Much of business is down to battles and buzzwords. The buzzwords turn up as ways to focus effort as trends change. The battles are there to implement the thinking that should flow from the buzzwords. FDs have spent a shell-shocked year watching as US companies have come to grief, and both analysts and investors have watched to see what might happen in the UK. At the same time markets have collapsed, money has become tight, and many of the assumptions that underlay the business philosophy of the past decade have crumbled into dust.
So the key buzzword now is management information. This means companies need to ensure that all their employees understand what’s going on across the organisation as well as seeing what’s happening in the markets.
One way of focusing on the primacy of management information would be to concentrate on the type of disclosure which the company makes in its Operating and Financial Review (OFR). And that’s where we come to the battles. The UK corporate scene has never got its culture of disclosure right. All good accountants were, once upon a time, brought up to think that information which was to be made public should be drawn from a company only painfully. This attitude has stuck in corporate culture for far too long. It manifests itself in continuing complaints that the disclosure of information is a hugely bureaucratic procedure which wastes the time of corporate executives who would otherwise be employed in creating wealth within the company.
It’s taking a very long time for the way that business life has changed to register. What the events of the past couple of years have taught us all is that those companies which have thrived, or at least survived, have been those which the outside world of analysts, investors and regulators have understood. The markets have crucified companies which turn out to be achieving something rather different to what had previously been predicted.
FDs should look at the latest suggestions from the Accounting Standards Board. Unlike many financial reporting standards, the one which now deals with the OFR is not technical or wildly complex. “The OFR”, it points out, “should assist the user’s assessment of the future performance of the reporting entity by setting out the directors’ analysis of the business”.
There are two sides to this. The first is that the directors are the stewards of the investors’ cash. So they are the ones who can best provide the overview of what is going on. The second is that directors do sometimes have less than a full idea of what is going on. A conscientious and well-implemented OFR is going to help the investors understand. But its very process will also bring directors up to speed as well.
Directors often complain the market is blinkered and that analysts are ignorant souls with just one thing on their minds. All these two constituents, of what is called the investor relations business, seem to want is earnings figures or predictions. FDs should turn to page seven of the ASB’s statement on the OFR. “Wherever possible,” it says, “the OFR should identify and comment on the measures that are used by the directors as the key performance indicators in managing the business.”
This is what they should be providing. They need to create greater understanding among investors and this is how they should be doing it. If the directors can explain what they see as the key performance indicators then they will be telling the investors what they see as important. That may sound a simple concept. But it changes the way that the company is perceived and judged.
ASB says: “These measures may be financial, or non-financial.” People are comfortable with the financial indicators even if, at the moment, they are all running the wrong way. People still find non-financial indicators harder to cope with. This is partly because often, for example in human resources measurement, there are no universally accepted indicators or because the information which the indicators provide seems woolly.
If that’s so then it’s another reason for directors to work harder at providing this information. First they need to understand that it’s both valid and useful.
Then they should disclose it. For the company it’s the first half of the process which is the most valuable and which pushes them up the learning curve. The disclosure of management information is a process which benefits both sides of the divide.
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