INTRODUCTION Strategic discussion shows signs of being more meaningful The way that companies discuss their corporate strategy and objectives has been one of the areas of reporting which has received the most attention in recent years. Undoubtedly most companies have risen to the challenge and used the report as the central vehicle, alongside the investor presentation, for conveying management’s plans and outlining priorities. The way that this information is presented alongside other content within the report has also improved, with more and more companies showing quite clearly how KPIs are used to measure progress, and even how individual risks could impact the delivery of strategy. Early signs of strengthening around risk disclosures The financial crisis was responsible for highlighting a number of shortcomings in the way companies are run, yet one of the most notable was undoubtedly the quality of risk management. Inevitably, failings in process led to risk reporting coming under scrutiny and it has been highlighted as one of the weakest areas of disclosure by a number of different regulators and standard setters globally. Boilerplate lists of 20-plus risks where there are far too many to be considered ‘principal’ risks continues to be an issue, and in the UK there are already moves from regulators to address this as the reporting framework evolves. The clamour from external stakeholders is for industry and business specific risks to be included in Annual Reports rather than generic market or financial threats which affect all businesses. Some companies are beginning to adjust to what is being asked of them, and we are starting to see examples of more streamlined risk sections which focus on those factors which ‘keep the Directors awake at night’. Despite these green shoots, this is still undoubtedly one of the most challenging areas of reporting which needs addressing if corporate trust is to be restored. Performance reporting reaches a plateau From 2004 to 2006 we saw a significant increase in the number of companies reporting key performance indicators (KPIs), a trend which has levelled off somewhat in the last few years but still continues to move towards almost universal reporting within the FTSE 100. For over three-quarters of companies, KPI reporting has become part-and-parcel of their disclosure ritual for five years now and, arguably, for a number of these businesses, there has been only limited change in their approach. Tables of KPIs are visible throughout UK corporate reporting and we have reached something of a plateau where further innovation is necessary to really enhance the usefulness of the measures presented. In most instances KPIs are discussed in a silo. Leading reporters are linking KPIs to other aspects of the report such as risk (10%), remuneration (39%) and strategy (31%), however very few of even the ‘usual suspects’ make linkages between all elements. For a real step change to occur, companies need to think about how KPIs can be integrated throughout the report and presented as measures which are indeed central to the running of the business. Behavioural governance reporting emerging As companies adjusted to some of the key provisions of the new UK Corporate Governance Code, further Government consultation has meant that the landscape of governance reporting seldom stands still. Long-termism, women on Boards, Board effectiveness and company stewardship are all subjects which are either currently under consultation or have recently been the focus of new regulation. As a result, companies have had to work hard, not only to keep themselves up-to-date, but also to ensure that the way they talk about how their organisation is run, continues to evolve accordingly. While only the best reporters are addressing some of these new issues whilst they are currently under review, or when the recommendations are in their infancy, we have seen signs that the focus on specific areas of corporate governance reporting has served as a catalyst for improvement in the quality of reports as a whole. The FRC’s attack on boilerplate reporting seems to have paid off and consequently more and more reports focus on capturing the essence of boardroom culture and the human interactions which underpin decision-making. We see this as an area which will continue to develop over the coming years, driven not only by regulatory scrutiny, but also by the good work of report preparers in responding to the demands of stakeholders. 4 © Black Sun Plc 2011 www.blacksunplc.com
