The annual report: throw it out and start from scratch!
CFOs should throw out their annual reports and start from scratch if they are serious about addressing governance reporting shortfalls. That’s the view of reporting specialist Black Sun, which warns that tweaking reports simply doesn’t go far enough to meeting today’s onerous reporting requirements.
Sallie Pilot, director of research and strategy at Black Sun, believes too many companies are afraid to make radical changes to their annual reports, preferring instead to take update previous versions with a few facts and figures. But in doing so, they are missing out on huge opportunities to engage with stakeholders, and address calls for great transparency in the way they conduct business.
“What happens with most governance reporting is that companies take last year’s report and tweak it. They should really start with a blank sheet of paper and start from scratch otherwise it doesn’t help the flow of the story because it ends up being very siloed,” Pilot says.
“Historically the way companies approach their annual report is by splitting it into three:- a review of the business, governance and financial statements. On a positive note, we are starting to see more integration between the first two,” she adds.
Black Sun believes the Financial Reporting Council’s (FRC) ongoing review of the Combined Code has led to some uncertainty about what constitutes best practice is corporate reporting. And until the results of that consultation are made public, there is a concern that many companies will miss out on opportunities to gain a competitive edge from their business reporting.
But Ian Wright, director of corporate reporting at the Financial Reporting Council (FRC), theUK’s independent regulator responsible for promoting confidence in corporate reporting and governance, downplayed the concerns. He also warned tearing up old annual reports and starting from scratch was an unnecessarily draconian step for most companies.
“Not all companies approach their corporate reporting in holistic terms and you do get some odd outcomes as a result. But in the UK most management commentary is of a very high level. Certainly feedback from the Corporate Reporting User Group (CRUG) suggests that companies do a good job of giving investors the information they need,” Wright said.
“We put a lot of effort last year into going concern disclosure and liquidity risk exposure. That’s about making sure companies have a plan A and a plan B. Feedback so far is that it has generated good results but we’ll only really know when we see how many companies go bust!”
Wright believes it is a shame that the corporate reporting debate is so narrow, and tends to focus on the publication of an annual report “rather than looking at if there’s an essential piece of information that crops up in the year and how you management that.”
Fortunately a growing swell of companies are already looking to how online channels in particular can enhance the information they supply on an ongoing basis to their stakeholders. SAS (Stocks Austin Sice) has worked with numerous FTSE100 and FTSE250 clients including Aviva, GSK, Diageo, BP, Land Securities, and J Sainsbury, helping them to formulate their reporting strategies ‘from cradle to grave.’
Adrian Parker, client partner at SAS says that while the target audience of reports is still the same as 10 to 15 years ago, essentially large institutional shareholders and City analysts, the profile of those individuals has changed. “One of the main things is that City guys are much younger and have been brought up in an online world and have much less time. A paper-based report isn’t the channel that audience will gravitate to.”
The Companies Act 2006 meant that people had to opt in to receive paper-based annual reports. Although that was a small nail in the coffin for the big, glossy annual report, Parker believes companies are recognising the value of good communications and are channelling their efforts into better online reporting supplemented by a more simple and functional paper-based reports.
“It’s a big cultural change for a lot of companies. Traditionally the annual report has been run by the finance team who tend to be quite conservative or it’s the CEO’s baby so suggesting a change can be challenging,” Parker says. “Customers can find it hard to move out of the corporate speak world. There’s a tendency to use laboured language. ‘Another solid platform for growth.’ All the corporate clichés come out!” says Parker.
The Internet looks set to play an increasingly important role in supplying stakeholders with real time and current sources of information in a dynamic and engaging way. Printed annual reports will continue to be published – but mainly because it is something they ‘have to do’ rather than because it is something that adds intrinsic value.
Neil Wolstenholme, associate partner at Ineum Consulting, has many years’ experience working at the coalface of annual report production in industry. “The annual report is at best marketing, but often it is perceived as a nuisance, with the process – the review and audit – having more value than the output.
“Changes to annual reports have been less about legislation and more about pressure groups picking up on certain statements and reputational risk elements of annual reports,” Wolstenholme adds. “Personally I’d rather read one 20-page cohesive view rather than 80 pages of disjointed. Little and often is better than a monstrous weighty tome once a year.”
The perfect annual report: 10 steps to success
1. Start with a blank sheet of paper rather than making changes to your existing governance report
2. ‘Tell the story’ about how the organisation is run and make the content as interesting as possible to readers
3. Use the chairman’s statement as an opportunity to outline the company’s commitment to good governance
4. Link in other key information to the governance report such as strategy, business model and risk
5. Use diagrams to illustrate key processes and procedures
6. Clearly outline the role of the board and what its primary activities and achievements were during the year
7. Have the chairman or senior independent director ‘own’ the governance report
8. Ensure that committee reports explain activities and priorities not just members and responsibilities
9. Use case studies to bring the information to life
10. Drive readers online for more information about codes of conduct or specific policies