responding to change€¦ · responding change. in the 7th edition: executive summary 02 research...

Analysis of the 2011 FTSE 100 corporate reporting trends 7thEdition — 2012

toResponding

Change

In the 7th edition:Executive summary 02Research overview 06Research categories

Setting the scene 08Leadership 12Corporate Governance 17Sustainability 23Market and outlook 28Strategy 32Risk 36Performance 41Approach to reporting 46

Methodology 51Data file 51Appendix 56About Black Sun 58

Analysis of the 2011 FTSE 100 corporate reporting trends

The

100Complete

edition of Black Sun’s research into corporate reporting trends within the FTSE 100 Annual Reports.

It is clear that the time for change is upon us. Stakeholders, regulators and companies alike have recognised the need for this and the wheels are in motion to make this a reality. Corporates need to both embrace and respond to the upcoming changes to ensure that they present the strongest representation of their company’s story and continue to build the essential commodity of trust. As Charles Darwin said, ‘It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change’.

We hope that you find our research an insightful and constructive contribution to the narrative reporting debate.

Black Sun’s Corporate Reporting Research & Strategy Team — June 2012

7thWelcome to the

www.blacksunplc.com © Black Sun Plc 2012 1

Significant progress to dateThis is our seventh annual analysis of FTSE 100 corporate reporting, and as we look back over those years, it is clear that much has been achieved. As the demands of stakeholders and regulators continue to push reporting requirements, we have seen some notable advancements in disclosure and communications. Companies are trying to tell their story in a more effective and meaningful way as evidenced by the following achievements:

• In 2005, when the Government abolished the mandatory Operating and Financial Review, only 40% of companies reported on strategic objectives, today nearly all do (97%). Put simply – reports have become more strategic.

• Before the Business Review required KPIs for analysis of financial and non-financial information in 2005, they were reported by just 19% of companies, now KPIs are provided by all but 3%.

• Risk reporting has also improved – while only 45% of companies disclosed their risks at that time, today all do.

• Sustainability was rarely seen as a business-critical activity. In 2006 only 34% of companies had Board level sustainability committees, today this has risen to 51%. We have also seen reports become far more integrated.

• Before the 2010 UK Corporate Governance Code required that the Annual Report explain the company’s business model, the majority of companies (58%) made no mention of it; today it is referred to by 84%.

Today’s most pressing needs create the pathway to tomorrow’s greatest potentialIn the aftermath of the financial crisis, trust and confidence in the corporate world was crushed, however all was not lost. The crisis provided a valuable opportunity to take stock and question both the role of corporates in the wider world and how trust and confidence could be restored.

With recent news emerging of a double dip recession in the UK and economic stability continuing to weaken in the eurozone, it is now more important than ever before for companies to simplify their corporate story and demonstrate progress in a way that reflects the financial, social and environmental context in which they operate.

Executive summary

• In 2010 when the UK Corporate Governance Code encouraged Chairmen to report personally in their Annual Reports about the role and effectiveness of the Board, only 17% of Chairmen did so, only two years on, this has risen to an impressive 55%.

• Since Lord Davies’ Review of Women on Boards last year, the number of companies with women in the Boardroom has risen from 78% to 88% and 13% of companies have already reached the 25% target.

• The percentage of companies reporting a specific link between KPIs and remuneration has also increased from 14% to 17% in the course of one year, and we expect this to be even higher in the next reporting season.

© Black Sun Plc 2012 www.blacksunplc.com2

Enlightened group led the way All this is encouraging, and as we have discussed in our previous reports, there is a strong group of enlightened companies that continue to lead the way. These reporters consistently move forward, looking for ever-more insightful and meaningful ways to communicate. It is these reporters who have proactively engaged with the reporting debate, and have responded to new regulatory initiatives and stakeholder demands. For this group, corporate reporting is about demonstrating accountability. These companies are looking to engage with stakeholders on a regular basis, communicating a clear and consistent story. For them, good communication is a sign of leadership and they are using their reports as a catalyst to stimulate discussion with their stakeholders, and in particular with their major shareholders.

A new corporate landscapeThe journey has not been easy, and the world has changed. Wider stakeholder interest has been piqued, companies are being held to account, and trust needs to be rebuilt. The ‘shareholder spring’ has changed the dynamic for companies and in particular for their Board members. Companies have ever-more engaged shareholders, recognising that as they have a stake in the Company, they also have a voice.

Where the Annual General Meeting (AGM) was once only attended by a few special interest groups, now many shareholders are challenging the Board and demanding greater accountability, looking at the results

and the economy and saying this simply isn’t going to work. The latest round of AGMs have been anything but comfortable for the vast majority of Boards around the world. Remuneration levels for Board members, and in particular CEOs, have been in the spotlight for a number of UK corporates. In meeting after meeting, investors have challenged remuneration committees about their decisions and even the decision-making process. Pointed questions have also been asked about sustainability, with companies more than ever being held to account. This focus on transparency in the Boardroom is here to stay.

This has not gone unnoticed by the Government and regulators as well. In response to the public outcry there has been a plethora of new consultations, discussion papers and guidance notes impacting narrative reporting. Well over 20 have been published since the UK Corporate Governance Code in June 2010, in total amounting to over 1,000 pages. The aim of all of this may be to bring greater clarity, but many would question whether it is actually just adding to the confusion. For corporates it must feel like the goal posts just keep moving.

Many challenges remainReporting will undoubtedly play a major role in rebuilding trust in this new environment, but only if we recognise there are a number of challenges which still remain. While we have looked at those that are leading the pack, behind are a number who continue to lag. These companies seem to ignore the value strengthened reporting will bring

them, both internally and externally. They fail to see that good disclosure will not only facilitate the engagement process with investors, but can help to unify management thinking and even act as a catalyst for internal decision-making. These benefits need to be recognised and acknowledged before the challenges we have seen in this year’s reports can be overcome.

• Many still need to provide greater insight into their governance practices. Currently only 29% of Chairmen use their opening statements to provide an explanation of the governance culture they seek to uphold.

• Over 45% of companies still fail to go beyond boilerplate reporting when discussing the role and effectiveness of the Board.

• While strategy may feature in nearly all reports, only 30% of companies provide a detailed appraisal of their strategic objectives with linkages to other key elements of reporting.

• While the business model may have been mentioned by 84% of companies, only 10% genuinely shed any light on how they actually create value.

• Only 12% of companies currently make the connection between strategy, KPIs and remuneration and only a few link to non-financial KPIs.

• While 68% of companies may identify non-financial KPIs, over a third are still discussing sustainability in isolation to the business strategy and performance.

• The majority of risk reporting fails to give a meaningful insight into the priority risks or the changes which may impact on the strategy.

CONTINUED —»


Executive summary continued

JUNE 2010REGULATIONUK Corporate Governance Code

DECEMBER 2010GUIDANCEGuidance on audit committees

JANUARY 2011DISCUSSION PAPEREffective Company Stewardship - Enhancing Corporate Reporting and Audit

MARCH 2011GUIDANCEGuidance on Board effectiveness

APRIL 2011DISCUSSION PAPERCutting clutter

SEPTEMBER 2011DISCUSSION PAPEREffective Company Stewardship: Next Steps

SEPTEMBER 2011LAUNCH OF TESTING FACILITYLaunch of the Financial Reporting Lab

SEPTEMBER 2011DISCUSSION PAPERBoards and risk

DECEMBER 2011DISCUSSION PAPERDevelopments in Corporate Governance 2011 - The impact and implementation of the UK Corporate Governance and Stewardship Codes

FEBRUARY 2012DISCUSSION PAPERWhat constitutes an explanation under ‘comply or explain?’ Reports on discussions between companies and investors

APRIL 2012CONSULTATIONUK Corporate Governance Code, UK stewardship code and on audit committee guidance

“ a plethora of new consultations, discussion papers and guidance notes impacting narrative reporting…”

OCTOBER 2010CALL FOR EVIDENCE‘A long term focus for corporate Britain’

FEBRUARY 2011CONSULTATION‘Lord Davies Review of Women on Boards’

SEPTEMBER 2011CONSULTATION‘The Future of Narrative Reporting’

SEPTEMBER 2011CONSULTATION‘Executive Remuneration’

FEBRUARY 2012INTERIM REPORT‘Kay Review of UK equity markets and long-term decision making’

MARCH 2012RESPONSE‘The Future of Narrative Reporting – The Government Response’

MARCH 2012CONSULTATION‘Launch of the consultation on improving the governance arrangements surrounding executive pay’

Proposed October 2013

Proposed October 2012

Proposed April 2013


SEPTEMBER 2011DISCUSSION PAPER‘Towards Integrated Reporting’ – Communicating value in the 21st century

NOVEMBER 2011LAUNCH OF PILOT PROGRAMMEOver 70 reporting organisations and investor networks

Time for changeMuch has happened over the last 12 months to ensure that Boards are more effective and accountable to their shareholders, but much is still uncertain. There are a number of major reviews ongoing, including the Financial Reporting Council (FRC) on UK Corporate Governance Code, Stewardship Code, and Audit committees; combined with the BIS proposals around Executive Remuneration and the Future of Narrative Reporting. In all, these proposals suggest better and more strategic information in Annual Reports, which shareholders need to understand how the companies they invest in are being run. Annual Reports are seen as a vital tool to facilitate the stewardship of companies and to encourage engagement with those running them.

A comprehensive and seemingly constant rethink of regulation, governance and disclosure is occurring. The needs and requirements of the market and of its stakeholders also continue to change drastically. In such a fast paced and complex environment, reporting should be seen as the basis of accountability. It is through clear, relevant and meaningful reporting that we can begin to restore investor’s confidence in the future. Companies need to see the opportunity inherent in good reporting, and rethink their approach in order to evidence the quality of their decision making and ultimately the quality and sustainability of their strategy.

Our review of FTSE 100 reports shows that the quality of narrative reporting has undoubtedly achieved significant success over the last seven years, but there is still a long way to go. In an ever changing market, the goalposts will continue to move and the best will continue to raise the bar, as investors, stakeholders and regulators call for more transparent and insightful reporting. Companies need to stop hiding behind the complexity which undoubtedly is there, and is likely to remain, and concentrate on simply ‘telling a story that people can believe in’.

See page 56 for detail on these consultations

2013 and beyond

Also there is perhaps a need for Government, regulators and standard setters to take heed to some of their recommendations for more transparent, strategic and connected thinking amongst themselves to provide clearer more joined-up thinking.

Encouragingly, there are two innovative initiatives, the Financial Reporting Council’s Lab concept and the International Integrated Reporting Council’s Pilot programme, which could maximise the momentum for change and help provide alternative solutions to reporting. The Financial Reporting Lab offers the opportunity for businesses, investors, auditors and regulators to work collectively to bring all of these new initiatives and proposed changes together, develop and test new thinking in reporting, and hopefully take a large part of the cost and risk out of the process of innovation and reduce the need for regulatory intervention, whilst the IIRC Pilot Programme offers the opportunity for reporting organisations and investors to contribute to the development of the principles, content and practical application of the integrated reporting framework.

Finding solutions will not be easy but for many of us involved in the corporate reporting process, the benefit of clear, concise reporting has long been apparent. Not just in the way that good disclosure helps to facilitate the engagement process between companies and investors, but in less obvious ways, for example as a catalyst for internal decision-making or in unifying management thinking. The key to improvement in reporting is to demonstrate the business benefits to organisations, investors and regulators alike and this is a great initiative which will build the sort of collaborative trust and engagement which is required to improve the quality of disclosure and its usefulness. Let’s not miss the opportunity to engender faith and confidence, but embrace it, and deliver meaningful change to corporate reporting to ensure it retains its relevance in the future.

APRIL 2011GREEN PAPER ‘EU Corporate Governance Framework’

APRIL 2011GREEN PAPER‘Disclosure of non-financial information’


Research overview

Opportunities emerge through the challenges of a changing world

Setting the scene Early signs of concise strategic reporting

Leadership Demonstrating individuality and culture

Corporate Governance Moving towards greater accountability and transparency

Sustainability Progressing towards integration

Companies continue to make progress in this area, as they go to greater lengths to describe and present their businesses. Today, fewer companies are relying on readers having an existing knowledge of the company and what it does. The requirement for companies to explain their business model has had a huge impact, causing many to rethink how they present themselves to not only explain how the business ‘generates or preserves value over the longer term’ but also to differentiate them in a crowded marketplace.

See page 8

We have seen a steady improvement in this area, as corporates go to great lengths to rebuild trust and meet the demand for greater transparency and accountability. A number of corporates are making an effort to present a more personable, open and honest statement this year. Moving away from the bland statement of fact which we have seen in the past, they are providing a meaningful, forward-looking statement which openly discusses the key issues. Despite the uncertainty over the exact outcome of all the reforms, more companies seem to be focusing on ‘telling their story’ in their own words, demonstrating their individuality and culture.

See page 12

This area has seen the greatest improvement since last year. While it can be difficult to convey the culture of the boardroom in a report, it is evident that companies are trying to do so. There has been a significant shift away from the ‘tick-box’ approach to one which tries to provide insight into Board decision-making processes and the steps the Board is taking to ensure the long-term success of the business. Personal reporting and an increased level of transparency around key topics such as Board effectiveness are central to providing readers with more meaningful disclosure and a greater sense of accountability and transparency.

