Ben Mathews: Reimagining the annual report

HSBC’s group company secretary speaks about cutting the company’s annual report by 44%

How did you achieve such a dramatic reduction in this year’s annual report?

Sadly, in past years, HSBC had earned itself a reputation for the weight of its annual report rather than its quality!

At one point, the Royal Mail was limiting the number of HSBC annual reports that its delivery people could carry at any one time. The familiar sound of the brick landing on the doorstep around March each year only meant one thing – your HSBC annual report had been delivered.

The opportunity was ripe to find ways in which we could seek to reduce what had become a near enough 600-page tome, recognising that this is a document that serves multiple needs; not only to inform shareholders but also to inform other stakeholders, including our regulators.

By 2016, having then delivered an annual report that tipped the scales at 500 pages, we agreed that we would aim to reduce the overall length of the report by 20%. We more than successfully managed that for the 2016 annual report – in fact, getting the overall length of the document down to just 282 pages, a 44% reduction.

That outcome was a year in the making. It needed a huge amount of planning, involving the different departments and functions that contribute to the report, each being tasked with ways in which to achieve that 20% reduction.

It also involved identifying those areas of the existing annual report where there was not an underlying compliance or regulatory requirement that could not be satisfied in other ways.

“‘Getting the overall length of the document down to just 282 pages was a year in the making’”

One particular action we undertook was to break out regulatory reporting with its much smaller target audience into a separate report. Similarly, we have separated our ESG [environmental, social and governance] reporting, putting more of it online.

Certainly, the ESG community seems to be prefer this. In today’s world, digital delivery is what it is all about, with downloadable formats that can be used for modelling and analysis.

That means we ended up with a more compliance-focused 2016 annual report – one concentrated on our various legal and reporting obligations for year-end purposes, rather than an attempt to satisfy everybody’s needs in one place.

Were there any particular problematic areas that were much harder than others to reduce?

It involved some fairly challenging conversations with some functions. Some found it difficult to adjust what they were used to doing and used to delivering – simply because that is what they did last time – to achieve the objective of reducing the overall page count.

It meant they had to re-examine why they had got to producing the kind of density of information that they had. That is one of the reasons why this was a year in the planning, because it was not going to happen right first time around and a change of this magnitude takes time to bed in.

Did everyone buy into it straight away? Or did you get some resistance?

I would not say we got resistance, but you do need strong executive leadership in this. We have a disclosure forum that we use to manage and oversee our external reporting obligations and it is chaired by our CFO. It took a few bangs of the table – not a lot of bangs of the table – but there was an overall consensus that things had to change.

The fear was that without drawing a line under 2015’s annual report it could have continued to grow in length – and weight.

What has the stakeholder feedback on the report been so far?

I have had nothing but positive feedback. And I would say that investors have particularly appreciated breaking out things like the ESG report into something that is more digestible for them and that particular community.

At the same time as focusing on the reduction in the physical length of the annual report, we have continued to drive the digital messaging, with a simpler website entry point to HSBC, from a stakeholder perspective, and its external reports.

There is still more work to do in that space and other companies have made some great inroads in this area, including downloadable formats of different sections of the annual reports to suit their particular needs. If you are an investor or a stakeholder interested in one angle more than another angle, then you can go straight to that area.

Like other corporates, we still need to get to a place where digital is the common entry point for any information about a company, as opposed to people feeling they need to have the physical copy on their desk as a reference bible.

Do you think the changes to the European reporting requirements will further that as well?

I do not think so, because corporate reporting and disclosure standards in the UK are already well advanced relative to many of our European peers, and we are already substantially compliant with the new reporting framework that is coming in.

I think that an area of opportunity for UK issuers is to think about ways in which they can actually enhance the online experience, so as to make digital by far the preferred medium for conversations with shareholders.

“There is still a problem where, traditionally, the annual report is seen as the entry and exit point for any information regarding a company”

I have been in conversation with the FRC and other regulatory bodies, such as BEIS, to re-emphasise the opportunity to look at this from a legislative perspective, so as to permit companies to exclusively communicate with shareholders online. That would be a significant development for corporates and shareholders alike, in my personal view.

Do you think that the current volume of information required in the annual report can be a barrier to clarity and usefulness?

Yes, undoubtedly. There is still a problem where, traditionally, the annual report is seen as the entry and exit point for any information regarding a company. I would say that is wrong.

The first point of recourse should, in fact, be the website – in terms of giving that opportunity for an investor or other stakeholder to find answers to questions for themselves.

The annual report cannot be the be-all and end-all, and the problem that we still experience is that legislative solutions seem typically to have their output in the form of additional disclosure obligations in the annual report.

