Corporate Reporting blog

Confidence, confidence, confidence

Reading the Sunday press I was reminded again what a unique economic period we are living through. When only a matter of months ago we had oil prices over the $150 mark, a three fold multiple of where it is today. We were worrying about the reappearance of inflation and the impact it might have on the ability of central banks to drop interest rates to stimulate the economy. How the pendulum has swung. No longer are we worrying about the ability of the world to resource the engines of growth. Now it appears, we have all the raw materials we need. Well almost. Unfortunately, despite the heroic efforts of our governments to provide liquidity and financial backing, we are missing the special additive, the magic dust we take for granted, that critical commodity called "confidence". Without it, as we are now experiencing, the engine starts to splutter and potentially stall. 

But what can we do to alleviate this situation. Well perhaps we should all be taking a leaf out of the book of my colleague Tony Lomas, one of the administrators at Lehmans. At an evening debate last week with a large contingent of Non Executive Directors, Tony implored them to go on a communications offensive to engage with all their stakeholders - to champion a programme of confidence building, not just with their bankers, but with their suppliers, employees and the communities that rely upon them. Looking at it from the other side we have all to a greater or lesser extent lost trust in the system and this can only be reversed by active engagement.   

As I thought about Tony's comments, it reminded me of many conversations I have had with a number of companies in recent weeks. I have been reminding them that reporting is a competitive tool, that merely complying with minimum reporting requirements is no longer an acceptable standard. I would suggest that in the current climate these two facts should be taken even more to heart. The next reporting cycle is not the time to be economical with the truth or to assume investors will find what's important by trawling a data dump that purports to be a communications document.

Perhaps more importantly, companies need to recognise that transparency and clear and cohesive reporting flow naturally from the well run company that is on top of its brief. This point is not lost on investors. So as we look ahead to the next few months, let's remember that transparency and clear communications are the foundation on which trust and confidence can be rebuilt. But critically, as Tony suggests, don't forget your other stakeholders, the ones on which your business really relies and who are also under significant stress.

If you want inspiration on how to enhance your communications please visit www.corporatereporting.com - our library of best practice has just been updated. Also, next week we are launching the findings of our reporting review of the FT350 companies. I look forward to sharing the high points of this review then.

I am always pleased to hear your views and comments on the postings, and to take questions about corporate reporting.

David

Corporate behaviour – the missing link

Much has been written in recent weeks about the linkage between remuneration and incentive structures and risk taking. For some the linkage appears to be a revelation - human behaviour being driven by greed and financial reward - now there's a new one. As a colleague of mine (who has spent his career trying to help distressed companies) put it: "If you ever want to know anything about an organisation, its motivations and strategy, go no further than the bonus system - it normally reveals all".

As we rethink the regulatory model one of their biggest challenges will be to ensure that a balance is maintained between risk taking and market innovation. Switch off the risk button too aggressively and don't be surprised by the outcome. I can hear some of you say this might not be a bad thing in the circumstances, but the worst thing we can do in the medium term is create an environment where no one is inclined to take a reasonable risk (indeed some might argue that we might already be moving there!). 

As I wrote this blog I suddenly had a sense of déjà vu, it reminded me of a paper I wrote many years ago after the demise of Enron entitled Markets need the missing piece of controls jigsaw. I remember suggesting that while the introduction of Sarbanes-Oxley appeared a smart move we should not expect too much of a return on our investment on new processes and controls if the issue of corporate culture and behaviour was not addressed at the same time.

While this may have been a missed opportunity last time around, I sense it’s not going to be missed this time. So while I am the last to want more regulation, I like others accept it is inevitable, the challenge is to ensure it is measured and thought through. So in this vein I was almost pleased to see the guidance produced by the UK FSA on remuneration recently. Pragmatic and practical, it formed part of the recapitalisation package for UK banks. Subsequently it has been more widely circulated to all Chairmen and CEOs of FSA regulated businesses. It establishes a requirement that Remuneration Committees control of an organisation's remuneration should extend beyond the board, it recognises the need for ensuring independence of remuneration for those in risk and compliance roles, ensuring their input is taken into account when setting compensation for others, and above all reminds organisations that robust performance information with a longer term assessment horizon can only aid a greater degree of corporate responsibility. All sensible stuff.

My hope is this thinking will translate one step further into external reporting. No not another 15 pages of data - just a small statement to explain how the dynamics and structure of board remuneration is cascaded down through the organisation. To understand the shape of what's required those interested may want to look again at the Report Leadership document on executive remuneration, which was published last year. Developed with input from investors and some Remuneration Committee Chairmen it brings into focus all the elements that are needed to enable those outside a business to assess the appropriateness and impact of the remuneration policy.

Perhaps if we get the behavioural bit right this time we might find the next crisis a little less painful. Let's hope so.

I am always pleased to hear your views and comments on the postings and to take questions about corporate reporting.

David