The future is now

Annual Reports are changing, but how will they look in the future? And will new government guidelines be effective? Isabel Bass reports.

A few decades ago, nobody ever talked about “narrative reporting” when discussing annual reports. It would have sounded ridiculous. Like hiring Ernest Hemingway to write the thing. Like presenting all company information in a linear plot line that arcs to a clean end. Companies’ annual reports and accounts were either as dry as a compliance report, or else somewhere between wondrous and crass.

Even now, people reminisce about H.J. Heinz’s “Ode to the Tomato”, an arresting 96-page document dedicated to the source of many of its 57 varieties; they recall the brown paper bag-like AR cover chosen by Petrolite, a US specialty chemicals manufacturer, to convey that earnings were not good and it knew that; and remember E.F. Hutton filling most of the 76 glittering metallic pages in its Annual Report with striking photographs of top executives posing in elegant surroundings -- to show it was far broader and more up-market than it was then perceived to be.

There was even a spoof annual report for “Alphonse Capone Enterprises”, which did the rounds. In it, mafia boss Al Capone opened his Letter to Shareholders with the words “1931 stunk.” But he assured them to hang in there - new hit movies and plays showcased their business as exciting, providing you don’t get hurt. Moreover, consumer products should do well, he advised, following his “consolidation” of Chicago in the St Valentine’s Day massacre, the notorious 1929 gang land slaying.

Ours is a more austere era, ushered in by the worst financial crisis since Al Capone’s day. It has been driven by a focus on short-term profits and rewards, and it exposed the whopping failures in corporate reporting and the unbelievable ignorance concerning systemic risks to business and financial institutions. It demonstrated the urgent need to deliver transparency, responsibility, and communications.

Public discontent in the UK and elsewhere has led to greater disclosure being required from companies. In the UK a nervous government heard the call. Last autumn, the Department of Business, Innovation and Skills (BIS) issued a consultative document aimed at streamlining the Annual Report and making it clearer and more accessible to stakeholders. It was part of the government’s Red Tape Challenge, which ties in with the FRC’s Cutting Clutter initiative.

The Annual Report and Accounts was a brilliant target. It had become increasingly unwieldy and cumbersome, weighed down with ever-growing requirements made on companies for more information disclosure. People wondered if anybody ever really read it.

“It’s good to periodically open up things, especially in times of great change,” notes Steven Toller, director of innovation at Jones and Palmer, the Birmingham-based corporate communications consultancy.

The BIS document suggested removing the Companies Act disclosure requirements, cutting out the need for Summary Financial Statements, and clearing up areas where the Listing Rules, IFRS, company law and the Corporate Governance Code are inconsistent or require similar disclosures.

Unsurprisingly, the response from the 116 organisations which responded to BIS was generally positive. “Anything to simplify and make the report more succinct is welcome,” says Michael Mitchell, general manager at the IR Society, whose 600-plus members include most of the FTSE 100 and much of the FTSE 250 companies.

“The annual report’s usefulness has been compromised by inclusion of new mandatory information aimed at transparency but in fact achieving complexity,” he says. He informed BIS that IR Society members, in spite of their best efforts, found the Annual Report to be often cluttered by irrelevant information required by regulation.

“Narrative reporting” in this new era refers to how the company could better communicate in the AR and Accounts, and throughout its communications. To be sure, it’s been around for a while, but it is rising like foam on top of a cappuccino.

BIS wants to split the AR document in two. The front would consist of a concise “Strategic Report” -- information all shareholders want to see. The back would contain the Annual Director’s Statement and the figures, which would be made available on company websites.

This is where trouble begins. What to include in which section? “Will the back of the book become a dumping ground?” asks Richard Carpenter, managing partner at MerchantCantos, a leading UK-based international design and communications agency.

He points to a danger that the two “stories” – the strategic report and the Annual Directors Statement – can become separated. Worse, he notes, readers could pay less attention to the back of the book, the Annual Directors Statement and the figures, and it could become as dry as a SEC regulatory filing.