See page 17

Sustainability reporting continues to develop, with corporates at varying stages of the journey. While the majority continue to have a siloed and isolated section divorced of the corporate strategy and performance, there are a number of leading reporters who have made progress on this journey and are demonstrating the linkages between strategy, risk, governance and performance as well as the social, environmental and economic context in which they operate.

See page 23


Market and outlook Moving from past performance to future opportunity

Strategy Becoming more meaningful

Risk Signs of strengthening disclosure

Performance Improving relevance with stronger linkages

Approach to reporting Encouraging signs of conciseness and connectivity

Incremental steps are being taken to move the Annual Report from a document reviewing the past to one providing meaningful insights into the future, thereby allowing readers to align the vision and strategy of the company with the future operating environment. Some companies are taking this a step further and discussing the key industry trends and opportunities for the future.

See page 28

Strategy has continued to evolve this year. From a short paragraph in the management statements seven years ago, to an integral component of the report today where it is beginning to underpin the entire narrative. Linking strategy to key areas such as KPIs, risk and sustainability, demonstrates that strategy has become not only the nucleus of the Annual Report but of the entire business. The best reporters are disclosing future targets for the business and providing more meaningful insight into the future strategic progress of the company.

See page 32

The quality of risk disclosure has undoubtedly improved over the past five years, with the majority of companies now providing detail on risks, their specific impacts and mitigating activities. The challenge now is for companies to make the discussion informative rather than boilerplate, by providing sufficient detail to allow outsiders to understand risk and how it specifically relates to business operations. Encouragingly there are a number of leading companies beginning to provide innovative and valuable insights to enhance accountability and transparency.

See page 36

There has been a continual improvement in recent years in the number of companies disclosing KPIs. The quality of the disclosures continues to improve, providing readers with a clearer and more meaningful understanding of why these KPIs have been chosen. A minority are linking KPIs and strategy to executive remuneration, thereby demonstrating both how successful they have been in implementing their strategy while justifying executive remuneration.

See page 41

As corporate reporting increasingly becomes a year-long, connected conversation, companies have clearly had to rethink their reporting strategies to ensure they are communicating their messages in the most effective way for the channel. A greater focus is being made on telling a clear and concise story, which can be brought to life in the online environment, using tools such as video and social media applications to engage and inspire audiences and to give insight into the personalities behind the brand.

See page 46


FTSE 100

Setting the sceneEarly signs of concise strategic reporting This section analyses the information which companies provide to set the scene for the report and which helps readers to understand how a company creates and sustains value in the short, medium and long term.

Leading reporters:• Provide a clear, concise overview of not just what

they do, but how and where they do it

• Provide clarity around the business model and how the company creates and generates value

• Describe their key strengths and points of differentiation from their competitors

• Maintain consistency in how business segments are presented and reported on

A graphical representation of the quality of FTSE 100 disclosure, the longest lines representing the best reporters with reducing length reflecting reducing quality.


What’s required? Currently the UK Corporate Governance Code requires the Board to present a balanced and understandable assessment of the company’s position and prospects. This specifically includes discussing the business model and explaining ‘the basis on which the company generates or preserves value over the longer term (the business model)’. Currently the closest guidance to the definition of a business model comes from the ASB’s Reporting Statement on the Operating and Financial Review as guidance concerning matters which should be considered as part of the business model. The OFR states that the report should include ‘A description of the business in order to provide members with an understanding of the industry or industries in which the entity operates, its main products, services, customers, business processes and distribution methods, the structure of the business, and its economic model, including an overview of the main operating facilities and their location’.

Current and future developments Over the last few years there has been a growing recognition that Annual Reports have got longer and longer and it is increasingly difficult for shareholders to distil the pertinent information they need from the information provided. Responses to the BIS consultations ‘The Future of Narrative Reporting’ and ‘A Long-term Focus for Corporate Britain’ provided evidence as well as a consensus view, that changes to the narrative reporting framework were needed.

Although still a work-in-progress, the Government has indicated that there was a great deal of support for most of their proposals to change company narrative reports, to make the new framework clearer for companies and easier for investors to locate the information they need. The framework will ‘allow companies to separate the strategic, headline information that all shareholders are likely to want to see into a concise Strategic Report. The remaining information would make up the Annual Directors’ Statement which by default would be made available on company websites.’ The Government is now working with stakeholders on the details of these proposals, with intended draft legislation expected later in the year.

Uncertainty remains as to what, exactly, is meant when we talk about ‘the business model’ but undoubtedly it will be of significant focus to reporting moving forward. Suggestions are that the proposed Strategic Report should contain strategic ‘concise, high quality disclosure’ that will provide ‘a clear line of sight from the strategy, business model and risks of the company to the financial results’.

The IIRC also believes that the company’s business model is central to the concept of integrated reporting as it ‘is often seen as the process by which an organisation seeks to create and sustain value and it provides a better basis for management to explain what really matters, bringing reporting closer to the way the business is run’.

C ompanies are going to greater lengths to describe and present their businesses. Whereas in the past many have relied on readers having an existing knowledge of the company and what it does, today they are not only providing insight into their products and services, but are providing a snapshot of their corporate structure, geographical scope of operations and segmental performance. The requirement for companies to explain their business model has had a huge impact on this area of reporting, causing many to rethink how they present themselves. This gives them a better basis to explain what really matters and differentiate themselves in a crowded marketplace.


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Figure 1.2

How are companies discussing their main industries and markets?

• Very detailed description 21%

• Detailed description 49%

• General description 28%

• No description 2%

FTSE 100

Setting the scene continued

This year we have seen further improvement in the way companies are describing their businesses. All companies now discuss their main products and services, with 98% discussing the industries and markets they operate in and the divisions of the company. Furthermore, the quality of this discussion has improved this year, as companies recognise the need to place the company’s activities in context and highlight where they operate, before any meaningful discussion of performance takes place.

Better business descriptions

FTSE 100 composition

• Eleven new companies joined the FTSE 100 since last year’s analysis

• Nine of the new companies who joined the FTSE 100 had never previously been included

• Financial services had the most companies in the FTSE 100

• Technology had the fewest companies in the FTSE 100

Business models

• 10 companies provided a detailed description of their business model

• The fundamentals most referred to in the business model descriptions were financials, business principles and sustainability

• Oil and gas, and industrial companies included the most detailed business model descriptions

• Financial services and consumer services sectors had the least amount of business model discussion

Figure 1.3

How many companies include the following in the operating review?

Strategy

Market context

Operational highlights

KPIs

Outlook

Case studies

60

14

38 35

55

35

Figure 1.1

How are companies discussing their main products and services?

• Very detailed description 34%

• Detailed description 42%

• General description 24%

FTSE 100

For most companies this takes the form of a graphic overview at the beginning of the report, providing a concise and straightforward introduction to the business, which can then link through to more detail within the operational review.

More consistency in operating reviews This engaging approach is now often continued in the divisional reviews, where introduction pages and highlights boxes are used by 55% of companies to summarise the key achievements for the year. More companies are now discussing specific and consistent operational and financial measures for each division, providing a more structured approach to these sections of the report. While this allows greater comparability of the divisional information, the challenge now is to align this more closely with the group objectives and KPIs to demonstrate how the group’s strategies are being delivered at an operational level. Currently only 14% of companies provide divisional KPIs, and only 8% are aligned to the group strategy.

sun facts


Clarifying the business model The requirement to explain the business model has been another key development for this area, causing companies to think about how they present themselves, and for many it has not only explained how the business ‘generates or preserves value over the longer term’ but has helped to differentiate them in a crowded marketplace. This single requirement has had a major impact on reporting, whereas a few years ago you could read a company’s report from cover to cover, without really understanding what they did, or how they made money.

While last year saw the early adoption of business model reporting by some companies, it is clear that the additional year has provided time to reflect on what it means for their business and we have seen real improvement in this area. The percentage of companies providing detailed or very detailed descriptions of their business model has increased this year to 43%, from 24% last year and only 12% the year before. The percentage of companies providing a basic description or brief mention of their business model this year is 41%.

Figure 1.5

What approach is taken to business model reporting?

• Business description 23%

• How they make money 19%

• Integral to strategy 9%

• Value creation 8%

• Referred to but not described 25%

• None 16%

FTSE 100

Figure 1.4

How do companies refer to the business model in their report?

’11’10’09

Just mentioned

Detailed

Basic

Very detailed

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68

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42

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Overall, the term itself seems to be more understood, and whereas in the past companies had used the phrases ‘business model’ and ‘strategy’ interchangeably, they have recently begun to make a distinction. Broadly speaking, most companies use descriptions of their business model to provide clarity around how they create and sustain value, whereas the strategy is concerned with how companies deliver on this to achieve their objectives. In this respect, a company is not just explaining what they do but how they do it. Many companies have used the discussion of business model to describe their key strengths and competitive differentiators, such as financial strength, risks, people, approach to sustainability and governance. Of those elements, risk was referred to most often, with 10% of companies identifying the nature of risks in their business model. When a company reports well on their business model it provides a better basis for management to explain what really matters, and ensure that it is clear to see the way the business is run.

Varying approaches Four distinct approaches to describing the business model seem to be emerging. Of these, 23% of companies use a business description approach that explains how the company is structured and how it delivers its products or services; 19% use the business model to explain how they make money; 9% use the business model in the context of overall strategy; and 8% use the business model to illustrate how they add value at different stages of their operational process, a popular approach within the basic materials sector.

Whatever the approach, the point is companies are engaging with the idea of explaining what really matters and what makes them different.


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FTSE 100

LeadershipDemonstrating individuality and culture This section analyses how management is featured in the Annual Report. Effective leadership is often seen as a vital element of a company’s success, so it is through these sections that it is possible to convey to the reader the company’s behaviours and attitudes.

Leading reporters:• Deliver personally written statements that

demonstrate ‘tone from the top’ and communicate the character and personality of the business

• Ensure the report is a reflection of the business as seen ‘through the eyes of management’

• Clearly differentiate between the role of the Chairman and CEO through the content of their statements

• Clearly set out the company vision, strategy and commitment to governance



What’s required?Following the codification of directors’ duties in the Companies Act 2006 and, in particular, the duty to promote the success of the company, there has been significant debate as to the role of companies in society, and the extent to which directors should take into account wider stakeholder groups in reporting. The requirements of the Business Review in the Companies Act make specific reference to helping members of a company assess how directors have performed in respect of this duty, thereby directly linking the fundamental role of directors to reporting.

Regulation and legislation concerning leadership disclosures continue to centre on accountability and focus on personal reporting on corporate governance. The UK Corporate Governance Code in particular encourages the Chairman to report personally in their annual statement on how principles relating to the role and effectiveness of the Board have been applied.

Current and future developmentsThe debate as to the purpose of companies will almost certainly run on for many years to come, though for the moment, the legislation strikes a fine balance between the interests of shareholders and other stakeholders; therefore it is important that company reporting reflects this situation. This notion of greater accountability is one that the regulatory regime is cracking down on with a number of strong statements and bold initiatives.

Things such as the EU Corporate Governance Green Paper and the FRC Stewardship Code require greater engagement between directors and shareholders with key management figures being held to account. Furthermore, the continued focus on governance derived from consultations such as the Lord Davies’ Review of ‘Women on Boards’ and the FRC’s ‘Boards and Risk’ have meant the Chairman must take a stronger stance on discussing governance in their personal address, and display greater responsibilities than just outlining recent Board changes.

T he demand for greater transparency and accountability is fast becoming ingrained as a fundamental part of today’s corporate landscape. With more pressure than ever on corporate performance, corporate reporting has recently taken centre stage in the debate on restoring trust in the UK market. It has been encouraging to see that, despite the uncertainty over the exact outcome of all the reforms, more companies seem to be focusing on ‘telling their story’ in their own words, demonstrating their individuality and culture. Particularly notable have been the ‘Warren Buffet’ style management statements which deliver a very simple and clear story as to what the organisation is really trying to achieve and how it’s going to get there.


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Leadership continued

Greater insight into managementBeing set at the front of the report, the management statements are a key way of demonstrating the ‘tone from the top’, effectively setting the theme for the report at the outset. This year 81% of companies used their Chairman and Chief Executive statements to set up the strategic themes for the report, successfully using these statements to provide an executive summary for the report as a whole. Interestingly, this year we have seen a greater distinction and clear differentiation between these two roles in company management statements. The focus from the Chairman is much more about governance, the Board and the shareholders. This has likely been influenced by the FRC’s Guidance on Board Effectiveness, which emphasises that, ‘good Boards are created by good Chairmen’ and that the CEO predominately owns the strategy and outlook for the business. In fact, many more CEO statements are now providing additional detail on the outlook for the company, with 27% providing a detailed outlook with supporting contextual information.

This makes for a much more interesting read, moving beyond a bland statement of factual, historical information to provide more insights into the personalities as well as the strategies of the business moving forward. A handful have even introduced question-and-answer style statements, which have been reinforced online with videos and social media efforts supporting the communications programme.

Companies continue to broaden corporate visionFor the last few years, the majority, 87%, of FTSE 100 companies have made bold statements about their overall vision or what they want to achieve. What has been different this year is that many more companies have given an indication of how progress towards this vision will be monitored and measured by management. In addition, the messages feel more genuine and sincere, with many more Chairmen and Chief Executives not only taking ownership of the vision and values of the business but making a commitment to delivering value to all of a company’s stakeholders, rather than just shareholders. This rose to 66%, up from 40% last year, while the commitment to only shareholders remained relatively static at 19%.

