2012 FinCom Session 1

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Reporting and financial communication

Skema - MSc Finance - 2012
Reporting and financial communication

Presentation Objective Course organisation Evaluation
Skema 2012 - Reporting & Financial Communication - Session 1
Course organisation
Session 1: financial communication inside the corporate organisation Session 2: regulaory framework Session 3: Recurring communication on financial performance Session 4: Ongoing communication Session 5: CSR and extra-financial Communication Session 6: Financial communication during operations Session 7: Financial communication for non-public companies
Evaluation
Make a group of 5 Pick a company Prepare a slideshow presentation

\ max. 15 mn \ company presentation: activities, key financial data, markets, challenges, strategy, stock
market
\ in a way that address the issue described in the document
Notation will include

\ Company understanding \ Financial understanding \ Presentation design and simplicity \ Oral presentatio \ Group coordination
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Reporting and financial communication - 1

Skema - MSc Finance - 2012
Agenda
Financial communication inside the corporate organisation

1. What is financial communication ?
2. Internal processes for information production, certification and disclosure
3. Corporate organisation & ethical principles
What is financial communication ?
Principles of rhetoric
Source : Wikipedia
Rhetoric: (from Latin rhetorica the art of speaking well) is an art or a technique of persuasion, generally via the language Rhetoric principles are set up around 5 questions:
\ Who?=> body or corporation issuing the message \ Says what?=> message content \ Via which media or support?=> set of techniques used to spread the
information
\ To whom?=> audience receiving the message \ What is the impact?=> how the message can influence the audience
Global definition of communication

Source : Wikipedia
Communication is:
\ the act of communication, creating a relationship with others,
transmitting something to someone
\ the whole means and techniques that allow the transmission of a message
toward an audience that may be vast and heterogeneous
\ and the action of a body or a corporation to give information

and to promote its activities toward a public, to maintain its image by any media mean
General definition of financial communication

Financial communication concerns:

\ any kind of information or message \ and any kind of communication support \ issued by corporations that seek for
Issuer of the message : Corporation that offer of securities to the public (equity or debt) Main audiences targeted :
\ securities buyers:
individual shareholders, institutional investors financial analysts, journalists
financing and/or report to those who have provided such financing
\ intermediates and prescribers:
\ and dedicated to the financial

community
Expected impact : to provide Investors with every element that can minimise the asymmetry of information
10
Regulated / Non regulated Financial communication

Corporate bonds and equities issuance on regulated markets, are subject to the European regulatory framework of Public offering Public entities may issue bonds reversed to accredited investors, with a specific regulatory framework:
\ Local authorities (Regions, Cities) \ Public authorities (Social Security Agency) \ National States
Public Offering regulation framework is not relevant for financing provided by business angels, private equity, banks Those counterparts nevertheless require specific financial communication
11
A great variety of stakeholders

Rumours Information out of the control of the issuer Information delivered by the issuer
Institutional Investors
Individual shareholders
Employees & Management Employee-shareholders Unions & Works councils NGOs & lobbies
Brokers Media Press Authorities Advisors Institutes
Issuer
Internal communication Corporate Communication Public Affairs & Lobbying Investor Relations
12
Financial communication supports market efficiency

A component of financial markets

\ An obligation defined by the Law \ A necessity for efficient markets \ Under the control of an independent
Authority (SEC, FSA, AMF) sanctions
A global communication toward shareholders has progressively emerged

\ With specific language and tools \ Repackaged it for various target
audiences
\ And submitted to civil and criminal
\ Implemented by specialised teams
Has structured itself along-with the historical development of financial markets

\ Accounting information \ Financial information \ Corporate information \ Financial marketing
Best practises spread to:

\ non-listed companies \ investment funds, banks, business partners
13
Financial communication results from the implementation of a corporate strategy

How is the company positioned within its environment ?
\ shareholding structure and control \ importance of share valuation \ financial image of the company sector \ operational and financial performance \ Outlook and prospects
Which goals?
\ seek financing for future developments \ preserve independence \ renew shareholding structure
Which means to achieve these goals?

