Understanding investors: directions for corporate reporting - ACCOUNTANTS FOR BUSINESS

 
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 2013
Contents

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 REPORTING
Executive 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                                                               5
THE 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 REPORTING
THE 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                                                                 7
1. 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 REPORTING
understand 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                                                          9
as 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 REPORTING
2. 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                                                                                    11
interim 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                                                                    13
VALUE 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 REPORTING
3. 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                                                                      15
MORE 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                                                                         17
MORE 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 REPORTING
4. 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                                                                     19
Investors 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 REPORTING
reporting 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                                                                       21
XBRL: 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 REPORTING
The 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                                                           23
5. 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 REPORTING
References

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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