Figure 2.1

How many companies make a clear statement of their overall vision or goal?

87%Figure 2.2

To whom does the company make a commitment?

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Stakeholders

Shareholders only

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26

85

19

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Management accountability

• 66 companies made a commitment to delivering value to all of their stakeholders in their management statements

• Q&A formats were used by nine companies in management statements

• The opening Chairman’s statement of 27 companies referred to the UK Corporate Governance Code

• Lord Davies’ ‘Women on Boards’ recommendations were addressed in the Chairman’s statement of 18 companies

Figure 2.3

How many Chairman or CEO statements set up strategic themes?

81%

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Figure 2.5

How are companies discussing sustainability in the management statements?

2013

28 26

5445

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• Rationale for sustainability

• Discuss sustainability issues when talking about business strategy

Demonstrating responsible capitalismOne of the other significant developments in management statements has been the increased focus on addressing ‘responsible capitalism’. This year, 54% of companies are beginning to articulate the business case for sustainability in their management statements, up from 28% last year. Although many companies are still defining what sustainability really means to them, there is a clear gap between a company’s desire and the actual implementation. However, many more companies are beginning to

understand that they have an important role to play in tackling global sustainability issues. Of this year’s management statements, 31% highlight the global sustainability challenges facing their business, up from just 13% last year. In addition, 45% of statements make some reference to sustainability issues and how they are being addressed by the business strategy.

See page 23 for more detail on sustainability reporting.

Figure 2.6

How many companies discuss solving global sustainability challenges?

31%

Figure 2.4

To what extent does the CEO outline future prospects for the company?

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91

35

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Some detail of the outlook for the company

General overview of the outlook for the company

Detailed outlook and specific contextual detail provided


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Leadership continued

Growing personal reportingPersonal reporting by the Chairman on the role and effectiveness of the Board has been cited as one of the ways to ‘attack the fungus of boilerplate’. This is certainly starting to bite. In the past most Chairman’s statements discussed little more than Board changes, if anything at all.

This year, 56% of statements provide greater insight into the Board’s governance approach, emphasising the Chairman’s role in leading good governance practice, up from 28% last year. We are seeing leading reporters emphasise the importance of governance to the business, and then go on to outline key governance objectives and the focus of the Board for the future. They often address issues such as Board evaluation and succession planning and link these to their statement in the detailed corporate governance section later in the report.

Interestingly, providing more detail in this regard has not deterred Chairmen from also providing a personal introduction to the governance report, an approach taken by 55% of companies this year, up from 31% last year. It seems a trend is emerging where companies use their statements at the front of the report to top-line the key governance issues of the year and then provide more in-depth detail on these issues in an overview to the governance report. This approach might be just what the ‘Strategic Report’ is striving to achieve – communication of how governance supports the strategic objectives of a company and clearer connections to the company’s approach to remuneration.

See page 17 for more detail on governance reporting.

These are all clear signs that post the financial crisis, directors and leaders of business are beginning to seize the opportunity to use their reporting as a tool to evidence greater understanding as well as accountability of the key issues facing corporates today.

Figure 2.7

How are companies discussing governance in the opening statements?

’11’10’09

Board changes and general commitment to governance

Board changes only are discussed

Board changes and detailed commitment to governance

54

8

82

20

51

81

18

12

86

29

27

30


FTSE 100

Corporate GovernanceMoving towards greater accountability and transparency This section analyses a company’s commitment to effectiveness, internal processes, controls and management, and how the company is organised to deliver on its objectives, making it more accountable to both shareholders and stakeholders

Leading reporters:• Demonstrate accountability through personal

reporting from the Chairman and Chairmen of the committees

• Present governance as a key component of the narrative, related to other areas

• Demonstrate the boardroom culture and how this contributes to a well-run company

• Provide insight into governance activities, performance against prior objectives and targets for the coming year, and how these link to strategy



What’s required? Post the financial crisis, and its focus on corporate governance, two key conclusions were drawn. Firstly, that more attention needed to be paid to following the ‘spirit’ of the Code, and secondly, that the interactions between corporates and shareholders needed to be improved. As a result, when the UK Corporate Governance Code was introduced it emphasised that, ‘the purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company’. The idea of opening the doors to the boardroom and communicating the character of the company still provides a good basis for a governance report, explaining what the culture of the boardroom is and how the company is organised to deliver on its strategy.

Current and future developmentsCurrently the FRC is consulting on the proposed revisions to the UK Corporate Governance Code, to give effect to its ‘Effective Company Stewardship’ proposals. The proposed changes focus on reporting gender diversity policies, the annual tendering of the external audit, asking Boards to explain why they believe their Annual Reports are fair and balanced, and encouraging more meaningful audit committee reporting. The FRC also aims to provide more guidance on explanations that should be provided to shareholders when a company chooses not to follow the Code.

The FRC is also consulting on proposed changes to the Guidance for Audit Committees to support the changes to the UK Corporate Governance Code. Proposed changes to auditor standards include an increased focus on auditor communications; specifically on the significant professional judgements and the extension of auditor reporting to include stating if the Annual Report is fair and balanced and consistent with the knowledge acquired by the auditor in the course of performing the audit. The FRC is also consulting on updates to the Stewardship Code.

In addition to this, the EU Corporate Governance Green Paper published last year focused on three particular areas: Boards of Directors, shareholder engagement and the quality of corporate governance statements. We expect to see developments from the EU in the governance framework this year, however, suggestions are that changes will not be controversial for the UK market.

A significant shift in the quality of governance reporting has occurred over the 20 years of the UK Corporate Governance Code. There is little doubt that the Code has played a positive role in changing company behaviours so that the Annual Report is the key to engaging with shareholders and providing real insight into these behaviours. While many would agree it can be difficult to convey the culture of the boardroom in a report, it is evident that companies are trying to do so. Over the past few years there has been a significant shift from the ‘tick-box’ approach to one that tries to provide insight into Board decision-making processes and the steps the Board is taking to ensure the long-term success of the business. Demonstrating accountability and an increased level of transparency around key topics such as Board effectiveness are central to providing readers with more meaningful disclosure. While the importance of governance reporting is becoming recognised by more companies, there is still much more progress to be made.

Corporate Governance continued


Board composition

• The average Board had 10 members

• The average Board had seven non-executive directors

• The largest Board had 18 members

• The smallest Board had five members

• The greatest number of females on a Board was four

• 10 companies featured the Board in a group photo

• 61 companies presented photos of the executive management team

• There was only one female Chair of a Board

Greater insights into good governance The once dry and boilerplate governance report has seen significant improvement this year as companies try to provide an insight into their boardroom culture. This year 55% of company Chairmen set up their governance reporting with a personal introduction. In two years this focused approach has grown from 17% to 31%, through to 55% of companies in 2011. The quality of these introductions has also improved dramatically. They often elaborate on the themes addressed in the Chairman’s traditional statement at the beginning of the report, providing real insight into the key issues the Board has faced in the year, and what the key challenges will be for the future. This approach is perhaps paving the way for a summary governance statement as envisioned by BIS’s proposed Strategic Report.

Leading reporters are making a real effort to provide informative disclosures and many are also attempting to use more engaging language, along with tables and graphics to bring the narrative to life. However, many are

still at the other end of the spectrum and their reporting remains very weak in this area. These companies continue to provide text heavy, boilerplate and often uninsightful disclosures, which change very little year-on-year.

Improving Board committee reportingWe are also seeing efforts to provide greater clarity and meaningful information within Board committee reporting. While 92% of companies provided a description of the role and responsibilities of each committee, 80% took this further and discussed their achievements and actions for the year, and a small but growing number, 13%, also outlined their plans and targets for the future. These reports are also presented in a more engaging way. 34% of companies featured a photograph of the committee Chairman, and 3% of companies featured a photograph of the committee as a whole. 33% of companies also provide ‘positioning’ statements or quotes from the committee chair to reflect their focus or key achievements for the year.

Boilerplate introduction

Personal introduction outliningapproach to Board effectiveness

Chairman ‘owns’ the wholegovernance report

Figure 3.1

How many companies have a personal report on governance?

’11’10’09

40

676

49

129

2717

Roles andresponsibilities

Key activitiesof the past year

Personal letter from

Chairman

Targets for the future

Photograph of com

mittee Chairm

an

Photograph of com

mittee m

embers

Figure 3.2

How many companies’ committee reports include the following?

92

80

13

34

3

33

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Increasing demonstration of Board effectivenessThe FRC’s 2011 updated guidance on Board effectiveness has encouraged companies to reconsider their reporting on key areas such as Board composition, the evaluation of directors and succession planning. Similar to last year, nearly all companies (90%) include some discussion of their evaluation processes, however, this year the quality of this disclosure has greatly improved. More companies are striving to provide insight into the workings of the Board, with 52% providing details of the issues raised and 40% also discussing the resulting objectives.

While the concept of Board evaluation, first suggested by the Higgs Report in 2003, is not new, the FRC’s revised UK Corporate Governance Code and ‘Guidance on Board Effectiveness’ have increased the focus on evaluating the Board committees and individual directors, recommending specifically that companies carry out an external and independent evaluation of the Board every three years. The number of companies committing to this provision has increased significantly to 87% from only 50% last year, however, most are still just providing a description of the process. Very few are providing real insight into how Board effectiveness is being enhanced, with only limited discussion of evaluations and action plans.

The annual re-election of directors was another significant change under the Code. Again, this is an area where we have seen improved disclosure, with almost all companies (96%) stating that all directors would be subject to re-election at their forthcoming AGM, up from 58% last year. This suggests companies either see the benefits of annual re-election or, more cynically, are of the mindset that the appointment of new directors is seldom subject to significant shareholder opposition and therefore compliance is the easier option if it mitigates any negative publicity.


Audit committee reporting becomes a priorityThe increasing focus we have seen in the past year on committee reporting will no doubt be emphasised in audit reporting moving forward. The FRC has published two papers on effective company stewardship, which highlight the need to extend the remit of the audit committee. The proposed changes most significantly include asking audit committees to consider whether the entire Annual Report is fair and balanced, not just the financial statements. This has caused some debate over the role of the Audit Committee versus the Board in signing off the Annual Report, and it will be an interesting area to watch over the coming year. The FRC has also suggested greater transparency around the company-auditor relationship, and is currently consulting on introducing mandatory competitive tendering every ten years as well as enhanced disclosures on a company’s decision-making processes.

Figure 3.5

How many companies state that all Directors are, or will be, subject to annual re-election?

96%

The outcomes

and findings

Resulting objectives

Figure 3.4

How many companies disclose the following in relation to the Board evaluation process?

40

52

Figure 3.3

How many companies explain how succession planning is being completed?

• Detailed insight with specific insights 15% provided into the progress made

• General overview of the process and how 39% it is being approached

• Only mention succession planning 42%

• No discussion 4%

FTSE 100


Focus on boardroom diversityBoardroom composition and balance has been an area of debate over the past year, driven in part by Lord Davies’ recommendations on ‘Women on Boards’, as well as the wider diversity debate around background and experience. This year we are seeing companies provide greater discussion of the make-up of their Board, including succession planning and diversity policies. The aim is to ensure the right mix of skills and experience to challenge the debate and drive the decision-making processes. Companies are beginning to explain more about Board composition, including succession planning for the future, with over half providing a detailed account of how they will maintain an experienced and balanced Board.

’09

’10 ’11

Figure 3.6

How many companies have female representation at Board level?

88

7878

Figure 3.7

What is the breakdown of female non-executives on the Board?

’11’10’09Two female non-executives

Three or more non-executives

One female non-executive

227

46

75

44

18

10

72

85

13

30

42

Figure 3.8

What is the breakdown of female executives on the Board?

• Two female executives 2%

• One female executive 15%

• No female executives 83%

FTSE 100

Figure 3.9

How many companies make a commitment to boardroom diversity by stating the following?

Female

representation targets for Board

Diversity policy

in nominations

report

20112010

14

44

9

56

We have also seen some improvement in the gender diversity debate, with 88% of company’s Boards now having female representation, up from 78% last year. The vast majority of this increase has resulted from the recruitment of female non-executives, with the increase in female executive directors being only 1% (from 16% in 2010 to 17% in 2011). This perhaps reflects the time it will take for companies to implement initiatives and policies throughout their organisations to ensure the talent is available to move into these executive positions in the future. A significant number of companies have already begun this process, with 44% explicitly stating the level of diversity the company is seeking, up from just 14% last year. In addition, 56% currently outline either a policy or approach to ensuring diversity, up from 9% last year. Overall these are significant improvements, taking us closer to Lord Davies’ target of a minimum of 25% female representation by 2015.


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Figure 3.11

If there is non-compliance, has the following information been provided?