\ shareholders policy,
corporate governance, dividend policy & disclosure policy
\ financial communication \ investors relation policy \ retail shareholderspolicy
14
Efficient financial communication leads to:

Higher valuation of the share price, Attract new shareholders, Shareholding stickiness, Ease access to financing means and reduce the cost of debt, Improve the group brand image
15
Information asymmetry
Akerlof - 1970 - The market for Lemons
information asymmetry occurs when, in a transaction, one party has more or better information than the other:
\ the vendor knows better the quality of the good he/she sells \ the worker knows better his/her own value than the company that wants to hire him/her
This creates an imbalance which causes market inefficiency

\ adverse selection: as they are confronted with a lack of information to distinguish good/bad
products, buyers tend to lower the price offered ; vendors of good products then refuse to sell at a discounted price and leave the market ; the market is not efficient
\ moral hazard: a person signs a contract with an insurance company, in order to prevent a
specific risk; the insurance company will price the coverage based upon an probability analysis ; once he/she knows he/she is covered by the insurance, the person may change their behaviour and be less careful ; risk probability increases as well as costs for the insurance company.
The effects of Information asymmetry in financial markets have been widely studied
16
Internal processes for information production, certification and disclosure
17
Financial disclosures
Information must be delivered on-time

\ Financial reporting flow and consolidation process \ Auditors due diligence \ Information and approval from the Supervisory Board \ Information to employees representatives & Work Council, Unions
Information must be structured and commented

\ Analysing of information internally \ Preparing communication tools: press release, slideshow, reports \ Organising information meetings: conference calls, one-to-one and one-to-many meetings
with financial analysts, investors, journalists shareholders meeting
Information must be scheduled

\ Every companies communicate at the same periods \ Disclosure has to be equal for every audience
18
International Financial reporting Standards (IFRS)

GAAP and financial standards shall reach 2 aims:

\ guarantee that financial statements give
a true and fair view of the situation of the company in every dimension
past / present assets / liabilities profitability / risks
Financial communication has become each time more complex

\ IFRS are more complex and increase
volatility on balance sheets and P&L
\ IASB keeps producing new standards,
widely objected to by every category of users (corporations, analysts, investors) convergence IFRS/ US GAAP
\ The US keep delaying a possible
\ allow to value and compare the

company
time-wise / sector-wise produce forecasts / discounted cash flows
Some companies now disclose nonIFRS financial statements, restated to be understandable

\ Comparison between companies and
sectors is nothing but from easy surge
Since 2005, listed companies must be IFRS compliant

\ initially created for investors purposes \ and for a convergence with US GAAP
\ While accounting and auditing costs
19
Financial calendar
For a company ending financial year on December 31st
Disclosure Q4 & Annual sales Annual results Q1 sales Annual shareholders meeting Q2 & interim sales Interim results Q3 & 9-month sales
Deadline February 15th April 30th May 15th June 30th August 15th August 3&st October 15th
Form Press release Conference call Press release Information meetings Press release Conference call Public meeting Press release Conference call Press release Information meetings Press release Conference call
20
Accounting and finance organisation

Accounting teams in each subsidiary prepare the financial package in line with the accounting principles approved by the Board Consolidation teams ensure global coherence, make adjustments and produce consolidated accounts CFO and IRO analyse the results and produce the official information, message Production
Full, timely & reliable
External auditors control and certify accounting results and every information provided to the market The Supervisory board approves financial statements and draft communication tools, backed by the Audit Committee CEO, CFO and IRO will then disclose the information
Control
Fair, Accurate & comparable
Structure
Understandable & compliant
Disclosure
Equal & Simultaneous
financial information process
21
Accounting and consolidation

Accounting teams are in charge of legal and analytic reporting

\ for each subsidiary \ in accordance with group consolidation
and accounting rules
Consolidation team is in charge of producing group financial information

\ Sales intercos \ Goodwill valuations and depreciation \ Defferred tax assets & liabilities \ Impairment tests
\ and IFRStandards
Reporting deadlines are increasingly short, while reported information tends to become more complex and detailed Local accounting teams deal with auditors correspondents
High-expertise in IFRS is required As well as the capacity to discuss and negotiate with external auditors And a good understanding of market reactions to accounting decisions and disclosures
22
Internal audit
Internal audit teams assess that information is consistent and that operational teams are compliant with procedures
\ Accounting methods for sales, inventories... \ Cash payment, provisioning methods for customers & inventories \ Security of assets of the company \ repartition and delegation of responsibility
Companies are required to report on the quality of their internal control procedures
Their aim is to identify and address every potential risks

\ Risk of fraud \ Risks of uncontrolled cash & payment policy \ Industrial risks, people protection, environmental respect \ Risk concerning credibility and corporate image \ Financial risks: credit, exchange rate, cash
23
External audit
Auditors certify that financial statements are true and fair, based on:
\ Random controls of the different accounting processes for the company and its subsidiaries \ Meetings with the accounting teams and company management, on any technical or
strategical aspect
\ And they engage their responsibility
An widening scope of information is to be submitted to Auditors certification

