Corporate Governance: When annual reports contain nothing but puffery

In the days when IBM was a technology colossus bestriding
the globe, it was not supposed to be possible to be anywhere in an IBM location,
even if resting underneath a desk in mid-afternoon, where you could not see a
sign exhorting you to ‘Think’.
The same should happen to finance directors this year.

But while ‘Think’ is not a bad one, the legend that should be stuck up on
office walls this year is the old election slogan: ‘It’s the story, stupid’.

We are currently seeing one of those great tides that appear out of explosive
events. One of the cries of ordinary people through the economic crisis has been
for someone – anyone – to explain what has been going on, what is going on now
and what is likely to go on in the future. They want an explanation of what, to
them, is a paradox. People in business seem to be calmly saying that all of this
mess can be explained. But the ordinary public finds itself as baffled as ever.

Though FDs may find some of this uncomfortable, they should latch onto the
drive for simpler explanations and turn it to their advantage. For one thing, it
expands their empires. They are typecast as the bastions of financial integrity,
of strategic wisdom which derives from the integrity of the figures, and as
protectors of good corporate governance. No bad thing for an FD to be viewed in
this light, but it doesn’t go far enough. There is another role they can build
in the aftermath of the economic crisis; that of narrator and facilitator. They
need to become the link, not just with investors through the traditional
investor relations pattern, but with the public at large: they need to make
themselves the tellers of true stories of what the company is up to, what it is
doing and what it hopes the outcomes will be.

It is interesting that one of the great success stories that stands out in
the recession has been that of retailer John Lewis and its upmarket food
offshoot, Waitrose. It has been terrific at explaining its business model and it
has known that its story is one the public will identify with. The company’s
management knows the partnership structure is different, that equal sharing of
bonuses will compare well with banking stories and that the clear link between
good service, quality of experience and its business model has – and will –
stand it in good stead. The only surprise, given its success over the years at
putting across this simple narrative and reaping the hugely profitable benefits,
is that so few other organisations have followed this lead.

The problem is that most businesses still don’t see it this way. They push
out annual reports containing blatant puffery at the front, flannel in the
middle and then a mass of figures to fill up the sleep-inducing ballast at the
back. Businesses derive little benefit from any of this and it is a missed
opportunity for the FD to make clear how important they are to the business.

The real task, as has become increasingly obvious over the past year, is to
make the stuff readable. Narrative is how you communicate. Readable narrative is
how you gain the benefits. The Financial Reporting Council has done its bit in
trying to show people how to remove the jargon and speak plainly. Now the
Institute of Chartered Accountants of Scotland (ICAS) has produced a short,
practical guide to how all this can be done. It is called Making Corporate
Reports Readable and it does just that. It has been masterminded by Hugh
Shields, recently of Barclays Capital and now head of external reporting at
Deutsche Bank.

Not surprisingly, it takes the annual report of a large international bank as
its model. It puts the whole thing together in 28 pages, which is all anyone
could want or need.
The bulk of the figures are elsewhere. What the 28-page report concentrates on
is simple. It talks about what the business does and how it makes its money. As
it is designed to be the centrepiece of the results announcement, it becomes the
directors’ story with the boilerplate eliminated and the intimidating mass of
detailed figures available elsewhere, and by other means, if you want it. Page
headings give you the flavour: ‘Our Performance’, ‘Our Business Model’, ‘Most
Significant Accounting Policies’, ‘Significant Notes and Judgements’, and the
outlook for the ensuing year.

This is where the future lies. Legally, any company could implement this
model of report now. It makes people think, both inside the organisation and
outside. It provides clarity. And, most important of all, it creates a simple
understanding for everyone, from the business world and the layman’s, which can
only boost credibility and, of course, profits.

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Robert Bruce is a leading commentator on accountancy issues