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By Manos Schizas, economic analyst at ACCA
Only a fraction of the world’s SMEs are funded by public equity. ACCA considers whether the world’s capital markets can do more for small issuers.
Xavier Rolet, CEO of the London Stock Exchange Group, has been making the rounds recently, drumming up support for Europe’s SMEs as the most reliable job creators in the region. He’s right, of course, in identifying the sector as a powerful engine of employment, but can the capital markets supply SMEs’ funding needs?
The dotcom boom of the late 1990s ended badly – or so I was taught in university. But more than a decade later it seems to me that it was a fantastically benign episode compared to the credit bubble that followed it. Though it had to end some time, it was the dotcom era that made today’s digital economy possible, bequeathing a digital and social infrastructure that we couldn’t live without today.
But perhaps the period’s most lasting legacy may be the stereotype of the twentysomething internet billionaire: starting a game-changing business in his or her basement, then taking it public a few years later, still in jeans, as the prospectus presented to the world. It’s a great story, but also a desperately rare one.
To this day, only a very small percentage of the world’s SMEs are funded by public equity. The figure varies by country but is typically in the low single digits. Because the total population of SMEs is so massive, this relatively small share still means that micro-caps and small caps (with a market capitalisation of less than $65m and $200m respectively) made up 64% of the world’s listed companies in 2011. But they accounted for only 14% of individual stock market trades and 4% of share trading volume, according to figures from the World Federation of Exchanges.
Illiquidity is a market-killer. It scares away investors looking for reliable exit opportunities as much as it does entrepreneurs looking for fair valuation. It also endangers the social mission of markets. Stock exchanges serve society by channelling funds to productive investment through price discover; this however means that liquidity is most crucial in those segments of the market in which issuers most critical future finance needs are still ahead of them.
Appropriately a recent report by UK think tank Centre Forum singled out stamp duty on sales of shares for criticism as an effective tax on liquidity. In the era of high frequency trading, some policymakers may even welcome this outcome. But even if there is such a thing as excess liquidity in capital markets – which is subject to fierce debate – when it comes to small listings, there is no liquidity to waste, no froth to skim.
Governments have used other tax incentives extensively to promote equity finance; after all the interest on debt is tax-deductible, which creates an uneven playing field. Emerging markets, from Jamaica and Trinidad and Tobago, to frontiers such as Cambodia, offer substantial tax breaks to listed firms, subject to clawbacks, as long as they remain listed for some years. Many governments also extend these breaks to investors. In the UK, for example, investments in the AIM exchange are now eligible for inclusion in stocks and shares ISAs.
While tax relief may encourage investors to hold onto more of their gains, the ears of tax and wealth advisers everywhere also prick up at the mere mention of a tax incentive. Tax relief may increase returns, but it is only one side of the equation. Small issuers are seen as riskier – and not without cause. Students of accounting are routinely taught from seminal studies that use business size is a proxy for risk. The lack of analyst following compounds this problem: analysts’ incentives are to generate recommendations for the sell-side and micro-caps simply cannot generate enough sales to justify their time. It is not impossible to develop alternatives, but they won’t come for free either.
Back in the UK, Centre Forum correctly identified the need for a new listing culture in which all stakeholders collaborate to encourage the financing of SMEs through public equity. Ironically, this is precisely the reality in less developed markets – where government, business associations, exchanges and the accountancy profession work hand in hand to groom prospective issuers.
Why not take a leaf out of their book? After all, secondary boards aimed at SMEs, however established the main exchange boards they are allied to, are perpetually in frontier market territory.
Meanwhile, the tiny but rapidly growing crowdfunding industry, which allows retail investors to put small amounts of equity towards promising start-ups, could introduce a whole new generation of potential investors to the concepts and risks of equity investment. Policymakers and exchanges have yet to see the link between crowdfunding and the capital markets, but they should.
For more information read Protecting stakeholder interests in SME companies: good practice adopting and promoting e-invoicing in the EU and The rise of capital markets in emerging and frontier economies.
This article first appeared in Accounting and Business magazine small business special edition, May edition, 2013.
Liz Hughes, head of ACCA Ireland, on the value of a new approach to financial reporting
The term “integrated reporting” may not yet be a part of your current accountancy vocabulary but the likelihood is that it will become a standard feature of reporting practices in the near future. Its move to prominence is being driven by three related developments.
Firstly, increased recognition that the traditional use of the financial statement as the sole measure of a company’s health and wellbeing can no longer go unquestioned. Secondly, the widespread introduction into entities’ reporting practices of a number of specialist reports, for example, reports on corporate governance policies and practices. Finally, and more generally, the steady increase in company disclosure requirements, which has led to corporate annual reports becoming extremely lengthy documents, sometimes running to hundreds of pages. This trend, while understandable, is contrary to the goal of achieving transparency in reporting practices.
There is now a developing body of opinion that we need to promote a new approach to corporate reporting, one that brings together all the material factors impacting on an entity’s standing and performance, and communicates them in a coherent ‘integrated’ way. Crucially, it is argued that an entity needs to weave these different strands of information into a coherent narrative that is driven an explanation of its strategy, i.e. plans it has to achieve its business objectives. The essence of this new concept then, is not to add to the proliferation of reported information but to identify the factors that are most material to a full explanation of what a reporting company is trying to achieve, and to make sure that a full and rounded explanation is conveyed.
