Sustaining investor confidence

Recent events on the world stage have brought renewed focus on the suitability and transparency of corporate reporting. Criticism has been levelled at all of those involved in the process: from directors and company accountants, to auditors and standard-setters. Many have blamed complex or inappropriate accounting regulations, whilst others contend that the same accounting standards are simply a thermometer showing the sickness of the global financial market. For many investors confidence is at an all time low.

Much of the criticism of corporate reporting in the wake of the financial crisis is clearly justified: the conflict between unbiased financial reporting and directors’ profit-related pay is self-evident; equally the complexity and peculiarity of certain accounting standards cannot be denied.

However, corporate reporting is much more than a balance sheet, income statement and related notes. Whilst these items remain a key element of shareholder communication, the information conveyed by the financial statements cannot, and should not, be the only driver of perceived value.

The key tool for anybody wanting to make good investment decisions (whether this be an investment of cash, time or confidence in an entity) is high quality, current information. For this reason, capital markets such as the JSE require listed companies to release sensitive information in a controlled way to all investors at the same time.

Conversely, a lack of information can lead to investors pricing in an additional ‘risk premium’; in other words, the less an investor knows about an investment opportunity, the more risk is assigned to that opportunity and the less an investor will be willing to invest (or the higher the return that will be expected by the investor).

Today’s investors are, more than ever, focussing not just on profit sustainability, but on the ‘triple bottom line’ of economic, environmental and social sustainability. The need for transparency and public reporting in these areas to enable responsible investment is now widely recognised. This is demonstrated by the increasing number of alternative sustainability indexes, such as the JSE Socially Responsible Investment (SRI) Index.

Accounting standards and company law requirements will always need to be complied with. Today’s leading companies are looking to exceed these requirements by explaining accounting jargon in plain English and including additional information on topics of importance to investors such as governance, sustainability, operational performance and forward-looking information. Ultimately, this information should enable investors to make better, informed decisions.

Such an approach to reporting should, and indeed will be, recognised. The results of the 2009 Excellence in Corporate Reporting survey sponsored by Ernst & Young are expected to be announced in May; it will be interesting to see which companies are leading the way in corporate communication.

Plaudits and accolades aside, in an increasingly complex and competitive corporate world, the ultimate reward for any company pursuing excellence in corporate reporting is surely an increase in investor confidence.