2.12 What do investors want?

Financial reports are meant to provide useful information for decision making to the users of this information. They tend to focus mainly on the past performance of a company and focus less on the potential future performance of the company.1 Investors and creditors are part of the group of users and decision makers.

Prior to the great financial crash in 1929, financial regulation in Europe had a focus on creditors’ protection and on the protection of shareholders, after, the focus shifted to the investor’s protection. As a reaction to financial crisis, Governments have been restructuring financial markets and reinforcing the position of investors.2 Investors are crucial to the flowing of financial markets and they have the money to invest. Therefore, they are able to foster responsible investment and transparency. Together with analysts, the investors are the primary target audience of financial reports.3 Today’s financial reports are prepared to answer primarily to the investors’ demand for information and the financial reporting framework is set- up to provide investors with relevant, accurate and comparable information.4

International capital markets will most likely benefit from improved corporate reporting. On the road to improve corporate reporting, investors may have a pivotal role. Investors have reported that to achieve meaningful corporate reporting there is a need for constructive engagement between the corporate sector and investors, between investors and policy makers and regulators, clear and transparent communication of information, comparability of information disclosed, less complexity, real time reporting and proving the link between financial returns and sustainability reporting in the long-term.5 ACCA has reported that 63% of investors have reported to “place greater value on information or commentary generated outside the company rather than as part of corporate reporting”.6 Also, financial statements are necessary but not sufficient to evaluate the performance of corporate managers and motivate them to perform in the interests of shareholders, as well as to decide whether to buy or sell shares in corporations.7

A McKinsey Quarterly survey (commissioned by McKinsey and the Canada Pension Plan Investment Board) of more than 1,000 board members and top senior executives) around the world found that 63% of respondents believed the pressure to demonstrate short-term financial performance had increased over the previous five years and that 86% believed that using a longer time horizon to make business decisions would positively affect corporate performance in a number of ways, including strengthening financial returns and increasing innovation. However, they are not doing what they believe is best.8 According to McKinsey, the executives seem to be unable to change given the continued pressure from financial markets on public companies to maximize short-term results. The game changers are, according to McKinsey, large investors which are the market’s major players, among others, big asset owners such as pension funds, mutual funds, insurance firms, and sovereign-wealth funds. Private capital can and must play a role in addressing the challenge of shifting towards maximizing capital in the long-term. They are in a unique position to harness the capital markets to help address large and complex environmental, social and governance corporate impacts.