Corporate reporting – something short of paradise?

KPMG has recently issued Room for Improvement, the second edition of its survey of business reporting.

The study presents ‘the main findings from a global analysis of the content of 270 larger listed companies’ reports, in an effort to highlight weaknesses and identify good practices in the presentation of corporate information.” These are its main findings, highlighted as “the ‘must dos’ for improvement.’”

  1. Give investors the information they need Annual reports can do more to look beyond past financial performance to provide objective information on current performance levels, details of strategy and progress in implementing it. They should provide more insight into how key business resources are being managed to meet the longer term needs of the business. Report content 42 percent of the average report is devoted to the financial statements, but only 14 percent addresses business strategy…
  2. Keep the report content clear and relevant Narrative discussions of corporate performance are often repetitive, anecdotal and fail to reflect business priorities, while the length of financial statements is often driven by national practices rather than the specific circumstances of the business. Plenty of space The average annual report is 204 pages long. Reports don’t need to get larger to be more insightful…
  3. Provide a longer term view using operational KPIs Better reporting of non-financial key performance indicators can help to balance short-term discussions of financial performance with a longer-term view of business success. The right objective operational performance measures provide insight into business prospects but they are not widely used. To support a longer-term view of performance, companies should select measures that align closely with the specific factors that drive success for their business, such as the strength of the customer base. A healthy business Only 11 percent of reports come close to covering performance information on six key areas of business health…
  4. Provide practical KPIs that align with strategy Some companies are already providing simple measures that explain some of the most significant aspects of business performance. These measures can help investors assess the commercial success and prospects of the business. Winning customers Only 17 percent of reports tell you whether the business is winning or retaining customers…
  5. Provide deeper analysis of strategy Descriptions of business model and strategy could be more tightly focused. Many business model descriptions focus on only a few aspects of the company and strategy discussions tend to highlight short-term incremental performance improvement rather than the long-term, corporate direction. Short term 44 percent of reports do not look beyond short-term initiatives when discussing strategy…
  6. Focus risk analysis on what’s important for the future The quality of risk discussions is variable. Many risk discussions appear to have been published in order to comply with regulations rather than to help investors understand how the most important risks are being managed. Common issues were failure to focus on the risks that are most relevant to business value, and not addressing risks relating to growth strategies. Risk overload Risk disclosures in four countries identified an average of over 20 ‘key’ risks each, suggesting a lack of focus on the most important matters…

The report backs all of this up in some detail, generating all kinds of interesting observations along the way. It barely mentions IFRS (although the full annual financial statements were within the scope of what was looked at) or integrated reporting – the focus is on the quality of reporting under key headings, regardless of whether it arises voluntarily or as a response to local requirements (on the latter front, the report makes the familiar observation that worrying about compliance may often crowd out useful information, as for example in the point about highlighting too many risk factors). As such, it certainly provides a useful reference point for Canadian preparers, as for those elsewhere.

The problem, perhaps, is that this might all seem to imply a perfect balance that is seldom seen in practice and that KPMG, one suspects, would be reluctant to try to define. In this regard, it seems disingenuous, for instance, to observe as cited above that “the length of financial statements is often driven by national practices rather than the specific circumstances of the business,” as one highly doubts that KPMG’s application of materiality in assessing compliance with IFRS is significantly different from that of the other firms. It may seem contradictory to observe under 5 above that descriptions of business models don’t focus on enough things, while lamenting under 6 above that disclosures of risks focus on too many. Isn’t the corporate landscape littered with entities whose managers thought they were focusing on “the most important matters,” until one of the “less important” ones came up to bite them?

And who is “the investor” against whose needs these are being measured? Is he or she an actual person whose decisions might have been materially different if some of the trains of thought in the report were pursued, or just a mythical construct? As I’ve asked before, if the corporate reporting of large and complex entities turns out to be large and complex, is it really best to seek to rein that in, or rather to use new technologies to help curate and sift through the complexity? Is it solely on the part of corporate reporting that ‘room for improvement” exists, or should users be taking more responsibility for their own assessments?

‘We hope you find our analysis to be a useful contribution to this debate,” say the authors of the report. Indeed it is. But it feels like the debate is crammed by now with useful contributions. Where is the moderator who will force the conversation toward a practical resolution? Or is the debate essentially fated to run forever…?

The opinions expressed are solely those of the author

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