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Winter 2008/09

Trends in Corporate Reporting: Best practice

in FTSE 100 Annual Report and Accounts
Welcome to the new re-think supplements. For those of you familiar with our
publications, the re-think supplements are now replacing our previous Directions
supplements and, unless specifically requested, will only exist online at the re-think
tank or as pdf from now on.
For the winter 2008/09 edition we re-visit the subject of best practice in FTSE 100 annual
reports – but with the concept of best practice being rather vague and fluid we’ve focused
on what we see as three key areas. Richard Sheath of Independent Audit reviews the
progress being made in governance reporting; Dan Perrett of Hewitt New Bridge Street
looks at the tricky area of remuneration reporting; and Nigel Salter of salterbaxter identifies
genuine improvements in the ways companies are reporting on strategy.
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About salterbaxter
Established in 1998, salterbaxter is one of the UK’s leading creative consulting businesses.
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We advise organisations on corporate branding, corporate responsibility, employee
engagement, corporate reporting and digital programmes.
If you would like to find out more about us please call or email Louise Dudley-Williams
T: +44 (0)20 7229 5720. E: ldudley-williams @ salterbaxter.com
JOIN THE DEBATE: www.salterbaxter-rethinktank.com
rIchard sheath : co-founder : Independent audIt
yes – but why?
bIt by bIt, year by year, governance reportIng Is gettIng better. we’re
gettIng a bIt more InsIght Into what boards are actually doIng – and
every bIt helps. but there’s stIll a long way to go to get to the poInt
where we understand why companIes thInk theIr governance Is good.
Let’s start with the good news. It’s still a
curate’s egg with no company nailing all (or at
It all starts here
least most) of what we’d like to see. Based on
a review of the FTSE 100 governance reports,
more companies have now recognised that
simply restating the Reserved Matters of the
Annual Report 2008
committees’ terms of reference doesn’t give
us any particular insight into how they actually
ITV plc
200 Gray’s Inn Road
London WC1X 8HF
www.itv.com
Investors: www.itvplc.com
work. Many are beginning to give an indication
of what they’ve focused on to give us a flavour
Reuters Group PLC
Annual Report and Accounts 2007
(see below for examples) – particularly for the
audit committee. We’re now hearing more
about the nature of induction programmes
and how the board is briefed. There’s a lot
Aviva plc
Annual Report and Accounts 2007
more information on the approach to board
effectiveness reviews – and companies are
being more adventurous in giving a feel for the
Forty five
million
customers.
resulting changes. There’s progress from last
Twenty seven
year – and it seems to be more widespread
countries.
One Aviva.
as companies look at each others’ reports
to see where things are heading.
Annual report and
But it’s all happening rather slowly.
financial statements 2008
Companies still seem to be stuck in a groove
of telling us a lot about what we already
know. We know that FTSE 100 companies
are going to be following standard governance
processes, what boards and their committees
do and that their members all have good
Quality Value Service Innovation Trust
business experience. We don’t want to hear
all about the process. What we don’t know –
and what we want to understand – is why the
board thinks its governance approach worked
well in helping position the company for the
future, keeping an eye on the risks and
knowing that things are under control. What
was good about the way that it applied the
processes that was effective? How did it manage
the best eXampLes
to avoid the pitfalls that boards can fall into?
How was the experience of the directors
the board’s work:
tate & lyle
applied in a relevant way? What made the
board work as a team which provided
the audIt commIttee:
avIva, reuters, home
challenge and support to management?
retaIl, Itv We’re still largely left in the dark.
dIrector brIefIng:
home retaIl, reuters,
InternatIonal power,
marks & spencer
contact: ldudley-williams@salterbaxter.com : salterbaxter, 202 kensington church street, london w8 4dp. t: +44 (0)20 7229 5720
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This year – given the failures of business
Annual Report 2007
models and risk oversight structures – we
looked particularly closely at risk management
reporting. There are a few companies who
stand out (see below) as good examples. Their
reports are effective in explaining how the
different bodies in the governance structure
ITV plc Report and accounts 2007
fit with risk oversight: understanding how the
board builds a picture of the internal control
and risk management structures helps given
that it’s at the core of good governance. Clear
explanations of the flow of risk information
(up and down the organisation structure) also
gives confidence that it is actually happening.
