Failing to be transparent when reporting a company’s position is about more than compliance. “Shy reporting” can also affect a business’s ability to create an investment case that’s both persuasive and reassuring to investors.
In uncertain times, it's something that could mark the difference between much-needed investment post-Brexit, or a severe lack of it.
Recent research from the Financial Reporting Council noted that failure by boards to clearly explain business models in a company report can put off investors entirely, or make their potential investment smaller.
However, there’s a growing divide between a minority who choose to be forthcoming with where they see their business’s role in the future, and a majority who tend more towards “shy reporting” and cloudy positioning.
You can’t paint a full and accurate picture of a company’s fortunes without addressing the negatives alongside the positives.
Look at the pressures that John Fallon, Pearson’s chief executive, is under following the company’s recent profit warning. It could be argued that these stresses could have been offset had Pearson’s year-end report and supporting communications set out a clearer picture of their markets – and more importantly, their understanding of those markets dynamics.
Companies that tend towards shy reporting and avoid mentioning challenges may think that they're diverting stakeholder attention by presenting a strong and idyllic vision of their business. But what they’re really doing is revealing a lack of confidence to tackle what’s ahead. Any perceptive investor is sure to pick up on this lack of insight when examining a proposal.
Radley Yeldar, the corporate communications agency for which I work, has been conducting research into the annual reporting of FTSE 100 companies for the past 11 years.
The research used 16 criteria across four categories, including explaining and measuring performance, and effective storytelling. It found that while a few company reports are worth celebrating, there’s work to be done at many of the UK’s biggest businesses.
As a group, those in the top 10 – also including Lloyds Banking Group and FTSE 100 newcomer Provident Financial Group – all clearly set out their long-term investment cases against the backdrop of the current economic environment, as well how they see their markets in the future.
Critically, they also outline the progress they’ve made in light of the current market conditions as well as the challenges they face because of them.
Ashtead, which came tenth in the shortlist, is a prime example of the Financial Reporting Council’s business model reporting ethos, providing the reader with valuable detail about how the company adapts the business model across different stages of the economic cycle.
Land Securities (ranked third in the research) is clear and honest about its board’s activities throughout the year and the future direction of the business, using graphics to illustrate risks and link those potential hurdles to its strategy.
A report that fails to address key market issues such as the impact of Brexit, and demonstrate how its business model and strategy are ensuring its sustainable future, is a report with holes in it – holes that others are willing to fill in without all the facts.
Best practice corporate reporting shouldn’t just be an exercise for external stakeholders either. The process can often be lengthy, involving auditors, investor relations teams, company secretaries and board-level management, all tasked with examining and reporting on the business from the ground up.
Overall, it’s an opportunity for the company to consider how it sees itself, its role in the markets in which it operates, as well as the future it wants to create for itself. An annual report is not just about year-end results; it can also be a touch point for potential investors, financial journalists and other stakeholders year-round.
By making a report a mission statement and statement of intent, a business can inspire great confidence and set out a clear investment case that can be revisited long after the year-end has passed.