The Master CFO Series
A tale of two markets
Building investor confidence in long-term health
As companies rebalance investments across markets to secure their future, it’s the CFO’s job to ensure the investors are with them for the journey.
“When investors meet CFOs, what they’re really trying to test is their character. Are they… an advocate or a reporter?”
— Glen Suarez, Deputy Chief Executive, Knight Vinke
This requires them to clearly and coherently narrate two distinctly different chapters of a single story. One is about today’s established business, its competitive performance and ability to generate profit: it is often a tale of difficult conditions and hard won margin. The other is about tomorrow’s opportunity: it is about capital investment in new and unfamiliar territories in pursuit of growth.
The role of the CFO in communicating with the investor:
| High performers are better at communicating a cohesive story|
High-performing companies tend to find it much less challenging to convey an overall growth story to investors when balancing investments between rapid-growth and developed markets.
What degree of difficulty are you currently encountering in communicating with your investor base across the following areas? (percentage)
• High performers (HP): respondents from organizations in the top quartile of EBITDA growth over the last three years.
• Low performers (LP): respondents from organizations in the bottom quartile of EBITDA growth over the last three years.
Investors want reassurance from the CFO first and foremost
Both investors and CFOs agree that it is primarily the job of the CFO to communicate with investors about a change in investment allocation across developed or rapid-growth markets. They also agree that greater investment in rapid-growth markets means that the CFO needs to communicate more frequently with investors.
Investors need confidence that the company can capture competitive advantage
“Not all emerging markets exposure is created equal,” argues Chris Leavy, Chief Investment Officer of US Fundamental Equity at BlackRock.
“Five years ago, when demand in these markets far outstripped supply, you didn’t have to be very good to earn a decent return. Now, as investment in rapid-growth markets catches up with the underlying growth in demand, we will start to see a separation between operators who are good at what they do…versus those companies that don’t have those capabilities.”
Investors want the CFO to be a reporter not an advocate
“When investors meet CFOs, what they’re really trying to test is their character,” says Glen Suarez, Deputy Chief Executive of Knight Vinke, an asset management firm.
“Are they the type of person who’s going to communicate results that convey the business in the best possible light or are they trying to present an objective picture so that we can make up our own minds. In other words, is the CFO an advocate or a reporter?”
Investors want greater exposure to the board and local management
“It’s very important in the eyes of investors that the independent non-executives appear to be fully persuaded of the course of action that management is recommending,” says Roger Barker, Head of Corporate Governance at the Institute of Directors.
“Non-executives do need to have greater direct exposure to investors and it isn’t entirely satisfactory if this contact is filtered through the CFO or the CEO.”
What information investors are looking for:
| Investors want evidence of good risk management|
“We would expect there to be effective reporting of risk management at board level, along with appropriate levels of responsibility and accountability,” says Colin Melvin, Chief Executive, Hermes Equity Ownership Services. “We would like to see chief risk officers attending board meetings where required and reporting directly to the board.”
Companies struggle to strike the right balance of disclosure
In the past few years, disclosure requirements have ramped up significantly and required companies to make available a growing quantity of information. The issue, then, is more one of striking a careful balance between disclosing what is relevant and bombarding investors with unnecessary detail.
How investors want CFOs to communicate:
| Investors rely on more than the annual report|
The days when the annual report was the main vehicle through which companies communicated with the outside world are long gone. Indeed, investors in our survey are skeptical about the ability of the annual report to provide the insight they need about a company’s allocation across different markets.
Investors want forward-looking, real-time and concise insight
“Investors don’t care about what’s already taken place. They’re much more interested in what might happen in the future and the executive team’s assessment of the key opportunities and risks,” says Jeremy Jennings, EY’s Regulatory & Public Policy Leader for EMEIA .
Investors are looking for personal reassurance from the CFO
Investor respondents place more emphasis than the CFO does on the value of one-to-one meetings, trading updates and presentations. It is understandable, given the complexity of diverse market investments, that the investor wants the opportunity to question the CFO directly about strategy.
information about investments in developed and rapid-growth markets (percentage)