FINANCIAL PERFORMANCE
The buck stops here
Dumith Fernando
Dumith Fernando is the Chairman of the Colombo Stock Exchange (CSE)
One of the most important measures of a company’s success is undoubtedly its financial performance; but considering the evolving role of listed corporates in the capital market, it measures how only one stakeholder – i.e. the shareholder – benefits in a short-term sense.
Increasingly, businesses have to take a ‘stakeholder approach’ rather than a ‘shareholder approach.’
Dumith Fernando says: “Traditionally, we look at annual reports but that alone does not reveal the full story of the sustainability of a company’s business model, the opportunities that are available or its future growth profile.”
He adds: “All these factors make a business an attractive investment but they’re not always captured through traditional financial performance metrics alone.”
“Fairly successful companies nowadays have to be defined by how they are monitoring and meeting the requirements of other stakeholders – such as customers, employees, those in their supply chains, communities, governments and of course, investors,” he explains.
Financial metrics do not enable you to measure future performance as they’re more a reflection of past performance. Having said that, balance sheet metrics do reveal how solid a company’s foundation is to contribute to its performance in the future.
Fernando believes that transparency and accountability are absolutely essential.
He elaborates: “I think the role of transparency is extremely important because senior management and shareholders must be able to hold all agents in a business accountable. In a public company, that becomes even more crucial because the public is investing in it.”
“The Colombo Stock Exchange (CSE), through its listed company rules, tries to ensure that best practices in transparency are upheld to strengthen investor protection,” Fernando points out.
He feels that Sri Lanka’s listed companies maintain a high level of transparency but feels there’s always room for improvement: “The feedback we receive from foreign investors – who compare us across different emerging and frontier markets – is that from the governance and transparency perspective, we probably have one of the better stock exchanges.”
“We need to make sure that more and more companies – especially smaller businesses – are educated, and aware of the need and responsibility for transparency and accountability. Companies that are more widely held can probably do much better in terms of transparency and accountability,” he remarks.
Fernando deems the quality of auditors to be critical – because external auditors have to put their stamp of approval on each and every company’s financial statements whether it is listed or not.
“So the expectation is that they follow the highest professional standards to require the expected standard of integrity from any company,” he explains.
Commenting on what leads to strong financial performance and valuation upside, he lists metrics such as the growth potential, cash flow profile (which is also relevant to liquidity and solvency), profitability characteristics (how much revenue earned naturally falls to the bottom line) and quality of earnings (relevant to how sustainable or volatile they might be), as well as effective measures of return on individual investment decisions.
But it is also essential that qualitative drivers of these metrics are understood, thereby enabling better management.
“Clarity in terms of leading nonfinancial indicators and metrics, which might be relevant to various stakeholders, have to be part of a strategy for good financial performance and reporting,” Fernando maintains, adding that “without being able to keep multiple stakeholders satisfied, companies cannot develop long-term employee and customer loyalty, a strong brand reputation, and effective government and community relations.”
“All of these are in turn essential to developing long-term shareholder returns and investor confidence,” he adds.
Fernando concludes: “Corporates have to lead the charge in balancing multiple stakeholder interests to ensure long-term sustainability, going beyond the once traditional focus on merely promoter and shareholder interests.”