22

66

8588

A B C D

A Background to why there is non-compliance

B Clear rationale, specific to the company, explaining non-compliance

C Indication of whether the deviation from the Code’s provision is for a limited time

D State whether alternative measures have been taken to deliver on the principles set out in the Code and to mitigate any additional risk

‘Comply-or-explain’ explanationsThe EU’s latest Green Paper on corporate governance reviews whether corporate governance statements need to be regulated in regard to the ‘comply-or-explain’ principle. The UK’s comply-or-explain approach represents one of the strongest in the world and lies at the heart of the UK’s corporate culture. In light of this, the key to retaining our comply-or-explain approach is the quality of our reporting. While we are seeing greater improvement in governance and its reporting by many, some companies could still do more. In explaining deviation from the Code, companies need to clearly outline why this has occurred and provide details of the arrangements that are in place to protect both the business and stakeholders’ interests. To aid this process, the FRC released a paper on ‘What Constitutes Comply-or-Explain?’ at the start of 2012, which identifies the key information which should be disclosed if a company is not in compliance with any provisions of the Code. Our research shows that most companies are making an effort to explain both how they have complied with the Code, and where there may be deviations; 88% of those corporates who were not compliant with the Code provided background as to why this had occurred, and 85% also provided clear rationales for non-compliance, while 66% indicated whether it was for a limited time period. However, only 22% reassured their shareholders with an explanation of whether alternative measures had been taken to deliver the principles of the Code or to mitigate any additional risk.


Figure 3.10

How many companies are not fully compliant with the UK Corporate Governance Code?

41%


FTSE 100

SustainabilityProgressing towards integration This section analyses what is reported in terms of environmental, social and governance issues. It also monitors how well non-financial data is integrated into the overall business, including strategy, performance and management.

Leading reporters:• Tell a balanced and consistent story throughout the narrative

• Demonstrate how sustainability is embedded into the overall business strategy

• Demonstrate commitment from the top down

• Ensure material issues are linked to the business and the identification process is articulated

• Articulate the governance process and how it is managed

• Identify issues of the future and articulate what the business is going to do about them

• Use qualitative and quantitative data to provide a complete story


Please note that we have used the term ‘sustainability’ throughout the report in reference to non-financial performance areas. We have found that corporates use a number of varied terms for this and we use sustainability as an appropriate reflection of long-term strategic thought, planning and communication.


What’s required? The requirements of the Companies Act 2006 state that ‘the business review must, to the extent necessary for an understanding of the development, performance or position of the company’s business, include information about: environmental matters, the company’s employees, social and community issues, including information about any policies of the company in relation to those matters and the effectiveness of those policies’.

Current and future developmentsIn the Government response to ‘The Future of Narrative Reporting’ consultation, BIS state that the Strategic Report will be a key part of how companies communicate with not only investors but wider stakeholders. They refer to the Strategic Report being used to ‘describe (to the extent necessary for an understanding of the business) how social, environmental and human rights considerations relate to their business model and strategy. This will ensure that social and environmental information is considered alongside the analysis of the company’s strategy and risks – the result being an integrated report demonstrating, where relevant, the links between these issues.’

Adding to this momentum, a global consensus of more rounded reporting of company performance has been led by the International Integrated Reporting Council (IIRC). The focus here is on building on the foundations of financial, management commentary, governance and remuneration and sustainability reporting in a way that reflects their interdependence. This past year has been a busy year for the IIRC with the public consultation on their Integrated Reporting Discussion Paper, the establishment of the IR Pilot Programme including over 65 reporting organisations across the globe from the corporate to public sectors, and an Investor Network with over 20 institutional investors to help develop the reporting framework.

In this landscape, there continues to be initiatives that drive ethical and responsible corporate behaviour, such as the UN Global Compact, and – specifically for reporting – the Global Reporting Initiative (GRI) which next year introduces the G4 iteration of guidelines that will seek to guide companies in how to provide relevant information for various stakeholder groups.

A s the investor focus on financial and non-financial disclosure continues to intensify, companies will need to ensure that sustainability is integrated into strategic decision-making to demonstrate that it is managed in the same way as any other business issue. Over the last few years there has been a proliferation of reporting standards and regulations in this area which have forced companies to increase their focus on sustainability issues and improve their corporate reporting. As a result, this year’s research shows that all FTSE 100 companies stated a commitment to non-financial performance in some way. The majority, however, continue to have a siloed section divorced from the corporate strategy and performance. Nonetheless, there are a few who have made progress on this journey and are demonstrating the linkages between strategy, risk, governance and performance as well as the social, environmental and economic context in which they operate. These leading reporters don’t talk about sustainability because they have to, but because they believe it is fundamental to demonstrating a company’s ability to create value both now and in the future.

Sustainability continued


Integrated reporting

• 11 companies stated that the Annual Report integrates key sustainability reporting information throughout

• Four companies had signed up to the IIRC Pilot Programme

Performance and validation

• Performance summary charts were provided by 31 companies

• 11 companies reported against the Global Reporting Initiative (GRI) framework

• FTSE4Good was the most common external assurance scheme

Sustainability – more than just a name?There is increasing consensus that the type of information required to assess the past and current performance of companies and their future sustainability is much wider than what is currently provided in the Annual Report. While there has been an increase in the information provided, with all FTSE 100 companies now reporting on sustainability issues in some way in their Annual Report, the quality of that information still varies and key gaps remain. The challenge is not just to keep on adding information but to ensure that clutter is removed, leaving only the most material information. In the current environment, where companies continue to adapt to changes in the way business is conducted. The hope is that integrated reporting may help to better articulate a full and richer picture of corporate behaviour and performance by explaining how business creates value and the context in which the business operates.

Figure 4.1

What terminology is used for sustainability?

• CSR 9% • CR 41% • Sustainability 31% • Sustainable development 4% • Other 15%

FTSE 100

Companies are at different stages in the integration of sustainability into their mainstream reporting strategy and it often seems as if the terminology that a company uses to describe its activities is reflective of that journey. For instance, an increasing number of companies use the term ‘sustainability’, (31%, up from 14% last year)

These leading companies are articulating a clear link between sustainability factors and the delivery of their business strategy. Interestingly, 68% of companies disclose non-financial key performance indicators. However, clearly, more needs to be done to ensure connected thinking when talking about their sustainability and corporate strategy.

See page 41 for more detail on performance.

which is likely to be an indicator of the demand to demonstrate stewardship and explain how a company creates and sustains value. The economic climate has also been a factor in this change in terminology as ‘sustainable’ businesses have been seen to be those with their eyes firmly fixed on the long term.

Integral to strategyDisconnected reports – where the standalone report or sustainability sections of the Annual Report are displaced from the main narrative and corporate story – still exist. Over the last few years, however, we have seen a growing number of companies recognise and evidence that non-financial factors are critical and intrinsically linked to their strategy. The number of companies presenting sustainability as an integral element of their strategy now stands at 31%, up from 20% last year. 37% of companies have a dedicated sustainability strategy which complements or supports the wider business strategy.

Figure 4.2

What is the link between sustainability and group strategy?

’11’10

Sustainability is standalone but doescomplement the group strategy

Sustainability is completelyindependent to group strategy

Sustainability is integralto the group strategy

12

31

80

3733

65

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Does the Chairman/CEO sit on the sustainability committee?

3946

4033

3934

Strategic commitment from the topIntegrated reporting is often discussed as being a reflection of ‘integrated thinking’ within an organisation. This is the way that those charged with governance and management monitor, manage and communicate how a company creates value and demonstrates how this will contribute to success over time. Although companies are making positive progress in reporting on sustainability issues in their report, descriptions of the governance of these issues are still relatively weak, with 53% of companies providing just a basic discussion and only 21% providing more specific detail.

Sustainability continued

Figure 4.6

How many companies disclose the process undertaken to determine material sustainability issues?

16%

’06

’07

’08

’09

’10 ’11

Figure 4.4

How many companies have a Board level sustainability committee?

3946

40

51

3934

Figure 4.3

What is the nature of the description of sustainability governance?

’10’09

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41

52

79

27

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38

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Specific discussion

Basic discussionMaterialityMateriality and the process of identifying key focus areas for the business have increased in prominence, largely due to the principles underpinning the Global Reporting Initiative. The GRI states that, ‘information in a report should cover topics and indicators that reflect the organisation’s significant economic, environmental, and social impacts, or that would substantively influence the assessments and decisions of stakeholders’.

The challenge for companies is to identify which sustainability issues are material to their business and then ensure that policies, practices and management systems are developed to provide not only the Board and management with the confidence in the integrity of both financial and non-financial information, but also their wider stakeholder groups. The 16% of companies that do define the process they have been through to identify material issues demonstrate a clarity of thought and a more strategic approach to delivering, and subsequently communicating, their sustainability story.

See page 32 for more detail on strategy.

Partly as a result of the GRI definition, materiality processes have been largely linked to effective stakeholder engagement. Though many companies refer to stakeholders, discuss who key stakeholders are and even talk about understanding stakeholder needs, few go into detail on the mechanics of that engagement process. Fewer than a third of the FTSE 100, 32%, substantiate their claims of stakeholder engagement with clearly defined processes and procedures.

Figure 4.7

How many companies refer to stakeholder dialogue and the engagement process?

32%The way that companies manage sustainability is increasingly being handled in the same way as any other business issue. Encouragingly, this is reflected in the number of companies reporting a Board-level sustainability committee, which has climbed from 40% to 51% over the last year. Though the figure of CEO/Chairman membership of these committees has fallen to 33%, the direct line to the Board remains the critical determinant of integration.


Figure 4.8

How are sustainability issues reported?

Performance

identified

Targets provided

Issues andpolicies identified

Environmental Social and community People

20112010

Performance

identified

Targets provided


Performance

identified

Targets provided


42

58

76

9084

93

28 30

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7886 87

91

Growth in performance reporting This year has seen a significant improvement in the level of performance data being supplied on non-financial issues. This increase is encouraging, as not only does it demonstrate that these issues are being monitored, but it implies that these matters are being managed and are therefore a key component of the business’ success. Companies have got better at demonstrating key issues and supporting policies, however, real progress needs to be made in target setting if non-financial performance is ever to be fully integrated into the core performance measurements for the business. That said, some are demonstrating that they have a matrix and the processes in place to do just that. They are, however, few in number.

While the findings are promising, the challenge for companies moving forward

will be not only to identify existing data but to fill any information gaps around particular issues which are material to the business. Companies must report on all material issues, not just those which are easy to report on, to ensure that the information provided is valuable, and to demonstrate how a company’s engagement with stakeholders is driving improvements in performance. Leading companies have clear KPIs which monitor progress against sustainability priorities, which are linked into business strategies. 24% of companies, (see page 45 for more detail) are also demonstrating the alignment between sustainability performance and executive remuneration to meet growing demand for clearer linkages between pay and performance and delivering long-term sustainable value.

Further work to be done on governance and assurance Independent assurance is often used to provide integrity and credibility to the data and statements a company publishes relating to non-financial information, whether solely in the Annual Report or as a standalone Sustainability Report. Surprisingly, there are still very few companies, 11% this year and 7% last year, that provide external assurance for the non-financial content of their Annual Report. The use of external verification and assurance standards continues to grow in sustainability reporting. As integrated thinking drives integrated corporate reporting, we would expect this verification to translate into the annual reporting process.


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FTSE 100

Market and outlook Moving from past performance to future opportunityThis section analyses the level of contextual market information companies provide in relation to their own business. It also tracks the disclosure of forward-looking information which helps investors assess the current and future performance and prospects of the business

Leading reporters:• Provide explanations of the market, industry trends

and opportunities

• Use insights into the competitive landscape

• Present a forward-looking orientation to give context to strategy

• Use external, independent data to reinforce qualitative statements



What’s required?The UK Corporate Governance Code has highlighted some sections of the repealed OFR as guidance. These sections include a recommendation to discuss ‘the entity’s major markets and competitive position within those markets and the significant features of the legal, regulatory, macro-economic and social environment that influence the business’.

With respect to forward-looking information, the Companies Act 2006 continues to provide guidance stating that the business review must, to the extent necessary for an understanding of the development, performance or position of the company’s business, ‘include the main trends and factors likely to affect the future development, performance and position of the company’s business’.

Current and future developments The BIS consultation on ‘The Future of Narrative Reporting’ calls for more ‘meaningful forward looking statements’ and the Kay Review – an independent review of the effect of UK equity markets on the competitiveness of UK business – calls for a more long-term focus in reporting. While these two sets of guidance are yet to set any kind of solid framework, they are encouraging companies to display contextual information in their Annual Reports which supports the business’ strategic information and links current performance with future strategic plans and outlook.

I n difficult market conditions it is increasingly important for businesses to provide context for their operating environment and in some cases to justify performance. Yet we are starting to see companies take this a step further and begin to outline their thoughts about key industry trends and opportunities for the future. Reports are slowly beginning to change from being a historical reflection of the past to providing a platform to project the future. Presentation of longer-term issues, consideration of the wider market and the company’s competitive position within it, as well as the potential risks to the company, all help to provide more meaningful outlook information, which will enable investors to make better, more informed decisions.


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Market context

• 58 companies had a dedicated market section

• In the operating reviews, 55 companies provided detail on the market

• 24 companies had a dedicated outlook section

• Within the outlook discussion, 23 companies referred to non-financial issues

• Industrials and consumer services sectors provided the greatest number of outlook discussions

Greater market contextThe majority of companies continue to present information on general industry trends, with 48% using independent data to add credibility to their discussion, which is particularly useful if the data is sourced from a well known and reputable organisation. We have seen a slight decrease in those who provide insight into the impacts these trends have had on the company, probably due to the stabilising market environment. This information can not only be used to justify performance, but can demonstrate how the company has reacted to, and planned strategically for, trends within the industry, effectively differentiating them from competitors.

