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EXPERTS IN CORPORATE COMMUNICATION
WHAT’S NEXT FOR THE
STRATEGIC REPORT?
CUT THE CLUTTER SO YOU
TELL YOUR COMPANY’S STORY
Richard Hollins
Most companies have now published their first
strategic report, so it’s a good time to think about
how to improve the next one.
Our view is that companies need to do three things with their reports.
We’ll touch on the first two below. The third – making the strategic
report shorter and more effective – is the main subject of this paper.
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What’s next for the strategic report?
1. CONTINUE TO IMPROVE THE BASICS
There are encouraging signs that the strategic report
is having the intended effect, with many companies
improving their reporting this time around.
FTSE 250 companies in particular have put more effort into
defining their business models, explaining their strategies and
linking the report’s different sections. The influence of the
Financial Reporting Council’s (FRC) guidance1 is apparent.
However, too many companies of all sizes still have work
to do on explaining the basics. Strategy, objectives, the
business model, key performance indicators, risk and the
external environment remain weak spots, despite this
year’s developments.
The issue here is not (usually) the writing or design but
the quality of the company’s strategic thinking. Companies
need to spend a lot more time contemplating their strategic
framework, so the key elements and the connections between
them are logical and clear. In particular:
• Are you explaining the major trends in your markets
and how you’re responding to them, or does your
report pretend you operate in a bubble?
•Does your business model clearly demonstrate the
competitive advantages that enable your long-term
value creation, or does it just describe the inputs
and outputs of your operations?
• Do you state your company’s objectives? Are these
both realistic and measurable? What’s the timeframe
for achieving them?
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• Does your strategy flow from the business model?
Is it both necessary and sufficient for achieving your
objectives? Have you properly distinguished between
your strategy, business model and objectives, or are
you mixing them up in your descriptions?
• Do your KPIs genuinely show your strategic progress or
are they just generic financial outputs? Can you link your
KPIs to management pay, to show the line of sight from
strategy to reward?
• Does risk link back to your strategy and show what could
knock it off course? Do you explain how risk is changing?
Or are your principal risks just the generic risks of being
in business?
Tackling these issues would be a big step forward for
many companies.
2. THINK ABOUT THE STRUCTURE
Traditionally, companies have viewed their annual reports
as just that – a report on last year. We encourage our clients
to see it differently – as their once-a-year chance to tell their
story to investors.
The FRC takes the same view. Its guidance on the strategic
report1 aims to:
It also encourages companies to:
“…experiment and be innovative in the
drafting of their annual reports, presenting
narrative information that enables them to
best tell their story while remaining within
the regulatory framework…”
This raises an important question: what does ‘telling the
story’ mean? We think it means using the strategic report
to set out why your company is a good long-term home for
investors’ capital, then providing the evidence to support it.
That requires you to first set out essential information about
your company – why it exists, how you create value, what
you aim to achieve and how you’ll achieve it. Then, with the
context clearly defined, you can explain how you got on in
the previous year.
Many companies, though, still lead with the last 12 months,
putting the chairman’s and chief executive’s statements
right up front. That’s like telling someone the result of your
match but not which sport you were playing. To judge your
performance, your readers need to know the game. This is
particularly true for investors who are new to your company
but even long-standing shareholders will need reminding of
the basics. Fund managers cover many stocks. The amount
they can retain about any one company is limited.
“…set out the high-level principles that
enable entities to ‘tell their story’.”
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What’s next for the strategic report?
2. THINK ABOUT THE STRUCTURE
Appendix 1 shows our suggested structure for a strategic
report. You can see how each element builds on the one
before, creating a logical flow that tells your company’s
story. This structure also encourages you to think about
the report as a whole, rather than tackling each subject
in isolation.
Annual reports should help investors decide which companies
deserve their capital. This means providing enough detail to
be informative and convincing, without swamping your key
messages. That’s why it’s worrying that annual reports are
so bloated. In fact, this year’s reports are the fattest yet.
+9%
Average increase in length of
a sample of FTSE 100 reports2
+15%
Average increase in length of
a sample of FTSE 250 reports2
This is partly down to new rules for remuneration reporting,
with the FRC’s Financial Reporting Lab2 finding that these
sections were one third longer this year. However, plenty
of the bloat results from fatter strategic reports.
+11%
Average increase in length of the front
end of December year end reports3
+20%
Average increase in length of September
year end strategic reports4
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3. REALISE THAT SIZE MATTERS
The longest report in the Lab’s sample weighed in at an
incredible 424 pages, while the shortest FTSE 100 report
it reviewed was 124 pages. FTSE 250 reports in the sample
ranged from 108 to 190 pages. While page numbers are a
crude guide to length – a full-page photo is not the same as
a page packed with text – it’s apparent that companies are
producing more content than ever.
Not surprisingly, the FRC has identified the lack of
clear and concise reporting as a serious issue. As well
as seeing its guidance on the strategic report as part of
the solution, it is running a series of projects this year
to help companies cut their reports down to size.
Why should your report be shorter?
“…investors still express concern that the
key messages about the business are buried
in too much verbiage of little value or are
obscured by boilerplate.”
It’s also human nature to avoid difficult things. How
many reports are sitting unread because their sheer
size is daunting? The longer the report, the fewer people
will tackle it.
Finally, all the extra detail adds to the time and cost you
incur to write, design, typeset, proofread, print and post
the report. That’s money you could better use elsewhere.
