When drafting annual reports, preparers face a difficult balancing act. They must satisfy regulators and provide a comprehensive overview for stakeholders, but too much information can make a report difficult to digest.
The annual reports of FTSE 350 companies now average 186 pages, up 26% over the past five years, according to EY’s most recent study on the topic, Annual Reporting in 2016–17: Broad Perspective, Clear Focus. And that means report preparers must work harder than ever to make sure they remain focused and relevant in their reporting.
A similar Deloitte study that has been published for the past 12 years examines annual reports of 100 FTSE companies of various sizes (some companies in the Deloitte study overlap with companies in the EY study). While FTSE 350 companies included in the Deloitte study had annual reports averaging around 180 pages, the reports of smaller listed companies Deloitte analysed had reports that averaged around 120 pages.
Twenty years ago, the average report was 43% narrative and 57% financial statements. Narrative now makes up 61% of the average report included in the Deloitte study.
While growth in report length can often be tied to new or increased regulatory disclosure requirements, lately companies are also being challenged to demonstrate a broader contribution to society. As public trust in business has declined, companies have been expected to engage with a wider group of stakeholders.
EY and Deloitte offer tips for preparers looking to streamline their companies’ annual reports, particularly when it comes to structuring that increasingly important narrative. Among them:
Let strategy and business model guide the narrative of the annual report. “It all comes back to linking very clearly to your strategy and business model,” said Mala Shah-Coulon, associate partner in EY UK’s corporate governance team and one author of the EY report. “If you are able to link things back to your strategy or your business model, then you will be able to remain cohesive and also clear and concise.”
Although 60% of the reports EY reviewed clearly linked principal risks to strategic objectives, only 8% of companies linked all the way through from strategy to KPIs, risks, and remuneration.
“A company’s purpose should be more than simply an explanation of what the company does,” Veronica Poole, Deloitte’s global IFRS leader and UK head of corporate reporting, wrote in the firm’s Annual Report Insights 2017 report. “But it should also reflect consideration of how value creation is sustainable, in the longer term, for its broader stakeholders.”
When it comes to the increasing pressure to publish an annual report for a wider range of stakeholders, companies can manage report length by making sure that information relates back to strategy.
“If a company is going to talk about culture, it should cover what the culture is, why it is relevant to the strategy and business model, how it is measured and assessed, and, if relevant, what is being done to embed or change the culture,” Shah-Coulon said. “You need to have a materiality filter to ensure that disclosures that are present are relevant to your readers. The filter should be to the extent those disclosures will help inform their assessment of the company’s development, its position, or its prospects.”
Answer essential questions. To help preparers ensure they are still covering key information in their reporting, EY has created a litmus test of essential questions a reader should be able to answer after reading a company’s annual report. To provide a complete picture of the business for stakeholders, report preparers need to address the following:
- Purpose and strategy: Does purpose clearly inform strategy, and are a company’s strategic objectives clear and measurable?
- Business model: Most importantly, how does the business model help deliver the strategy?
- KPIs: What are the key metrics used to measure progress against the strategic objectives?
- Risk appetite and principal risks: What risks are key to the successful delivery of the strategy?
- Risk management and internal control disclosures: How are principal risks assessed, and how do the company and the board manage them?
- Viability statement: What is the process and time frame used to assess the viability of a company?
- Governance: What did the board do to govern the company, including specific governance issues that arose and how they were addressed.
Don’t duplicate the previous year’s report. It might be tempting to use the previous year’s annual report as a template. But last year’s report format may not be the simplest way to communicate a company’s current prospects. While consistency in reporting is important, it’s not always necessary to include process-oriented information that doesn’t change year over year.
“If you’ve set out the five-year strategy three or four years ago, you may not need to repeat all that,” said Shah-Coulon. “What you would do is say, ‘This is how we’ve progressed, these are the challenges we’ve faced, this is how we’ve measured the achievements, and these are the future actions we are going to take.’ The problem is that it’s an increasingly time-consuming process to produce this, and the temptation is very much to roll forward what you had last year and update it.”
Shah-Coulon suggests companies take the opportunity to look at their annual reports with fresh eyes. “If you actually took a blank sheet of paper and said, ‘If I were doing this today, how would I start?,’ I think that could be a good way to reduce page length. The temptation is to layer more and more information as rules change or as your company and business model change, rather than taking a complete fresh look.”
Look to successful case studies. Of the FTSE 350 companies that EY analysed, HSBC had the most dramatic reduction in length between 2015 and 2016, reducing its report from 502 pages to 286 pages. HSBC took several steps to reduce the length of its report, including:
- Setting a goal: The company set a goal of 20% reduction in pages across departments. Everyone contributing to the report had to present a plan to achieve this goal (or justify why they wouldn’t be able to meet it).
- Using an editor: Editorial guidance helped report preparers tighten wording, apply a consistent style, and eliminate duplication of information.
- Streamlining disclosures: HSBC focused on satisfying regulatory requirements and highlighting information that would be important to stakeholders, and reevaluated the importance of information that didn’t fit those criteria.
- Reassessing information: Some sections included in previous reports, such as the detailed index, were moved online.
“The lens that companies need to bear in mind when providing disclosure is that these documents are primarily for shareholders and investors,” Shah-Coulon said.
Even now that annual reports are increasingly published for a wider audience of stakeholders (including employees and customers), the duty of the company remains to “provide enough information and balanced information to act as a hook for investors to ask questions,” she said.
Remember: The only thing certain is change. The EY and Deloitte reports addressed the uncertainty that now exists in the wake of the Brexit referendum.
As disclosure requirements evolve and companies are expected to engage with a wider range of stakeholders, it will become increasingly important to craft annual reports with clear, concise messaging.
—Sarah Harvey is a US-based freelance writer. To comment on this article or to suggest an idea for another article, contact Neil Amato, a CGMA Magazine senior editor, at Neil.Amato@aicpa-cima.com.