Corporate Reporting blog

The executive pay debate continues and ‘people reporting’ also begins to interest investors

Last week over a hundred client representatives attended our annual Building Public Trust Award for Executive Remuneration in the FTSE100 and FTSE250 and People Reporting in the FTSE100.

Congratulations to the winners SSE and Lonmin for Executive Remuneration in the FTSE100 and FTSE250 respectively, and Wm Morrison Supermarkets for People Reporting in the FTSE100.

This is the third year in which we have presented these awards at a single, dedicated event. We originally made this change to reflect the growing importance and alignment between these two key areas of corporate reporting. The past year has seen this importance and alignment increase still further.

Take executive remuneration. It’s always been a major focus for investors- to the extent that it’s the only category of PwC’s Building Trust Awards that has remained completely unchanged since we launched the awards in 2003. Over the past 12 months, we’ve seen the scrutiny of executive remuneration intensify even further. Not just in the boardroom, but in the halls of Westminster and the media. This increased focus on executive remuneration emphasises the importance of organisations communicating openly and transparently about this highly sensitive issue.

What struck me in my discussions with a number of people at the lunch is that it's proving really difficult to know how far to go in adopting the BIS draft regulations on narrative reporting for companies’ 2012 accounts. Many companies want to use the 2012 report as a trial run under the new regime before the requirements come into force for 2013, but there is no guidance available to assist with interpretation of the proposals.  The revised ABI guidelines, released recently have provided some definition around investors' expectations of the new-style reports but this guidance is far from detailed.

It's very rewarding to see so much enthusiasm from companies for the BPTA and the opportunities that the new reporting environment will bring. We're working with a number of companies who are converting their reports to the new formula and look forward to seeing some examples of how the new BIS requirements promote greater transparency in our review for next year's BPTA.

While people reporting may rarely make the headlines, we have seen the importance and recognition of strategic disclosures of people strategy and performance grow year on year. Companies are reflecting in their external reporting the growing demand that chief executives are placing on their organisations for evidence of strategic alignment between HR activities and business goals. The investment community is also steadily increasing its level of attention on the people agenda, with engagement, talent management, productivity and people cost management now increasingly forming part of investment decisions, as well as transactions.

Based on PwC’s review of the FTSE100 this year, please find below some examples of what best performing companies are doing in the people reporting space.

• Start as you mean to go on: focus on people from the Chairman’s statement onwards
• Don’t hide your people information: publish it in the annual report and use supplementary reporting (eg. CSR, sustainability report) to build on the content, reinforce key messages and provide evidence of performance and activities through data and case studies
• Be clear on what your people agenda is: what are the key drivers of people performance for your business and how are you addressing them?
• Publish your people performance indicators and your progress against your targets – ensure the indicators are relevant to your industry and publish your performance against external benchmarks or internal targets, where appropriate
• Show how you link your people strategy to overall business strategy & objectives
• Structure your reporting clearly and make the information easy to find: Strategy – data – processes – risks

I would encourage you to take a few moments to review the executive remuneration and people reporting of this year’s winners and highly commended companies to see where you might make changes to your own reporting next year.

Do please keep in touch - I really value your responses to this blog.

BFN

Charles

Accessible and integrated reporting remains a rising priority

Last week I was delighted to join our annual Building Public Trust Awards for Sustainability Reporting in the FTSE 100, FTSE 250 and Public Sector. The lunch attracted over 120 client representatives from both the private and public sector. I would like to congratulate Unilever for winning the FTSE 100 award, Balfour Beatty for winning the FTSE 250 award and Highways Agency for winning the Public Sector award.

In this, the fifth year of the Sustainability Reporting awards, PwC’s assessment suggests that a large proportion of companies (particularly FTSE 100) continue to report on their sustainability performance which underlines that reporting in an open, accessible and integrated way remains a rising priority for many of the UK’s most forward-thinking listed companies.

However - disappointingly - it also suggested that progress has slowed significantly. Apart from a few stand-out reports and big improvers, the standard of sustainability reporting has largely remained the same year on year.  A few examples were identified of how sustainability related issues are really being integrated and embedded within a business, or of how this is helping to shape the company in the future. Experience is similar in the public sector, where the pace of change is slow but we are seeing a gradual shift towards better reporting – in part accelerated by the new mandatory reporting requirements.

