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Corporate reporting

The role of an annual report

Annual reports are a precise art form. Combining regulatory information with corporate brand and narrative, they can be an extremely effective communications tool and, whilst they might seem a little staid, nothing could be farther from the truth.

Indeed, when it comes to purpose and culture, annual reports are leading the charge after new legislation from the Financial Reporting Council ruled that all companies with a primary listing should have a purpose that is aligned with values, strategy and culture, and that this should be monitored by the Board.

While the new Code only comes into effect for accounting periods starting 1 January 2019, conversations around what it means have started already.

‘There are all these conversations happening around culture and purpose that weren’t happening before,’ says Catherine Joyce, consultant at corporate communications agency Jones & Palmer. ‘That’s an ongoing trend, generally because of the fresh concern around sustainability issues, while retention is becoming a bigger problem than it used to be so you need to engage people.

‘A great way to do that is through having a purpose statement, by demonstrating that the company is doing more than just generating a profit, it’s actually trying to achieve some greater value.’

Stephen Butler, corporate reporting director at design agency Luminous, adds: ‘Often when I go in and talk to companies about purpose and particularly the C-Suite culture, the first thing they say is Oh that’s all waffle, it’s intangible, we can’t record that. But actually, when you start to break it down, and you look at the information the Board is receiving around employee engagement, staff turnover and anti-bribery and corruption, codes of conduct and risk, they realise actually We are receiving a lot of information, but how are we using it? I think it’s helping them to sift through that and understand the mechanisms of how they are going to report on all that data.’

‘Having a purpose makes it easier to guide culture and a lot of companies are moving towards less of a physical assets value creation model and more towards intangibles around brand and intellectual property. There is greater need to engage and have a better workforce,’ explains Joyce.

‘The concern is that companies feel the pressure to be seen to be talking think sustainability is high enough on the agenda in the UK,’ he says. ‘There are too many reporters that silo sustainability into its own little section, rather than thinking about how to unbundle or integrate sustainability through the book, particularly at strategy level. Quite often you’ll read a report and it’ll have similar photos of fun runs or things like that, or they may say they’ve trained x number of employees, but they don’t talk about everything in the context of strategy.’

Contextualising information and clarifying how it is relevant to a company’s performance is a hallmark of the integrated reporting movement, which combines topics such as sustainability, governance, and financial performance to communicate how these factors create value now and in the future.

According to the International Integrated Reporting Council, an integrated report ‘requires and brings about integrated thinking, enabling a better understanding of the factors about purpose and culture, but how meaningful is that reporting going to ultimately be? Only time will really tell.’

As purpose has been creeping up the Board’s agenda, it will come as no surprise that sustainability is not far behind. ‘Big themes [for annual reports] going forward are purpose, stakeholder engagement, culture, wider value creation and long-term thinking,’ says Anne Kirkeby, lead corporate reporting consultant at Black Sun.

‘Companies have pushed and pushed to have a long-term story. It’s not just about how they’re investing in the now. It’s investing in the future. Companies must show that they are part of a solution, rather than part of the problem.’

Joyce agrees, adding: ‘There are a lot of things pushing this long-term thinking, around being seen as a company that does good things, not just as one with a good financial return.’

For Butler, though, companies are still not pushing sustainability as much as they should be. ‘I don’t that materially affect an organisation’s ability to create value over time.’

‘It’s about integrated thinking as well as reporting,’ says Kirkeby. ‘[Sustainability] is thought into the strategy, not an ‘add on thing’ as part of the report.’ However, exclusive research by CorpComms Magazine reveals just two annual reports produced by FTSE100 companies describe themselves as integrated, even though many more are.

Kirkeby estimates that nearly two thirds of FTSE100 annual reports are integrated reports. She explains: ‘It’s a cultural thing. The Government is pushing for [companies] to do it. In Holland and Japan, they say integrated report but in the UK very few call it that. No one wants to put their neck on the line and say We produce an integrated report. It is baby steps. You can effectively follow guidance in the UK and produce an integrated report without intentionally doing it – that wasn’t the case six years ago.’

As part of an integrated report, sustainability will usually cover everything from the company’s approach to tackling modern slavery (though our research reveals that one in ten FTSE100 annual reports fails to mention this at all) to the diversity of its staff, meaning that employees will often find reference to themselves in that chapter, as opposed to elsewhere in the report.

More than a third of FTSE100 annual reports have an Our People section listed in the contents, whilst 11 don’t cover it at all. The Our People title varies too, with similar information falling under Our colleagues, A Great Place to Work or, in the case of mining company Fresnillo, Human Capital. Kirkeby explains: ‘It depends what you call it internally. It should be language that is natural to you. You can’t call it Human Capital if you call it People internally. Some of the wording may be slightly different but it looks similar to the untrained eye. It’ll typically be an integrated annual report talking about human capital; it recognises that employees represent a monetary value.’

‘When we’ve talked to some of our clients about integrated reporting, they find the use of the term Human Capital a little cold,’ says Joyce. ‘One of our clients said they didn’t like the term Our people; they wanted Our colleagues. They wanted to make it more engaging. Human capital comes across as very focused on value creation, whereas Our People feels more like This is written for you as well. It feels a bit more inclusive.

