04/11/2020

How much material in the Annual Report is immaterial?

The FRC, in the opening of Section 1 of its Guidance on the Strategic Report, "encourages entities to experiment and be innovative in the drafting of their annual reports". When one considers each of the component objectives of the Strategic Report, there is a reasonable argument to suggest that the current 'report and repeat' format for many companies might require a reset...

There are clear guidelines as to what must be contained within the Strategic Report. There is also an objective to be comprehensive, relevant and concise. So beyond the numbers and the governance, what else is most relevant to the shareholder? We would argue that, at its most basic, it is a balancing act between a long-term Return On Investment versus the perceived Risks associated with achieving the business’s Strategic Objectives. As a Design and Communications Consultancy, we have reviewed many Annual Reports over recent years as we aim to get an understanding of a business. It is often the case that the most interesting and revealing information about a business is contained within the Principal Risks and Uncertainties and in accompanying Investor Presentations where the pertinent detail is provided in a more concise and targeted presentation. This approach is potentially the key to more effective shareholder communications when developing the content for the annual report.

While other stakeholders may have an interest in the information contained within the Strategic Report, clearly the primary audience for the annual report is the shareholder. And as a responsible shareholder it is reasonable to suggest that, given that they have already entrusted their investment towards the 'resource allocation decisions' within the business, they have a reasonable understanding of that business. And for those who have not yet signed-up, there are other more comprehensive channels than the annual report from where they can glean this information. The Strategic Report is after all considered the top layer of information for shareholders.

So what is material to the shareholder within the Strategic Report as guided by the FRC? It is not an exhaustive list however that is not to suggest it is an easy task. The greater challenge is to create a 'clear narrative flow' from what is typically segmented information often ticking the box to meet best practice. However by taking a step back, perhaps many of the mandatory moving parts could be addressed within a more effectively constructed narrative of the strategy presenting an overarching and compelling Investment Case. Ultimately, the Investment Case is a combination of a statement of Purpose; the Business Strategy to achieve this Purpose; the ability of Management to put the strategy into action; resulting in a sustainable and long-term ROI achieved through its execution; with responsible governance and stewardship by the Board. For example, if the Business Strategy was to be restructured to provide a concise overview of the industry through (i) markets & position, (ii) factors & trends, (iii) risks & materiality, (iv) resources & allocation, (v) competitors & peers, (vi) actions & impacts and (vii) performance & outlook, all delivered from the one pen and a singular tone-of-voice, might that provide a more engaging and comprehensive narrative flow for shareholders, and a more understandable reassurance that their investment is being carefully managed and allocated within an acceptable level of risk?

Among those components of the Strategic Report that are mandatory sits the Business Model in all its glory, often posed as a question of 'how do we create value?'. This year in particular, businesses of all scales might well instead ask ‘how are we doing?’ when addressing shareholder concerns. (At this juncture, it is important to note that assuming the Board has effectively engaged within their remit under S172, they will also have an active stakeholder engagement process for their other material stakeholders). Beyond beautifully designed flow diagrams illustrating Resources > Operations > Outputs > Outcomes which are undoubtedly a welcome punctuation to voluminous columns of text, it is questionable how insightful this presentation is to the shareholder's understanding of how the business performs and operates, especially in a publicly available document. In a recent publication, the FRC has identified ‘Five current questions investors seek information on’ focusing on ‘Resources’, ‘Action’ and ‘The future’, with 3 out of the 5 specific to cash and liquidity in the short-term. With Investor reassurance and their support being more important than ever in the current economic climate, is it worth considering that these 5 questions might be a more appropriate framework towards a more informative Business Model reflective of YE2020?

At Source, we have been designing and producing annual reports since before the days of the internet when these documents were indeed considered not only the record of truth but also a key marketing and investor relations tool. It was perhaps the only communication each year with the entire body of shareholders, received by post 20 working days in advance of tea and biscuits served at the AGM. Then, it was also remarkably shorter in terms of narrative, less comprehensive in terms of Financial Statements and Corporate Governance was simply implied rather than described. And PDFs were a format known only to designers and printers. Roll on a couple of decades and the highs and lows of corporate progress or otherwise is well documented and widely accessible. The corporate face of all businesses are now polished onto various screen formats and technology platforms. Yet remarkably, for many PLCs it would appear that the Annual Report is not developed as an integral component of their overarching corporate communications and is instead viewed as a solitary annual endeavour.

As Annual Reports now regularly breach the 200 page barrier, they are becoming increasingly impenetrable and less reader friendly, especially with the flicking forwards and backwards with those supposedly helpful linkages. As well as rethinking the structure of the Strategic Report, the time has come for entities to embrace the benefits of publishing digitally. Analysts can easily dive deep into the Financial Statements, exporting selected sections into various other usable digital formats. Narrative can be enriched by rich media and content that is relevant, but not material, can be directly referenced to an external online resource alongside other company information. It is no longer necessary to present the entire back story of the business as it has evolved; nor is it necessary to include every CSR initiative undertaken throughout the year; nor in fact is it required by law or regulation to include a Chairman's Statement or Chief Financial Officer's Report.

So perhaps it's time for a clean sheet of paper and a red pen as we experiment and be innovative in the drafting and content mapping of the annual report for YE2020.