Amid today’s tough trading conditions, it is understandable that reporting on sustainability performance may have slipped down the agenda for many boards. But it can make a real difference—not least by helping to build and retain trust among a wide range of stakeholders.

It’s for this very reason that transparent and integrated sustainability reporting is especially important in the current environment. This importance applies equally in the public and private sectors, since both businesses and governments have pivotal roles to play in enabling society to mitigate and adapt to the effects of climate change and foster sustainable development.

While this trend takes nothing away from the winners and organisations that have been highly commended, it does suggest that many companies that ‘talk the talk’ on sustainability reporting now need to show a real commitment by ‘walking the walk’.

More positively, the awards provided a high-profile indication of the progress being made by the leaders in an increasingly important and influential aspect of reporting.  The winners and companies that were highly commended are showing their peers the way forward to a more sustainable world.

BIS consults on a new structure for narrative reporting

The Department for Business Innovation & Skills (BIS) has just issued draft regulations to try and re-energise narrative reporting in the UK. There has been a real sense of anticipation around these proposals for some time and debate about how far BIS would and should go. I would encourage you to read the ' Straight away guidance' we have just issued - summarising the regulation, its likely impact and some key issues for consideration.

For me, it's really encouraging to see that government is engaged on this important topic and, clearly using the right kind of language to move the reporting agenda forward to help build trust in business and its performance. BIS has highlighted the need for companies to think outside the compliance box and communicate clearly about what is strategically important. The draft regulations propose a separate ‘strategic report’ to replace the business review and include requirements for companies to report on their 'strategy' and 'business model'. They also address human rights issues and gender diversity.  Refreshingly, the current proposals also remove some reporting obligations from all companies. However, the proposals are not as radical as the ideas discussed in last year’s consultation.

What's interesting about the proposals is that, in their current form, they don't actually permit anything that companies with a bit of imagination cannot already do. There is clear recognition that a lot can be achieved from a culture of best practice and innovation - we don't necessarily need more rules. But given the previous rhetoric, I can't help thinking that the government has not made the most of the opportunity to help reporting catch up with the needs of today's capital markets and other key stakeholders.

• Are the proposals going to get us to the right content for relevant and effective reporting?
• Do proposals make the most of modern technologies, such as online information, to meet stakeholder needs more efficiently and effectively?
• What implications will the regulations have on the year-end reporting strategy?
• Will this help reduce frustration about the 'clutter' and growing length of annual reports?
• Will the information companies provide be robust? Will it be trusted?

I would encourage you to read the Straight away guidance and draft regulations and make sure that BIS understands your perspective on this before the comment deadline on 15 November 2012.

You can send your official comments to narrativereporting@bis.gsi.gov.uk. And, as always, please do share your thoughts and informal views with us here.

Speaking out on rebuilding trust

To follow up on my video post last week, I thought you would be interested to see PwC chairman Ian Powell’s keynote speech given at the Building Public Trust awards last week.

Ian highlighted that the loss of trust is not just in business, but in institutions generally. Rebuilding trust, he said, is fundamental to a functioning, fair and successful economy.

He called for concerted action to rebuild trust in business and make sure that the value business brings to society is recognised.

Ian talked about three key elements that need to be included in the plan of action, namely:

• First, government must stand up for business
• Second, business leaders have to be prepared to stand up for themselves
• And third we in the professions that support business need to be prepared to embrace change. 

You can take a look at the 'Building public trust' animated film Ian shared during his speech. And find out all about who won the awards for 'excellence in reporting' and the forthcoming awards luncheons on the BPTA website.

As always, please feel free to leave your comments and questions.

BFN

CB

Showing the way forward - Building Public Trust 2012

 

Video transcript:
Last night we held our 10th Annual Building Public Trust dinner at The Dorchester Hotel here in London.

The event was attended by a prestigious list of guests from the business and investment communities together with politicians, regulators and representatives from the public sector. The audience was testimony to the importance attached to the role that an open accountable corporate regulatory can play in restoring and rebuilding public trust.

