Fixing the productivity puzzle - through reporting

24 March 2016

This week has seen the release of the Investment Association’s Productivity Action Plan. It’s designed to boost the UK’s economy through long-term investment and I was really pleased to see that the role of corporate reporting was front and centre in their ‘productivity principles’.

The three most relevant recommendations in the Action Plan are to improve:

  1. reporting and research on productivity and refocus on longer-term strategic drivers
  2. reporting on capital management and clarify investor expectations of capital management
  3. reporting on culture, human capital and accounting for intangibles.

We’d echo all of these. Transparent information on current and future corporate performance fuels effective decision-making in the investment markets. The annual report remains a big part of this but, as things stand, too many are still focused on historic financial performance and short term prospects. Information that enables investors to assess the wider sustainability of future corporate performance is conspicuous by its absence. For many years our investor engagement programme has highlighted that investors are frustrated by the information they’re given. As one investor commented recently:

We think 80%+ of a company’s value is based on the longer term, i.e. more than 3 years out, so we look at the strategy of the company and how that fits with the market it is operating in. For example, we will look to see if they are in a price driven market or an innovation driven market, then we will assess how well that fits with the company’s stated strategic goals.”

How future-orientated is the annual report today?

Last year, our Searching for Buried Treasure report on FTSE 350 corporate reporting found that forward-looking reporting was an area of weakness for most UK companies, with only 40% of those reviewed providing some sort of forward-looking data beyond their current reporting period. And those providing forward-looking data did so to different degrees, with some companies – for example – providing a clear forward-looking position on their CSR strategy or market conditions but providing little insight to their wider strategic priorities.

The 2014 UK Corporate Governance Code really should be encouraging companies to provide more insight into these areas. When it was released, Stephen Haddrill of the FRC commented “the changes to the Code are designed to strengthen the focus of companies and investors on the longer term and the sustainability of value creation”, very much aligned with the Investment Association’s agenda.

We’re not really seeing the evidence for this in 2015 annual reports so far, however. The viability statement provision of the Code requires boards to assess the company’s prospects over a period significantly longer than the traditional going concern horizon, and they also need to explain why the chosen period is the appropriate one in their circumstances. But what we’ve seen in practice is relatively short periods being chosen – the vast majority have been for three or, at most, five years. And this is the case even in organisations where there is clearly a planning cycle that extends way beyond three or five years: oil & gas and other extractives are obvious examples, but so are businesses like life insurance and pension providers.

To an extent we understand this – the Code provision asks directors to sign up to something that sounds like a working capital statement (“…will be able to…meet its liabilities as they fall due…”). That really does need to be based on a solid set of forecasts – hence the choice of three or five years.

But most people’s interpretation of long-term sustainable value creation does not end at a three or five year horizon. We’ve therefore already gone on record in our recent publication Tackling the viability statement with suggestions for looking beyond that horizon while still having an appropriate foundation for the formal viability statement. In essence, we’d like to see broader and longer-term information being given about prospects, planning and risks even if the formal statement is relatively restricted. The feedback we’ve received so far is that investors would be happy with this approach and we think it could really help move the market in the direction that the Investment Association is advocating in its Plan.

We will of course be continuing to look at how reporting practices are changing this year, the impact of the viability statement and whether companies are being more forward looking in their disclosures. So stay tuned for our latest updates.

Elaine Forrest | Corporate Reporting specialist
Profile | +44 (0)20 7804 2402


More articles by Elaine Forrest



Verify your Comment

Previewing your Comment

This is only a preview. Your comment has not yet been posted.

Your comment could not be posted. Error type:
Your comment has been saved. Comments are moderated and will not appear until approved by the author. Post another comment

The letters and numbers you entered did not match the image. Please try again.

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.

Having trouble reading this image? View an alternate.


Post a comment

Comments are moderated and will not appear until the author has approved them.