There has been a steady year-on-year improvement in the number of companies providing insight into their competitive environment, reported by almost all companies, 93%, this year; however, the vast majority of these statements are still very generic in nature, with only 29% providing any meaningful or specific detail.

Figure 5.1

How many companies use independent data in the market discussion?

48%Figure 5.2

What kind of contextual information are companies providing?

Industry trends

Macro-econom

ic trends

Impact of industry

or market trends

on the company

201120102009

50

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Figure 5.3

To what extent does the company discuss competition?

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29 Specific discussion

General discussion

Market and outlook continued

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Figure 5.5

How are companies disclosing forward-looking information?

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125

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General outlook information

Detailed information with some data or targets

Brief outlook information

Very detailed outlook information with some data and targets

Figure 5.4

Does the company disclose sustainability issues in the market discussion?

• Specific discussion 16%

• General discussion 9%

• No discussion 75%

FTSE 100

Encouraging improvements in outlook information There has been continued improvement in the disclosure of forward-looking information, now provided by 99% of companies. While the quality of this discussion still varies greatly, from a short, meaningless paragraph in the management statements to detailed discussions throughout, more companies are striving to provide meaningful disclosure. This year 46% of reports featured detailed or very detailed forward-looking information with some data or targets, up from 17% three years ago. As companies become a little more certain and confident of their future within the current market environment, they are also taking the opportunity to outline their thoughts about future industry trends,

and where they see significant opportunities moving forward.

While some companies remain cautious of providing guidance which may prove to be inaccurate, this is an opportunity to discuss the future activities and prospects of the company from management’s viewpoint, in line with its strategic objectives and priorities. While this is rarely quantified or particularly detailed, there are signs that companies again have confidence in their ability to forecast performance, at least to some extent.

Sustainability issues in the market discussionSustainability issues are being discussed with the market review by 25% of companies, up from just 16% last year. This supports the strategic focus we see being placed on sustainability issues, and it is encouraging to see the market discussion working in conjunction with the topics mentioned within the strategy, offering the reader a clear overview of the external factors which can impact strategic success. Information reported includes such things as the emergence of potential legislation or new environmental regulations which may lead to impacts on a particular company’s financials and performance.



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StrategyBecoming more meaningfulThis section analyses how companies express their strategy and objectives to provide a clear indication of what they aim to achieve in the future and how this will be delivered.

Leading reporters:• Provide clear articulation of goals and strategic priorities

• Use strategy to underpin the entire narrative, consistently reinforcing the company’s direction of travel

• Include and link KPIs and risks to corporate goals and strategic objectives

• Include clear links across the Annual Report to communicate a more strategic connected story



What’s required?The Companies Act 2006 details that businesses must provide ‘a fair review of the company’, which is clearly quite a tenuous demand on how a company should detail its strategy, though it is now widely accepted that strategy should underpin the entire narrative and that business objectives should be clearly stated. Equally shaky demands are provided in the UK Corporate Governance Code, which recommends companies to include an explanation of the ‘strategy for delivering the objectives of the company’. Companies have gradually improved their strategic discussion over the past few years, however, this is more likely due to recent market factors than to the UK Corporate Governance Code and Companies Act.

Current and future developments The majority of regulation and consultations published in recent months have mentioned strategy to some extent, and this is more often than not a call to integrate and link strategy to more areas of reporting such as sustainability (BIS: ‘The Future of Narrative Reporting’), remuneration (BIS: ‘Executive Remuneration’) and risk (FRC: ‘Stewardship Code’). Strategy, to date has likely been one of the only key elements of reporting not specifically required by legislation. This will undoubtedly change moving forward as BIS’s ‘Future of Narrative Reporting’ proposals promote strategy as the driving force behind all areas of reporting, stating that the Strategic Report ‘will provide an opportunity for companies to show how, at the highest level, these issues are integrated into their strategy’. Moving forward, companies will need to move away from short-termism and be more strategic and long term in their focus.

A nnual Reports have undoubtedly become more strategic. Over the past seven years of research we have tracked this journey; from where the majority of reports did not even mention strategy, we have seen it become a greater component of reporting. At first it might have been a paragraph in the management statements, evolving to a standalone and often disconnected section, to today, where it has become an integral component of the report, effectively underpinning the entire narrative and providing a more meaningful discussion of the company’s goals and objectives. Linking strategy to key areas such as KPIs, risk and sustainability, demonstrates that strategy has become the nucleus not only of the Annual Report but of the entire business. Clearly elevating the role of strategy is partly the purpose of the BIS proposals and by making these critical links we can see a more meaningful story emerge from many of this year’s reports. In alignment with other areas of reporting, long-termism is playing an increasing role in strategic disclosures, as demonstrated by the best reporters, many of whom are disclosing future targets for the business and providing more meaningful insight into the future strategic progress of the company.


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Figure 6.1

How many companies discuss business objectives?

’07

’06

’05

85

40

68

’08

82

’09

86

25

55

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’10

92

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73

1

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97

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78

3

Just long-term

Just short-term

Long-term and short-term

Strategy continued

More meaningful strategic discussionThe quality of the strategic discussion in most reports has improved once again. There has been a steady progression from 2004 when 75% of companies mentioned their strategy and only 16% provided any meaningful discussion. Today this has risen to nearly all companies mentioning their strategy, and 78% providing a detailed appraisal, giving real insight into their plans for the future and how they propose to achieve them. However, 20% of companies are still at the beginning of this journey, providing only a mention of their strategy with no real detail.

Figure 6.2

What is the level of strategic discussion in the Annual Report?

’11’10’09

Detailed appraisal

Detailed appraisal with linkage

Mentioned

45

27

23

95

25

38

32

95 98

30

48

20

Strategic messaging

• The most popular strategic priority was ‘growth’ followed by ‘cost optimisation’ and ‘customer focus’

• One company specifically divided the report into a ‘Strategic Report’ and ‘other detailed information’

• 59 companies had a message on the front cover of their report

• The word ‘value’ was used in nine company’s messages on the front cover

• 10 companies had a standalone resource section

97% of companies now discuss business objectives, and this year we have seen 16% going a step further and providing strategic targets to allow readers to actively track future progress against key goals. As we have come out of the financial crisis, the focus on short-term objectives has diminished and now for most companies these are long-term objectives, focused on how the company will create sustainable value in the future.

This renewed strategic focus has given rise to a much more ‘Strategic Report’ – where the strategy is used to underpin the entire narrative, not only linking key areas such as sustainability, risk, KPIs and remuneration, but also being used to tell the story through management statements and even through imagery and case studies. This is encouraging given the Government’s focus on strategic reporting.

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None

Financial

Manufactured

Intellectual

Natural

Social

Hum

an

Figure 6.6

How many companies are discussing the following resources?

34

2226

22

36

56

35

Figure 6.3

Are strategy and KPIs linked?

’10’09

25

57

12

20

63

24

23

16

’11

75

42

13

20

KPIs identified and linkeddirectly to priorities

KPIs identified and linkedto overall strategy

KPIs identified but link is tenuous

Demonstrating strategic linksWhile exactly three-quarters of companies have demonstrated a link between KPIs and strategy, for some this is still a tenuous description, with only 42% providing detailed and direct links between the company’s strategic priorities and KPIs. This not only enables the company to link current performance to what it plans to do in the future, but it also offers the reader an insight into how management gains an accurate picture of the extent to which the strategy in place is allowing the company to perform.

See page 41 for more detail on KPI reporting.

Figure 6.7

How many companies have a specific sustainability objective within their group strategy?

’09

’10 ’11

4856

36

Figure 6.4

How many companies specifically identify key resources?

74%Figure 6.5

How many companies are linking resources to strategy?

’08

’09

’10 ’11

20

43

2215

Companies have also improved the way they discuss their resources, and in particular those intangible enablers such as human, social or intellectual capital, which will aid them to deliver on their goals. This year resources were discussed by 74% of companies, with 43% linking them to strategy and a further 26% linking them to the business model. The most commonly reported resource is the human resource, which includes employees, and which is discussed by 56 of the resource reporters, evidencing the growing value and recognition companies are placing on a skilled and committed workforce.

Integration of sustainability continues

The strategic discussion has also become more holistic for many companies, focused on non-financial performance as well as financial. As companies recognise the need to build shareholder and stakeholder value side-by-side, we continue to see sustainability integrated into the overall strategic discussion by the majority of companies. This discussion is also becoming more meaningful and robust as companies focus on their key issues, providing an honest appraisal of performance and articulating clear plans for the future. Currently 48% of companies include a specific objective focused on sustainability within their group strategy discussion, up from 36% two years ago. In addition, 31% of companies present sustainability strategies which are integral to group strategy, up from just 20% in 2010.



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RiskSigns of strengthening disclosureThis section analyses how information regarding principal risks, risk identification and management processes are reported on by the company. The narrative should be clear and concise to allow the reader to gain an understanding of all factors affecting the business and the internal processes in place.

Leading reporters:• Clearly explain the risk identification, management

and mitigation processes in place

• Identify principal risks specific to the company, and provide insights into risk profile

• Focus on strategic risks rather than operational risks

• Identify whether there have been any changes in the risk profile and what the priority risks are for the year

• Describe the risk appetite of the business



What’s required?Risk reporting has again attracted the attention of regulators over the past year with the FRC and the Financial Reporting Review Panel (FRRP) in particular focusing their attentions on improving the quality of disclosure. The main issues cited for this area of reporting tend to be twofold, firstly, risk factors are often too numerous to all be considered ‘principal’ and specific to the entity in question. Secondly, the link between strategy and the risks which could affect the achievement of this strategy is often weak, or indeed non-existent, leaving the reader to draw their own conclusions.

Current and future developmentsIn support of this, the FRC’s discussion paper, ‘Boards and Risk’, has called for Boards to focus on risks capable of undermining the strategy or long-term viability of the company or damaging its reputation. In addition it highlights that investors would prefer companies to focus on strategically significant risks, rather than long lists of generic risks, and link these disclosures into the business model. Specifically, they are interested in how a company’s risk profile and exposure will be impacted following changes to strategy or the business environment.

This focus on risk continues and, among other things, in response to the recommendations in ‘Effective Company Stewardship’, the FRC believes that, ‘in future, narrative reports should focus primarily on strategic risks rather than operational risks and those risks that arise naturally and without action by the company; and disclose the risks inherent in their business model and their strategy for implementing that business model’.

R isk still undoubtedly remains one of the most challenging areas of reporting. With the intense focus of the last few years, the quality of risk disclosure has improved, with the majority of companies now providing more detail on risks, their specific impacts on the company and mitigating activities. The challenge for companies is to make that discussion informative rather than boilerplate by providing sufficient detail for those outside the company to understand risk and how it specifically relates to business operations. Encouragingly, a number of leading companies are beginning to provide valuable insights, by not only linking their risks to other areas of their reporting but evidencing that the company’s risk management is dynamic, adapting to meet the changes in such things as external market or strategies. Sadly, though, these reports are very much the exception.


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Risk continued

Figure 7.3

How are companies providing details of their risk factors?

• Very detailed explanation 24%

• Detailed explanation 65%

• Basic explanation 8%

• No explanation 3%

FTSE 100

Encouraging shifts in risk managementThe debate and focus around risk identification and risk management by investors and regulators has been reflected in the level of disclosure we have seen this year around risk reporting. One of the great challenges of risk disclosure is the disconnected and confused nature of reporting, with disclosures being split between a risk section in the report and the internal control statement in the governance report. Increasingly companies have tried to consolidate that information and integrate this more into reporting on the organisation.

This year 88% of companies, up from 75%, clearly outline the process of risk identification, 40% providing detailed or very detailed information. In addition, almost all companies now detail risk management information in some way, with an increasing number, 33%, providing very detailed information. It seems as if many Boards are in the process of reviewing and developing risk management approaches and it will be interesting to see how they communicate their changes.

Number of risks

• The average number of risks disclosed was 12

• The most risks disclosed by a company was 29

• The fewest risks disclosed by a company was four

• 62 companies disclosed sustainability related risks

Risk accountability

• 9 companies explicitly linked risks to strategy

• There were three companies who identified individual Board members responsible for specific risks

• There were three companies that featured case studies in their risk section

Focus on strategic riskWhile all companies provide an explanation of the key risk factors impacting the business, the number of companies providing detailed or very detailed disclosure of risk factors has steadily increased from 72% to 89% over the last two years. However, the number providing very detailed or sufficient detail to understand the risk and how it relates to the business has remained relatively static at about a quarter of companies. Clearly companies will need to give more focus to providing more meaningful information moving forward.

Figure 7.1

Is the process of risk identification clearly outlined?

’11’10’09Detailed information

Very detailed information

Basic information45

13

17

75

41

18

14

73

88

12

48

28

Figure 7.2

How are companies detailing their risk management information?

’11’10’09Detailed information

Very detailed information

Basic information38

25

30

93

43

26

22

9197

33

29

35

sun facts


Figure 7.4

How many risks are identified?

• 1 to 5 8%

• 6 to 10 31%

• 11 to 15 37%

• 16 to 20 12%

• 20+ 12%

FTSE 100

Figure 7.5

How many companies have highlighted any priority risks for the year?

16%

There is also little change in regard to the number of risks the majority of the companies (68%) disclose, which continues to be between six and 15, with the average number of risks being 12. For these disclosures to improve, companies need to provide evidence that the risks are managed appropriately with the most important risks being discussed rather than a list of all possible risks. Encouragingly, the leading reporters, made up of 16% of companies, are clearly identifying their priority risks for the year, describing how risks have grown in importance and how they are being managed.

