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To some the introduction of the Strategic Report may seem to be of little consequence, with perhaps a change in title from Business Review to Strategic Report and just two new mandatory inclusions for listed companies. But the implications of the new narrative reporting requirements, together with the new governance reporting regulations, are more subtle and more effective than they first appear, representing a milestone along the corporate reporting evolutionary path. At FutureValue we think this milestone requires recognition and a matching development of our own annual report analysis and evaluation, the Strategic Value Profile, now suitably renamed the Strategic Report Profile. You can download an example of the new Profile Dashboard and Highlights page relating to a new 31/12/2013 Annual Report here.
In making the reporting of business model and strategy mandatory, alongside the already required reporting of risk, regulators are in effect asking a question of reporting companies: ‘Is your company able to present these key items as part of a robust, rigorous and intelligible framework of key narrative items in a manner that makes sense and informs investors of the realisability of future potential?’ Because if your company can’t and it doesn’t, these new mandatory items will on their own appear naked and questionable, leaving key stakeholders with important, unanswered and vexatious questions. And, to present these reporting items as part of an intelligible framework, companies need to demonstrate some joined up strategic thinking. This in turn will require the assembly of all these mandatory, ‘to the extent necessary’ and other unspecified reporting narrative items into a credible and compelling argument that hopefully represents more accurately what is going on in that company. And that is what makes the recent regulatory changes that much more subtly effective than first impressions might have suggested. It is also what many investors have long been searching for.
This wide-ranging if subtle impact may not have been explicitly the intention of Government and its regulators, but it will surely be the effect over time. Interest in narrative reporting from analysts and investors has been increasing in recent years to reflect the fact that, typically, at least 80% of the market value of a company is not on its balance sheet. That growing interest and the gradual realisation by Boards, executive and non-executive members, that they need to pay more attention to Annual Report narrative, will help drive the change that is making corporate reporting become much more than the traditional middle management chore it has been hitherto. This also now puts a premium on the quality of strategic thinking and its application to good effect in the business that need to be on show in the Strategic Report volume of an Annual Report. Sensitive to changes in the corporate reporting world, FutureValue is now marking this milestone of the reporting evolution with a revamp of its Strategic Report Profile of all major listed companies. This is in order to capture more visibly, more graphically and more comparably the inherent value of strategy related content for analysts and investors, in particular, as well as for all stakeholders.
So what are the changes to the Strategic Report Profile? The top, summary page is now in effect a dashboard that enables any user to assimilate more immediately and more visually the effective strategic value added by a company. There are now six charts on the re-designated dashboard and highlights page. Three of these charts provide granular, comparable and historical scores against the FTSE100 as a whole. But, probably the most interesting development of the dashboard is to be found in the three maps for each of the key mandatory strategy related items – Business model, Strategy and Risk. Laid out as compass cards, each map has a compass needle that indicates the relative usefulness of the data reported by that company. A really good reporting company will have its three compass needles pointing to the green zone on each compass card. These three optimal compass needles will signal a company that is presenting: a distinctive and value centric business model; a consistent, logical strategy focused on business goals; and, an evaluation of risk that addresses specifically the factors that would impact the capacity of the company to achieve its goals. Now, if you want to see what this means visually you can download here an example of the new Strategic Report Profile from one of the first 31.12.2013 Strategic Reports. Note that this is only the Dashboard and Highlights page for this Group. There are also another seven pages of detailed and underlying analysis.
So, how will your company fare? Will its first Strategic Report merit three needles in the green zone on its dashboard? If it does then it will almost certainly be presenting a full and complete effective strategic framework that will truly engage investors and analysts. How does your company’s score compare with the average scores and exemplar scores for the FTSE100? And how have your company’s scores changed relative to the FTSE100 over the last eight years?