The word on the street is that companies in Europe are becoming more talkative. And not necessarily because they are being told to. Most European markets now require half-yearly reporting but more and more companies are taking the initiative and voluntarily reporting their accounts quarterly. There is a simple reason: because they have aspirations outside their own markets, and understand that greater transparency lowers the cost of capital. On top of that, the internet has transformed the ways that companies can communicate with their investors and many are looking at increasing the frequency of their reporting over the web. But how far has this trend really taken hold in Europe? And how much is it just the spin of the design agencies that want their business?
For starters, there is a clear difference between giving out lots of information and doing full accounts. It seems that companies have definitely got the hang of the former. Ian Wright, head of corporate reporting at PricewaterhouseCoopers, certainly agrees: ‘There is undoubtedly pressure on European companies to produce more information than they have traditionally done, and to announce their plans earlier.’ Wright points to the now defunct Dresdner and Deutsche Bank merger, stating that just a few years ago, it would have taken much longer for news of the deal to reach the public domain. Wright sees the internet as a centerpiece of this information dissemination process: ‘It’s very important for companies to get information to people quickly. They need to keep people’s confidence, to react to things quickly. The web site is very much part of this.’
Web embrace
A study by the International Accounting Standards Committee, Business Reporting on the Internet, reinforces Wright’s position that European companies have embraced the web. It identified the 30 largest companies in 22 countries around the world (nine in Europe) to determine whether they had a corporate web site; if so whether the web site included financial statements or other financial data; and if so exactly what the data was and in what form it was presented. The survey found that of the 660 companies surveyed, only 95 (14 percent) did not have a corporate web site at all. Of the 556 with a web site, 155 did not include any financial statements or other investor-related data. The remaining 410 companies (roughly two-thirds of the total) included either complete financial statements or selected financial data (Germany and Sweden were among four countries where all large companies use financial data on their web sites).
But that doesn’t address the issue of whether companies are issuing full accounts more often. According to Etienne Mercier, head of investor relations at Michelin, it’s definitely a trend but not one his company is ready to embrace yet. ‘We’re convinced that one day we’ll move to quarterly reporting,’ he says. At the moment, Michelin reports earnings figures half-yearly with quarterly announcements of revenues and sales figures. ‘We’ve not felt particular pressures to move from shareholders or from our competitors. If our shareholders started making lots of noise about it or if all our peers started reporting on a quarterly basis, we would have to do so as well.’
Twice is enough
Malcolm Cheetham, head of accounting at Swiss company Novartis, says that for the moment his company wants to keep reporting twice-yearly too. Like Michelin, Novartis makes sales releases at intermediate quarters but not income statements. ‘We have no plans to change to quarterly reporting, at least not this year,’ says Cheetham. Novartis is currently actively pursuing a US listing which it hopes to finalize by mid-year and which may put pressure on the company to change to more frequent reporting. According to Cheetham, it is too early yet to tell. ‘As a foreign registrant we’re not obliged to produce quarterly figures but maybe we’ll feel the pressure to anyway.’ The company’s attention is instead focused on accelerating its full annual closing figures. This year they came out in mid February, a full month earlier than the previous year. And Novartis may look at speeding up half yearly figures as well – although this is complicated by summer holidays in Switzerland which tend to close down companies for much of July and August (currently half yearly figures come out at the end of August). ‘My perception is that speed of reporting is the key issue at the moment in Europe. Speed of communication with investors is very important.’
According to Guy Stern, chief investment officer at Frankfurt-based Sal Oppenheim, speed is okay but investors and analysts want better information too, more often. ‘Many companies we follow have started reporting more but not on a quarterly basis. Those that do report quarterly generally do so on an income statement basis not on a balance sheet basis. What we want is for companies to commit to full reporting four times a year like in the United States.’ According to Stern, realistically Europe won’t get up to speed with the US for the next couple of years. ‘The regulatory environment is just not there and share price pressure is only just beginning to pick up,’ he says. Stern adds, however, pressure for quarterly reporting has increased markedly for companies. ‘As the environment for takeovers – hostile and friendly – becomes more prevalent, you’re going to get companies coming under a lot of pressure. Part of achieving a decent share price is having good visibility. Part of good visibility is about having good transparency,’ he says.
