Saturday Essay: Why The Annual Report Matters, And How To Do It Well.
Trust me, I’m listed in the book that should be on every CEO and company secretary’s desk.
The basis of today’s Saturday Essay is taken from an interview with Claire Bodanis, author of Trust me, I’m listed. Why the annual report matters, and how to do it well.
Catching up with Claire Bodanis is a meeting of minds. Not only do we have a love of choral music, especially the great tradition that cathedral choirs represent, we both enjoy writing, don’t like jargon and see the art of storytelling as an essential technique in helping companies and individuals communicate to their stakeholders.
Annual reports are often seen as stuffy and boring, put on a shelf and forgotten about, because, according to Claire, the value of reporting as the basis of the relationship of trust between company and stakeholder, is not fully understood. Neither is their importance as a communication tool.
That’s why Claire, one of the UK’s leading authorities on reporting, was asked by the Chartered Governance Institute to write this well-researched, comprehensive, entertaining and compelling book, a masterclass in reporting.
And with an added bonus, she has brought together a team of specialists to produce a detailed how-to guide with authoritative voices from across the reporting spectrum.
It is peppered with case studies, but don’t mention best practice!
“There are some things in the book which will make people sit up, best practice for example. It is a dreadful concept, when it comes to reporting.”
I can feel the sharp intake of breath already from readers.
“The notion of best practice is anathema to good reporting, because it suggests that there is a single way of doing things that can be copied or replicated to good effect. This is the polar opposite of good reporting, which should be unique to a company.
Sir Donald Brydon CBE, who wrote the Foreword
"I was delighted to discover that mine is not a voice crying alone in the wilderness on this concept – Sir Donald Brydon, who wrote the foreword to our book, makes a similar point (in even fruitier language, which I quote in the introduction!) in his review into the quality and effectiveness of audit .”
What makes a report truly ‘best practice’ is whether or not it meets a company’s objective for reporting and whether it tells a company’s story in an engaging and meaningful way, while, of course, complying with all regulations.
This year in particular will challenge this concept, and those whose approach to reporting is to update what they’ve said before, rather than tackle the report afresh.
That’s because of the Covid-19 pandemic, Claire points out.
“This year, with the coronavirus changing everything, businesses can’t just go back to last year’s annual report and update it – which, sadly, often happens despite the fact that reports should be written from scratch each year. This year, no one can say ‘OK not a lot’s changed in 2020, so let’s just update it’. Companies will find it an interesting – and no doubt challenging – process.”
That’s why the book has hit the market at the right time. But what makes it really stand out is that Claire and her co-authors don’t pull any punches.
“We had absolute freedom from the publisher to say what we thought and why,” she says. “And, the book contains perspectives from many people across the reporting spectrum – company secretaries, investors, lawyers, auditors – who also spoke freely.”
That’s what makes Trust me, I’m listed valuable and authentic – and it’s the same principle that should apply to reporting. So, bearing in mind reporting’s importan ce why does the annual report get a lot of flak? Why are some reports so dull and why is reporting seen as a chore? According to Claire, it’s because reporting is often not done that well – hence why her book was
“Doing it well is all about how you approach it. The fundamental principle of our book is that, if you understand why you’re doing something, you will do it well. If you go back to the core principles, and do reporting well, what you produce won’t be dull; it will be valuable and therefore feel a worthwhile exercise, rather than a chore. To do it well, you have to start by asking the right questions – to get to the ‘why’.
The first question I ask when preparing a report for a company is: what’s our objective? Followed swiftly by, who is this for? It is important to know who your audiences are and what the objectives are for them. For example, what is it that company X wants stakeholders like investors or employees to understand? The annual report has a much wider audience than people often think.”
Having read the book, and listening to Claire, it is fast becoming apparent that there’s quite a lot that is missed by companies – and missed opportunities, if you like.
I ponder whether the company secretary or others are too busy to give reporting the time it needs. Claire is quick to point out that it is not always down to the company secretary.
“It’s more about the attitude of the board or senior management – and whether they see it as just a regulatory chore. You would think that shouldn’t happen, but sadly it does in some companies.
So those people lower down company structures tasked with producing the report have a struggle to get it done. And if it doesn’t get senior management time, it merely becomes a tick box exercise and you get an updated version of the previous year, which as I say, in a Covid-19 era, just won’t do.
The annual report is far more than a legal requirement to be reluctantly completed. It is the best opportunity a company has to tell its story and to earn the trust of its stakeholders, while giving the world the opportunity to hold it to account.
“And, it’s a hugely missed opportunity for a company. In one of my favourite quotes from the book, a large institutional investor said, unprompted, ‘the annual report is an essential trust contract between a company and its investors’.”
