30 January 2017 by Peter Swabey
A look at best practice and potential pitfalls in corporate reporting
The production of an annual report is a legal obligation for a company, but any company that thinks of the annual report purely as a compliance burden is missing the point. Perhaps more importantly, they are missing the opportunity to tell their story to investors, to potential investors and to any other stakeholder, including the public at large. At a time when there is, by common consent, a lack of trust in business, this is surely an opportunity too important to overlook.
I had the pleasure of sitting through the judging panels for the 2016 ICSA Awards. I say pleasure because it was, really, a pleasure to see how many companies have grasped the opportunity created by their public reporting obligations to tell their story. It was also a pleasure to hear the judges debating the various merits of the entries, with some real passion generated on occasion by how a company has met a particular reporting requirement and, in some cases, some really tight final decisions.
I was first involved in the judging panels for the 2013 Awards and even in the short time since, it is noticeable how the standard of reporting has risen. Reports that were outstanding three years ago are now back of the pack, not because they have got worse, but because others have learned from them and have caught up or even overtaken. With that in mind, it is be helpful to pull together some suggestions for companies wanting to improve their reporting.
First impressions count. This is where your design team, whether inhouse or external, can really help you. An increasing number of companies are opening their reports with a simple and clear ‘highlights’ page which sums up performance, often in a neat graphic, and a concise (perhaps only a sentence or two) introduction to the company.
There were a few companies where it was several pages before the judges could actually work out what the company did. A simple statement that ‘XYZ plc makes widgets’ – I am sure that your marketing department has something that can be used as a basis for this – really helps with that first impression.
Have a clear and understandable business model. All companies have one, but not all can express it clearly in a few words. Some were fuzzy and a few had been over-designed into unwieldy graphics that left the judges wondering what it was all about.
If you cannot express your business model – what your raw materials are, what you do to them, what the outputs are and therefore how you make money – in a few sentences, you probably need to think harder about them. Some companies have an easier life in this regard than others. Companies in, for example, the property sector often have a relatively simple business model compared with extractive companies.
We hear a lot about integrated reporting in the context of a company’s external environment. Following the International Integrated Reporting Council’s principles is one way a company can ensure that its report stands together as a unified whole, but just as important is the way the constituent parts of the report flow together and demonstrate that they are part of a grand plan.
Most companies talked about their strategy, the risks that challenge them, their key performance indicators (KPIs), governance structures and executive pay, but in many cases these all seemed to be drafted in isolation. Fewer companies unambiguously linked all these aspects of their reporting together.
Those companies who, having described their strategy, went on to discuss: how the risks that they were incurring were necessary for the delivery of that strategy; the governance processes which supported this activity; what they were doing to ensure the viability of their business model; the KPIs necessary to achieve the strategy, and; finally, how executive pay arrangements supported all this activity. Where this was done, it lifted the report clear of its peers and, more importantly, demonstrated a high clarity of thinking at board level.
In our report last year on the role of the nomination committee, we looked at the way companies are, increasingly, looking deeper into the company to identify and help to develop its future leaders; casting the net wider to identify potential directors and thinking further ahead than the immediate replacement of a retiring board member. This has not always been apparent from annual reports.
There are, undoubtedly, some constraints on the committee’s ability to report more meaningfully, due to the sensitivity of issues under consideration, and we are firm believers in the need for better, rather than more, reporting − so as to convey assurance that issues are being addressed and to provide insight into the outcome of board effectiveness reviews.
It was therefore encouraging to see a greater focus this year on the quality of nomination committee reporting and, in particular, the quality of director biographies, focusing on why that individual should be appointed, rather than simply reiterating their CV. This gives investors a better sense of the skills that individual directors bring to the board which, in turn, helps them assess the overall strength of the board and the effectiveness of the board evaluation process.
Finally, a note on some of the relatively avoidable pitfalls into which some companies toppled. The UK Corporate Governance Code and the Disclosure and Transparency Rules (DTR) not only includes requirements for how companies behave, but also requirements for how companies report.
There are specific disclosure requirements in the Code and some companies failed to make that disclosure, even if it was painfully obvious from reading the report that they were compliant. Examples of these oversights included:
This simply looks careless and, we were told by investor representatives, can be treated as an indicator of culture. This creates an impression that if the company does not pay attention to detail here, there may be other, less noticeable but more significant, places in the business where similar carelessness could have significant implications.
That said, my overall impression was of significant improvement in the quality of the reports that our judges were being asked to assess and I am grateful to them all for the time and trouble taken.
For a list of all the winners and photos from the awards, visit icsa.org.uk/awards