THE quality of reporting by the UK’s top public companies has slowed despite greater economic uncertainty and increased investor demands for better disclosure, new research has found.
It seems that although investors continue to call for brevity and clarity in annual reports – now extending to an average of 181 pages – many FTSE companies are paying lip services to some core areas of interest such as viability, culture and business models.
Although almost all of the companies analysed in EY’s research mentioned culture in some form in their annual report, only 9% of reports provided an explanation of how the board monitors or measures culture.
Corporate culture has become a priority for regulators and investors in the wake of misconduct issues such as the rate rigging scandal. Research by the UK accountancy regulator, the Financial Reporting Council, recently found that strong values were inextricably linked to long-term value.
“Many stakeholders, investors and regulators are hungry for new and greater insights into corporate culture and other such non-financial information. They recognise that culture is fundamental to a company’s performance, the risks it faces and how the business is valued. Yet the reality is that insights into culture remain largely absent from most corporate reports,” said Hywel Ball, EY’s managing partner for assurance in the UK & Ireland.
Only ‘fractional’ improvements were found in the quality of some core disclosures such as business models and links across the report, according to EY which reviews FTSE 350 narrative reporting.
EY found that 59% of the FTSE 350 companies analysed had explained how the company makes money in their business model, but it was just a 1% improvement on last year. Only 12% of companies backed up their business model through links to strategy, key performance indicators, risks, and remuneration, a rise of 3% on last year’s research.
“The limited improvement in business model disclosure, which is one of the litmus tests for a good annual report, is disappointing,” said Mala Shah-Coulon, executive director in EY’s corporate governance team.
Disclosures on viability also fell short of expectations. EY said many companies were conservative in their first year of reporting on their viability and that more detailed information was needed around the disclosure and quantification of specific scenarios and assumptions.