It has been three years since the Companies Act became law, supposedly ushering in a new era of corporate reporting. But has it changed the culture of communication? Or are old habits inhibiting progress? David Benady reports:

When Peter Kemp attended the Annual General Meeting of a leading quoted company recently, he noticed something rather surprising. Kemp, the managing director of Global3Digital which creates online annual reports for listed companies, was struck by the fact that three quarters of the 500 people attending his client’s AGM were clutching paper copies of the company’s report and accounts. “It was a wake up call. A lot of people out there want their reports in hard copy,” he says.

That wasn’t supposed to happen. Among other things, the Companies Act 2006 introduced new rules allowing businesses to ask shareholders to opt out of receiving printed reports and instead to view them online. Some thought the rule change would sound the death knell of the printed annual report.

But it seems that hasn’t happened. Nearly three years on from the bill receiving Royal Assent, not all of its intended outcomes have come to bear. Meanwhile, the legislation has given rise to other, unforeseen consequences.

Certainly, the death of the printed report has been greatly exaggerated. Many investors have clung on to their printed copy which they use as a working document to source information about a company. They scribble notes all over it. They read it on the train. They keep it handy on their bookshelf should they need to refer to it.

Maybe it is a generational thing. For those who have grown up getting information from newspapers, printed reports and books, the idea of dispensing with hard copy annual reports is hard to take. Perhaps a new generation of digital natives will arrive in a few years armed with mobile internet devices to access the corporate information as they need it.

For the time being though, the printed report has many devotees. These are mainly institutional investors and those that are constantly referring to the reports in their daily work. That said, many companies have been able to drastically cut down the number of reports they send out. Retail investors with small and temporary holdings in the companies do not need regular access to the information. Some companies are understood to have saved millions of pounds by persuading retail investors to opt out of receiving a printed copy and look online.

“A lot of companies are almost in hiding. They are very happy with the traditional approach to reporting. They will carry on in that way until someone pulls them up”

However, despite old habits dying hard, most agree that the Companies Act 2006 has brought about the biggest shake-up in company reporting for two decades. Apart from the move to online reports, the Act has introduced greater indepth narrative reporting in the annual report’s business review. It also requires companies to list relevant key performance indicators (KPIs).

For those involved in the preparation of company reports - investor relations staff and the design agencies they employ to create them - the Act was a milestone in the rapidly unfolding story of the way companies relate their business activities to investors. So three years on from the introduction of the Act, what is the verdict?

John Shepherd, corporate communications director of online betting business PartyGaming is in no doubt that the Act has changed reporting for the better. “I’ve been looking at annual reports for 30 years – 20 of them as a financial reporter – and I’ve seen incredible change for the good. If you go back in time, the annual report was basic, it contained a chairman’s statement, a director’s report and the balance sheet information and was impenetrable by most people. Now they are delivering far more for all kinds of stakeholders,” he says.

Even, so the new requirements have piled the pressure on corporate communications departments and their design agencies. “It has made reporting longer and more complicated,” says Simon Lake, managing director of corporate communications consultancy Likemind. “It took a while for companies to get their heads round it nd see how the elements fit together to create a compelling story that explains why you should believe in a business,” he adds. But he believes that overall it has improved the standard of reporting and means investors can get better information on which to base their investment decisions.

Meanwhile, Karen Keyes, head of investor relations at IT giant Logica, says that in broad terms, the Act’s emphasis on narrative reporting through the business review has been positive in getting companies to verbalise their strategies and present them in more detail. However, she adds: “There is always a danger that people will overcomplicate it for themselves and create content to fill a list of requirements.” She says choosing the most appropriate key performance indicators (KPIs) requires rigour and an extra level of due diligence and communication with management teams.

As Logica is a technology firm, the move to online reporting is welcome, she says. “The electronic communications side has meant we’ve had to think harder about how we report online. We were already along that journey, but it has forced a lot of other companies to think twice and has made the design agencies consider how to communicate effectively online,” she adds.

The new reporting requirements have been introduced on a staggered basis since the Act became law. This has helped companies adapt to the new environment, but many still have a long way to go to make their reports fully compliant with the spirit of the Act. “We’ve seen improvements but ncreasing the amount of content hasn’t necessarily led to improved communications,” says Rosie Acfield, corporate reporting consultant at Radley Yeldar. “Providing that information in a way that is accessible, joined up and meaningful is the next big challenge,” she adds.

Clearly, companies in different sectors need to take different approaches to KPIs and to decide which information is important to include in the business review. Acfield says BA has been particularly strong in reporting contractual obligations which are likely to affect its business.  Marks & Spencer has also strong in this area and gives detailed information about relationships with suppliers and employees. Radley Yeldar’s head of corporate responsibility Tom Rotherham says this is partly because these factors have become increasingly important for the future of many companies such as retailers and service businesses, and he believes focus on these areas would have increased anyway without the Companies Act. “It isn’t driven by the regulations but the understanding of what is material to the business,” he says.

