DIRECTIONSMONTHLYSUPPLEMENT

APRIL 07

TRENDS AND ISSUES IN THE WORLD OF CORPORATE REPORTING

BIG, SHORT, PRINT, ONLINE – WHAT SORT OF ANIMAL IS THE ANNUAL REPORT EVOLVING INTO?

Welcome to the April edition of Directions Monthly. The annual report hassuffered from being an uneasy alliance of several different objectives. But nolonger will this report exist as we know it – new legislation means companieswill have a range of reporting options. So what form will the annual reporttake? This month we’ve invited Robert Bruce, a regular columnist for theFinancial Times, to shed light on the evolution of the species.

Nigel Salter Lucie Harrild

Directions Monthly April 2007 Issue 11

Sometimes it is the sheer lunacy of a policywhich brings a real issue into focus. DouglasFlint is Group Finance Director with HSBCHoldings. He runs the finances of one of thelargest banks in the world. At a conferencelast November he talked about his annualreport. During the implementation ofinternational financial reporting standards,(IFRS), he had found that the number ofnew systems codes they had to introduceincreased by 67% since the introductionof IFRS in 2004. The annual report andaccounts, which back in 1997 had run to100 pages, now exceeded 400 pages andwas too heavy to be delivered byconventional post. The Post Office haddeemed its weight a health and safetyissue for postmen.

It is an anecdote like that which bringsyou up short. The whole business ofhaving to send out a full statutoryannual report and accounts toshareholders was leading to procedureswhich made no sense. And at the same time the introduction of IFRS had lead to a very different look to the way that financial informationwas explained. Inevitably during the first few years of implementationthese figures would be largelyincomprehensible. It is only goingto be in the long term that familiarityand understanding will grow. In themeantime, in the short term, companiesneed to try other ways of putting theirmessage across to shareholders and other stakeholders.

The consequence of this has meant thatcompanies are looking increasingly atemploying more elements of narrative

reporting. They are trying to put across theirstrategy, their performance, their financialstability, in ways which they hope ordinarypeople in the business arena will find easier.Companies hope to both increase the speedwith which they can get the message acrossand also the depth of understanding, whichtends to be easier to get across in wordsrather than figures.

The annual report has been on a long journey – taking many shapesand forms along the way. How will companies take advantage of therange of reporting options which they now find available to them, and how will the traditional beast develop?

Robert BruceColumnist for the FinancialTimes and leading commentatoron accounting and financialreporting issues.

Directions Monthly April 2007 Issue 11

So people are harking back to the plans theyhad when the operating and financial review,(OFR), was due to become a mandatory partof their annual report and accounts. Thisdocument was to include a whole range ofnarrative reporting from future strategy tokey performance indicators. The mandatoryelement of the OFR was precipitately tuggedout from under corporate planners’ feet lastyear. But the European rules on producing aBusiness Review can conveniently be fittedinto its place.

But the old problems surrounding the annualreport and accounts remained. The documentsuffers from being an uneasy alliance of severaldifferent objectives. It is a calling card, amarketing tool which shows off the company’svirtues and aims. It is the repository of thefinancial figures, generally indigestible andoften a solid block of grey type across manypages. It is the place where the Chairman andthe directors strut their stuff. All these elementspull apart from each other. And it has becomeincreasingly difficult to defend the purpose ofthe annual report and accounts in its positionof being an odd alliance of the statutory andnon-statutory, the financial and the non-financial, the marketing document and thelisting requirement.

For once a Government initiative looksto have solved the conundrum.

This is highly unusual and most people wouldrack their brains to recall another occasionwhen the Department of Trade and Industrydid something which the corporate sectorfound useful. But what the DTI has done, as aresult of a section of the new Companies Act2006 which came into force in late January, isallow the corporate sector a new route forward.

Essentially the DTI has enabled companies,having gained shareholder approval at anannual general meeting, to scrap the printedversion of the annual report and accountswhich had to be sent to all shareholders andeffectively make an online version the defaultposition. This has far-reaching consequences.

This legislation has come like an earthquake in the world ofproducing the annual report and accounts. No one is entirely sure what the landscape will look like once the dust has settled.But there are several distinct and likely consequences.

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Initially the DTI reckoned that the resultingsavings in postage and printing costs would be around £50 million across the corporateworld. But, having now made a few moreconsultations, they think that this is a wildunder-estimate. Certainly HSBC will no longerhave to challenge the health and safety of thenation’s postmen.

Under the legislation, if companies receiveshareholder approval, shareholders wouldonly receive a printed version if they makewhat is described as ‘a purposeful request’.And even in those circumstances companiesmay decide that what they send out is asimplified and summarised version.

This legislation has come like an earthquakein the world of producing the annual reportand accounts. No one is entirely sure whatthe landscape will look like once the dusthas settled. But there are several distinctand likely consequences.

The first is that companies are likely to putmuch more resource into their online offerings.Traditionally corporate websites have been anuneasy combination of consumer informationand investor relations. The new legislation isgoing to make the investor, shareholder andother stakeholder information which appearsinto a much more important part of the corporateoffering. Transferring much of the narrativereporting into an online resource, which somecompanies may do, opens up all manner ofpossibilities. The idea of animated graphicsto show how key performance indicators areshaping the achievement of corporate strategyis only one idea which could now become a reality.

The second is that companies will changethe emphasis of their printed offerings.The combined use of an annual report andaccounts as both a shareholder and marketingdocument no longer needs to happen. The need to have everything in the samepackage vanishes. Different corporatedocuments can be produced which can beaimed more directly at the requirements ofdifferent users.

The third is that the use of short summarisedreports can be tailored to different groups.Environmental activists need no longertrawl through the rest of the informationbefore identifying the precise informationthey were looking for, for example. The samewould be true of many discrete user groups.

But ultimately the new legislation hasone overwhelming advantage. It givescompanies choice. And companies willbe judged by the choices they make. Thetyranny of the old annual report andaccounts will go. Companies now needto make sense, and take advantage of,the wide range of options which theynow find available to them.

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Contact:Nigel Salter Lucie Harrildnsalter@salterbaxter.com lharrild@salterbaxter.comTel: +44 (0)20 7229 5720 Tel: +44 (0)20 7229 5720

Directions Monthly supplements our main Directions report. This report is published eachyear and is now regarded as the UK’s most comprehensible analysis of the trends andissues in CR communications. If you want a copy of the full Directions Annual Survey andReport, call us on the number below or email directions@salterbaxter.com

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