Although 89% of companies now identify the potential impacts of their risks, very few, 5%, provide any real analysis or quantification detail. In contrast, many companies seem to be explaining much better how they are mitigating against risk, with 81% providing a specific statement for each risk. These are encouraging signs but in many cases the details of the mitigation efforts read as if they had been written for any company rather than providing specific details.

Some of the best reporters have moved away from long lists of generic risks and have begun disclosing integral strategic

risks. In fact, disclosure of operational risk has dropped slightly and reporting on strategic risk has increased from 52% last year to 64% this year. We are also seeing a number of companies structuring their risk tables around their strategic priorities, thereby establishing a stronger link between risk and strategy.

Figure 7.6

How many companies are identifying potential impacts?’09

’08

’07

74

78

62

67

80

76

’10

84

79

’11

89

84Quantified impacts

Qualitative identification of potential impacts

Figure 7.7

How do companies explain how they are mitigating risk?

’10’09

’08

20

81

5677

32

37

87

63

20

’11

92

81

7Specific statement for some risks

General statement for all

Specific statement for all risks


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Leading reporters provide greater insights There have been a number of developments over the past year, which seem to have resulted in some momentum with leading reporters. For these companies, there has already been much focus on clearly demonstrating how risks are strategically identified and managed in the business. What is emerging is more insightful disclosures around the company’s overall risk appetite and approach as well as greater acknowledgement of not only ‘what’s changed’ but ‘how the company is dealing with it’ – whether this is a response to external environment changes or internal changes to processes. In addition, these companies are providing much more meaningful information about what the audit and/or risk committee did rather than just boilerplate descriptions. There are even a few who discuss how the remuneration criteria affects management behaviour and hence the risk of an investment. This enables investors to identify whether the remuneration criteria are aligned to the company’s overall strategy.

Risk continued

Growing strategic alignmentIn addition to some innovative initiatives by the leading reporters, there is a sense that, overall, companies understand that risk discussions need to be presented as more strategic and integral to managing performance against strategic objectives and priorities. There is a group of emerging companies whose reports are effective in explaining how the governance structure fits together with risk management providing a better understanding of how the Board operates, with clear explanations of the flow of risk information. This approach gives greater confidence that the process is actually in place and being used effectively. These companies are also providing informative explanations, rather than boilerplate terminology, of what the risks actually are, how the company defines them and how it deals with them in practical terms. It seems that what is important to these companies’ reports is an indication that risks are being managed in the context of the strategy and that Boards have accounted for the ‘unknown unknowns’ as well as the ‘known unknowns’ when formulating their objectives.

Top reporters demonstrate accountabilityThe best reporters are displaying greater accountability in their risk disclosures. This year 44% of companies demonstrate clear ownership of risk, with the risk report being introduced by a director or senior executive. Taking this a step further, we have seen three companies identifying the executive responsible for certain risks, effectively linking executive responsibility to specific risks, and showing greater alignment between internal and external risk management processes.

Figure 7.8

How many companies have someone who shows clear ownership of risk?

44%Figure 7.9

How many companies have identified individuals responsible for specific risks?

3%Other initiatives also apparent, include risk case studies and outlining quantitative risk criteria, which have been exhibited by a small group of companies. These new initiatives are exciting and really heighten the sense of corporate accountability; however, they are yet to be exhibited by the majority of companies and are still used only by the best reporters.


FTSE 100


PerformanceImproving relevance with stronger linkagesThis section analyses the disclosure of business performance in the Annual Report. Stakeholders are increasingly demanding transparent, comprehensive information in order to gain a balanced view of the company’s performance, both now and in the future

Leading reporters:• Explicitly recognise financial KPIs and non-financial

KPIs, where relevant

• Provide a rationale for the use of each KPI

• Include clear alignment of KPIs to strategic objectives

• Evidence the link between strategy, KPIs and remuneration to justify pay

• Report comparative data and future targets


What’s required? The Companies Act 2006 states that ‘the review must, to the extent necessary for an understanding of the development, performance or position of the company’s business, include: analysis using financial key performance indicators, and where appropriate, analysis using other key performance indicators, including information relating to environmental matters and employee matters’.

The increased scrutiny of executive remuneration and the relationship between KPIs and executive awards has also manifested itself in the UK Corporate Governance Code which is for many in its first full year of implementation. It states that ‘a significant proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual performance’ and that ‘performance-related elements of executive directors’ remuneration should be stretching and designed to promote the long-term success of the company.’

Current and future developmentsMuch of the focus by Government over the past year has been on tackling executive pay. In the consultation on ‘The Future of Narrative Reporting’, BIS recognised the increasing complexity, length and need to link remuneration to the long-term performance of the business and stated ‘that companies should provide greater clarity about the link between pay and performance, so that shareholders can be confident that directors are being incentivised appropriately and can challenge where they do not think this is the case’.

Following on, there have been a number of discussions and consultations specifically around executive pay. Proposals being taking forward by the Government will address three main areas: firstly increased transparency around the determination of executive pay including providing a link between the remuneration policy and company strategy; increasing shareholder power by introducing a binding shareholder vote on future pay policy for the Board as a whole; and more diversity within the remuneration committee, which will result in greater diversity on Boards, as well as the idea that best practice will be led by the business and investor community.

T here has been a continual improvement in recent years in the number of companies disclosing key performance indicators (KPIs). Although financial KPIs are now well established and firmly part of the reporting landscape, non-financial practice continues to evolve. The quality of the disclosures continues to improve as well, with more companies each year presenting clearer and more meaningful descriptions of KPIs and why they were chosen. For KPIs to be meaningful, readers need to feel assured that those presented in the report are a true reflection of those used internally by the Board to manage the business. To evidence this, companies need to clarify the link between the KPIs and strategy and provide greater insight into links between these performance measures and executive remuneration. Connecting these elements of reporting will allow companies to demonstrate business sustainability, and how successful they have been in implementing their strategy, as well as providing the much sought-after justification for executive remuneration. While we are seeing greater connectivity between key areas of reporting such as strategy, risk and financial and non-financial performance, meaningful links to remuneration are still to be provided by most.

Performance continued


Financial KPIs• The highest number of KPIs

reported was 16

• Five companies did not disclose financial KPIs

• The average number of financial KPIs disclosed was seven

• The three most common financial KPIs were sales/revenue, EPS and TSR

Non-financial KPIs• The highest number of

non-financial KPIs reported was 13

• 32 companies did not disclose any non-financial KPIs

• The average number of non-financial KPIs disclosed was three

• The three most common non-financial KPIs were safety, employee engagement and CO2 emissions

Measuring progress through KPIs

Figure 8.1

How many companies identify KPIs as a tool for measuring progress?

’08

’09

’10 ’11

65

77

6357

For most, KPIs are now firmly etched into their reporting agenda, with nearly all companies reporting them in some form. Financial KPIs are well established with 95% of companies reporting these. The challenge for many remains the identification and disclosure of non-financial KPIs. In line with previous years non-financials are only

provided by 68% of companies, highlighting that for many these issues can be difficult to measure, and that for others these issues perhaps are simply not material. Many companies report additional performance measures, covering environmental, employee and social matters in the Sustainability section of their Annual Report.

The number of KPIs identified by companies has remained relatively static, between four and six for financial, and between one and three for non-financial. The challenge now is how to demonstrate their relevance to the business, providing investors with insight into the key areas of focus for management. Furthermore, 14% of the FTSE 100 present divisional KPIs, with the majority of these companies matching their divisional KPIs with their group KPIs.

Figure 8.2

How many companies specifically identify key performance indicators?

’08

’09

93

57

2

34

88

55

3

30

’10

94

65

1

28

’11

97

66

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29

Just non-financial

Just financial

Both

Figure 8.3

How many financial KPIs are being identified by companies?

• None 5%

• 1 to 3 7%

• 4 to 6 42%

• 7 to 9 27%

• 10+ 19%

FTSE 100

This year we have found that 77% of companies identify the role of KPIs as being a measuring tool, up from 65%. This figure has grown steadily each year as companies make a clearer connection to KPIs acting as a key management tool to assist with the measurement of progress. For many this connection could just be superficial as few provide any further evidence that this is actually the case.

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KPI tables are being presented alongside the strategy for many companies, while others are now going beyond this approach and discussing their strategy and KPIs in a more integrated way, disclosing KPIs within the strategic priorities discussion, increasing their relevance and importance as well as giving readers confidence that management is measuring the success of the strategy.

See page 32 for more detail on strategy.

Clarifying executive remunerationIt has been impossible to avoid the furore surrounding executive remuneration, with remuneration reporting quoted as being ‘over-long, over-complicated and unclear’ and often lacking any clarity on the link between executive pay and company performance. To date, extensive regulations and guidance have improved the quantity of disclosure, but have often led to a lack of clarity.

Last year, the Association of British Insurers (ABI) published its first report on ‘Board Effectiveness’ and issued its revised ‘Principle of Executive Remuneration’, giving UK boardrooms the clearest indication yet on executive pay and effective performance by institutional investors. Broadening the debate have been BIS’s recent and ongoing discussions and consultation on the package of measures to address failings in the corporate governance framework for executive remuneration. These are likely to have a significant impact on the structure of remuneration reports in the future. As the Secretary of State announced in January, remuneration will be split into two sections: one detailing the proposed future policy for executive pay; the other setting out how pay policy has been implemented in the preceding period.

16% of companies this year discussed whether their KPIs had achieved their targets, providing readers with the ability to understand both the level of success and the ambitions of the company, which are both critical matters in shareholder decision-making.

Performance continued

Figure 8.6

How many companies discuss whether targets have been achieved?

16%

Figure 8.7

How many companies demonstrate a link between risk and KPIs?

12%

Positive steps in linking strategy and KPIsClearly a company’s strategy is fundamental to its future success, therefore it makes sense that KPIs should relate to the strategic objectives, measuring how the company has performed against them. We are seeing more companies make this connection, 42%, and, encouragingly, many are striving to make the connection more explicit. KPI tables are becoming more accessible, providing clearer descriptions of performance and in most cases comparative information and broad targets, with a few providing the relevance to strategy for each KPI.

Figure 8.5

How many companies demonstrate a link between group strategy and KPIs?

’09

’10 ’11

42

3124

Figure 8.4

How many non-financial KPIs are being identified by companies?

• None 32%

• 1 to 3 39%

• 4 to 6 19%

• 7 to 9 7%

• 10+ 3%

FTSE 100


This year, in response to all the focus, we are seeing some companies begin to make an effort to provide some clarification of this overly complicated issue. 60% of companies provided an introduction from the Chairman of the remuneration committee, in an effort to be more transparent about what people are paid. Many begin to make the link to company performance and explain the rationale behind the level of the award. In addition, a very small number of companies are going further and are presenting each executive’s remuneration package as a ‘single figure’, as suggested by BIS.

Figure 8.8

How many companies demonstrate a link between remuneration and KPIs?

’10’09

’08

8

30

2219

31

12

39

14

25

’11

65

17

48

Specific link

Basic link

Figure 8.9

Which KPIs are linked to remuneration?

• Both financial and non-financial 22%

• Just non-financial 2%

• Just financial 41%

• No link 35%

FTSE 100

The increased focus seems to have had an impact on the Annual Report with more companies now linking their KPIs to executive performance and awards – 65% do this, up from 39% last year. However, only 17% are providing a specific link, with the majority providing a very loose and often tenuous link in the remuneration report. Of those companies that present a link, 41% are linking to just financial KPIs and 22% to both financial and non-financial KPIs. These moves are all still small steps, but are encouraging and suggest that companies have recognised that trust needs to be rebuilt with stakeholders and that greater transparency and clarification needs to be given to linking remuneration policies to performance and achievement of strategy.

Remuneration

• 60 companies included a personal introduction from the Chairman of the Remuneration Committee at the start of the remuneration report

• 12 companies made a link between strategy, KPIs and remuneration

• There were five companies who made an explicit link between KPIs and remuneration in the KPI section of the report, as well as the remuneration section

• The sector seen to be providing the most explicit links between KPIs and remuneration was financial services

• One company referred to a ‘single figure’ in their remuneration report

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Approach to reportingEncouraging signs of conciseness and connectivityThis section analyses how companies are delivering their overall reporting strategies as well as how they are embracing online reporting as a means of enhancing their communications with stakeholders.

Leading reporters:• Focus on quality rather than quantity, using good

information and design to make the content accessible

• Present an engaging, concise ‘strategic overview’ which sets up the investment case, strategy, performance measures and introduces the management team

• Use the online environment to give users a choice in terms of how they access and view information

• Utilise social media to bring content to life and create an accessible two-way dialogue



What’s required?The e-communications provisions of the Companies Act 2006 are now well embedded in the reporting regime of most listed companies and the majority are continuing to upgrade their online reporting to meet the demands of ‘defaulted’ shareholders. Additionally, HM Treasury’s published ‘Plan for Growth’ discusses the need for quoted companies to ‘materially simplify narrative reporting’, thereby encouraging companies to explore the different channels available, such as the website, to best present core and additional information about their business.

