Reporting: Issue 2 - EY · make a difference by helping our people, our clients and our wider...

ReportingReportingReportingReportingReportingReportingReportingReportingIt’s more than the numbers issue two | april 2012

Out of the shadowsThe growing drive to report on human capital

On the roadHow to prepare a compelling investor roadshow for different parts of the world

Efficiency driveAn effective finance function has become a source of competitive advantage for global companies

Early adaptersWhy it’s important to take

a strategic approach to sustainability-related risks

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The world’s climate and ecosystems are changing at an unprecedented rate. Experts predict that, in the next decade, the impact on the supply of energy and water will fundamentally change society and the global economy. How will your business adapt to the new opportunities and risks?

Find out more at ey.com/sustainability

See More | Sustainability

Let’s have a business discussion

about the weather.

Welcome to the second edition of Reporting.From our meetings with businesses around the world over

the last few months, it is clear that universal uncertainty regarding a return to positive economic outlooks in developed markets continues to consume boardroom time. News bulletins are dominated by the uncertainty surrounding the implementation and effectiveness of the political solutions that will drive economic growth. In our interconnected world, the fiscal compact in Europe will affect markets far beyond the continent’s geographical boundaries. In developing economies, the deceleration in growth is directly related to decline in export markets, so double-digit growth can no longer be relied on.

Liquidity challenges still exist, but some of the stress in the system has been reduced through quantitative easing. However, high levels of unemployment mean the prospects for growth in many Eurozone countries remain bleak, hampering efforts to address debt levels (more detail is available in Ernst & Young’s quarterly Eurozone Forecasts). There are small signs of recovery in the world’s largest economy, the USA, but high unemployment and mixed signals from different market indicators, so there’s no case for riotous optimism.

Companies that operate internationally have a significant role to play in recovery. Current lack of confidence is holding up

business investment, which in turn delays a return to growth. Credit tightening by banks is disproportionally affecting small and medium-sized enterprises – traditional engines of growth.

In these challenging times, companies should focus on how they build the confidence of stakeholders for investment in growth and change. As companies prepared their year-end reports, we noted a universal focus on cash and debt and a more conservative approach to accounting. All of this is in tune with the times. Our article on balancing cash and debt on p9 explores this in more detail. We see that companies continue to maintain their cash reserves rather than investing in acquisitions and additional R&D. Arguably, a more expansive and long-term approach could positively impact global capital markets.

The poll (p8) summarizes a survey carried out with investors on the information they will focus on in interim reports. Respondents clearly place equal value on both the record of financial performance and the narrative explaining business strategy and focus for the future. They want to be confident that companies are taking charge of their own destiny and are hunting down opportunities for growth – using their cash reserves to create enduring businesses.

Whether driven by investor demand, regulatory intervention or common sense, companies that take reporting beyond compliance and tell the full performance story will help rebuild the confidence that global capital markets so keenly desire.

I would like to thank those of you who took the time to offer feedback on our first edition, published last November. Please register your comments on this issue at www.ey.com/reportingmagazine/feedback. Your views will be very welcome.

CHRiSTiAn MOuiLLOnChristian Mouillon is the Global Vice Chair of Assurance at Ernst & Young

ernst & Youngassurance | tax | transactions | advisory

About Ernst & Youngernst & Young is a global leader in assurance, tax, transaction and advisory services. worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. we make a difference by helping our people, our clients and our wider communities achieve their potential.

ernst & Young refers to the global organization of member firms of ernst & Young Global limited, each of which is a separate legal entity. ernst & Young Global limited, a uK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com.

© 2012 eYGM limited. all rights reserved.eYG No. au1142

this publication contains information in summary form and is therefore intended for general guidance only. it is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither eYGM limited nor any other member of the global ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. on any specific matter, reference should be made to the appropriate advisor.

the opinions of third parties set out in this publication are not necessarily the opinions of the global ernst & Young organization or its member firms. Moreover, they should be viewed in the context of the time they were expressed.

No rights-managed images in this magazine expire before 1 august 2012.

in line with ernst & Young’s commitment to minimize its impact on the environment, this

magazine has been printed on paper with a high recycled content.

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april 2012 Reporting [02/03]

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04Watching briefKey issues for reporters

06Ratings and riskpaul Coughlin of standard & poor’s gives an insight into the ratings agency’s approach and explains how it has changed since 2007

08The polla survey of international investors found that, when it comes to interim reporting, they rely on a combination of numbers and narrative to make investment decisions

09Balancing actwe investigate how companies are balancing cash and debt in the current economic climate, and how they are communicating this balance to stakeholders

12Early adapterswhy it’s important to take a strategic approach to sustainability-related risks

16Efficiency drivewe discover why, in a global economy, an efficient finance function has become a source of competitive advantage

20Out of the shadowsinvestors are increasingly interested in the worth of a company’s human capital, even though it isn’t traditionally accounted for. so how do you place a value on your workforce?

25The buy sidepedro Bastos, Ceo of HsBC Global asset Management in Brazil, on what he looks for in a potential investment

26Making sense of synergiesFor CFos, reporting the synergies achieved by an M&a deal can pose a challenge

285 things i’ve learnedFinnish-born Hannu ryöppönen explains how he’s learned to adapt his reporting style to cater for audiences around the world in his 35-year career

30On the roadwe ask the experts how to prepare an effective investor roadshow and find out what presenters can expect from audiences in different regions

34… and morerecent publications from ernst & Young, plus books that may be of interest

“Don’t try to be too smart. Rather, be honest, and if you don’t know, say so”

Finance function effectiveness

Sustainability-related risks

Lessons from a CFO’s globe-trotting career

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Watching brief

Convergence and standard settingrepresentatives from the us securities and exchange Commission (seC), the Financial accounting standards Board (FasB) and the international accounting standards Board (iasB) all indicated at the aiCpa National Conference in December on Current seC and pCaoB Developments that the seC could incorporate iFrs into the us financial reporting system but retain us Gaap.

the iFrs Foundation published two reports in February evaluating the corporate governance of the iFrs Foundation and the composition of the iasB. the recommendations include limiting the membership of the Monitoring Board (the oversight body representing capital market authorities) to jurisdictions committed to the domestic use of iFrs in their capital markets that participate in the funding of the Foundation. the exact meaning of “domestic use” is yet to be determined. the reports emphasize the Foundation’s commitment to global adoption of iFrs as developed by the iasB and make it clear that convergence may facilitate adoption but is not a substitute.

seC Chief accountant James Kroeker has more recently implied that there was movement toward an “endorsement” proposal, whereby iFrs would be incorporated into us rules, with the us retaining the authority to evaluate future global financial reporting standards. this is similar to the approach described by the seC staff in a paper last year. No details have yet been released.

while the Boards (iasB and FasB) continue to make progress on the joint projects, their commitment to arriving at the best solution in the long term means that several projects are being re-exposed for comment, including those on revenue, financial instruments and leases.

of institutional investors said that, among the sources of information available in the next round of interim reporting, they will rely on management presentations to help inform their investment decisions.

62% To find out more about investor presentations and roadshows, go to p30. You can find more results from the survey on interim reporting on p8.

WATCHINg bRIEF


a recent report from the organisation for economic Co-operation and Development (oeCD), Corporate Loss Utilisation through Aggressive Tax Planning, can be taken as an early warning that tax authorities everywhere will be increasing their levels of scrutiny in this area.

participating countries say they have encountered a number of tax planning schemes on losses, and the study distinguishes four categories of detection strategies in this area:• Disclosure and reporting• investigations and audits• Domestic and international cooperation• Data analysis

AGGRESSiVE TAx pLAnninGthe report confirms that tax administrations in many countries are looking more closely at corporate loss utilization and increasingly consider schemes that involve tax losses as aggressive tax planning (atp).

at the same time, there are changes at the legislative level. while some countries previously widened their rules on carryforward or carrybackward of losses to help companies exit the financial crisis, there are now increasing restrictions on this. international cooperation and the exchange of information are growing.

the report issues four recommendations to countries:

• improve data on losses and evaluate the economic and revenue impact of temporary measures on the use of losses for tax purposes, with a view to deciding whether they should be abolished, extended or made permanent

• Consider introducing or revising restrictions on the use of losses, including built-in losses (these are not effectively suffered losses but due to application of a different value in the books than the fair market value), in cases of mergers, acquisitions or group taxation regimes, and on the multiple use of the same loss

• share intelligence on aggressive tax planning schemes on losses, their detection and response strategies

• Consider increasing the levels of cooperation with other tax administrations and introducing or revising disclosure initiatives targetedat atp schemes on losses

AddiTiOnAL CHALLEnGESultimately, running efficient tax structures is a key to success for every multinational enterprise and, to achieve that end, tax planning is necessary. However, there is no clear distinction between what the tax authorities see as valid and aggressive tax planning and, unfortunately, the oeCD does not provide a definition of what constitutes aggressive tax planning.

The OECD publishes corporate loss utilization report

To read about the latest developments in measuring the value of human capital, go to p20.

the closer monitoring of the tax treatment of losses and the increasing fight against aggressive planning schemes brings additional challenges. to comply with the understanding of aggressive tax planning in different countries, multinational enterprises must continuously survey developments and make sure their tax positions are in line with local requirements.

THE BEnEFiTS OF COLLABORATiOnthe report also confirms that tax administrations are increasingly developing cooperative compliance programs. these involve the tax administrator and the taxpayer agreeing to collaborate in a more open and transparent way, resulting in a lighter audit touch and a more effective targeting of limited tax administration resources.

a number of countries (such as the Netherlands, australia and the us) have introduced such programs, and the positive experience is making others follow. these programs are successful because they offer incentives for compliant behavior rather than relying on the threat of penalties. tax authorities receive the relevant information at an early stage, and businesses gain legal certainty and can avoid costly disputes.

“Staff are your greatest asset and liability. It would be bizarre if you didn’t manage your greatest asset or liability, and to do that, you must be

able to monitor and measure it”

paul Coughlin, executive Managing Director of standard & poor’s Global analytics & operations, gives an insight into the ratings agency’s approach

Com

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Ratingsand risk

What were the main problems in rating structured products in the run-up to the financial crisis?Between 2005 and 2007, standard & poor’s (s&p) was aware of the deteriorating credit quality of us mortgage-related securities transactions and we repeatedly published reports highlighting our concerns. Had we fully anticipated the severity of the declines in these markets at the time we issued our original ratings, many of those ratings would have been different. we have taken a number of actions to make it much more difficult for these securities to receive our highest ratings in the future.