But he adds that many companies still need greater clarity when giving information about corporate responsibility in their reports. Some reports include information about fun runs and charitable activity without any explanation as to why this should matter to investors. “The key point for the non-financial side is the time frame,” says Rotherham. For short-term investors, environmental and labour factors are probably of little relevance. But for long-term investors, these become more important.

“Increasing the amount of content hasn’t led to improved communications. Providing it in a way that is accessible, joined up and meaningful is the next big challenge”

Some research indicates that many institutional investors are far from happy with much company reporting and find huge differences in the clarity, transparency and insight of annual reports and statements provided by different companies. “The lack of disclosure varies between companies with small companies typically tending to be lacking and large companies being excessive,” one institutional investor told researchers commissioned by annual report designers SAS. An interesting finding of the SAS research, based on interviews conducted by Thomson Reuters of 40 institutional investors, is that the most widely read part of an annual report is the section on remuneration, then the hairman’s statement followed by the business review. Meanwhile, most respondents called for the Corporate Responsibility report to be included as a summary in the main report, rather than as a separate document all together.

Adrian Parker, a partner at design agency SAS, which helped Logica create its annual report, says that there is a lot of peer pressure for companies to produce sound and informative annual reports. So if one retailer produces an outstanding report, others will look to follow. But he warns: “There are a lot of companies which are almost in hiding. They are very happy with the way they do their reports and take a traditional approach to reporting. They will carry on in that way until someone pulls them up.”

Over the past ten years, the average number of pages in an annual report has nearly doubled, but some believe that too many of the documents have become “corporate PR vehicles,” too ready to sing the praises of management’s actions, but lacking in hard information and insight.

The Companies Act is still a work in progress and it could take years for businesses to become fully conversant with its reporting requirements. Most believe it is a step in the right direction, giving broader access to information to more stakeholders. But it seems likely that the printed copy of a company’s report and accounts is likely to remain popular among investment specialists for some time to come.

The ranking
Some of the UK’s top listed-companies are failing to provide their stakeholders with adequate access to corporate information online,  according to a survey on web-based annual reports carried out by Smiths Partnership.

The report designer’s annual analysis of 280 reports from FTSE 350 companies found they varied widely in usability and the online tools they provide for searching and reading the documents.

The most advanced reports use the HTML format, while the most basic option is a printable pdf. Smiths Partnerships has ranked the online reporting of companies according to the sophistication of the technology and how successfully they communicate.

Logica, Land Securities and Provident Financial have created some of the best online annual reports in the last reporting season, according to the research. But others have not done so well. About one third of the FTSE top 350 companies report use HTML, with Standard Life praised for making the greatest improvement in HTML. The report claims BT is failing in its duties to investors by creating only a rudimentary pdf file of its annual report.

The report adds: “BT provide the biggest disappointment this year by reverting back to an image based report, that, for a company of BT’s size is surely a dereliction of accessibility obligations.”

Playing tag
XBRL, the new computer language for business, could transform corporate reporting over the next five years. The interactive technology allows companies to electronically “tag” their accounts and convert the numbers into computer lingo, hence the name “extensible business eporting language”.

Analysts, investors, journalists and the even the tax man will be able to crunch a company’s tagged accounts at the stroke of a computer key. No more slaving over a hot calculator. The technology allows investors to compare data between companies. Want to compare the return on capital employed across five different retailers? XBRL canbring up the data in a second.

Some believe this will heap extra pressure on those working in corporate communications, forcing them to respond rapidly to complex questions about a company’s report and accounts.

“XBRL allows investors to come up with difficult questions more quickly and will force communicators to respond faster,” says Neville Wells, content director at annual report designers Likemind. “It makes things harder to hide, good or bad.”

In the US, the Securities & Exchange Commission has told public companies to report their accounts in XBRL from this summer. HM Revenue & Customs will require UK corporation tax returns to use the technology from 2011. The question is whether XBRL will catch on for orporate reporting. Some have their doubts. “I think there are a lot of barriers to it working,” says Richard Carpenter, managing partner at corporate reporting consultancy Merchant. He points out that XBRL was first launched a decade ago but has had little take-up since then by companies or investors.

“It’s chicken and egg. Companies aren’t tagging with XBRL because investors don’t demand it. Investors aren’t using it because companies haven’t done the tags,” he says.

Supporters argue that when HMRC makes the tagging mandatory, investors and analysts will demand to see those BRL files, hastening uptake of the technology.