The concept is now being taken forward by the International Integrated Reporting Council (IIRC), a new body based in London that is enjoying widespread support from business, the profession and regulators. IIRC is currently developing a framework to guide companies in how they should go about producing integrated reports, through a consultation paper on this framework. Depending on the feedback received, a final version will follow by the end of 2013. More information can be obtained at www.theiirc.org
This article first appeared in Accounting and Business, Ireland edition, April 2013
By Neil Stevenson, executive director of Brand, ACCA
On Monday we hosted our annual Global Symposium of forum members. This one day event brings together the chairs of all the Global Forums from around the world.
Launched in September 2011, the Global Forums are strategically important to ACCA. They bring together leading employers, members and other subject matter experts from 33 countries to help shape and inform our policy; they provide a unique international perspective drawn from best practice from around the world; and they help ACCA to increase reputation and influence with employers, policy makers, regulators and standard setters.
The Global Forums offer ACCA several opportunities.
- By bringing together groups of experts from around the world – from the public and private sectors, public practice and academia – they can ensure that ACCA makes a difference through our contribution to policy development and technical thinking.
- The Forums help us to enrich the input we get from our research and from expert opinion.
- They enable us to further the thinking and discussion on current and future issues in the accountancy and finance professions.
The challenge for the profession will be the need to prove its value – to prove its public value. ACCA has been a strong champion of public value. It means acting in the public interest, promoting ethical businesses and growing the economy. This is at the heart of everything we do as a professional body and I know this is an ethos shared by our Global Forum members and wider ACCA membership.
It is our job to continue to be a voice which not only stands for excellence, but also challenges convention in the interests of developing a strong and more relevant global profession, which puts public value first.
I would like to highlight some of the successes of the global forums to give everyone here a sense of the impact they are making. Many of the forums contributed to our global virtual conference, Accounting for the Future, last year, which achieved over 15,000 delegates.
The success of the ACCA-IMA Accountants for Business Global Forum, which acts as a think tank to consider how finance leaders are responding to the issues they face, has also been considerable. The range of issues discussed by the Forum is significant, reflecting the breadth of challenges facing CFOs and the finance functions they lead. In October 2012, the Forum published its first paper The Changing Role of the CFO. The paper used insights from a number of CFO roundtables held in New York, Zurich, Shanghai and Moscow. The report identifies a number of key areas such as growing regulation, the impact of technology, the focus on talent and capability, and growing interest in the need for commercial insight as shaping the CFO role.
Another area where global forums have played a significant role is in the critical debate around audit. Members of the Global Forum for Audit and Assurance gave expert views on the International Auditing and Assurance Standards Board’s proposals to improve the auditor’s report.
Their views were used extensively in ACCA’s formal written response to the IAASB’s related Invitation to Comment on ways to improve the audit report. This was a significant consultation! We are also pleased to see that former ACCA President Brendan Murtagh now sits on the IAASB.
Elsewhere, the Global Forum for the Public Sector hosted ACCA’s fourth International Public Sector Conference in December of 2012. The event – ‘Rebalancing the economy – boosting growth’ – included high-profile speakers such as: Brian Quinn from the World Bank, Mario Marcel from the OECD and Richard Hughes from the IMF. In January, the forum published the policy paper Setting high professional standards for public services around the world. The paper addresses a number of key areas ranging from what ACCA thinks on public financial management to financial reporting standards for public services and has attracted a great deal of media interest.
I was also delighted to see the Global Forum for Corporate Reporting represented at ACCA’s International Assembly, when chair Lorraine Holleway presented alongside Hans Hoogervorst, chairman of the International Accounting Standards Board.
Our work on SMEs has also been at the centre of global debate. The Global Forum for SMEs published a paper called Access to Finance for SMEs: A Global Agenda. This urges governments to take greater policy action to help SMEs access finance. It was issued in time for a meeting of the G20. The work of the forum also feeds into the European debate through FEE and other bodies. This global forum is also gaining considerable media coverage for its activities, with its work on access to finance and the role of accountants receiving more than 100 pieces of press coverage in the past few months!
ACCA has been at the forefront of the sustainability debate for many years, and the Global Forum for Sustainability has been leading the charge in the past year. It has conducted research which asked Is Natural Capital a Material Issue? I am pleased to see we continue to collaborate with many organisations in this area, including KPMG and Fauna and Flora International.
In autumn 2012, the Accountancy Futures Academy published the report 100 Drivers of Change for the Global Accountancy Profession which identified 100 emerging drivers for change that directly or indirectly impact business and the accountancy profession. The report has also attracted significant interest from professional bodies and business around the world. And it has been used as a source for the development of our own future strategy.
This is just a snapshot of the work undertaken by the Forums. Through their activities I believe ACCA can lead the way by demonstrating we are at the helm of understanding key issues affecting not only the accountancy profession, but governments, policy makers, the drivers of business and financial behaviour as well as employers and the wider global economy.