The dinner marked a decade of building public trust awards. When one looks back it is striking just how novel the idea of rebuilding trust was. Trust has arguably never been in shorter supply nor more desperately needed than now. Ian Powell, PwC’s Chairman and senior partner, gave a very frank and thought provoking speech about the back-drop of turbulent financial markets and depressed consumer confidence and I will share Ian’s speech with you in full in the near future. It was also an opportunity to celebrate those organisations that have excelled in their external reporting. Four awards were presented covering the FTSE 100, FTSE 250, public sector and to celebrate the 10th year of BPT we added an additional award, Towards Integrated Reporting 10th Year Anniversary International Award. And it gives me great pleasure to congratulate Fresnillo plc the winner of the FTSE 100 Award, Shanks Group plc for winning the FTSE 250 Award, Defence Science and Technology Laboratory for winning the Public Sector Award and Potash Corporation for winning the International Award Towards Integrated Reporting.

I have personally been impressed with just how fast some companies are making changes that make a real difference to investors understanding of their business. It is clear that improvements in the quality of reporting is not just a UK phenomenon with many companies around the world realising benefits from looking carefully at the information needs of their boards and their many and diverse stakeholders. And on this note I wish you good luck for the next reporting season.

So with my thanks and bye for now.

So what do investors really think about the audit and assurance?

It is rare for me to read the findings from a global survey from cover to cover. But when the investment community speaks about the value of audit and assurance, I listen.

PwC published on 10 September ‘Assurance today and tomorrow’. Based on over 100 interviews with senior investment professionals from 11 capital markets, this report is compelling reading for anyone interested in the effectiveness of the governance structure underpinning the information reported to shareholders. The candour and insight offered by those who participated in this study present the audit profession with some clear messages.

More insight

Firstly, although the investment community takes comfort from knowing that financial information has been through the audit process, the investors and analysts we talked to said they would like the audit to evolve so that it remains reliable, relevant and valued in the future.

This came as no real surprise to me. In fact, we have been working hard behind the scenes for some time to identify opportunities to better meet shareholder needs.

However, what did strike me when reading this report was the degree to which this desire for greater transparency is balanced by a focus on the practical. A number of those we spoke to asked how in practice auditors can provide insight without added information simply becoming boilerplate statements. There is no appetite for boilerplate statements that ostensibly tick a particular disclosure box.  Similarly, questions were raised about the unintended consequences that might arise from transparency into the internal debates between auditor, audit committee and management. Would such conversations become less frank if elements of that discussion were subject to public report?

It was also striking to know that respondents to the survey don’t see the audit in isolation; it is part of the overall system of governance. So when thinking about enhancing disclosure, they are not focusing solely on the audit report. For example, investors were generally satisfied with how going concern matters are addressed in auditor’s reports today, but they are clamouring for more transparency from management around covenants.

Hazy understanding of audit committees

In a similar vein, a second key message that rather astounded me when reading this survey was how few of those we interviewed had ever met with any audit committee members. A large number confessed that they had but a hazy understanding of the function that audit committee members perform. As audit committees act as champions of shareholder interests, finding a mechanism to allow investors to understand better the effectiveness of their work is a clear conclusion of this study.

Measures that move markets

Finally, a message from this report that is dear to my heart.  We heard from many participants that measures that move markets should, in general, be subject to some form of independent assurance - often non-financials – for example subscriber numbers. I can understand this. If I were committing capital to a company, I would say exactly the same. So I strongly encourage all management to consider the information they report that is price sensitive. Is it reliable? Is it consistent over time? In this world of constant challenge and scrutiny, I would suggest that this is a message from the investment community that CEOs and CFOs cannot afford to ignore.

The challenges set out for the audit profession in this report will not be resolved over night. Nor can the profession make progress alone. If we want an assurance and reporting model that is fit for the 21st century, analysts and investors along with management and other stakeholders will need to be engaged in the debate.

So while we digest the findings and decide on our next steps over the coming months, I would encourage you to do the same and to share with us any further thoughts and ideas that you might have.

As always, do please keep in touch – I really value your responses to this blog.

BFN

Charles

Restoring ‘trust and confidence’ - The Kay Review of UK equity markets and long-term decision making

The Final Report from John Kay is a typically good and provoking read – far more so, to be honest, than many of the papers that hit our desks day-in, day-out. It has the potential to be one of the most significant initiatives that UK business has seen for some time - or it could turn out be a damp squib. Much depends on how it is taken forward by the Government – we believe it is an opportunity that must not be passed up.

