The annual reports of FTSE 350 companies have increased in length by 25% over the last five years.
With additional reporting requirements in the pipeline, particularly around the board’s accountability to its wider stakeholders, companies will need to work harder to ensure they stay clear, focussed and relevant, says EY.
EY’s review of narrative reporting Annual reporting in 2016 / 17: Broad perspective, clear focus, revealed the average FTSE 350 annual report is now over 186 pages long, compared to 181 pages in 2015 and 148 pages in 2012.
Room for improvement
The quality of annual reporting remains high but there is room for improvement, particularly in terms of ensuring that a company’s reporting is focused and specific to its strategy and operations. Only 8% of the annual reports fully articulate the entire linkage between the company’s key risks, remuneration and key performance indicators (KPIs) to their strategy. This is a decrease from 12% last year. In addition, 41% of annual reports communicated their company’s broad purpose, but only about half clearly linked it to their strategic objectives.
Mala Shah-Coulon, Executive Director in EY’s Corporate Governance team commented: “These linkages are central to ensuring reports remain focused and clear. FTSE 350 companies have largely kept up with new issues of interest to shareholders and stakeholders, such as culture, purpose and sustainability. However there is still room for improvement around areas such as viability statement reporting, stakeholder engagement and, in some cases, governance reporting to ensure disclosures are sufficiently specific to the company and focused on actions and outcomes, rather than just processes.
“With annual reports getting longer and additional reporting requirements in the pipeline from the Government’s recent Corporate Governance reform proposals, companies need to ensure they are using the annual report to tell a clear, concise and coherent story about their business. The annual report is a key document for companies to set their stall out to shareholders on how their business is being run for the long term, taking into account their interests as well as those of key stakeholders.”
Risk of viability statements becoming bland and boilerplate
The report also highlights areas for improvement around viability statements and says there is a risk of these disclosures becoming increasingly boilerplate. EY says that that many companies have been conservative in reporting on viability and that more specific information is needed around the quantification of specific scenarios and assumptions. The majority of companies analysed chose a viability period of just three years (81%), compared to 3% who chose four years and 16% who chose five years.
Ken Williamson, head of EY’s UK Corporate Governance team comments: “Viability statements seem to have stagnated, and in some cases, moved backwards. In our sample of 100 annual reports, the average reported time horizons have reduced since the first published statements. We would like to see more engagement with the investment community to ensure that these statements remain fit for purpose. Otherwise there is a risk that the viability statement will become a bland, boiler plate disclosure similar to the going concern disclosure it was designed to enhance.”
Wider stakeholder engagement
According to EY’s analysis, 81% of the annual reports explained who the organisation’s key stakeholders are and in some cases how the company engaged with them. However very few companies disclosed the topics discussed or feedback received and the company’s response. Stakeholder engagement was also rarely discussed in the governance report. Under recent proposals companies may need to disclose how boards take into account this engagement as part of their strategic decision making.
Hywel Ball, EY’s UK Managing Partner for assurance comments: “Boards are increasingly being challenged on how they are creating long term and sustainable businesses. However, a lot of the value generated by companies isn’t currently captured in today’s financial reporting. For example, intangible assets such as culture, human capital or intellectual property are absent from many corporate reports, leaving stakeholders with an incomplete picture of a company’s true value. This is also contributing to a widening trust gap between business and society.
“The Coalition for Inclusive Capitalism and EY are bringing together CEOs from over 20 global companies, to address some of these important issues. Through this initiative – called the Embankment Project for Inclusive Capitalism – we hope to develop a model that will help companies to better communicate the long term value they are creating for their stakeholders.”