Global CFOs face tough balancing act investing across both developed and rapid-growth markets
- Lack of transparency in rapid-growth markets mean problems in measuring ROI
- CFOs should prepare for investor churn as exposure to rapid-growth markets increases
- Investors want access to more timely and more forward-looking performance information
London, 10 January 2012 – Few CFOs think their company is effective at managing investments across markets with significantly different growth rates according to a new Ernst & Young report launched today. Most also lack confidence in communicating this investment balance across divergent markets to the investor community. In a survey of over 750 CFOs world-wide, two thirds replied that they do not believe their organization is good at balancing resource allocation between developed and rapid-growth markets. A similar number find it difficult to convey an over-arching narrative to investors when balancing investments across these markets.
The study, A tale of two markets – telling the story of investment across developed and rapid-growth markets, explores the role of the CFO in balancing investments across developed and rapid-growth markets and examines the way in which CFOs communicate these decisions to investors. It includes findings from interviews with leading CFOs and investors, as well as two surveys conducted with the Economist Intelligence Unit. The first of these surveyed 759 CFOs from around the world and the second surveyed 244 professional investors.
Les Clifford, Partner and Chair of Ernst & Young LLP’s CFO Program in the UK and Ireland, comments, “In an environment where many developed markets are unlikely to grow significantly over the next few years, CFOs are increasingly looking to rapid-growth markets as a source of future income. This requires the CFO to manage a very difficult and complex equilibrium across markets which are very different in terms of their characteristics, risk/return profile and performance horizons. This balancing act, at a time when competition for capital is so fierce, also requires the CFO to focus on a communication strategy that gives the investor comfort that management are in control of what they are doing in these diverse markets.”
Lack of transparency in rapid-growth markets
In balancing investments across markets, the CFO has to constantly manage contradictory forces: the drive to capture the growth opportunities in rapid-growth markets to counter sluggish performance in many developed markets, as well as the need to protect sources of profitability from these developed markets. While both investors and CFOs agree that the best hopes of long-term growth lie in rapid-growth markets, the survey findings suggest that CFOs are not finding it easy to provide an objective rationale for allocating resources to them. Two-thirds of CFOs agree that inadequate data and poor transparency means it can be difficult to build a robust evaluation model to support these investments.
Jay Nibbe, Ernst & Young EMEIA Markets Leader, comments, “The lack of historical precedent and access to reliable data impedes the ability of the CFO to address investors’ questions on when to expect a return on their investment. Despite the obvious attractions of rapid-growth markets, the slower-growing, developed markets still account for the lion’s share of revenues and profits and need to be sustained in order to fund the growth strategy. It is understandable that, with these different markets, the CFO is finding it difficult to manage the balance.”
CFOs should prepare for investor churn across different growth markets and reassure investors personally
CFOs need to consider the need to engage a new investor profile with a different appetite for risk. The significant majority of CFOs (84%) and investors (63%) believe the higher risks and volatile returns associated with entry into rapid-growth markets will trigger a churn in the investor base. The key to preventing investor churn, according to the CFOs interviewed for this report, will be for the CFO to clearly articulate company strategy and keep the investor informed of where they are on the path towards that strategy.
Both investors and CFOs agree that it is primarily the responsibility of the finance leader to communicate changes in investment allocation across developed or rapid-growth markets and that greater investment in rapid-growth markets requires more frequent communication with investors. Yet despite this, investor communication is bottom of the majority of CFOs’ list of priorities when considering investment strategy.
Jay Nibbe comments, “When you consider the responsibilities of the CFO, from addressing working capital management, investment allocation decisions, and the entire capital agenda of an organization, it is understandable why communication with investors can move down the priority list. However, increasingly investors are looking for clarity about the risk and return horizon for the investments made in both markets. As such the CFO will need to increase their attention to effective communication to the market.”
As companies develop riskier, and more complex, business models spanning developed and rapid-growth markets, investors want more information about how CFOs see the competitive landscape evolving and comprehensive risk management strategies. Asked about the single aspect of investor relations that is the most important to get right, investors point to clear information about changes to the risk profile as the leading factor. Almost two-thirds of investors also say that they would like CFOs to provide more granular information about the prospects for particular markets.
Investors want more forward-looking, real-time and concise insight
The swift pace of business in rapid-growth markets means that traditional reporting frameworks may be too static to keep investors informed about key developments. Investors want greater immediacy, citing regular trading updates as the form of communication they find most useful for gathering information about investments in rapid-growth markets. This suggests that traditional channels of communication, such as the annual report, may no longer be enough to satisfy the time-sensitive needs of investors. Less than half of investors surveyed think that the annual report is effective at providing details on risks in developed and rapid-growth markets, and only 42% think it is good at helping them to support investment decisions.
Les Clifford says, “We hear more and more from the market, and from CFOs, that the traditional annual report and accounts is no longer the primary source document as far as investors are concerned. Investors are much more interested in what’s going to happen in the future, than what has already taken place. And, they want access to reliable information on an increasingly real time basis. As they rely more and more on information that is generally unaudited, this poses some very interesting and significant questions about the future assurance model for reporting.”
A tale of two markets – telling the story of investment across developed and rapid-growth markets is the latest study in Ernst & Young’s Master CFO Series – a collection of studies which provide insight on elements of the CFO’s role. This study explores the role of the CFO in balancing investments across developed and rapid-growth markets. It includes findings from interviews with leading CFOs, investors and other senior executives, as well as two surveys conducted with the Economist Intelligence Unit. The first of these surveyed 759 CFOs from around the world and the second surveyed 244 professional investors. Copies of the study as well as others in the Master CFO Series can be requested from www.ey.com/cfo
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