However, ratings on most types of asset-backed securities have performed quite well, including those backed by consumer loans, equipment leases and credit cards and ratings on structured finance securities issued outside the us.

How has S&p’s approach changed since the crisis began?Following the financial crisis, we made significant enhancements to our criteria, which we think will benefit investors by producing more comparable, stable and forward-looking ratings over the long term. we enhanced the criteria we use to rate us residential mortgage-backed securities, commercial mortgage-backed securities, collateralized debt obligations, banks and bond insurers. overall, the changes make it more difficult for these securities to receive s&p’s highest ratings.

s&p has also taken many steps to make the ratings process more transparent, including increasing our interaction with investors, policy-makers and the press regarding our published ratings and analyses.

additionally, we have invested more than us$200m in the last three years in our internal processes, controls, compliance and risk management functions.

What should be the role of liquidity in assessing ratings?First, let me say that our ratings only speak to credit risk. in the aftermath of the financial crisis, we issued several requests for Comment (rFCs) to market participants about providing commentary and analysis on non-default risks. the rFCs focused on, among other factors, liquidity.

Based on the market feedback, we determined that we would not offer an explicit rating or ranking scale on a security’s relative liquidity, i.e., the ease of trading that security. there are other market participants who are better positioned to gauge a security’s liquidity than s&p.

we will continue to incorporate liquidity dependencies into our ratings analysis and publicly comment on those dependencies in our analysis where appropriate.

The downgrade of uS government debt provoked a big backlash. How important was the political deadlock in this calculation?of the five main factors that we examine in sovereign analysis, two played a role in the downgrade of the us sovereign rating. one is the

pROFiLEpaul Coughlin coordinates the global management of standard & poor’s analytical units and has direct responsibility for the ratings business, including corporate,

financial services, government and structured finance in the americas. Before his ratings career, paul worked in economic policy and administrative roles in the australian Government, and subsequently spent six yearsin merchant and investment banking.


COmmENT: PAUL COUgHLIN

fiscal score in light of the trajectory of the debt levels of the us. the other is the political score, in light of the political environment in washington, DC. the rating change reflects our view that (in addition to the fiscal challenges) the effectiveness, stability and predictability of american policy-making and political institutions have weakened at a time of ongoing fiscal and economic challenges.

our view of the difficulties in bridging the gulf between the political parties over fiscal policy makes us pessimistic about the capacity of Congress and the administration to develop a broader fiscal consolidation plan that stabilizes the Government’s debt dynamics any time soon.

How does S&p’s approach vary in different regions of the world?s&p takes both a global and local approach to rating debt. we have a global scale for our ratings. this gives investors and other market participants the ability to compare debt across different asset classes and geographies. as part of our global scale, we developed ratings definitions for each rating category. these are tied to economic stress scenarios modeled on different periods in history.

For example, a stress scenario we associate with our aaa rating is the us Great Depression.

while our scale and ratings definitions are global, we also have local knowledge and experience. we have 23 offices worldwide with more than 1,300 rating analysts. Because of that local knowledge and experience, we can tailor our ratings and criteria to factor in local market conditions while maintaining our goal of global consistency and analytic standards.

is the role of political stability becoming more important in sovereign credit ratings?political risk has always been one of the key factors for s&p in determining sovereign ratings. our ratings speak to both the ability and the willingness of an issuer to pay its debt. often, political risk has been a major factor in our ratings of emerging market sovereigns.

in fact, there have been examples of emerging market defaults driven primarily by political factors. ecuador’s default in 2009 comes to mind as an example of this phenomenon. argentina’s relatively low rating is also due to, among other things, our assessment of political risk and our view of the willingness of the Government to pay bondholders.

Historically, political risk has not been as much of a rating driver in developed markets. However, recent changes in the political environment in certain countries have had an impact on our view of many sovereigns’ creditworthiness. n

“Political risk has been a major factor in our ratings of emerging market sovereigns”

Over the past year, several high-profile rating actions on g10 countries, such as S&P stripping the US of its AAA rating, as well as multi-notch downgrades of a number of European countries, have reignited controversy on the significance, purpose and processes of credit rating agencies (CRAs). Among the most vocal critics were the administrations of the affected governments, European institutions’ representatives and central bankers. Other market participants also questioned the wisdom and timing of these rating actions, pointing out that these somewhat aggressive downgrades contrasted with the CRAs’ relatively lax standards when assigning ratings to structured notes linked to the US real estate market up until 2007.

In January this year, European Central bank head mario Draghi suggested that it’s time for investors and regulators to rely less on ratings agencies. “What we should do is to learn either to do without them or with them, but to a much more limited way than we do today,” he said. “To a great extent, markets anticipated these ratings changes and priced their assets as if these ratings had already been issued.”

Arguments for the lower market relevance of CRAs include:i) The low diversity of credit opinions, as leading rating

agencies tend to use very comparable risk assessment models, resulting in similar rating assessments.

Viewpoint

are ratings over-rated?Jean-Luc Lepreux, Senior Credit Analyst, Société Générale

ii) The procyclicality of ratings translating into high ratings when times are benign and downgrades when the environment becomes less supportive.

iii) CRAs’ patchy track record in rating specific market segments (such as US residential mortgage-backed securities and collaterized debt obligations).

iv) A switch by investors from a traditional value or buy-and-hold investment style to more short-term, total return strategies, undermining CRAs’ long-established “rating through the cycle” model.

Clearly, having a greater variety of opinions available to bond markets participants, using more diverse angles of analysis, would significantly benefit the investing community and enhance investment decisions.

Conversely, arguments pointing to the over-reliance of investors and regulations on credit ratings, and potential conflicts of interest, appear less relevant. Statistics highlight that ratings are, on average and over the long term, good indicators of credit risk. In addition, investors would be well advised to base their investment decisions on a separate credit analysis using their own set of criteria. Finally, proposed alternatives to CRAs, such as central banks providing ratings, particularly for sovereign borrowers, or the creation of public-funded CRAs, appear rife for potential conflicts of interest, undermining the value of such ratings. That said, greater scrutiny of CRAs’ rating processes and practices, including strict compliance to codes of business conduct, would alleviate potential conflicts of interest inherent to their business model.

All in all, remedying the CRAs’ shortcomings is probably more palatable than diluting their relevance through intrusive regulation and possible political interference, notably with regard to sovereign ratings.

A SURvEY OF INTERNATIONAL INvESTORS REvEALS THAT THEIR INvESTmENT DECISIONS ARE UNDERPINNED bY A COmbINATION OF NUmbERS AND NARRATIvE. FOR INvESTORS, DATA THAT RELIAbLY DETAILS PAST PERFORmANCE NEEDS TO bE COmPLEmENTED bY A FORWARD-LOOkINg NARRATIvE THAT gIvES A STRONg SENSE OF FUTURE STRATEgY AND SOURCES OF gROWTH

the poll

investors rely on a balance of financial data and management insightthe respondents in our survey put equal weight on the financial statements and on management’s account of business performance in their investor presentations.

What information provided to you by companies during the interim reporting season do you rely on most for making investment decisions?

Balancing cash and debt

Given that bank lending is restricted in many developed economies, and that companies are likely to be constrained in their access to credit for some time to come, debt is a key area of focus: 41% of respondents value a statement of the company’s overall position in relation to its debt financing, while 42% want the narrative – disclosure of the actions management are taking to manage future debt financing. the article opposite explores the strategies companies are using.

in January, ernst & Young surveyed more than 200 professional investors responsible for portfolios spanning companies around the world. these investors were questioned about the information they would use in the next round of interim reporting when making their investment decisions. Here are some of the key findings:

in the current economic climate, cash is a key concerna company’s cash position is of premium importance to our panel. the profit and loss (p&l) and cash flow statements will be closely scrutinized for weaknesses.

in the upcoming interim reporting period, what information do you expect to have the most impact on your decision to invest?

62%

62%

65%

61%

55%

60%

46%

49%

47%

23%

10%

41%

35%

29%

12%

Very valuable Quite valuable

The most valuable forward-looking information explains directionwhen looking to the future, investors in our poll value a description of strategic focus and the sources of growth more than financial modeling.

What other forward-looking information do you think would be of value when reviewing standard interim financial reports?

investor presentation by management

Future changes to company strategy

profit and loss statement

interim financial statements

sources of future growth

Cash flow statement

analyst interpretation

Future cash flows

Balance sheet

press releases

investor kit

the Ceo statementor report

Valuation of assets

statement of changes in equity

27%

25%

Future financial performance 29%

19%


in the years since 2008, when the credit crunch convulsed the financial system, few corporate trends have proved as widespread as the move by businesses to build up their cash reserves. when the markets froze, CFos and corporate treasuries around the world suddenly faced real uncertainty about whether, and at what price, banks would continue to fund their capital needs. even more unnervingly, some money market funds, which treasurers had used to park surplus cash for the short term, blocked withdrawals, leaving businesses without access to their money.

Not surprisingly, the shock of this experience is still fresh in the minds of CFos, and this helps to explain the steady build-up of cash on corporate balance sheets, much of which is not intended to repay debt. in an article in the spring 2011 edition of McKinsey on Finance, Bin Jiang and tim Koller reported that “european and us companies currently hold a total of around us$2t in excess cash” (where “excess cash” is defined as the amount of cash outstanding over and above operating cash, which is defined as 2% of revenue).

Since the credit crunch, businesses have being building their cash reserves, even though this can be expensive. Andy Davis investigates how they are going about balancing cash and debt, and how they are communicating this to stakeholders

Balancing act

INSIgHT: bALANCINg CASH AND DEbT

“the thing that all companies have learned in the last five years is that liquidity is a critical ingredient of any growth strategy,” says paul reilly, CFo of arrow electronics, a NYse-listed distributor of electronic components based in Melville, New York. and, given recent memories of funding markets that effectively closed, he places most stress on what he calls “committed forms of liquidity that are less likely to go away.” But where to find them?

OppORTuniSTiC MOVESBank lending has become increasingly constrained for many businesses, and even though some can access the public bond markets, these markets have not always been favorable to companies wanting to raise money at a given moment. so the accent has moved on to opportunistic moves to mitigate funding risk – raising money when it is available on acceptable terms, even if the proceeds are not needed immediately.

