CorpComms Magazine

There are two sides to corporate reporting. The first is regulatory compliance while the second is the communications piece, which presents an opportunity to use the annual report to engage with existing and prospective investors. In theory, at least, the two should tie up.

Regulators want businesses to be more transparent and strategically 'joined-up' in their reporting, which supports clearer and more engaging communication, but companies are frequently lambasted for using annual reports to merely tick compliance boxes, communicating little useful or relevant information on the direction of the business or its long-term sustainability.

And with new regulations, such as the UK Corporate Governance Code which was updated in June, putting ever greater emphasis on clearer, narrative reporting, many companies may find their reports are neither compliant nor useful communication tools.

The new regulations will require many companies to review their annual reports. For example, the updated Code requires companies to disclose details of their business model, but few organisations have as yet done so. Indeed, it appears that there is little new in the latest 2009-2010 annual reports for many companies.

'Our analysis of the FTSE 100 reveals that - although a few companies have made a step-change in their reporting this year - most of the UK's largest companies continue to make small improvements in content and navigation,' says Clive Bidwell, head of corporate reporting at Radley Yeldar. 'Certainly, the best reporters continue to get better, with improvements in areas such as market commentary and risk management information. On the whole, though, narrative reporting appears to have reached a plateau, with little significant change year-on-year.'

The regulatory minefield

Undoubtedly, some companies will be hindered by confusion regarding the latest swathe of regulations and what these mean for their annual reports. The recent Accounting Standards Board Review of Narrative Reporting and the UK Corporate Governance Code (formerly the Combined Code) both focus on the need for companies to detail the business model in annual reports. Last month the Department for Business, Innovation and Skills published a consultation paper on narrative reporting, which is aimed at ensuring that directors' social and environmental duties are covered in company reporting, as well as improving corporate accountability and transparency generally. Just one month earlier, the UK Stewardship Code for Investors aimed at enhancing the 'quality of engagement between institutional investors and companies' was introduced. And, most recently, the International Integrated Reporting Committee (IIRC) was launched, whose remit is 'to create a globally accepted framework for accounting and sustainability' with the intention of helping to develop 'more comprehensive and comprehensible information about an organisation's total performance'.

That companies may be feeling swamped by all this is evidenced by confusion around recent FSA guidance. 'Traditionally you would have a preview announcement where you'd publish your results,' says Richard Carpenter, managing partner at Merchant. 'Then two to four weeks later, you'd publish your annual report which would have more flesh on the bones. Due to an FSA guidance note, though, some companies moved to printing out a preview announcement in exactly the same format as the annual report. There was some confusion over what was actually required.'

Kate Shaw, chief executive at Living Group, believes companies are confused by the meaning of business sustainability. 'Companies are required now to provide much better evidence on how sustainable they are. That means: how is the business going to survive and thrive, and how is the business model designed to create shareholder value in the long term? But the word 'sustainability' has been mistaken in recent years for meaning environmental issues,' she says. The Prince of Wales' Accounting for Sustainability Project (A4S), which led to the formation of the IIRC, may have exacerbated the problem because people associate the Prince of Wales with the environment, so assume that business sustainability is about corporate responsibility (CR) when this actually fits within the much broader picture of business sustainability.

Good and bad practice

Whatever the reasons, Rethinking Reporting, Black Sun's latest analysis of FTSE 100 companies' annual reports, reveals 'major shortcomings in corporate reporting in the UK'. Based on studies of regulation, legislation and best practice communications, the findings were as follows:

1. Reports provide too much generic information and data, with not enough insight into business objectives, strategies, performance, governance or risk.
2. They present information in an inaccessible manner, both in print and online.
3. Forty companies fail to report non-financial key performance indicators (KPIs).
4. While 42 companies in the FTSE 100 refer to business models, only seven provide any valuable commentary or insight into these models.
5. Many reports do not show how corporate responsibility integrates into the business.
6. Risk reporting focuses on quantity rather than quality with little 'meaningful discussion of potential impacts or mitigation strategies'.

'The real challenge is for companies to bring all the information together to tell a story,' adds Sallie Pilot, director of research and strategy at Black Sun. 'Many are now reporting KPIs, for instance, but are not linking them into strategy. The link between performance measurement and remuneration is not good either. We are expecting a big improvement in this and a lot will come in through the next two seasons.'

