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September 19, 2019

From shareholder to stakeholder value: The evolution of Annual Reports

Written by Simon Gittings
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You’re never sure quite what to expect from an ‘Evolution’ themed event. Will it be a stargazing guru’s guess at what the future holds, a premonition of doom, or a promise of future nirvana? The September 13th Communicate magazine Evolution of the Annual Report event was a more grounded affair looking at current reporting and investment trends and observing how these might affect the future of reporting.

A Contextual Look at Corporate Reporting

The event started with ‘A contextual look at the UK’s changing approach to corporate reporting,’ which included a precise of PWC’s annual review of FTSE 350 annual reports by Mark O’Sullivan, PwC’s director of corporate reporting.

His overarching message:

The world is changing rapidly, but companies continue to broadly report the same strategic narrative, with the majority (92%) reporting no change in their business model.

Can this really be the case? Yes, some traditionalist businesses have disappeared – but many companies are responding to the changing business environment. Which begs the question – does their business model genuinely reflect how they create value, or is it simply a dusting-off of last year’s content?

From Shareholder to Stakeholder Value

One of those big changes affecting business is the shift from a focus purely on shareholder value, to a focus on stakeholder value. This growing movement will no doubt be accelerated by the Business Roundtable’s recent declaration that profits for shareholders are no longer the only purpose of a corporation. In the UK, the requirement to report not only on how companies interact with their stakeholders but how they are responding to what they hear will become mandatory in 2020. 

Of those that currently report on stakeholder engagement, roughly 80 percent report on how they engage, only a quarter report on what they heard, with even less discussing how they reacted to what they had learnt or how their stakeholder engagement aligns with their strategic priorities.

Are Businesses Really Listening and Acting?

In a period of business mistrust you might think that companies would take every opportunity to demonstrate that they are listening and acting. However, the sceptic might conclude that the majority are simply going through the motions. This unfortunate perspective was reinforced by Mei Ashelford, director of reporting intelligence from Gather who revealed that many companies are focused on boilerplate governance disclosure – to the point of asking who else they could ‘copy’. 

She puts the lack of governance evangelism amongst companies down to three key causes:

  • Perspective - a lack of boardroom and executive engagement, with a focus on short termism
  • Turmoil – ongoing and significant changes in regulations, societal and investor expectations and of course technology
  • Resources – reporting is increasingly demanding, but resources are not scaling in response

She concluded with a reference to the impact of a single episode of “Blue Planet” on our perspectives on plastic. Simply put, if society increasingly demands that companies behave in a responsible and sustainable manner, and investors react by increasing their scrutiny of ESG performance – then companies will not be able to sideline governance reporting for long.

Assessing ESG Performance of Companies

Phil Fitz-Gerald, director of the Financial Reporting Lab (FRC), built on this by revealing the extent to which investors go to in assessing the ESG performance of companies. He described an investor that uses more than a 100 different data sets to measure ESG performance – only three of which were sourced from the company. Indeed, its becoming increasingly common for investors to review a company’s Glassdoor reviews to assess culture and employee engagement. This interest in ESG data has of course not escaped the data aggregators – many of which, Bloomberg included, provide ESG data alongside financials.

He went on to expand on the methods investors use to gather data on their investments and potential investments:

  • Tracking truck deliveries to manufacturing plants by satellite to estimate production output
  • Using geo-location and mobile cell data to predict shop level customer data
  • Using algorithmic travel portal scraping of flight prices to predict airline profitability

Of course, these sorts of measurements are all focused on driving short term-investment decisions by getting insights ahead of the competition. While most companies are focused on long-term investors, it still confirms what Investis Digital has been telling clients for a long time: just because you don’t want to publish data about your operations, don’t assume investors will fail to find it, or worst case – estimate it from other sources.

The Data Dilemma

The market is driven by data, and with the rise of AI investing, it will become increasingly so. But this creates a dilemma – data, and data driven investing is by its very nature short term and will only become faster as investors look to gain advantage with ever faster data gathering and analysis.

What does this mean for companies and their reports, indeed for annual reports in general? The panel ended with a discussion on ‘is reporting broken’?

The consensus: reports, driven by ever increasing regulation, are becoming too broad in scope and are too focused on the past, and are a poor indicator of future, long-term performance in a rapidly changing world. So yes: although reports aren’t necessarily broken, the need to be rethought to reflect our changing society.

Later in the day there was a showcase of successful corporate reporting featuring presentations by Helen Baker from Coca-Cola European Partners and Louise Pyman from Burberry. 

The Coca-Cola Approach to Reporting

Helen described her company’s momentous three-year journey from incorporation to integrated reporting. Unlike many organizations, Coca-Cola has consciously reduced the length of its report, while at the same time increasing disclosures. And as part of their sustainability efforts they’ve reduced their print run to just 750 copies, despite pressure from US investors. She revealed that she had not had a single request for a printed report since its publication.

Burberry Creates a Narrative

Louise explained the importance she puts on ensuring each year’s report truly reflects the year’s narrative and isn’t merely a dusting-off of last year’s messages. Her other key message was that in our digitally centric world, companies should not rely on their message being buried within the report but should make sure the message is reflected across all of their communications. Each year, Burberry updates the content across the entire corporate website to align with the company’s report narrative. 

We’ve been advocating the need to treat corporate websites as living, agile communication platforms rather than evergreen behemoths for years. However, we also warn clients from simply lifting and shifting content from annual reports onto their website as doing so rarely results in a satisfactory or effective online experience.

Sustainability Shapes the Corporate Narrative

The day concluded with a session focused on the role that sustainability content has on shaping corporate narrative. The focus was on the value of reputation, somewhere around 25% of a company’s market cap, and the need to create reputational capital that can be ‘spent’ in times of turmoil or crisis. 

This was followed by some examples of companies looking to take report ‘content’ beyond their report. Fundamentally this was a recognition that reputation is influenced by an ever expanding and well informed stakeholder group. Therefore, companies must work harder than ever to communicate around the issues that drive their reputation.

The Takeaways

  • The dramatic and accelerating technological, societal and political changes we are experiencing require companies to communicate more authentically and rapidly than ever with a broader and better informed stakeholder audience.
  • Companies will need to demonstrate they are taking a longer-term view to successfully navigate rapid change based on a detailed understanding of how their markets and the factors effecting them are evolving.
  • As ESG performance becomes increasingly linked to reputational value and ultimately how long-term company performance is perceived, companies will need to provide an authentic narrative of how they behave and where they are going. That the shift from companies focusing on financial performance above all others to a broader value creation model is here to stay -- as is the need to demonstrate not how little harm they inflict, but also how much opportunity they create for all stakeholders and our precious planet.

Contact Investis Digital

For more insight into how to create compelling annual report narratives that reflect your brand values, contact Investis Digital. We help businesses tell their stories with compelling narratives to their key audiences.

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