Market differentiation will increasingly be underpinned by how effectively companies can communicate information on shareholder value to financial analysts and investors. Methods of corporate valuation and reporting are evolving rapidly, as traditional accounting models can no longer be relied upon to provide a full picture of corporate health.
To meet changing market demands, companies must shift the focus of their reporting to include more data on value-building and non-financial assets.
CEOs must concentrate on communicating forward-looking, detailed information on these assets, as well as estimated cashflows. The pace of business today means financial markets demand this data quicker, and in more user-friendly formats. Developments in internet technology, specifically the widespread adoption of XBRL (eXtensible Business Reporting Language), mean this can happen.
The PricewaterhouseCoopers value reporting message is simple enough.
Value is only realised if it is being effectively communicated to the capital markets. Or, put bluntly, investors cannot value what they cannot see – explaining why so many managers bemoan the gap between internal and external perceptions of their company’s potential. If the capital markets are to be steered away from short-term earnings performance and towards the activities that underpin value creation, management must put systems in place to measure, record and communicate these activities.
Information must be easily exchanged inside and outside organisations and the internet is playing a crucial role in this process.
Progress is being made – the ‘balanced scorecard’ approach to management is a case in point but it remains piecemeal. More progressive companies now use valuation models based on assessments of future cashflows to drive onward strategy and resource allocation and these techniques are being pushed down the organisation through the introduction of value-based management. But the missing link is in the area of communication. A new reporting model needs to be established to complete the chain.
Protagonists on all sides of the capital markets are questioning what information is required, both to understand performance and to understand the likely future success of an organisation. There is a growing recognition that we need to measure new, soft, areas of business activity – areas such as the innovation cycle, intellectual assets, and customer and human capital. These are all key drivers of top-line revenues and future corporate value. For the most part, companies are only now beginning to focus on these internal measurement systems.
Financial analysts and investors perceive a gap between the information disclosed by companies and what they require. The historical, earnings-based, reporting model, which gives a historical account and focuses on earnings, can no longer meet market needs on its own. The shareholder value metric, with its greater emphasis on cash flows, future orientation, and accounting for intangible assets, provides the market with a fuller view of a company’s true worth, but current reporting models do not record the soft areas calculated in shareholder value. Left to their own devices, many companies fall short when it comes to informing the markets of their value-creating activities and value drivers.
The PwC value reporting model enables the identification of market reporting needs and assists a company in meeting them. It not only facilitates more comprehensive and accurate reporting to the markets, but is also a valuable addition to internal reporting systems, heightening managers’ awareness of how these items translate into sustainable cashflows. Some companies may balk at providing more detail than required by regulators, but greater transparency may prove to be a decisive tool in the competition for capital.
By providing more detailed information on value drivers, intangible assets and estimated future cashflows, a company can boost its credibility. This results in more accurate share valuations, the retention of more long-term investors, and access to additional capital.
Until a standardised method of value reporting is developed and agreed upon, the traditional reporting model has an important role to play in helping to standardise frameworks for disclosing data. The most progressive corporations appreciate that the fundamentals, on which successful business has always depended, remain as valid in the new economy as they do in the old.
Uppermost amongst these is the need for a clear business strategy that is hot-wired into day-to-day decision-making processes, a focus on cash generation and an enterprise-wide understanding that well-tuned organisations are dependent on all their constituent parts operating in harmony.
There is no doubt that the past 12 months have seen some of the world’s leading companies making positive progress in their disclosure of information.
A 1999 report sponsored by FASB, the ‘Business Reporting Research Project (BRRP), assessed the Fortune 100’s attitudes towards internet reporting.
It showed companies could be classified into one of three groupings, according to the way in which they use the web to report on business information (to complement printed material; to substitute for printed material; or to innovate with new offerings and tools).
