Too much company information makes finance hard to grasp
Accountants and banks should not be shy about binning useless stuff, writes Simon Samuels
As all good golfers know, less is often more. Might the same be true when it comes to financial reporting? The page count inflation of company reporting over the past two decades has been staggering. Back in the mid-1990s the typical report and account was fewer than 100 pages; this spring’s annual report season saw most major companies publish weighty tomes, often more than 250 pages.
Putting aside the environmental damage from tree felling or the resulting back conditions afflicting an army of postal workers, has all this extra disclosure actually helped stakeholders better understand the businesses? Does more disclosure reflect a genuinely more complicated world, does it merely reveal the complexities that were always there, or is it simply the regulatory and accounting world gone mad?
Perhaps the greatest champion of this “disclosure explosion” are banks. For example, 25 years ago Deutsche Bank’s annual report was under 100 pages (including two pages dedicated to their art collection). Of course banks today are big and complicated, and so one might expect their disclosure to also be big and complicated. Yet with Deutsche’s 2015 annual report running to more than 600 pages, it is right to ask whether such volume is helping or hindering stakeholders to understand what’s going on. And not only are there lots of words; any reader not familiar with AFS, CDR, CPR, CVA, DRE, DVA, EAD, FVA, IMM, LCR, LGD, MREL, NQH, NSFR, SFT, SNLP or TLAC (just to choose a few examples) will struggle to comprehend many of the issues.
This matters. With the regulatory rules for banks in an endless state of flux and lurking fears of massive litigation, shareholders already have enough excuses to consider banks “uninvestable”. If attending a speed reading course and acquiring a degree in acronyms are also required to understand what they report, then many investors may conclude that their time is better spent assessing companies in more comprehensible industries. That makes it harder and more expensive for banks to raise capital, which for Europe — with its heavy reliance on bank lending — is bad news.
So what to do? The most obvious thing is to cut down disclosure. Regulators, accountants and banks should not be shy about binning useless stuff. Prioritising what matters is equally important, as advocated by the Financial Stability Board’s enhanced disclosure task force and by the recent banking futures report.
More radical, yet more relevant, disclosures would help, such as details of what topics were discussed and when by the board over the year or comparisons of the performance against budget.
While insiders may protest that the complexity and opacity of the reporting simply mirrors the real world of banking, such thinking lacks imagination. With most banks’ stock market valuations below their book value, the industry needs to embrace, not resist, radical ideas that might help investors understand what they are being asked to invest in.
When I started working in the City 25 years ago as an analyst, before emails and before the internet, a key part of the job on the day a bank reported its results was calling its shareholders and telling them the actual numbers, since the sole electronic delivery mechanism was an expensive stock exchange news feed that only the investment banks could afford. Today, while all 600 pages of Deutsche Bank’s results are disclosed instantaneously to everyone, the volume, complexity and lazy reliance on jargon and acronyms means that the analyst job has once again become one of simply communicating the numbers to the owners. As a result many are left asking the same question as their predecessors did a quarter of a century ago: “How much money did the bank actually make?”
Surely we can do better than that.