A Clearer View

The EU's Transparency Directive came into force last year. So it is inevitable that the focus will once again fall upon the CFO's role in effectively communicating with stakeholders. The Transparency Directive seeks to harmonise the way in which Europe's public companies present and distribute investor relations and market information.

Richard Carpenter is a strategist at reporting consultancy Radley Yeldar. He helps companies comply with the various rules governing disclosure. Recently, his biggest task has been to make sure his clients understand the new financial reporting calendar.

"The key element of these new rules is the change to the periodic reporting timetable and the introduction of interim management statements, which are quarterly reports by any other name," he says. "So it's changed the reporting deadlines and reorganised the management statements for those not producing quarterly reports. It also made prelims voluntary, though that's a minor thing as 99.9% of companies will still do it."

Some of the changes are relatively minor, and show no change from the previous approach, which mandated that boards report any material news immediately. But the method of reporting has seen a thorough shake-up. Matthias Erler is deputy CEO at the French IR consultancy Hugin. He says the directive will mean that CFOs will need to be more aware of what they need to tell investors and the most efficient ways of doing this.

"What needs to be remembered is that this is about facilitating transparency and giving access to all stakeholders to the right information. It's also about price-sensitive information. So that means all information that can have an impact on the share price," he explains.

Company size matters

What makes the Transparency Directive different is that it has been driven by regulators, but in the past it was led by best practice. As so often in corporate reporting, blue chips have led the way.

"It is a change for many small and mid-cap companies that now must be more transparent and comply with the rules," Erler says. "I can imagine for small caps it is difficult to make sure they are compliant so they will need to get good advice and help with it. Of course it's easier for the blue chips since they have larger IR teams to cope with this."

To prepare, companies need to remember that the regulations and implementation are different from one country to another. Since 2002 UK companies have to distribute through a primary information provider (PIP). To take the UK, then you see the regulators have certified a number of professional providers, of which Hugin is one. The system in the UK is based on PIP, usually certified by an independent auditor. PIPs distribute the news to secondary info providers (SIPs). In the UK, companies use these to fulfil the requirements of the directive.

Account users

The debate over the form corporate reporting should take often focuses on those producing the reports. But what of those who use company accounts to make significant investment decisions?

Paul Lee is a director at Hermes Equity, which currently manages a portfolio exceeding £45bn. He also contributes to the Corporate Reporting Users Forum, a professional group set up to ensure investors' views are heard in the reporting and governance debate. Lee says despite the regulators stated aim of simplifying reporting and encouraging more beneficial disclosure, few corporates in Europe were convinced.

"I think companies still have more work to do," Lee says. "Some of the changes that have come through have been pretty helpful and they set out a roadmap for companies to follow and to grab the opportunity that's there. But thus far we haven't seen many companies grabbing that opportunity and taking this forward."

Risk is the key failing as far as Lee is concerned. In his view, shared by many investors' groups who use accounts, while the compliance culture is being driven by regulators, the risk reporting aspect is being driven by lawyers – generally never a good situation.

"With the liability situation, it doesn't need to be the case," says Lee. "Risk reporting in far too many cases is a long list of all sorts of issues that might go wrong."

To many, the current exhaustive boilerplate approach detailing every single risk attendant on the business looks like the list of risks an investor might find in a US prospectus, covering absolutely every eventuality of what might go wrong. In Lee's view, risk reporting is in danger of becoming perfectly meaningless.

"It comes down to the level of companies saying, in essence: ‘We might make rubbish products and no-one will buy them." And that's not what we as users need from risk reporting," he says. "We need to know the four or five key risks that the company is facing that keep management awake at night and how they are managing those risks."