However, there are also some significant improvements. For example, over the past five years, FTSE 100 companies reporting KPIs has risen from 19 in 2004 to 93 in 2009. Companies also appear to be providing more details of strategy, principal risks, market trends and corporate governance - with 36 per cent also linking corporate responsibility into their central strategy.

Bidwell has also seen some movements by companies keen to get ahead of the regulations and trends. In response to the Corporate Governance Code, companies such as high street retailer Marks & Spencer have started to use this part of the report as an opportunity to communicate. 'With chairmen encouraged to report personally on how the principles relating to the role and effectiveness of the board have been applied, we're seeing a number of governance statements being introduced by chairmen. We're also seeing a growing number of graphics and other elements, which we're more used to seeing in the business review, such as bullet points and box-outs,' he says. More companies also made explicit reference to their business models this year, although Bidwell expects more to do so next year.

Online reporting: distraction or necessity?

If companies are slow to comply with regulations and improve their narrative reporting, then this is no doubt complicated by the fact that there is an ongoing focus and debate over the relative worth of online versus print reports. For Nick Jefferson, chief executive at Likemind, it was notable that some FTSE 100 companies opted against publishing an online report this year, instead choosing PDF format.

He says: 'It really depends on what constituencies companies are talking to. If you're talking to analysts then there's every good reason for just sticking to a PDF because they're very easy to use and analysts will know when they've seen all the information available. This can be more difficult to ascertain on an HTML site. But if you're a retailer or a high street brand, then investing in an HTML report gives you a good opportunity for brand expression.'

For Living's Shaw, there are now very few excuses for companies not to produce an online report. 'Online is a hugely important and rapidly growing channel that companies cannot ignore,' she says. 'Companies should now have genuinely internet-based, dedicated microsites that are properly coded, navigable and searchable.'

While some companies may not have as great a brand need to report online, Shaw criticises others that have a huge online element to their businesses but still fail to walk the line in terms of producing an online annual report. 'They're not thinking in a joined-up way,' she says.

The unexpected side effect of the online/offline challenge may be distracting clients from the main issue though: the message. 'Online is just a channel. Agencies think too much in terms of channel,' says Jefferson. 'What really matters is what goes into that channel - whether it's print, online or mobile. It's not the medium, it's the message that counts. What are you saying and how are you saying it? Is there a coherency to the entirety of your message? Once you have the message right you can use any number of channels. The focus on online is misplaced. The important thing is message, message, message.'

Companies are faced with numerous challenges for the reporting season ahead: meeting myriad regulatory requirements; clearly communicating a joined-up message that tells the story of the business, both in the short and long term; and managing the process demands of both online and print reporting. Considering the annual report is still largely put together by different internal departments, where everyone already has a day job, the task is daunting although, as the best reports have shown, not insurmountable. With agencies promising much change in the years ahead, their clients need to be up for the challenge.

Lessons and trends for annual reports 2010-2011

• There is an overriding trend for companies to use their annual reports to tell their story in a clear, compelling way.
• There is a significant amount of new regulation to consider, particularly the UK Corporate Governance Code, which applies to financial years starting after 29 June 2010. This code will put far more focus on effective communication via the corporate governance statement, which has previously largely consisted of 'boilerplate' content.
• There will be increasing pressure on companies to report on their business model, but in a joined-up way that clearly links to strategy.
• One of the objectives of the BIS Consultation on the Future of Narrative Reporting is to improve the reporting of environmental and social issues - and to again link it through to business strategy.
• Other areas of likely increased focus are risk management, nonfinancial KPIs, and performance management and remuneration.
• Companies are likely to continue a recent trend of including market context in their reports - such as threats and opportunities in the marketplace and how the business responds to these.
• The move to online reports appears to have slowed/stabilised over the past two seasons, no doubt in part due to recessionary pressures on budgets. If the economy continues to improve, however, there will be a likely increase in online reporting.
• Online functionality is likely to further improve in the form of tools such as print baskets, notes and interactive charting, and growing use of video to present executive interviews and case study material.

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