What steps is the board taking to improve shareholder value?
What strategy is the board pursuing?
Does management believe that the company’s market valuation is appropriate?
Is it contemplating any actions to bring the price/earnings ratio to an appropriate level?
What effect has restructuring had on the company’s productivity, operating results and competitive position? How do the benefits compare with the planned benefits? What additional restructuring activity is anticipated?
Are all the company’s production facilities working at full capacity?
How does productivity compare with others in the same industry?
How did last year’s actual results compare with budgeted or forecasted results? Are earnings for the current year so far keeping up with budget or forecast results and, if not, why not?
To what extent has the company’s gearing changed over the past year?
Is the company satisfied with its present level of gearing? If not, to what extent does the company plan to change its gearing levels and over what period?
Does the company rely heavily on short-term bank borrowings? Has any reluctance on the part of banks to provide new financing affected the company? Have any banks refused to lend to the company?
How does the company’s return on investment compare with that of others in the industry?
How have the company’s shares performed as compared with the overall market? Have significant swings in the company’s share price affected its ability to obtain equity financing?
What is the company’s credit rating? Has it been reviewed or changed recently? What is the company doing to improve its rating?
What type of debt has the company issued? What are the interest rates being paid on these issues?
What borrowing facilities does the company have in place? What is the current level of utilisation?
What is the company’s policy with regard to the use of derivatives? What is the company’s current gain/loss at year-end on derivatives acquired as hedges? What level of profit or loss was generated during the year from derivatives activity not undertaken for hedging purposes?
What is the company’s investment policy? Are there restrictions on the type and maturity of allowable investments? What is the current market value of these investments, and how does that compare with the carrying amount in the balance sheet?
What is the company’s policy with regard to foreign exchange exposure?
Are transactional exposures hedged? Are translation exposures hedged?
Are economic exposures managed?
Is the company allowed to write options or enter into leveraged off-balance sheet transactions? If so, how are the financial risks associated with these types of activities controlled? Are their market values regularly reviewed?
Does the company have a credit risk management function with clear independence and authority? If so, what are its responsibilities? Are credit limits established for all counterparties with whom the treasury function does business?
How does the company’s effective tax rate compare with other companies in the same industry?
Have the Inland Revenue, Customs and Excise or the Contributions Agency threatened to assess for penalties or further tax that would significantly affect the company?
Does the company have any tax benefits that are not recognised in the accounts?
Will the introduction of self-assessment with effect for accounting periods ending after 30 June 1999 present the group with any general compliance problems?
PROSPECTS AND OPPORTUNITIES
How is strategy formulated?
What steps are being taken to reduce the company’s cost base?
What impact does the board anticipate the introduction of a common European currency will make on the company’s prospects, particularly initially when the UK stays out?
Does the company anticipate that the introduction of a minimum wage and/or acceptance of the EU’s Social Chapter by the government will have any significant impact on the company’s activities?
Does the company have plans to take advantage of electronic commerce?
What changes in technology are foreseen and how will they affect the company’s business?
Who are the company’s major customers? What percentage of projected sales will they represent during the coming year? Over the next five years?
Are any of these customers in financial trouble? Does the company routinely monitor the financial condition of its major customers?
Who are the company’s major competitors?
Will the company need to raise any additional capital in the coming year?
Is the market right for a share or debenture issues?
Is the board seeking to make business improvements through shared knowledge and intellectual capital?
Are all the non-executive directors completely independent?
What weaknesses in internal controls were identified as a result of the directors’ review?
When will the board comply with the Secretary of State’s request to put the remuneration report to a vote of the members?
How does directors’ remuneration relate to that of other companies of comparable size or in the same industry? Is the board satisfied that directors are neither under- nor over-compensated for their work?
Does the remuneration committee/board formally evaluate the performance of the company and the company’s top executives and directors? If yes, what areas of the company’s, executives’ or directors’ performance should be improved?
If the company were to be acquired, what types of benefits would officers of the company realise under current benefit plans or employment contracts?
Does the Board ensure that newly-appointed directors receive training appropriate to their new role, and that existing board members receive additional training as necessary?
Does the Board maintain and review controls relating to all relevant control objectives, not just financial controls?
How does the size of the company’s board of directors compare with other companies of comparable size or in the same industry? Is the size of the company’s board of directors appropriate?
Has the board designed a comprehensive executive succession plan or recommended any executive succession changes?
BUSINESS RISK MANAGEMENT AND CONTROL
What steps does the board take to identify key business risks?
What controls does the company have in place to avoid the type of fraudulent activities that occurred in other companies in recent years (eg rogue traders in financial instruments, procurement frauds)?
