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From accounting to accountability

As corporate reporting evolves, companies are now expected to discuss their long-term vision, business model and performance in financial and non-financial areas

CORPORATE reporting has increasingly been in the spotlight over the past few years, but post the credit crunch this scrutiny has intensified. Since this time, there have been a number of corporate incidents whereby strong, global businesses have been held up to scrutiny for mismanagement, poor governance and lapses in board-level decision-making.

As a result, stakeholders, government, regulators and policy-makers have looked for ways to ensure companies are held to account for their activities and are accountable to their shareholders and wider stakeholders’ groups. The annual report is seen as a means through which this can be achieved and, as the corporate reporting framework begins to evolve, companies are now expected to discuss their long-term vision, their business model and their performance in financial and non-financial areas.

Many corporates have become more transparent in their reporting, aware that the risk of not disclosing information which could have an adverse impact on their business performance is potentially huge. Companies are now using their corporate reporting as a means of managing their reputation, and often for achieving competitive advantage; matters which boards previously preferred to keep behind closed doors.

Trends in reporting

From research into the corporate reporting trends of the FTSE 100, we have seen evidence that the process of improving transparency and disclosure in the narrative section of a company’s annual report is well underway, and that the benefits are being realised. For some, the drafting of the annual report has become the “eureka” moment when boards start to thread together a clear story about how the business really works, why it exists and the specific goals and strategies which drive its development.

If the way companies talk about their business to their shareholders and stakeholder audiences is at odds with how the business is actually run or how performance is measured, there is a risk that the trust and confidence of these groups will be diminished. Supporting this fact, businesses clearly understand that the annual report can be a powerful vehicle for building trust, as 78% of respondents to our survey of FTSE 100 and FTSE 250 companies on the business benefits of reporting agreed that increased transparency increases investor confidence.

We often find different parts of the business telling very different, sometimes conflicting stories about how the organisation works, makes money and assesses risk. Bringing these stories together into a coherent and concise message often requires the alignment of internal and external reporting.

The annual reporting process can facilitate discussions between different stakeholders within the business, with almost two-thirds of respondents identifying enhanced internal coordination and communication as a key benefit of the annual reporting process.

So while the benefits are becoming clearer, the gap between the “leading” and the “lagging” corporate reporters in the FTSE 100 is increasing and, in some cases, it’s easy to confuse quantity with quality. The average report length is now 175 pages (up from 108 pages in 2004), and six of this year’s reports weighed in at over 300 pages.

So what is holding us back?

FTSE companies still see the increasing complexity of reporting as the biggest barrier to getting the process right. The past year alone has seen companies having to understand, and report accordingly, on three significant regulatory changes, including the UK Corporate Governance Code, the Financial Reporting Council consultation on stewardship, and the recommendations from the Davies Review.

But there are other factors, and the majority are internal. Around a quarter of respondents believe that a lack of board and senior management buy-in is having an effect on transparency and disclosure. With only one in five boards significantly involved in the preparation of the annual report, and only a third of those responsible for their annual reports being confident that all their board members could actually explain the company’s business model, a disconnected picture is often painted.

The practical challenges of good reporting

Many businesses clearly understand that the annual report can be a legitimate vehicle for building trust and for creating accountability. Although it can be challenging, good reporting is often considered a proxy for good management, and provides companies with the opportunity to demonstrate how the Board runs and manages the business.

As best practice continues to develop and the reporting framework evolves, corporate reporting looks as if it will continue to be an area of greater focus and progression in coming years.

In the meantime, crafting and communicating the story remains a boardroom challenge that is worth seizing. To quote Sir Roger Carr: “For a business to thrive it needs the support of its owners, the engagement of employees, the trust of the community in which it operates – and once a year the annual report provides a perfect platform to connect with all stakeholders and strengthen that relationship”.

To produce a good report the narrative needs to tell a joined-up story, and to achieve this we have outlined our five key communication principles:

1. Think integrated and develop a consistent, integrated approach to all communications.
2. Set out key messages that reflect the directors’ view of the business and focus both on matters relevant to your stakeholders and that are forward looking.
3. Stay focused on meaningful, relevant, balanced and comparable information.
4. Build up your story over time by reporting and reinforcing key themes and messages.
5. Reflect your culture and values and highlight what makes your company different.

Sallie Pilot is director of research and strategy at Black Sun

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