How do you view your reporting requirements? The answer may indeed depend upon your view point and indeed the level of detail at which you need to engage with regulation at reporting time. As a chairman your semi-independent views get the healthy exercise of a written articulation of company progress and thoughtful insight to governance. As Chief Executive a review of the nitty gritty management procedures and strategy, what are you being tough on, and where is value being added. Then there is the Finance Director with what many think of being the black and white of the situation, both the numbers and the financial strategy, a ‘chancellors budget speech’ about assumptions, trends, financial risk management and how the booty might be distributed (or not) to the shareholders. But this is just the named cast of the production, a worthy platoon of other professionals contribute to the final document, from the board to the ranks of company secretaries, IR and Marketing staff, PR agencies, Communications agencies and of course the (these days perhaps slightly paranoid) auditors. Perhaps it is easy to see why some might view the process as obligation.
Before we get any further, let me state my standpoint, a gesture at least towards transparency. Having spent some time at business school studying business and management, I first have to admit to being generally fascinated by three areas, technology management, corporate governance and strategy (you will see the threads if you have read some of the other blog entries). Working in the business of corporate reporting media you might also expect me to have a positive view of presenting yourself well. My assertion is thus that corporate reporting should be viewed as more opportunity and self preservation than obligation, let's see if I can convince you.
Teaching grandmother to suck eggs
I’m suggesting you have only two reasons for your IR communications:
- Demonstrating Corporate Governance – How the managers are managing
- Value Recognition – Helping the market to be efficient
Demonstrating Corporate Governance
Let’s just clarify why corporate reporting takes place, indeed this article is essentially about investor relations so let’s be clear about agency theory...on the whole these days the owners of companies don’t work within them (I know there is an argument that the staff partly own the company through pension investments and such like but let’s not go there now). As a consequence there is demand for people like you to take responsibility for someone else’s company, hopefully run it well, and get appropriate compensation. Now here is the difficulty, how do the shareholders manage you?
Over the last few decades in particular, reviews of corporate governance in the UK (and indeed worldwide) have been responding in part to a growing line of corporate scandals. In order to reduce the likelihood of these occurrences there have been three broad lines of review, transparency (how easily can shareholders get to the truth), independence ( are auditors and non-executive directors keeping their eyes open and speaking-up) and reducing moral hazard (aligning the directors with the shareholders so they too ‘feel the pain’).
As a consequence of this, a significant part of your reporting is devoted to complying with either listing rules if you are not a primary listing on the official list (i.e. Main Market Listed) or the combined code if you are, as well as with parts of the Companies Act (both of these embody much of the EU governance legislation at the minimum level or at a higher national standard)
There have been many debates and interesting articles written about what value the management team bring to a company, but suffice to say the opportunity to put forward the case for a well run business rests with your governance communications plan. Many investors put considerable weight on the competence of the directors to ‘manage risk’ which as I’m sure you all know is about balance, rather than necessarily reduction, and thus the clarity of your communication is paramount.
On the back of the core governance requirement comes the implied need to ‘be good’, and your CSR reporting can hopefully strike the right balance between giving back to the communities and countries where resources are being drained and not negatively impacting the shareholders return by supporting director’s pet causes.
In short your governance reporting has a great opportunity to build trust, convince existing and future shareholders that the organisation is well managed and that it has an appropriate view of maintaining its external environment (though largely self-serving).
Value Recognition
Describing value is a precarious task, at perhaps a simplistic level moving to a common accounting standard (like IFRS) seems like an obvious step in the right direction, but there is a lot more to value than the accounts. If you believe that history repeats itself then a good explanation of the financial performance achieved to date may be sufficient. For those of you who measure internal performance through management tools like EVA (Economic Value Added) you know that in real terms adding value means far more than reporting profit.
It then seems to be incumbent upon those communicating with your capital providers to have a clear understanding of where the line is between commercial sensitivities and allowing value to be transparently measured. The cost of capital is clearly a key component of this, alongside the profit generated and cash flows.
So here are some of the things you can leverage with communications, the clear presentation of strategic activities with likely future profit and cash flow (with the appropriate disclaimers), and your communications plan to engage both your equity and debt investors to reduce the expected returns and thus leveraging your value.
Why not do nothing?
The description so far implies there are some positive things that can be done with better communications; it is also worth clarifying the downside if you do nothing. Well at the legitimate end, you would still be putting out all of your regulatory news covering material facts and conducting the business in an efficient way. The analysts will look at your accounts, reporting activity and history to work out your market beta’s and such like, giving you some market valuation which with sufficient liquidity will, through the concept of efficient markets, leave everyone happy. Right?
A takeover target
Well like all things, it is seldom that simple. Statistically shareholders of the companies being taken-over seldom lose out in the short-term, but the management usually do! So how do you stop being a takeover target? I’m sure you have a view but being undervalued is the last place you want to be. I would suggest that at the minimum level of reporting you are most likely to be hiding your light under a bushel and thus will be undervalued ...and prey.
Summary
Corporate reporting is undoubtedly obligation, but at the same time an opportunity you should be taking to deliver value to your shareholders (which hopefully you are aligned with) and thus also be keeping yourself from danger whilst building your own and your company’s reputation.
For more information about investor relations view the website of the comapny I work for www.jonesandpalmer.co.uk
Links :
Subscribe