Financial professionals are acutely aware that the present content of annual reports and accounts gives shareholders only a glimpse into what drives the business. In fact, the increasing complexity of financial reporting standards is moving readers of accounts away from the information about how value is created in the business. The sort of information that management uses to assess a business is not what those same directors are told to include in their most important communication vehicle to investors – the annual report. But a group put together by the ICAEW and led by finance director Ken Lever is aiming to come up with a set of suggestions that will go some way towards realigning management thinking and concerns with the annual report and accounts. Lever, who is FD of Albright & Wilson, says, “Existing financial statements are limited because they are driven by historical cost accounting, which is focussed on profits not cash. Even the ASB acknowledges that the financial statements are a subset of the information actually needed to be known about an organisation. “Creating economic value is a function of future cash flows. It is not impossible to provide more information that helps the reader understand the factors that drive value creation: the quantum, timing and certainty of future cash flows.” Lever and his steering group (six finance directors or other senior figures from commerce and industry, an academic, three from the City and one from a professional services firm) are hoping to produce guidance that will encourage companies to produce information in the annual report that will help spread understanding about value creation and so improve the basis on which investors can make an economic decision. Such data would help level the investment playing field. Recent research has suggested that the three biggest influences on the biggest fund managers are (in descending order) presentations by management, analysts circulars and annual reports. The average investor – and even some smaller fund managers – don’t have a seat at the presentations and won’t be on the circulation list for research reports. Lever says: “The way that managements manage a business, the benchmarks and targets, are relevant to the external community. But what happens at the moment is that we produce a load of accounting information which we don’t use to run the business.” This desire to make more meaningful information more accessible isn’t pure altruism. Finance directors of small quoted companies are alarmed at the lack of liquidity at their end of the market, and a greater amount of useful, digestible and relevant information may help investors understand the true value of a company and hence keep the share price perky and the shareholders interested. David Phillips, European head of value reporting at PricewaterhouseCoopers, says that analysts and investors still use historical cost information, which has a limited value. “What we are trying to do is bridge the gap between the historical reporting model and the information used and needed by the investment community,” he says. “We need a greater recognition of the things that underpin the financial numbers – such as market share and market growth. Although we are looking at this in the context of the annual report we mustn’t forget there are a whole host of channels.” Lever says he practices what he is about to preach. In its annual report, Albright & Wilson shows a form of economic value – called cash added value (CAV). And the graph actually shows that under the CAV, the company did better in 1996 than it did in 1998. But Lever insists that a crucial point is to carry on showing the trend even when the numbers aren’t flattering. He also says that the reasoning behind the numbers should be carefully explained. Lever added: “There is an important emphasis on cash because cash gives rise to value.” Albright & Wilson is an interesting example of the stockmarket misunderstanding a company’s value until poked awake by bid activity. Albright & Wilson has recently been taken over by bid vehicle ISPG, which is backed by French chemical company Rhodia. In recent times the share price had been as low as 58p, which is well below ISPG’s cash offer of 160p. The discussion document is due out by late summer, and although the final report will not be mandatory, the steering group hopes to influence the future of financial reporting. It may well find a receptive audience. Reports on strategies for creating shareholder value might include: – presenting the strategic position – marketing strategy – competitive position in the market place – market share – quantified non-financials such as innovation, recruitment, retention and development of people.
View our archived webinar, including Oracle and a host of ‘Fast Data’ experts, to discover how financial professionals can help create a Fast Data business
Reinmoeller, professor of strategic management at Cranfield School of Management, has proposed an Eight Actions Model to help organisations increase margin and perform ahead of market expectations
When thinking about Iran as a potential market it’s important to go in with open eyes. This means being aware of some of the myths as well as being clear on the challenges
Third of UK companies with defined benefit pensions schemes are paying out more from their scheme in pensions than is being received in contributions