The purpose of an annual report is to convey what is happening inside a company to the outside world – how it is performing, where it is heading and how it is going to get there. Unfortunately, far too many reports still fail to achieve this simple function.
The plethora of regulatory change over the past ten years has led to reports growing from a simple 30 page document to, in some cases, 600 page monsters. The aim of all of this change has been to improve transparency, but it has arguably had the opposite effect. Many reports have become legal box-ticking exercises, causing them to lose their primary purpose – to communicate the performance and direction of the business. The good news is that recent UK legislation on the strategic report is encouraging reporters to return to good communication principles.
The Financial Reporting Council’s (FRC) guidance on the strategic report states: ‘[We] encourage companies to experiment and be innovative in the drafting of their annual reports, presenting narrative information in a way that enables them to best “tell their story”.’ It is interesting to see how companies react to the storytelling element in a reporting context. For many reporting content generators, the concept of ‘story’ sits uncomfortably in annual reporting. The Oxford English Dictionary’s definition of a story shows why: ‘Story – A description of events and people that the writer or speaker has invented in order to entertain people.’
The idea of a ‘story’ as a tale, or invented narrative, goes directly against the principles of reporting. A clear story, or tale in particular, should sit at the centre of a good report. In fact, the definition of a tale is enlightening: ‘Tale – A fictitious or true narrative or story, especially one that is imaginatively recounted.’ A ‘tale’ or ‘story’ does not have to be fictitious, it can be based solidly on truth and fact, but most importantly, imaginatively told. This is the foundation of the FRC’s guidance. For an annual report to work as a communication channel and to fulfil its primary purpose, it needs to have a coherent and relevant thread to its narrative. For example, linking a business’ purpose, vision, market environment, business model, strategy, risk, performance and governance into one story will immediately give the person reading the report a sense of coherence and logic to the narrative.
The starting point is to understand that a report is not a selection of independent pieces of disclosure. Over the past ten years, Radley Yeldar has been benchmarking annual reporting in the FTSE 100. Without doubt, the biggest frustration of our reporting consultants is the lack of clear linkage between the relevant sections of the report. It is important that the report establishes:
- How the strategy relates to market conditions and market predictions
- How the risk management process relates to the business model
- How measures of success have informed board discussions over the year.
The best way to make these elements link together is to ensure all the reporting contributors are joined up from the beginning of the process. To galvanise these people together, there are three simple steps that can help.
The first step is to see the annual report as the starting point of a year’s investor communication, not the end. Although the report is a reflection of the past year’s performance, it is also an opportunity to discuss the direction of the business for the year ahead. By identifying the key messages the board wants to portray to its stakeholders over the year, each content contributor can ensure their sections reflect those ambitions. For example, if the key message for the year is ‘maximising operating efficiencies’, the business model, strategy, divisional reviews, KPIs, sustainability reviews and board activities should all refer to that ambition as part of their narratives. Immediately this gives the whole report a common thread.
The second step is to ensure your narrative is material. If you are creating a ‘story’, it should always sit within the context of the environment in which it is being told – in this case, what you do as a business. Materiality is about identifying the things that are critical to the success of the business – and if you take them away, your business starts to fail.
The simplest way to do this is to start with your business model. A business model should describe the activities your business undertakes to deliver your products or services. It should describe the value these activities create for your customers and the financial returns they create for the business and its shareholders. It should also identify the risks involved across your value chain and the resources and relationships critical to ensure the long-term sustainability of your activities. Finally, it should describe the wider value your business creates by doing what it does.
Done well, a business model will identify the material elements that your business manages and measures on a day-to-day basis. These should be the only things you report on. In fact, you could view the business model as an expanded contents matrix for the report. Straight away this will help link all the various narratives in the report into one consistent story.
Finally, make your report reflect what your business really is. Our research has highlighted how many reports lack any true insight into what makes a business different from others. In the brand world, there is the classic test of putting your thumb over a company’s logo – can you still tell which company it is without it? The same applies to reports – there are many which only relate to their company through the logo on the cover.
In these cases, the narrative is written without character or emotion, failing to give a sense of what makes that company different from its peers. This is important for investment decision making – why would investors choose this company over another? It is how you approach what you do that will sway that decision. The best annual reports encapsulate the essence of what makes a company great, what drives them on and why they are a long-term investment proposition.
Each year, Radley Yeldar announces its top ten reporters in the FTSE 100. This list reflects those companies that go beyond regulatory requirements to bring to life why they are who they are.
Storytelling has a fundamental place in reporting. It is what links your investment proposition into one complete and coherent narrative, it is what makes you stand out from your competitors and helps you focus on what is material. When creating your next reporting suite, think about the following three quick wins:
- See the annual report as the starting point of a year’s investor communication
- Ensure your narrative is material
- Make your report reflect who you are.
This is a part of a series of articles we are posting as part of the How Does It Stack Up? 2016 Report. To learn more about best practice corporate reporting, visit the How Does It Stack Up? page.