“That’s because, when reporting is done well, it has the potential to be a fundamental source of truth.
"I know people sometimes scoff at the notion that companies writing their own reports can be considered ‘truth’, but think about how they’re put together. What they contain is some of the most scrutinised, carefully thought through, regulated and audited information that is out there today.
“This is even more important when there is fundamental crisis of trust in all sorts of information – we’re all aware of fake news; what do you trust? whom do you trust? what sources of information do you trust?”
Claire says, a company’s truth is not simply about whether the data is correct (which of course it has to be), but whether the story that is being told is an accurate and compelling explanation. And when it’s isn’t, it’s often not that well hidden!
“As a reader, it’s actually very easy to spot waffle, obfuscation, platitudes in things that are written. You can see it a mile off.
“For example, if you say ‘we are fundamentally committed to human rights in our supply chain’ and then write nothing about what you’re actually doing to ensure those rights, it stands out. A reader will ask where’s the supporting data?
“That’s why a good annual report is so strong – because it explains and provides evidence.
“The good companies – and I’ve worked with many – are the ones who take this seriously, where the internal auditors come round and say ‘on page 62 we state we have a commitment to do this, that or the other, where’s the evidence to back up the data?’.”
In an era where there is not a lot of faith in information, the accuracy of corporate information is fundamental. And especially now, when the relationship of business and society is massively under question and discussion.
The annual report as a source of truth is fundamentally important for a democratic fair and responsible society.
“The annual report has to comply with legal requirements and, at the basic level a company can get away with doing just that,” says Claire. “If it ticks all those disclosure boxes, it is considered ‘not wrong’.
"I would, however, argue against that because if you look at the FRC guidance coupled with the new corporate governance code there is an emphasis on telling your story.
"So if a company just provides information but doesn’t clearly explain the story, it’s not, in my view, complying with the regulations. And I like the UK regulatory system because it is essentially based on principles, not rules, and requires companies to explain themselves.
"And explaining yourself against principles is a far more revealing exercise.
“One of the fundamental principles is the directors’ duty to decide what is ‘material’ (reporting jargon for important!) to its shareholders and stakeholders and report on that.
“It’s a fundamentally more revealing kind of approach than just ticking a list of boxes because you have to join the dots for the reader. Coming back to doing it well – if you understand why you’re reporting then you will write something better.
“Compare ours to the US system, which is basically rules-based and requires the filling in of a very, very long form that produces hundreds of pages of unreadable gobbledegook. Companies don’t have to put that into context and explain the story for you, the reader, so, unless you are a professional, it’s very difficult to analyse it and draw out the story from the data.
“Contrast this with the UK requirement that directors have to sign that the annual report is fair, balanced and understandable. This last point is essential – it should be understandable to its readers. Because, of course, if you can’t understand it then you can’t judge, as a reader, if it is balanced or fair.
"I must say, though, that I think a lot of UK annual reports, despite being signed off as ‘fair balanced and understandable’ fall far short of it!”
Another aspect, often overlooked, is that the information in the annual report, because it is understood to be the most rigorous accurate information you are going to get about a company, is frequently the source material for many other aspects of corporate communication. And so its audience is even wider.
Trust me, I’m listed explains this point in an appropriately titled last chapter Sweat the asset. In it the author sets out how to get the best return on the considerable investment companies make in their annual reports (even the box-tickers) by making the story the foundation of their communications.
“The story and information produced in the annual report is highly strategic, has been scrutinised and signed off by the Board – why wouldn’t you make it the foundation of everything else?” says Claire.
“The mistake companies often make in using the report more widely is that they start from the finished product, copying and pasting bits out of it into different communication channels.
"You know, Andrew, as a journalist and speechwriter, that this just doesn’t work because the report is written for a particular format and you can’t just take bits out and stick them on a website for example and expect the result to be engaging and accessible to that audience in that medium.
“So, when we talk about sweating the asset, it’s not about cutting and pasting, but about broadening the thinking and development stage of the reporting process, where the story is written, and involving the right people across the company.
"If those responsible for other comms understand the story being told, they can develop it in the right way for the channels other than the annual report.”
"The annual report is a hugely valuable internal exercise for directors and senior management in understanding their own business better.
“The annual report has an enormous internal benefit too, which people often don’t think about. Chapter 1 of the book refers to this – the ‘know thyself’ principle, which should be of immense value to senior management and directors.
The annual report is a shop window, described like a first handshake and where due diligence begins.
"This is particularly important for larger companies, with operations and people all over the world. Directors can’t know what is going on everywhere, so the annual report process, which scrutinises the business for them, is really valuable. It’s a way of playing back what’s really going on.”
