Investors aren't getting the quality of communication they need from CFOs whose companies invest in risky, rapid-growth markets, according to a study of global transactions from Ernst & Young.
The study, based on a survey of 750 finance chiefs, along with shareholders, finds that fewer that half the investors believe that corporate reports provide enough detail on the risks of investment in developed and emerging markets. Meanwhile, the second prong of this two-pronged research effort says that two-thirds of the CFOs questioned don't see their organizations as good either at balancing resource allocation between those developed-market and emerging-market types, or at communicating the company's overarching strategy.
The report is titled "Tale of Two Markets: Telling the Story of Investment Across Developed and Rapid-Growth Markets." And E&Y believes that both elements of this risky-market scenario -- both the investing itself, and investor communications about the investment strategy -- and in need of being studied together. And, of course, the responsibility is squarely in the chief financial officer's purview.
'New Territory' for CFOs
"Much of this is new territory for a position that has been historically focused on managing the company's finances, prompting many CFOs to become more well-rounded business leaders who excel at communicating with key stakeholders," Diane Larson, Assurance partner with E&Y's Assurance and Markets division, tells CFOworld.
"With more companies investing in risky, rapid-growth markets while managing new demands from regulators and investors, the role of the chief financial officer is undergoing a profound transformation," she says. "Investors and regulators want more detailed and timely information from CFOs, while CEOs and boards of directors are expecting them to go beyond the numbers and serve as strategic business advisors who can better manage risk and pursue new growth strategies."
That suggests that investor relations -- especially in the area of interpreting investment strategies -- needs to be a more important part of the CFO's agenda. And indeed, providing ways to elevate IR is one of the goals of the study.
"Above all else, investors want to understand changes in the risk profile so that they can factor these into their decision-making," the report says. "This trend highlights the importance of communicating more frequently with investors and of bringing them along on a journey as the company's strategy evolves."
Detailing 10 Lessons
The investor relations recommendations are included in a list of 10 lessons, starting with the CFO's need to make keep an eye on any company resource allocation change, as well as the overall growth that is part of the corporate forecast.
Applying financial discipline in the area of resource allocation requires that finance ensure "that budget for capital expenditure is kept in line with the company's expectations for growth in revenues for each market," the report says. "By keeping tight control over these metrics, CFOs can apply an objective yardstick for changes in investment.
Other lessons include being careful not to neglect developed markets, even as companies elevate their interest in rapid-growth areas. Indeed, number three among the 10 lessons is guidance on prioritizing markets, and assuring that options exist for shifting allocations when that's necessary.
Did Things Go Wrong? Admit It
Other insights that E&Y says grow from the study's results include these:
- Finance should take the lead in admitting to investors when plans don't work out. It notes that shareholders "will be suspicious of a CFO whose company never seems to make a mistake." Any admission, of course, needs to be accompanied by explanations about what went wrong, and the actions taken to rectify the situation.
- Don't save investor relationship-building for difficult times alone. "During good times is precisely when companies can build goodwill," the report says.
- Transparency about sources of funding is important, especially at a time when investor groups and rating agencies both are critical of companies' disclosure about sources of funding and committed lenders.
- Since investors like predictability, finance should be consistent with investment criteria, and show off the company's discipline.
- Don't avoid talking about the competition, especially in rapid-growth markets. "To compete effectively for scarce capital, overseas companies will need to articulate to investors a clear set of advantages over their local peers," the report says.
- -"Articulate a 'Plan B'," so investors gain insights into what the company would do were a shortfall to develop.
One last suggestion is for CFOs to broaden the number of individuals talking to investors, so that stockholders get to experience groups from board members to company managers, such as those dealing with that rapid-growth market management.
If those people are good, such exposure can build greater confidence in the overall corporate operations, the report notes.
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