Companies need to improve the way they compile performance metrics in their year end and interim reporting to ensure they reflect the needs of investors, says the Financial Reporting Council (FRC)
The FRC’s Financial Reporting Lab is calling for greater transparency on how metrics are calculated so they are clearly aligned with a company’s strategic goals. They should also provide enough data to allow comparison with the previous year’s performance.
The report, ‘Performance metrics – an investor perspective’, sets out investors’ views on the reporting of performance metrics.
It is the outcome of the first phase of the Lab’s project on performance metrics and includes a framework and set of questions for companies and their boards to consider when deciding on how they report their performance.
The authors full recommendations are that metrics should be:
• aligned to strategy;
• in context;
• reliable; and
‘The report highlights the importance of ensuring that there is a clear link between the metrics reported by a company and what the company is trying to achieve. The Lab’s report sets out the questions that companies should ask themselves to ensure that the metrics they choose are of most help to investors,’ said Phil Fitz-Gerald, director of the Financial Reporting Lab.
Investors use metrics for a range of reasons including:
• analysis and value on (benchmarking, comparing across a sector and screening);
• assessing management’s credibility;
• assessing long-term value;
• forecasting or assessing trends; and
• assessing whether management is appropriately incentivised.
The report supplements the current regulatory focus on the reporting of performance following the guidance on Alternative Performance Measures issued by the European Securities and Markets Authority and the Financial Reporting Council’s (FRC) reviews on the application of that guidance.
Report by Rob Munro