And there is a warning from Claire. Whilst doing a number of internal interviews across different departments for one company’s report, it revealed fundamental divisions in approach and understanding, which had not been properly recognised before.
“The benefit of doing this properly is enormous – because you can then act on differences or issues that surface through the process. If, that is, you do it thoroughly. People think of the annual report as the end – a written description of things that have happened.
Rather, if you do it properly, it’s a dynamic process that really challenges and develops thinking around the issues that matter for a business.”
Another key issue for reporting – even if companies get the rest of it right – is that the end product isn’t always produced in and engaging and accessible way, which will mean it isn’t read or understood in the way that it should be. So, to realise your investment – for the annual report to earn its keep – it must be written and designed well.
“An annual report is not a novel, with its own inherent narrative pull. Readers need encouragement to turn the pages – a lot in some cases!” says Claire.
Which is why chapter 4, appropriately called Respect your reader, dissects how to produce the report with tips on how to make the report useful and engaging through the writing and design. As a communications coach, I found it an excellent read, especially tips on the essential elements of a reporting brief.
I remark that the book is free of jargon and Claire laughs. “We were going to have a jargon busting appendix to explain all the terms we’d used in the book, but we had to ditch it because even the non-technical person who read the manuscript couldn’t find any !”
As a speechwriter and trouble-shooter for directors looking to present themselves as thought leaders and go-to experts, I remind clients that is always worth remembering who your audience is, and Claire Bodanis has certainly remembered this.
The main contributors
Mark Forsyth (Prologue) Adrian Hornsby (Chapter 1} Heather Atchison (Chapter 4)
Kerry Watson (Chapter 3) Neil Roberts (Chapter 6) Jay Sheth (case studies)
A brief history of the Annual Report
Chapter 1 of Trust me I’m listed contains an entertaining discussion of the history of reporting and how it came to be – summarised here.
Reporting’s history is characterised by a cycle of business evolution; information disclosures becoming incomplete; corporate collapses and scandals following; and a backlash prompting regulatory action and more disclosure.
Corporate reporting, in its more modern sense of information, prepared by a company and reported to external stakeholders didn’t take shape until the 1600s.
The trigger was naval enterprise in a newly globalised world, where significant money was to be made by sailing across it and bringing back goods. Such ventures required capital and so the captains of ships started selling stock in their seafaring trips. With investors coming on board, there was also the requirement for the entity to tell them what it was doing with their money. Within a few short years this was taking the form of an annual financial one-pager – a lot like a balance sheet.
Moving into the 1700s the most significant company was the East India Company, which became fantastically rich and powerful. A boom in commerce at the end of the 17th century led to a glut of new companies, and with them, share issuances, and, because by then shares themselves had come to see so wonderful, buyers in London coffee houses snaffled them all up.
By 1719 share enthusiasm was bubbling high and The South Sea Company launched its much-anticipated public offering and things tipped into a frenzy, leading to the South Sea bubble and the inevitable collapse that ruined thousands of people. This led to the Bubble Act that determined that only companies with a Royal Charter could sell shares – the first regulatory intervention.
Skip forward to the 1830s and the Industrial Revolution, which marked the loosening of this Act, and the beginning of statutory reporting. Technological advancement was creating whole new industries., such as railways, deep-pit mining and industrialised steel making.
These were all highly profitable, but again, capital intensive, and so once more the business case arose for raising investment by offering shares to the public. Railway mania followed and companies collapsed; people went bankrupt and a regulatory backlash followed. This time, rather than banning shares outright, the focus turned to the information shareholders were being given
Investment was too powerful a tool to get rid of altogether but if companies could be persuaded to be less secretive, so the thinking went, and simply ‘tell it like it is’, then shareholders wouldn’t get so fooled. An accounting requirement was passed into law for a ‘full and fair’ balance sheet to be distributed at annual general meetings, and the concept of auditing was introduced.
In the modern era, reporting has had many more of these cycles. In the early 1990s, a number of crises occurred, including the collapse of BCCI and Robert Maxwell’s companies, which led to a new set of governance recommendations.
Then the financial crisis of 2008 prompted further regulations, while the collapse of BHS in 2016 and Carillion in 2018 among others, further fuelled the drive to produce renewed guidance.
Thus FTSE company reports have increased in length from around 60-80 pages in the early 2000s to hundreds of pages today. All the more reason for them to be written and produced well!
For more information on the book visit www.trustmeimlisted.com
For more information on Claire Bodanis, founder and director of comms and reporting agency Falcon Windsor, visit www.falconwindsor.com