Spotlight on investor outreach
Author: Robert Bruce
18 Octrober 2010
Investors are often described as the primary users of financial statements. Yet few investors have the time or the inclination to get involved in the development of new IFRSs. How to bridge the gap? Robert Bruce investigates. His views are his own and may not represent those of the IASC Foundation or the IASB.
Traditionally the arguments about the extent of investor involvement in the formulation of financial reporting standards have tended to be expressed in clichés. On the one hand people would say that standard-setters sit in ivory towers. And on the other hand it was argued that analysts are far too busy hour-by-hour to devote any longer term thinking to what might be useful. But structural and cultural changes in how the whole process works now look to be producing real change and much better understanding and engagement.
What has happened is that the two sides to the debate, the standard setters and the analysts, have both started working much harder at recognising the problems and trying to do something about them. Peter Elwin is Head of European Pension Strategy at JP Morgan Cazenove and is a founder member of the Corporate Reporting Users Forum, (CRUF) which, formed five years ago, seeks to bring together members of the analyst community and through discussions bring their views to bear on the standard setters. It now has groupings which meet in London, Frankfurt, Sydney, New York and Tokyo. ‘The structural issue that the standard-setters face is that investors aren’t that interested until it hits the figures’, he says, ‘and then they throw up their hands and say: “What is this stuff?”
Luci Wright was the IASB’s
investor liaison manger
until May 2011
CRUF is trying to change that, and on the other side of the traditional divide, the standard-setters are trying to encourage and bring about change as well. The recently appointed Investor Liaison Manager at the IASB is Luci Wright. ‘I am heartened by how positive people are all over the world’, she says. The outreach process is changing radically. ‘In the past outreach was often done too late’, she says. ‘Once you get to the exposure draft stage the final result is less likely to look very different'. Tanya Branwhite, Divisional Director of Research for Macquarie Capital Securities in Australia and a member of the Australian CRUF, applauds the efforts. ‘If the IASB goes through their processes and gets no input then we cannot complain’, she says. ‘You can’t throw your hands in the air and say we have no time to do it’. And the changes in attitude are having an effect. ‘The one thing that is different this time compared to the crisis in the 1990s’, says Terri Campbell, senior investment manager at Liberty Mutual Group in Boston and co-chair of the US CRUF, ‘is that then it felt like the standard-setters just issued edicts and we would grumble that we weren’t part of the dialogue. This time we have had the outreach from the IASB and FASB. That’s a really positive change’. Patrick Finnegan is an IASB Board member and former Director of the Financial Reporting Policy Group at CFA Institute Centre for Financial Market Integrity. ‘There has been quite a bit of activity and concerted effort by organisations like the CFA Institute and others in participating in dialogue with the regulatory community’, he says.
‘It is a challenge’, says Antonio Vegezzi, IASC Foundation Trustee, President, Capital Italia Fund and former President and Director, Capital International in Switzerland. ‘Few investors have the time or the inclination to submit detailed comment letters on new accounting standards that may not come into effect for many years. Standard-setters need to move into the world inhabited by investors, not the other way round. That means different ways of engaging, using different language, with different timescales and feedback mechanisms’, he says. ‘That is why the Trustees have prioritised enhancing the representation of investors at all levels – the Trustees, the IASB and its various advisory bodies’.
All this is happening in a time when the theme around the world is that the voice of the user, the investor, needs to be better heard. The G20 have made it plain that they want to see better information better communicated to investors. The relevant US regulatory body, the Securities and Exchange Commission (SEC), continues to emphasis the needs of investors. The SEC has made it plain that a fundamental issue in future acceptance of IFRS as being acceptable for use in the US will be its usefulness to US investors. The need for effective and timely outreach from standard-setters and better, more coordinated, input from investors has never been greater. ‘As a result of the changes we have made, investors now have the front seat. I hope the investors see this. We want to be proactive’, says Antonio Vegezzi.
‘The voice of the investor is not heard as loudly in the reform agenda’, says Steve Cooper, IASB Board member and onetime head of valuation and accounting research at UBS, ‘particularly from senior higher level people. There is lots of input from specialist analysts in specialist areas. It is not the same from senior investment officers as from senior preparers. It is at that level that we don’t hear as much. One or two individuals may be active, but the organisations themselves are not. We need to get people more involved in what we do’. This is what Luci Wright is seeking to change. It is about dispelling the perception of remoteness and actively encouraging participation. ‘That is why we have recently launched Investor Perspectives – a series of investor-focused email alerts written by former analysts on the IASB for the investor community’, she says.
But complexity will still remain. Investor needs are not uniform. Investors themselves have multiple motivations, pursue very different strategies and operate in very different markets. Terri Campbell uses the phrase ‘like herding cats’ when describing how the US CRUF tries to reach a consensus view. ‘Different investors are investing with different agendas’, she says. ‘Something might be beneficial to a mutual fund with a long-term strategy rather than someone at a hedge fund who can short the stock’. Some investors dislike the way that reporting is leading to greater volatility being shown while others prefer the volatility because they can benefit from the trading opportunities it creates. ‘We all want more disclosure’, says Campbell, ‘but what? We all want nice clean rules but the reality is that it is much messier. If investors are holding long-term how valuable is it to see the short-term volatility compared to a bank which is holding the stock on a very short-term basis. How do you justify the trade-off?’
This is where investor needs diverge from the traditional view that the system needs to be wholly coherent. David Phillips is Senior Corporate Reporting partner with PwC in the UK. ‘Investors’, he says, ‘are in the camp of not wanting huge change. They are not hung up on technical purity. They are more pragmatic. They want the things that are causing them problems to be fixed’. ‘Standard-setters’, says Peter Elwin, ‘need to be problem-solvers’. ‘The IASB’s task is a difficult one’, says Tanya Branwhite. ‘From a user’s perspective I’d rather end up with a set of standards that we believe in and can use rather than convergence to get a complete uniform set of global standards’. It is pragmatism again. ‘My concern is that we look at individual proposals but we get lost in the minutiae’, she says. ‘Our critical question is what is the philosophy and what is the end-point? What are they driving to achieve? We don’t fully understand that’.
‘The biggest challenge’, says David Phillips, ‘is around the difference between the slightly academic approach, the conceptual framework and all that, and investors who are much more interested in the maintainability of earning streams and key data points and if not available in the mainstream will roll up their sleeves and go elsewhere to uncover the information’. There is a recognition of this argument at the IASB, ‘We can make it easier for the analyst community’, says Steve Cooper. ‘So instead of asking them a full range of questions on an exposure draft we can ask them more about specific issues, the key issues from the investor perspective. We can modify our message to analysts’. ‘We need to hear criticism from investors if they are in disagreement with us’, says Antonio Vegezzi.
The solution is keep up the momentum of bringing the standard-setters and the users closer together in a dialogue which should make the process more effective. But in the end there will always been some friction. And people have to be realistic about that. ‘There will always be someone who doesn’t agree’, says Luci Wright. ‘You can’t please everyone’. And that has to be accepted. ‘If it was straightforward no one would be arguing about this’, says Terri Campbell.
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