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‘The pioneers always get the arrows’ conjures up an amusing word picture that applies all to often and all too well to those are the first to do something before everyone else. Companies with 30 September year-ends have been the pioneers in publishing a Strategic Report for the first time. Will they get the arrows, too? FutureValue’s early conclusion is that some may deserve to. In mitigation, these reporting pioneers had no model to follow or examples set by others to imitate. The only guidance from the Financial Reporting Council was merely ’Draft’ and therefore limited in its persuasive impact, if not even questionable in some respects. As FutureValue has been making its way through this first clutch of these new Strategic Reports one thing stands out more than any other – the lack of overall logic from a strategic perspective.
Linkage has become an obsession of the FRC. One has only to glance through the ‘Exposure Draft: Guidance on the Strategic Report’ to discover on page after page ‘Linkage examples’. These stand out in the FRC document on a dark blue background as if to ensure that the reader cannot miss them. What is the purpose of linkage? Linkage should be about logic. Its purpose is quite simply to enhance, if not instil, the logic of the overall content of the Strategic Report and make it usable to a company’s stakeholders, and in particular to investors and analysts. At its simplest level it is, to use the lingua franca, about ‘telling a Company’s story’. At a more informed level, it is about presenting a cohesive document as the FRC intends and declares in its guidance objectives. “The objectives of this [draft] Guidance on the Strategic Report are to: [ … ] promote greater cohesiveness in the annual report through improved linkage between information within the strategic report and in the rest of the annual report.”
Our review of this early batch of new era Annual Reports reveals that companies have no problem in complying with the new reporting structure. Equally, all the new style Annual Reports we have reviewed so far seem to be able to include the strategy and business model, of varying quality, as now demanded by statute. But, the rather depressing conclusion is that few seem able or willing to go the extra mile to create a sense of cohesion. There may be some evidence of superficial ‘linkage’ through the application of page references and cross-references even, but we have yet to find a Strategic Report that is indisputably a Strategic Report, and not just in name. Indeed, one might even argue mere cohesion of the document with page references is not sufficient. It does not promise logic, just a sense of connectedness of data. Putting risk information at the end of the Strategic Report preceded perhaps by Key Performance Indicators, a mile from the business model and strategy and without any indication of how these illustrate the Company’s sensitivity to its future or portray clearly strategic progress, seems all too common. It leaves the abiding sense of companies that are still going through the motions to comply and still preparing their Annual Reports as if painting by numbers.
We live in an era where narrative in Annual Report really matters. The logic inherent in a well articulated strategy framework that underpins that narrative reassures investors that this may be a company that can outperform its competitors, if not also its sector. The benefits of getting that flow of logic right are considerable. It seems that too many companies still don’t get it. Linkage is helpful, but it is the logic that really matters.