20 April 2015
The ICSA policy team and judges of the Excellence in Governance Awards identify examples of corporate reporting good practice in FTSE 350 companies
The strategic report represents an opportunity for companies to get away from boilerplate reporting and focus on the issues that really matter to them. The regulations creating the requirement – the snappily titled ‘The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013’ – are supported by guidance from the Financial Reporting Council (FRC). The guidance noted ‘while the changes introduced by the Regulations represent a relatively modest change to the pre-existing legal requirements, the FRC believes that they should act as a catalyst for entities to prepare clear and concise narrative reports that facilitate fair, balanced and understandable reporting.’ It was this clarity and sense of cohesive purpose and story telling which we were looking for from this first tranche of strategic reports.
We hear a lot about integrated reporting – and rightly so – in the context of a company’s external environment. The strategic report is an opportunity for companies to discuss their performance, governance and future prospects in more detail than is normally possible in a chairman’s letter. Its focus is on those matters that the board deem worthy of reporting to shareholders, rather than those they are obliged to report and which can now appear in the directors’ report. The strategic report must meet all the requirements to be fair, balanced and understandable, comprehensive and concise, and engage the reader. Rather than dividing the various sections among different departments within the business, it is necessary for an overall ‘guiding hand’, probably the company secretary, to ensure that the strategic report reads as a cohesive whole.
This is an intensely personal aspect of corporate reporting – much will depend on the culture of the company and the personality of the chairman. It is therefore unsurprising that companies tackled the new strategic report in a variety of ways – some better than others. The very best will be an outstanding advertisement for all that the company does, as one judge commented on the Babcock International strategic report – ‘it makes you want to invest in them.’
A good strategic report goes beyond a discussion of the company’s strategy to the way in which it runs through all aspects of governance of the company. This includes how it links into the key performance indicators (KPIs) against which the board measure themselves and, consequently, how strategy and the achievement of strategic goals link in to remuneration. Examples of good practice:
There should also be a realistic assessment of the risks and uncertainties that may blow a company off course. Although many of these may be generic to an industry, the best strategic reports look in much more detail at the specific risks and uncertainties that might affect the company over the short, medium and longer terms. Examples of good practice:
The increasing focus on telling the corporate story has meant that sustainability has become another key component of strategic reporting. This is very helpful in lifting it out of the potential backwater of CSR reporting and putting it front and centre of the company report. There are some businesses for whom sustainability is not a key issue, but those are relatively rare.
The absence of any commentary about sustainability issues in the strategic report will tell its own tale. For most companies, this is an opportunity to explain what they do as part of normal business without it being a separate piece of reporting. Examples of
Babcock International plc: www.babcockinternational.com
Land Securities plc: www.landsecurities.com
Aviva plc: www.aviva.com
BAE Systems plc: www.baesystems.com
Cairn Energy plc: www.cairnenergy.com
Provident Financial plc: www.providentfinancial.com
Lonmin plc: www.lonmin.com
National Express plc: www.nationalexpressgroup.com
For further information see the winners book produced for the ICSA Excellence in Governance Awards 2014 at the ICSA website.
Peter Swabey is Policy and Research Director at ICSA