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Company reporting and the art of leadership
Everyone complains that they don't like corporate reports, yet they never come up with an alternative way of presenting them. Nick Topazio of CIMA outlines the Report Leadership model developed together with PwC and design consultancy Radley Yeldar.The model represents an important opportunity for companies to communicate better with investors, potential investors and other stakeholders. Rather than be seen as a public relations exercise, it represents proposals for a fundamental cultural shift in the way companies present themselves to the outside world.
Corporate reporting needs to move in a new direction - well beyond the limitations of measurement and accounting. Our report leadership group believes that corporate reporting should be more relevant, informative and accessible. Reports need to provide investors with what they want, without inundating them with unnecessary detail.
Up until now corporate reports have tended to confuse rather than explain. They also need to move into the real world, recognising that, usually, most of a company's share price is not reflected in the value of its assets, but in its intangibles. A quarter of a century ago, 80% of the market value of the S&P 500 was reflected in the balance sheet, with 20% consisting of intangibles and future growth opportunities. Today those proportions are reversed. The company report is an opportunity to explain to the outside world why the market value of the company is not captured in its asset valuations.
Of course, much crucial company information is already presented in reports – but it needs to be set out much more clearly. There needs to be a market place analysis that positions the company information in its market context, so a company report should include a strategy progress statement.
How to design a report
Investors want a clear statement on a company's direction and a time frame over which to assess the achievement of strategic objectives. The group's strategy should underpin the whole report – and the strategy and priorities should be specified at the front and be the basis for describing current and future performance. Graphics should be used as well as text to express the strategy simply, consistently and memorably.
Readers of the report should understand who is responsible for which key performance indicators (KPI). Targets for each KPI should be presented clearly. The report should spell out what the risks to the business are and what the company's mitigation strategy is for those risks. Readers should understand the company's activities in their market context, read about market conditions and learn about the trends and factors affecting the company's sales within their market.
The report should honestly assess the competitive and macroeconomic factors, backed by externally sourced market statistics, with reference to both historic and forecast market data. External trends that are likely to affect the group’s business environment should be described.
Traditional financial reporting focuses on past performance. This is important for management accountability, but is inadequate as a guide to future returns. Investors need forward-looking context and non-finance information to support a company's cash flow projections. Products in the pipeline should be identified, with their market potential. There should be an outlook section for each operating division.
Starting points
A good starting point is for companies to remind themselves how they present management reports to their own boards. Broadly, this approach should be taken for company reports too. Of course, internal reports are likely to go deeper than a company feels it can go in a public document, but the style of explaining the realities, opportunities and threats facing the company should translate well to the company report.
Corporate reporting should be aligned with management reporting - it should be the top slice of what is reported to the board. This is not necessarily a matter of reporting less – or more – in the company report, but of putting things more clearly. Specifically, greater detail is needed (with the context) on revenue, costs, market information, pensions and debt.
Users want to assess management accountability from the annual report. They want to know if managers have protected and added value to investors' capital. Current and potential investors want to gauge future value growth. Before investors can start to model the future they need to understand how value has been created in the past. Financial statements usually fail to explain adequately the value generated for shareholders given the company's capital employed, risk profile and required returns.
Reports are too big but the solution may not be just to simplify and shorten. They should be readable and tell a story, not just be a box ticking exercise. And, importantly, reports need to get away from using complex language. Plain language should be used, with all acronyms explained. Style and presentation are important. It may be difficult to make reports shorter, but the front sections can be made more readable and concise.
Don't forget multimedia presentation
There also needs to be consideration of the use of multimedia reporting. Too often companies' online presentation of their reports is no more than placing the PDF of the report on their website.
Of course, companies must still comply with the regulatory requirements – and this must guide the content of reports. But compliance should not be at the expense of producing a coherent and comprehensible corporate report.
There is a fear that more transparent styles of reporting can lead to unintended consequences, such as giving competitors useful information. But transparency can bring benefits: for example, in helping investors understand why trading expectations have not been met. While regulatory requirements must be met, companies must begin to see their reports as an exceptional opportunity to portray what they are trying to do with their business.
Nick Topazio is the business and financial reporting specialist at the Chartered Institute of Management Accountants (CIMA). More information on the Report Leadership project is available at www.reportleadership.com
Number of comments: 1
AccountingWEB.co.uk 3-Jun-2008
Categories: Business Features
Times read: 1496
The article is completely correct in where it is heading - there must be far greater transparency and explanation, especially about the intangibles.
The thing that most readers want to understand from reports is the likely future performance and the risk to the future sustainability of the organisation, in its broadest CSR sense. Ideally they need to be able to compare such risks between different organisation. There therefore needs to be a common and repeatable method for understanding such risks, in terms of their ability to deliver their CSR goals (in other words their balance of economic, social and environmental objectives). Readers can then better judge the organisation on a mixture of its historical performance, its future goals and the risks to it not being able to achieve them.
Risk information needs to include not only be what is often currently reported, that is the risk register and strategies being adopted to address them. This is not normally fully repeatable and even worse can be influenced by internal considerations and politics. It also needs to include a consistent assessment of the behavioural indicators that are being experienced by people inside and outside the organisation. Why? Because it is these behaviours that truly drive performance and its sustainability, and they therefore provide excellent early warnings of what is likely to happen in the future.
I believe that the results of consistently applied behavioural assessments should become part of every report, so that readers can add this other dimension to what is currently proposed. Such methods are already available and need to be evaluated as their potential in providing the 'missing link'.
