Plotting a new course in corporate reporting
Two dramatically different trends are taking hold in the business world.
With the rise of blogs, 140-character “stories” on Twitter and “infographics” that summarize entire topics with a few words and pictures in otherwise shrinking newspapers, there is a growing emphasis on shorter and simpler communications.
It’s a stark contrast to what seems to be happening in corporate reporting. While corporate reporting is still the market’s most important source of investment information, conversations we’ve had with various professionals suggest the volume and complexity of today’s financial environment makes it more difficult than perhaps it should be for stakeholders to make decisions efficiently and confidently.
Why? Significant increases, for the most part, not only in the rising complexity and types of mandatory disclosure but also in the sheer volume of information generated by analysts and other market observers. Between the fear of litigation and the material impact potential of “social” information sharing on a company’s market value, is it surprising things have become so complex?
We hope you’ll work with us to find the answers.
More regulation, less protection?
We’ve already spoken with a number of directors on the boards of Canadian companies, institutional investors and analysts about the state of corporate reporting in Canada. These discussions covered a number of issues. Importantly, everyone agreed that the sheer volume of disclosures is obscuring focus on key issues critical to effective decision-making.
Indeed, the rising number of rules and regulations that govern the form and content of information publicly traded companies are required to report has added so much complexity that many worry the objective of informing and protecting stakeholders is becoming harder and harder to achieve.
But nor is it simply a matter of too much regulation. Multiple stakeholders are involved in the process and all of them – regulators, preparers, directors and auditors – add to the complexity. Suffice it to say, everyone’s buy-in will be needed to find an effective solution to current challenges.
More information, less comprehension?
Broadly speaking, two categories of information are available to stakeholders and the investor community:
- Reports and other information that companies prepare themselves and deliver to the market, including financial statements, management discussion and analysis (MD&A), compensation discussion and analysis (CD&A), annual information forms (AIFs), etc.
- All other information generated outside the company and its control.
Inside out
Implementing the International Financial Reporting Standards’ (IFRS) principles-based framework in 2011 created renewed opportunity for companies to better tell their financial story. A few years in and what we’re seeing instead is an inclination to compliance for its own sake, an end rather than the means to an end, and not least because the penalties for not complying and identifying all risks are greater than the rewards for doing it better.
Consider the MD&A. From our conversations with directors and our own observations, we conclude that it has become less useful than intended.
There is significant opportunity within the existing rules and guidelines to provide real clarity. But companies often resort to repeating information included in the financial statements and to using boilerplate risk and forward-looking information. This leads to MD&As that often fail to enhance understanding of a company’s financial picture or its future prospects, relative to what was intended.
Outside in
Public companies can see dramatic shifts in shareholder value due to rumour, speculation, analyst reports, activities at competitors or other industry changes. By its nature, this information is not subject to verification by an independent source.
Thirty years ago, this wouldn’t have mattered much. A relative layperson could read a set of financial statements and get what was needed from it, not least because the statements did not compete with mountains of supplemental and potentially extraneous information – some, but much less than today. Given the current environment and the speed at which information now spreads, this “noise” in the system now matters a great deal.
We can get there from here
One proposal attracting attention is the International Integrated Reporting Council’s International Integrated Reporting Framework, which defines an integrated report as “a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term.”
It is not the only model that’s been proposed. Several organizations have also produced studies and offered both general and specific recommendations for improvement.
For instance, could one small step be the re-ordering of the financial statement notes to include first those matters that management deems to be the most important for its stakeholders rather than simply following the statement caption order? Could technology be more effectively used to drill down into financial details of interest to stakeholders and potential investors? Could real-time attestation be used on important company metrics that impact shareholder value?
Be the change you want to see
The questions, admittedly, are often as complex as the problems they seek to solve. But that is no reason not to ask them, nor especially not to try and answer them.
To do so, we need your voice, and we invite you to take advantage of our platform. Like decisions, recommendations are made by those who show up.
The next question, then, is arguably the most important: “How are we going to do it?”