Martin o’Donovan, Deputy policy and technical Director at the uK’s association of Corporate treasurers, says: “the financing markets have proved to be extremely uncertain. if you’re not sure whether you’ll be able to renew your bank facility when it matures in a year’s time, or that, when you need the money in a year’s time, the bond markets will be open to you and competitive, it makes sense to keep a fair bit of cash in readiness to cover those refinancing needs.

“if the bond markets are looking good now, you might as well do a bond issue and just put it on deposit. it sounds inefficient to borrow at 5% and reinvest at 1%, but what it’s doing is buying you certainty.”

o’Donovan argues that if a business is raising 10-year money for an upcoming refinancing, the problem of being out of pocket for a few months due to the “negative carry” – the difference between borrowing and deposit rates – is not the paramount concern. “there is a feeling that this is a good opportunity. it’s not going to look as if you’ve done

“There has to be a plan as to why a company is holding cash. If companies are not able to rationalize what they’re doing, then shareholders, quite rightly, should be querying it”martin O’Donovan, Association of Corporate Treasurers

a really bad deal at today’s levels.”this was the experience arrow electronics had. “we

have opportunistically pre-funded debt maturities,” says reilly, “and we were willing to take the negative carry because the liquidity was there and the cost of that borrowing was quite attractive.”

even in developing world markets, where bank lending has not become so constrained, companies have changed their approach to funding themselves. Juan Felipe Hoyos Botero, CFo of productos Familia, a large Colombian maker of personal hygiene products, says: “all our financing was short term until the end of 2008. at that point we realized that, as the circumstances were changing, it was a very risky strategy. so we decided to look for long-term financing.”

in common with other large Colombian corporates, the company got as far as preparing a bond issue. But at that point, Colombia’s banks realized that they risked losing their biggest clients. “Banks came to large corporate customers and offered good, long-term financing that was not available before,” says Hoyos Botero. productos Familia was able to guarantee its liquidity position via 7- and 10-year credit lines from its banks – far longer commitments than the 3 to 5-year facilities that were available before the crisis – at rates of around 9%.

STRATEGiC ACquiSiTiOnSFor many companies, there are reasons aside from simple liquidity requirements to explain the decision to hold large cash balances. they include the need to be able to make strategic acquisitions or invest quickly in pursuit of market opportunity. reilly says arrow has made more than 20 acquisitions in the past three years as part of its strategy to broaden the markets it serves and “come out of the recession stronger than we went in.”

there are other, longer-term reasons for corporate treasurers to think opportunistically about when to access the bond markets. o’Donovan says that a large number of leveraged buyouts will need to refinance by 2014, which will create a greater demand to borrow on bond markets. “on top of that, banks are being told they’ve got to borrow more long-term money and government borrowing is high, so there’s a lot of demand for funding,” he adds. “the expectation is that this will reach a peak in a couple of years’ time, so that’s another reason to try to get in early.”

to a great extent, then, the negative carry for holding cash just represents the price of ensuring that the business cannot easily be starved of working capital. But the decision


INSIgHT: bALANCINg CASH AND DEbT

to hold increased quantities of cash does demand a reasoned engagement with shareholders.

First, companies need to demonstrate that they are working hard to offset the penalty they pay for holding cash. as Magnus lind, founder of Malmö-based treasurypeer.com, which brings together some 3,000 corporate treasurers, says: “they become better and better at managing that negative carry.” in arrow’s case, this meant working hard to achieve strong cash generation and more efficient use of working capital, thereby countering any impression that the business might be overcapitalized.

second, they need to articulate a clear strategy that explains their attitude to cash and funding risk. “there has to be a plan as to why a company is holding cash,” says o’Donovan. “if companies are not able to rationalize what they’re doing, then shareholders, quite rightly, should be querying it.”

an issue that has occupied some investors and rating agencies, particularly in us corporations, has been the question of where within a group corporate structure any cash reserves are held. Cash held within foreign subsidiaries may incur significant withholding tax if it needs to be moved to the holding company level; in the case of us companies, the rate can be 40%, according to the association of Corporate treasurers, with tax payable both when the cash leaves an overseas jurisdiction and when it enters the us. a portion of it may also have to be paid out to local minority investors if the parent group wishes to move it back to the corporate HQ.

reilly says that arrow maintains a dialogue with investors on the way it manages its cash reserves. “there is greater interest in companies generating and effectively redeploying cash, whether that’s through a disciplined approach to M&a, organic investment, or redeploying it back to investors.”

arrow has pursued all three routes, but in answering its investors’ wish to see some cash returned to them, the company has again ensured itself maximum flexibility by deciding to pursue share buybacks rather than dividend payments. in its most recent quarterly results, arrow reported that it had completed its latest us$100m buyback

program and committed to return a further us$150m to shareholders by this route. over the past four years, it has spent us$550m buying its own shares.

the buyback route is widely favored in the us because it offers tax advantages to large investors over dividends. But the management also favors buybacks, since they allow arrow to retain flexibility – buybacks don’t carry the same sense of commitment as a dividend declaration, and they can be varied and carried out at times that suit the business. reilly says that arrow has returned more capital to shareholders via buybacks than it would have done if it had committed to regular dividend payments instead.

A LOnG-TERM SHiFTNo one interviewed for this article could see the present situation changing soon. indeed, lind argues that we are seeing a shift in long-term trends similar to the one that followed the Great Depression. then, he says, “there was enormous deleveraging and companies had a lot of cash in the bank.” this trend reached its conclusion in the 1970s, when share prices fell and investors began to buy up companies that had cash balances greater than their equity value. the trend reversed again when financial deregulation and credit expansion got under way in the early 1980s.

Now, says lind, we are witnessing another reversal. “Net debt will become far rarer. there will be net assets for most corporates because the large companies will have to provide financial support for the weaker parties in the supply chain. so the large corporates will have to hold larger surpluses.”

this striking forecast suggests that the balance of cash and debt may be at a turning point similar to others that have emerged in the past. if so, the implications of the shock to the financial system caused by the Great recession will continue to be felt for years to come.

Textbook treasury practice is not to hold cash while you have borrowings, because the cost of the debt is generally higher than the return cash can earn. This gives rise to “negative carry” – essentially, the cost of holding cash.

Normally, treasurers centralize cash, either at holding company level or at a regional treasury center,

rather than leaving it in the various subsidiaries. Recently, companies have been focusing on the risks of leaving cash in peripheral Eurozone countries, such as greece, which are at risk of leaving the euro and an immediate devaluation.

Once aggregated, cash can be used to pay down short-term borrowings, such as overdrafts, that can

be immediately redrawn as required. Cash not required for these purposes can be invested. Once it is pooled at the center, the business will have a more investible amount and so will command a more competitive interest rate.

Cash can either be put on deposit at the bank or invested in money market funds – vehicles that

promise instant repayment, while investing their cash holdings in short-term instruments, usually up to 30 days’ maturity. Investing via money market funds diversifies credit risk across a range of institutions, rather than concentrating it in a single bank, but even these funds barred redemptions during the worst of the credit crisis.

US$2tThe total amount of excess cash held by European and US companies, as of spring 2011

Classic cash management

adaptersEarly

Companies that take a strategic approach to sustainability-related risks give themselves the best chance of surviving and thriving in an increasingly uncertain world. Serge Debrebant reports

INFORmATION: SUSTAINAbILITY RISk

adaptersEarly

Last year, MillerCoors, a joint venture between the us brewing companies saBMiller and Molson Coors, told investors that three of its eight breweries were located in water-stressed or water-scarce areas. Brewing companies depend heavily on regular water supplies, which is why, at its creation in 2008, MillerCoors set up an impressive water stewardship plan to reduce its consumption and to secure its availability. “this is going to be a critical issue, whether it’s 5 years down the line or 10 years,” a company representative told the Guardian. indeed, by 2050, one in three us counties will face high risks of water shortages, according to the environmental consulting group tetra tech.

several decades ago, companies in developed countries rarely worried about water. although most industries depended on it, it was usually so cheap and abundant that concern over its supply didn’t play a big role in business decisions. But in many parts of the world, the situation has changed. according to the united Nations, one-third of the world population lives in water-stressed countries. By 2025, experts say, that number is going to rise to two-thirds.

water isn’t the only sustainability-related risk that companies are now looking at anew. “if we just talk about a drinks manufacturer, it has to think about water scarcity, raw materials, rising energy prices, waste and changing market demands,” says Doug Johnston, Director of sustainability & Cleantech services at ernst & Young. “all those risks affect a company’s ability to achieve its objectives.”

Many companies already take these hazards into account, particularly organizations whose business depends on the success of long-term investments. Miners have developed sophisticated management systems to identify, assess and prioritize risks, while oil and gas groups have explored risks through scenario planning. Business continuity plans across sectors outline crisis responses to protect their assets against storms, floods and other disasters.

STRATEGiC AppROACHtaking sustainability risks into account isn’t about discovering new risks, but about realizing that some risks might have a sustainability angle, or might increase in intensity or scale because of environmental and social stress. “it’s a different way of thinking,” says Johnston. “on a microlevel, companies are used to dealing with sustainability risks, but seeing them on a strategic level is a different matter. a strategic approach helps them understand interconnections.”

over the past decade, those strategic conversations – in governments as well as corporations – focused largely

on the reduction of greenhouse gases, in the hope of keeping climate change in check. less thought went into preparing for its adverse effects, with companies neglecting questions about how to make their operations resilient to the extreme weather, water scarcity or crop failures that could come. “adaptation is certainly lagging behind mitigation,” says stephen seidel, senior adviser at the Center for Climate and energy solutions, an environmental think tank in the us.

one reason is that even experts are uncertain how climate change will play out. “Climate change is new volatility that companies have to think about,” says Juan José Daboub, former Managing Director of the world Bank. in 2010, Daboub founded the Global adaptation institute, a us-based non-profit organization that assesses and ranks the climate change resilience of all the countries in the world.

the mining company rio tinto has tried to cope with this uncertainty by commissioning a series of reports evaluating the impact of climate change on its operations and major projects. it used data from the intergovernmental panel on Climate Change and the uK-based Hadley Centre for Climate Change to analyze how water resources, electricity supply and infrastructure on its sites might be affected over the course of 50 years. one of its reports studied the impact on a grid size as small as 20km² – much more detailed than typical climate models. rio tinto concluded that changes would be minimal in the short term, but would probably increase in the long run, while sites in the southern hemisphere were more at risk than those in North america. the results helped the company make long-term business decisions.


