative reporting but there a number of investors highlighted commented: ‘I think most companies
is still more to be done in terms of shortcomings in the way risk won’t disclose what’s in their risk
improving the communicative aspects’, information is reported. framework because there’s too much in
says Guy Jubb, global head of it and they would be concerned about
governance and stewardship at ‘The vast majority of companies giving away sensitive management
Standard Life Investments. produce something on risk disclosures, information. Often, the company is
but only a small proportion provides going to tell you it’s low risk or low to
Interestingly, only a small minority of any substantive commentary or medium.
investors surveyed think that description of the risks’, says Pitkänen.
improvements to narrative reporting are ‘So you get every kind of risk thrown in So you may need to assess risk based
required. When asked specifically on – a bland statement where the quality on information you can get from a
this topic, the emphasis is on obtaining of information is very poor.’ variety of different sources, not rely on
more insight into key risks to business, information specifically from the
an area that has long been of concern, Risk is a sensitive area, however, and company.’
key growth opportunities and longer- some believe there may be a limit to the
term expectations for the business. amount of information that companies
Figure 3.2: Which of the following types of information do you think are most
important to include in the narrative reporting section of an annual report, in terms
of aiding your investment decisions?
0 10% 20% 30% 40% 50%
Key risks to the business 38
Key growth opportunities 37
Longer-term expectations for the business 36
Changes to competitive environment 29
Drivers of future performance 27
Drivers of past performance 19
Reporting on business unit performance 18
Sustainability 18
Corporate governance information 16
Reporting on regional performance 14
People and talent issues 12
Regulatory environment 11
UNDERSTANDING INVESTORS: DIRECTIONS FOR CORPORATE REPORTING 17MORE ASSURANCE
Today’s increasingly sceptical investors
‘The auditor has an increasingly important role in
are looking for greater assurance. There providing more general assurance to shareholders.’
is a trade-off here. Assurance takes time
and slows down the flow of information.
The extent to which investors prefer
speed to assurance varies depending
on the nature of the information (see
Figure 3.3). For example, investors are likely to express a strong preference for informative audit reports, which should
more likely to express a strong speed when it comes to emerging have a positive impact. ‘I think the bar
preference for assurance when it comes opportunities and, to a lesser extent, has been raised when it comes to audit’,
to general financial information and profit warnings. ‘The auditor has an adds Talbut.
liquidity. By contrast, they are more increasingly important role in providing
more general assurance to shareholders ‘There is a growing demand to improve
over management actions as they relate the level of dialogue and challenge
to the asset base’, says Talbut. between audit, the audit committee
and shareholders, to highlight some of
There is a trade-off At the same time, investors are keen to the key judgements which underpin the
between speed and see an improvement in auditing itself.
Current proposals from the
financial statements but also to get
greater clarity around the relationship
assurance of information. International Auditing and Assurance between the auditor and the audit
Standards Board (IAASB) promise more committee.’
Figure 3.3: For each of the following types of reporting information from companies, would you prioritise speed or assurance?
0 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Profit warning 25 8 20 20 28
Emerging opportunities 19 12 23 21 26
Covenant breaches 19 12 27 22 20
Emerging risks 24 13 22 18 24
Liquidity 30 13 20 17 21
General finacial information 33 9 19 17 22
Strong Slight No Slight Strong
preference preference preference preference preference
for for for speed for speed
assurance assurance
18 UNDERSTANDING INVESTORS: DIRECTIONS FOR CORPORATE REPORTING4. Future trends in reporting
INTEGRATED REPORTING
Over time, company reporting needs to
There is strong support among investors in the
be responsive to a world that is UK and Ireland for integrated reporting.
changing through economic turbulence,
new regulatory initiatives and new
business priorities. Sustainability and
corporate social responsibility (CSR)
together form one such area. While an
increasing number of companies are ‘Nor is this information provided in any corporates towards long-term value
providing CSR and sustainability meaningful way that can be compared creation.
information to accompany annual reports, with figures for their peers.’
there tends to be less linkage between There is strong support among
the data in these different outputs. Integrated reporting combines financial investors in the UK and Ireland for
Generation Investment Management’s and ESG performance in one report, integrated reporting. More than 90% of
founder, David Blood, explained: ‘Most and aims to communicate more fully an investors surveyed said it would be
environment, social and governance (ESG) organisation’s strategy, governance, valuable for companies to combine
disclosure is not currently conducive to and performance, together with the way financial and non-financial information
mainstream use by investors, since in which non-financial information fits into an integrated reporting model (see
these reports typically lack clear links with into its operations. By presenting this Figure 4.1).
the company’s financial performance information in aggregate, it promises to
and long-term prospects for success.’ align the interests of investors and
Figure 4.1: How valuable do you think it would be for companies to combine financial
and non-financial information into an integrated reporting model?
