Derek Pain: Too much information - less would be more in company accounts
No Pain, No Gain
Friday 22 November 2013
Have company accounts become too complicated for the average small investor? All too often we are confronted with a morass of figures that, I suspect, mean little to anyone unless they are well versed in accountancy.
I have spent over 50 years reporting on the City and I recall in my younger days how we had to be content with just two profit figures – before and after tax. Nowadays, there is a profusion. In one interim report I looked at, there were seven profit figures, including underlying, operational and the statutory pre-tax.
In the main, these copious figures do not make it through to the published full accounts. Even so, a shareholder is beset by a multitude of arcane notes and sub-notes that could thrill an accountant, City analyst or fund manager but must leave others baffled.
I suppose it is all part of the vogue for transparency. A few years ago abbreviated reports became popular, but in my experience not many companies have persisted with them. Probably the internet is to blame as well: after producing a complex array of figures for online perusal, I suppose drawing up shortened reports is too much bother.
I realise that the commercial world is now much more complicated than years ago. And many multi-figure reports, as those involved see it, are merely complying with the best of modern-day accountancy demands. But is such a vast multitude of mundane information really necessary? I think not. It would be far preferable if the printed word were more rigorously adopted. For example, some of the vastly detailed chairman and chief executive statements are worth reading but too many are just hot air, seemingly aimed at creating the correct image rather than informing shareholders.
Now to another moan: the absurdly high benefits that many company directors and managers award themselves. The leading economist Andrew Smithers recently attacked the present system that allows rewards based on share-price performance – a major factor in this week's revelation that blue-chip directors obtained a 14 per cent rise in the year to May.
In his book, The Road to Recovery, Mr Smithers takes a critical look at remuneration and bonuses related to shares. Such rewards, he believes, could harm a company's performance as management teams are unlikely to do anything that could reduce the likely value of shares. Such attitudes could sacrifice longer- term progress.
Managements also score from share buybacks. I have long preferred increased or special dividends as a far better way of rewarding investors if a company has surplus cash. But many directors opt for buybacks, euphemistically described as "returning cash to shareholders". A side effect is that they favourably influence the earnings per share calculations – the yardstick invariably used when salaries and bonuses are set.
A few years ago City heavyweight Terry Smith (pictured above) lambasted buybacks, saying that most "destroy value for the remaining shareholders". He has had an eventful City career: at one time, as a stockbroker analyst, he created uproar when he co-authored a book on the dubious but legal ways in which some companies doctor their accounts.
These days Mr Smith's activities include fund management. Three years ago he launched Fundsmith Equity, which today has over 9,000 clients. Its performance has been rewarding, with compound progress of 17.3 per cent per year. And he is clearly a "buy and hold" investor: of the 22 companies that the fund embraced at its launch, 16 are still involved. Two of the departed fell to takeover bids that provided happy returns.
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