Long Term Investing and Financial Reporting

Transcription

1 Long Term Investing and Financial Reporting Ugo Bassi, Director of Capital and Companies European Commission, DG MARKT Trustees of the IFRS Foundation and ICAEW Chartered Accountants Hall, London, 9 April 2013 Ladies and gentlemen, Firstly, I should like to thank the Trustees of the IFRS Foundation, in particular the Chairman, Michel Prada, and the ICAEW (the Institute of Chartered Accountants in England and Wales), in particular Michael Izza, for this invitation to speak to you tonight, in this beautiful location, in the fine British spring weather! Long term investing is becoming increasingly central to our concerns in Europe. And not only in Europe. Long term investment is now firmly on the agenda of the G20. The OECD, the World Bank and the Financial Stability Board are all actively engaged on different work-streams in this area. Here in the UK, John Kay examined last year whether the UK equity markets give sufficient support to long term goals. His Review has been very influential on our thinking about these matters. 1

2 And what, precisely, are our thoughts? Since two weeks they are no longer a secret, since they are presented in a Green Paper on long term investment published on the 25 th of March. This paper aims to stimulate the broadest possible debate about how to foster the supply of long-term financing of the European economy. In particular, how to improve and diversify the system of financial intermediation for long-term investment in Europe. In short: who will provide the real economy with credit for enterprises? We know that In the long run, we are all dead. With this famous quote, Keynes did not question the necessity to invest in the long term. To the contrary, without long term investment, growth, jobs, SMEs and competitiveness will die or, at least, suffer. The central concern in the Green Paper is whether the financial system is able to channel funds to finance the long term needs of corporates and society at large. On one hand, our corporates need to invest: invest in assets, tangible and intangible, to enhance their productive capability, and to invest in research and development for the future; Europe needs to be better connected, via transport and communications; our children need a response to the challenges posed by climate change, and our parents and 2

3 ourselves! - need answers to the transformation of an ageing society. On the other hand, our banks, which currently provide more than 75% of overall financing, are deleveraging and taking a more cautious approach to maturity transformation. And our governments, which have traditionally played a significant role in long term finance, for example for infra-structure projects, are deleveraging too, in the face of fiscal constraints. This is a multi-dimensional problem and the Green Paper tackles it on that basis. It sets out a total of thirty questions to stakeholders on a range of issues, asking for views that I will summarise under 4 headings: 1) the role of financial institutions in channelling long-term financing. This includes the future role of commercial banks, in light of the changes they are under-going (mainly deleveraging and intra-financial business as opposed to customer-facing activities) The question, hence is: is there a role for public development banks and institutional investors, such as lifeinsurance companies and pension funds? These institutional investors currently hold an estimated 13.8 trillion of assets (more than 100% of EU GDP). Given the longer time horizons of their business models, can they 3

4 play a greater role in changing the landscape of long-term financing? 2) the role of direct capital market financing of long-term investment in Europe. These markets are relatively underdeveloped in comparison to other international jurisdictions and, in particular, in light of what appears to be an equity gap in Europe; 3) options to enhance the access of SMEs to bank and non-bank financing; and 4) a range of cross-cutting, so-called enabling, factors relevant to long-term saving and financing. These cover taxation, accounting, corporate governance and the role of information and reporting. I do not intend to run through all thirty questions here and now. However, I would like to say a few words about some of the issues raised in the Green Paper, that I am directly responsible for. 1) Firstly, on corporate governance. We see a possibility that mandates and incentives for asset managers could be developed to support long-term investment strategies and relationships. The Green Paper poses a question about the kinds of incentives that could be developed here. 4

5 But as you may be aware, the Commission has already taken action in this field by adopting, in December last year, an Action Plan on European company law and Corporate Governance. The objective of this initiative is to enhance corporate governance, inter alia by encouraging more and better shareholder engagement. In the past years, shareholders have often been insufficiently engaged with companies and have not exercised sufficient oversight over management. In addition, shareholders, especially institutional investors, have tended to focus increasingly on short term profits, in particular during the crisis. There is therefore a need for measures that would both facilitate the exercise of shareholder oversight over management as well as encourage shareholders to adopt a more long-term oriented approach. We would like to propose a package combining legislation and soft law that would aim at correcting these problems. As a first step we propose to amend the current Directive 2007/36/EC on the exercise of shareholders rights in listed companies. Generally speaking, we are going to propose a set of measures aimed at enhancing transparency, in order to provide shareholders with better tools to participate to the life of the company. We are looking at critical areas such as related parties transactions, proxy advisors, corporate governance and other policy reports. But we are also looking the other way 5

6 around and we plan to work on better shareholders identification. We are looking also at the remuneration policies, where shareholders may be more interested than ever in making sure that they are designed in a way that privileges long term result as opposed to short term benefits. Don t worry, we are not envisaging another CRD IV here. We are perfectly conscious of the differences between banks and (non-financial) listed companies, and therefore we do not envisage strict rules in this context. All what we have in mind is to increase the transparency and comparability of information on remuneration across the EU, and to grant shareholders a say on pay (with modalities that we are still looking at) which will hopefully rise the level of responsibility among the management and among the shareholders themselves. 2) The second area that I would like to comment on in the Green Paper is fair value accounting which Hans will also speak about. I wonder how many papers have been written on this topic in the past few years? At the Commission, we hear many conflicting views in this area. There are those who claim that, in IFRS, there is too much use of fair values, which creates too much volatility in financial statements. That users cannot 6