Steven Tolley has other concerns. He works directly with the people on the ground, the FDs, company secretaries, those trained to dot the I’s and cross the T’s. “They’re not used to grappling with the big picture, at least not yet,” he says, “If not handled carefully, these new initiatives could give even more work to those involved in producing the Annual Report, not less.”

Other organisations fuss about whether the separation will create duplication, increasing - not diminishing - the amount of material they have to produce. Several replies to BIS urged a flexible boundary between the two reports. Others begged for a clear understanding not just about what must be written, but about the purpose and objective of narrative reporting.

There were many different views about social and environmental information. Some felt that these were helpful indicators to shareholders while others argued to include them only if necessary to understand the business.

Executive pay was a hot potato, and it was obvious that much more discussion has to take place to reach consensus about the future Annual Report and Accounts. No wonder BIS moved the timeline for heralding the changes from October 2012 to April 2013.

Will the changes bring about another reshuffling of the chairs on the deck? Is BIS taking into account the wired environment in which we live and the fact that companies are already grumpy about creating a printed and a web AR? Is it considering the multinationals which list on many exchanges? What about the way in which communicators and CFOs must quickly produce financial data, increasingly complex financial reporting consolidating multiple teams and departments and often multinational groups? Can it match the need to reduce “clutter” with the insatiable demands from external audiences for more information?

Those with long memories are sanguine. “There have been so many changes over the years. These things go in trends,” says Richard Carpenter. The judicious observer of tomorrow’s latest fashion may concur. Consider the rise and fall of business fads over the past decades, such as the buzz-phrase “back to basics”, quality circles, the paperless office, the factory of the future, internal new venture groups.

But many are convinced we are in a paradigm shift. Many drivers, not just the BIS, are sweeping us into new territory in which corporate reporting can be more appropriate for today.

The IIRC, the new international association with 70 companies worldwide already signed up, is testing the principles and practices of Integrated Reporting. Its goal is to create a new global standard and develop a solid framework.

“The IIRC is driving at the same thing as BIS,” says Sallie Pilott, director of research and strategy for Black Sun plc. “They both aim for flexible reporting that is very grounded in the business model and strategy. They both welcome a business model that connects the dots for people, pulls everything together, and presents a holistic company. ”

The IIRC has set up a pilot programme to allow companies to work collaboratively and gain insights from investors as they try out new methods and approaches in their annual report. The FRC Reporting Lab, established a few months ago, is an open forum set up for companies to come into a safe environment where they can present ideas and get solutions. Its oversight board and committee include accountants, lawyers, listing regulators and everyone in the supply chain.

HSBC is already testing the waters. Under the leadership of Richard Scurr, head of group finance operations, it has embarked on a two year project to craft an “integrated reporting” version of its 2010 accounts, focusing on disclosure.

Its premise, which Scurr reported to CGMA (Chartered Global Management Accountant), was that the core of integrated reporting is a description of the strategy of the company and how it creates value. Soon they discovered that the quality of disclosure needed to improve.

Scurr noted that integrated reporting, especially for big organisations, triggers changes in internal management structures and reporting. He also saw how challenges to reporting and rewriting published drafts force you to rethink the way disclosure is constructed. “It is rewarding as it encourages you to think beyond familiar boundaries,” he told the CGMA.

All the changes will take time, but may be far-sweeping. “They have the potential to shift companies more towards communication rather than compliance,” notes Mark O’Sullivan, director of corporate reporting at PWC. He is certain that they will trigger more internal debate within the company. “Boards will have to argue out the corporate strategy and business model, and then tie these into the workings of the whole company, including executive pay and remuneration.”

Who will lead the charge? What counsellor, advisor, or communications expert will be experienced enough to take up the challenge? It behooves corporate communicators to brush up their skills and knowledge so that they can be in pole position.