The FRC is right to urge reporters to raise their game when it comes to disclosing key resources and relationships.
Shortly after we finalised our How does it stack up? (HDISU?) rankings, the Financial Reporting Council (FRC) published its letter to Audit Committee Chairs and Finance Directors outlining the areas that companies should aim to improve. It referred to its recent consultation proposing amendments to its Guidance on the Strategic Report where it urged companies to consider the broader drivers of value that contribute to its long-term success. In particular, it wants companies to write about the sources of value that are not recognised in the financial statements and how these are managed, sustained and developed.
A company can be viewed as a collection of capabilities. Many of these are intangible and difficult to value, but account for the majority of a company’s market capitalisation. They include brands and products, internal systems, relationships with customers and suppliers, operating licences, resources and its reputation with the public, governments and prospective employees. The most valuable assets are usually a company’s employees. Most importantly, in a competitive market, a company can only add value if there is something distinctive about these capabilities that yields a competitive advantage.
In our analysis of reporting on resources and relationships we assess the extent to which these are clearly identified and discussed in detail. In addition, we judge how well they are positioned as enablers of the business model and, ultimately, how well this combination of resources and relationships underpins a source of competitive advantage. The average score for reporting on resources and relationships for our top ten reporters was 6.6 out of 10, but the scores varied between 8 and 4.
Coca-Cola HBC, a bottling plant for Coke covering a large part of Europe, scored highly. In a slower changing industry like soft drinks, a brand like Coca-Cola can be sustained, with appropriate management, indefinitely. The brand is a key source of competitive advantage, but as a bottler, Coca-Cola HBC assessed the most material resource and relationships and reported on how it is managing them with further detail on its progress in its performance section.
Vodafone’s competitive position is based on its operating licences (listed in its notes), ownership of physical networks and its customer base. In addition, it reports on how it is building on its competitive advantage through its core programmes covering its network, customer experience, financial resources and culture.
As the latest reporting season gets underway, we recommend the following:
- Ensure that you have considered all the key resources and relationships using the six capitals identified by the IIFC framework. You can still benefit from this approach even if you are not publishing an integrated report
- Only report on the resources and relationships that are relevant to your business
- Show how they enable your business model and report on what you’ve done to develop them during the year
- Report on what is distinctive and show how they support value creation