0 10% 20% 30% 40% 50%
Very valuable 42
Quite valuable 51
Not that valuable 5
Not at all valuable 2
UNDERSTANDING INVESTORS: DIRECTIONS FOR CORPORATE REPORTING 19Investors believe integrated reporting
would provide a better explanation of
the linkage between sustainability and
‘Integrated reporting should help put the concept
long-term corporate performance. A of stewardship right at the heart of the corporate
similar number believes it would
provide greater information on how
reporting system.’
long-term risks such as climate change
will affect a company’s business model.
The key benefits of integrated Life Investments’ Guy Jubb. ‘Integrated Despite the support for integrated
reporting, according to respondents, reporting would be a big help here – reporting, it seems some investors
are the ability to gain a better identifying asset categories that are not continue to harbour reservations about
understanding of the long-term outlook captured in current reporting and the its benefits. Among the survey
for the company, and a strengthened value aspects of the company, and respondents, the main reasons that
explanation of the linkages between providing a degree of accountability as investors do not consider integrated
sustainability and long-term well. And it should help put the concept reporting valuable is that they see it as
performance (see Figure 4.2). of stewardship right at the heart of the too complex and are not convinced it
corporate reporting system, which is of will achieve its goals (see Figure 4.3).
‘A company’s social responsibility and particular importance to the Given that investors are already worried
sustainability efforts are integral to the shareholders and other long-term about ‘clutter’ in the annual report, this
longer-term wealth and health of the stakeholders of an organisation.’ suggests that policymakers will need to
company and reputation’, says Standard think carefully about how integrated
Figure 4.2: What would you consider to be the main benefits of a shift towards
integrated reporting?
0 10% 20% 30% 40% 50%
Better ability to understand the long-term 46
outlook of a company
Better explaination of the linkage between
sustainability and long-term performance 42
Greater informationon how long-term risks, such
as climate change, will affect business the model 38
Better understanding of all sources of capital,
not just financial 33
Greater understanding of key risks
and opportunities 29
Better understanding of link between
sustainability and strategy 27
More robust, less marketing-oriented approach
to reporting on non-financial issues 25
More joined-up picture of
a company’s prospects 15
20 UNDERSTANDING INVESTORS: DIRECTIONS FOR CORPORATE REPORTINGreporting can be implemented in a way
that does not add to the information
burden that affects many investors. It
‘In practical terms, there is much less consensus
will also be important to communicate in terms of what we actually mean, what it would
clearly the benefits of this approach to
investors.
look like, how different it would be and how it
would be better.’
‘It shouldn’t be too complex to
understand the key drivers of your
business – that’s exactly what an
integrated report is’, says Mr Blood. ‘It filings.) So when we talk about integrated agrees it would aid the creation of an
should have the financial and ESG reporting, it’s not the goal in itself.’ overall picture of the business and its
metrics that are accurate, consistent prospects’, says Mr Talbut. ‘But in
and easily accessible, but most of all, ‘Integrated reporting is a reflection of practical terms, there is much less
material to the business. The materiality integrated thinking within a company, consensus in terms of what we actually
part is critical, which is why we support and that’s ultimately what they should mean, what it would look like, how
the work Jean Rogers is leading at the be striving for.’ different it would be and how it would
Sustainability Accounting Standards be better. We need to build a better
Board (SASB, is focused on developing While conceptually there is a very clear consensus in order to advance this.’
and disseminating industry-specific, attraction to integrated reporting,
material sustainability accounting some are unsure about the practical
standards for inclusion in SEC form steps to get there. ‘I think everybody
Figure 4.3: Which are the main reasons why you would not consider integrated
reporting valuable?
0 10% 20% 30% 40% 50%
Too complex 43
Not convinced that it will achieve its goals 43
Ongoing confusion about what integrated
reporting is meant to achieve 39
Lack of clarity about the objectives
of integrated reporting 39
Lack of accepted standards about what
integrated reporting should include 30
Too ambitious 26
Satidfied with the current framework 17
UNDERSTANDING INVESTORS: DIRECTIONS FOR CORPORATE REPORTING 21XBRL: THE CHALLENGE OF Figure 4.4: Which of the following statements best describes your current use and
ELECTRONIC DATA opinion of XBRL?
Extensible Business Reporting 0 10% 20% 30% 40% 50%
Language (XBRL) is fast becoming a
global standard for the sharing of Currently using and find it valuable 24
financial data. Essentially, it provides an
identifying ‘tag’ for each piece of Currently using but do not find it valuable 21
financial information, thereby enabling
an automated approach to processing, Not yet using but would find it valuable 40
sharing and storing that data. Around
the world, numerous projects using Not yet using and do not intend to 15
XBRL are under way. In 2010, the
Australian government launched
Standard Business Reporting, which is
based on XBRL, to allow companies to
file financial reports online with
different government agencies.
In the UK, HMRC has required
mandatory filing of tax returns using
XBRL since 2011, while in the US, the
Securities and Exchange Commission
requires all companies to submit their Figure 4.5: Which of the following do you or would you consider to be the greatest
filings using XBRL. benefits from the adoption of XBRL in corporate reporting?
