IR Resources

Best practice guidelines for annual reports

With all companies now reporting under the Companies Act 2006, a number of reviews have been conducted into how companies are doing. In particular the FRC issued its own review of narrative reporting in October 2009. In the summary of the review ‘Rising to the challenge’ the FRC noted that:

‘Most companies are providing a good standard of information in their financial reviews, the description of objectives and strategies, and the provision of financial key performance indicators (KPIs). However, there are significant opportunities for improvement in the reporting of principal risks, trends and factors, contractual and other arrangements and non-financial KPIs. During our review, we found immaterial clutter detracting from important information most frequently in the corporate social responsibility (CSR) and risk reporting sections of the narrative.’

These comments mirror our judges’ findings in last years Best Practice Awards as follows;

1. KPIs
The judges felt that overall there is still room for companies to explain their strategy and the relevance of their key performance indicators more clearly, demonstrating how they drive their business day to day and help them differentiate themselves better within their sectors.

2. Governance
The judges felt that all companies could do better and would look for further improvements in 2010, with an emphasis on going beyond the boiler plate explanations.

3. CSR
The judges were looking for companies that really integrated their CSR reporting into the business review. the winner made a formidable attempt to integrate its social and corporate reporting throughout its annual report. UK companies could learn a lot on how to bring this challenging aspect of reporting to life from this report.

The FRC also provides a useful checklist for narrative reporting

Do’s and don’ts for companies

1. Do provide context for principal risks and uncertainties – are they increasing or decreasing… don’t simply include generic descriptions of risks that could easily be cut and pasted into another company’s report.

2. Do use tables to link principal risks to related actions to manage the risks… don’t shrink the risk content down to fit the table, instead expand the table to fit the content.

3. When articulating strategy, do ensure that you describe ‘what’ your goals are and 'how' you plan to achieve them… don’t make bland statements like ‘our plan is to grow’ with no further explanation.

4. Do use your KPIs to demonstrate progress against stated objectives and strategies... don't just tick the box by providing a KPI table that does not link to the rest of the narrative.

5. Do explain why CSR is important to the business… don't include information on employees, environment and social and community that is not important.

6. Do include non-financial KPIs to explain how the key drivers of the business are monitored… don't include peripheral measures such as number of employees just to tick a box.

7. Do provide an explanation of your business model – how you make money incorporating discussion of processes, distribution methods and structure… don't limit this to discussion of just products and services or resort to the use of undefined technical jargon.

8. Do support your discussion of relevant industry trends with external evidence… don't be afraid to quantify the trends instead of relying on bland statements like ‘the outlook for our industry is good’.

These are a very helpful starting point and we will be looking at how companies have taken this advice on board.

The role of the annual report continues to evolve. The report has long been the primary source of authoritative information about a company, but it now needs to complement and supplement other information sources, particularly the corporate website. The report also gives companies the opportunity to produce their own authoritative information, particularly important given the significant amount of unverified third-party information available on the internet.

These guidelines highlight annual reporting best practice from a shareholder perspective, taking into account the recent focus on narrative reporting and the implementation of regulations that affect the content, structure and format of the annual report.

The guidelines focus on the objectives, content and structure of the annual report, recognising its key role in helping an organisation to communicate its progress, performance and personality. In addition, as the Companies Act 2006 allows companies to provide shareholders with an electronic rather than printed report as default, we have produced guidelines for both print and online reporting.

These guidelines have been compiled with input from industry practitioners and representatives of the major users of annual reports – shareholders and industry analysts. They do not seek to interpret regulation or cover statutory requirements, but focus specifically on ways to ensure that communication to shareholders is effective. (For information on regulatory requirements please refer to the websites listed at the end of the guidelines).

What is the purpose of the annual report?

From an investor and analyst perspective the key objectives of an annual report are:

• to educate and inform shareholders (potential as well as current);

• to set out a strategy and report on how that strategy is being implemented;

• to report on performance during the period under review and put that performance in context of the company’s strategy and markets;

• to explain the risks and factors that could influence the performance of the business;

• to provide direction and clarity on corporate governance issues and to explain how decisions on governance are related to the performance and strategy of the business

• to fulfil other legal and regulatory responsibilities.

In addition, many companies see the annual report as an opportunity to build their corporate reputation with a wider group of stakeholders and showcase their company to customers, prospective business partners, staff and their local community.