Is the company satisfied that its remuneration policies do not encourage excessive risk-taking? Are there controls in place to prevent exposure to excessive risk?
What steps has the company taken to ensure that its systems of control, both in the UK and abroad, are protected against software failure associated with the transition to the year 2000?
Have outsourced service providers agreed to indemnify the company in the event of a performance failure?
Does the company have investments in, or funds on deposit with, any troubled financial institutions reported to have funding difficulties? How is the company assessing relationships with financial institutions?
How does the company prevent introduction of computer viruses or other unauthorised access to its data files?
Does the company have an established and internally well-publicised procedure for reporting fraud or illegal acts by management and employees to a member of senior management with defined responsibilities for this area?
Has the company been censured or fined by any government regulators?
Have management and the board investigated the reasons for these actions?
What impact does the censure or fine have on management’s integrity?
What arrangements are in place to monitor and report on any risk of breaching loan covenants, in time for avoiding action to be taken?
Who on the Board has responsibility for risk management and derivatives?
What qualifications does that person have for that role?
What risks of the company are self-insured? How often are self-insurance reserves reviewed for adequacy?
To whom does the chief internal auditor report? Is he or she an officer of the company, or is internal audit work contracted out? Do the internal auditors have access to the company’s audit committee?
Does the company follow the accounting practices that are prevalent in its industry? In those instances in which alternatives may be used, are the company’s choices generally considered more “liberal” or “conservative”?
What are the major judgemental areas in the 1997-98 financial report?
What judgements have had to be made in putting together that report?
What are the implications for the company/group of adopting the revised accounting standard on goodwill and intangibles (FRS 10)?
Why did the company’s financial statements show that its cash flows increased (decreased) during the last year when its earnings decreased (increased)?
Does the company expect cash flow to increase or decrease next year?
Who is responsible for ensuring that the operating and financial review (OFR) adequately describes the company’s business performance, results and financial position?
Were (are) there any disagreements with the prior or current external auditors?
Have the external auditors reported to management any material weaknesses or reportable conditions in the company’s system of internal accounting control?
Has the company any significant exposure to environmental regulation in the US?
Have any company products been recalled? Are any subject to recall? What is the anticipated cost of a particular recall? Does a decision to recall mean that a product was not adequately tested before it was marketed?
Does the company foresee any financial implications arising from future UK and EU environmental legislative programmes?
CORPORATE FINANCE MERGERS AND ACQUISITIONS
Has management evaluated the worth of each of the separate segments of the group compared to the value of the business as a whole? Could shareholder value be further enhanced?
Is the company’s dividend policy sustainable in the long term or will it undermine the value of the company?
If an unsolicited offer for the company is received, what procedures will be used to evaluate the offer? Would shareholder value be enhanced if a bid were made for the company?
Has the company considered making a special dividend payment to shareholders or implementing a share buy-back scheme as a means of distributing value to shareholders? What would be the impact on the company’s earnings stream of a share buy-back?
Does management stand to benefit from any change in control?
What is the company’s strategy with regard to acquisitions?
What criteria does management apply in evaluating acquisition targets?
What approach does management take to vendors with regard to earn-out clauses on acquisitions?
What would have been the impact on earnings if goodwill on past acquisitions had been capitalised and amortised through the profit and loss account in accordance with the new accounting standard (FRS 10) dealing with goodwill?
What impact will this standard have for the future acquisition strategy of the company?
Were the fair value adjustments which were made against the net assets of companies/businesses recently acquired fully taken into account when assessing the consideration to be paid?
What provisions have been set up on the acquisitions? What is the purpose of each provision? How have provisions established in prior years been utilised during the last year?
Are there any significant warranty or litigation concerns arising in relation to recent acquisitions?
What is the company’s strategy with regard to disposals? Can the Board amplify the criteria used to distinguish core from non-core activities?
Are any significant operations considered to be non-core?
In appointing advisers for due diligence work on their behalf, do the directors appoint advisers who may seek to cap their liabilities or to introduce proportional liability clauses into their terms of engagement?
What is the nature and current status of any material litigation pending against the company?
Is the company under investigation by any government agency, or by any agency of a state or a foreign government?
Are the directors satisfied that the company is in compliance with the Pensions Act 1995? Are there safeguards in place to ensure that contributions are paid over to the scheme within the statutory time limits?
This is an edited extract from Talking with your Shareholders 1998, published by Deloitte & Touche. For a copy of the full 48-page booklet, please contact Rachel Gristock on (0171) 303 5908.
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