Untapped potential of the effective Annual Report - FutureValue
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Untapped potential of the effective Annual Report
28/07/2015
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An authoritative recent survey of investment analysts reveals that contrary to common belief a significant proportion of analysts use Annual Reports as their primary source of information on companies. Yet, despite the valuable role these Reports play, a persistent theme of survey respondents is that annual reports have “evolved into a corporate brochure and regulatory box ticking exercise”. The survey seems to confirm a fact, long established by FutureValue’s research, that the majority of UK reporting companies have yet to wake up to the immense potential value of an effective Annual Report, misconceiving mere compliance as the best option of an expensive regulatory reporting exercise.

Conducted by the CFA [Chartered Financial Analysts] Society of the UK of its members, the survey contains at least one more surprise. Analysts typically take a longer term perspective to forecasting financial performance and making investment recommendations than conventional wisdom would hold to be the case – nearly 80% seek to forecast financial performance for three or more years, while 55% have an investment recommendation horizon of three years or more. Given that more than 60% of the respondents are buy-side analysts, the role of Annual Report in projecting credibly the future performance of a reporting company is of far greater significance than many would credit, it would seem. Reporting companies should see the annual reporting exercise as a worthwhile investment more than a chore and a cost.

While much of the focus of the CFA survey is on the financial statements the respondents seem to show the greatest dissatisfaction – apparently some 47% of them – with the reporting of ‘principal risks and uncertainties’, typefied in one response: “Risks and uncertainties has become a general legal tick-box exercise to note every risk and worst case”.  Yet the CFA also reports: ”that over 90% think this (risk reporting) is a useful disclosure [and] clearly an area which deserves more attention from companies, and perhaps also from regulators”. Well, the good news is that the FRC is giving it more attention and the 2014 changes to the UK Corporate Governance Code should go some way to remedying the deficit here from the regulatory perspective at least, provided the consequent reporting outputs are properly policed as well.

The real challenge, ‘though, is for reporting companies. Until they are able and prepared to define more precisely the strategic direction of their businesses, the effective identification and reporting of truly principal risks will prove elusive. Declaring an unqualified strategic goal ‘to increase shareholder value’ or ‘to achieve sustainable revenue growth’ gives no clue as to strategic direction. Diffuse and indeterminate strategic direction inevitably leads to disclosing an array of generic and indistinct risks that are of no help to investors or analysts. Yet this is the preferred reporting tactic of all too many a FTSE350 company.

Clearly defined and effectively reported strategic direction, based around a business goal, strategic intent or even just a mission statement, will enable analysts to develop their forecasts of longer-term financial performance, and subsequent recommendations, with greater confidence. It will also make its easier for reporting companies to apply greater precision in their risk reporting to further assist and satisfy these analysts. Quite simply, good, strategically literate corporate reporting inspires confidence. It can in turn reduce a company’s market volatility. Everyone wins. The CFA survey shows why this is the case, lest there be any doubt!

You can access the CFA Society survey here.