Beyond the Bottom Line: Framework for Long-Term Value Reporting

In today\'s fast-changing business world, the current system of reporting that focuses on quarterly earnings seems to have become outdated. The growth of modern businesses like tech startups, infrastructure projects, and R&D highlights the flaws of focusing only on short-term results. Sustainable businesses take time to deliver results. Assessing their growth solely based on quarterly earnings can lead to misinterpretation of their true potential. A company may be investing heavily in customer acquisition, research and development, building its infrastructure, or entering new markets, where returns may not be immediate and quarterly earnings insufficient to get favorable response from investors.

Are All Companies same?

Is a company working on Artificial Intelligence (AI) the same as one trading in fast-moving consumer goods? I am sure, answer to this is emphatic \'No\'; then why quarter results produced by all Companies looks the same? Because, all of them follow same regulatory template. Financial ratios like profit margins or revenue growth are universally relevant, however they fail to account for the unique dynamics that drive a business. For example - A manufacturing company might focus on inventory turnover and production efficiency, while a tech firm should be evaluated on product development or user growth, and a space company might focus more on technology innovation, regulatory compliance and partnerships & collaborations.

Businesses are not alike, the environment in which they operate is not same, risks they carry also varies and therefore matrices on which they are evaluated should also be different and not just quarterly earnings.

Investor Presentation is there, what else is needed?

Some companies voluntarily shares performance indicators and other long term matrices through \'Investor Presentations\'. However, the lack of a standardized framework leads to inconsistencies. Companies may highlight favorable metrics when they perform well but discontinue or modify reporting when the results are less favorable. This information is neither reviewed by their auditor nor approved by their governing board, thus not giving any assurance of accuracy of information presented.

Should we then do away with quarterly financial results reporting?

As an investor, I wonder how I would know answer to some of the relevant questions:

• How is business performing?
• Is my investment safe?
• Should I increase or decrease my investment?

Companies routinely monitor their KPIs internally and Investors should not be deprived of these critical piece of information, as they too have right to understand the ongoing progress of a company they have invested in. Depending on the nature of the business, access to wider range of information should be given to investors on a more frequent basis instead of just limiting progress card to financial earnings.

Imagine an e-commerce startup, giving regular update to its investors on critical metrics such as user acquisition, conversion ratio, repeat customer, product engagement, or customer retention rates. For an infrastructure company, key updates might include project milestones, progress on land acquisition, contract awards, or regulatory approvals, percentage of project completion, percentage of actual traffic vis-à-vis projected traffic.

Further, a SaaS (Software as a Service) company could report on customer acquisition costs, monthly recurring revenue, and churn rates. A manufacturing company might focus on capacity utilisation, production efficiency matrices, cost of raw material inflation index, supply chain performance etc.

These are some of the lead performance indicators that can give investors a much clearer view of where the company is heading by providing report on \'Long Term Value\'.

What could be the framework for 'Long Term Value' reporting?

A complete overhaul of regulatory framework requiring companies to disclose quarterly earnings is required. To ensure accountability, consistency and relevance of reporting with changing times, the following framework is suggested:

• Companies should be free to choose matrices they want to report considering the industry, stage of evolution and other factors. Amazon made losses for 20 years but shareholders still continued to reward, there was one simple reason, the company continued to communicate their focus area with their shareholders and matrices showing the clear progress on the same.
• All matrices should be classified in three categories, as follows:
  
  • Critical to Success: Focus on long-term view.
  • Lead indicators of Progress: Short-term in nature and may include financial results, if company believes that to be the best metric.
  • Risks Factors: Relevant and concise risks, avoiding exhaustive lists. This should not be like risk factors in Prospectus in which any and every remotest possible risk is mentioned. This is taken as false alarm by Investor and squarely ignored.

• These matrices, along with the frequency of reporting (minimum Quarterly), should be approved by the Board of Directors and consistently followed and reported by Companies.
• Numbers, thus reported should be reviewed (not audited) by Auditors and authorised by Board for issuance for greater accountability.
• We live in an ever changing environment and these matrices may need change to keep up with changing world. Any departure/modification to these metrics should be approved by Board with rationale of changes recorded and communicated to investors. To bring more accountability, voting by Independent Directors may be made compulsory. Changes to the \'Critical to Success\' metrics should be carried only with Shareholders\' approval and promoters not participating in the voting process.
• Annual report along with complete set of audited financial results should continue under current framework.

Conclusion: Focusing on Long-Term Value Creation

By embracing this framework with governance, companies can align investor expectations with their strategic goals, fostering mutual trust and ensuring sustainable growth leading to long term value creation.