It was always going to be more than a critical look at some of the components of the equity markets – the insidious effects of short-termism on the competitiveness of UK business were the real target from the start.

The Final Report begins by recognising that UK business needs to “invest” and “develop its capacity for innovation, its brands and reputations, and the skills of its workforce” in a way that “will enable us to achieve our long-term financial goals.” Based on his review, Kay records “wide agreement...that equity markets today [are] not as effective as they should be in supporting these purposes.” This goes right to the heart of UK business and his report is a real opportunity to tackle some of the issues that are often blamed for the financial crisis.

The solutions Kay suggests are firmly centred on the themes of restoring trust and confidence between investors, companies and intermediaries and creating a culture that incentivises the right behaviour, allowing equity market participants to look beyond the short term to sustainable, long-term performance.

I’m very glad to say that this is absolutely consistent with the discussions around ‘trust’ and ‘doing the right thing’ that PwC has been leading in recent times. Because it doesn’t feature on the balance sheet trust can be overlooked. However, a whole range of recent events have demonstrated the need to build and sustain trust back into the core of corporate and business culture.

Kay does not see further regulation aimed at preventing ‘wrong behaviour’ as the answer; he takes a principles-based approach, and wants a regulatory framework that creates a culture of ‘doing the right thing’ and enables and encourages investors to achieve “long-term returns by supporting and challenging corporate decisions in pursuit of long-term value”.

In the PwC response to Kay’s Interim Report we looked forward to the implementation phase and said that it would have to proceed with caution. The equity markets play a vital role in the UK economy and positive features must be preserved. As always, care is needed to avoid disadvantaging the UK against our international competitors – though with the preponderance of overseas companies among recent flotations, the effects of any changes to the markets would not be limited to UK business.

Having said this, the principles and many of the recommendations in the Kay Review must not be left to languish – restoring trust is just too important for all of us involved in UK business. The report’s recommendations are addressed to the Government, regulatory authorities and key players in the investment chain and Secretary of State Vince Cable is to consider the report and respond later in the year. Although there has been a mixed response to some of the recommendations, we should all take an active part in making the most of this opportunity.

Here are a couple of thoughts to get the ball rolling:

• Is it not time to look again at different classes of share for listed companies, with different voting rights to reward long-term investors?
• Why should Good Practice Statements be limited to directors, asset managers and asset holders? Why should other advisers not follow suit – including audit firms, law firms and banks?

 As always, do please keep in touch – I really value your responses to this blog.

Executive pay: a new direction

Before the Olympics took over, barely a day passed without a mention of executive remuneration in the media, whether in relation to bankers’ bonuses or the size of exit payment on the departure of a director. Is this ongoing scrutiny of executive pay justified?

For many readers of the UK press, the amounts paid to senior executives of UK listed companies for one year’s work will dwarf the amount they earn over a lifetime.  And even the leading news  outlets  are  not immune to the temptation of attention-grabbing headlines highlighting the gulf between the pay of business leaders and much of the rest of the population.

How can organisations manage the message better? Perhaps media reaction would be less damning if companies prepared the ground more carefully, taking the shocks out of the system by clearer reporting of their directors’ remuneration. 

For ten years, we have looked at the quality of reporting of directors’ remuneration in FTSE 100 companies as part of the PwC Building Public Trust Awards.  In identifying a shortlist of companies showing best practice reporting, we consider the transparency of the remuneration report and the clarity of the link between reward and corporate performance. We also look for evidence of the committee taking the lead on how remuneration is based on performance outcomes. The winner of this year’s  BPTA for the reporting of Executive Remuneration will be announced on 22 November 2012.

The Government has also questioned the inequality between pay for senior roles in UK organisations and the more modest levels in the wider population. As a result, the Government has been consulting with the public on the accountability of listed companies to their shareholders over directors’ pay and its disclosure for almost a year and draft legislation has now been laid before Parliament. The purpose of the legislation is to provide shareholders with the ability to veto proposed remuneration policy before it is put into effect through a binding resolution. Once shareholders have approved remuneration policy, only payments that are consistent with that policy can be made.

