Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Wednesday, June 10, 2009

Corporate reporting is about ‘cutting out the clutter’.

The preparers of annual and other reports have always had to balance between compliance and communication. Traditional wisdom has it that so much of what the ‘rules’ say should be reported is of no interest to anyone, and is simply there for compliance sake.
Well now there is support for the view that reporting should be more about principles of good communication.

2 years ago, the Financial Reporting Council launched its project to review the complexity and relevance of current corporate reporting requirements. This week, it published Louder than Words: principles and actions for making corporate reports less complex and more relevant.
The discussion paper looks like a first step along a long road of change to what companies tell the market. Probably the most important conclusion to be drawn from it is that the FRC thinks that reporting should be more principles based. Indeed it lays down a series of communication principles. They are hard to argue with – motherhood and apple pie and all that – but the fact the FRC says them is helpful.

The report also makes 5 ‘calls for action’. In these days of focus on survival, the first call for action – to provide better information on cash flow and net debt – is vital. Pulling out and explaining key metrics used by investors such as debt ratios (gearing, interest and dividend cover), debt maturity profile, and contractual obligations will assist analysts relying only on the notes to the accounts.

So far so good. There are 2 areas where I am tempted to disagree.

First the title. We know that well over 50% of a company’s valuation does not lie on the balance sheet but in assets like management skill, technology, brands, patents etc. It would be unfortunate if some read the title as meaning that the narrative in annual reports – words after all – somehow mattered less.

The second is the statement about the intended audience for reporting. It says “One widely acknowledged problem is that reports currently aim to please too many types of user. There is a need to refocus them on their primary purpose: providing investors with information that is useful for making their resource allocation decisions and assessing management’s stewardship. We suggest that regulators and companies should reconsider how they address the needs of other stakeholders – for example, those with specialist interests in environmental and employee diversity issues.”

Environmental and employee issues absolutely deserve equal consideration with financial issues, and should be of interest to investors as well as wider stakeholders. They are part of the equity story, and should not be shunted into another report.


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