\ Content and consistency of the Reference Document \ Report of the Board on corporate governance and internal control \ Financial forecasts \ Information concerning Sustainable development \ Operations concerning securities and the shareholders rights
External audit is a crucial component of trust

\ cf. Enron / Arthur Andersen case
Skema 2012 - Reporting & Financial Communication - Session 1 24
Supervisory Board
The Board is responsible for supervising, monitoring and evaluating the management of the Corporation in the best interest of the shareholders The Board is to approve financial statements before disclosure
\ Members of the Board hold civil an
criminal liability toward shareholders members changes the process, as they need time to achieve their task order to achieve specific controls on financial statements: the audit committee
The Board is also responsible for overseeing the execution and fulfilment of strategy and fundamental goals
\ strategic plan and options \ approval of the budgets \ Merger & acquisitions \ Executive compensation program,
including the variable portion based on earnings targets and individual performance
\ Increasing commitment from board
\ The Board creates a dedicated team in
25
Audit committee
The Audit committee is an extension of the Board

\ Initially a Best practise, they tend to become a legal requirement (cf. European Statutory
Audit Directive) Best practise :
\ Committees composition is not regulated.

a majority of independent members; members with a relevant expertise in accounting and finance; executive members excluded
\ The Audit Committee can use any means to understand accounting options,
and evaluate if risks are correctly anticipated and addressed
The Board bears the ultimate responsibility for approving financial statements
\ It is the legal institution liable toward shareholders
26
Chief Financial Officer: a key position

Financial communication is under the responsibility of CFO

\ According to specific studies among Europe, CFO estimate that financial communication
takes at least 50% of their working time expertise
\ Experience of listed companies and financial communication requirements is a highly-sought \ More and more listed companies tend to recruit a person responsible for and dedicated to
financial communication: the IR Officer, attached to the CFO
Financial communication has to co-ordinate with other functions in the company

\ Operational functions to collect information \ HR for internal communication and legal requisite \ Communication, in order to ensure that the company delivers a consistent message,
even to different targets
27
Chief Executive Officer : fully committed

CEO is legally responsible for the information disclosed to the market

\ Civil Liability \ Criminal Liability
CEO is strongly committed in financial communication, considering:

\ required time and commitment \ legal responsibility \ company s credibility: the CEO embodies the company, its vision and values
28
Investors Relation Officer: a matter of influence

A very delicate position

\ in the US, generally a senior VP, \ in France, it is not so often \ he is one of the official speakers for the
company
No operational power but a strong influence No specific profile but a financial background is required
\ financial analysts \ controller
Always involved in major decisions Need to have a strong knowledge of every aspect of company life Brings market perception and expectations back to the top management
Communication skills is a must
29
Strategic risks related to financial communication

Risks related to the share price

\ Sharp change in share price, due to an inappropriate anticipation of a specific disclosure \ Under valuation due to a inefficient or insufficient communication \ High volatility in share price due to a lack of liquidity
Risks for the company

\ Difficulties in finding a financing due to a low share price
or a lack of interest from investors
\ Risk to loose the control of the company (public offer) \ Risk to face tension inside (staff) or outside (business partners) the company
Risks for the management

\ criminal risk in the case they disclose unfair and untrue information, they try to manipulate the
share price, or are involved in insider process
\ Risk to be dismissed if shareholders consider the company to be under valued \ Risk for their personal wealth
30
Interview Emma Mercier
31
Business case
32
Corporate organisation & ethical principles
33
Common organisation of an IR Team in a medium-to-large cap

CFO Head of IR
Team schedule Data Base Logistics Dissemination of the press releases
Reporting : market evolution, analysts feed-backs Annual report Shareholder analysis Individuals shareholders Financial web site SRI
Contact with the financial market : Analysts & investors Q&A
1 Assistant
2/6 persons
2/4 persons
34
Who does IR ?
A dedicated team or not : depending on the size of the company

\ with the support of one/several IR consulting agency (ies)
With a key position within the organisation

\ Direct report to the CFO \ Close to the CEO & Executive Committee
Financial background required

\ either from corporate finance: accounting & auditing, management control, cash
management
\ or from financial markets: financial analysts, corporate access
35
Main tasks
Financial Communication
\ Designing and editing financial documents : press release, annual report, financial web site \ Managing the dissemination of the financial communication
Investor Relations
\ Main contact for Investors and analysts \ Organisation and attendance to analysts meeting, road-show, conference \ Individuals shareholders : letters, meetings, club \ Organisation of the AGM
Others
\ Preparation of Board Meeting \ Communication on Sustainable Investment issues \ ...
36
Aims and objectives : external

