DISJOINTED narratives about corporate strategy are squandering an opportunity to boost investor confidence and sullying an otherwise improved set of FTSE 350 annual reports. That’s the verdict of EY’s review of the 2014 annual reports of FTSE 350 companies.
The Big Four firm’s analysis found that 85% of companies are complying with all or all but one provision in the UK Corporate Governance Code, while fewer than one in ten (9%) companies clearly articulated the links between their strategy, business model, key performance indicators, approach to executive remuneration and principal risks.
Ken Williamson, EY partner and head of corporate governance in the UK & Ireland, said: “Shareholders use annual reports to gain insights into both the progress of the business over the year and its future direction, and so it’s important they can see how things like risks and remuneration relate back to the company’s strategy and objectives. However, what we are seeing at the moment is often disjointed, unconnected narratives, which don’t explain how key performance indicators relate back to the corporate strategy.
“By using what can sometimes feel like a ‘template’ approach to the annual report, UK PLCs are missing an opportunity to provide a rounded view of their business and instil their investors with greater confidence.”
He added that while it was encouraging that companies kept pace with the swathes of new regulatory requirements introduced over the past five years, the annual report – when done well – should be far more than a legal or marketing document.
EY’s probe discovered that the average FTSE 350 annual report is some 167 pages long, up on last year and significantly up from the 148-page average in 2012 – which pre-dated the introduction of new strategic reporting regulations and the director’s remuneration regulations.
The accountancy giant stressed that as new changes are set to be enacted next year, with the introduction of a viability statement and disclosures on slavery and human trafficking, there was a risk that reports will get even longer.
To avoid the annual report becoming clouded with less relevant information, the firm advises companies to keep it specific, focus on what they have done and will do, instead of repeating sections of the report which rarely change from year to year. This approach is already happening in pockets of the FTSE 350, but more can be done to improve the situation, especially in nomination committee reports.
EY’s analysis was based on a sample of 100 annual reports of FTSE 350 companies with September-December 2014 year-ends. The sample was weighted 38% FTSE 100 and 62% FTSE 250 companies.