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The Well-rounded Annual Report
A survey of the annual reports of the UK's top companies
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What makes a well-rounded annual report?
An introduction to the Well-rounded Annual Report survey,
What is wrong with annual reports?
by Ken Olisa, Chairman of the Foundation for Performance MeasurementIt seems to me that there are two fundamental problems with today’s generally distributed corporate annual reports:
- They are annual.
- They are generally distributed.
As an annual event, concerned mainly with performance covering a period of near history, paper-based annual reports are out of step with the contemporary desire for instant access to relevant data.
As widely distributed documents, annual reports can also be bland, as their authors tread a careful line between informing those with a healthy interest in a company’s performance – shareholders, whilst not unduly arming those with an unhealthy interest – competitors.
Information at web speedThe Internet has, in a very brief period, changed very fundamentally the reporting of company results. Today anyone with access to a screen can check share prices, benchmark company performance, read official and unofficial company news, join chat lines to debate their target’s affairs and tune into teleconferences which were once the exclusive preserve of analysts.
With up to the minute information widely disseminated at web speed, the concept of the traditional annual publication is ever more heavily questioned.
In fact the idea of annual reporting has been under fire for considerable time. In America, public companies have reported quarterly for a long time - a practice that has consigned the full year report to little more than an opportunity to add photographs of smiling staff and customers to previously released data.
Here in Europe, the annual reporting cycle remains well entrenched, but the introduction of Techmark by the London Stock Exchange (which offers quarterly reporting as an option) and the imminent arrival of NASDAQ Europe are clearly harbingers of a new order.
It might be easy to dismiss these innovations as typical of the techno-centric worlds from which they originate. But representatives of more traditional values are also questioning the very purpose of the annual report. Recently the Institute of Chartered Accountants of England and Wales (ICAEW) published a discussion paper as part of its Corporate Report – New Horizons project. In it companies are urged to provide more hard performance data:
The discussion paper calls for companies to set out, in their annual reports, their strategy for the creation of value and the progress they are making towards achieving that strategy, as indicated by those key performance indicators and measures used internally by management
Robert Langford, Head of Financial Reporting, ICAEW
writing about the paper Inside Out: Reporting on Shareholder Value
part of the 'Corporate Report - New Horizons' project (Nov 99)
Hidden behind the words of their consultation paper, the members of the Institute have put their finger on the second problem with annual reports – striking a balance between disclosure and confidentiality. Investors, rightly, demand increasing levels of detail about a company’s performance and they want to see that detail provided with increasing periodicity.
But to paraphrase Lady Bracknell, one should be careful when disclosing bad news. It might be considered unfortunate to admit to one’s investors that a revenue or cost programme is undershooting its targets, but it would be suicidal to expose the soft underbelly of under-performance to one’s competitiors.
Yet, on the other hand, in today’s web-speed world, if a company doesn’t set out the overall context within which its performance should be judged, it runs the risk of losing control of the entire communications mission, as uninformed interpretation and gossip replace measured dissemination of information.
The Well-rounded Annual Report Survey
It is against this backdrop that the Foundation for Performance Measurement commissioned this second survey of the annual reports of the FTSE 100 companies. The Foundation is a membership organisation dedicated to extending the scope of enterprise information beyond the conventional focus on internal, historic, financial, numeric and short-term data. In this survey, it poses the question: "Do the annual reports of Britain’s top companies provide readers with the information they need to make an informed judgement about investment in those companies?"
Our 1998 survey attracted widespread interest with articles appearing in the Financial Times, The Observer, The Daily Telegraph, Accountancy, Accountancy Age, Chartered Secretary and Company Secretary’s Review, together with coverage in regional newspapers and other management journals.
Jim Kelly of the Financial Times captured the general mood when he wrote:
… is it not true that most internal performance data remain confidential because they are of more use to competitors than shareholders? And might it not be true that the reason many companies do not publish such data is that they fail to track them?
