By: Mark Cracknell, Head of Research, Generation CFOIt is essential that an organisation retains the trust of those who work for and invest in them. Without trust, you risk losing stakeholder buy-in and support that is critical during uncertain times. How do you achieve this and what are the challenges of delivering this in practice?
Who are the stakeholders?
We often think of stakeholders as external shareholders or investors, but this excludes a whole swathe of people who have a vested interest in your organisation. The most important of these are your employees, then customers and suppliers who want to trade with you and invest in the relationship. Finally, there are the banks and lenders.
The importance of communication
We have seen throughout the crisis the importance of communication and the role this has in building trust. Communication can come in many guises and from many departments within an organisation. Maintaining a consistent message in a fast-changing environment can be a challenge, especially with the heightened awareness of social purpose that now prevails i.e. how did the company conduct itself and how did it contribute during the crisis?
As finance professionals, our focus is invariably on financial information. When this is provided to internal stakeholders, we tend to self-govern in terms of quality and content. Where financial information is made public, there are regulations to follow to ensure integrity is maintained. The objective of public reporting is to inform current and prospective investors, generating public trust in your organisation to retain or attract investment.
The impact of COVID-19 on reporting
During a period of uncertainty, such as that caused by COVID-19, many stakeholders will be seeking reassurance about their position. Employees will have concerns about their jobs and future security. Banks and lenders want to know their money is safe. Investors want to ensure their investment will continue to grow.
The importance of reporting is therefore significantly increased during uncertainty as we seek to provide information to the stakeholders. This should include not just historical data but also ‘forward-looking judgments’ and a narrative around the strategy to deliver this. This should help build an understanding of the current situation, and how things might develop as this uncertainty evolves. In this respect, being clear and transparent can only be encouraged.
What do you report?
When we refer to internal reporting, this will differ from one organisation to another and will be driven by your own requirements and needs.
For external reporting, this is a bit more complex. How much do you reveal to the public and what form should it take?
This whole area is regulated in the UK by the Financial Reporting Council (FRC) whose mission is “to promote transparency and integrity in business”. The FRC’s Financial Reporting Lab recently published an excellent report on this very subject entitled “Reporting in times of uncertainty”. This provides insight into what investors would like to see, highlighting:
- a desire for disclosures from companies on the financial resources available to them including cash and access to additional finance (such as committed bank lines), other financing and non-standard debt arrangements (such as supply chain financing); and
- the importance of forward-looking information which explains how resilient the company’s business model is to the current events and various scenarios
The report also provides examples of disclosure that companies have already published. What is apparent is that being clear and transparent is the way to gain the trust of stakeholders.
What action do you need to take?
Regardless of whether you are reporting internally or externally, we highly recommend that you read the FRC report “Reporting in times of uncertainty”. We will also be discussing this report with the FRC and industry experts in an upcoming Deep Dive session where we will also cover the practicalities of delivering narrative statements and the future digital landscape for regulatory reporting.