Radley Yeldar (RY)’s ‘How Does It Stack Up?’ study this year reveals new challenges ahead for reporters and shortcomings in the FTSE 100 sample. In light of the Financial Reporting Council (FRC)’s annual letter to finance directors and audit committee chairs, which outlined the areas of company reports that require improvement, reporters will need to address these weaknesses in order to reclaim top positions in the ranking.
Companies that scored highly took these areas into account, focusing on key elements of their report that needed improvement.
LandSec has been recognised as the best reporter in the FTSE100 this year for the third time in 12 years of the research. This is owing to improved communication of its key resources and relationships, a weakness for many reporters, which propelled it to the top spot.
New entrants to the ranking include Coca-Cola HBC, Mondi, Taylor Wimpey and United Utilities Group. Vodafone has drastically improved its previous ranking of 37 to 2, thanks to much improved resource and relationship coverage and risk narrative.
The Top 10 2017 ‘How Does It Stack Up?’ ranking:
|4.||Provident Financial Group *|
*Based on FTSE 100 constituents as of 31st May 2017 review
Three key necessary areas of improvement highlighted by the FRC included:
- Clear explanation of the relationship between different pieces of information
The strongest reports gave sufficient attention to the interconnection between disclosures such as KPIs, strategy and risk, while maintaining the overall flow of the report for it to remain cohesive. Although most reports in the FTSE100 make multiple links between their various sections, RY discovered that just 10% achieve this with an ordering which is entirely logical.
- Ensure disclosures on KPIs are sufficiently case-specific and that descriptions are clear and informative
RY rebased this year’s study’s criteria to reflect the higher expectations on companies in performance reporting. This was partially driven by new guidance devised by the European Securities and Markets Association (ESMA) in response to a disparity between reporters’ approach to outlining alternative performance measures.
Subsequently, the criteria favoured companies which adopt an appropriate range of KPIs and use them to form a strong ‘spine’ throughout their report. RY believes this creates robust and coherent reporting which links KPIs and strategic priorities to demonstrate progress and provides clarity in how directors are remunerated.Only 5% of reporters do this at the highest level, while an additional 29% demonstrate good practice reporting to an almost-as-high standard.
In particular, the FRC would like companies to ensure that KPIs linked to remuneration are explained in sufficient detail. Just 26% of reporters in the FTSE100 demonstrated an unequivocal link between the KPIs in their strategic report and the KPIs in their remuneration section.
- Consider the broader drivers of value that contribute to the long-term success of the company
LandSec excelled in clearly identifying its key resources and relationships; something which companies across the entire FTSE100 typically struggle with. These are often important sources of value that haven’t been recognised in the financial statements, such as the employees, which are often discussed in a separate section to the business model.
The International Integrated Reporting Council (IIRC)’s reporting framework has long-term value creation at the heart of its principles. As it becomes more widespread, RY found that many reporters struggled to use the framework effectively, feeling compelled to ‘tick off’ its six capitals, when its purpose is for companies to report on those most relevant to them.
Brett Simnett, Director of Investor Engagement at RY said:
“A good report should identify the key material resources and relationships they need to manage to successfully operate. This should then inform the structure of the reports narrative. There are signs that some reporters are seeing the benefits of a fresh approach to how they report, but there are many who are adding layer-upon-layer of extra information on top of existing formats which is hindering clear communication.”
The ‘How Does It Stack Up’ research uses 15 criteria to assess annual reports, which are grouped into four categories: understanding the business and context, explaining and measuring performance, business sustainability and effective storytelling. Crucially, Radley Yeldar uses its experience as a design consultancy to widen the focus away from just pure compliance, instead judging the quality, depth, transparency and coherence of the content and how easily it’s accessed.
The ‘How Does it Stack Up?’ research is a practical tool created 12 years ago by RY to promote best practice and give all companies access to thinking that could establish or keep them at the forefront of reporting.It seeks to assist in successfully engaging key stakeholders from shareholders, employees and community organisations to the media and customers.
Read the full article on Global Banking & Finance Review here.