A study by Booz Allen Hamilton examines how buy-side, sell-side, and private equity analysts in Europe rate the capital market communications of listed companies across industries. Over 60% of the financial analysts Booz Allen surveyed reported that current communication practices do not meet their requirements for making investment and rating decisions. This leads to lower valuations and — in some instances — even exclusion from investment portfolios.

In this context, Booz Allen examined the role that Chief Financial Officers (CFOs) play in closing the information gap as they communicate their companies' strengths to the capital markets. "The CFO is 'mission critical' to building credibility with the capital markets," explained Booz Allen Principal Jens Niebuhr.

Capital Market Communications Fall Short

"Ineffective capital market communication comes at a price depending on the severity of the communication deficit," explained Niebuhr. In The Netherlands, for example, 50% of analysts surveyed said they levy a penalty ranging from 10-33% on the valuation of stocks that do not meet disclosure requirements. A lack of transparency on how numbers are reported can also have an adverse impact on corporate brand equity. Insufficient disclosure, which is closely monitored by financial market regulatory bodies, can increase the risk of litigation.

The analysts called for an increased level of disclosure on financial and operational performance, strategic positioning and initiatives, and delivery capabilities. However, the CFO must find the right balance between meeting these information requests while managing risk and cost to the company. Too much disclosure can result in a loss of bargaining power with customers, suppliers, and other stakeholders or trigger an adverse competitive action.

The analysts also identified key components to their investment decisions — such as quality of management and convincing strategies with measurable targets — that were missing from the companies' capital market communications. "Analysts generally expect companies to put financial performance into a strategic context but many fail to do so convincingly," said Niebuhr. "The analysts stressed the value of framing the financials with market strategy, operational performance, and resource deployment — all backed up with tangible initiatives."

The New CFO Agenda

The CFO's job will become more strategic and business-oriented. The functional role around accounting, financing, and M&A remains important, however; CFOs will increasingly be measured based on their business impact. "The CFO must play a very active role in defining and executing corporate strategy in partnership with the Chief Executive Officer," said Niebuhr.

In this context, the CFO must act as an advocate for the shareholders' interests. "It works both ways," said Niebuhr. "From the company to the market — in terms of capital market communication — and from the market to the company — instilling an external or shareholder perspective throughout the company's business units." To foster this connection, the CFO must own a defining role in key governance processes where the multibillion-dollar business decisions are being made and establish a performance management with the required external orientation.

About the Study

The capital market communications study was led by Booz Allen Vice Presidents Irmgard Heinz and Karin Dorrepaal and Principal Jens Niebuhr. For further information, please contact Irmgard Heinz or Jens Niebuhr.

For more information, download "The New CFO Agenda – Setting the Pace for Value Generation."