A recent example of a missed opportunity was the requirement that now exists to disclose the full list of a company’s subsidiaries in the annual report.

This is nothing but additive and, frankly, of questionable value, when that disclosure could so easily be made in an online format.

There have been a lot of developments in financial industry recently, for example with the introduction of the Senior Managers and Certification Regime (SCMR). Has this changed the way the industry operates at all?

Not particularly. There has been, to an extent, some concerns expressed about the additional burden placed on regulated firms as a consequence of the SMCR.

But the way in which I look at it is that it has, if anything, provided us with an opportunity to clarify roles and accountabilities and to remove risk of blurring, duplication or misinterpretation of expectations.

Any approved person under the new regime will be acutely conscious of the duties they have placed upon them personally and individually, and the liabilities to which they are now exposed in the exercise of their responsibilities and duties in that capacity.

Has it caused a seismic change in the way in which they operate? No, I have not seen evidence of that. Is the regulator any more interested than the regulator already was? No, I do not think so.

Do you think there are any particular issues with our current system of corporate governance?

I am a huge fan of the UK Corporate Governance Code. I applaud the flexibility that exists there for companies and company’s boards to interpret the code depending upon the particular circumstances facing that company.

It has been 25 years since the original code was launched and over that period of time it has been through a process of continual evolution. It commands fantastic respect amongst shareholders, stakeholders, and is well-regarded internationally.

Given recent events, there has been a perfectly understandable interest in pursuing potential legislative solutions to address corporate failings, and fortunately I think, with the benefit of dialogue that has taken place involving many stakeholders, it was recognised that actually a flexible, principles-based corporate governance environment continues to be the most appropriate one for the UK.

Do you foresee any other governance challenges on the horizon?

Challenges continue around the quality, effectiveness and frequency of interactions between the owners of companies (whatever form or time horizon they represent) and the companies themselves. That requires further attention from both sides.

Then there is the public trust issue. That is still far from being overcome and recent events have done nothing to improve the perception. I am not talking about financial services companies specifically, but more the broader perception of companies themselves from a public standpoint.

“Companies have to demonstrate that they are not run by ‘evil people’ who do ‘evil things’ and overpay themselves”

They have to demonstrate that they are not run by ‘evil people’ who do ‘evil things’ and overpay themselves; that is a complete misapprehension. Probably both companies and their owners are guilty of missing the opportunity to improve the quality and level of engagement and understanding.

Some of the stakeholder engagement that is being considered currently will be helpful in an evolutionary way in seeking to actually improve that current status.

One of the other areas of focus has been section 172 of the Companies Act. Do you think directors give enough regard to their statutory duty?

There is no black and white answer to that. I am working with the general counsel and company secretarial group GC100 right now, at the request of BEIS, to refresh the guidance that already exists on how directors undertake their responsibilities.

I am looking forward to working with ICSA, BEIS and other regulatory and government bodies to make sure that is a useful, meaningful reference source, and to make sure directors, when they are taking decisions, are conscious of their potential repercussions.

We hope and aspire that there will be a better level of understanding and an improvement in the dialogue.

What are the governance challenges with a large international company like HSBC and the number of subsidiaries in contrasting jurisdictions?

It is absolutely the company secretary’s responsibility, as the chief governance officer of the firm, to make sure that information flows up, down and across the firm and is crystal clear and fluid.

Equally, the accountabilities of individual subsidiary boards should be set out and agreed in writing, and there needs to be an agreed escalation mechanism along legal entity lines for issues that are encountered.

I know it is easy for me to sit here and say that in what is a highly-regulated sector with a firm that is fundamentally based on a heritage of legal entity banks.

Having this corporate governance framework in place is not going to be easy for all firms, but it helps to provide clarity and accountability in relation to decisions that are taken, and how those decisions are taken, if there is a charter or document setting out how the ‘institution’ works.

But from my experience, there remain opportunities for subsidiary governance to be deepened and broadened, so that subsidiary boards have a clearer understand of what their responsibilities are – as opposed to being a formality that gets in the way.

What do you think are the most important skills and attributes for a company secretary?

You have got to be a number of things. You have got to be a great listener and a great communicator. You have got to have diplomatic skills and tactical skills. You have got to have nous.

You have got to have an underlying understanding of the commercial drivers motivating individual behaviours and business priorities. And, above all, you have also got to recognise the increasing importance attached to your role – and embrace it.

The days of the more traditional company secretary role are some way behind us and there is a valid expectation that company secretaries should be, and are, empowered to raise their heads; to raise views on matters that are relevant to boards and to management teams in the governance space; to remind them of their responsibilities and help them to understand procedures that need to be taken into account; and, if necessary, to raise a red flag.

Interview by Henry Ker, editor of Governance and Compliance

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