And, up to a point, he does of course have a point. He went on to say:
Neither of these arguments should be used to frustrate better disclosure. The Foundation is right to encourage companies to disclose at least a flavour of the kind of indicators they use internally. …. If nothing else, such disclosure at least signals to shareholders that the board recognises the importance of performance measurement.Jim Kelly, Financial Times, 10th November 1998
It is a sine qua non that investors have a need to understand a company’s performance. As a Director of a number of companies myself it seems obvious to me that the bulk of that information should be trusted and meaningful, and should come from the company itself, rather than from commentators.
In this survey, the Foundation set out to establish some benchmarks to help Directors (and their ghost writers) understand just how their planned reporting compares to that of their peers.
Irrespective of its future form, the annual report remains a potentially powerful tool for competitive advantage. This document aims to provide its readers with the comparative data needed to define the role of their own annual report. I hope you will find that it sets the scene for the subsequent timely and detailed discussion of a company’s performance.
The Well-rounded Annual Report Survey - 1999
Communicating Business Performance to Shareholders
"There will undoubtedly be challenges to be faced in the new era such as deciding how to strike the balance between transparency and not giving away too much competitively sensitive information … These issues must be addressed, but they are not reasons for staying where we are."Sir Brian Jenkins, Chairman, Woolwich plc
Quoted in The 21st Century Annual Report, ICAEW (Nov 98)
The Well-rounded Annual Report survey asks the question: "Do the annual reports of Britain’s top companies provide readers with the information they need to make an informed judgement about investment in those companies?"
In the Foundation’s 1998 survey, we found that many executive commentaries made assertions about current, and particularly future, performance that were not backed up by meaningful performance data.
In refining the survey for 1999 we have therefore concentrated on identifying the quantified performance measures contained in these commentaries. The Well-rounded Annual Report Comparative Survey 1999 compares the results by company, by sector and by performance topic.
As an additional service, the Foundation is also offering companies the opportunity to order an Individual Company Evaluation analysing a specific annual report in detail.
The commentary sections of each report were reviewed and every instance of a quantified performance measure was noted. Each of these individual "citations" was then transcribed into a computerised database and various attributes were recorded to enable the data to be analysed by company, sector, topic and so on.
To subscribe to the survey
The Comparative Survey is priced at £320 (£376 inc. VAT) per copy. (Foundation members and previous subscribers: £240 / £282 inc VAT) The Comparative Survey and Individual Company Evaluation combined are priced at £1280 (£1504 inc. VAT) per copy. (Foundation members and previous subscribers: £960 / £1128 inc VAT).To place your order either e-mail the Foundation at info@fpm.com requesting an order form or click here to download the information sheet and order form and return it to us by fax on +44 (0)208 546 2105.
The Well-rounded Annual Report Survey - 1998
Ken Olisa, Chairman of the Foundation, comments: Effective communication about historic and more importantly future performance is key for public companies - for both internal and external audiences. Until recently the Foundation has focussed on internal communication, where there are highly sophisticated techniques and methodologies for identifying performance drivers and for visualising performance messages.In this reseach study, we turned our spotlight on the Annual Reports of the FTSE 100 companies. These represent the principal medium of communication with external audiences, and we wanted to find out how they compared with internal means.
The key finding was that external communication may be more glossy, but it is less sophisicated. In internal reports, management assertions and commentary are usually supported by hard data, and often this is provided as a trend of historic performance with a future target. This is not the case in Annual reports.
We found that there are only 19 performance topics mentioned in Annual Reports (see fugure 1 below) - yet only 2 companies mentioned all 19. Some companies mentioned as few as 10! And communication is not only about breadth, it is also about depth or meaningfulness. We measured meaningfulness on a scale of 1 to 4, where 1 means that the subject was merely mentioned in the commentary ("Customers are important to us"), and 4 means that the subject is measured against a quantified target ("Our target customer base for 1998 is 25,000 companies, which is a 10% increase on this year"). Figure 2 shows the overall distribution of scores (some companies had identical scores, so the number of individual data points is less than 100).
Interestingly we only managed to find targets in 5% of the possible cases, and only 40% of the cases reported trend data.
The report provides authors of annual reports with a powerful benchmark analysis of who does what best.
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