Quo Vadis, Financial Reporting?

Mr. Kirchhoff, the Investors' Darling

Looking back and moving on in the field of financial communication in Germany / Questions for Klaus Rainer Kirchhoff, Chairman of the Board of Kirchhoff Consult AG, and Prof. Dr. Henning Zülch, Holder of the Chair of Accounting and Auditing at HHL Leipzig Graduate School of Management. The interview was conducted by Christian Kretzmann (HHL).

“Der Beste Geschäftsbericht” (“Best Business Report”) was a competition conducted by Prof. Dr. Dr. h.c. Jörg Baetge and manager magazin between 1995 and 2013, aiming to honor Germany’s best business report in terms of content, language and design. In 2014, it was replaced by the Investors’ Darling competition. Since then, the 160 largest German publicly traded companies have been analyzed as well. The goal is to name Germany’s capital market strategists of the year and include other crucial elements of financial communication on top of reporting in order to meet the increased demands of the stakeholders. This is now achieved by integrating the fields of investor relations and capital markets.

Under the headline “Looking back and moving on in the field of financial communication in Germany”, Christian Kretzmann (HHL) interviews Klaus Rainer Kirchhoff, Chairman of the Board of Kirchhoff Consult AG, and Prof. Dr. Henning Zülch, Holder of the Chair of Accounting and Auditing at HHL Leipzig Graduate School of Management.

? Mr. Kirchhoff, the Investors’ Darling capital market competition was first conducted last year and published in manager magazin in October 2014. It replaces the largest German reporting competition so far, Der Beste Geschäftsbericht, after almost 20 years. How did this change come about?

! The previous competition, Der Beste Geschäftsbericht, greatly improved the quality of German business reports. Up until 20 years ago, German business reports ranked far behind Anglo-Saxon ones by international standards. Today, they rank among the best in the world, regarding both transparency and the appealing format allowing for easy analysis. We mainly have Professor Jörg Baetge to thank for this development. Over the last few years, he showed tremendous commitment to raising the quality of reporting. Due to the clear guidelines which the competition was able to offer to the companies, German business reports have reached a high standard these days and, just like in Formula 1, the difference between the best is very small. Moreover, the demands of the most important target group of reports, the investors, have changed. Investment decisions are made much faster if they are not simply left to be made by computer programs anyway.

“Investors’ Darling has the potential to promote the equity culture in Germany as we are a developing country in this regard.” Klaus Rainer Kirchhoff

Therefore, investors these days rely more on various media and ways, such as the internet, to obtain information on top of the business report. Some companies took great effort to score well considering the prestige that comes with a prize in the competition since these companies often did not necessarily treat their investors with good investor relations or a good performance. Against this background, it was only logical to develop the competition one step further so that now all communication of the companies in the capital market is examined and subsequently questioned while including performance in the assessment.

? Professor Zülch, the competition, including the analyses at its foundation, are based on the three-part RIC model. However, the competition so far was dominated by the field of reporting. Could you please comment on these developments?

! When we talk about disclosure quality in accounting, this concept is often reduced to the elements of mandatory publication in the form of business reports. This mindset, however, no longer applies. On top of its legal requirements and regulation standards, the business report is, without a doubt, still an important element of corporate communication but we need to keep in mind that stakeholders expect more these days. Hardly any investor will base their decision solely on the figures and comments companies provide in their business or quarterly reports. A target-group-oriented, more detailed approach within the framework of investor relations has become essential. The two fields of reporting and investor relations combined offer the sender’s perspective of a company – information is prepared and provided to the capital market. However, it does not stop there.

“Our ranking is not a compliance test but a competition of the best.” Prof. Dr. Henning Zülch

This is where the direct and indirect recipients of information, who take in and interpret the information and deduce actions, come in. These actions, for instance, buying or selling shares, are reflected on the markets and may cause sometimes rather significant price fluctuations which then lead to implications for the respective companies. We believe that capital market competition is not complete until both the sender’s and the recipient’s perspectives have been adequately portrayed. Our RIC approach does just that, recording and analyzing precisely these three fields of reporting, investor relations and capital market.

? Mr. Kirchhoff, the results of the ranking show that some companies have lost their top positions due to the new method of analysis. Then again, other companies perform well and are on their way to the top. How would you assess this new order and how do the companies perceive it?

! The new competition reflects the quality of investor relations in the companies far better than the previous one that solely focused on reporting. It is a new challenge for companies they have to face if they want to survive in the ever intensifying global competition for investors. The Investor’s Darling competition therefore takes into account the changing conditions in the global markets. Improvements of the ranking results can only be achieved if companies take the deficits identified seriously, analyzing them and tackling them systematically within the organization. Cosmetic changes, which are neither sustainable nor far-reaching, will be of no help. However, our intention is not to punish but to hold a comprehensive and neutral mirror up to the companies, allowing them to take action themselves and to initiate positive changes in the interest of all stakeholders.

? Professor Zülch, when looking at the overall result, it is rather striking that not a single company was even close to achieving full score in all categories. The top performers achieve a mere 70 of 100 points. What do you think is the reason for that and where in particular do you see need for improvement?

! Our ranking is not a compliance test but a competition of the best. Renowned German companies listed by the DAX, MDAX, SDAX and TECDAX compete against each other. We have high expectations, yet realistic ones, for these companies. You have to remember that they represent the top of the German stock market and therefore serve as role models and set standards with their actions. A company publishing complete, understandable and transparent business reports, doing a great job at investor relations (e.g. providing an instructive IR website) and having its results validated on the capital market will perform well in the competition. In the event of deficits in an individual category or all of them, the company is called upon to implement improvements, therefore enabling itself to do better next year.

? Mr. Kirchhoff, as you stated, the previous competition not only set a standard accepted by the general public but has also proven to have contributed to increasing the quality of financial reporting in Germany. How do you assess the value of the current ranking for the participating companies and their stakeholders?

! Just like the previous competition, Investors’ Darling will lead to investor relations in Germany increasing in quality and there is definitely room for that. It is rather indicative that there is not a single academic chair in Germany purely dedicated to investor relations. HHL and the team surrounding Professor Zülch deserve credit and gratitude for taking the initiative here. I am convinced that companies will participate intensively in the competition. Therefore, we are seeking dialog with the companies to continue to develop the criteria. Investors’ Darling has the potential to promote the equity culture in Germany as we are a developing country in this regard. Investor relations – and this is a special challenge – should also take into account private shareholders, a target group greatly underestimated and therefore neglected. The transparency offered by the competition allows companies an in-depth understanding of how they can improve their investor relations. The companies themselves, but also the capital market in its entirety, will benefit from these developments.

Further information:
http://www.hhl.de/accounting
http://www.kirchhoff.de/
http://www.manager-magazin.de/magazin/artikel/investors-darling-2014-mister-350-prozent-a-998577.html (in German)