The continued quest for a perfectly calibrated crystal ball

On 1st October 2014 the revised UK Corporate Governance Code became effective for all companies listed on the London Stock Exchange.

One of the requirements of the revised Code is for companies to provide a ‘viability statement’ that looks out beyond a 12-month horizon and provides information to investors about longer-term financial stability and volatility.

It’s obvious to me, and hopefully to you that doing this relies on having really high quality risk information, not just the anecdotal heat map that we all could have drawn up without knowing anything much about the company in the first place.

I was intrigued to read a spokesman for the Institute of Directors (The Times, 22nd October and IoD website) who was saying that looking out beyond 12-months wasn’t a reasonable request.  The old chestnut about crystal balls was mentioned and it make me remember that there remains much about RISK information that people don’t seem able to grasp, i.e. it’s about a potential future – it isn’t data – it can’t be ‘true’ or ‘correct’ – it’s an estimate or a forecast.

But with estimates/forecasts, we need to know confidence levels.  Of course you cannot be sure – investors aren’t daft – they don’t expect 100% certainty – but they also expect forecasts based on the best risk information you can get, and that requires:

·       An obsessive interest in scanning the horizon and seeing what might be coming your way.

·       An open-mindedness to new data, new ideas, thoughts and perceptions of colleagues.

·       An ability to take lots of input then model how all that might play out on the objectives that matter most to you.

The really exciting thing for business though is that if you do all the good stuff so you can comply with the FRC regulations, you also stand a chance of improving your performance and creating the competitive advantage needed to achieve or improve on your forecasts.