“Climate change is new volatility that companies have to think about”Juan José daboub, Global Adaptation institute

another sustainability risk – one that is separate from, but linked to, climate change – is the challenge of securing a steady supply of raw materials. prices for sugar, coffee and other agricultural commodities have been highly volatile in the last years. when cotton prices rose to a record high of us$2.197 per pound in March last year, several clothing companies issued profit warnings. the price fluctuation was partly caused by speculation and increasing demand from China, but crop failures also played a role.

again, fluctuating commodity prices aren’t a new business risk, but seeing them as a sustainability risk might influence a company’s response. the swiss food company Nestlé, for example, decided to promote sustainable farming to make its supply chain more robust. in 2010 alone, it trained more than 140,000 independent farmers as part of its “Creating shared Value” initiative. Coffee planters in Mexico learned how to use new drying techniques. Dairy farmers in Colombia increased their yields by improving the biodiversity of their pastures. in China, farmers saved 80% of their water by using new equipment to treat coffee beans. the initiative not only makes Nestlé’s suppliers more resilient, it also increases their revenues and improves Nestlé’s reputation.

Nestlé’s financial performance in recent years shows that a comprehensive sustainability strategy can also benefit the company itself. in 2010, net profits exceeded sFr34b on sales of sFr110b. Nestlé’s stock price, meanwhile, has outperformed the swiss stock market since 2008.

COMMuniTY COnSidERATiOnSa strategy such as Nestlé’s certainly contributes to good relationships with the communities in which a company works. Mining companies, in particular, have taken note: most incorporate community engagement into their core strategies. in addition to a regulatory license, they seek a social license to operate.

“the idea is that the community allows a company to operate within its territory; even if the issue is often a difficult one to overcome, it’s important to have the community on your side,” says Mathew Nelson, oceania

leader of Climate Change and sustainability services at ernst & Young.

But risks are also opportunities. taking sustainability issues seriously can help a company reach new customers and discover new market niches. when it was formed in 2000, the australian energy provider origin positioned itself as a low-carbon company, long before the Government decided to introduce a carbon tax.

“we believed that this was what the customers wanted from us, and this was why we did it,” says Carl McCamish, executive General Manager of Corporate affairs at the group. origin invested in low-carbon power plants and renewable energies and engaged with communities and indigenous people. today, the company not only has an excellent reputation, but is also the leading provider by market share of green power products in australia.

THE BOTTOM LinEthere are many ways in which a company might fail to see sustainability as a strategic risk. Johnston lists some of the issues he has encountered: “too many silos in the organization, not enough capability around the sustainability risks and mitigation, risk management processes that focus only on those things that can easily be measured, leadership that doesn’t appreciate the strategic implications of the sustainability risks.” For a sustainability strategy to work, he says, the whole company has to believe in it, and not just the sustainability department.

“If I can say to a CEO that we’re going to

save £100m by doing this, he’s going to listen”doug Johnston, Ernst & Young

INFORmATION: SUSTAINAbILITY RISk

with countries falling into recession and businesses eager to control costs, these departments often find themselves under pressure. as long as sustainability is perceived purely as a reputational issue, management will tend to see it as non-core and be quicker to cut budgets. this is why it’s more important than ever to show that sustainability measures make a difference to the bottom line. “if i can say to a Ceo that we’re going to save £100m by doing this, he’s going to listen,” as Johnston puts it.

in the long term, a new perspective on sustainability risks might push companies to include them in their annual reports. the integrated reporting debate is leading in this direction. integrated reports not only focus on financial data, but also include environmental, social and corporate governance aspects and give shareholders a more holistic picture of a company’s state of affairs.

increasingly, financial markets are demanding this information. in the last four years, investors voted for more than 30 water-related shareholder resolutions at us companies. and in 2011, investors in us and Canadian companies voted for 19 resolutions related to climate impacts and adaptation risks. ultimately, the growing demand for integrated reporting may push more companies to take a more strategic view of the sustainability risks that may threaten their future prospects.

unilever – preparing for the next 500 yearsWhen Paul Polman, Chief Executive of the multinational Anglo-Dutch consumer goods company Unilever, unveiled the group’s Sustainable Living Plan in November 2010, even environmentalists were impressed by its ambitions. The company wants to halve the environmental footprint of its products by 2020, improve the nutritional quality of its food lines and link more than 500,000 small farmers and distributors to its supply chain.

Polman also wants to double Unilever’s sales. There was “no conflict between sustainable consumption and business growth,” he said when presenting the initiative. He and his team say that three main arguments underscore the business case for sustainability. First, consumers and retailers increasingly demand sustainable products. Second, sustainability drives product innovation and helps the company to grow its markets. Finally, efficient energy consumption, water use and packaging save the company money.

Unilever has already introduced new products that are both more sustainable and popular. It launched a hand laundry detergent that requires less water for rinsing – from three buckets to one. meanwhile, with its Pureit in-home water purifier, Unilever aims to provide 500 million people with safe drinking water by 2020. These products appeal particularly to consumersin developing countries, tapping newgrowth markets.

At the same time, Unilever works with the farmers in its supply chain to enhance their living standards and teach sustainable agricultural practices. Half of Unilever’s raw materials stem from farming and forestry. Promoting sustainable farming provides Unilever with security of supply.

Although some of these measures are costly, Polman believes they are necessary for Unilever’s future. At the World Economic Forum in 2010, he explained that this was a strategy for the long term. “We want to be in business for the next 500 years,” he said.


2/3of the world’s population will live in water-stressed countries by 2025

As companies expand into new territories, understanding the performance of new acquisitions depends on the finance function

addressing complex accounting issues and re-engineering reporting. Christopher Alkan explains why financial efficiency

has become a source of competitive advantage

Empire building is a favorite activity of top executives. in 2011, businesses worldwide spent us$908 billion buying up foreign rivals, according to thomson reuters – that’s about 60% more than a decade ago. scooping up foreign competitors can allow companies to expand into the fastest-growing nations, as well as stripping out costs.

But one downside to the growing geographical spread and complexity of these business empires is that assimilating new subsidiaries can make the task of reporting financial results much more difficult. New acquisitions will sometimes use different accounting systems or adhere to different

Efficiencydrive

regulatory standards. as firms venture into fast-growing emerging nations, they often face even more diversity in accounting and regulation, and the resulting clash of accounting cultures can cause chaos.

“Harmonizing the reporting functions of new foreign acquisitions can often require a complete overhaul in order to get a clear picture of whether the deal has boosted returns, as well as to keep sight of the performance of the entire business,” says Joshua ronen, a professor of accounting at New York university’s stern school of Business. and all this is happening at a time when analysts across the world are demanding ever greater precision

and transparency from the financial statements and forecasts of CFos.

A quESTiOn OF COMpROMiSElike marriages, mergers require plenty of compromise. when two companies unite, the first step is to understand the differences between them. “this ‘gap analysis’ identifies where the compromises need to be made,” explains Gilles Frappier, a director at ernst & Young’s advisory practice in paris. to begin with, there are many versions of Gaap in use in leading economies, and reconciling them with each other, or with iFrs, requires specialist knowledge.

t o K Y o N e w Y o r K D u B a i

INSIgHT: FINANCE FUNCTION EFFECTIvENESS

spring 2012 Reporting [16/17]


a host of other adjustments also need to be made, says stephane Kherroubi, Financial accounting advisory services leader, ernst & Young eMeia. “it is vitally important to integrate the financial statement of the new subsidiary, including reassessing the fair value of assets and liabilities,” he says. “this will drive your future key metrics and ensure that you can calculate the payback of what you have acquired.” Firms also have to ensure that financial data is aligned and provided at the right time. in addition, Kherroubi recommends a detailed analysis of the accounting risks of the new acquisition – especially in developing countries – and the measures that can be put in place to mitigate these risks.

then there is the content of financial metrics. Businesses frequently use different metrics to measure their progress and harmonizing these key performance indicators will ensure that a company’s managers worldwide are aiming for the same goals. even the inputs that go into these indicators may vary.

“For example, firms often define something as simple as margins in different ways by including or excluding different costs,” says Frappier. “until these definitions are aligned, it is hard for everyone to agree how well the business is doing.”

the potential incompatibilities don’t end there, either. reporting periods may differ, with some firms capable of producing highly up-to-date figures while others can only muster quarterly data. as a result, accounting it systems may need to be synchronized.

THE nEEd FOR uniFORMiTYHaving identified these conflicts, a global firm needs to eliminate them. “the cardinal rule is uniformity,” says Frappier. “every part of the firm all over the world needs to have a common set of rules, definitions and procedures that they stick to.” a firm also needs to set up strong lines of control leading to the chief financial officer.

this project, which can take at least six months, should start from day one. “unless your companies can quickly create accounting, controlling and performance measurement harmony, you can run into serious trouble,” says Frappier. “it’s like trying to drive a car while being partially sighted or blind; the chance of an accident increases sharply.” Kherroubi believes that part of an advisory firm’s job is to “provide the acquirer with a gap analysis at the acquisition date, including a road map of priorities and costs estimated to align the acquired business.”

“Every part of the firm all over the world needs to have a common set of rules, definitions and procedures that they

stick to”Gilles Frappier, Ernst & Young

the need to align accounting and performance data manually can also cause problems, resulting in a lag of several weeks to produce the necessary information. unless these delays are eliminated quickly, it can become harder to spot problems in underperforming subsidiaries promptly.

equally importantly, precious opportunities can be missed, says paul wood, eMeia Finance leader in performance improvement at ernst & Young. “if it takes two or three weeks to get out your results each month and you’re not sure if you can really rely on them, it can slow down your ability to take the right decision at the right time.”

MORE FROM LESSa poorly organized finance department can also be more expensive. wood says that world-class organizations tend to spend as little as 0.1% of turnover on their finance functions, while more mediocre globalized firms spend between 0.5% and 1% of revenue. Finance can be a far bigger drag on the least well-organized firms, eating up as much as 3%–5% of turnover. the sums spent are often inversely related to the value added by these functions.

so the challenge is to trim the cost and burden of routine financial functions as far as possible, freeing up the remaining


B e i J i N G l o N D o N

staff to add value to the business.one firm that has achieved this is

energinet.dk, a Danish company that owns and manages the network that electricity providers use to deliver energy to end users. it managed to cut reporting time from 21 days to just 10 without adding a single member to its 29-strong finance department.

