At one of our Annual Conference's breakout sessions, Alan Newman Chief Financial Officer at YouGov PLC chaired a panel including Anna Colban of the FRC, Will Pomroy of Hermes Investment Management and Philippa Foster-Black CBE of the Institute of Business Ethics, who discussed which corporate reporting practices to avoid destroying your reputation.
Anna Colban from the FRC opened this breakout session by covering two recent FRC projects – the smaller companies project and the culture project.
The smaller companies project, aimed at gathering and assessing evidence of the issues and challenges facing smaller listed companies, also explores ways in which the FRC can support these companies. The project found that the principal areas of investor focus in companies’ reports are:
- Business model, principal risks and uncertainties;
- Cash flow statements;
- Underlying financial performance;
- Accounting policies; and
- Disclosure of accounting judgements and estimates.
Anna stressed that this project raised the opportunity to help smaller companies to produce better reports, are there were many opportunities for improvement identified. The FRC has already developed some initiatives in this regard, such as sending focused annual reminders to smaller quoted preparers.
She also mentioned the FRC’s Culture Project, which is a governance assessment focused at understanding why there have been recent corporate scandals despite the UK’s very high corporate governance standards. The first key observations of this project, which will be published in July 2016, define culture as an asset and set the relationship with shareholders as key.
Finally, she highlighted the Financial Reporting Lab project – Digital Future: Data, which will examine how technology trends might drive future change in corporate reporting and how transformation of reporting formats might be optimised for investors and companies.
Will Pomroy from Hermes Investment Management followed, giving a presentation more focused on what investors look for in companies’ reports.
After providing an insight into Hermes EOS’ history and shared engagement resource, Will explained that they look for quality stocks among small and mid-cap companies. Quality stocks, in this regard, are those that demonstrate, among other characteristics:
- sustainable growth;
- durable competitive advantage;
- a strong balance sheet; and
- management integrity, talent and vision.
Will also emphasised that investors do look in detail at annual reports before investing in any smaller company, and continue to review them in an ongoing basis. One of the reasons for this is the lack of availability of third party research on these companies.
He explained that every report must be built around the unique business model of the preparer, and should highlight its business model, strategy and performance, risks, value creation and the meaningfulness of the key performance indicators (KPIs). Will emphasised that it is crucial that companies communicate their judgements and address the negative aspects of their business to avoid reputational risks.
Philippa Foster-Back from the Institute of Business Ethics introduced the topic of the role of culture and governance. She explained that companies have the ability to build a resilient reputation for trustworthiness and that they can repair trust in case of a reputational failure. Reputation is actually an outcome of trust.
Philippa mentioned that companies’ core ethical values and organisational model have an impact on reputation, and that it is important for companies to bring alive the words they choose as values in their conduct and decision making as an organisation. She highlighted some questions that the board should ask themselves regarding culture to understand, for example, whether they know how the organisation is working and what dilemmas the staff is facing day to day. The key question for the board to answer in this respect is “How do we know?”. Boards need to know if their organisation is living up to its values and should understand that this is the best way to do business because:
- It is the right thing to do;
- Sets tone and culture;
- Supports staff;
- Good place to work;
- Retain and recruit best quality staff;
- Gain and retain customers;
- Gain reputation; and
- Self insurance, mitigate risk.
The participants discussed with attendees some examples of good practice among companies in reporting and communicating with investors to promote and preserve good reputation. The panel agreed that companies need to be more upfront when there are bad news and acknowledging when problems arise. Also, reporting is most meaningful when it is timely. While participants agreed that the lack of resources continues to be the greatest challenge for smaller companies, they mentioned that good reporting expectations continue evolving and increasing. In a world of fast information, the panel agreed that most of the companies’ information, such as the business model, should stand the test of continuous access to information and social media.
