Understanding investors: directions for corporate reporting - ACCA

26 Pages·2013·0.49 MB·English

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 part project examining what
Accountants) is the global body for professional
investors want from corporate
accountants. We aim to offer business-relevant, first-
choice qualifications to people of application, ability and reporting and how organisations
ambition around the world who seek a rewarding career
are responding to their needs.
in accountancy, finance and management.

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
investors need to make their
value to economies in all stages of development. We aim
to develop capacity in the profession and encourage the decisions, how they now like to
adoption of consistent global standards. Our values are
receive that information (both the
aligned to the needs of employers in all sectors and we
ensure that, through our qualifications, we prepare format and the communications
accountants for business. We work to open up the
channels), and their level of trust in
profession to people of all backgrounds and remove
artificial barriers to entry, ensuring that our qualifications what they receive.
and their delivery meet the diverse needs of trainee
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 information via blogs and social media,
famously claimed that in just two days, 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 agencies – and, of course, from the
civilisation until 2003. So it is no surprise companies themselves.
making investment
that we see a similar phenomenon in
decisions. the world of investment. Investors today Despite this proliferation of information,
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 source of information for investment 63% of investors say
research at Threadneedle Investments. decision making, but it is far from being
they place greater
This finding is consistent with previous the only one. As Figure 1.1 shows,
research, (ACCA 2011), showing that half investors in the UK and Ireland today value on information or
of investors used the annual report as make use of a wide variety of different
commentary generated
their main information source, and information sources, including one-to-
hence underlines the importance of one conversations with companies, outside the company
policymakers satisfactorily addressing feedback from investment advisers, and
rather than as part of
criticisms of the annual report. analyst presentations. ‘The annual
report is simply the opening of a corporate reporting.
Investors are also relatively traditional in conversation’, says Pitkänen. ‘It provides
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
9 9 19 36 26
if its corporate reporting lacked clarity
The annual report is no longer
18 18 19 27 18
a useful tool for investors
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