“it is great to get more from less, but for us the efficiency enhancing process has directly translated into higher-quality work,” says Brian sorensen, Finance Manager at energinet.dk. “Before, the finance department would spend, say, 80% of our time on figures and bookkeeping entries, but now we spend only around half that.” the time freed up, he explains, can be spent on higher value-added activities, such as analysis and business development.

as well as improving efficiency, sorensen believes the improvements have enhanced the status of the finance department in the organization. “reports are generated faster and in a more usable form, meaning that the monthly reports are used to a greater extent,” he says. “so the finance department is more visible in the organization.”

SHAREd SERViCE CEnTERSto help increase the value added by the financial function, accounting firms can help companies to decide how best to organize it, including the strategic use of shared service centers (ssCs).

this will often result in companies taking basic transaction processing offshore to lower-cost countries in eastern europe, india, China and asia pacific, and latin america. according to sabine Bechelani Fouchier, leader, eMeia Finance Center of excellence at ernst & Young, around 80% of global companies have already concentrated

80%of global companies have concentrated their routine finance functions in shared service centers


“If it takes two or three weeksto get your results out each month, it can slow down your ability to take the right decision

at the right time”paul Wood, Ernst & Young

their routine finance functions in ssCs that handle transactions from many countries.

others go one step further and outsource such functions to firms that offer business process outsourcing. this has grown into a vast industry, with worldwide revenues of us$182b in 2011, according to Gartner.

However, this shouldn’t go too far, as Kherroubi points out: “You need to have someone leading the process, managing the local situation and making sure the business is compliant and optimized with local rules.”

GLOBAL COnSiSTEnCYthe challenges of providing effective reporting can be even greater for decentralized firms. “there can be big advantages to giving plenty of autonomy to local subsidiaries,” says phillip stocken, a professor of accounting at Dartmouth College in the us. particularly for consumer goods companies, it can be vital that local chiefs have the flexibility to respond quickly to changing market conditions. in ernst & Young’s Growing beyond report (published in 2011), when asked how companies were acting to increase their speed to market, empowering local decision-making was the most popular response, chosen by 49% of all respondents. High performers put even greater emphasis on this.

But local independence also raises the danger of problems being hidden. as a result, decentralized firms need to be even more rigorous in setting globally consistent rules for back-office functions and risk, says stocken. at least in the early stages, there are merits to ensuring that workers from the home country play a role in integrating the finance operations of new subsidiaries, rather than depending solely on local experts. “using expatriates

can be the most effective way of exporting institutional knowledge and patterns,” argues stocken. later, the optimal mix of expats and local experts may vary, depending on the company’s structure.

A BROAd RAnGE OF SkiLLSFinally, a first-class finance function is vital to avoid overloading and confusing a firm’s leaders. this gets harder the more complex and diverse a firm becomes. Having reduced the cost of routine tasks, global companies need to ensure that the more elite group left can deliver plenty of value. according to Fouchier, this means that the remaining finance team must be more than merely skilled accountants.

“Having the technical accounting know-how should be the minimum requirement now for chief financial officers,” she says. “Finance departments need plenty of people who have much broader business skills, to ensure that they can provide the most helpful information to those guiding the firm’s strategy.” such finance chiefs will often have had a variety of roles within companies, including support for operations and business strategy.

in an increasingly globalized economy, financial efficiency has become a potential source of competitive advantage. Firms in fast-moving sectors, such as pharmaceuticals and computing, are no longer satisfied with monthly reporting and are developing real-time data that enables executives to monitor developments around the globe 24 hours a day, 7 days a week. as a result, companies with less nimble finance capabilities are in danger of being left behind by swifter rivals. as chief executives build vast global businesses, it is becoming ever more important that finance functions are up to the complex task of capturing developments throughout these sprawling empires.


out of the

shadowsBusinesses haven’t traditionally accounted for human capital on the balance sheet, but it’s an area investors are increasingly interested in. Dan Barnes investigates the opportunity for forward-thinking companies to differentiate themselves by throwing light onto a previously shadowy aspect of their performance

INFORmATION: REPORTINg HUmAN CAPITAL

»

The design guru at a major electronics firm quits his post; a film production company lays off a team of writers; a mortgage bank outsources administration to a third party, cutting out its middle management layer in the process.

each of these examples will have a significant effect on the future productivity and share price of the respective companies. and yet, although investors can account for these losses in human capital, there is no standardized way for the companies themselves to do so.

Human capital, a concept defined by the organization for economic Cooperation and Development (oeCD) as “the knowledge, skills, competencies and attributes embodied in individuals that facilitate the creation of personal, social and economic well-being,” is intangible, and therefore often not quantified. But it can be.

Bassi investments, a us-based fund manager, uses proprietary human capital metrics to determine when to invest; it claims that investment in education and training has been shown to correlate positively with a company’s future performance. Founded in December 2001, its strategy originated in research conducted by the american society for training & Development (astD) into stock performance, training and learning. By measuring learning hours per employee, the astD found that firms that spent more per employee did better in subsequent years. laurie Bassi and Dan McMurrer had been working at the astD and, having found no interest in the research among financial services firms, formed Bassi investments.

“we decided to put our money where our mouth is and we’re now running three funds,” says McMurrer, currently Chief research officer at the firm. “over the last 10 years, they have outperformed the s&p 500 index for 7 or 8 of those years.”

Many of the larger asset managers apply their own measures to their socially responsible investment funds. By doing so, these funds challenge the exclusive use of

accounting measures to report a company’s performance to investors – who are increasingly demanding more information. while accounting only reflects the cost of staff, via their wages, a survey conducted in september 2011 for ernst & Young’s report A tale of two markets found that 50% of investors wanted better reporting of how intangibles (such as human capital) might affect the business and 54% wanted a better description of how the business model creates value.

andrea Cartwright, Head of Human resources at uK building society Nationwide, acknowledges that wages are in some ways a surrogate for the value that a company places on its staff. But she adds that this metric alone offers little insight in terms of understanding the potential value created by its employees.

“people do not join voluntary organizations because of pay, but because they get personal value from what

“Staff are your greatest asset and liability. It would be bizarre if you didn’t manage your greatest asset or liability, and to do that you must be able to monitor and

measure it”dr. Raj Thamotheram, network for Sustainable Financial Markets



they do,” she observes. “so the value of people does have a numeric value in terms of pay, but that is not a determinant of future performance.”

if they used a metric that offered insight into future growth, investor relations teams would provide a far more useful measure for investors – but only if it were comparable with that of other businesses. in some countries, plans are afoot to develop human capital standards that could be used for this purpose. in the us, a working group run by the society for Human resource Management (sHrM), a non-profit professional association and authorized standards body, is developing performance metrics for this purpose (see reporting standards panel opposite). in the uK, the operating and Financial review currently allows companies to report aspects of human capital such as recruitment and retention, but in a non-standardized manner. the Commission for employment and skills was expected to issue a review in Q1 2012 that would examine the Government’s options to increase human capital reporting by employers.

HELd TO ACCOunTthe lack of standardized quantification of human capital is partly rooted in its absence from accountancy rules, which constitute the framework for most capital reporting. these specify that human resources cannot be considered capital, despite their apparent similarity to other investments and assets.

“if i spend £1,000 upgrading a machine, i depreciate that over the machine’s useful life; if that was five years, i’d charge £200 a year,” says peter Ferrigno, Head of Human Capital, eMeia, at ernst & Young. “if i spend £1,000 on a training course, why is it any different?”

He explains that there are two reasons for the distinction. First, technology upgrades would only be capitalized above a certain limit, which is typically higher than the cost of a standard training course. second, you own the machine and you could sell it. Both iFrs and us Gaap dictate that a company cannot consider something an asset unless it can be controlled.

“if i give Charlie some training and he’s now £1,000 cleverer, i can’t sell Charlie, so the accounting concept of prudence says i shouldn’t capitalize that

increase in Charlie’s value either,” says Ferrigno.there are exceptions; for instance, in its last annual

report, english professional soccer club tottenham Hotspur reported its players as intangible fixed assets that were capitalized and amortized over the period of the player contract. “their logic must be that each player they have paid for is individually identifiable,

42%In Ernst & Young’s 2012 Globalization survey, 42% of respondents ranked talent management as the most difficult operational challenge for global firms to manage, second only to regulatory compliance

not an assembled workforce,” says ruth picker, Global leader, iFrs services at ernst & Young. she adds, however, that the value of employees is recognized in many firms – it just isn’t reported.

“You could argue that a lot of what employees do is build internally generated goodwill,” she says. if one business buys another, the acquirer is allowed to recognize the goodwill of the firm it acquires because it is paying for that goodwill. “You crystallize the value by buying it,” continues picker, “but even then, you aren’t allowed to recognize it [on the balance sheet].”

SEEinG THE VALuEthe institute of Chartered accountants in england and wales estimates that anywhere between 50% and 90% of the value that a firm creates stems from managing intellectual capital, rather than its more tangible assets.

“How could you not try to quantify that?” asks Dr. raj thamotheram, president of the Network for sustainable Financial Markets, a group that highlights how market players contribute to market dysfunctionality and what needs to happen to increase market resilience. “staff are your greatest asset, and also your greatest liability. it would be bizarre, to say the least, if you did not manage your greatest asset or liability, and to do that you must


be able to monitor and measure it.”such measurements are possible on a company-

by-company basis; Hr scorecards are relatively commonplace and allow each business to identify what affects its own operations. even so, in the ernst & Young 2012 Globalization survey, the two most challenging factors were found to be measuring employee performance and predicting a business’s talent requirements – regardless of the type of market a firm was operating in.

For such metrics to allow a comparison between firms is harder. angela Baron, an advisor at the Chartered institute of personal Development (CipD) in the uK, notes that efforts to create a standardized framework have repeatedly failed. “what’s important to particular businesses in terms of their human capital indicators is going to be quite different depending on the sector they operate in, and even those in the same sector will vary from one end of the spectrum to the other,” she says.

However, some data is already commonly available because, in some countries, companies are required by law to report certain metrics. reporting workforce demographics is a common legal requirement in many developed markets, often to support diversity or anti-discrimination legislature. But this kind of reporting


is still far from uniform; in switzerland, for example, reporting employee ethnicity or race is illegal, whereas such details are a requirement in some other european states. in France, meanwhile, enterprises with more than 300 employees are required to provide data on more than 100 metrics each year in a social report.

