If you’ve ever had to judge an annual report quickly, you’ve probably learned
to appreciate quality. Deloitte partner Isobel Sharp has done her time on such
judging panels and says the winners are those that best describe their business.
“A good report sets out very clearly what its segments are and gives information
about the markets in which it is reporting,” she explains. “I want you to tell
me about your competitors, your relative market position, your order book. I
want you to tell me about the people and the key players. Then the whole report
has to tie together.” Too often, Sharp says, the highlights page doesn’t exactly
correspond to the segmental analysis, or to the chief executive’s report.
Presentation also matters. “It has to be visually interesting, but that
doesn’t mean just including pictures of employees smiling at you,” Sharp says.
“There should be charts and graphs that give the message clearly, rather than
lots of text. You also need a decent size font and should avoid using shiny
Producing a good annual report means taking the needs of readers into
account. “We have done research among both equity and bond analysts,” says David
Phillips, ValueReporting partner at PricewaterhouseCoopers. “Their plea is that
companies make sure the basic information is given to them. For example, the
people trying to analyse companies from the bond market perspective really want
to know what the proper cash flows of the business are, what all the borrowings
of the business are (in one place), and when those borrowings are being repaid
on a year-by-year basis. On the equity side, again they have some basic
requirements. They really want to know how growth is being achieved and whether
it is organic or via acquisition; they want to know the return on investment.”
PwC has developed a reporting model – the ValueReporting Framework – which
aims to deliver a complete picture of a company. The model consists of four
blocks which build on each other. The first is the market overview, which sets
out the external operating environment. The second reporting block – the
company’s strategy, its goals and objectives – naturally follows on. The way
that the company delivers its strategy is then covered by the third block, which
PwC calls “value-creating activities”. These include activities related to
recruitment and retention, innovation, brands, the supply chain, and
environmental, social and ethical issues. Finally, the fourth reporting block –
financial performance – builds on all that has gone before, explaining the
outcome of the company’s strategy, activities and market environment.
“Most investors would say that the market space in which the company operates
and its strategy are the two most important elements of information,” says
Phillips. “For example, if a company has a dominant position in the marketplace,
and the market is growing very quickly, you don’t have to be Einstein to work
out what the opportunities for that company to succeed are likely to be.”
Throughout the report, companies need to tell a coherent story, Phillips
says. The financial information should be supported by other information that
helps readers put it in context, such as relevant key performance indicators.
These might include customer satisfaction indices, measures of innovation or
employee retention figures. Data enabling the company to be compared against its
peers is also particularly useful.
One company that has developed a powerful reputation for the quality of its
annual reports is Geest, which has won ProShare’s award for the best annual
report by a non FTSE-100 company for the past five years. Asked what makes a
good annual report, Michelle Doughty, chief executive of ProShare, said: ”
Helpful descriptions of the company’s business, its objectives and strategy, and
the industry and markets within which it operates.” Key dependencies, relati
onships and risks should be identified. “The report should give a comprehensive
picture of the company’s financial performance, likely future performance and
trends,” Doughty said. “Clear style, ease of use and effective design are also
Paula Cooper, Geest’s group communications manager, says work on the annual
report begins about six or seven months before publication. “We try to give a
balanced picture of our business – the upside and the downside. The market
reports have been important for us and our investors. We put in a lot of
information to say this is why you should still be investing in Geest. It’s
still a growth story. We give all the reasons why we think this is the case. On
the other hand, we also spell out the risks to the business very clearly. You
can’t spin it so it’s all a bed of roses, because business isn’t like that.”
Geest’s 2003 annual report and accounts ran to 120 pages. Helping to guide
readers through the material is a priority. “For the past couple of years, we
have used tabs down the right-hand side so people can get to the relevant
information relatively easily,” Cooper says. “The design is also important to
highlight messages and to get a corporate feel for the whole book, but it’s
wrong to be completely design-led. People can see through design. What they want
are facts and figures.”
Geest has worked closely since 1998 with communications consultancy Merchant
to produce its annual report. “We have taken them from doing a good but fairly
traditional report to one which really adds value to the reader,” says Robert
Moser, managing director of Merchant. The process of creating an annual report
begins with thinking about what information will excite a potential or current
investor about the investment proposition. Merchant conducts considerable
research with analysts in this respect. “With Geest, we went to the investment
community and talked to them about their specific needs,” says Moser. “We found
that nobody in the chilled food marketplace was publishing real, hard market
information and we decided that a good positioning for Geest would be to enter
the space of being the people who understand the market inside out. Geest now
writes a pretty chunky market report each year containing data about the market,
and it has been broadened to include mega trends in the whole
Analyst research is still conducted each year, at the start of the annual
report project and at the end of it. “We find out the company’s reputation in
the City and what the audience is asking for in terms of their reporting needs
and how they perceive the clients’ competitors’ reports,” says Moser.