Just under half of investors surveyed are 0 10% 20% 30% 40% 50%
using XBRL (see Figure 4.4). A recent
Ability to compare performance between
survey from the CFA Institute found companies or industries 43
similar use patterns. Among end users Increased standardisation between
of financial reports, 47% said they were companies in use of extensions 40
aware of the worldwide standard for
electronic reporting, compared with Availability of more granular data for analysis 39
45% in 2009 and 41% in 2007 (CFA
Institute 2011). Greater consistency in taxonomies used 36
The main benefit of using XBRL, say Increased accuracy of analysis 34
investors, would be to compare
performance between companies more Compatibility with our existing models 20
easily (see Figure 4.5).
Ability to upload data automatically into models 19
22 UNDERSTANDING INVESTORS: DIRECTIONS FOR CORPORATE REPORTINGThe use of taxonomies should mean Despite the potential benefits from
that information obtained from one
company can be compared with
using common taxonomies, the group
of investors who do not find XBRL
There is some latent
information from another. XBRL should valuable worry that there is still a lack of support for XBRL but it
also be of benefit for companies’
internal reporting practices, because it
consistency in taxonomies under
different accounting standards (see
requires more
will facilitate the sharing and access to Figure 4.5). A key challenge is that standardisation.
standardised data across regions, taxonomies can be somewhat different
functions and subsidiaries. under IFRS from the approach under
GAAP. This makes one of the key
Among the survey respondents, there benefits of XBRL – comparability – less
is certainly some latent demand for obvious.
XBRL: two out of five investors say they
are not yet using it but would find it ‘I think XBRL is potentially useful’, says
useful to do so. Even so, it is clear that Santander’s David Stewart. ‘But the
this is an area that divides opinion main thing for me, certainly with respect
among investors. Among the 45% of to big companies and particularly banks
investors who say they use XBRL, only and insurers, is for these companies to
around half think that it is useful (see have more of a standardised approach
Figure 4.4). in terms of how they report.’
Figure 4.6: Why do you not currently find the adoption of XBRL to be valuable?
0 10% 20% 30% 40% 50%
Lack of consistency in taxonomies under 42
different accounting standards
Lack of awareness and education about the 39
benefits of the technology
Technology is still too immature 32
Resistance to change among investor user 27
base
24
Lack of standardisation between companies
in the use of extensions
21
Lack of compatibility with existing models
and databases
20
Lack of assurance or audit process
covering some tags
18
Information is not sufficiently timely
UNDERSTANDING INVESTORS: DIRECTIONS FOR CORPORATE REPORTING 235. Conclusion
Better reporting is essential to the
smooth running of the capitalist system.
It helps companies attract investment
Clarity and transparency matter. More than two
and build deeper relationships with out of three investors said they would apply a
investors, and it allows stakeholders to
develop a deeper understanding of a
bigger discount to a company if its corporate
company’s strategy and position. reporting lacked clarity.
Stronger relationships with investors
mean that companies have greater
financial support and stability.
Clarity and transparency matter. More perceived to be improving the Investors and corporates also bear a
than two out of three investors said they reporting framework. Innovations such responsibility. There needs to be
would apply a bigger discount to a as integrated reporting find strong constructive engagement on reporting
company if its corporate reporting support from investors but, against a issues from both sides so that the
lacked clarity. Good reporting can also backdrop in which investors are already broader financial markets are served
help to strengthen financial markets overloaded with information, care must effectively. At the same time, investors
and ensure that capital flows to where it be taken that new reporting initiatives need to engage more with the
can be most usefully invested. provide genuinely useful additional regulatory and standard-setting
input. processes, while recognising that some
The survey reveals a number of clear of their demands may be unrealistic.
areas where improvements in reporting Investors too must seek to find ways to
are required. Many investors say that better assimilate a wider range of There is a complex web of relationships
there is too much clutter in corporate information. Their ability to analyse between auditors, regulators and
reporting, and they worry that increasingly complex and interrelated companies as well as broader
management has too much discretion is data, often in real-time, will grow in stakeholders. Nevertheless, at its heart,
how numbers are reported. importance. the relationship between company and
investor is paramount.
They are also divided over whether the
annual report remains a useful
document. Although the majority value
it, there is a sizable minority that
believes it is no longer fit for purpose.
Policymakers and standard setters must
Investors need to engage more with the
give careful consideration to these regulatory and standard-setting processes.
issues, along with initiatives that are
24 UNDERSTANDING INVESTORS: DIRECTIONS FOR CORPORATE REPORTINGReferences ACCA (2012), Re-assessing the Value of Corporate Reporting, , accessed 8 May 2013. BIS (Department for Business, Innovation and Skills) (2012), The Kay Review of UK Equity Markets and Long-term Decision Making: Interim Report, , accessed 8 May 2013. CFA Institute (2006), Breaking the Short-Term Cycle, , accessed 8 May 2013. CFA Institute (2011), CFA Institute Member Survey: XBRL, , accessed 8 May 2013. Millar, M. (2011), ‘Lightning fast’ future traders working in nanoseconds’ [online article], 18 November, , accessed 8 May 2013. UNDERSTANDING INVESTORS: DIRECTIONS FOR CORPORATE REPORTING 25
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