Ianus, long-termism and the role of corporate reporting
15 December 2016
As we gallop towards the Christmas holidays, it feels like the corporate reporting world has just finished ‘peak conference’. For those connected with integrated reporting, there was a bit of a mini marathon last week with the IIRC-ICGN conference focusing on longer-term investment. With colleagues, I ran a workshop on encouraging long-termism: shifting the balance from historic to forward-looking information to an audience of investors, business and IR grandees (including Mervyn King). As inspiration, we had an image of the two-headed Roman God Ianus on display, whose power lies in the fact that he has a face to the past and an equal one to the future.
How forward-looking is today’s corporate reporting?
Corporate reporting as an enabler for long-termism was brought front stage in the UK with the Kay review, and Strategic Reporting emerged as the prized solution. Has it been? Perhaps not quite yet – but it may do in future.
The Mckinsey survey of 2013 showed that over 70% of CEOs thought they should plan beyond 3 years. Our research on forward-looking information released last month shows that this hasn’t yet come to fruition. The majority of companies are talking to periods shorter than 3 years and often shorter than the periods on which their viability statements are based. Furthermore, only 33% present strategic forward-looking information.
However, it would seem investors are looking for much more forward-looking information from business – our 2014 survey of investors showed that only 14% were satisfied with the information on future strategic plans that was being communicated. Earlier this year we worked with the IIRC to understand what information investors want and there was an overwhelming acknowledgement of the importance of pre-financial factors (e.g. environmental, social and governance) in allowing an understanding of future value creation potential. The debate in our workshop on lead (as opposed to lag) indicators also supported this.
Improving dialogue with investors on forward-looking information
What emerged from our workshop is that the frameworks of strategic and integrated reporting provided a good starting point to support longer-term horizons, but business can go further. Tips for business that emerged from our discussion:
- Invest time in reflecting the dynamism of your business model as an insight into future value creation potential.
- It is the responsibility of business to make the connection on how and when ‘pre-financial’ factors (such as accident frequency, employee retention) become financial for their individual business and to move the conversation out of the generic and standardised.
- Be aware of the risk in relatively short reporting periods in an age with such dramatic change enabled by technology. If you’re not looking out more than 3 years (as well as focusing on the here and now), how can you be sure that you’re not investing in what might soon become stranded assets?
- Bust the myth that what is traditionally known as non-financial information (or as we like to see it pre-financial) comprises more complicated/unreliable data sets compared to traditional financial data. Itau Banco’s Group Finance Director captured it well when he remarked on how equally subject to estimates and judgement a financial balance sheet is with the date possibly being the only incontrovertible truth.
So Ianus would have us all keeping firm in the past but with a face to the future, and it was great to see the IIRC do the same. So many familiar and friendly faces from when the IR framework was just forming, but now also a much broader, new group of participants in the capital markets.