Explanation of what the risks actually are,
Annual Report 2007
how the company defines them and how it
deals with them in practical terms – not just
a labelling or listing of risks with boiler-plate
terminology – helps too. And discussion of
emerging risks reassures the reader that the
board’s looking ahead and not just relying on
past experience or reacting to things that have
already happened.
Sadly though, reports of this nature are
very much the exception. On the whole,
risk management reports are distinctly
uninformative, reading like a litany of standard
What’s inside?
risks with the predictable descriptions of risk
HOME RETAIL GROUP PLC
Annual Report and Financial Statements 2008
mitigants. Discussion of risk management
is often text book in style – and, outside
the financial services sector, largely absent.
Particularly in the light of events in the
financial markets and the risks that it creates
for all sectors, you’d like to think that reporting
on governance and, in particular, risk
management might shift to a more informative
level over the next year. And for those
struggling with the question of “how?”, keep
it simple! Don’t just say what you do (although
results of the
effectIveness
that’s a good start), explain why it succeeds
revIew: tate & lyle, in doing what it’s supposed to do.
marks & spencer, Itv
rIsk reportIng:
home retaIl, reuters,
marks & spencer,
tate & lyle,
InternatIonal power,
prudentIal
ct
conta
us
DAN PERRETT : PARTNER : Hewitt New Bridge Street
Remuneration review
IMPROVING REMUNERATION DISCLOSURE IS IN LARGE part
simply ABOUT AIMING TO MAKE THINGS EASIER TO UNDERSTAND.
For UK listed companies the disclosure given
in the remuneration report is extremely
important as it is governed by:
1. Legislation
– Directors’ Remuneration Report
Regulations 2002
2. Combined Code of Corporate Governance
– ‘Comply or explain’ requirement
3. Institutional Investors
– ABI and NAPF Guidelines
– Best practice rather than mandatory
– Some areas now sacrosanct whilst others
remain aspirational
This leads to a high level of disclosure that
attracts significant attention from shareholders,
the press and the directors’ family and friends.
It is important that the remuneration report
is structured in a way that not only follows
certain guidelines, but also makes it simple
and easy to understand because shareholders
have an annual vote on the remuneration report.
To introduce the report many companies
now have a letter explaining key changes
to remuneration in the year. Lonmin Plc
goes a step further by including a detailed
review of the committee’s agenda at meetings
throughout the year. By disclosing this
information shareholders are able to understand
what issues the committee are thinking about
and why the remuneration policy is structured
in the way that it is.
The use of clear, bold headings to structure
the report makes it much easier to navigate
through the text. Not only does it show
investors what has been included but it also
allows them to locate the relevant sections
easily. For example British Sky Broadcasting
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has numbered sections, which in turn have
bright sub-headings. Furthermore, colour is Chief
Executive
an important tool for making the report more
All other
attractive but also it can make the information executive
directors
much more simple and clear. Vodafone 0% 20% 40% 60% 80% 100%
makes good use of this with red headings, Salary Target bonus (cash) Target bonus (deferred shares) Expected value of LTIP awards
which really stand out from the black text.
Stacked bar chart from Severn
Many reports now include a summary
Trent report showing breakdown
table breaking down each element of total of remuneration
remuneration. This gives a brief overview
of what the executive receives. This can be
further improved by splitting the table into WPP Share Incentive Scheme dilution for 2003 to 2007 %
long term and short term remuneration as WPP
10
5.4 6.0 7.2 6.6 5.7
ABI Limit
WPP has done. 8
6
In fact, tables are a great way of setting 4
2
out information that could easily get swallowed 0
in a large body of text. RPS Group (outside 03 04 05 06 07
the FTSE 100) makes a fantastic job of using
Bar chart from WPP report illustrating
tables, with everything from a Long-Term share scheme dilution since 2003
Incentive table, setting out the past four years
worth of awards including the grant level and
performance conditions for each director to
the exact bonus payable for all 30 different
performance levels. Every number has been
neatly ordered into a table.
Another great way of splitting up text and
making things clearer is by using charts.
WPP has a bar chart illustrating share scheme
dilution since 2003 and many companies, Pie charts from RPS Group’s report
showing breakdown of remuneration
including Severn Trent, have a stacked bar
chart breaking down the split in remuneration
(i.e. what percentage is salary, bonus etc.).
