Written by: Richard Carpenter, Merchant, London
Many countries have recently introduced International Financial Reporting Standards (IFRS) for the first time, leading to larger, more detailed financial statements and a growing need to explain them. As a result, the front sections of annual reports, influenced further by the introduction in several countries of regulations governing the narrative content, have become more complex and more demanding for readers to navigate.
The danger of the ever-expanding report is that some companies forget the overriding reason why they report in the first place: to communicate their key messages. Good corporate reporting demonstrates to important stakeholders how the management team runs the company and at the same time involves disciplines and structures that should help management do that better. But the main purpose must be to communicate to external audiences.
In Autumn 2008, in an effort to establish best-practice guidelines for practitioners, Merchant set out to review the annual reports, corporate responsibility reports and websites of some of the largest companies listed on financial markets around the world.
The results, set out below, show that the UK and Sweden consistently produce some of the best all-round annual reports. Germany is notable for the quality of its corporate governance reporting, France and South Africa for reporting on human resources and South Africa for reporting on supplier relationships and corporate responsibility.
What follows is an overview of some of the world’s major markets with a brief explanation about what makes some reports stand out, using our own benchmarking criteria. Reports, we believe, should express the personality and brand of a company. What is unique about the business? What is the investment story? Even though annual reports are supposed to be primarily aimed at investors, too many companies forget to give that audience a compelling reason to invest. A good annual report should cover the investment proposition within the first few pages – and make it clear how this story fits into the wider market context. That may sound easy but, in the pressurised corporate reporting schedule, it is all too easily forgotten.
See Overview of results
Unfortunately, in the rush to comply with IFRS and other regulations and legislation, many companies overlook the communications imperative. They end up with a report that meets all compliance requirements but fails to communicate an overall message that will inspire confidence among shareholders and other stakeholders.
The examples described suggest that the best have one thing in common: they draw in the reader with a clear and compelling investment proposition. Telling that story is something that most companies and senior management teams do every day. If they do not put it clearly in the annual report, they will fail to meet the needs of their most important audience – their investors.