FDs tasked with upholding companies' financial reputation

Equity analysts and fund managers have significantly changed their views of what makes a company an attractive investment, with focus shifting from pure financial strength to wider matters such as reputation and transparency.

The first in a series of research papers, conducted by Ernst & Young, found that the quality and transparency of accounting, the accuracy of earnings guidance and the quality of a company’s financial governance are considered just as important as the bottom line.

The focus of the first study was on companies’ financial reputation and how this has changed as a result of recent financial scandals. Three-quarters of respondents said financial reputation is important, but measuring this is a qualitative process, meaning that the credibility of management, communication and the quality of financial reporting is important.

As one US equity analyst said: “It takes a long time to develop a reputation, one announcement to lose it and years to get it back. A company can get it back, but management never does.” Four-fifths of respondents said that the role of the finance director has widened because of financial reputation.

Communication is at the heart of financial reputation. For a company to attract investors, it must communicate its financial situation clearly, transparently and in a timely manner. More than half of the respondents said that poor communication with investors could damage financial reputation. This is never more so than in times of crisis: if something has gone wrong, investors want to know what it was, why and what has been done to rectify the problem.

“Companies’ financial reputation can be irreparably damaged by attempts to pull the wool over investors’ eyes,” said a UK fund manager.

There are many things boards can do to manage the financial reputation of their company by addressing three issues: assess the calibre of your reputation against peers and the desired state; improve the calibre of the reputation; and monitor its performance and the drivers of its performance.