Our Director of Financial Communications, Tom Baldock, on how changes in financial reporting requirements will affect the City...
Journalists don’t often get excited about statutory reporting requirements, but National Grid plc made headlines in January when it told the market that in future it would update investors on a half-yearly, rather than quarterly, basis. This followed guidance from the FCA in November (following an EU directive in July 2014) that listed companies would no longer be required to use interim management statements (they can continue to report quarterly if they wish).
In explaining the decision, National Grid said that as a long-term business earning “low-risk returns over several decades”, mandatory requirements to publish information put too much focus on “matters of little relevance.” In an interview with the FT, Chief Financial Officer Andrew Bonfield went further, adding that up to a month of senior management time could be saved each year as a result of switching to half yearly reporting. He encouraged other companies to follow suit.
So why the excitement? Well until the latest changes, many were of the view that over-frequent reporting was leading PLC boards to focus too much on performance metrics set by the City’s sell-side analysts. There had been calls across the spectrum of politics and business for change and so National Grid was applauded in many quarters (notably including the financial press) for making the change quickly.
It’s easy to forget the history here. Back in pre-financial crisis days, regulators had a different set of priorities. A series of scandals had left investors and regulators lacking confidence that enough checks and balances were in place to control boardrooms. One result was tighter corporate governance, another was the EU Transparency Directive 2004/109/EC, which declared the need for ‘more timely and more reliable information about the share issuer's performance over the financial year’ and ‘a higher frequency of interim information.’ The interim management statement (IMS) was thus born and UK companies with a main market listing had to start using them in 2007.
Now it has been dropped, some think there might be new problems. Feedback to the FCA’s Consultation Paper on the 2014 EU Directive included the argument that there will now be an increased burden of responsibility on PLC managements to ensure all price sensitive information is released as soon as possible, resulting in unscheduled trading statements and greater volatility.
But there has been little public support for this view. With financial stability and growth the priority, structures that promote short-term thinking are under fire from regulators. And so for its part the EU is talking a different language, acknowledging the IMS’s administrative burden and saying that it is “essential to reduce short-term pressure on issuers and give investors an incentive to adopt a longer-term vision”.
So what will be the result of this latest change? Are companies clear about what to do?
When the IMS was introduced in 2007, FCA predecessor the FSA was criticised for not giving enough guidance to companies about what information to disclose. Initially companies grappled with the problem of how much to say. The Investor Relations Society expects that for the vast majority of UK listed companies, ‘there will be little immediate change’ and ultimately it will be investors who decide what is acceptable. But there is considerable support for companies wishing to report less frequently. The Financial Reporting Council (FRC) has publicly supported moves to stop publishing quarterly while the UK Investor Forum has argued strongly for a greater focus on long-term investment by companies, rather than hitting quarterly data points.
Back in 2007, sectors gradually found their own norms for handling the new IMS. If more sector leaders break ranks, as National Grid has done, then change could come quickly. Certainly the impulse for many company directors will be to report less and focus on the business more. Finance Directors will be keeping a close watch on their peers in the coming months.
If you want to discuss any financial communications requirements with Tom, please email him. You'll find more information about our offering on our website.