CorpComms Magazine

There are two ways of looking at annual reports. They can be viewed as increasingly burdensome documents that take months to prepare and require hours of senior people's valuable time. Or you can see them as fabulous opportunities to showcase your company and inform stakeholders what you are doing and why.

Many companies lean toward the former view, particularly following the slew of new regulations that have come into force over the past few years. Companies were first given strict instructions about the content of the directors' remuneration report. Then they were put under pressure to say more about corporate responsibility, before being told to include an operating and financial review (OFR), until the OFR was withdrawn. Then it was replaced with a business review. And now we have an enhanced business review. In addition, accounting standards have changed so the financial part of the annual report is bigger and more complex than ever.

'There is real confusion over the impact of regulatory changes,' says Robert Moser, managing director of corporate design consultancy Merchant. 'Companies are asking the same question again and again: What shall we do?'

The Department of Trade & Industry (DTI) lays out what it believes are fairly comprehensive guidelines around what should be included in the new review: 'The business review requires a balanced and comprehensive analysis of the development and performance of the company during the financial year and the position of the company at the end of the year; a description of the principal risks and uncertainties facing the company; and analysis using appropriate financial and non-financial key performance indicators (including those specifically relating to environmental and employee issues).'

Theory and practice

At first glance, this sounds straightforward. But many companies are unused to including items such as non-financial key performance indicators (KPIs) in their annual reports, while others fear that if forward-looking statements turn out to be misguided in any way, they are laying themselves open to litigation.

'A lot of companies are adopting a wait-and-see approach; they are looking at what their peers are doing as a way of defining best practice,' says Sallie Pilot, director of corporate reporting at marketing and communications agency Black Sun.

The changing legislation is particularly onerous for smaller businesses, which lack the resources of FTSE 100 or FTSE 250 companies. 'I question the one-size-fits-all approach,' says Neil O'Brien, finance director of tool and equipment hire company Speedy Hire.

Speedy recently won the best investor communication award at the annual PLC dinner and the company is now in the FTSE 250 with a stock market value of around £550 mn. But O'Brien still feels for smaller businesses - a category Speedy Hire fell into just a few years ago - over-burdened by some of the latest legislation.

O'Brien says the first step toward compiling an effective annual report is to think clearly about your business and the various audiences with which you want to communicate.

'We begin the process three or four months beforehand,' he describes. 'Initially, we talk about the issues we want to get across to shareholders, suppliers, customers, employees and other stakeholders. Our aim is always to base our report on our business. We want to communicate three or four critical messages explaining what we do, how we do it, why we do it and where we are taking the business.'

Once upon a time...

This emphasis on telling the story of your business is echoed by consultants, other companies and even non-business organisations. 'The danger these days is that companies tick off the legal requirements and don't think about what they are trying to communicate - they have to think about the integrated story,' says Richard Carpenter, development director at corporate communications group Radley Yeldar.

Land Securities has won consistent praise for its annual reports over the years. Emma Denne, former director of corporate communications at Land securities and now global head of communications at ING Real Estate, says: 'I do not believe annual reports should be driven by regulation. The key is to take a balanced view of the performance of the company and its future prospects.'

Taking such a balanced view requires confidence on the part of a company's directors, as it may necessitate pointing up potential negatives, either in the business itself or the market in which it operates. The key, however, is to remain clear about what you are trying to communicate and why. 'You have to explain the market you operate in, what you do, the risks you face and the way you are going to position yourself in order to minimise those risks,' explains Pilot. 'There has to be a consistent message.'

Denne has five tips for companies seeking to create an annual report that is relevant, appropriate and interesting:

• Explain what your business does.
• Do not use jargon.
• If you have to use jargon, explain it. Phrases such as 'reversionary yield' may be perfectly clear to property analysts but not fully understood by local authorities or private shareholders.
• Never just assume people have read your last annual report. You may have new shareholders, customers employees and suppliers who are unfamiliar with your ongoing story.
• Do not be afraid to use humour. This can lift an annual report and show stakeholders that the company has a human face.

In terms of design, there is also a need to make your annual report as accessible as possible. 'Reports are getting bigger and bigger,' notes Carpenter. 'The move to international financial reporting standards (IFRS) alone has increased the pagination at the back of the book, and the front end is chock-full of new requirements, too.' Consultants and companies alike advocate plenty of white space, plenty of sign-posting, different typography and pulled out quotes or messages so shareholders can take pages in at a glance without reading every word. 'Companies need to think about navigation, putting in contents and subheads, and pulling out key messages,' adds Carpenter.

Following the rules

Companies are not the only organisations that need to report back to stakeholders on a regular basis, of course. Nor is the corporate world the only place where big developments are taking place as a result of changing regulation. Char ities, for example, are encouraged to comply with the Statement of Recommended Practice, 'Accounting and Reporting by Charities' (Sorp 2005). 'Under the code of best practice, we are obliged to outline our aims and explain what we are doing to achieve them,' says Chris Foster, media officer at the Scout Association. The group, which won the CorpComms award for best annual report in 2006, is very clear about the requirements of its annual report and the audience to whom it should appeal.

'We have two documents,' continues Foster. 'Our report and accounts has a small print run and is of fairly limited interest. Our review is more like a marketing document. We talk about what we have been doing and use case studies to illustrate the story. The document needs to be professional because we want to impress our sponsors. We need to show them we can spend their money wisely, and that we are not just a bunch of guys pitching tents in a field.'

Foster believes the latest Sorp guidelines actually help the Scout Organisation to construct its review. 'The guidelines have encouraged us to improve the way the review is structured,' he says. 'We view it as a shop stall, setting out who we are and what we have achieved.'

In the corporate sector too, some companies believe the demands laid out by the business review merely conform to what the best communicators are already doing. 'We have always exceeded the statutory regulations because we felt it was important to explain ourselves comprehensively to shareholders,' says one FTSE 100 company.

International competition

'There is an ongoing split between companies that believe in the value of communication and companies that don't,'

Moser says bluntly. He advocates looking over seas for inspiration. Merchant publishes a regular critique of top annual reports across the world, covering every aspect of reporting, from 'At a glance' to 'Corporate responsibility reporting.' In many cases, companies from South Africa, Hong Kong and France are leading the way, although the UK heads the list for 'Clearly articulated strategy' and 'Details of senior management.'

Firms shouldn't use that as a standpoint to rest on their laurels, however. 'There is no point just looking at what other UK companies are doing. Look around the world,' advises Moser.

There is a further challenge: the Companies Act 2006 makes it much easier for companies to file their annual report electronically. 'They can default to e-provision so shareholders have to ask for the printed version. It will no longer be sent to them automatically,' explains Carpenter.

Most companies already provide an electronic version of their annual report in the form of a PDF on their web site. That approach may have worked so far but is unlikely to impress stakeholders if it is the only document to which they have access. 'One of the points about annual reports is that they are published on high-quality paper and this gives them a particular edge,' explains Moser.

'When they are printed off on a local printer, they just don't have the same brand value.' He believes the most creative companies will start to become much more imaginative in the way they present their annual report online. 'There could be a video link of the chief executive outlining the strategy for the business and there could also be video clips of new machinery, customers or even sites,' he suggests.

But many shareholders are still expected to request receipt of their annual reports in the old-fashioned way: by post. And forward-looking companies may choose to send out printed versions anyway, in an effort to separate themselves from the corporate herd. 'This is a huge opportunity. Clever companies can make their reports stand out, and they will,' says Moser. The annual report landscape is evolving and firms need to adapt. But even as regulatory demands increase, the essence of the annual report remains the same: explaining to stakeholders what you do, what you're going to do, and why.

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