If companies want to know how they compare to others in a similar industry, peer benchmarking is one approach they may use to make that comparison. Peer benchmarking involves selecting a group of companies with similarities, such as industry or index. Within this group, companies can compare key metrics, disclosures, and various performance indicators. This helps businesses to ensure that they are stacking up against the competition in the way they handle investor relations, strategic planning, and regulatory reporting.
Peer benchmarking is a common practice for various aspects of operations, financial reporting, and other decision-making. For example, 96% of S&P 500 companies reported using peer benchmarking for executive pay in 2015, a practice that has since spread to other indices like the S&P 1500.
Best Practices for Benchmarking in Financial Reporting
Since SEC filings and many other corporate disclosures are a matter of public record, they are an easy place to go for detailed information about industry peers. Key areas of analysis should include:
- The detail and overall readability of the disclosures
- Existence of financial ratios and KPIs
- Risk factors that align between companies
- ESG performance and reporting
- Current market positioning
- Competitive insights that can help the company improve
AI is an effective tool for comparing numerical values, but AI’s natural language processing can also provide a different way to make qualitative assessments. Companies may use AI to perform a narrative analysis that examines disclosure trends and streamlines language use in filings to be more consistent with their peers.
Benefits of Peer Benchmarking for Financial Teams
Implementing peer benchmarking provides a variety of benefits. This practice can:
- Improve Quality of Filings: Align disclosures to meet industry best practices and ensure consistency across SEC filings.
- Gain Strategic Insights: Discover trends that industry leaders and competitors follow, such as a specific funding plan or IPO timeline. Gain a greater understanding of how peers discuss risk and performance.
- Increase Confidence Through Data: Use data-driven insights to support executive decision-making. Strengthen investor trust with consistent, accurate reporting.
In some cases, peer benchmarking can be aspirational, helping the company grow to compete with stronger companies. For example, a mid-cap tech firm trading in the Nasdaq index might use peer benchmarking to align their disclosures with the Magnificent 7.
How AI Is Transforming Peer Benchmarking
AI has the potential to turn weeks of manual peer review into minutes. AI’s ability to process massive amounts of data in a short period of time allows companies to complete a rapid evaluation of financial data and language used in financial reporting. Machine learning and natural language processing can identify trends, tones, or sentiments that set certain peers apart from the rest.
Companies can use AI in financial reporting to ensure they stay competitive with their peers. AI-powered financial software automates the comparison in moments, providing data-driven insights with sufficient depth and precision for effective decision-making.
Peer Benchmarking and Regulatory Compliance
Although peer benchmarking is a critical tool for evaluating performance when compared to peers, it can also be a potent source of information for compliance. New companies with little experience filing SEC reports may look at their peers’ existing reports as a guide to identify how much detail to include and the most precise language to use. Seasoned companies might analyze peer reports to gain new insights into reporting trends and set refined goals.
The result of using peer benchmarking in financial reporting is that companies can properly flesh out sections like MD&A or risk factors, decrease filing deficiencies, and smooth out the process of audit reviews. Instead of making adjustments as a reaction, businesses can use comparative analytics to ensure proactive compliance.
Benchmarking for ESG and Narrative Reporting
Although ESG is an important component of many companies’ financial planning and reporting, it lacks the standardization of SEC filings and other reports. Peer analysis helps to fill the gap between what companies think they should provide and the details investors expect to see.
Benchmarking assists companies in creating financial storytelling that aligns with peers, particularly in terms of tone, structure, and emphasis of ESG and DEI. Peer analysis outlines how similar companies frame their commitment to sustainability and governance, as well as each metric they use. Along with ESG reporting software, peer benchmarking provides a roadmap for responsible, complete reporting that meets the needs of investors and analysts.
Implementing Peer Benchmarking
To get the most from peer benchmarking, companies should follow certain steps:
- Create Peer Groups: Select a group of peers, usually about 15, by industry, market cap or similar regulatory requirements.
- Clarify Objectives: Identify specific aspects to measure, such as the depth of ESG reporting, disclosure completeness, or risk reporting.
- Leverage AI Tools: Rely on technology to automate the analysis and reporting, such as AI-integrated financial reporting software.
- Review and Revise: Use the findings from the analysis to make changes to disclosure templates, adjust tone or increase transparency.
- Ensure Adequate Training: Provide training to reporting and compliance teams, confirming that they know how to interpret insights effectively.
A defined process for benchmarking can help ensure that the analysis provides actionable insights that lead to measurable improvements.
Benchmark Smarter, Report Better
Peer benchmarking is more than just a practical thing that companies do to keep tabs on their competition. It is a critical aspect of analysis that companies perform to ensure that they continue to meet the demands of the future, just as important as a thorough M&A valuation. It provides a strategic reporting advantage that can improve decision-making, efficiency and long-term gains for the company.
The use of data-backed insights in peer benchmarking can help to increase investor confidence, provide stronger communication, and improve compliance with the SEC and other authorities. To learn more about how DFIN ActiveDisclosure can take your benchmarking to the next level, with better insights and smarter filings, request a demo today.
