Investors find management commentary barely sufficient

Information provided in official management documents lags behind the expectations of analysts and investors in many areas, according to a new study by <link people erik-roelofsen _blank>Dr. Erik Roelofsen and Professor Gerard Mertens.

Analysts and investors give a low rating to the usefulness of information in the Management Discussion and Analysis (MD&A) documents – also known as the Operating and Financial Review in the UK. The average MD & A barely scores 6 out of 10 in the study, which consulted more than 400 analysts and investors worldwide. Analysts and investors are in favour of more mandatory disclosures, and find that relevant disclosures about, for example, sustainability, productive capacity and legal structure are often missing.

The MD&A provides a narrative explanation, through the eyes of management, of how a firm has performed in the past, its financial condition, and its future prospects. The MD&A is normally published together with the primary financial statements and notes.

Six out of ten analysts and investors are in favour of more mandatory information in the MD&A. A majority says information about sustainability, productive capacity, and legal structure are in short supply in the MD&A. Just a few are satisfied by the information provided on strategy, financing, and risks. The MD&A could be improved if more information could be quantified and presented more clearly and consistently. Most investors and analysts believe tables speak louder than words.

Important findings

• The usefulness of written management commentary is rated 6 on a scale of 1 to 10
• Management commentary is generally preferred to be received via a conference call
• 59% of respondents are in favour of more mandatory disclosures in the MD&A
• 63% of respondents want more quantitative information
• 57% of respondents want more consistent presentation
• The best information is provided on accounting policy changes. About 30% are largely or completely satisfied about these types of disclosures
• 46% believe that the MD&A is audited

The researchers asked analysts and investors to rate the usefulness of different types of information, such as primary financial statements and earnings press releases, on a scale of 1 to 10. The MD&A scored remarkably low: 6 out of 10. Disclosures provided in the MD&A do not meet the information requirements of analysts and investors in many areas. Only few investors indicated that they receive information that largely or completely satisfies their needs for sustainability (17%), legal structure (21%), and productive capacity (19%). A small number of analysts and investors receive sufficient information about financing (22%), strategy (25%) and risks (22%). The best information is provided with respect to changes in accounting policies. Auditors are often involved in developing these disclosures.

Mandatory disclosures

Six out of ten analysts and investors indicate that the MD&A could be improved if more mandatory disclosures were required. Dr. Erik Roelofsen, a researcher at Erasmus University and director at PwC led the research. He said: “Recently the International Accounting Standards Board issued new rules for management commentary. These rules are non-binding. When it issued the new rules, the board expected that the existence of these rules would encourage jurisdictions to adopt it as their own. To date we have seen few jurisdictions that have taken meaningful steps in this direction, while analysts and investors would clearly applaud it.”

Most countries have only limited requirements with respect to the content of the MD&A. This study shows that more specific guidance is desirable. Roelofsen: “Instead of each and every country starting to develop its own requirements for the MD&A, it would be easier and better for international comparability and convergence if local jurisdictions would adopt the guidance developed by the IASB as their own. In Europe, I could also see a role for the EU in this respect.”

More numbers

Another way in which the MD&A could be improved does not relate to the content but to the presentation. Investors want more consistency in the format of the presentation. Roelofsen: "Many firms use long narrative disclosures in their MD&A and keep changing presentation formats. This makes it difficult for analysts to find the information they need.” Further, words like “significantly” or “as expected” annoy analysts, according to Roelofsen. “Analysts prefer a number in a table and that table should preferably look the same year- after -year.” Another remarkable result is that 46% of analysts and investors presume that the MD&A is audited, whereas in practice that is rarely the case.

About this survey

The RSM Global Analyst and Investor Survey is a quarterly survey held worldwide among sell-side and buy-side portfolio managers and analysts. The study collects opinions and expectations about global economic developments, economic indicators and subjects that may impact the economy now or in the future. The survey is a joint effort by the Rotterdam School of Management, Erasmus University and PwC. The research has been set up by <link people erik-roelofsen _blank>Dr. Erik Roelofsen (researcher at Erasmus University and a director for PwC) and Professor Gerard Mertens (Professor of Financial Analysis). This particular survey took place between 28 March and 4 April 2011 and involved some 400 investors and analysts.