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co-authored with Neville Wells
Insight can be found in many places; in a classroom, a conference hall and, as ever, in a pub.
At a convivial conversation last Monday the question came up, “Why are some companies producing annual reports that are just so much better than others?” And the conclusion boiled down to, “Because they want to, because they can and because they know the value of getting it right”.
Targeted reporting requirements demand the attention of directors far more than in the past. Addressing them properly may lead to refreshment of strategic thinking, re-visitation of the business model, redefinition of the goals of the business, review of the consequent strategy and reconsideration of governance processes.
There are those that fudge this; they lash something about ‘Delivering value’ to a nice ‘business model’ graphic and a bunch of generic financials labelled as ‘KPIs’, seasoned with the risks from the prospectus published a few years ago and all held together by some post-rationalised icons, a rather anodyne Q&A, pretty case studies and big pictures with ‘messages’. And, rather surprisingly, some of these ‘pigs in wigs’ win awards.
Then there are others who are strategically literate, put in the hard yards, keep on top of developments, join everything together in a logical and linked up way, with useful case studies, powerful messaging and good navigation that all adds up to a row of insightful beans. These win awards, too, if less frequently than they should.
Much more importantly, ‘though, what these latter companies also do is demonstrate, in a compelling and convincing manner, how the company is going to create sustainable value in the long term.
More often than not, this is because the responsibility for the content really does sit in the Boardroom, where it gets the attention it needs (the ‘want to’) – they know this stuff intuitively… The reporting process gets much needed horsepower and this lets the managers manage it (the ‘can’). Real value accrues (the ‘getting it right’).
We have tracked strategic reporting over the last decade and have established a significant correlation between exceptional reporting content and market performance. ‘Getting it right’ can, at best, engender a positive uptick in market performance; at the least it will lead to a reduction in market volatility. Some Boards and their senior internal advisers understand this.
But, of course, it is not the process of effective reporting itself that is responsible for this. It is the demonstration of management’s ability to deliver value that is the truly persuasive factor. Exceptional reporting starts with having the basis upon which the narrative can be created, then putting it all together properly to reflect reality.
Producing the Annual Report is often seen as a burdensome compliance task to be got out of the way quickly and at minimal cost. It is, for many, a delegated middle management chore. Silo-ed creation of the various inputs to the narrative content by people lower down the strategic knowledge tree hampers the presentation of a logical and holistic view of the business. If they knew what the Board knew they would probably be on the Board! The origination and production of the Annual Report remains at best a diverse process; in many cases it is just haphazard.
Our conversation turned to the reality that many companies appeal for the help of their external advisers in the hope that they will do the trick for them and compensate for any lack of internal capability. We looked at a map of auditors against the quality of the narrative content of the companies they audit and saw a normal distribution – some good, some bad and a large dollop of average. One of the accountants present opined that auditors have little time, budget, remit or even the capability to advise effectively on the content of the narrative chapters – and, anyway, advice in this area amounts to a conflict of interest.
If auditors can’t help, the Annual Report agencies are the next advisers in line. Many have revenues impaired by the demise of large print mark ups, reduced print runs, sharper procurement and latterly the precipitous fall from grace of costly full digital Annual Reports. Salvation is being sought in the form of fee-generating advisory services, which used to be largely subsidised by margins from elsewhere. But the world has moved on, the complexities and requirements are more rigorous. Many resort to, or can only afford, junior or inexperienced personnel to give advice on the origination of thinking and copy around corporate strategy and complex business issues – especially on smaller accounts.
Yet client companies listen because they know no better. If nature abhors a vacuum, something has to fill it and it does. Our map of agencies against respective client narrative quality proved a real eye opener. This route may get the job done, but taking the easy way out means that those exceptional benefits remain elusive.
Maybe more companies need to learn to survive on the shores of the corporate reporting ocean. We believe that companies need the internal capabilities that will enable them to leverage the bigger prize. Not a bigger team but, starting in the Boardroom, a team with the capability to produce quality content, challenge advice and understand process so that they control their own reporting projects effectively from end-to-end and reap the benefits.
It is all a matter of teaching people to fish, not making them buy herrings once a year.