The FRC’s recommendation that ‘companies should take advantage of technological developments’, and its proposal that ‘companies be relieved of the burden of producing a printed Annual Report’ was seen as too controversial by investors and wider stakeholder groups alike. It became apparent that the FRC were perhaps a few years too early with their recommendation. However, as the next generation of Annual Report users are almost exclusively consuming information in a digital format, the likelihood of reports being demanded through online channels is high.

Current and future developmentsThe move towards a concise Strategic Report which focuses on strategic headline information is encouraging many companies to rethink, not just the information, but the way it is delivered. The other part of the proposed narrative framework by BIS in ‘The Future of Narrative Reporting’ suggests that ‘the detailed information required in the Annual Directors’ Statement is best suited to presentation online, where it can readily be searched and used in conjunction with other information on the company’. Although this is by no means a solid requirement and the green light for the BIS consultation is yet to shine, it does emphasise the growing importance and focus on companies utilising the new media environment and its ability to enhance engagement and user experience.

C ompanies face the challenge of ensuring that their communications remain effective in offering a clear, meaningful and holistic picture of their business, amidst the increasing regulatory obligations and stakeholder expectations. In this environment, corporate reporting has become a year-long conversation covering both financial and non-financial issues. Digital reporting is in the spotlight as the world moves towards a ‘paperless society’, globalisation dissolves borders and stakeholder groups become more digitally savvy. Companies are rethinking their reporting strategies to ensure they are communicating their messages in the most effective way for the channel. We are seeing a greater focus on telling a clear and concise story, which can be brought to life, both in print and in the online environment, using tools such as video and social media applications to engage and inspire audiences and to give insight into the personalities behind the company.


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Approach to reportingCompanies today are operating in a 24/7 digital environment, with stakeholders being able to access a wide range of corporate communications and ready to engage in two-way dialogue. Corporate reporting is no longer just about the Annual Report, it is a year-long conversation covering financial and non-financial issues. While a challenge for companies, this has had a positive impact on reporting, with much stronger alignment of corporate messaging across different communications and channels.

In this environment there has been a focus on ‘cutting the clutter’ in reporting, ensuring reports focus only on the business-critical issues, pointing readers online to find further information. Encouragingly this approach may now be starting to manifest itself in the length of reports, as this year we see the

annual growth in the number of pages reach a plateau (the average length this year is 176 pages, as opposed to 175 last year). While still a long way from being a concise read, we are seeing signs that companies are trying to streamline and simplify their messaging. A key trend we have seen this year is the introduction of the ‘strategic overview’ at the outset of the report. This overview effectively summarises the key aspects of a company’s story, including business model, governance structure, strategy, risk, KPIs and in some cases even remuneration. This provides readers with an engaging and concise overview of the company’s key messages, what the business does, how it does it and its goals for the future, right at the outset of the document, leaving the remaining report to focus on the detail. Often called the ‘quick’ or ‘essential read’ it provides readers with a clear, concise, and often ‘holistic’ view of

Annual Report length

• The longest Annual Report was 489 pages

• The shortest Annual Report was 80 pages

• There were three Annual Reports over 400 pages

• The longest narrative section of an Annual Report was 304 pages

• The shortest narrative section of an Annual Report was 35 pages

Sustainability reporting

• 70 companies published standalone CR or Sustainability Reports either in print or online

• 17 companies had videos within their online CR reports

• The longest CR or Sustainability Report was 260 pages

• The shortest CR or Sustainability Report was six pages

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48

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’09

’10 ’11’07

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Percentage of narrative content

Figure 9.1

What is the average length of Annual Reports?

60

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2819 21

Figure 9.2

How many companies produce an Annual Review?

sun facts


Online approach As corporate websites grow in complexity and functionality, companies are rethinking their digital reporting strategies, ensuring the right messages are being delivered online, rather than focusing on delivering the full report in HTML. In fact the number of full or part HTML reports has decreased this year from 67% to 58%, but we have seen more companies use different tools to engage with online users, such as bringing their strategic overviews to life and the emergence of Reporting Centres. We are seeing greater use of interactive features such as comparison charts, video, search functions and feedback polls, which can extend and reinforce the core messages published in the printed report.

10Figure 9.4

How are Annual Reports delivered online?

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Interactive PDF

• Less than 100 pages 6%

• 100-199 pages 70%

• 200-299 pages 17%

• 300-399 pages 4%

• 400 + pages 3%

Figure 9.3

What is the breakdown of the length of Annual Reports?

the business, in essence an executive summary of the detailed report. This approach has been particularly favoured by those with long and complex reports, often meeting the requirements of more than one legal jurisdiction.

These overviews are often brought to life online, in many cases fulfilling the role of an online Annual Review. The information is often supported with additional imagery, and in many cases video to really engage and inspire audiences. With only 21 companies this year opting to produce an Annual Review, maybe we will see more of them focusing on this approach and providing a strategic review either at the beginning of their current report or as a separate document, and then enhancing the message in the digital environment to ensure it relates to all stakeholders.

Reporting Centres are a emerging trend, produced by 14% of companies. They provide a single location to bring together multiple strands of a business’ reporting strategy such as the Annual Report, Annual Review, Sustainability Report and key investor updates and presentations. Current Reporting Centres are using a host of different techniques to deliver regulatory information that includes HTML reports, interactive PDFs, videos, webcasts and flip books.


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Approach to reporting continued

Social networkingLast year we saw a significant jump in companies linking to social networking sites and this trend has continued into 2011. 29% of companies are linked to Facebook while there has been a surge in the number of companies linked to Twitter increasing from 29% to 40%. Links to YouTube have also increased this year as companies are using this social network to display management speeches, advertisements, corporate videos and even employee case studies. While most of these links are from the corporate website, three companies link directly from the HTML Annual Report.

This growth in the use of social media demonstrates the growing trend in personalisation and providing an accessible two-way dialogue. It is also a key way to bring content to life, providing all stakeholders with access to management in an engaging way.

The sustainability reporting environmentWe have discussed sustainability reporting in depth in this research, looking at the journey reporters are embarking on and the growth of sustainability strategies which are integral to the group strategy. Moving away from the content and looking at online presentation, we found that 52% of companies use their website to expand on the sustainability content provided in the Annual Report. This is a significant change from last year where the majority of information was found within the Annual Report itself, and is consistent with the focus on ensuring the Annual Report presents a concise overview of key strategic messages. In the online environment companies are able to bring this content to life and we are seeing greater use of video, demonstrated by 17% of companies and even the emergence of feedback forms utilised by 19% of companies.


Digital reporting

• 51 companies featured the Annual Report on the corporate website homepage

• The largest number of clicks from the company homepage to the Annual Report was four

• The most popular online functionality tool was the ‘search function’

• 18 companies promoted videos that appear online in the Annual Report

• 12 companies invited feedback on the Annual Report

• 13 companies published iPad apps

Figure 9.6

How are companies delivering sustainability information online?

• Print/PDF 26%

• Summary print/comprehensive online 52%

• Only in Annual Report 22%

FTSE 100

Figure 9.5

How many companies include a link to social networking sites from the corporate site?

YouTube

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MethodologyBlack Sun’s year-on-year benchmarking review of the FTSE 100 Annual Reports narrative tracks trends and best practice in light of the evolving regulatory requirements and reporting landscape.

Benchmarking approachOur review has been developed by Black Sun’s Research and Strategy Team, who have worked in conjunction with independent advisers, clients and regulatory bodies to identify what constitutes ‘best practice’ reporting within the remit of the regulatory guidelines.

The focus of the review is on the narrative of the Annual Report, to assess how effectively companies have communicated information about their business to their stakeholders. Our evaluation does not cover the financial statements or notes and we do not use the study to evaluate the accuracy of the information, compliance with industry regulations, or financial performance.

Sample groupOur sample consisted of companies within the FTSE 100 as at 1 March 2012 and the sector analysis is based on the Financial Times FTSE sector indices. The Annual Reports which have been reviewed cover years ending between 1 January 2011 and 31 December 2011 and we assess them against over 200 data points year-on-year.

During the year there has been a significant reshuffle of those companies in the FTSE 100. Since our research sample last year, 11 companies have changed and, of those 11, nine entered the FTSE 100 for the first time. This change may have impacted the results as the new entrants adjust to the reporting standards of the FTSE 100.

Legislation & regulationA sample of some of the legislation, regulation and good practice standards which we have reviewed and used to formulate the criteria for our analysis is as follows:

• Companies Act 2006

• UK Corporate Governance Code

• BIS’s consultation on ‘The Future of Narrative Reporting’

• FRC’s Effective Company Stewardship consultation and Next Steps

• BIS’s Discussion paper on Executive Remuneration

• IIRC’s Integrated Reporting discussion paper

• Accounting Standards Board’s Reporting Statement on the OFR

• FRC’s Guidance on Board Effectiveness

• FRC’s Guidance on Audit Committees

• EU Corporate Governance framework

Data FileFTSE 100 sector indices:

Basic MaterialsConsumer GoodsConsumer ServicesFinancial ServicesHealthcareIndustrialsOil & GasTechnologyTelecomsUtilities

Symbols used in this data file:

Please note that all companies had a basic Annual Report PDF available

HTML report PDF report Interactive PDF report

html ipdf

Overview of Reporting Overview of Digital Reporting

Financial year end

Total number of pages (Annual Report)

Number of pages

of narrative

% of narrative

content

Total number

of pages (Annual Review)

Total number

of pages (CR Report)

