Beyond financial numbers

As economic activity restarts after an extended lockdown it will be time for companies to present their annual report card to shareholders. The challenge of getting high-quality financial information to investors has been partially dealt with by the Institute of Chartered Accountants in its various guidance notes. Once auditors sign-off on financial results, companies will hold virtual shareholder meetings — now permitted by the Ministry of Corporate Affairs (MCA) to bring closure to the financial year. All this will be eased by the various related deadline extensions granted by the Securities and Exchange Board of India (Sebi) and the MCA.

Despite the Covid-related disruptions, the need to communicate with markets remains important. Last week the Sebi issued an “advisory” on what it believes companies should be disclosing with relation to the pandemic. Although called an advisory, there are sufficient references to “material eve­nts”, and to “disruption of operations of any one or more units or division of the listed entity due to natural calamity... force majeure or events such as strikes, lockouts etc”, to suggest, this circular cannot not be ignored.

Then there is the uninterrupted requirement to publish quarterly re­sults, that I will briefly focus on. Many companies believe that with over the seven weeks of lockdown, the forthcoming quarterly results will deviate substantially from the trend line. They are clamouring to do away with these.

This call to do away with quarterly reporting builds on something we have been hearing for a while. Corporate leaders have complained bitterly that these distract companies from focusing on the long term. 

The focus on the short term means cutting down on investments, excessive share buy-backs and increased dividends. Though Indian corporates have largely remained frugal on dividends and buy-backs they see the pandemic as an opportunity to extend reporting from quarterly to half-yearly. If almost no car was sold in April, what purpose will posting quarterly results, with the April-May numbers inside them, serve?


To argue that companies can focus on the long term — say, five years or more because they have extended re­porting by a quarter, does not cut ice. Lawrence Summers, former US Pre­sident Barack Obama’s former treasury secretary and a professor at Harvard, dismissed this argument with a characteristically pithy boutade when he said, “Just as my students often suggest that the grading system forces them to study a particular syllabus rather than pursue their intellectual passions, managers prefer to avoid frequent accountability for results.”

It is also naïve to believe that investors do not have the ability to analyse companies which report disrupted quarterly numbers. After all, companies get funding from venture capitalists, private equity and IPOs on the back of credible long-term plans and the quality of management. This is not to say that you don’t need to look at the current financial numbers but that investors have the ability to look beyond the quarter’s numbers.  

The CEO and senior leadership expect between daily and monthly reporting. They use it to monitor performance, accelerate ideas, refocus attention, redirect workers and to firefight. If they can receive the information, clearly the processes permit this to be generated. So why not make it available to other shareholders?

Finally, there is regulatory anxiety: the less frequently information is released, the more valuable inside information is. Add to that the access large investors have to company managements and markets clearly are better-off with more frequent reporting. I believe Sebi’s circular on the need for Covid-related disclosures tells us where it stands on this debate.

Turning to disclosures beyond nu­mbers. The need to present investors with meaningful business commentary is greater during periods of extreme disruption, particularly during unprecedented times like these. The roughly seven-week period would have given companies some clarity regarding tre­nds or uncertainties that they face in their business. First, there should be realistic assessment by the board whether the company will continue as a going concern or what will it take to do so. Only after doing this can it turn to the broader disclosures expected.

The commentary on operations should include whether the factory or a unit has been in operation, including colour on if the operations have been undertaken remotely. The plan to restart business should include a discussion on availability of labour, ease in procuring raw materials, distribution of the finished goods, including how will travel restrictions impact the company’s prospects.

In addition, boards need to ask how robust the internal risk controls were, during this extended period of lock-down and if necessary, rework these. Cybersecurity is now more critical than any time before: another kind of virus-attack here will be debilitating. Finally, behavioural changes of consumers and suppliers that affect business will be helpful.

In addition to non-financial disclosures, investors most want to hear about the firm’s liquidity position and the impact Covid-19 will have on its working capital cycle. Companies must assess their short-term and medium-term funding requirements, particularly companies with high operating leverage or high financial leverage. Investors want to know if the company has sufficient liquidity to meet debt repayment obligations. Communicate if you need to raise funds.

Clearly, the above is not an exhaustive list so having a framework helps —focus first on conditions that existed but could not be recognised or quantified at the time of presenting the accounts. And then conditions that did not exist at the time of filing the financial results and only surfaced after the date. Companies and boards will also do well to remember that disclosure requirements largely depend on materiality — and whether failure to disclose a particular risk or business development will make the financial statements misleading to investors.

Finally, I expect boards to meet more often and even outside the “formal” board meeting structure. Analysing the consequences of the pandemic on the company and thinking about second and third order consequences needs the board and company leaderships collective wisdom.
The author is with Institutional Investor Advisory Services. 

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