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Further to my earlier blog, I thought you would be interested in the following articles 'Watchdog criticises cluttered and vague annual reports' and 'Regulation stifles good corporate communication'.
As always I am pleased to hear your views and comments on the postings, and to take questions about corporate reporting.
David
I thought you would be interested in the article below that appeared in last week’s Accountancy Age. PwC’s recently launched snapshot of the FTSE 350 reporting practices here in the UK; is referenced throughout the article. I would encourage you to read this snapshot of the survey findings, which doesn’t make pleasant reading. We recognise that reporting is not made easy by the regulatory demands imposed on all companies today, but sadly too many reports display the dead hands of compliance and the editorial committee. While a few companies have cut through the historic clutter and the short-term financials to create a strategic picture of the business that is informative and convincing, they are the minority.
PwC partner speaks out over 'dreadful' annual reports
Reports leave a lot to be desired as communication documents
Written by Mario Christodoulou
Accountancy Age, 22 Oct 2009
Companies have given up trying to make their annual reports readable according to PricewaterhouseCooper’s reporting chief who believes over-regulation could be killing off good reporting.
David Phillips, PwC’s senior corporate reporting partner, believes a box ticking culture has degraded some annual reports to the point where they are, “legally compliant, but, as a communication document, dreadful”.
Reports that are produced by a compliance process or by an editorial committee, you can spot those report versus those companies who have taken a much more top down approach to it… and put some personal input and character into it,” he said. “What the investors want is just good data and, if I’m honest, financial reporting today doesn’t give them that.”
His comments come as the reporting regulator, the Financial Reporting Council (FRC), prepares to release new guidelines on narrative reporting. In June, the FRC said it was concerned “reports no longer reflect the reality of the underlying businesses, with key messages lost in the clutter of lengthy disclosures and regulatory jargon”.
In his own report of FTSE 350 businesses released this month, Phillips found many fail to tell a “clear, credible and coherent” story. “Companies also struggle, or are understandably reticent, to provide clear information about the key dependencies in their business model” the report states.
It also accuses some companies of paying “lip service” to sustainability reporting. The report predicts, companies will be pressured to provide evidence of their climate change measures.
Phillips said some companies’ sustainability reporting is “a bit of a shopping list” with little consideration of the affect sustainability will have on their business model.
“It is not about producing a nice global report saying what nice things we do in the community, it is about whether this business is sustainable in the long term,” he said.
“These are real business issues and they are going to affect the marketplace and consumer needs… For some companies this is a bit of a sideshow it has more to do with shareholder relations.”
Only 31% of companies aligned sustainability with their strategy according to the report an increase on the previous year’s 23%.
On remuneration, the report found only 12% of companies align their remuneration to strategy and KPI.
With a renewed focus on big bonuses, Phillips believes businesses can no longer get away with just providing minimal information. “Some reports can be a bit of a data dump whereas some reports… have gone out of the way to help understand how individuals are paid,” he said.
“There are quite a few companies to whom I would go back again and say that they have generally adopted a compliance report compliance with the minimum is not good enough in today’s terms.” "
As always I am pleased to hear your views and comments on the postings, and to take questions about corporate reporting.
David
Advisers in their various forms display the same traits - good at telling others what to do but not so happy to "eat their own dog food". When presenting to companies on the importance of transparency and best practices in reporting, I normally stop at some point and admit it's easy to be up the front telling others how to do it, when in reality the best reporting is achieved after a lot of hard work and effort. Critically this hard work and effort covers everything going on in a business from the way it’s led, to the quality of engagement with key stakeholders and the scope of the information that has been developed to run the business. The simple fact is that external reporting can do no more than reflect the internal reality. Put another way, you cannot report externally what doesn't exist internally - well some may try, but most are found out.
Furthermore, we often ignore the fact that external reporting's key value is the internal discipline that it creates back inside the organisation. Yes it provides the market with some information and signals - but the real value comes from the debates, discussions and arguments that it engenders within a management team and at the board. I'd suggest that if this hasn't happened, then the organisation hasn't challenged itself enough. The defence that we do just enough to comply is not good enough and in my experience it is short hand for we'd rather not confront key issues in the hope they might go away or be missed.
PricewaterhouseCoopers is not immune from this challenge and I was heartened by hearing Ian Powell our UK chairman admitting publically that he valued the discipline that the reporting process creates internally. If you haven't seen it, I attach a copy of our most recent annual report. For those of you who cannot get enough of this type of information you may also be interested in our UK Transparency Report - a public report required by our regulators which focuses on audit quality. Here again we have tried to follow the "dog food" principal and have gone beyond what's required by regulation. For those with an eye on the future, I'd recommend to you an article in the report written jointly by John McFall (Chairman of the House of Commons Treasury Select Committee) and Richard Sexton (PwC’s UK Head of Assurance).
It puts down a challenge to the profession to seize the opportunity brought about by the credit crunch and to question whether a different remit for auditors could enhance the profession’s relevance and long term sustainability.
As always I am pleased to hear your views and comments on the postings, and to take questions about corporate reporting.
David
We launched the start of our 2009 Building Public Trust programme last week with our flagship dinner at which we presented a number of awards. Ian Powell, the UK firm's chairman highlighted in his keynote speech that a recent Ipsos MORI poll indicated that business leaders have now joined politicians on the lowest rung of public confidence - some accolade! He went on to say that a disproportionate amount of time had been focused on executive remuneration rather than the crucial area of personal responsibility. He emphasised the need to "avoid a world where those in authority are encouraged simply to go with the flow, to believe unquestioningly the consensus or to assume someone else is in control. Saying no or asking the difficult or, on the face of it, the stupid question, requires courage and a sense of personal responsibility".
Also at the dinner we presented a lifetime achievement award to Sir John Parker, for the work he has done over his career to build trust and confidence in the organisations, both public and private, with whom he has been associated. In his acceptance speech he made a wonderful comment which resonated with the audience - "I've also learned that it's very important in boardroom life, for all participants to leave our egos at home. Your partner or spouse will be much more capable of managing it, than you are and your company will be all the more successful without it being present".
In the same vein, I have recently been involved in discussions around changes to the governance code here in the UK - the Combined Code. It is encouraging that the UK regulators recognise that the quality of corporate governance ultimately depends on behaviour not process. Furthermore, in trying to lift the veil on effective governance there is also a growing recognition that what needs to be reported should focus more on the substance of board activity - what has the board actually done - rather than the current focus on the form - the terms of reference of committees, who sits on each committee etc.
I have in recent years had the pleasure of working with Professor Roger Steare of Cass Business School. Roger, as some of you will remember, has written extensively on the behavioural aspects of business and business ethics. We decided a few weeks ago to write a joint submission in relation to a review which is currently taking place into the effectiveness of the UK Combined Code, focused on the behavioural aspects of good governance. I attach this letter for your information and I know Roger and I would value others’ views on its content and ideas. Governance, as we know, is not an easy issue but I sense we are becoming more aware of the behavioural challenge at its heart and are recognising that the box ticking model on which so much of the western world relies is of limited value.
As always, let me know your views by commenting on the blog, or by email.
David
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