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A good holiday following the 2014 Accolades event on 2 October has afforded an excellent opportunity for reflection on the Accolades and not just on the winners but also on those who made the long and short lists for the six Accolade awards. This was the seventh year that we have used strategic value analysis of Annual Reports as the basis for evaluating and ranking listed companies, so it felt like a good time to take stock.
The growing consensus around the importance of narrative in corporate reporting and the ascendance of the Strategic Report have together confirmed to us that FutureValue’s focus on strategy for differentiation of companies according to their declared prospects has been right all along. But there are two specific insights that indicate we have truly been on the right track. One insight comes from the mission of the reporting regulator, the FRC. The other is to be seen in the collective market performance of all the companies short-listed for FutureValue Accolades over the first six years.
At the Accolades seminar in early October Melanie McLaren, FRC’s Executive Director of Codes and Standards, affirmed that the FRC’s mission is investor-oriented, declaring that what gets reported drives investor intelligence. So, FRC sees reporting as focused principally on investors, and affirms this also in its Guidance on the Strategic Report. Now, the one thing investors like least is uncertainty, we are often told. So, extrapolating from FRC’s investor-oriented mission and what we know investors like least tells us that corporate reporting has to be about reducing uncertainty. Given that past performance is recorded, audited and to all intents and purposes certain, it can only be in respect of future performance where there is the need to reduce uncertainty. And the quality of strategic thinking and its application to a business in the form of strategic management is the only reliable means of addressing that uncertainty and reassuring investors. So, we have been prescient on this count.
The collective market performance of companies short-listed for the FutureValue Accolades over time continues to outperform the FTSE350 Index by a significant margin. Calculated using a simple index, this outperformance is markedly greater where companies are short-listed for two or more consecutive years. In a nutshell, companies that report their strategic thinking and its application to their business – past, present and future – tend to outperform the market. So, taken together, the implicit issue of reducing investor uncertainty underlying the FRC’s mission and the Short-listed Companies Index both confirm the value of our Strategic Value Analysis methodology as a means to differentiate the future potential displayed in listed company annual reports.
This year we published long-lists of companies for each Accolade at the beginning of the judging process to show the wider range of companies that were in the frame. Only a small number of new companies make the short lists each year, although 2 of those 4 new achievers this year were rewarded with Accolades – Provident Financial Group and Coca-Cola HBC. In all, we short-listed 16 companies in total in 2014 with 6 companies listed for two or more Accolades. Of these 16 companies 8 have been shortlisted for an Accolade in each of the last three years. One company has been short-listed all 7 years of the Accolades – Land Securities – and one company – Halma – for the last 6 years of the Accolades. We can only presume that there are many other companies truly capable in terms of strategic thinking and management, but that choose not to disclose this vital uncertainty-reducing capability to investors in their corporate reporting.
It was reassuring for us and, I am sure, for Provident Financial Group (PFG), to learn that PWC awarded PFG Best Annual Report by a FTSE250 Company in its ‘Building Public Trust’ Awards the evening after FutureValue awarded PFG the Best Business Model Accolade – ahead of all FTSE100 as well as all other FTSE250 companies. Coca-Cola HBC AG also showed us that it is possible to use the IIRC’s Integrated Reporting framework and produce a relatively concise equivalent of a Strategic Report that emphasises shared value. One notable feature of a number of the winners – Best Business Model, Best KPIs, Best Strategic Risk – was the scope of the narrative applied to that specific element in their respective Strategic Reports. For PFG it was 12 out of 72 pages, for ARM Holdings it was 8 out of 58 and for Fresnillo it was 12 out of 92. This suggests much about the culture in these particular companies, yet scope of narrative is not a prerequisite for Accolade success by any means. Indeed, shorter is often better and represents more rigorous strategic thinking. Both Lloyds Banking Group and Marks and Spencer Group both won Accolades with below average length Strategic Reports at 44 and 34 pages respectively and concise coverage in what are the two most challenging categories – Strategic Leadership and Best Strategic Capability. Both produced very rigorous strategy frameworks.
So, what can we expect of the 2014/15 reporting cycle? Well, now that we have clear and mostly unequivocal FRC Guidance, we can expect companies to make their Strategic Reports more concise and more useful to investors. These more adventurous second attempts may well be even better discriminators of future potential, making Annual Reports more helpful indicators of good long-term propositions. Investors should be the winners.