Data Strategy - Annual reports enter ‘new world’ with KPIs
The number of FTSE 100 companies including key performance indicators (KPIs) in their annual reports has doubled as they get to grips with new mandatory reporting requirements. Financial KPIs are now included by four out of five companies, while over half are also reporting on non-financial indicators.
Corporate reporting specialist Black Sun has studied the annual reports for the year to December 2006 from every company in the top 100. It found significant impact on reports from the Business Review regulations, as well as the Accounting Standards Board’s voluntary operational financial reporting statement recommendations.
“It is a new world in terms of mandatory business reporting,” says Sallie Pilot, director of corporate reporting at Black Sun. “Corporate social responsibility had previously been voluntary, so it was a struggle for companies to understand what non-financial things were affecting their business.”
The new rules have led to an improvement in the quality of reporting, with greater transparency and disclosure. Last year, 79 per cent of reports included financial KPIs, compared with 56 per cent in 2005. Non-financial KPIs are now included by 53 per cent, up from 31 per cent a year ago. KPIs are linked to business strategy by 63 per cent of companies.
“The challenge is that once a company has defined the KPIs, it has got to report on them consistently over time,” says Pilot. It is notable that one-third of FTSE companies do not provide a definition for their indicators.
Where non-financial KPIs are being used, 96 per cent relate to employees, using indicators such as staff retention or satisfaction. Environmental indictors are used by 80 per cent, 72 per cent use community measures and 30 per cent social. Sector specific indicators are also widespread.
Black Sun examined the number of KPIs being used across the FTSE 100. Half of all organisations were using four to six, but the range was one to 14. On non-financial KPIs, the average number in use was two out of a range of one to 15.
Changes to reporting requirements are slowly bringing about a cultural change. Working with the London business School, Black Sun interviewed 50 senior executives on the effect of narrative reporting. Over three quarters said it had increased transparency in their firm and 66 per cent said reporting KPIs had helped to clarify which indicators were right for their business.
Pilot says the focus on the annual report is becoming a driver of greater internal integration: “Some companies have become clearer about their strategy and goals. Once they have committed to those, there is greater dialogue between the board, non-executive directors and directors.”
Internal and external reporting requirements are becoming more aligned at 74 per cent of firms. The data sources needed to feed the annual report are converging with the routine business reporting tools already in use. “Most big corporates have a clear idea of what they are doing and where they are going. But there was no one place where all that was focused. We see an opportunity for the annual report to play that role,” says Pilot.