THE iMpORTAnCE OF EduCATiOnthe datasets of salary, investment in education and levels of education used in academic research (see panel, p26) are often accessible at a corporate level; the challenge is to derive a meaningful quantitative analysis from the figures. as Ferrigno puts it: “You can’t say my people are better than another company’s people because they cost me 10% more. Does that make them 10% better?”

alessandra Casarico, associate professor in public economics at università Bocconi in Milan, says that level of education correlates with salary, both for individuals and employers. But it can provide much more. “there are also spillover effects from one person’s education on the rest of the labor force,” she says. “How much can i benefit from working next to somebody who is very educated or very able? if you focus on wages, you are looking at the return that acquiring education has, but ignoring the effect it has on other factors such as improving overall, rather than just individual, productivity.”

Nevertheless, research suggests that few fund managers are analyzing these factors in an empirical way. in 2009, Johan Henningsson of Mälardalen university school of Business in sweden carried out a qualitative study with 14 fund managers in stockholm. it found that the fund managers tend to use social networks to help understand the complex, non-empirical intellectual capital (iC) information that surrounds firms, creating their own “stories” about a firm and its performance.

Finding metrics that all stakeholders value is a challenge. in a CipD report released in November 2010, View from the City: How can human capital reporting inform investment decisions?, the majority of investment practitioners interviewed claimed that most human

Reporting standardsIn the US, a working group run by the Society for Human Resource management has developed standards for reporting six measures related to human capital:• Cost per capita, which includes training and

development• Leadership strength• Turnover, broken down by job classification• Leadership quality, defined by a company-

wide survey• Engagement, as measured by a survey• A qualitative analysis of the firm

Academic research has focused on human capital (which the OECD defines as “the knowledge, skills, competencies and attributes embodied in individuals that facilitate the creation of personal, social and economic well-being”) at an economic level rather than at a corporate level.

In October 2011, the OECD issued a working paper on measuring human capital. Researchers applied complex algorithms to five datasets – survival rates, educational attainment, employment rates, school enrolment rates and annual earnings – from 16 countries in order to quantify an individual’s human capital according to their predicted lifetime income.

The study found that people with higher education have a higher human capital value than those with lower education and concluded, among other things, that it could offer governments guidance on the balance required in building higher education to offset the effects of an aging population.

gang Liu, the leader of the OECD human capital project, says the results offer practical advice beyond that for policy-makers. governments can use human capital measurements in relation to their social agenda, businesses can use them to analyze their use of labor and they help individuals to see the financial advantages of investing in their education. “Firms treat [human capital] as cost,” he says, “but they can generate long-term returns by using highly educated people.” The graph below shows an example of how education correlates with returns in India’s IT industry.

Getting the measure

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Return = Ftse all-world india index – technology industry. total return measured in indian rupees. number of iT graduates = total number of technology graduates and postgraduates (computer science, electronics, telecoms, etc.) entering the workforce in india. source: National associationof software and services Companies (NassCoM)

capital reporting is not meaningful to external stakeholders. the biggest challenge was found in reporting outcome measures rather than input measures, such as the effect of training rather than the amount of training received or the cost of absences.

one respondent commented: “even simple measures, such as demographic or absence information, are hard to make meaningful. to be relevant to investors, it has to be elevated to be reported against business issues or outcomes.” and where firms are able to identify specific measures that they wish to use, the paucity of incentives to report them makes it difficult to find this information in standard company filings.

For his part, Dan McMurrer explains that the greatest challenge Bassi investments has faced is in getting access to the correct measure of investment in training, as firms are often reluctant or unable to provide such data. as a result, where directly comparable metrics are unavailable, analysts gather data on the amount and types of training that companies offer.

other fund managers also offer investment based on human capital reporting. For example, aXa investment Managers’ wF Framlington Human Capital Fund uses a proprietary screening model developed by its responsible investment (ri) unit to invest in firms. the fund selects three back-tested criteria from a broader pool that includes the quality of working conditions, career development and changes in staff numbers over a three-year average.

thamotheram says the lack of demand from board level for this information is partly an effect of the lack of drive by investors who simply haven’t got the experience, or the training, to see the connection between human capital data and financial performance.

“to generalize, investment analysts and company CFos are not up with current thinking on this issue,” he says, “and the fact that they share this mind-set makes it harder for either to change. it’s based on lack of experience and ideological assumptions and it doesn’t mean it’s not true; it just means they don’t know about it yet.”

and that, in a nutshell, is the big issue right now. However, as initiatives such as the society for Human resource Management’s gather pace, there is a real opportunity for forward-thinking companies to move ahead of their competitors by bringing reporting on human capital out of the shadows. n

“The value of people doeshave a numeric value in terms of pay, but that is not a determinant of

future performance”Andrea Cartwright, nationwide


For major investments, we produce our own cash flow models, projecting forward 5 to 10 years. all our assumptions are then double-checked in the marketplace, where we talk extensively to suppliers, clients and regulators to deepen our understanding. that forms part of our exhaustive research on current and planned company investments, which provides a much wider frame of reference than just company reports and statements and sell-side research.

the investable group of companies that we can look at totals 150 out of the 500-odd companies listed in the region. that’s compact compared with other regions. we also have 10 analysts, a large number to cover the 40 stocks in our Brazil fund.

as long-term investors, we look particularly at the generation of free cash flow returns and valuation. Company financials are scrutinized and reviewed as well. the companies’ own projections are important, as the research team needs to engage with management to understand performance, as well as how and why corporate financial dynamics are changing. there’s always something that can be gained from company data: we can check our own premises and it gives us a basis to confront the company if results are not in line.

nOn-TRAdiTiOnAL METRiCSincreasingly, the investment selection process is incorporating non-traditional evaluations such as


pEdRO BASTOS, CEO OF HSBC GLOBAL ASSET MAnAGEMEnT in BRAziL, ExpLAinS WHAT kind OF COMpAnY inFORMATiOn THEY FOCuS On WHEn COnSidERinG A pOTEnTiAL inVESTMEnT

Pedro bastos joined HSbC global Asset management in brazil in 2006 asCEO. He has helped the company build assets to US$40 billion and the firm has launched a wide range of funds, from full-fledged hedge fund equity arbitrage strategies through to credit portfolios. He is on the boards of the National Association of Financial market Institutions (ANbImA) and the Association of Capital markets Investors (AmEC).

INSIgHT: THE bUY SIDE

The buyside

social responsibility and governance, integrating and blending these criteria into more formal and traditional financial and analytical modeling.

an extension of this more organic approach to measuring corporate performance is the issue of executive remuneration. HsBC in Brazil has been voting in favor of companies that continuously improve corporate governance by aligning remuneration with long-term interests.

a number of peculiarities help to explain why Brazilian funds have been less activist than those in developed countries. until recently, shareholders or their proxies had to be physically present at meetings to vote, and that’s a costly proposition in a country the size of Brazil.

that rule has been dropped, and there are even moves to make voting mandatory. asset managers will participate more and more in exercising voting rights, especially with the arrival of specialized shareholder consultants who advise on voting. we are in the first phase.

RApid MOdERnizATiOnindeed, the Brazilian market is rapidly modernizing all round. the gap between Brazil and other jurisdictions in the developed world is shrinking and, on average, standards are better than in most emerging markets. this has been a healthy evolution, which has taken place over 15 years. the creation of the New Market, a segment that only companies with high standards of corporate governance can join, represented a major step forward.

what is left to be done? at a recent key investor seminar, 150 Brazilian investors were asked which reform would most improve governance in Brazil. the answer was to enforce and enhance these New Market rules and the greater use of independent board directors, who should fill at least one-third of board positions.

that dovetails with the idea that ever more disclosure is required. More family-owned companies in Brazil will become corporates, and that will bring in more transparency. n

A healthyevolution

Making sense Synergies are often cited as the reason behind M&A deals, but reporting on how they will benefit the business is a challenge for many CFOs. Christian Doherty investigates

Max Habeck, eMeia leader for operational transaction services at ernst & Young, recalls an assignment from a few years ago. “i advised a us company on buying a european industrial group, and during due diligence, we helped client executives to identify about us$150m in cost synergies. the chief executive then said, ‘Great; tomorrow i’ll report to the market and i’m sure we can find us$250m.’”

admittedly, Habeck has seen the issue of reporting synergies move on a little since then. But challenges remain.

the word “synergy” has, over the past few years, acquired near-mythical status. Countless deals – some ultimately successful, many others not – have been predicated on the basis of synergy. Companies promise cost savings, sales boosts, upticks in revenues and back office and operational efficiencies as a reason for pursuing a particular M&a strategy. investors and analysts usually like the sound of it.

of course, not every deal delivers. But more often than not, post-transaction, these synergies, whether real or not, present a challenge for the reporting function.

THE GOLdEn RuLESCurrently, accounting rules demand some – largely quantitative – disclosure of deal rationale and

performance. “From an accounting point of view, the biggest challenge is to explain why the buyer paid what they paid,” says ruth picker, ernst & Young’s Global iFrs leader.

“Companies have to disclose the details of the business combination in the accounts so that users can see exactly what it is they have acquired. so they do need to quantify the acquisition, and usually they will also offer a narrative description of what they’ve acquired and why, though it’s not required under the accounting standards.”

CFos, then, need to be careful in how they approach the question of synergy. according to Habeck, two golden rules apply: set the baseline, and keep it simple. “CFos need to give shareholders an idea of what the baseline of the deal is. sometimes you read lofty statements where things are expected to become positive immediately, and you have to ask why a CFo would do that,” he says.

“ultimately, they need to be clear and concrete about what the baseline for success is, because if they don’t set that expectation properly they will find themselves in trouble, trying to explain the rationale behind the deal.”

when it comes to the synergies the company expects to achieve through the deal, the focus should be on

of synergies


SLUg: XXXXXXXXXXX XXXXXXXXXXX

probabilities of success. “You need to be clear on what initiatives you’ll be kicking off and what you expect to realize,” says Habeck. “You must also be clear about the key risk areas, and whether you’re prepared to manage those risks accordingly. Companies need to show that they have correlated the synergy benefit they plan to get with the risk they are running. so there is a need to make it clear to investors that something that might bring high benefits will also run a high risk, and that you are prepared for that.”

of course, analysts and investors can be a difficult audience to cater for, given that they often fall into two distinct camps: long-term followers of a company’s value-building performance, and those seeking insight into short-term targets.

“some analysts say that they ignore the goodwill and synergies completely and that they are only interested in the cash flows,” says picker. “that also means that they ignore any impairment charges later, because they’ve already effectively written them off.”