The Government is also proposing new disclosure regulations that are intended to provide greater insight into the overall value of remuneration received and its alignment with corporate performance. A number of features of the new requirements reflect the criteria that we have used to assess remuneration reports for the BPTA in recent years. Two fellow partners - Tom Gosling and Sean O’Hare said in their recent webcast that the new regulations will improve the quality of reporting of directors’ remuneration reporting, through greater transparency and simplicity.  Much of the detailed reporting will emerge over time through guidance and market practice. The challenge for preparers of the new-style remuneration reports will be meeting the legislative requirements in a way that effectively communicates the key messages.

Do please keep in touch - I really value your responses to this blog.

BFN

Charles

Demand for insightful information sparks fast forward on reporting change

Olympics-mania has struck and it may be holiday season in some countries, but work on a new reporting model that will address today’s and tomorrow’s issues has gathered pace. This probably stems from more people recognising the need for an upgraded scope of corporate information to properly inform decisions.

An outline of the basic structure of the Integrated Reporting Framework was published by the International Integrated Reporting Council just a few weeks ago, with promises to soon follow up with a prototype of what reporting using this framework might look like.  In September, we also expect companies who have been involved in the IIRC’s pilot programme to share insights from their experiments with information and reporting.

At PwC in the UK, we have been assessing company reporting in the run up to our Building Public Trust Awards for excellence in reporting and I have been impressed with just how fast some companies are making changes that make a real difference to investors’ understanding of their business (and their valuations). Take a look at what the Shanks Group has been doing, for example, to show how it creates and preserves value and what investors thought of their new-style reporting.

And it’s clear that improvements in the quality of reporting is not just a UK phenomenon with many companies around the world realising benefits from looking carefully at the information needs of their boards and important stakeholders. That’s why we are introducing a new international award for the first time this year for excellence in integrated reporting – we will be announcing the winner in early October.

Having said that, moving to effective and integrated information and reporting is not a sprint – it’s an ongoing fitness programme! And we can all benefit from sharing our experiences of what works well.  There are some useful perspectives in the recent edition of World Watch magazine on governance and reporting.

As always, do please keep in touch - I really value your responses to this blog.

BFN

Charles

Green shoots for corporate reporting

The general feeling on the outcomes of the Rio+20 Earth Summit at the end of last month was one of disappointment or even failure. With such high hopes and expectations (and more than a sprinkling of charged emotions) the outcomes of such events are often viewed this way.  However as the dust settles there is some cause for optimism, particularly in relation to corporate reporting.

Before the event Alan McGill, a fellow PwC Partner, wrote a blog post highlighting the need for businesses to change the information set they use to run the business and went on to call for corporate reporting regulations and standards to level the playing field and accelerate action from business.  And though we might not have got the commitment to a more integrated method of reporting including (mandatory) sustainability reporting that many were hoping for it did remain in the final text when so many areas disappeared.

The important paragraph is Paragraph 47 which 'encourages' companies to integrate sustainability information into their reporting cycles reads:

"We acknowledge the importance of corporate sustainability reporting and encourage companies, where appropriate, especially publicly listed and large companies, to consider integrating sustainability information into their reporting cycle. We encourage industry, interested governments as well as relevant stakeholders with the support of the UN system, as appropriate, to develop models for best practice and facilitate action for the integration of sustainability reporting, taking into account the experiences of already existing frameworks, and paying particular attention to the needs of developing countries, including for capacity building."

This paragraph is already getting much support - Brazil, Denmark, France and South Africa  have formed a political group called 'Friends of Paragraph 47' to advocate corporate sustainability reporting.  This sort of support is what is needed to turn paragraph 47 into regulations and standards that provide much needed certainty for business.

The UK government has gone one step further.  Nick Clegg announced in Rio that from April 2013 all companies listed on the Main Market of the London Stock Exchange will be required to publicly report on their greenhouse gas emissions in their annual report - a long awaited decision I highlighted in my blog back in April.

Are we seeing the first green shoots of a shift in corporate reporting towards a more integrated model that helps solve the problems of the future?

Do please keep in touch - I really value your responses to this blog.

BFN

Charles