Online format of

Annual Report

Online format of

Annual Review

Online format of

CR Report

Basic Materials

Anglo American Dec 226 122 54% – 82 –

Antofagasta Dec 164 90 55% – 86* – *

BHP Billiton Jun 268 159 59% 42 54

Eurasian Natural Resources Corporation Dec 160 71 44% – 36 – –

Evraz Dec 158 79 50% – – – – –

Fresnillo Dec 208 119 57% – – – – –

Glencore International Dec 164 101 62% – 106* – – *

Johnson Matthey Mar 138 74 54% – 76 –

Kazakhmys Dec 226 125 55% – – – –

Polymetal International Dec 148 85 56% – – – – –

Randgold Resources Dec 189 142 75% – – – –

Rio Tinto Dec 224 129 58% 36 165

Vedanta Resources Mar 164 84 50% – 40 –

Xstrata Dec 214 113 53% – 136* – *

Consumer Goods

Associated British Foods Sep 116 57 49% 30 60

British American Tobacco Dec 208 108 52% – 193 –

Burberry Group Mar 148 86 58% – – – – –

Diageo Jun 196 109 56% – 96 –

Imperial Tobacco Group Sep 136 74 54% – – – –

Reckitt Benckiser Group Dec 88 35 40% – 50 –

SABMiller Mar 176 75 43% – 20 –

Tate & Lyle Mar 120 59 48% – – – –

Unilever Dec 132 59 45% – 44 – –

Consumer Services

British Sky Broadcasting Group Jun 128 58 46% 68 117 –

Carnival Nov 64 3 5% – 100* – – *

Experian Mar 164 89 54% – 36 –

Data file continued

* As at 06/06/12 these companies had not released a 2011 report



Financial year end


Number of pages

of narrative

% of narrative

content

Total number


Total number


Online format of

Annual Report

Online format of

Annual Review

Online format of

CR Report

Consumer Services

ITV Dec 142 79 56% – 10* – *

InterContinental Hotels Group Dec 132 68 52% 60 88 –

International Consolidated Airlines Group Dec 204 77 38% – – – – –

Kingfisher Jan 112 54 48% – 109 –

Marks & Spencer Group Apr 116 72 62% 32 56

Morrison (Wm) Supermarkets Jan 108 52 48% 36 28

Next Jan 98 42 43% – 46 –

Pearson Dec 180 89 49% – 52 –

Reed Elsevier Dec 200 82 41% – 66 –

Rexam Dec 148 83 56% – – – –

Sainsbury (J) Mar 114 48 42% – 90 –

Tesco Feb 162 91 56% 40 70

WPP Dec 196 143 73% – 84* – *

Whitbread Mar 96 38 40% – 16 – –

Financial Services

Admiral Group Dec 100 52 52% – – – –

Aberdeen Asset Management Sep 124 53 43% – 20 – –

Ashmore Group Jun 92 48 52% – 15 –

Aviva Dec 372 164 44% – 260 –

Barclays Dec 286 192 67% 36 98

British Land Company Mar 188 131 70% – 86 – –

Capital Shopping Centres Group Dec 144 84 58% – 6 –

HSBC Holdings Dec 440 277 63% 60 36

Hammerson Dec 132 51 39% – 56 –

Hargreaves Lansdown Jun 80 45 56% – – – – –

ICAP Mar 140 61 44% – – – –

Land Securities Group Mar 164 88 54% – 85 –

Legal & General Group Dec 240 87 36% – 155 –


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Financial year end


Number of pages

of narrative

% of narrative

content

Total number


Total number


Online format of

Annual Report

Online format of

Annual Review

Online format of

CR Report

Financial Services

Lloyds Banking Group Dec 368 204 55% 40 48* *

Man Group Dec 148 73 49% – – – –

Old Mutual Dec 300 124 41% 100 40 –

Prudential Dec 484 157 32% – 55 –

RSA Insurance Group Dec 160 72 45% 88 68

Resolution Dec 272 109 40% – – – – –

Royal Bank of Scotland Group Dec 489 304 62% 59 44 –

Schroders Dec 156 74 47% – 28* – *

Standard Chartered Dec 268 159 59% – 16 –

Standard Life Dec 276 86 38% 32 8

Healthcare

AstraZeneca Dec 216 138 64% – – – –

GlaxoSmithKline Dec 252 133 53% 8 103 –

Shire Dec 152 73 48% – 8 –

Smith & Nephew Dec 160 76 48% – 37* – – *

Industrials

ARM Holdings Dec 164 93 57% – 36 –

Aggreko Dec 148 86 58% – – – –

AMEC Dec 126 64 51% – 27 – –

BAE Systems Dec 194 113 58% – – – –

Bunzl Dec 104 52 50% – – – –

CRH Dec 128 58 44% – 84* – – *

Capita Dec 144 85 59% – 36 –

Compass Group Sep 140 60 43% – 40 –

Croda Dec 108 46 43% – 44 – –

G4S Dec 144 70 49% – 40 – –

GKN Dec 134 72 54% – – – –

IMI Dec 140 68 49% – – – – –

Data file continued

* As at 06/06/12 these companies had not released a 2011 report



Financial year end


Number of pages

of narrative

% of narrative

content

Total number


Total number


Online format of

Annual Report

Online format of

Annual Review

Online format of

CR Report

Industrials

Intertek Group Dec 116 59 51% – 6 – –

Meggitt Dec 112 54 48% – – – –

Rolls-Royce Holdings Dec 132 70 53% – – – –

Serco Group Dec 180 107 59% – 24 –

Smiths Group Jul 144 85 59% – 20 –

Weir Group Dec 146 70 48% – – – – –

Wolseley Jul 164 85 52% – – – –

Oil & Gas

BG Group Dec 164 85 52% – 50 –

BP Dec 300 151 50% 36 54

Petrofac Dec 176 106 60% – – – –

Royal Dutch Shell Dec 192 97 51% 40 40

Tullow Oil Dec 184 109 59% – 74* – *

Technology

Sage Group Sep 130 66 51% – – – –

Telecoms

BT Group Mar 186 86 46% 28 24

Vodafone Group Mar 156 73 47% – 24 –

Utilities

Centrica Dec 150 64 43% 42 43

International Power Dec 240 116 48% 40 – –

National Grid Mar 188 108 58% – 12* – *

SSE Mar 156 76 49% – – – – –

Severn Trent Mar 128 58 45% – – – –

United Utilities Group Mar 120 55 46% – 146 –

Totals 176 51%


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Appendix

Details of consultations, discussion papers and guidance since June 2010

2010JUNEFRC – ‘UK Corporate Governance Code’Regulation

Sets out standards of good practice in relation to Board leadership and effectiveness, remuneration, accountability and relations with shareholders. Applies to accounting periods beginning on or after 29 June 2010.

OCTOBERBIS – ‘A Long Term Focus For Corporate Britain’Call for evidence

The review aimed to establish whether there are further issues affecting the functioning of capital markets and, if so, what the causes are. It considered the role of directors and shareholders and asked fundamental questions about shareholder engagement, market short-termism and the functioning of the investment chain in the UK. It also considered directors’ remuneration and – following up the Takeover Panel’s recent announcement – the economic case for takeovers. The responses to the call for evidence identified a number of issues with short-termism in UK equity markets and of some agency problems. On this basis the Secretary of State asked Professor John Kay to conduct an independent review to examine investment in UK equity markets and its impact on the long-term performance and governance of UK quoted companies.

DECEMBERFRC – ‘Guidance On Audit Committees’Guidance

Designed to assist company Boards in making suitable arrangements for their audit committees, and to assist directors serving on audit committees in carrying out their role and assist them when implementing the relevant provisions of the UK Corporate Governance Code.

2011JANUARYFRC – ‘Effective Company Stewardship - Enhancing Corporate Reporting And Audit’Discussion paper

Considers how the effectiveness of the stewardship role of Boards and audit committees can be enhanced through corporate reporting and audit. The FRC released a subsequent paper, ‘Effective Company Stewardship, Next Steps’ – discussing the next steps as a result of the initial recommendations.

FEBRUARYBIS – ‘Lord Davies Review Of Women On Boards’Consultation

Recommended that all Chairmen of FTSE 350 companies should set out the percentage of women they aim to have on their Boards in 2013 and 2015. FTSE 100 Boards should aim for a minimum of 25% female representation by 2015. A further recommendation of the Davies report called for the FRC to amend the UK Corporate Governance Code to require listed companies to establish a policy concerning Boardroom diversity, including measurable objectives for implementing the policy, and disclose annually a summary of the policy and progress made in achieving the objectives. Following consultation the FRC announced in October that it intends to amend the UK Corporate Governance Code in accordance with this recommendation.

MARCHFRC – ‘Guidance On Board Effectiveness’Guidance

This guidance relates primarily to the leadership and effectiveness of the Board components of the Code.

APRILFRC – ‘Cutting Clutter’Discussion paper

Contains a number of aids for reducing clutter. The FRC intended to follow through on this initiative in a number of ways, including working with the Government on its review of narrative reporting. In addition, as proposed in the Effective Company Stewardship consultation, the FRC would like to create a ‘financial reporting lab’ to enable greater innovation.

EC – ‘Disclosure Of Non-Financial Information’Green paper

The Commission intends to present a legislative proposal on the transparency of the social and environmental information provided by companies in all sectors.

EC – ‘EU Corporate Governance Framework’Green paper

Reflects on the comply or explain principle and introduces the concept of monitoring bodies. It also reviews the role of shareholders engagement and the role of non-executive directors in challenging the Board.

SEPTEMBERBIS – ‘The Future of Narrative Reporting’Consultation

Proposes a new framework for narrative reporting to make reporting more concise and strategic. Proposals suggest two documents – the Strategic Report, which provides a concise summary of the company’s business model, financial results, strategic direction, risks and highlights from the governance and remuneration reports, and the Annual Directors’ Statement, which will provide the detailed information that underpins the Strategic Report in a more structured and comparable way.

BIS – ‘Executive Remuneration’Consultation

Builds upon the ‘Long Term Focus for Corporate Britain’ consultation. Recommends that clear links are made to strategic objectives of the company and proposes how reporting could be made clearer and more concise.

FRC – ‘Effective Company Stewardship: Next Steps’Discussion paper

Outlines the responses the FRC has received to the recommendations in ‘Effective Company Stewardship’ and, following consideration of these responses, summarises the actions the FRC intends to take. Decisions as to any changes will be made in 2012, and should any changes be agreed as a result they would also be incorporated into the revised Code that will apply from 1 October 2012.

Impact on reporting certainImpact currently uncertainSupporting changes / feeding into change


FRC – Launch of the Financial Reporting LabLaunch of testing facility

A format developed to help solve corporate reporting problems by providing the opportunity for businesses, investors, auditors and regulators to work collectively to bring all the new initiatives and proposed changes together, develop and test new thinking in reporting, and take a large part of the cost and risk out of the process of innovation and reduce the need for regulatory intervention.

IIRC – ‘Towards Integrated Reporting’ – Communicating value in the 21st centuryDiscussion paper

Development of a global framework for reporting that is able to accommodate complexity and integrate all different strands of reporting in a coherent way. IIRC put together a Pilot Programme to provide the opportunity to contribute to the development of the framework and to demonstrate global leadership in this emerging field of corporate reporting. It is anticipated that an Exposure Draft of an International Integrated Reporting Framework will be published for comment in the next year.

FRC – ‘Boards And Risk’Discussion paper

The FRC held a series of meetings to learn more about how Boards were approaching their risk responsibilities in a rapidly changing market. As a result, a limited review of the Turnbull Guidance will be considered in 2012.

NOVEMBER IIRC – Integrated Reporting Pilot ProgrammeLaunch of the Pilot Programme

Over 70 reporting organizations across the globe from the corporate to public sectors; and an Investor Network with over 20 institutional investors will be developing and testing the principle, content and practical application of integrated reporting. It is running for a period of two years and is due to end in October 2013 after which the Framework will be published.

DECEMBERFRC – ‘Developments In Corporate Governance 2011 – The Impact And Implementation Of The UK Corporate Governance And Stewardship Codes’Discussion paper

Review of the responses of companies and investors to the challenges laid down by the two codes and how companies are responding.

2012FEBRUARYFRC – ‘What Constitutes An Explanation Under ‘Comply Or Explain?’ Reports On Discussions Between Companies And Investors’Discussion paper

Given the debate in Europe about the future of comply-or-explain, the FRC brought together those who make explanations and those to whom they are addressed in order to compare notes about what each side understands by the word explanation.

BIS – ‘Kay Review Of UK Equity Markets And Long-Term Decision Making’Interim report

Professor John Kay published the Interim Report of his independent review to examine investment in UK equity markets and its impact on the long-term performance and governance of UK quoted companies. The Interim Report summarises the responses to the review’s call for evidence and presents a broad discussion of the issues raised. A final report, including recommendations for action, will be presented to the Secretary of State for Business in the summer of 2012.

MARCHBIS – ‘The Future Of Narrative Reporting – The Government Response’Response

Over the next few months BIS will work with the FRC and other representatives that have responded to the consultation to clarify the detail of the Strategic Report and work to establish the full breadth of information that should go into the Annual Director’s Statement.

BIS – Launch Of The Consultation On Improving The Governance Arrangements Surrounding Executive PayConsultation

Vince Cable launched the consultation plans including a range of measures which were proposed, being: an annual binding vote on future remuneration policy; increasing the level of support required on votes on future remuneration policy; an annual advisory vote on how pay policy was implemented in the previous year; and a binding vote on exit payments of more than one year’s salary. The objective is to promote better engagement between companies and those that invest in them, and to create a stronger link between pay and performance.

APRILFRC – ‘UK Corporate Governance Code, UK Stewardship Code And On Audit Committee Guidance’Consultation

This aims to give effect to the FRC’s Effective Company Stewardship proposals. The proposed changes to the UK Corporate Governance Code include: requesting FTSE 350 companies to put the external audit contract out to tender at least every ten years; asking Boards to explain why they believe their Annual Reports are fair and balanced; encouraging more meaningful reporting by audit committees; providing more guidance on explanations that should be provided to shareholders when a company chooses not to follow the Code; and the new Code will also embody provisions previously announced requiring Boards to report on their gender diversity policies.

FOR MORE INFORMATIONEuropean Commission (EC)www.ec.europa.eu/

Financial Reporting Council (FRC) www.frc.org.uk/

International Integrated Reporting Council (IIRC)www.theiirc.org/

UK Department of Business and Innovation (BIS) www.bis.gov.uk/


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About Black SunBlack Sun is one of Europe’s leading strategic corporate reporting consultancies.

At Black Sun we are firm believers in the value of corporate reporting to both companies and investors, as it provides a way for companies to communicate their activity, performance and future prospects to stakeholders. We bring together corporate reporting, sustainability and digital communications for our clients to create powerful integrated solutions. As strategic thinkers, the focus of our approach is our unique ability to combine knowledge of current issues with an understanding of our clients’ businesses, to develop powerful communication solutions.

Our reputation has been established through a unique combination of strategic research and analysis and ambitious creative thinking. We have over 20 years’ experience working with some of the biggest and most respected companies in the UK and international markets, helping them to build greater trust and confidence with their stakeholders. We set the standard and drive the agenda for our profession and are committed to driving the debate in corporate reporting whether through our industry research or consultations with government and regulators.

In the last year, our clients were once again recognised as leading reporters by various prestigious bodies. Twelve awards were won, including:

• Best Printed Annual Report (Communicate Magazine’s Corporate & Financial Awards);

• Best Strategic Governance Awards (Strategic Value in Corporate Reporting Awards);

• Best Board disclosure in the FTSE 100 (ICSA Hermes Transparency in Governance Awards);

• Best strategy disclosure for a FTSE 250 (ICSA Hermes Transparency in Governance Awards);

• Best risk management disclosure for a FTSE 250 (ICSA Hermes Transparency in Governance Awards);

• Best communication of corporate responsibility in the Annual Report (IR Society Best Practice Awards);

• Best communication of governance and risk in the Annual Report (IR Society Best Practice Awards);

• Highly commended for excellence in reporting in the FTSE 100 (PwC Building Public Trust Awards)


If you would like to understand more about the trends in corporate reporting or would like to understand how your reporting compares to the FTSE 100, contact us today. We would be delighted to help you on your corporate reporting journey.

For more information about Black Sun please contact Laura MacSweeny at [email protected] or call +44 (0)20 7736 0011.

Or visit us at www.blacksunplc.com

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Information

Black Sun Plc disclaimer

The information contained in this report is provided for general information purposes only and is not intended to constitute an alternative to professional advice. Although Black Sun Plc has endeavoured to ensure the content of this report is accurate, users of this report should seek appropriate professional advice before taking any action in reliance on any of the information contained within it.

All information in this report is provided ‘as is’ and Black Sun Plc provides no warranties or representations as to the completeness, accuracy or suitability for any purpose of the content of this report or any other warranty of any kind, express or implied, including but not limited to, warranties of satisfactory quality, non-infringement, or compatibility. To the maximum extent permitted by law, Black Sun Plc accepts no liability to users of this report or other third parties for any decision made or action taken in reliance on the information contained in this report or for any loss howsoever arising from any use of this report or its contents, including without limitation liability for any consequential, special or similar damages even if advised of the possibility of such damages.

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© Black Sun Plc 2012

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