With this year’s annual report season now over, reporting agencies are taking stock, surveying the market, and seeing what now constitutes best practice: Neil Gibbons looks at the trends to emerge this year.

Is there such thing as an annual report annual report? A yearly record of the activity, state-of health and strategy of annual reporting itself?

There’s certainly a case for one. With the corporate reporting industry in a perpetual state of flux – constantly pushed and prodded by shifting audiences, new reporting rules, technological change, the whims of stakeholders and its own innovation – it needs a handle on what best practice looks like.

So, as the latest annual reporting season disappears in the rear view mirror, we look at the state of reporting. What trends are emerging? What’s driving change? And where is there room for improvement?

First, the good news.

“Overall, the quality of business reporting has improved against previous years,” says Richard Carpenter, managing partner of corporate reporting agency Merchant. “In an increasingly tough environment, companies are striving to clearly communicate their investment proposition.”

Merchant is currently conducting its annual benchmarking survey of the printed and online annual reports of the FTSE 350 and 200 of Europe’s largest companies with the full findings to be published in the autumn.

Its headline finding – that clear communication is on the rise – is backed by others in the industry. “We’re seeing more clarity around the way some elements of legislative demands are articulated,” says Adrian Parker, client partner as SAS. Companies, he says, are moving away from “two pages of narrative with a couple of bullet points” and setting out a very clear strategy. “You can see the key metrics, the progress being made and who is responsible for what.”

However, some less-skilled communicators are responding to new legislation merely by producing more information. “Stakeholders don’t want more information – they want more insight,” he says.

But are they getting that? “Striking the right balance between communication and compliance is a continuing challenge,” says Clive Bidwell, head of corporate reporting at Radley Yeldar. “The Financial Reporting Council’s discussion paper ‘Louder than words’ urges preparers to “cut clutter” in making reports more relevant and useful.”

David Christopherson, CEO of Black Sun, agrees that the tough economic conditions have provided impetus and led to “a change in strategic focus”.

“With organisations concentrating on managing their businesses in difficult times, the focus has shifted from the long-term to the short-term; from record profits and growth to economic sustainability,” he says. “In fact, around 70% mentioned the uncertain economic times in their reports. Surprisingly, of the reports we reviewed, 29% didn’t mention the economic climate at all. This may be because they’re defensive stock or perhaps it was an oversight!”

But Christopherson argues that strategy has to be backed up by sound nitty-gritty. “Not only do companies need to have clear disclosure around strategy but that this also needs to be accompanied by the KPIs that will be used to measure it, details of the business’ objectives, the risks it faces, and the market context in which it is operating.”

In many cases that context is missing, or at least not being communicated effectively. “Many companies across the board still struggle to provide a clear linkage between strategy, KPIs and risks, although the FTSE 100 generally does better than the rest of the pack,” says Merchant’s Carpenter. “That said, we are seeing improvement: many of the smaller companies are now reporting pretty effectively on KPIs too.”

Radley Yeldar analyses every FTSE 100 report in its annual survey ‘How Does it Stack Up?’ This year’s report, launched earlier this month, named Land Securities, Capita, Aviva, Anglo American and National Grid as the top 5 – partly because they “provide a more explicit link between the key elements throughout the report: business model, markets, strategy, KPIs, risk and material CR issues”. 

Investor demands have been the catalyst, says Bidwell, with reporting on financial strength and risk moving higher up their agenda. But according to Carpenter, this year has seen great strides in governance reporting and risk reporting.

“The standard here has increased dramatically,” he says. “It’s no longer an afterthought. Many companies are making a real effort to make these sections appear transparent and communicative.”

But that effort isn’t always translated into success. In fact, Black Sun’s Christopherson singles out risk reporting as an area that is still too flimsy.

“We were a little disappointed to see only a limited increase in the quality of risk disclosure,” he says. “But things were moving so quickly that it might just have been a case of the rabbit caught in the headlights.”

Going digital
One of the biggest shifts this year is in form as much as content. Thom Newton is managing partner of 35 Communications, which is currently researching stakeholder communication needs. Its early finding is that annual reports are increasingly deserting traditional media.

