The key message of our review this year: it has never been so important for strategy to form the backbone of the annual report.
Calls for businesses to strike a new balance between shareholder primacy and responsible, long-term business models that consider the interests of a range of stakeholders are now mainstream and have been intensified by the COVID-19 pandemic.
Companies face real challenges in addressing these changes in their reporting. The annual report itself is creaking, as it is asked to accommodate more and more content - much of it in the major growth area of ESG reporting. It’s a report for shareholders that was not designed to address the needs of a wider range of stakeholders.
We recognise the many challenges that companies face and how difficult it is to address them. In our report (available to download below), our aim is to provide practical observations and suggestions around how reporting can be taken forward under the current framework, and how it can be adapted to the new priorities and challenges.
New requirements continue to be added and bring further complexities. But it can be argued that companies never quite got to grips with the most fundamental change of the last decade: the creation of a strategic report that gives a forward-looking and, as the name suggests, strategic view. For many companies and boards, it still feels foreign to be transparent about their plans.
Delivering that transparency is integral to effectively responding to the challenges that businesses face, and that makes it the key message of our review this year: it has never been so important for strategy to form the backbone of the annual report. Other, non-strategic information can be important, but for different reasons – such as its relevance to particular stakeholders. It would be a major step forward for more companies simply to be clear about this distinction. With that in mind, we offer a number of enablers that can help capture the strategic significance of information as well as make the other information more useful.
It has never been so important for strategy to form the backbone of the annual report. Without that, it really isn’t possible to see the wood from the trees in the mass of information that companies are under pressure to provide. But progress continues to be slow and more urgent change is now needed, particularly as the focus on ESG information increases.
The timeline is a vital component of strategy and we saw some improvement this year in the forward-looking orientation of reporting on strategy: 37% of companies explicitly described their strategy with a one-year time frame, compared to 30% last year. However, one year is far short of what most would consider a strategic timescale and 50% of companies still did not indicate a specific time frame at all.
Climate change and the actions needed to respond to it are already significant issues for many companies and will ultimately have financial impacts for most. Despite this, although there was a significant increase in front-half disclosures (dedicated ESG sections now represent 21% of the strategic report on average) and with 63% of companies making carbon reduction commitments, our review showed that only 23% of companies even mentioned climate change in their financial statements.
While some of the long-term impacts of COVID-19 are still crystallising, others have become clear – such as the increase in working from home and the accelerated shift to online platforms. But, while 83% of companies referred to COVID-19 in their going concern disclosures, our statistics showed that companies rarely addressed any medium- and longer-term strategic implications (only 11% acknowledged how COVID-19 has impacted their strategy).
Overall, the new reporting requirements have had a positive impact on the quality of stakeholder-related disclosures. But our findings suggest there is scope for further improvement. Whether information is given in case studies or tables, it often doesn’t demonstrate what has happened as a result of the engagement process.
62% identified the key issues arising from stakeholder engagement but only 15% did so at more than a high level and only 22% discussed how stakeholder interests had been balanced.
Despite the progress achieved in the composition of boards and executive teams as a result of the Hampton-Alexander and Parker reviews (on gender and ethnic diversity respectively), a lot of inclusion & diversity reporting remains boilerplate and high-level. Strategic relevance is particularly rarely addressed, despite being part of the relevant UK Corporate Governance Code provision. While 52% of companies provided a detailed description of their diversity policy only 7% linked the objectives to the core business strategy.
Our report identifies five techniques (or ‘enablers’) that we believe can help companies to address the reporting challenges that are reflected in our findings and shows how they can be applied to some of the most high-profile areas of reporting, from ESG and stakeholder engagement to topical issues such as COVID-19 and diversity. It also includes a number of extracts from annual reports published during the 2020/21 reporting season to help illustrate the suggestions made.