The Annual Report’s raison d’être
Why produce an Annual Report?
The Annual Report sits proudly at the top of the Corporate Reporting tree. It is the ‘go to’ document for the investor community providing key information on a company’s past and present performance, its position in the market, its business model, strategy for future growth and key risks. In a competitive marketplace where investors have the pick of the bunch the Annual Report has to provide a compelling, cohesive and sound story.
Historically the Annual Report was a statutory document produced simply because it had to be. However with a far greater focus on Integrated Reporting whereby the Annual Report should provide all stakeholders, from investors to staff, with a clear understanding of the business, the Annual Report provides a whole host of opportunities for a company to engage with its audience. Far more rides on the back of it these days and companies should be focused on showcasing their value creation story, not just for investors but for all stakeholders.
What do investors want to see?
The Annual Report should be a concise communication about value. There is great competition for capital so provide the relevant information. Investors want evidence of potential ROI and need access to key information quickly and easily. Today a far greater level of transparency and disclosure in operational and financial reporting is expected than in previous years. More than a box ticking exercise the report must work hard to promote confidence in the leadership team and offer a convincing and informed assessment of the business. Prior to investing their capital, investors need to assess the company’s performance and the context of that within the marketplace and how it fits in the overall strategy. They’ll be particularly interested in the risks a company is exposed to, the strategy to mitigate against these and the structure in place to implement it. Trust needs to be earned!
Ultimately the Annual Report needs to answer the question: why invest?
The Strategic Report and Integrated Reporting are both key to quality Annual Report communication. To quote PwC these both have ‘a shared DNA’ and ‘clear and relevant reporting is the shared goal.’ 1
The Strategic Report
The Strategic Report was introduced to replace the Business Review with the aim of promoting greater clarity, less clutter and duplication of information and to provide only the key information to investors. Integrated Reporting and the Strategic Report should go hand in hand.
Common challenges in drafting the Strategic Report include:
1. Distinction between the business model and strategy.
Put simply the business model refers to how the company creates or retains value today whilst the strategy refers to plans for future revenue or even a new direction. Develop a business model which demonstrates long term sustainability and identifies the business drivers underlying it.
2. Where to place the Chairman’s Statement
It is not necessary to include the Chairman’s Statement in the Strategic Report. If you choose to, consider what its purpose is since the Strategic Report is predominantly the CEO’s statement so be wary of duplication. The Board should engage in the narrative rather than simply approving it at the end of the annual report process.
The marketplace and your position within it – what piece of the pie do you have?
Achievable company objectives and the short and long term strategies to realise them.
Ensuring KPIs are not boilerplate but genuinely reflect the company’s performance both financial and operational.
6. Inclusion of Non-Financial Metrics.
Research shows a big correlation between Non-Financial Metrics (NFMs) and share price, especially those around corporate governance and environmental management.
Lead rather than lag indicators, such as an order book, demonstrate future performance and are therefore preferable. 2
Be open about risks. Any serious investor will lose interest without a clear statement on these. Remember that emerging risks can be viewed as a positive if they can be managed for competitive advantage. Risks should relate to the business model and strategic implementation, there is a tendency to list predictable risks and give less focus on operational or strategic risks.
8. Be concise!
Investors and other stakeholders need to find the information quickly without the need to dig through superfluous content. Ideally the Annual Report should be shorter but more relevant. Be clear in your narrative using simple language or explain any technical terms so that anyone without specific industry knowledge can understand. If you need to use industry jargon or technical terms a glossary should be included. Excessive, wordy content should be avoided, it’s about being concise and factual so focus on materiality.
Corporate governance is a key theme which should be demonstrated throughout the report – stakeholders want to know the leadership team is effective.
Explain how the business intends to deliver sustainable growth for the future but also how being a more environmentally friendly business contributes to the company’s figures – greater efficiency, more money in the pot.
Globalization and interconnectivity mean the world’s finances, people and knowledge are inextricably linked, as evidenced by the global financial crisis. In the wake of the crisis, the desire to promote financial stability and sustainable development by better linking investment decisions, corporate behaviour and reporting has become a global need. 3
Integrated Reporting aims to:
- Improve the quality of information available to providers of financial capital to enable a more efficient and productive allocation of capital
- Promote a more cohesive and efficient approach to corporate reporting that draws on different reporting strands and communicates the full range of factors that materially affect the ability of an organization to create value over time
- Enhance accountability and stewardship for the broad base of capitals (financial, manufactured, intellectual, human, social and relationship, and natural) and promote understanding of their interdependencies
- Support integrated thinking, decision-making and actions that focus on the creation of value over the short, medium and long term. 4
Whilst it is not a mandatory requirement in the way the Strategic Report is, this holistic approach to reporting is highly encouraged. The challenge, of course, is to create ‘one integrated information set’ that supports the business from top to bottom and presents a consistent picture externally. This covers effective management insight, effective governance and oversight and effective stakeholder engagement5. A company’s reporting ‘should present a connected picture of the business, how it is managed and governed and where it is heading. Disconnected reporting raises questions about the quality of management and governance.’ 5
A key goal of integrated reporting is to show a clear connection between the operational performance of a company and financial outcomes. By considering the longer term sustainability of a business model, integrated reporting encourages you to consider its dependency on critical resources and relationships beyond its operation and value chain. 1
To that end many companies are choosing to include an upfront summary of the business which connect the business model, strategy, risks and KPIs with clear links given to more detailed information further on in the report. This is an effective and confidence-inspiring way to provide an overview in a snapshot and demonstrate a cohesive approach very early on.
Don’t hide bad results. If this is the case then be open and turn it into a positive by explaining the strategy to put it right.
Good design is crucial. Copy supported by illustrations, iconography, graphics and photography all guide the reader through the story in a clear and intuitive manner. A well produced document clearly reflects positively on a company’s brand.
Use hierarchy of typography to enable easy navigation to key information as well as breaking up text heavy areas. This makes the document much easier to digest for the reader and offers a much clearer pathway for the story.
Avoid too many different authors as the tone of voice should be consistent throughout for a cohesive storytelling experience. There’s no point having an integrated report which sounds disjointed.
Remember that not everyone will read the report cover to cover and the flick reader must be catered for – clever design plays a key role in this consideration.
1 PwC: Integrated reporting and the Strategic Report: a shared DNA
2 The IR Society: Telling the company’s story
3 The IRRC: Why? The need for change
4 The IRRC: Integrated Reporting
5 PwC: Integrated Reporting: What does your reporting say about you?
Useful links for further reading
FRC: Lab insight report: Towards Clear & Concise Reporting. August 2014