“Although not new, the emphasis seems to be on a continuing shift from information in print to information online,” he says. “This is particularly important currently with the generation of costsavings being a key driver in how companies are communicating. This migration of information allows for a reduction in print and mailing costs.”

As a result, he says, a number of must-have technologies have been developed that allow companies to better manage detailed and complex content. “For example, PDF-builders have been introduced which enable people to build their own reports – selecting only those pages or sections of the report that are of interest to them. Dynamic charting tools also allow users to view financial information, in a number of different configurations.”

Reed Elsevier’s annual report showcases both of these technologies.

Merchant’s benchmarking study suggests that UK companies lead the way here. “The European take up of HTML reports is generally lower than that of the FTSE 100,” says Carpenter.

Could do better
For all this, there’s plenty that UK communicators could improve on.

Both Merchant and Radley Yeldar agree that the dditional legislative requirements of the Enhanced Business Review have not been fully addressed by many companies this year. Meanwhile, SAS’s Adrian Parker reiterates that an annual report is as much about communications opportunities as audience needs but argues that some companies are “ever so slightly reluctant to embrace that”.

Such reticence manifests itself in two main ways, he suggests. Firstly, in companies sticking to a boilerplate approach. “That tends to happen when the annual report is the responsibility of the company secretary rather than the communications team,” he says. Secondly, in “a mild nervousness” to talk about forward-looking plans. “I can understand that, considering the economic environment. One client described it as like trying to find your way safely across a frozen lake without stumbling across the thinnest bit of ice.”

Radley Yeldar’s Bidwell agrees: the economic conditions have had a negative effect on some reporters. “In this tough environment, many companies have battened down the hatches, waiting for the storm to pass. Their reports provide a poor view of strategy and future market conditions.

Understandably, they’re wary of over promising as they peer into the abyss, but forward-looking reports don’t need to predict the future, they just need to show how a company is focused on shaping its own future.”

Bleeding edge
While too early to be called trends, industry observers are seeing certain behaviours at the very cutting edge that may soon become the norm.

As part of Merchants benchmarking of European companies, Carpenter has spotted some interesting trends and initiatives from which UK companies could learn.

“For example, Volkswagen has an entire section entitled ‘value enhancing factors’ which covers key relationships,” he says. “At the same time, the European companies are generally far better than their UK counterparts at reporting on shareholder return. That’s something we hope to see improve - although, given the current environment, that might not happen anytime soon.”

Adrian Parker, meanwhile, sees a beneficial split between the material that a company is required to disclose and the material that a communicator chooses to transmit.

“There’s a definite polarisation between ‘comms material’ and ‘statutory material’,” he says. “And this brings freedom. So they have the statutory report – a utilitarian document, if you like – and the online annual review as well. If auditors get nervous about, for example, forward-looking statements, we can put them in another place. It’s more free and easy.”

As for 35 Communications, it has seen early indicators of a trend towards what it calls “continuous and integrated stakeholder communications” – a development that could be the death knell of the annual report as a standalone document. “This has been facilitated by online technology and allows companies to provide regularly updated information on their performance in the context of their business strategy rather than just once a year,” says Newton.

“For example, Tesco [a client of 35 Communications] has integrated the annual report and the corporate esponsibility report into the main plc site and GlaxoSmithKline has taken a similar approach to its corporate responsibility report.”

This is echoed by Black Sun’s Christopherson. “We think that the whole concept of corporate reporting is largely misunderstood,” he says. “It is much more than an annual report. It is a business reporting on its ongoing performance across a full range of media, with a consistency of message across all touch points. We believe that corporate reporting will eventually sit between IR and PR as a distinct discipline. In many ways, it’s the one thing that ties the two together."

Is it all worth it?
Keeping up with best practice can be a headache. But do people actually take notice of the annual report?
• 88% of institutional investors say the annual report is the most credible reporting tool in assisting them to make better investment decisions.
• 89% of them agree that reports containing greater insights into a company’s business strategy and action plans aided this process
• 90% of analysts say increased transparency and disclosure has a positive impact on their confidence in a company
• 70% of analysts review annual reports, analyst presentations and corporate websites at least quarterly; 50% review them weekly or monthly
Source: Black Sun