KEEP INFORM the financial market on a regular basis on financial accounts, outlooks and strategic issues ADAPT the communication to the different stakeholders needs while still delivering the same message and information ANTICIPATE and manage the expectations and the fears of the financial market IMPROVE the company brand image without overselling the stock
BUILD a professional relationship based on confidence and credibility with the stakeholders A good UNDERSTANDING of the competitive environment On going MANAGEMENT of the consensus
37
Aims and objectives : in-house

HAVE ACCESS to the information in-house that could have an impact on the share price CO-ORDINATE the corporate communication with the other departments of the company REPORT to the Top Management on market, sector and company perception from analysts and investors = advisory role
REPORT to the Board Members on market expectations
38
Main principles
Integrity
\ Honest and ethical conduct, including
the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; Understandable Disclosures released information
Equality
\ Equal access to information for all
categories of audience
\ Simultaneous disclosure of any
\ Full, Fair, Accurate, Timely and \ Consistency and comparability of the
information that may impact the valuation
Responsibility
\ Compliance with Laws and Regulations \ Accurate risk management and
procedures of control
39
Code of ethics
ITW (electronic components) http://investor.itw.com/phoenix.zhtml?c=71064&p=irol-govconduct AT&T (telecoms) http://www.att.com/gen/investor-relations?pid=5595 CBS (media) http://investors.cbscorporation.com/phoenix.zhtml?c=99462&p=irolgovConduct CLIFF (French Investor Relations Association) http://www.cliff.asso.fr/Code%20de%20deontologie.asp
40
Main issues
Conflict of interest Insider information Fair disclosure / spread of false or misleading information Price manipulation
41

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message dentreprise

p!r convaincre vos pa"enaires

Reporting and financial communication

Reporting and financial communication

Presentation Objective Course organisation Evaluation

Skema 2012 - Reporting & Financial Communication - Session 1

Skema 2012 - Reporting & Financial Communication - Session 1

Make a group of 5 Pick a company Prepare a slideshow presentation

\ in a way that address the issue described in the document

Notation will include

Skema 2012 - Reporting & Financial Communication - Session 1

Reporting and financial communication - 1

Financial communication inside the corporate organisation

2. Internal processes for information production, certification and disclosure

3. Corporate organisation & ethical principles

Skema 2012 - Reporting & Financial Communication - Session 1

What is financial communication ?

Skema 2012 - Reporting & Financial Communication - Session 1

Global definition of communication

\ and the action of a body or a corporation to give information

Skema 2012 - Reporting & Financial Communication - Session 1

General definition of financial communication

Financial communication concerns:

financing and/or report to those who have provided such financing

\ intermediates and prescribers:

\ and dedicated to the financial

Skema 2012 - Reporting & Financial Communication - Session 1

Regulated / Non regulated Financial communication

Skema 2012 - Reporting & Financial Communication - Session 1

A great variety of stakeholders

Brokers Media Press Authorities Advisors Institutes

Skema 2012 - Reporting & Financial Communication - Session 1

Financial communication supports market efficiency

A component of financial markets

A global communication toward shareholders has progressively emerged

\ And submitted to civil and criminal

\ Implemented by specialised teams

Has structured itself along-with the historical development of financial markets

Best practises spread to:

Skema 2012 - Reporting & Financial Communication - Session 1

Financial communication results from the implementation of a corporate strategy

p!r convaincre vos pa"enaires

Which means to achieve these goals?

\ financial communication \ investors relation policy \ retail shareholderspolicy

Skema 2012 - Reporting & Financial Communication - Session 1

Efficient financial communication leads to:

Skema 2012 - Reporting & Financial Communication - Session 1

Akerlof - 1970 - The market for Lemons

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This creates an imbalance which causes market inefficiency

Skema 2012 - Reporting & Financial Communication - Session 1

Internal processes for information production, certification and disclosure

Information must be delivered on-time

Information must be structured and commented

Information must be scheduled

Skema 2012 - Reporting & Financial Communication - Session 1

International Financial reporting Standards (IFRS)

GAAP and financial standards shall reach 2 aims:

Financial communication has become each time more complex

\ IASB keeps producing new standards,

\ The US keep delaying a possible

\ allow to value and compare the

Some companies now disclose nonIFRS financial statements, restated to be understandable

Since 2005, listed companies must be IFRS compliant