For & Against: Disclosing non-financial data

Non-financial detail builds trust, by Timothy Copnell

Globalisation is bringing many opportunities and challenges, not least the need for greater transparency. Transparency is the lifeblood of the capital markets, leads to a lower cost of capital and is the prime driver of investor confidence.

Sound accounting and financial reporting are vital. But traditional financial statements form only part of the information set required by analysts and investors. Increasingly, shareholder value is generated by intangible assets such as brands, know-how, intellectual property and, most importantly, people.

Investors need more information about these if they are to understand a company’s strategy for creating value and the key drivers that must be managed to implement those strategies and achieve the company’s objectives.

Disclosure of key non-financial indicators makes aspects of a company’s capabilities more transparent to investors and helps bridge the gap between management’s perception of a company’s potential and that of external investors. Most of the key information is already used internally to manage the business and could be presented through structured, qualitative disclosures – subject, of course, to the constraints of commercial sensitivity.

But investors also have an interest in corporate sustainability, central to which is the generation of long-term shareholder value. By demonstrating a commitment to the principles of sustainability, whether economic, social or environmental, companies can more easily attract long-term capital and enhance confidence among shareholders and a wider group of stakeholders including regulators.

Disclosing information about social, environmental and other non-financial measures not only demonstrates this commitment, but creates a bond with that wider group of stakeholders. Where relationships with shareholders and other stakeholders are neglected, companies risk the wrath of the world media and long-term damage to their corporate reputation, key intangible assets and intellectual capital.

In conclusion, initiatives that support the provision of information which enable users of annual reports to better understand the strategies adopted by companies and the potential for achieving them should be embraced.

Those responding creatively to such initiatives and the rising expectations of investors will benefit from new opportunities for competitive advantage. By learning how to define, capture and report on a wide variety of non-financial information, companies are finding new ways to safeguard their reputations, build trust among their stakeholders and, ultimately, improve their corporate performance.

• Timothy Copnell is director of corporate governance at KPMG

Figures mean more than words, by Peter Williams
Over the past few years, the major focus on financial reporting has been on the words rather than on the figures.

The trend to concentrate on aspects of corporate governance such as the operating financial review (OFR) and clarifying the sections on directors’ remuneration and terms and conditions, seems to have meant there has been less focus on the numbers.

But the major statements – the balance sheet, profit & loss account and statement of recognised gains and losses – remain at the centre of financial reports.

The problem seems to be no-one, including the accountancy profession, is quite sure what the financial reports are trying to do.

A variety of interest groups are suggesting their pet themes should be included in the statements – internally generated brands, human capital, intellectual capital, reputational capital are some of the favourites and along with every suggestion is a host of ideas of how to value and measure these new age, new economy ideas.

Run a pharmaceutical company? Then stick a value on all the PhDs you employ. Do lots of training? Put your staff down as assets.

As the economic downturn starts to bite, the focus of shareholders and analysts may start to return again to less funny numbers. There will be less desire to measure the intangibles and more interest in making sure the entity doesn’t run out of the readies.

The accountancy profession has done a splendid job ensuring corporate governance works. It now needs to do something equally useful and reignite a debate among the financial community to decide what financial reporting is really for.

The danger is that fashion or pressure from interest groups will mean bits are introduced into the financial statements on a piecemeal basis without any coherent reason without a real understanding of what the users of financial reports realistically need to know.

One of standard-setter Sir David Tweedie’s best jokes down the years is the alleged comment from a newspaper which ran: ‘When Sir David took over at the Accounting Standards Board, UK financial reporting was looking into an abyss. Since then it has taken great strides forward’.

After dragging itself out of the abyss of creative accounting in the early 1990s, UK financial reporting seems to be struggling to avoid the abyss of meaninglessness in the early 2000s.

• Peter Williams is a freelance writer