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Achieving excellence: strategic reporting

The CGIUKI policy team and judges of the Excellence in Governance Awards identify examples of corporate reporting good practice in FTSE 350 companies

The strategic report represents an opportunity for companies to get away from boilerplate reporting and focus on the issues that really matter to them. The regulations creating the requirement – the snappily titled ‘The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013’ – are supported by guidance from the Financial Reporting Council (FRC). The guidance noted ‘while the changes introduced by the Regulations represent a relatively modest change to the pre-existing legal requirements, the FRC believes that they should act as a catalyst for entities to prepare clear and concise narrative reports that facilitate fair, balanced and understandable reporting.’ It was this clarity and sense of cohesive purpose and story telling which we were looking for from this first tranche of strategic reports.

We hear a lot about integrated reporting – and rightly so – in the context of a company’s external environment. The strategic report is an opportunity for companies to discuss their performance, governance and future prospects in more detail than is normally possible in a chairman’s letter. Its focus is on those matters that the board deem worthy of reporting to shareholders, rather than those they are obliged to report and which can now appear in the directors’ report. The strategic report must meet all the requirements to be fair, balanced and understandable, comprehensive and concise, and engage the reader. Rather than dividing the various sections among different departments within the business, it is necessary for an overall ‘guiding hand’, probably the company secretary, to ensure that the strategic report reads as a cohesive whole.

This is an intensely personal aspect of corporate reporting – much will depend on the culture of the company and the personality of the chairman. It is therefore unsurprising that companies tackled the new strategic report in a variety of ways – some better than others. The very best will be an outstanding advertisement for all that the company does, as one judge commented on the Babcock International strategic report – ‘it makes you want to invest in them.’

Strategy and KPIs

A good strategic report goes beyond a discussion of the company’s strategy to the way in which it runs through all aspects of governance of the company. This includes how it links into the key performance indicators (KPIs) against which the board measure themselves and, consequently, how strategy and the achievement of strategic goals link in to remuneration. Examples of good practice:

Babcock International produced a fluent and well-written strategic report which, in the words of one of the judges, is ‘very clear about what makes Babcock Babcock’. There is an insightful overview of divisions and the business model, and strategy is explained well, with meaningful and specific non-financial KPIs discussed in detail – for example the section on diversity about the talent pipeline. The CEO’s statement is concise and explicitly linked to strategy.
BAE Systems eloquently sets out the strategic framework, which includes vision, mission, values and strategy. The links between the objectives, strategy and markets are all expounded. The diagram of how risk is managed is also easy to understand.
The Land Securities business model is candid about how the company makes its money, and displays considerable honesty about strategic issues – for example the cyclical nature of the business. The KPIs are well analysed and fluently linked to remuneration. This was a very engaging strategic report.
Lonmin presents the company clearly; the structure, business model and risks are all comprehensively set out and the sections on the composition of the board and the company’s strategic priorities explained. The report breaks down activities and provides measurements to aid the reader’s understanding and the judges liked the Q&A section with the CEO, which provides insight and an interesting format rather than the usual statement.
National Express produced a very well presented and easy to read report, with a good overview of service lines and explanation of the business model. The CEO’s review is comprehensive, logically conveying the company’s strategy, and the investment case section neatly sums up the company’s profile and proposals for long-term value creation.
Provident Financial gives an excellent description of their market and its opportunities. The company is upfront and unapologetic about what it does, and presents this very well. The business model section provides a clear and concise overview and goes on to explain key differentiators. The strategy section states what they committed to do last year and notes progress against this and the next steps.

Risks and uncertainties

There should also be a realistic assessment of the risks and uncertainties that may blow a company off course. Although many of these may be generic to an industry, the best strategic reports look in much more detail at the specific risks and uncertainties that might affect the company over the short, medium and longer terms. Examples of good practice:

The Aviva risks section is very good and benefitted from being very specific.
Cairn Energy gives a insight into the planning process for sites and the responsibilities of various parts of the business, together with an excellent overview of risks. The diversity section is also impressive.
The Lonmin risk section is strong, and in some depth, noting if and how risks have changed and their KPIs are very good on safety.
The National Express risk section provides a clear explanation of how they assess risk and what areas were focused on in the year. The links to KPIs are impressive.

Telling the story

The increasing focus on telling the corporate story has meant that sustainability has become another key component of strategic reporting. This is very helpful in lifting it out of the potential backwater of CSR reporting and putting it front and centre of the company report. There are some businesses for whom sustainability is not a key issue, but those are relatively rare.

The absence of any commentary about sustainability issues in the strategic report will tell its own tale. For most companies, this is an opportunity to explain what they do as part of normal business without it being a separate piece of reporting. Examples of
good practice:

Babcock’s statistics on the ‘bid pipeline’ add value and lift the market outlook section. The message of the sustainability section is clearly portrayed, with detail on topics backed up by KPIs.
The Cairn Energy report really focuses on the bigger picture for the company. There is a helpful snapshot of performance by quarter and a clear industry overview, supported by strong identification of objectives and KPIs, some looking to the future.
CSR is very well integrated throughout the Provident Financial report.