Why Communicating ‘Extra Financial Value Drivers’ is the difference between good and great companies
20th March 2014
Changing Priorities of Investors
India’s Financial Markets – distinguished member to the global trillion-dollar club and one of the top 15 in terms of capitalization – have played a significant part in the country’s overall growth story. A ten-fold increase in the annual FDI flows from USD 2.2 Billion in 2004 to about USD 27.3 Billion in 2012 showed the level of investor interest that has been generated in recent times. Questions have been raised about the continuity of these trends especially due to the present slow-down, but the broad consensus is that India is likely to retain its position as one of the leading destinations for investment.
There is, however, a caveat. The domestic business community needs to be aware of the fact that they are being tracked on much broader ‘extra financial’ parameters – factors that become even more important during a slowdown – and perceptions of India being a tough place to invest in. After the global economic crisis, the practice of integrating extra financial information has been gaining attention amongst responsible investors as well as amongst the business and political intellectuals.
Extra financial information may combine a wide range of ESG (Environmental, Social and Governance) issues which are likely to have a short, medium and long-term effect on corporate performance. Extra-financial factors include, corporate governance, human capital practices, innovation, intellectual property, customer contentment, climate change, natural resources management and reputational risk.
These concerns, that have conventionally been brought up only by the socially responsible investors (SRI) are evidently getting mainstream with global investors, regulators and analysts. International guidelines and recommended standards such as UN backed Principles of Responsible Investment and Equator Principles lay down the fundamentals of this responsible approach and are advancing in terms of adoption. The global investment community may not seek complete integration from India at this stage but will still be looking at adherence to global standards in managing these issues.
Role of Strategic Financial Communications
In the financial world that transforms by the second, strategic communication practices need to stay a step ahead on diverse existing and upcoming issues that organisations may cope with, predominantly those that relate to their fiduciary duties and may have organisational impact. It must be able to strategically evaluate the various patterns of stock performance that the company may undergo as the result of a public disclosure or new regulations. Due to the potential impact of legal liability claims emerging out of the extra financial issues and the impact on the company's share price, financial communication has a pivotal role in managing them.
The decision making by the investors as well as the analyst community is a customised and highly complex process. The motivations and perspectives of different participants in this decision making space may vary significantly. The financial communication practice needs to be aware of these differences and build expertise in creating customised strategic communications. Mere communication of extra financials and their linkage with long-term value may not be adequate even for some of the more prominent companies. It is important for the winning firms to identify and engage with analysts that follow the company.
Communicating Corporate Performance across Dimensions
In order to advance the dialogue on extra financial communication, companies need to give shape to the message they would like to convey to the capital markets to ensure that they are adequately assessed. They must comprehend the environmental, social and governance issues that are central to their business and understand their impact on financial metrics. Who should deliver this critical information is also very relevant. As many investors and analysts indicate that direct engagement with the companies’ CEO or CFO is likely to influence their investment decisions, straight guidance from the top or board level representatives should be helpful in mainstreaming extra financials.
Once the ‘what’ and ‘who’ parts are well defined and developed, the companies need to ascertain that the “how” is equally well executed, that is, effective communication channels have been deployed. There are attributes that are similar or dissimilar between investors and analysts, therefore a robust communication strategy should act on these similarities and variances, applying several channels to target specific clusters of stakeholders. A critical thing about extra financial information is the extra rigour on quality disclosure not just quantity. Stakeholders need information that supports comparison and benchmarking around these parameters that have always posed a major challenge to conventional investment analysis.
Taking a cue from the investors and other stakeholders, companies can join large-scale efforts to enhance the comparability of extra-financial information – through development of standardised benchmarks and methodologies. One such effort that is gaining ground in India is Business Responsibility Reports by listed companies based on the National Voluntary Guidelines as recommended by the Ministry of Corporate Affairs and SEBI. Further refinements may come along in due course, but developing communication around such platforms could bring significant benefits to reporting companies and stakeholders alike.
Succeeding companies are already making the transition from the outdated financial modeling to more advanced sustainable partnership models that go beyond focusing on shareholder wealth. In the long term, the key differentiator between the companies that succeed and those who do not in this extra financial end game, will be complete engagement on such issues with all the stakeholders and, very importantly, strategic communication of such intentions and milestones to the capital market actors.
Sumantra Sen, Director, FCCMA, Penn Schoen Berland, SA