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If all this sounds like rather a lot of work, consider an experiment
conducted by PwC with Danish business Colorplast, a company that is widely
recognised as a world leader in presenting a total picture of corporate
performance, not just financial performance. PwC took Colorplast’s 2002 report
and accounts and edited it down, producing a revised version that omitted all
the quantified, non-financial data. This new version complied with accounting
standards and included a typical annual report narrative, but it did not contain
any of Colorplast’s normally reported metrics relating operational performance
to economic outcomes. PwC then gave one or the other version to each member of
Schroders’ investment team to use to develop (without conferring) a forecast of
revenue and earnings for the next two years, and a buy/sell recommendation for
Those with the full information produced a lower average revenue and earnings
forecast than those with the edited data. However, those with the full
information were overwhelmingly in favour of buying the stock, whereas nearly
80% of those with the limited information recommended selling the stock.
The more detailed annual report created a rounded picture of the company and
its prospects, and one that supported the buy recommendation. “This was a
powerful piece of research,” says Phillips. One well worth remembering when you
start compiling your next annual report.
FOUR OF THE BEST
Geest – market overview
PwC’s Trends in Corporate Reporting 2004: Towards ValueReporting identified
Geest’s 2002 annual report and accounts as illustrating best practice in terms
of the market overview it provided. This is because its report does the
– It provides an overview of the fresh prepared foods market and the
estimated predicted growth in the market (40%) over a four-year period.
– It explains the reasons for Geest’s growth forecast, providing both
numerical and qualitative support.
– It supports each reason given with graphs and data from credible
– It graphically illustrates the growth of the fresh prepared foods
market compared with other key retail sectors.
“Whether you use company-generated information or other information
and quote the sources doesn’t really matter,” says David Phillips,
ValueReporting partner at PwC. “But you need to set the scene and help the
outside reader understand what is driving the thinking of the management.
Cadbury Schweppes – strategy
Cadbury Schweppes’ 2002 annual report illustrates best practice in terms of
reporting the company’s strategy because:
– It establishes three clear financial targets that have been communicated
consistently for several years – earnings per share, free cash flow and total
shareholder return (TSR).
– It links internal targets with externally reported financials.
– It establishes a clear peer group (including UK and non UK-based
companies), against which TSR performance should be assessed.
– It provides an assessment of performance against specified targets and the
chosen peer group.
“Consistency in reporting is important,” says Phillips. “Companies sometimes
ask what they should do when the metric they are using turns against them. But
that’s the thing – when it turns against you, that’s what you have to explain.
Once you have gone down this track, it is difficult to go back.”
BT – creating value
PwC identifies BT’s 2003 annual report, its 2003 annual review and summary
financial statements and its website (www.btplc. com/betterworld) as indicative
of best practice in terms of reporting value-creating activities. This is
– Demonstrates strong commitment to its workforce and the importance of
investing in, managing and rewarding them.
– Explains the value of a quality workforce candidly, explores the link
between company leadership in employment issues, and an ability to recruit and
retain talented employees.
– Aligns the key performance indicators (KPIs) with the strategic value of
the company and its primary stakeholder groups.
– Explains clearly how the KPIs were developed through consultation with
investors, customers and employees.
– Summarises the group’s historic performance around each KPI and establishes
a target for the coming year.
– Expands on each KPI to provide greater clarity on performance.
– Adds credibility to reporting through independent benchmarking.
“This is the real soft area of reporting,” says Phillips. “Some people want a
standardised way of measuring these things (such as people management). But the
key point is that companies should report what they use to run the business.”
Barclays – financial performance
Barclays’ 2002 annual report is commended by PwC for its reporting of financial
performance because it:
– Establishes clearly the primary financial goal in terms of TSR relative to
a defined peer group against which the group benchmarks itself.
– It graphically illustrates the group’s TSR performance against the FTSE-100
and chosen peer group.
– Identifies TSR as the best way of evaluating value-creation, as well as
describing supporting performance indicators such as economic profit, absolute
value and costs.
– Establishes targets for each indicator for 2003 and graphically
demonstrates performance against established targets over time.
– Explains how the group allocates economic capital to each business unit to
ensure risks are commensurate with return, while graphically showing allocation
of economic capital by both risk type and business.
“Reporting can be tedious, and I am a great believer in graphics,” says