understanding investors: directions for corporate reporting (acca research)

Understanding investors: Directions for corporate reporting (ACCA research)

By: Nino Bazhunaishvili

Content

Foreword Executive summary A broader range of information sources The pressure for speed The need for improvement Future trends in reporting Conclusion References

Foreword 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 responding to calls to disclose certain information with much more 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.

Executive summary

ABOUT THE RESEARCH This report, which was written by Longitude

Research on behalf of ACCA, is based on a survey of 300 investors, conducted in March 2013, and a program of in-depth interviews with leading figures from the investment community.

Half the survey respondents represent institutions with more than US$500m in assets under management. There was a good spread across sectors: 38% represented pension funds, 30% insurance companies, 10% private .

Respondents were based in the UK (80%) and in Ireland (20%),

Executive summery

In-depth interviewees:• 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

1. A broader range of information sources

“For now, the annual report remains the primary input for making investment decisions.”

Annual Report

One-to-one conversations

Analyst presentations/reports

Interim report

0% 20% 40% 60% 80%

63%

36%

35%

35%

27%

23%

20%

6%

Figure 1.1: Which of the following sources of information are most valuable for you as an input for decisions about invest-

ing in a company?

“ Investors are also relatively traditional in their preferred formats. “

Online static reports

Printed reports

Interactive online reports

Live presentations

Webcasts

XBRL

0.0% 20.0% 40.0% 60.0%

53.5%

44.5%

38.5%

38.5%

17.6%

8.6%

Figure 1.2: In which of the following formats would you most like to receive information from a company?


63% of investors say they place greater value on information or commentary generated outside the company rather than as part of corporate reporting.

‘Investors value a wide range of information sources, first and second-hand, to help them develop a richer understanding of the business’,


2. The pressure for speed

Only 51% of investors are satisfied with the timeliness of company information.

In addition to wanting more information to guide their decisions, investors increasingly want it more quickly.

The result is that investors now have access to information on a much timelier basis than ever before.

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?

Transparency

Level of assurance and reliability

Useability

Relevance of information

Overall quality

Suitability of formats

Timeliness

Level of detail

5

4

2

2

5

2

3

4

12

11

12

14

8

13

15

13

25

27

30

30

35

33

31

33

33

35

39

38

38

40

34

38

25

23

17

16

14

12

17

12

Very Dissatisfied Quite dissatisfied Neitherdissatiafied norsatisfied

Quit satisfied Very Satisfied

Almost half the investors believe that

mandatory quarterly reporting should be abandoned.

‘A large majority of respondents, whether they represented companies or investors, considered that quarterly reporting and interim management statements fell into the category of useless or misleading information’,


• This is not to say, however, that all investors have such a long-term focus. Momentum and high-frequency traders will inevitably base their models on short-term information and, for them, the quicker information can be released, the better.

• ‘No business should be managed on the basis of what it’s going to do over the next three months

• Three-quarters of investors say that despite its flaws, the quarterly report remains a valuable tool for investment decision making .

• Among 41% of investors is for companies to release audited financial statements on a quarterly basis


• A key challenge with this time lag is that other, unaudited, sources of information become available, which means that information in quarterly reports will already have been priced in by the time they are released. ‘Certainly you do need assurance that the figures you are getting are correct’,

• There are cost implications, too.

3. The need for improvement

A key problem is complexity – almost two-thirds of

respondents think that corporate reporting is now too complex

Investors’ confidence in company reporting has fallen and scepticism has risen since the global financial crisis.

‘ What was different about the global financial crisis was that it was unprecedented both in severity and speed, and also the fact that it hit everything at once; the greater the crisis, the greater the subsequent increase in investor scepticism.’

Cash flow statement

Income statement

Business unit reporting

Corporate governance information

Narrative reporting

0.0% 20.0% 40.0% 60.0%50.0%

46.0%45.0%

37.0%36.0%

34.0%32.0%

30.0%20.0%21.0%

Figure 3.1: In which of the following areas do you think the annual report needs greatest improvement?

3. The need for improvement

MORE COMMUNICATION ON RISK

Key risks to the business

Longer-term expectations for the business

Drivers of future performance

Reporting on business unit performance

Corporate governance information

People and talent issues

0.0% 10.0% 20.0% 30.0% 40.0%38.0%

37.0%36.0%

29.0%27.0%

19.0%18.0%18.0%

16.0%14.0%

12.0%11.0%

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?

‘The auditor has an increasingly important role in providing more general assurance to shareholders.’

There is a trade-off between speed and assurance of information

Figure 3.3: For each of the following types of reporting information from companies, would you prioritize speed or assurance?

Profit warning

Emerging opportunities

Covenant breaches

Emerging risks

Liquidity

General finacial information

0 20 40 60 80 100 120

25

19

19

24

30

33

8

12

12

13

13

9

20

23

27

22

20

19

20

21

22

18

17

17

28

26

20

24

21

22

strong performance for assuarenceSlight performance for assueranceno performanceslight performance for speedstrong performanceform speed

4. Future trends in reporting

There is strong support among investors in the UK and Ireland for integrated reporting.

Very valuable

Quite valuable

Not that valuable

Not at all valuable

0.0% 20.0% 40.0% 60.0%

42.0%

51.0%

5.0%

29.0%

Figure 4.1: How valuable do you think it would be for com-panies to combine financial and non-financial information

into an integrated reporting model?

‘Extensible Business Reporting Language (XBRL) is fast becoming a global standard for the sharing of financial data.

XBRL: THE CHALLENGE OF ELECTRONIC DATA

Currently using and find it valuable

Not yet using but would find it valuable

0.0% 10.0% 20.0% 30.0% 40.0% 50.0%

24.0%

21.0%

40.0%

15.0%

Figure 4.4: Which of the following statements best describes your current use and opinion of XBRL?

Conclusion

Clarity and transparency matter. More than two

out of three investors said they would apply a bigger discount to a company if its corporate reporting lacked clarity.

Investors need to engage more with the regulatory and standard-setting processes.

References

ACCA (2012), Re-assessing the Value of Corporate Reporting, <http://www. accaglobal.com/content/dam/acca/ global/PDF-technical/financial-reporting/reassessing-value.pdf>, 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, <https://www.gov.uk/ government/uploads/system/uploads/ attachmentdata/file/31685/12-631-kay-review-of-equity-markets-interim-report.pdf>, accessed 8 May 2013.

CFA Institute (2006), Breaking the Short-Term Cycle, <http://www. corporate-ethics.org/pdf/Short-termism_Report.pdf>, accessed 8 May 2013. .

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