Michael Clark, a London-based Swiss market analyst for Robert Fleming Securities, is more upbeat about European companies’ achievements to date. ‘Companies have come a long, long way. Traditionally Swiss companies had dinosaur-like accounting. There really hasn’t been a tradition of openness here. But as the management generation has changed and the investor base become more internationalized things have really started to be shaken up. The larger Swiss and German companies, especially those who want a US listing, are moving toward US Gaap or IASC standards,’ Clark comments. He adds that although reporting standards are not up to US level yet, they are definitely moving in that direction. ‘It’s not just about introducing quarterly reporting but also things like quarterly conference calls with senior management and generally a cultural shift. That’s something we’re clearly seeing.’
Management implications
But what implications does increased frequency of reporting mean for corporate management? After all, they still have to get on with the business of running the company. According to Novartis’s Malcolm Cheetham, regular communication is not really a management time issue.
And Antti Raikkonen, head of IR at Nokia, which does report full accounts quarterly, adds that in some ways it makes things easier. ‘From a business management point of view you have to look more carefully at what you say.’ He continues: ‘Your approach also has to be more systematic and you have to be more organized to meet the tighter deadlines, but in the end that puts you at a clear advantage.’
Paul Reynolds of London-based design and technology agency Marchcom, says that he has found that managements are happy to report as often as possible. ‘What’s happening in the economy at the moment is that technology, media and communications companies are totally over-valued and all the bricks and mortar companies are looking at them and saying, How do I become a dot-com company? I want to be like them. What some are concluding is that a way of doing so is by quarterly reporting.’ Reynolds adds, however, that although chief executives and finance directors are saying that they’ll report monthly if they need to, auditors are having to hold them back because of the audit implications. ‘Clearly the greatest pressure is on the auditors because they will have to produce the figures more often,’ Reynolds says.
Michelin’s Etienne Mercier comments that in some ways, quarterly reporting would make things easier for the investor relations function. ‘At the moment we give out information but can’t always tell people the whole picture, which can be difficult to explain.’ The IR officer is effectively the company mouthpiece for the figures, so increased reporting may mean more press activities and more announcements for them but the web offers great opportunities in terms of this, Reynolds adds. ‘There is no real need to send faxes or booklets out anymore with results. Most people can press a couple of buttons and get something e-mailed directly to them.’
Changing definition
Reynolds believes that the internet is changing the whole definition of company reporting. Contrary to popular opinion, he suggests that in the UK at least, the annual report is fast becoming obsolete. ‘I predict that within six months companies won’t be producing annual reports anymore. When you’ve got preliminary documents available on the web which are almost as big as the annual report, who cares? They’re a major expense and increasingly seen as out of date and out of time.’ Sal Oppenheim’s Guy Stern sees this as missing the point. ‘The internet is one of the available ways of sending out the company report, but that’s about information dissemination. We don’t care if we get it by mail, fax or if it comes to us electronically. All we care about is the quality and frequency of the information. The key question is: Are you doing full reporting?’ comments Stern.
The web does provide other advantages however, for example, holding analyst meetings online. As a London-based analyst following Swiss companies, this is a real plus for Michael Clark. ‘It means you don’t have to go to the Continent when you want to attend a meeting which saves a lot of time.’ That is, however, only a potential plus point for Clark who says that software problems have so far prevented him from tuning in to any online presentations. Cheetham and Raikkonen, whose companies both put their meetings online, agree that the technology is still not good enough. The signs are, however, that European companies are embracing electronic communications. According to Clark, this is happening even more on the Continent than in the UK. He explains: ‘What happens in the UK is that a company tends to fax out an announcement about its analyst meeting and everyone trundles two blocks over in the City. On the Continent, things are much more dispersed, because many large companies are stuck out in the sticks. There is a greater need for electronic communications in Continental Europe, so companies there are moving faster.’
Communicating over the internet obviously doesn’t come without its disadvantages. Perhaps most challenging for investor relations officers is the complicated business of managing information that gets to investors. It’s not as easy a process as it used to be. With data on companies widely available on the web and improved channels of communication between investors through online chatrooms and bulletin boards, there’s a real fear that people are passing on mis-information. Comments PricewaterhouseCoopers’ Ian Wright: ‘A finance director may be watching his company’s chatroom and sees someone say something about the company that is strictly not true. The investor relations officer needs to act fast because this is the sort of thing that makes share prices move, but in the end what can he or she do?’
Wright suggests that this process of managing information is one that companies are only just starting to address. It’s an issue that the regulators are looking at too. How do they make sure that there are rigorous standards on the internet in the same way there are accounting standards for financial statements? The IASC has proposed a code of best practice for reporting standards which, as this magazine went to press, was being put before its board with a view toward reaching agreement by the end of the year or early next year. The US SEC and other regulatory bodies are also considering imposing similar standards. But in the meantime companies are having to go it alone.
