Last week we participated in a webinar on annual reporting organised by the IR Society. The topic: the main themes that have emerged through the current reporting cycle – and those we expect to dominate the next. 

What we’ve seen during the 2019/20 reporting cycle

This was, without question, the year that stakeholder engagement came to the fore. It had already started to get traction from the updated guidance to the Strategic Report, issued in 2018, but its prominence in 2018 UK Corporate Code, which most companies reported on for the first time, gave it new impetus. A large number of reporters introduced additional pages, and many presented the disclosure as a table, describing the stakeholder, method of engagement, issues raised and outcome. In general, companies were good at listing the engagement channels, but more reluctant to talk about actual issues raised and the final outcome. 

It’s possible that the focus on stakeholder relationships came at the expense of further information on how companies are developing the resources that underpin their business model. Some reporters dropped this altogether, but we believe they are essential disclosures. The narrative report is the only place that reporters can highlight the importance of intangibles and companies have struggled to explain how they manage financial capital and their capital structure to ensure the long-term success of their business model. 

Purpose continues to grow in importance and informs key aspects of annual reporting. Radley Yeldar was an early proponent of purpose, but even we are surprised by the extent it has been embraced by the reporting world. Purpose, or a shorter version of it, now features as the strapline for around 25% of FTSE100 reports. Within the strategic report, more companies show how it underpins their business model and link it to their strategy. It’s also a principle of the new Code with boards asked to establish the company’s purpose, values and strategy, and satisfy itself that these and culture are aligned. However, we seen less on purpose in governance reports, with a lot of companies preferring to cross reference mentions of purpose in their strategic report. 

The FRC has made a lot of effort to drive consistency between the strategic report and governance report, but this has presented some unintended challenges. Overlapping themes have caused some confusion with reporters wondering, for example, where they should put their stakeholder section and purpose. Most went for the strategic report, but others opted for the governance report. Our view is that the main disclosures should appear in the strategic report with the governance report providing a board perspective.

This was the first reporting cycle for the new Code and, while the majority of reports we’ve seen so far have organised their report around the new sections, the ordering of principles and provisions left some company secretaries scratching their heads. For example, the new Code asks companies to outline board activities before they’ve outlined board roles and board evaluation is not the responsibility of the Nomination Committee, while the other provisions under ‘Composition, Succession and Evaluation’ fall within its remit. But these are practical considerations that will be ironed out in future reports and there is now an opportunity to provide more insightful governance reporting.

Looking ahead: themes for the 2020/21 reporting cycle 

The Stewardship Code (2020) is aimed at the investment community but has implications for corporate reporters. We expect the annual report to play a key part in helping companies convey material environmental, social and governance (ESG) factors, which investors are being asked to engage on. Companies will need to take a fresh look at their ESG reporting to make sure it is fit for purpose and provides a clear picture to investors.

If stakeholder engagement was the main theme of this cycle, then ESG will be the big theme of the next cycle. In part, this will be driven by the Stewardship Code, but environmental reporting has received further clarity in the form of the Government’s Green Finance Strategy which sets the direction for climate change regulation and action. Large asset owners and listed companies are expected to report in accordance with the requirements of the Task Force on Climate-Related Financial Disclosures (TCFD) by 2022.

A few weeks ago, environmental reporting may have come at the expense of social reporting, but not anymore. COVID-19 has shown how interdependent and interconnected companies and their stakeholders are. Companies will be expected to explain the measures they took and how they made decisions to support employees and stakeholders during the crisis. Regulators want to see more transparency on actual stakeholder issues raised and outcomes, which will be a big change for many reporters. COVID-19 could accelerate this during the next reporting cycle, but we’ll wait and see if this represents a sustainable move towards more transparency on stakeholder engagement.

While purpose now permeates every aspect of reporting and features in the Stewardship Code, companies have been criticised for the quality of their purpose with too many that look like marketing slogans. We advise a rigorous approach to formulating these with input from the entire organisation led by the board. Reporting on culture also presents a challenge for companies because it’s all about how a company is run and doesn’t lend itself to objectives and targets. In a company with a strong culture, employees instinctively know what action to take because they are steeped in the ethos of the company. Descriptive and qualitative reporting on culture would be a good place to start. 

Finally, COVID-19 will be a key theme. Many companies have cut dividends and many more will reset their investment case going forward. We expect to see how companies have adapted their strategy, and in some cases their business model, in the short to medium term. Readers will expect more clarity and context around decisions that originated from the crisis. These could include delays to capital expenditure, cost cutting programmes and sales of assets. Conversely, we shouldn’t forget that some companies will emerge from the crisis in a position of strength and will be sharing plans that seized on opportunities.     

By Sean Bride  

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