THE Shareholder Spring last year was typical of any economic downturn. Revolutions tend to occur when times are bad. Rather than take to the streets, however, shareholders and other investors have raised their voices and are becoming harder for corporations to ignore after the financial crisis.
The scramble to introduce new rules to guard against the crisis ever happening again is an opportunity to put investors at the heart of standard setting and financial policy making. For too long, investors’ views have been faintly heard. But the landscape has now changed, and understanding not only what investors want but also who they are is critical to helping them invest. Their investment is perhaps more important to growth now than ever before.
It is one thing to talk about the “investor voice” but who exactly is that voice? Investors have different interests and not all want the same thing from financial reports. ACCA has been looking in detail at what investors in the UK and Ireland want from corporate reporting – the tool that helps them invest – post crisis. The aim is to identify if companies need to change the way they report on their activities and engage with the investor community.
ACCA has embarked on a four-stage study of the investor community, and the initial findings of the first two stages reveal interesting patterns about what investors want and how they make decisions. This may help finance professionals, and the businesses they work for, adapt corporate reporting to make it more investor friendly.
I won’t ruin your morning read with streams of data, and the first stages of the report will be published at the end of the month. But some trends stand out as particularly interesting. They show that there has been change in the way investors behave, and in the kind of information they look for.
Investors’ asset allocation and investment strategies have changed since the crisis. This was expected, but how they changed is of more interest. There is a more international element to strategy but also a more short-term approach.
The fact that investors are taking a more short-term approach has had a fundamental effect. The traditional domination of markets by pension funds and insurance firms has been eroded both by greater international ownership of companies, and by the emergence of players like hedge funds and private equity firms, with shorter-term investment horizons. Even traditional players have switched investment from equities to bonds.
Adding to that short-termism is confusion over the ownership of companies. The increasing proportion of trades that take place via computer in Nano-seconds (estimated by some to be 80 per cent) has left a question mark on who the owners of companies actually are – and how firms can engage with investors who hold shares for a very short time, and who have identities that are hard to pin down. We have already seen policymakers in the G20 and EU respond with measures to enhance long-term finance and address the “ownership vacuum”.
Central bank activism, leading to loose monetary policy and historically low interest rates, has also had a clear effect on investors, making them search for yields in riskier investments. The proliferation of new technologies such as mobile and social media has led to more corporate information being available to investors, much of it in real-time. How much of it is useful and whether it overwhelms investors is another matter, and one which the second stage of our insight into investor behaviour looked at.
THE END OF THE ANNUAL REPORT
Two-thirds of UK and Ireland-based investors told us that, since the crisis, they were now significantly more sceptical about the information that companies provide. A sizeable majority say they place greater value on information generated outside the company than on traditional corporate reporting. Investors are on a constant look-out for information that will give them the edge. This means that they increasingly rely on non-traditional sources, like analyst presentations, online news and social media.
There is less enthusiasm for the traditional annual report. Although 63 per cent of investors told us it was an important source of information, a significant minority expressed reservations about the quality and relevance of corporate reporting, with 45 per cent arguing that the annual report is no longer a useful tool.
Investors have also expressed mixed feelings when it comes to the regularity of reporting, particularly in relation to quarterly reporting. Many saw quarterly reports as valuable for their decision making, but a high number also said mandatory quarterly reporting should be abandoned and two-thirds felt it had encouraged hyper-investment. There was an appetite for a greater amount of information to be reported in real-time, particularly cash-flow information and balance sheets. But the fact that the same investors said they would be prepared to pay more for this to be externally-audited points to a desire for the dream scenario of speed and assurance at the same time.
Investors also expressed details of what information they wanted. A staggering 90 per cent believe it would be valuable for firms to combine financial and non-financial information into an integrated model, thereby enhancing investors’ understanding of a company’s long-term outlook. But there is still uncertainty as to what it would involve.
WHY THIS MATTERS
In the detail of our study, there are explicit messages about what investors want accounting standard setters and regulators, as well as policymakers, governments, auditors and even the investors themselves to take note of. That so many find no use in the annual report is a particular worry, and shows that initiatives like the UK Financial Reporting Council’s “cutting clutter” campaign must be re-invigorated.
The issue of quarterly reporting needs to be addressed. While investors find it useful, they also accept that it leads to a short-term approach by companies, with management more concerned with the next three months’ numbers than proper planning. In Europe, there are moves to remove it as a requirement – but there might be some logic in leaving it as an option, given the mixed feelings on the individual company and market effect.
For the audit profession, the good news is that only external assurance seems to give corporate reporting much validity in the eyes of investors – and that people mostly value assurance over speed. But would auditors be geared up to doing quarterly audited accounts? Or auditing of real-time information?
There is an onus on the investor community to engage more with the corporate reporting process, both at an individual company level and with the standard-setting process more widely. Following the age-old mantra that “decisions are made by those who show up”, it is crucial that wider engagement – assisted by developments like the UK Stewardship Code, which sets out investor obligations – happens so that the views of the end users of accounts are fully considered.
There have been reports that companies could see another Shareholder Spring this year. Rather than sweating over their AGMs, better engagement with investors and a greater understanding of their needs when it comes to information and reporting could benefit investors, potential investors and the companies themselves.
Ewan Willars is director of policy at ACCA.