Investment
professionals have a challenging job; gaining an understanding of how a
company’s business model operates, how management strategies are being
implemented, and how that translates into performance and value creation
is not easy.
According to a report
by PricewaterhouseCoopers, management teams that provide high-quality,
integrated reporting across all channels that tells a clear story not
only help investment professionals but also enhance their own
reputations and capital-raising potential.
The
report titled ‘Corporate performance: what do investors want to know?’
noted that with the growing momentum towards more future-orientated
integrated reporting, investment professionals around the world were
asked for their views on what constitutes useful corporate reporting and
where they see opportunities for management teams to improve on.
Produce quality report
The
quality of a company’s reporting impacts their perception of management
quality. Reporting quality could even have a direct financial impact
for companies. The survey showed that only 11 per cent of the
participants disagree with the idea that annual report disclosures about
strategy, risks, opportunities and other value drivers can have a
direct impact on a company’s cost of capital.
Investors want to know the cash flow
Explaining
the business model clearly is an important part of high-quality
reporting. Most investment professionals primarily want business model
explanations to focus on how a company generates cash and the value that
will become cash in the future. There is considerable scope for
improving the effectiveness of company reporting in these areas, and on
dependencies on key relationships and resources.
Explain the business strategies
In
order to be meaningful, an explanation of a company’s business model
needs to link to its overall strategy. Reporting on strategy should then
include key priorities and actions to allow the company to meet its
objectives, and progress made against them. This need for management
teams to tell an integrated and coherent story – across strategy,
business model, risks, resource dependencies and performance – is raised
regularly in conversations with investment professionals, the survey
found.
The need for a broader
understanding of the environment in which companies operate is indicated
by the substantial importance placed on information about dependencies
on key relationships and resources, the position of the business in the
wider value chain, and the company’s dependency and impact on the future
supply of resources.
Investment
professionals want a clear understanding of how a company is positioned
in its market and its operating environment. They want to understand its
impact on infrastructure, government tax revenues and communities, and
its exposure to constrained resources such as water and to uncertain raw
materials costs.
Disclose potential risk and proffer solutions
There
are a number of ‘effectiveness gaps’ in the reporting of key risks to
the business model. Investment professionals want to know how these
risks are managed or mitigated. Although understanding management’s view
of potential risks and their mitigation strategies is important,
experts note that too much boilerplate disclosure may impede that
understanding.
Link Key Performance Indicators with strategy, risks and remunerations
Operational
Key Performance Indicators are almost as important as financial KPIs
for company analysis and could be reported more effectively by many
companies. The majority (75 per cent) of investment professionals
surveyed would like to see a clear link from KPIs to remuneration
policies.
A key finding is that
investment professionals want to know why management has chosen
particular measures. Such an explanation may help users of accounts to
understand the importance of a particular KPI and helps to put the
company’s performance against the target in context. Perhaps even more
importantly, companies need to demonstrate a link between their KPIs and
their strategic priorities, as well as their business model.
Sustainability
KPIs (which relate to issues such as local community engagement,
environmental impact, natural resource use and employee engagement)
scored more highly with investment professionals than was seen in the
past. This, the survey found may reflect an increasing awareness of the
importance of such measures; they relate to factors underpinning a
company’s ongoing ‘licence to operate’, reflecting key dependencies to
the business model and are therefore highly relevant for long-term
investment decision-making.
They like
to see linkage between different elements of company reporting. Among
those surveyed, 87 per cent say that clear links between a company’s
strategic goals, risks, KPIs and financial statements is helpful for
their analysis.
The annual report provides valuable information
The
annual report remains a valuable source document, not only for
financial information but also in relation to governance matters and
environmental, social and human capital topics. It is also important for
explaining strategy, risks and opportunities. The reliability and
comprehensiveness of the annual report are its key strengths.
The
results may interest management teams who spend time preparing annual
reports but doubt whether investment professionals actually look at
them. Across all conversations with investment professionals in this
survey, the annual report was consistently cited as important in every
information category. In contrast, cited data sources that did not reach
the top three for any category include sell-side research, data
providers and ad-hoc company press releases.
Reporting adjusted performance measures
When
investment professionals analyse a company, their goal is to understand
the quality and sustainability of its ‘underlying’ or ‘core’
performance. They want insight into what drives profits year on year and
the measures that management teams consider to be market moving. They
want to understand the impact on company performance of management
actions relative to general market conditions
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