During the worst of the Covid-19 crisis, communicating with investors probably slipped down management’s list of priorities. But with year-end approaching, corporate reporting will inevitably hit the radar screen once more.
But where to begin? Few companies have been left untouched by the pandemic. Age-old business models have been ripped up. Customer and employee interactions have been reinvented, and risks that had never been considered material have indeed materialised.
And for all too many companies, this extraordinary year has left them facing the shocking prospect that going concern may actually be a concern.
Given this era of profound uncertainty, how should management set about communicating their performance, position and prospects to shareholders?
The Financial Reporting Council’s Financial Reporting Lab has published two documents that offer pragmatic advice to those charged with producing corporate reports. Both provide insight into the questions that are particularly important to investors at this time. Both offer reviews of the regulatory frameworks that apply.
But for me, it is the wealth of good practice examples that sets these reports apart. Drawn from a variety of companies, these examples allow readers to quickly scan the wide range of approaches taken by management to address shareholder concerns.
Going concern
Covid-19 – Going concern, risk and viability does what it says on the tin. For each of these areas of disclosure, this publication suggests some practical questions that boards might wish to consider. It also details the information that investors would like to see in each area, which are illustrated with a series of extracts from company reports.
Readers can see, for example, how Premier Oil reports on the results of a sensitivity analysis that it conducted and the subsequent action taken by management. Or how AG Barr has factored Covid-19 into its assessment of going concern along with medium and long-term viability. Or how Saga links its scenario analyses to both the viability and going concern sections.
It is also refreshing to see that this report doesn’t shy away from some of the more challenging questions about disclosure in this difficult environment.
‘We are often asked whether too much disclosure will amplify the problems faced by a company by creating panic among investors,’ explains Lab director Thomas Toomse-Smith. ‘As you will see in this report, our answer is an emphatic “No”.
‘Investors understand these are extraordinary times. What they need is confidence that management are in control – that they understand the risks and have a plan of action.’
Cash under scrutiny
The second report, Covid-19 – Resources, action, the future, builds on a series of meetings that the Lab held with investors at the start of the crisis. It groups the questions raised at these meetings into three categories:
- resources – including the availability of cash
- actions – what management is doing to manage short-term expenditure and ensure viability
- future plans – the decisions taken to ensure the sustainability of the company, including any lasting impact on customers, suppliers and employees.
The emphasis on cash is perhaps not a surprise. Indeed, in a survey conducted by the Lab, around 45% of respondents prioritised information that focused on current cash resources and company plans to manage shorter term liquidity issues.
‘Investors understand these are extraordinary times. What they need is confidence that management are in control – that they understand the risks and have a plan of action.’
Reporting on reporting
See professional investor John Kattar’s series of videos giving the investor perspective of corporate reporting issues.
Find out more about the Financial Reporting Lab through its video, Lifting the lid on the Finanical Reporting Lab.
Focus on wellbeing
However, perhaps more intriguing was the response that ranked second in this survey: a desire to see information about employees and the impact that the pandemic is having on their wellbeing.
‘In our experience, investors think about businesses in the round,’ Toomse-Smith says. ‘Of course, they need good disclosure about the financial performance and position of a company. But to assess the quality and sustainability of that performance, they need far more than debits and credits.
‘They want to understand the business model, and how it has changed; the risks the company faces and how management intend to mitigate potential hazards. And they want to understand the intangible drivers of value creation – including the wellbeing of employees.’
To help management think through how to tackle analysts’ questions about the impact of the virus on their business, this report provides numerous examples of good practice drawn from a variety of company reports and presentations.
These include Next’s report of the actions taken to generate and secure cash; WPP’s work to control cost, capex and working capital, shareholder returns and other issues; Balfour Beatty’s review of restrictions for key suppliers; Norwegian Airlines’ restructuring proposals; and ASOS’s analysis of changing customer behaviour.
The word ‘unprecedented’ has been used liberally over the course of the pandemic, and with good reason. But now, once again, management face an unprecedented challenge: this time to give confidence to investors that there is a plan, and that it is viable.
The two Lab reports will not solve this problem. However, taken together, they offer an abundance of common sense and pragmatic examples that might make a difficult task a little less painful.
