Smaller company reporting
At the start of this month, the FRC launched a programme to improve the quality of reporting for smaller companies. This was based on research into AIM-quoted companies with a market cap of at least £5m, and FTSE SmallCap companies with a market cap of £20m-100m.
As capital markets are increasingly globalised, companies now must compete with their international counterparts for investor funds. For smaller companies with a lack of detailed information resource (such as analyst reports), investment is more likely if they can produce better reporting.
Recent research shows that good reporting can also have an impact on a company’s credit rating, according to the FRC’s discussion paper Improving the Quality of Reporting by Smaller Listed and AIM Quoted Companies, published 2nd June 2015. However, many smaller company investors are unsatisfied with reporting quality; even for AIM-quoted companies, subject to less stringent reporting requirements. When discussing this research at an event on 9th July 2015, the FRC and investors alike agreed that whilst it would be inappropriate for smaller companies to be subject to the same reporting requirements as those with a premium listing, elements such as the business model and strategy can help smaller companies to be taken more seriously by investors.
What do we need to change?
Better reporting needs simpler reporting requirements for smaller companies. The FRC doesn’t just want companies to report better; they want them to want to report better.
While stripping regulation regarding financial disclosure for smaller companies reduces comparability, the FRC believes simplification of IFRS standards will help. It’s the carrot vs. stick approach: encouraging smaller companies to improve the quality of their reporting, rather than threatening them to improve it through more burdensome regulation.
Specifically, the FRC found that investors are interested in the business model and principal risks, as well as cash flow statements and the underlying financial performance of the company.
How to improve the quality of smaller company reporting?
Tell your company’s story. As was mentioned at the 2015 IR Society Conference, this would take an hour in a conversation, not a minute. Likewise, tell the story of who the company is, what it does and how it creates value; and what the drivers are throughout the report, rather than isolating the corporate story on a single page. Also ensure that the story is consistent across all communications - although certain aspects may be emphasised in different places – in order to cater to different audiences (such as retail investors, institutional investors, employees and host governments).
Quality, not quantity: rather than providing more disclosure leading to lengthy reports, aim for better disclosure. Tailor content to company-specific circumstances, rather than spouting boilerplate information and policies.
Draw on the whole team. The Annual Report shouldn’t be a one-man mission, left to someone in Finance who must draft the CSR Review and other sections outside their job description. Smaller companies often can’t spare the resource for a person (let alone a team) dedicated to little other than the Annual Report project for several months. Rather than asking others from around the company to contribute a particular section, get them to engage with the whole narrative to inject their angle into the story. Not only will this reduce any personal burden; it will also bring together a diverse range of approaches to thinking about the business. Finally, get the Board on side: their interest in and engagement with the project will aid disclosure around governance.
Have a look at some of the work we have done with smaller companies.