Investors inevitably want to know: Is a company performing as expected? What are the risks and opportunities for management? Mark O’Sullivan and Alison Thomas ask if clear answers are just a pipe dream
These are not questions that can be answered through intellectual discourse and debate. They require good hard data. And lots of it. Data that provides a window on the market and competitive environment in which a company operates; data that offers insight into the factors that are critical to delivering the entity’s short- and long-term strategic ambitions. They want data that illustrates the entity’s exposure to financial, operational and reputational risks; and that provides robust understanding of the company’s performance to date.
But it is clearly not just the volume of data that counts. Perhaps even harder than identifying possible sources of data is ensuring that such sources are reliable and that they can form the basis of genuine business intelligence. Today people expect to be able to view data in a ‘learning environment’ where disparate streams of data can be seen together to understand how they interplay, where historical relationships between the data can be leveraged and to pose ‘what if?’ questions about the future.
This is the vision. But is it a pipe dream? We don’t think so.
Through our engagement with investors and with management over the years, we have identified a series of steps that can significantly improve the effectiveness of a company’s external reporting and provide a better platform for effective decision-making by management and the board. Some of these steps are simple, involve little if any cost and yet will be valued by the capital markets today. Others involve a more in-depth review of the quality and utility of the data used internally and reported externally. Preparing well and identifying the right steps for your business is often half the challenge, but will have a positive impact on any changes you decide to make.
If your business is highly leveraged, does your reporting meet the needs of the fixed income community? If you are looking to attract long-term shareholders, do you help potential investors to understand why your company might be an interesting addition to their portfolio? If you are in an unusual or complex business do you help the reader to understand how you create value? Knowing how your target audience uses the information you provide can often identify simple opportunities to improve the effectiveness of your communications.
It is difficult to make any sensible decisions about improvements if you are not quite sure where you are today. Before starting on any programme of change, benchmark your existing disclosures against investor needs and against your peers. That will help to prioritise next steps both in terms of quick fixes and areas that might require review of internal information systems, and so on.
What information does management need for its effective decision-making? Understand the scope of data required and think about how you will want to use that data. Is it enough to receive print outs of reports from the various divisions? Or would you like data that you can easily pull into a ‘learning environment’ so that you understand better how the different business drivers interact?
Similarly, which type of investor would you like attract into your share ownership base. How can you provide them with the information that they need to forecast with confidence – to ensure that your company is given the valuation it deserves?
Time and again, investors tell us that management could significantly improve the usefulness of their corporate reports through very minor changes to existing disclosures. Look at the effectiveness of your GAAP disclosures. Is the information that is most useful to investors lost in a sea of boilerplate?
Management take comfort in the fact that their financial statements have been through a rigorous process of review by external auditors. But industry-specific metrics and non-GAAP information that is not audited often move markets too. Investors tell us that they look for evidence that this information is reliable too.
Alison Thomas and Mark O’Sullivan are both corporate reporting directors at PwC.