These graphical representations of data
are quick to find and hard to miss; and
can therefore reassure shareholders of
good policies that they may have missed
if they had been explained with only text.
A good remuneration report should be
interesting, clear and easy to understand
and, as far as possible, try to follow good
practice guidelines.
ct
conta
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NIGEL SALTER : DIRECTOR : SALTERBAXTER
Reporting on strategy
In last year’s review of best practice in strategy reporting we identified
that, at last, most companies were finally taking this subject seriously
and dedicating space and time to it. This year the picture has moved on
again – quite considerably.
There are now just a handful of companies who don’t discuss their
strategies and while it never ceases to amaze me that any company
can produce a report without talking about strategy, we won’t dwell
on the negatives here.
The positive side is much more interesting. There appear to be four
distinct approaches to strategy reporting developing (over and above
those who simply put a few paragraphs into the running copy but
I’m not really counting that as an approach – more a box ticked).
At the risk of slightly over-simplifying I’d put the distinct approaches
in these categories.
1. Businesses which have seen troubled or difficult times who
are now reporting back on a clear action plan or a strategy.
The best examples of these are ITV’s ‘Action Plan’ and Compass
Group’s ‘Map’ system – although the latter is rather complex at first
sight. I’d also mention Cobham’s ‘3 phases’ approach to strategy
which is interesting but doesn’t really fit into the category of being
for a troubled business – but it’s an effective way of describing how
the company’s strategy develops.
2. Businesses which divide their strategy into a number of strategic
priorities and then report back on them.
The best of these are Aviva, BAT and SAB Miller. Aviva also manage
to keep their whole approach to this straightforward and easy for the
reader to digest so they score top marks. All of them structure their
reports around the strategic priorities which makes for an easy to
follow narrative.
3. Businesses looking to keep it simple (this is definitely a good
thing) and distilling information into a summary table/overview with
performance highlights.
A few good examples here. 3i is excellent – it brings together strategy,
progress, risk and performance all in one table. International Hotels
Group also manage to distil theirs down into a simple table. Likewise
Legal & General, although this would benefit from some simpler
language and more information on performance against strategy.
Royal & Sun Alliance also do this well and Standard Life provide an
n
ti
About salterbaxter
ge uch Established in 1998, salterbaxter is one of the UK’s leading creative consulting businesses.
to We advise organisations on corporate branding, corporate responsibility, employee
engagement, corporate reporting and digital programmes.
If you would like to find out more about us please call or email Louise Dudley-Williams
T: +44 (0)20 7229 5720. E: ldudley-williams @ salterbaxter.com
JOIN THE DEBATE: www.salterbaxter-rethinktank.com
excellent overview with lots of information in just one spread.
They’re all worth looking at and they’re all good efforts to make
what can be a complex subject easy to grasp. This type of tabular/
graphic approach also translates well online.
4. Businesses demonstrating strategy in action, attempting to move
away from the purely theoretical and showing what it all really means
in terms of operations, people and performance.
These businesses sometimes combine the table approach of category
3 or the priorities approach of category 2 but the real focus is on
showing strategy in action. There are four great examples – Anglo
American (the title of the section is even ‘Strategy in Action’), BAE
Systems (‘Implementing our strategy’ – a series of case studies of
what is actually happening), Centrica (‘Delivering on our strategy’)
and Prudential (all part of the Chief Executive’s statement).
Any business looking to improve the way it reports on its strategy would
benefit from a quick look at any or all of these as they are all effective
in different ways. And because each is serving a very different purpose
and is undoubtedly responding to specific circumstance it’s hard to say
that one approach is better than another.
For me though, the two concepts of simplicity on the one hand and
showing strategy in action on the other appeal as they are very much
driven by a desire to help clarify for the reader. So while I think all those
companies mentioned deserve credit I would highlight the BAE Systems
report for demonstrating strategy in action as possibly the best of this
type and then the 3i report for its simple, but extremely rigorous,
overview of strategy, progress, risk and performance.
The key point to come out of the whole analysis though is that
the Business Review requirement for companies to talk about their
strategies in more detail and make them relevant to investors is
working. The narrative approaches of the leading companies are
tailored to their own needs as opposed to boring boiler-plate. They
are effective pieces of communication and most importantly they
serve to make clear what a company is trying to do and how it is
doing against these parameters. The conclusion is simple – good
reporting on strategy works.