Corporate performance: what do investors want to know?

Innovate your way to clearer financial reporting

Investment professionals are relatively open-minded when it comes to the presentation of accounting policies and notes to the financial statements. However, companies need to ensure that, whatever format or approach they choose, they help the users of their accounts find information easily and provide clear links between related content.

We interviewed 85 investment professionals from around the world to hear their views on what they find useful, and where companies might improve. We asked for their thoughts on accounting policy notes, the format of financial statements and the linkage between financial results and management commentary.

We outline below what they told us.

• Grouping accounting policy notes together is still popular, but many investment professionals would like to see policies presented alongside other relevant notes.
  
• Moderate detail on accounting policies is usually sufficient, though policies should be set in the context of the company and any changes clearly explained.
  
• Notes can be organised in different ways, but must be easy to find.
  
• Management teams should clearly show how the financial results relate to the business model, identified risks and the company’s strategy.
• Many investment professionals find it hard to see how a company’s income statement, balance sheet and cash flow statement fit together. It is worth making the effort to explain this.
• Moving management commentary into the financial statements or providing better links could help investment professionals in analysing company performance.

More integrated reporting could enhance investment professionals’ analysis

Management teams that provide high-quality, integrated reports that tell a clear story not only help investment professionals but also enhance their own reputations and capital-raising potential. With the growing momentum towards more future-orientated integrated reporting, we asked investment professionals around the world for their views on what constitutes useful corporate reporting and where they see opportunities for management teams to improve on today’s reporting.

• The quality of a company’s reporting impacts their perception of management quality.
  
• Reporting quality could even have a direct financial impact for companies: only 11% of survey participants disagree with the idea that annual report disclosures about strategy, risks, opportunities and other value drivers can have a direct impact on a company’s cost of capital.
  
• Explaining the business model clearly is an important part of high-quality reporting. Most investment professionals primarily want business model explanations to focus on how a company generates cash and generates value that will become cash in the future.
• In order to be meaningful, an explanation of a company’s business model needs to link to its overall strategy.
• There are a number of ‘effectiveness gaps’ in the reporting of key risks to the business model. Investment professionals want to know how these risks are managed or mitigated. However, although understanding management’s view of potential risks and their mitigation strategies is important, too much boilerplate disclosure is impeding that understanding.
• They like to see linkage between different elements of company reporting. Among those we surveyed, 87% say that clear links between a company’s strategic goals, risks, KPIs and financial statements is helpful for their analysis.
  
• The annual report remains a valuable source document, not only for financial information but also in relation to governance matters and environmental, social and human capital topics. It is also important for explaining strategy, risks and opportunities. The reliability and comprehensiveness of the annual report are its key strengths.

Reporting adjusted performance measures

When investment professionals analyse a company, their goal is to understand the quality and sustainability of its ‘underlying’ or ‘core’ performance. They want insight into what drives profits year on year and the measures that management teams consider to be market moving. They want to understand the impact on company performance of management actions relative to general market conditions.

Adjusted performance measures (APMs) are widely reported by companies alongside GAAP-based results. Based on interviews with investment professionals around the world, it is clear that APMs are highly valued. Nevertheless, their value could be enhanced substantially by changes in how they are reported. Investment professionals tell us:

• A substantial majority of investment professionals find APMs useful; only 12% do not.
• Companies could improve the quality of their APM reporting: 95% of investment professionals would like management teams to provide clearer descriptions of the items they have adjusted when calculating their ‘underlying performance’ measure, as well as why they thought it appropriate to make the adjustments.
• They are sceptical about the balance management teams display in reporting APMs. This is a concern because a lack of balance in APM reporting could damage management’s credibility with investment professionals: 81% of investment professionals say that if management’s adjustments to GAAP numbers seem aggressive or unusual, their evaluation of the riskiness of management increases.
• Investment professionals would find it helpful to know that companies were applying some basic ‘ground rules’ to their APM reporting. This would give them greater comfort in the relevance and reliability of the data they use in their own performance analysis.
• There is a case for considering assurance of APMs where not already obtained. Only 22% of investment professionals think that the measures that move markets (including APMs) are sufficiently reliable.