SEGMEnT REpORTinGFrom the investor side, there is a desire to understand fully the drivers behind any business combination, particularly when synergies are promised. “if there’s integration, and targets are set and you can see how the different segments – including the newly acquired entity – are performing, then there’s less of a problem,” says independent company reporting and investment analyst sue Harding, who is co-chair of the iasB’s Capital Markets advisory Committee and a member of the Joint iasB/FasB working Group on Financial statement presentation.

she agrees with Habeck’s view that synergies can only be understood if the acquiring company sets out the baseline for success and explains what it hopes to achieve in the future. “ultimately, synergies aren’t just about cutting a few costs and making savings. analysts and investors should be looking for more than that; it becomes a question of whether the company is delivering

on the targets it set. and beyond that, it’s about the ongoing performance of the newly combined unit.”

Harding believes that companies need to focus on improving the transparency and clarity of their synergy reporting. in particular, CFos need to lead an effort to improve segment reporting post-transaction. “there is an issue with the adequacy of segment information,” she says. “among analysts, there is sometimes a feeling that segments are too highly aggregated to provide

useful information, and that there can be too much of a ‘portfolio effect,’ where better-performing segments cover up the performance of the others.”

in most cases, the achievement of synergies within a new business combination can usually only be fully appreciated in retrospect, a fact that most analysts recognize. Given that, the onus falls on CFos to set the scene and manage expectations. “this isn’t rocket science, so keep a clear focus on not just transparency, but simplicity,” says Habeck.

“Don’t dream up something unnecessarily complicated that includes a number of unknowns in the equation – it will leave your audience confused. Most companies find it tough to get sales synergies. people – analysts and investors especially – are suspicious of the ‘magic in the air’ theory of M&a and will see through any grand claims.”

ultimately, the foundations of good corporate reporting apply here. transparency, clarity and realism will go a long way toward explaining corporate strategy with regard to an M&a deal – whether it succeeds or not.

“Companies need to show that they have correlated the synergy benefit they plan to get with the risk they

are running”Max Habeck, Ernst & Young

INFORmATION: REPORTINg SYNERgIES

Finnish-born Hannu Ryöppönen has 35 years’ experience as a CFO in the US, Denmark, Sweden, Finland, the Netherlands and the UK. He explains how he has learned to adapt his reporting style to different audiences throughout the worldInterview: Christian Doherty

things I’ve learned5things 5things I’ve5I’velearned5learned


Communicate the right messagewe learn more as we go along and see from experience how different stakeholders in a company understand and interpret the messages you deliver. whether addressing an employee, investor or supplier, or indeed the tax authority, the message you deliver could be the same, but the way you communicate it may have to change. ultimately, you must communicatein a way that they understand.

Hannu Ryöppönen’s career started in 1977 at Chemical bank, where he held various management positions in the US and the Uk. Since then, he has served as CFO of global retail giant IkEA group in Denmark and worked as Executive Vice president and CFO for grocery group Royal Ahold Nv. In 2005, he moved to London to take on the CFO and Deputy CEO role at global pulp and paper manufacturer Stora Enso Oyj, where he stayed until 2009. Today, he sits on several boards, including those of Danish pharmaceutical company novo nordisk, private equity firm Altor, and Hanken School of Economics in Helsinki.

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45Cultural differences countwhen working in emerging markets, you realize that there are various practices that tend to follow the types of political systems in those countries. the Brazilians follow a western model of capitalism and democracy, while China is less democratic and more authoritarian. these political systems affect the whole business culture within a particular country. For example, you can go to Brazil, talk to investors and agree a deal to build a factory, and they understand that you have to go back to your board and get final sign-off. in China, however, when you shake hands with the Ceo it’s a done deal and they see no need for approval from anyone else. n

Know your audienceMy work in communicating with investors and stakeholders has taken me around the world and i’ve seen a lot of differences in how audiences respond. take the americans and swiss, for example. in the us, audiences pose lots of questions and aren’t afraid to ask stupid ones. then you go to switzerland and it’s very different, because the audience is more passive and expects you to tell them everything. in the us and the uK you expect more open dialogue, which sometimes leads to quite aggressive questions, but in continental europe it’s more measured. Dealingwith both us and european audiences is challenging.

Stick to the factswhen delivering bad news, the CFo might wrongly be considered responsible for whatever mistakes have been made. But most stakeholders recognize that it is down to the management and the Ceo. this means that the CFo can communicate bad news in a different way, because they are seen as slightly removed from responsibility for it. with the CFo, there is an expectation of integrity. of course, you can lose that very quickly if you start to be too creative in how you explain things, given the 24-hour news cycle and the integration and speed of modern communications.

Keep it simpleMake sure you only talk about things you understand. Don’t try to be clever, because you can be sure that someone in the audience will catch you out. saying “i don’t know, i’ll come back to you with the right information” is always better than making things up on the spot, which can have serious consequences from a reporting perspective if you are in front of the press, or if investors can draw the wrong conclusion. i speak to students at my old business school [Hanken school of economics] and i always tell them the same thing: don’t try to be too smart. rather, be honest and if you don’t know, say so.

INSPIRATION: HANNU RYöPPöNEN

As the demand increases for companies to present their results and strategy to investors around the world, James Gavin looks at the variety of challenges they face and asks the experts how to prepare an effective roadshow

On the road

spring 2012 Reporting [30/31]

INSIgHT: THE INvESTOR ROADSHOW

Effective earnings and strategy presentation has emerged as a mission-critical part of the corporate toolkit, particularly for the increasing number of companies that need to cater for a globally diverse investor community. even in the age of 24/7 communications, taking to the road is still vital if you are to ensure that your company’s broader stakeholder community is engaged and up to speed with your performance and growth plans.

ernst & Young recently conducted a global survey of institutional investors (see p8 for more details). when questioned about the information available in the next round of interim reporting, 62% of respondents named investor presentations by management as a source they will rely on to inform their investment decision-making.

Many firms devote a large part of the corporate calendar to organizing results and strategy roadshows. investor relations officials, CFos and prs work together to design robust presentations that will both improve relationships with investors and positively influence market perceptions.

what’s more, there is a growing call for roadshows to move beyond the hitherto dominant western financial centers such as New York, london, Frankfurt and Zürich. asia in particular is expected to see an increase in roadshow activity in the near future, as companies reach out to one of the world’s fastest-growing investor communities.

CuLTuRAL diFFEREnCESanyone organizing an investor roadshow needs to be aware of cultural variations. Different regions have different investment styles and this will influence the design of the roadshow. the key to success is to be aware of different cultures and be flexible enough to take a lead from the audience.

the fund management industry in the Middle east, for example, is less developed than in the us or europe, and interaction between asset managers and corporates is not as common. as a result, investor meetings may need to include a more introductory presentation than you might make in the west; a broad overview of the industry and your competitors, as well as the company itself, is likely to be well received.

“Do understand who you are meeting and how investment decisions are made,” advises Maria Hunt, General Manager of the Middle east investor relations society. “investor meetings in the region are not as straightforward as traditional asset management meetings in the us and europe, because retail investors can play a significant role, as can family offices and sovereign wealth funds.”

she adds that you should allow plenty of time for meetings – and don’t overfill the day. “You can’t treat investor roadshows in the region like you can in london or New York, with back-to-back meetings starting early and finishing late,” she says. “Meetings in the Middle east seldom run to time, very often go on for longer than expected and can incorporate broad-ranging discussions.”

using a local broker or bank to help set up meetings

can assist the process. they will not only arrange all the logistics, but also advise you on who you are seeing and accompany you to meetings. they will usually speak arabic, too, which helps smooth the introductory process.

inCiSiVE quESTiOnSaccording to rachel McGuire of uK financial pr firm Buchanan, the united states is the country where companies face the most incisive questions and the biggest scheduling challenges.

“Generally, us analysts and fund managers will have done thorough research beforehand and will arrive armed with two, three or even four pages of questions, saying that they don’t want the formal presentation, they just want to talk through their questions – which are tougher. so you need to carry all your presentation facts and figures in your head,” says McGuire.

North american companies holding roadshows in europe also need to be ready for differences in questions. “Don’t be surprised if you get a level of questioning about management compensation, since a lot of investors focus on that to see if they have stepped over a line of appropriateness,” says Jim MacGregor, Ceo of abernathy MacGregor, a us-based financial pr firm specializing in investor relations.

asia’s emergence as a key location for roadshow activity requires even stronger cultural antennae. “in Hong Kong, you tend to get more strategy questions than figures-based analysis, and it has the advantage of being a very compact area to get around,” says McGuire. “However, although a roadshow to the Far east might sound like a good idea, sense-check whether you will get a return on your investment, as most money for uK investments will be run from their offices in london.”

shareholder structures also tend to be different in asia, with a number of companies having restricted floats and family ownership that put shareholders in the minority. this affects the dynamic of the roadshow.

as the Far east develops a more sophisticated investor culture, the experts say that businesses need to raise their game. “Companies in this region that are going on roadshows and meeting investors sometimes aren’t prepared for the issues or the level of detail that institutions want to address,” says Kirsten Molyneux, senior Consultant at Brunswick Group’s Hong Kong office. »

62%of institutional investors said that, among the sources of information available in the next round of interim reporting, they will rely on management presentations to help inform their investment decisions

while the standard of asian roadshows has continued to evolve, there are still areas for improvement. Giving feedback on a recent presentation, one asian institutional investor said: “please don’t just repeat the last results presentation – we want strategy, facts, commitment and management time!”

“investors turn up expecting to engage in a strategic dialogue with management,” says Molyneux. “the quality of the relationship between the company and shareholders can be affected if the meeting doesn’t match up to these expectations.”

asian investors are also less confident about newly listed companies, given the lack of a track record and share price performance. therefore, those companies need to be doing much more in terms of roadshows to convince the investment community.

“probably the biggest difference between asia and other regions is that roadshows don’t happen often enough here,” adds Molyneux. “institutions are very keen to meet companies, but not enough of them actively go out and find out who their shareholders are. they tend to see the same people all the time and there isn’t enough investor targeting, unless it’s deal-related.”

some of the formalities are different in asia, though this is not the deciding factor in the success of a roadshow. “the way things are conducted is probably more formal than it might be in the anglo-saxon market, but the most important thing people look for is the quality of the

information and a credible management team or senior investor relations officer (iro),” says Molyneux. “investors are expecting more from the conversation than a review of the latest results presentation and there are still a surprising number of companies that need to think more broadly about the information they give investors.”

