KPMG’s Mark Vaessen blogs on a discussion about moving investors to a longer-term view
We all know that short-termism from investors can have negative effects, including swings in the value of stock and under-investment.
But is there anything that can be done about it?
Encouragingly, at a panel discussion with investors that we hosted in Kuala Lumpur recently, the answer appears to be ‘yes’.
First, there was clear consensus among discussion participants about what drives a short-term approach. It is perhaps ironic that the reporting requirements placed on companies designed to boost transparency and openness, such as quarterly reporting and results forecasts, are often behind it.
Analysts and investors can become wholly focused on the next quarter’s forecasts. But as Amy Borrus, Deputy Director at the Council of Institutional Investors (CII) in the US, said, there is a view among many business leaders in the US and Canada that “companies should not feel obligated to issue earnings guidance”.
But if reporting is to some extent behind the problem — it can also be part of the solution.
Cleary, while reporting of the financials is central, the numbers on their own don’t provide the full picture. That is why non-financial reporting is also a vital part of the puzzle, helping investors form a more fulsome view of an organization’s performance and prospects — and so, in part, combat the short-term approach.
For Blair Cowper-Smith, Chief Corporate Affairs Officer at Ontario Municipal Employees Retirement System (OMERS) in Canada, non-financial reporting has to be married to financial reporting in order to “tell a full story”.
Yoshikazu Maeda, Head of Responsible Investment, Governance for Owners; Amy Borrus, Deputy Director, Council of Institutional Investors; Blair Cowper-Smith, Chief Corporate Affairs Officer, Ontario Municipal Employees Retirement System (OMERS); Mark Vaessen. Partner, KPMG in the Netherlands and Project Lead, Value of Audit.
But is non-financial reporting working as well as it could?
Yoshikazu Maeda, Head of Responsible Investment at Governance for Investors in Japan, said that sometimes “critical information is just lacking in corporate reporting”.
Amy Borrus meanwhile said that there was a need for more “standardized” disclosures to aid comparability and consistency.
That is why I believe it is now critical for a global body to take the lead and start coordinating the various non- financial reporting initiatives out there.
I hope that we will see a consensus emerging very soon as to which party or parties would be best placed globally to take the lead.
However, it’s not only about waiting for a new set of rules from regulators.
It’s also about ongoing engagement between companies and their shareholders, which Blair Cowper-Smith described as “a key part of making sure investors get more information about what businesses are actually doing”. For Yoshikazu Maeda, this helps “fill the gap” between what companies “really are” and what appears in their corporate reporting.
On that front, some useful suggestions were put forward. Yoshikazu Maeda suggested that CEOs should set out their vision for the next 5-10 years to give investors longer-term insight. Blair Cowper-Smith said that companies should have to give their answers to a number of standard questions so as to achieve “more specificity” about strategy.
Another important area with the potential to really make a difference is a subject close to my heart — expanded auditor reports. These have been used in the UK and the Netherlands for a number of years now and are rapidly becoming more widespread. Indeed, very recently, the SEC approved their introduction in the US — a really key development, given the significance of North America as a market.
Expanded auditor reports open up the ‘black box’ of what we do as auditors and give investors a hook for further communication with management. They also trigger more discussion with audit committees — who themselves are starting to publish their own reports. This is another positive in terms of giving investors more information.
There are no simple, quick fixes. But in my view, things are starting to move in the right direction. If this can be capitalized on, maybe we can increase the pace of change.
Pru Bennett, Head of Investment Stewardship APAC, BlackRock; Amy Borrus, Deputy Director, Council of Institutional Investors; Roger Tay, Head of Audit, KPMG in Singapore; Mark Vaessen. Partner, KPMG in the Netherlands and Project Lead, Value of Audit.