With chief executives toppling – the shareholder is king this spring
IT’S been four years since the darkest days of the global financial crisis, but its reverberations continue. From all sorts of different stakeholders, numerous reports and reviews have been launched to look into the causes of the crisis and there have been plenty of recommendations for reform to prevent lightning from striking twice. Up until recently though, one set of voices has been notably absent from the debate: the investors.
This matters – investors are the owners of the world’s businesses and are in a prime position to influence the management of those businesses in such a way that protects their investments. But the role of the modern investor is often overlooked; the fact that what some are calling the “shareholder spring” is only just beginning – with a handful of votes to register disquiet with executive pay – draws attention to investors’ earlier silence.
True, investor voices aren’t exactly homogenous, which can make it hard for investor concerns to cut through, but at the same time, policymakers usually do not see investor opinion as a starting point for reform or a reference point against which to prioritise issues. Instead, what usually drives reform programmes are the plethora of individual responses from multiple regulators and jurisdictions, each with their own aims. The consequent piecemeal approach to reform can cause problems further down the road.
THE BIG PICTURE
This isn’t to criticise regulators: individually they do a good job. But by considering issues from their own particular perspective, there is little focus on the inter-relatedness of issues, their impact on other jurisdictions, or their relative priority. Investors, on the other hand, tend to be able to see the bigger, global picture. Liz Murrall, chair of the International Corporate Governance Network’s accounting and audit practices committee, believes that: “Everybody seems to be running at the corporate reporting model from every direction. We have national standards setters setting requirements for the front of the accounts, and international standards setters setting requirements for the back. This is resulting in a framework that is not cohesive.”
Re-engaging with investors, bringing their views to the fore, and emphasising their role in corporate accountability will help develop a positive agenda for change. It will help strengthen reporting, assurance, and corporate governance, generate an overview of all issues, promoting a more integrated picture of the financial and accounting system, and provide structured evidence to inform wider debates in business, the accountancy profession, and the political sphere. This can only be in the public interest.
ACCA has repeatedly called for a focus on the investor, whether in corporate reporting or corporate governance, and our Standards for Business focus highlights the need for integrated standard setting. We’ve recently been working with Grant Thornton globally to collect the views of investor groups on assurance, reporting, and governance systems. Several key themes have emerged from our discussions: the need for a proper understanding of investor needs; the need for greater investor participation in an integrated reform agenda; and investors’ desire for higher standards of corporate governance, the broadening of reports, and expanded assurance and audit.
One of the biggest problems for investors is that their basic needs and assumptions are often overlooked or misunderstood by policymakers. For example, investors we’ve spoken with are irritated that some non-investors have taken a poor view of short-term investments, a form of investment investors believe is essential, as part of an overall mix, for properly functioning markets.
Likewise, despite ostensibly being the ultimate customer in financial reporting systems, investors believe their needs are inadequately considered in the reform process. Liz Murrall told us that: “One of the faults there may have been with the accounting standards setters was that often it was difficult to see if what they were proposing was a noticeable improvement to the information that was reported to the capital markets, and whether or not, in setting their priorities, that had been a consideration.”
INTEGRATED REPORTING
While there were criticisms of the status quo, there were also suggestions on how to improve matters: integrated reporting and corporate governance were identified as priority areas for reform.
Integrated reporting – the bringing together of all material information about an organisation in one report – was particularly favoured. Claudia Kruse at APG Investments says “we have taken a very strong view that integrated reporting has to be taken forward. It’s important [that] the standard setters are fully behind it, particularly in the US, so that it gains further momentum.”
Turning to corporate governance, investors almost uniformly see continuous improvements in standards as essential for maintaining their confidence in companies’ reports. Specifically, investors identify a number of areas of high importance: strong internal audit; consistent, high-quality audit committee reporting; truly independent independent directors; the beefing up of risk disclosures; and the tightening of bank regulation.
As well as praising the role of the internal auditor, investors also value the role of the external auditor, but, like ACCA, they feel the scope of audit and reporting can be extended and enhanced. Dr Ian Wood from AMP Capital explains the investors’ problem: “Auditors… get asked to say whether [information in the annual report] is a fair and reasonable description of the company at a particular point. They might say ‘yes, what’s depicted is reasonable.’ The problem is, that doesn’t mean it’s right from an investor’s perspective. The auditors can say what the company is hedging, but they are not in a position to say whether it’s a good approach to hedging.”
INVESTOR RESPONSIBILITY
There is an acceptance too, that investors need to take on more responsibility for raising their profile. More pro-active engagement from investors with standard setters is certainly something that has been more noticeable recently, exemplified in the UK by the FRC’s Financial Reporting Lab, a project aimed at bringing investors and companies together to discuss issues in reporting. Investors we’ve spoken to also acknowledge their responsibility to invest wisely – supporting companies that take diligent approaches to corporate governance, for example – and share best practice.
Raising the volume of investor voices leaves some important questions that need answers: how can standard setters develop a more co-ordinated agenda? How can the voices of investors be more clearly heard in the financial reporting reform process?
Adjustments to the current financial reporting framework are needed, and will be made. If they are to be relevant and to create value, then greater and more co-ordinated thought needs to be given to the needs of investors around the world and the reforms that would most increase their confidence in global financial markets. As Steve Maslin, a Grant Thornton partner, argues, “Investors are willing to explore new approaches to developing financial reporting reforms. They support the concept of a more integrated process that emphasises the interrelated nature of accounting, reporting, auditing and corporate governance standards and regulations. Any proposals for reform must begin with a sound analysis and understanding of the challenges investors face and their most urgent priorities for improvement.” Whatever happens, investors need to be listened to.
Andrew Leck is head of ACCA UK.