STRuCTuRinG A pRESEnTATiOnHow should a roadshow be structured to meet a potentially bewildering array of demands? as a starting point, companies should focus on the key points and be concise so that investors focus on the most important issues. More detailed figures should be available in an appendix for investors who choose to drill down on particular issues.

preparation is crucial, whether you are presenting in Chicago or shanghai. James Kidd, CFo of aVeVa solutions, a leading engineering software provider to the plant, power and marine industries, says that much of the hard work needs to be done well in advance of hitting the road: “ahead of each roadshow, we typically look at the profile of the investors we are meeting and their particular objectives, so that the meeting is aligned with their expectations.”

aVeVa generally undertakes roadshows on the back of interim and preliminary results, so there is a focus on the last reported period and understanding what has happened to the business and what the main strategic drivers are. “we build the story around the performance and the key messages,” says Kidd. “it is always vital to make sure you are consistent from meeting to meeting.”

inFORMATiOn OVERLOAdwhile it is important for companies to back up their presentations with as much data as is useful, they must also beware of information overload.

“You have to be focused,” says Kidd. “You have 45 minutes to an hour per meeting, which is a relatively short period of time in which to get your key messages across,

“Institutions in Asia are very keen to meet companies, but not enough of them actively go out and find out who their

shareholders are”kirsten Molyneux, Brunswick Group

»


INISgHT: THE INvESTOR ROADSHOW

The virtual roadshowThere are occasions when preparing for a marathon global roadshow is not necessarily the best use of corporate resources. Fortunately, developments in video and internet technology have seen the birth of the “virtual roadshow,” and some companies that don’t have the time or the funds to visit Rio de Janeiro or Hong kong arenow exploring the options available.

There are several to choose from, ranging from simply filming a presentation and putting it online, to more proactive possibilities that allow firms to communicate in real time with a wider audience. Webcast technologies can provide live or on-demand video or audio webcasting, including question and answer sessions.

International PR firm PrecisionIR builds packages for clients to which it can add services such as webcasts. “virtual roadshows are interactive and very much computer-focused,with graphics and video,” says Jenni mathews,an account manager at PrecisionIR.

There are a number of advantages to undertaking roadshows virtually, not least the significant cost savings. “You find that people who do roadshows generally spend a lot of money with their brokers setting up their meetings and this is one of the things we don’t have to worry about too much,” says mathews.

“We can also spread the marketing a lot wider, as we don’t mind if hundreds of thousands of people turn up – whereas, if they all turned up to an actual roadshow, it would cause all sorts of logistical problems.”

However, there are limitations to the virtual medium – notably the lack of the all-important eye contact. “The problem is that can you inform people electronically, but you can’t persuade them,” says Jim macgregor of Abernathy macgregor. ”Without the body language, there isn’t the chemistry – but it’s still better than nothing.”

especially if someone is not up to speed with your story. if you’re not careful, you can spend the majority of the time giving background information about the company.”

Charts and graphs are important to convey detailed information and highlight trends, but the narrative is equally important to help the audience absorb the information and understand the context. use too many slides and you can get in the way of building a strong narrative. the more successful companies are those that engage in an effective conversation with their investors and use just enough material to support what they are trying to get across.

it’s also important to get feedback from previous meetings so that you properly understand investors’ concerns and can address them. “us investors are less likely to provide feedback after the meeting, so it’s important to be direct and ask about any concerns during your meeting,” says sean Bride, an investor relations specialist at financial pr Citigate Dewe rogerson.

dEALinG WiTH BAd nEWSDelivering bad news is one of the hardest tasks facing companies undertaking roadshows. in asia, the need for diligent preparation has been made even more critical by the high-profile corporate issues that have been associated with asian companies over the past year. while the number of companies involved has been relatively small, it has been a reality check for businesses across the region.

“investors’ trust has been rocked and, as a result, people are going to be prepared to question the information companies present unless it is well explained and supported,” says Molyneux. “investors will not be happy to take management at their word, but will want to see a professional presentation that proactively deals with the biggest issues affecting the business, the sector and the market at large.”

in the Middle east, says Hunt, immediate disclosure via the stock exchange of bad or disappointing news is essential, as is a detailed explanation of exactly why the news is negative and, where appropriate, the steps being taken to rectify the position. “reaching out to shareholders by telephone as soon as the bad news is announced is the best approach, as that shows you care that the news is disappointing,” she says.

whether in asia, the Middle east, North america or europe, the important point is honesty; for example, being prepared to tackle a difficult issue up front in the presentation rather than waiting for an investor to raise it as a question.

“when delivering bad news, it’s helpful to provide some context and background, but in a balanced way so that you don’t sound too deflated or even out of touch,” says Bride. “You should demonstrate how you’re addressing a particular problem and reducing the risk of it happening again.” n

“If you’re not careful, you can spend the majority of the time giving background information

about the company”James kidd, AVEVA Solutions

GLOBAL SuSTAinABiLiTY SuMMiT A drive towards environmental and integrated reporting is just around the corner. That is what Ernst & Young’s first global Sustainability Summit was told in a special technical session on transparency in reporting. The event, organized by the global Climate Change and Sustainability Services practice, was held in madrid on 19-20 January and saw more than 300 attendees mingle with 49 senior-level speakers from more than 20 countries who were representing governments and the private sector. ey.com/es/sustainabilitysummit

ERnST & YOunG RApid-GROWTH MARkETS FORECAST – SpRinG EdiTiOn – ApRiL 2012While rapid-growth markets are proving resilient to the fragile global economy, more divergences are emerging among them. In the spring edition of the RgmF, you will discover why, over the medium term, Rgms will become a source of global growth and trade flows. Find out why in our report.

ey.com/rapidgrowth

inTO THE unknOWn – CLiMATE CHAnGE pOST duRBAnWe examine the outcomes from last December’s UN Climate Change Conference and address the questions that businesses should consider: • Do we foresee a global priceon carbon?• What is the future of Clean Development mechanisms? • What opportunities could

emerge around future adaptation measures?• Will the green Climate Fund provide funding opportunities?ey.com/sustainability

A TALE OF TWO MARkETS – TELLinG THE STORY OF inVESTMEnT ACROSS dEVELOpEd And RApid-GROWTH MARkETSThis third report in The master CFO Series explores the role of the CFO in balancing investments across developed and rapid-growth markets and the way in which the CFO

communicates this balance to investors.ey.com/cfo

Recent publications from Ernst & Young

... and more

2012 – A CHALLEnGinG YEAR FOR THE EuROzOnE There is little doubt that 2012 will be a very challenging year for the Eurozone, with large amounts of public and private sector debt to be refinanced, tight credit conditions, further fiscal austerity and job losses. Reforms are needed to boost medium-term growth, but will the current crisis be the trigger for changes that would

have otherwise been difficult to implement? And what should business leaders prioritize in order to navigate through this challenging environment? The spring edition of the Ernst & Young Eurozone Forecast provides the latest insights and comments on the development and prospects for the Eurozone.ey.com/eurozone

iFRS updATE FOR FinAnCiAL YEAR EndinG 31 dECEMBER 2011This comprehensive publication, updated twice a year, captures new standards and interpretations that apply to current reporting periods, as well as issued standards that are effective in future periods. It helps financial reporting professionals to identify the standards that are applicable for the June and December year-

end periods, and also covers current topical accounting and reporting issues that, for planning purposes, audit committees and finance departments need to consider.ey.com/ifrs

For the latest updates on iFRS, visit ey.com/IFRS


REvIEWS

The essential CFO: a corporate finance playbookby Bruce nolop (Wiley, May 2012)written from the balanced, top-down perspective of the modern CFo, Nolop’s book offers practical advice on executing effective corporate finance strategies. The essential CFO covers everything from establishing robust accounting and risk management processes to internal and external communications and developing talent within the organization.

Steve Jobs: the exclusive biographyby Walter isaacson (Little, Brown, October 2011)the world knew him as the driving force behind iphone and ipad developer apple, but what was steve Jobs like away from the media spotlight? walter isaacson’s book explores the life of apple’s late Ceo, focusing on his creativity, leadership and determination to succeed. Based on interviews with Jobs, his family and friends, colleagues and competitors, the biography also delves into his controlling nature and uncompromising business approach.

Taking people with you: the only way to make big things happenby david novak (Viking, January 2012)as Ceo of Yum! Brands, one of the world’s largest restaurant companies, David Novak knows a thing or two about leadership and steering a global business with 1.4 million employees. His guide to management covers employing the right people, motivating them, celebrating achievement and never tolerating poor performance.

Top business psychology modelsby Jonathan passmore and Stefan Cantore(kogan page, July 2012)this book offers many theories and frameworks recommended by psychologists to help executives understand human behavior, emotions and cognition in the workplace. presenting each concept as a concisely written summary, passmore and Cantore provide a variety of psychological techniques that can be applied to training and coaching.

On the shelfnew and recently published books

Editor tim turnerContributing Editor andy DavisAssistant Editor rob MorrisSenior designer Jenni DennisAccount director emma Kingproduction Manager John Faulkner

For Ernst & YoungJosy roberts-pay, Marketing Director, eMeia assuranceJoan Fulton, program Manager

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Christian Mouillon, Global Vice Chair, assuranceDon Zimmerman, assurance and advisory Business servicesFelice Friedman, Director, Global public policyphilippe peuch-lestrade, Global Government & public sector leaderr Balachander, assurance Markets leader, indiarichard wilson, assurance servicesruth picker, Global leader, iFrs services, Global professional practicestephane Kherroubi, Financial accounting advisory services leader, eMeiawarmolt prins, assurance Markets leader, eMeia

eMeia – Felice persicoamericas – tom Houghasia-pacific – Clive saundersonJapan – Yasunobu Furukawa

RecommendedWebsites that CFOs have in their bookmarks

bloomberg.comhbr.orgcfo.commckinseyquarterly.comeconomist.comwsj.comlinkedin.comfortune.comforbes.comft.com

ReportingIt’s more than the numbers issue two | april 2012

Out of the shadowsThe growing drive to report on human capital

On the roadHow to prepare a compelling investor roadshow for different parts of the world

Efficiency driveAn effective finance function has become a source of competitive advantage for global companies

Early adaptersWhy it’s important to take

a strategic approach to sustainability-related risks

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The world’s climate and ecosystems are changing at an unprecedented rate. Experts predict that, in the next decade, the impact on the supply of energy and water will fundamentally change society and the global economy. How will your business adapt to the new opportunities and risks?

Find out more at ey.com/sustainability

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