7 understand this volatility and that it leads to short-termism with pro-cyclical effects. But, for each of these people, someone thinks the opposite. They consider that fair values provide the most meaningful information for all investors; that fair values do not create volatility but reflect it and it is important for users to be able to understand the effects of market volatility on the results and position of a company. In their eyes, fair values do not lead either to short-termism or to pro-cyclical effects. These tend to be polarised views which do not always address the context. With IFRS 9, the IASB requires the use of fair values or amortised cost depending to some extent on the business models of the company, be it a bank, insurance company or other corporate. With the recent exposure draft on this area, we are hearing mixed views about whether such a dependence on the business model (as currently proposed) is practicable. Nevertheless it highlights the importance of bringing a more nuanced approach to the debate. The Green Paper poses a question about whether stakeholders believe the use of fair values contributes to short-termism in investor behaviour. It also asks what alternatives could be suggested to balance the accuracy of the information given to investors with sufficient incentives to hold and manage very long term investments. Hans will certainly 7

8 agree that those who care about the long term, should also know where they stand today. It is too early to say what will be the outcome and follow up of the Green Paper on this point. We all know that the Commission does not set the IFRS standards. We endorse them for use in the consolidated accounts of European listed companies. However, I welcome the comments that Michel Prada has made this evening on the link between accounting standard setting and wider public interests. His invitation to all of us here, this evening, to discuss these matters demonstrates that the IASB is listening to the broader debate. Hans will elaborate on some of these points in a few minutes. This is exactly how we see the standard setting process: it is all about collaboration, communication and joint efforts. We all share the same objective: high quality accounting standards, globally applied. Recognition of the link between accounting standards and broader policy issues is another topic that is high on the EU agenda and I will come back to this in my closing remarks. 3) The third area I would like to comment on is the need to think beyond financial information. There is a growing demand for companies to disclose non-financial information. Research suggests that companies which pro- 8

9 actively manage sustainability aspects of their operations consistently have a lower cost of capital and tend to out-perform their competitors over the long term. I do not need to tell an audience like you how important this area is, given all the work that many of you have already done on business sustainability. We are currently developing a more robust non-financial reporting framework and hope to begin discussions with the Parliament and Council in the near future. Our proposals will introduce changes into the Accounting Directive. The current text already requires companies to disclose, where appropriate, material information on environmental and employee-related aspects. But we are considering going further and strengthening the disclosure obligations for large companies so as to cover areas such as social, environment, human-rights and anti-corruption, as well as diversity in the Boards. Disclosures would cover relevant information about policies, performance and risks related to these matters. The Green Paper asks to what extent an increased integration of financial and non-financial information could help stakeholders to get a clearer overview of a company s long-term performance and contribute to better decision making. Before moving on to the fourth area, I should also just mention that many commentators tell us that the requirement for 9

10 quarterly reporting creates the wrong incentives and leads market participants to focus on short-term results. In its review of the Transparency Directive, the Commission has proposed lifting this obligation. 4) Finally, the Green Paper specifically addresses the issue of how SMEs access finance. How could EU regulations or reforms help in this area? One question which is implicit in the Green Paper, but which I would like to encourage you to address explicitly, is whether a specific accounting regime for listed SMEs in Europe, such as IFRS for SMEs, could enhance easier access to finance. I should like to reiterate that the Commission wants to hear your views. This consultation is the first step which will enable us to transform good ideas into possible policy actions in some areas, this might be a regulatory approach, whilst in others, it could be a matter of better coordination and promotion of best practices across Europe. On behalf of Commissioner Barnier, I encourage you to respond, to be creative and to tell us what you really think. The consultation period is 3 months; all responses received will be published on the Commission website (unless you request confidentiality) so this can truly be an open debate on the issues. 10

11 Finally, I should like to come back briefly to the general strategy on IFRS in the EU. Since 2002, the EU has adopted more than 60 regulations transforming IFRS or IFRIC interpretations into EU law. They are applied by the 9,000 companies which report under IFRS in the EU today. We think that time has come to conduct an evaluation of the IAS Regulation in the light of its initial objective. Did the eight years of use of IFRS in Europe contribute to improve the functioning of the EU capital market? Did it increase transparency and comparability of financial statements? At what costs? The preliminary work on this is now underway. The evaluation will include our endorsement process, which allows us only to reject or carve-out a standard. Except for a small carve-out in IAS 39 and IFRS 9, which is a specific case given its link with financial stability, all standards and interpretations have received positive endorsement advice from EFRAG, who advises the Commission on the adoption of standards, and have been accepted by Member States. To meet both these hurdles, the standards need to be of high technical quality and also need to be aligned with public 11

12 interest issues such as those that we have been talking about this evening. In November last year, the ECOFIN Council of Finance Ministers in Europe discussed international accounting standards and confirmed the EU s commitment to IFRS. However, they pointed out a need to strengthen the EU contribution to the standard setting process. In parallel and as a complement to the evaluation exercise, Commissioner Barnier has recently appointed Mr Philippe Maystadt, former President of the European Investment Bank and Minister of Finance of Belgium, as a Special Adviser to provide him with recommendations to enhance the EU s role in promoting high quality standards, in particular, considering how to achieve a single voice for Europe. This will encompass a review of the structures and processes in place in Europe in order to answer questions such as: Who should give a political steer in the assessment of accounting standards? Who provides feed-back to the IASB and when? Who should formulate technical advice to the Commission? Mr Maystadt will be meeting with many stakeholders including some of you here tonight and I hope the dialogues will be constructive. He cannot speak to everyone personally but there will also be a public consultation phase of his review and I hope you will give your views. In this fast-evolving context, the most 12

13 important point is that we keep working with the same objective in mind, which is to develop the best accounting standards, serving the needs of all users of accounts. I look forward to talking to you over dinner and to receiving some questions later. In the meantime, thank you for your attention. 13