PwC global research into best-practice websites (conducted in mid-2000) corroborates the earlier conclusions, while underlining the ‘Innovate’ group is expanding its audience beyond the traditional investor/analyst congregation (see box). But while most companies are now using the web as a transitional tool from a paper-based world, they have yet to exploit its full potential.
The effective identification and description of new areas of value is a vital step in this process. There must then be a sea change in the way information reaches the market. Breakthroughs in technology are now allowing companies to record and disseminate this information more effectively.
With XML (eXtensible mark-up language), today’s fastest growing internet technology, any piece of information can be identified and described with a tag or label allowing it to be reused for a variety of purposes in multiple presentational formats.
This technology enables disparate and previously incompatible systems to communicate the tagged information seamlessly. XBRL, the XML standard for corporate reporting, is set to revolutionise the business world as it can be used to produce real-time reporting for both internal and external requirements. Data in XBRL format can be used with advanced assessment, extraction and query tools, allowing its users to perform at lightning speed tasks that were once time consuming. Corporate reporting in XBRL format will begin to appear as early as the end of 2000, and inevitably, as the superior quality of XBRL becomes more widely recognised, companies will come under pressure to implement it in their own reporting systems.
In their drive to increase transparency, companies must begin to offer access to all publicly available information online. This will need to include data in XBRL format and tools allowing users to manipulate and assess that data. Most large companies already have their own website, posting general corporate, financial and investor relations information in varying degrees of detail. This is not enough for financial analysts and investors – moreover, as the number of individual investors continues to grow, the internet will become the most effective ways of reaching that community. The amount, or lack, of data available online, its usefulness and accessibility, will be vital determinants of those investors’ decisions.
Fundamental to this process will be the success with which the regulators follow, and anticipate, these trends in reporting. Consolidation of stock exchanges and the globalisation of capital markets mean the priority will be to create a level playing field for investors around the world.
What will be increasingly required in this new environment is quick access to the most relevant data. This lies at the heart of value reporting.
David Phillips is European Value Reporting leader at PricewaterhouseCoopers
HOW DO YOU MEASURE UP? COMPARING YOURSELF WITH THE INNOVATORS
The following 10 questions should help you to establish how effectively your company is using the net to communicate to investors
1. What is you company’s reason for using the web? Would you consider the company to be in the: ‘Complement’ group (where the web is used to increase the availability of printed information); ‘Substitute’ group (where the web is used as a substitute for hard copy distribution); or ‘Innovate’ group (where the company wants to make all information available at the click of a mouse). Is the type of information provided consistent with your goal, eg if you consider yourself to be in the ‘Innovate’ group, have you provided the widest range of data for an expanded audience?
2. Is the investor relations section of your website one click away from the home page?
3. If you rely on global markets for capital, do you offer language options?
4. Do you offer several options for getting reports (eg the ability to order online, PDF, or Excel versions)?
5. How long does it take to download the PDF version of your report?
(good, 10 seconds or less, bad, half a minute or more).
6. How effective and efficient are your search/navigation facilities?
(eg try searching for ‘Investor Relations’ or ‘Reports’).
7. Does your corporate overview contain the company’s: vision; values; objectives?
8. Does your site give due consideration to other stakeholders considering your vision (eg if customers feature in your vision, are customer measures provided on your website)?
9. Does your website include analyst/investor presentations in an easy-to-use format (eg PowerPoint slides with easy-to-use video)?
10. Does your website include all the analysts’ questions from presentations, clearly structured around key themes (eg similar questions grouped together)?
Just one half of UK practices have implemented a pricing structure around auto enrolment implementation and advice - with many suffering increased costs
Deloitte's north-west Europe foray; BDO, Smith & Williamson investment paths; Shelley Stock Hutter; and Wilkins Kennedy discussed by editor Kevin Reed on our Friday Afternoon Live broadcast
Accountants should alter their perspective on auto-enrolment to maximise business opportunities, according to Eric Clapton.
Kevin Reed discusses whether new accountancy group Cogital can rival the Big Four...and its likely direction of travel