a shareholderfriendly financial report

  • Date:01 Oct 2005
  • Type:CompanyDirectorMagazine

A shareholder-friendly financial report

 

More Australians are share owners than ever before, according to the 2004 ASX Share Ownership Study which showed that 55 percent of adult Australians (8 million people) now include shares in their investment portfolio, up from 51 percent last year (7.4 million people).
Commensurate with this increase in share ownership has been the need of retail investors, in particular, to acquaint themselves with the financial detail of the companies in which they are investing.
In the past, this task was made increasingly difficult through the use of professional jargon and terms and in the segmentation of this detail in financial reports that were contained in the annual report.
The reality was that financial reports were a product of the specialists who produced them rather than a document readily accessible to the ultimate users and beneficiaries – investors.
The AICD’s Reporting Committee has been looking at this issue over the past year and in conjunction with PricewaterhouseCoopers, the AICD launched its Shareholder Friendly Financial Report (SFSR) initiative last month.
The Shareholder Friendly Report is part of a broader look on the subject of how directors can communicate better with their shareholders.
A paper issued by the AICD in November 2004 entitled The Usefulness of Financial Statements outlined director concerns that a combination of Australian accounting standards and regulatory rulings were making financial statements increasingly complex and less meaningful, especially for shareholders who do not have detailed accounting and financial experience. In exploring this topic AICD also considered the wider issue of performance reporting to shareholders.
A further factor leading to production of this report was the trend in reporting practice influencing directors to demonstrate compliance with the law, rather than provide a picture of clear accountability.
AICD has long been concerned with this move towards “compliance reporting”. Directors have a duty to inform shareholders of their stewardship of the company. “Compliance reporting” creates a framework in which shareholders rely on intermediaries to obtain an appreciation of the direction and performance of the company.
“Companies need to provide information to the large number of retail investors in a form that is easier to understand than the reports used now.” says AICD chief executive, Ralph Evans.
“The Shareholder Friendly Report is a plain English, easy to digest document to communicate financial and non-financial performance goals and results from a company’s directors to everyday shareholders.”
Written from a non-technical perspective, the Shareholder Friendly Report provides a comprehensive scorecard on the company’s overall performance.
It reports not only the historic results and trends against key financial and non financial strategies, but also the company’s outlook for the future. Summarised financial information, with limited explanatory notes, is confirmed by both the directors and the auditors as being consistent with the full annual statutory financial report of the company.
Technical references necessary for full consideration of financial information, such as ratios, are summarised and explained in break-out boxes, demystifying the jargon with which shareholders are traditionally bombarded. For shareholders who wish to conduct deeper analysis, the full annual report, produced to satisfy legislative and regulatory requirements, is still available – either online or in hard copy.
The report promotes greater shareholder transparency through requiring detailed and descriptive explanations rather than a “check the box” approach to satisfying regulatory or legislative requirements and sets an example of practical, “good governance” for the company.
Other industry associations such as the Australian Shareholders Association have welcomed the AICD initiative.
“ASA welcomes the Australian Institute of Company Directors and PricewaterhouseCoopers Shareholder Friendly initiative,” says ASA corporate information officer Fiona Balzer. “We strongly support the development of a type of annual report where directors take responsibility for providing meaningful information to shareholders in plain English.
“The Shareholder Friendly Report initiative, in the hands of proactive directors, will go a long way toward meeting that need.”
The key features of the report are:
• The language is not overly technical
• Tables and graphs are easy to read and are accompanied by thorough explanations
• Financial information is understandable and in a more informative form than statutory layouts
• Describes company performance against stated corporate strategy
• Written specifically to inform as a “performance report” from the stewards of the business (board and management) to the shareholders
• The report is endorsed by the auditor as consistent with the full financial statements contained in the annual report
• Summarised divisional reports are included to show what is happening within the company. They are still performance reports, and in a format consistent with the CEO’s report
• Does not require interpretation by finance experts to be meaningful to the broad base of Australian shareholders
• Designed to provide an understanding of the business rather than act as a list of how a company complies to regulatory requirements
• Includes overview statements preceding each section
• Defines financial and non financial measures used
• The report’s framework is based on PricewaterhouseCoopers’ decade of research into the information needs of corporate stakeholders – “the PwC ValueReporting” framework.
The report is also broken down in easy to use sections such as:
• Chairman’s review of strategy and governance, and a CEO’s review of operations and risk management – including an evaluation of past performance, current direction and an outline of quantified future targets, key assumptions and sensitivities
• Summarised Financial Statements – presented in a more “user friendly” format to statutory layouts.
• Directors’ declaration – assures shareholders that in the board’s opinion, the report is presenting a true financial picture of the company and that the company is not at risk of insolvent trading
• Auditors’ report – assures shareholders from an independent perspective that the summarised financial statements give an accurate reflection of the company’s financial affairs as presented in the fully compliant annual report
• Summarised divisional reports – give shareholders insight into what is occurring within key areas of the company.
Details surrounding the legal structure, accounting policies and other such “standing data” have been deliberately omitted, insofar as they do not contribute directly to a picture of company performance. Instead this information would be freely available on the company website or available on request in a plain paper format.

 

Members are encouraged to go to www.companydirectors.com.au/index.html to download a copy of the Shareholder Friendly Financial Report