‘I’d find it strange if an annual report didn’t have an Our People section. If they don’t, it comes across as very We don’t care which I don’t think any company wants to suggest in any way.’ But whilst there is an increasing emphasis on the importance of staff, the annual report still plays a central part in investor relations, attracting new shareholders as well as informing current ones.

‘The report is becoming a much more hardworking tool in attracting capital providers to a business,’ says Butler. ‘We have conversations with financial directors, for example, who say We really want a visually impactful report that communicates our story and messaging, that we can repurpose across Capital Markets Days, so that story is consistent across all their investor communications or investor brand.’

Make sure you’re discussing both the positives and the negatives, but don’t jargon it up

‘[There] is this recognition now that, whilst [annual reports] used to be viewed as a regulatory document, there’s a value in it,’ says Joyce. ‘People are seeing that if you want to have good liquidity in the shares, you’re going to have to put effort into your investor communications.’

Kirkeby does advise caution when it comes to trying to reach multiple audiences with a single document, however. ‘The materiality of information is important; you need to see the wood for trees – don’t put everything in because you lose what is actually crucial. If you’re trying to be everything for everyone, you end up being nothing for no one.’ Butler likewise notes that, with regulatory requirements changing what needs to be included in annual reports, the temptation can be to simply keep adding, without reassessing what really needs to be included and what can be left out.

He explains: ‘There’s almost a three-year journey that you see with a lot of reports, where it’s an evolution. I think it’s always good to look back every year, look at the actual content that’s going into the report because it’s very easy to keep adding; another piece of legislation comes along, you add that in and suddenly you’ve got 200 pages. ‘Step back, look at the content. Does it need to be in? Does it serve a purpose? Does it enhance the investors’ understanding of the business and how the directors perform their duty? Is your design working hard enough? Has the agency become a bit staid in how they’re approaching it? Are they just re-skimming every year?’

Indeed, how information is displayed has as much importance as the content. Information needs to be presented in both long and short form, to suit the people who might just want a snapshot and those who want a more in-depth review of the company and its dealings. ‘There should be good use of headings, pull-outs and colour coding to show connectivity between sections and elements, use of At a glance and infographics – providing opportunity for the readers to skim read or long-read,’ Kirkeby advises.

Butler also points out that design is more important for some companies than others. ‘When you’re a larger business, you’re producing a lot of stakeholder content, so those reports tend to be quite pared back,’ he says. ‘But for businesses in the FTSE250 and below, the design of the report is becoming quite a critical communications tool. They want it to be visually engaging, easy-to-read and digestible.’

Being easily understood is one of the biggest challenges when it comes to annual reports. ‘An annual report is often produced by a vast number of different people within a company. They may all view the purpose of the annual report differently. Some of the pen holders may not ever work together outside of the annual report,’ Kirkeby asserts.

‘This means that it is easy for people to work in silos and it becomes complicated to have a coherent theme run though the different parts of an annual report and ensure connectivity between sections. Communicating a consistent story requires everyone to work together.’

Butler agrees. ‘You need to make sure there’s a joined-up narrative that leads the person all the way through the report. Equally, if your report is sitting in reception or a new employee is reading it for the first time, you want them to get a sense of the company quite quickly.

‘The first six pages are important, setting out why you exist, your purpose, what you do, how you do it, your business model and probably a bit of messaging from the leadership as well.

‘[Something] that I think is really important, that we don’t see enough of in reporting, is being fair, balanced and understandable,’ he continues. ‘Make sure you’re discussing both the positives and the negatives, but don’t jargon it up. When people sit down and write, particularly when you’re not used to writing (and lots of these are authored by IR or accountants who aren’t natural writers or who are very technical writers), there’s a tendency to use lots of big words and make the chief executive sound very clever, but that can add a level of impenetrability.’

Having the annual report owned by investor relations also leads to another unexpected challenge in reporting: pictures. ‘[IR departments] are not necessarily used to having to deal with photoshoots and branding and may not know what already exists internally – particularly in a decentralised company,’ explains Kirkeby.

Perhaps this is why insurance company Aviva and six other companies in the FTSE100 decided to steer clear of pictures altogether. Seven annual reports feature only black and white images of their board, something which Kirkeby says makes consolidating a corporate narrative harder.

‘Arguably the narrative is the same, but it’s more difficult to communicate something in all black and white,’ she says. Whether they choose colour or not, though, what’s clear is that annual reports have moved from simply being a compliance document to becoming a document that increasingly tells a forward-looking story. There is one golden rule that all annual reports must abide by and it features that buzziest of words: authenticity.

Kirkeby says: ‘It must be authentic to the individual company. It cannot be just a communication exercise. The litmus test is whether it resonates with employees if they pick up a copy. It is an opportunity to discuss topics like culture, engagement with stakeholders, sustainability and explain how these issues impact how you do business. Investors see it as a major risk if you don’t. The best companies see it as a business opportunity and make it a competitive advantage.’