Reporting: Less perfection, more authenticity

Black Sun has been tracking the evolution of corporate reporting for more than 13 years, examining how companies within the FTSE 100 are responding to a changing environment within reporting legislation and regulation. This year, in particular, has presented companies with numerous challenges going into the 2019 reporting cycle.

Following on from last year’s debate on governance reform and the government’s push for an economy ‘that works for everyone’, companies have had to implement the reporting requirements of the EU Non-Financial Reporting Directive for the first time, while both the draft Guidance on the Strategic Report and the draft of a revised UK Corporate Governance Code have been published, fuelling further debate.

Finally, the draft Companies (Miscellaneous Reporting) Regulations 2018, published in June, set out new reporting requirements in relation to section 172 of the Companies Act 2006, reinforcing the focus on directors’ fiduciary duties.

However, recent corporate failings continue to damage corporate trust and low corporate trust is bad for business. It means investors are less likely to invest, customers are less likely to buy products and banks will be hesitant to provide financing. It is also far more difficult to operate successfully in the long term if employees have lost trust and the company has difficulties maintaining its social licence to operate within local communities.

Many of the new topics that the reporting initiatives are trying to tackle − such as aligning purpose, values, behaviours and strategy − will be central for enhancing public trust in business and central to the annual report.

Intangible value drivers

Trust is also a key driver of reputation, a critical asset that represents considerable economic value and can be a competitive advantage, as well as providing resilience.

Ultimately, trust is the responsibility of the board. Consequently, the board needs to consider the role of the organisation within its societal context by understanding, prioritising, and balancing the needs of key stakeholders in a way that builds trust. Thereby fulfilling its responsibilities to promote the success of the company for the long term.

“The annual report must be wary of simply regurgitating ‘buzz-words’ that hold little meaning to the company”

Stakeholders and society expect more of companies. They believe companies need to be part of the solution rather than the problem. This is further supported by the growing recognition that ‘good’ business behaviour supports strong financial performance.

Alongside this, the power and speed of communications and social media put corporate trust and reputation under more scrutiny than ever before, making it difficult to control the message in such a transparent environment.

More and more, corporate value is being driven by factors that have previously been considered ‘intangible’ and often do not show up in the financial statements; factors such as brand, customer experience, patents and R&D. This puts pressure on companies to find better ways of communicating their full range of value drivers, as well as the issues impacting these drivers, in order to gain the trust of investors and other stakeholders.

Warts and all

Truthful and authentic communication plays an integral part in combatting low levels of trust, however it is not simply a matter of transparency and more communication.

As part of that, an annual report needs to adhere to the fair, balanced, and understandable principle and it needs to communicate accountability. However, this does not necessarily generate trust on its own.

An authentic and company-centric corporate narrative is important and the annual report must be wary of simply regurgitating popular ‘buzz-words’ that hold little meaning to the individual company, generating more cynicism with stakeholders.

“Truthful and authentic communication plays an integral part in combatting low levels of trust”

New reporting requirements introduce concepts that can prove powerful in building trust if companies embrace the spirit of them. However, they may equally serve as no more than a smoke screen for those who do not apply them earnestly. Evidencing which of the two categories your company fits into is vital, and authenticity will be absolutely key to doing so.

Every company can produce a best practice, award-winning annual report, but most do not tell an authentic story that communicates their uniqueness – warts and all – in a way that builds trust with investors and other stakeholders. What is needed is less perfection and more authenticity, while acknowledging that the imperfections make a corporate narrative honest and relatable and through that, believable.

Principles of trust

New regulations and the plethora of voluntary reporting guidance frameworks aim to make companies more accountable, responsible, future-proofed and ultimately more trustworthy.

This year’s FTSE 100 corporate reporting research from Black Sun identifies six ‘principles of trust’ focused on the following themes: Purpose, Culture, Shareholder voice, Diversity, Wider value creation and Long-term thinking. Individually and collectively, these principles contribute to developing corporate trust.

Principle 1: Purpose

The number of companies that communicate a corporate purpose in their annual report continues to increase – 66% now communicate their purpose, up from 60% last year. Yet most do not go as far as to explain how their purpose is aligned with their values, culture and strategy − which is one of the key points of the proposed UK Corporate Governance Code update.

Companies tend to fall into three categories:

• Companies that purely set out a purpose which defines how they contribute to wider society 
• Companies that briefly discuss their purpose in the strategy section and may discuss culture in this context
• Companies that discuss their purpose throughout the report, using it to reiterate their direction of travel for long-term strategy and the means to getting there

Principle 2: Culture

Reporting on culture, which saw a peak in 2016 but slowed slightly last year, has continued to plateau in certain areas, while gaining speed in new areas of strategic importance. An example is companies that discuss culture or values in relation to value creation, with 26% doing so this year, up from 13% last year.

Companies tend to fall into three categories:

• Companies that provide a commitment to culture and set out their values without further narrative
• Companies that discuss what they are doing to embed culture and focus entirely on how this will reduce risk
• Companies that explain how culture supports their strategy

Principle 3: Stakeholder voice

Stakeholder engagement and the manner in which this process informs strategy and decision-making is an area that has developed somewhat within the FTSE 100 (19% discuss how stakeholder expectations have been considered in strategy), while reporting on stakeholders has moved up several gears in terms of how companies identify their key stakeholder groups and their expectations.

Companies tend to fall into three categories:

• Companies that see stakeholder engagement as purely a sustainability consideration
• Companies that engage with stakeholders and acknowledge that this impacts how they think about the future
• Companies who explain how stakeholder expectations continuously shape their strategy

Principle 4: Diversity

Reporting on diversity has increased as a consequence of new requirements, but companies continue to have stronger reporting on board diversity than on employee diversity, with 56% setting diversity targets for the board, while only 25% do so for wider employees. Equally, discussions on diversity rarely become very strategic.

Companies tend to fall into three categories:

• Companies that see diversity is a moral issue – the ‘right thing to do’ 
• Companies that think increased diversity will negate group-think and allow them to tap a pool of underused resources 
• Companies that believe a workforce and management that reflects their core stakeholders enables them to be better prepared and respond to market changes

Principle 5: Wider value creation

The number of companies which explain the value they create for stakeholders beyond shareholder returns continues to increase, with more companies explaining the risks to their business model: 53% this year, up from 30% last year.

Companies tend to fall into three categories:

• Companies that focus on the value they create for stakeholders
• Companies that believe in creating long-term value for the company by creating value for others 
• Companies that cover critical issues like brand, IP and reputation – which are not captured on the balance sheet – proportionately to their importance

Principle 6: Long-term thinking

Companies are increasingly becoming better at using the market review to present future trends and impacts. They are now more likely to discuss how they are investing in the future – with 90% doing so this year, up from 82% last year – but are less overt about how these investments will support long-term value creation.

Companies tend to fall into three categories:

• Companies that explain how they are making investments for the future
• Companies that, dotted throughout the report, discuss long-term consideration such as investments they are making, changes to their product portfolio, responsiveness to ‘route to market’ opportunities 
• Companies that clearly connect all their measures to futureproof the company and can clearly articulate how strategic planning is positioning them to respond to long-term structural trends.

A ways to go

The FTSE 100 and global companies on the whole have some way yet to go in terms of reporting against all the new corporate reporting requirements.

The good news is, the majority have already taken substantial steps in preparation for next year. For many the challenge will mostly be around more accurately capturing in what they are already doing and conveying this within the annual report, rather than actually changing what they are doing.

Anne Kirkeby is lead corporate reporting consultant at Black Sun