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Getting it Right – The MD&A - November 03,2007
I know I have written many a column-inch about the annual report, but half the story has not yet been told. This week I am riding a smaller hobby horse – the MD&A. – Management’s Discussion and Analysis.

The MD&A is that part of the annual report that we shareholders should all care about more deeply and fervently than we care about whether we will be getting rice and peas for Sunday dinner. I would say with regards to the MD&A, we should all worship at its shrine, nay perhaps sacrifice our first-born, at its very appearance which, I hasten to add is few and far between here in Jamaica.

There are international best practices standards that clearly lay out the under-lying principles and guidelines for the MD&A. For example, the International Organization of Securities Commission (IOSCO), in 2003 published ‘General Principles Regarding Disclosure of Management’s Discussion and Analysis of Financial Condition and Results of Operations. IOSCO’s report points to the fact that “the corporate collapses that have occurred around the world in recent years have highlighted the need for improved disclosure and transparency. In particular, attention worldwide has focused on the importance of greater transparency in disclosure of financial information.”

Through management’s eyes
The MD&A should tell us what ‘they’ have done and will be doing with our money that we have invested in the company. Lest, I trod on the toes of the fastidious in my simplicity, let me use the definition used by the Canadian Institute of Chartered Accountants. “The purpose of Management’s Discussion and Analysis (MD&A) is, as regulators have determined, to provide a narrative explanation, through the eyes of management, of how a company has performed in the past and its future prospects. An effective MD&A integrates historical and prospective information and financial statement and business analyses that, together with the financial statements, impart useful knowledge to investors and other readers.”

In short, in this section of the annual report, management discusses numerous aspects of the company, both past and present. Among other things, the MD&A provides an overview of the previous year of operations and how the company faired in that time period. Management will usually also touch on the upcoming year, outlining future goals and approaches to new projects.

Isn’t that information EVERY shareholder should want to know? Furthermore, isn’t that information every investor should have ready and easily read access to, without having to wade through pages and pages of numbers that don’t make sense to us any way? We shareholders shouldn’t have to have double majors in management, business and high finance to find out whether our investment in your company is going north or south. Nor do we want to have to hire an accountant or cajole our finance-savvy friends into explaining ‘how tings’ a run in OUR company in which we have invested.

Should reveal as much
Of course, to be fair, in crafting the MD&A a company often walks a thin line between revealing too much information about its operations to its competitors and not providing existing and potential investors with enough meat on which to chew. Perhaps, the MD&A should be like those mini-skirts I use to wear in my hey-day and reveal as much as they conceal. The MD&A is about transparency, but how much?

Writing the MD&A is an art. It requires a sensitivity to the inner workings of a company and the external circumstances of that company’s industry, such as competitive forces, among other issues.

There are many benefits to good MD&A disclosure. Says the CICA, “The better a company communicates with those who assess its value in capital markets, the better the markets will understand and reward underlying potential and prospects. Specifically, the benefits that accrue from such communication may include reduced costs of capital, in creased financial analyst coverage and better access to institutional investor capital.” The MD&A, like financial statements, provides the opportunity for a company to demonstrate its account ability to investors for effective steward ship of resources, and, further, for meeting stated strategic objectives. Also, the discipline required to prepare an effective MD&A can strengthen internal management focus.

The CICA has developed several general disclosure principles in a guidance document offering six principles that provide the foundation underpinning MD&A disclosures. According to the CICA, MD&A’s should:
• Enable readers to view the company through the eyes of management;
• Complement as well as supplement financial statements;
• Be reliable, that is, complete, fair and balanced, and providing material information — namely, information that could influence a reasonable investor in making a decision to invest or continue to invest in the company;
• Have a forward-looking orientation;
• Focus on management’s strategy for generating value for investors over time;
• Be written in plain language, with candour and without exaggeration, and embody the qualities of understandability, relevance; comparability and consistency over reporting periods.

I have taken a cursory look at the 2006 annual report of Mayberry Investments Ltd. and was pleased to see that apart from their MD&A there is a Section headed, ‘Perspectives on Departments’ Contribution’. Future columns will look critically at some of our own Annual Reports and see whether we shareholders are being served.


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