Six tips for shrinking your strategic report
The FRC has already suggested ways to reduce the length of
annual reports (see pages 6-9 of its Towards Clear & Concise
Reporting publication2). We’re going to focus here on those
that relate to the strategic report, as well as making some
suggestions of our own.
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1 Change how you think about the strategic report
Most companies look at the strategic report as the place
where they explain everything that’s relevant to the year at
hand. That means all the detailed discussion of financial,
divisional and sustainability performance goes in there,
just as it did with the old business review.
It’s time to rethink that approach. The FRC’s guidance
clearly states that:
“The strategic report should be considered as
the top layer of information for shareholders.”
That means it’s a summary, with the detail elsewhere for
those who need it (see point 3 below). In fact, the FRC believes
the strategic report should be concise enough to read over a
“decent cup of coffee”5. No matter how hard that seems, it’s a
good indication of what you should be aiming for: a strategic
report that contains only the key information for investors.
Which brings us nicely to materiality.
2.Work out what’s material
The FRC’s guidance explains the concept of materiality
in some detail. But, fundamentally, if it’s important enough
to affect someone’s decision to invest in your company, then
it’s material.
That’s a high barrier. How much of your sustainability
section is really material? Or those contract wins you
describe in loving detail? Or the reams of text about your
risk management processes? The reality is that much of
it shouldn’t be in your strategic report.
Applying a rigorous materiality assessment would
significantly slim most strategic reports. Companies
need to do more here.
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What’s next for the strategic report?
3. REALISE THAT SIZE MATTERS
3.Put the detail somewhere else
Once you’ve cut the surplus detail, you need to decide what
to do with it. That really depends on why the information
was there in the first place.
• If it’s a disclosure that’s outlived its usefulness, then
ditch it. Chances are that no one will notice.
• If it’s a statutory requirement, then it will have to go
somewhere else in the annual report. That might be in
the directors’ report or it could be a separate section.
You need to decide where it’s most effectively displayed.
• Finally, you might have information that your analysts
and investors are used to seeing and still find useful.
This could include detailed discussions of your financial
or divisional performance or your non-statutory
sustainability disclosures. If you’ve put these in your fullyear results announcement, then your auditor will expect
to see them somewhere in the annual report. If not, then
you can still put them elsewhere in the report, or you can
stick them on the web or in a separate document. You’ll
have to decide if there’s value in keeping it all in one place.
Some companies are already providing information outside
the strategic report, and we’ve listed examples in appendix
2. Appendix 3 considers how you should cross-reference this
information, so your directors remain protected by the safe
harbour provisions in the Companies Act.
4. Reduce the repetition
It’s very easy for repetition to creep into your report,
particularly when you have several authors. For example,
strategy is central to the report, so it’s common to find
repeated explanations of the same points about it.
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Make sure you only cover things once. Read through the
entire report – governance and remuneration included –
and replace repetitive text with cross-references, to show
where readers can find the information. If this is outside
the strategic report, ensure you cross-reference or signpost
it properly (see appendix 3).
Summary
You should also look for unnecessary overlaps between
the chairman’s statement and the CEO’s review. If you can,
persuade the chairman to lose his or her statement altogether.
There’s no requirement for one in the strategic report and
the chairman has the opportunity to report personally in
the corporate governance statement.
The next major challenge is to cut the clutter in your strategic
report. Focus on materiality, so your report contains only
the essentials. Put useful but non-essential detail somewhere
else, whether that’s in the annual report or not. And make
sure the writing and design are tight and that they work
together to support your messaging. The outcome will be
a punchier, more interesting and more useful report,
which helps you to attract and retain investors.
5. Focus on the writing and design
Good, tight writing is vital for a short report. We can
typically cut our clients’ copy by 10–20% without changing
the content, and by considerably more if we need to boil it
down to the essentials. If your organisation doesn’t have the
writing or editing skills you need, get help from someone
who really knows about reporting.
The first set of strategic reports is an improvement on the
previous business reviews. However, companies have more
work to do to make them truly effective. Getting the basics
and the structure right should be the priority – you can’t
tell your story properly without this.
Similarly, your design agency has an important role. Look
for ways to express information visually – an effective
diagram or table can replace paragraphs of text. Conversely,
don’t use design for the sake of it. It needs to support your
communication, not overshadow it.
6. Get an outside view
When you spend months creating your report, it’s almost
impossible to be objective about the content. Getting an
expert view from outside the company can be invaluable
for understanding what works well and where your report
could be stronger, helping you to see the way forward.
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Appendices
APPENDIX 1
Strategic report: the building
blocks and basic connections
How the company will achieve
its objectives. Also links to
governance – how the board
oversees the setting and
implementation of the strategy.
The size, growth,
competitiveness and drivers
of the company’s markets.
Markets
and Trends
Business
Overview
Risk
Objectives
Business
Model
What the company does
and where it does it – the
starting point for every
annual report.
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How the company actually
does what it does and uses
its competitive advantages
to create value.
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The key risks which could knock the
strategy off course and damage value
creation. Also links to governance
– how the board ensures proper
controls and risk management.
STRATEGY
KPIs
What management thinks the
company can achieve, based on
its competitive advantages and
how it’s positioned in its markets.
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Shows how well management
is implementing the strategy.
Also links to remuneration –
how management is rewarded
for delivery.
Performance
How the company
performed in the year,
including sustainability.
Can include the chairman’s
and CEO’s statements.
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Appendices
APPENDIX 2
APPENDIX 3
Companies providing supplementary
information outside the strategic report
Information outside the strategic report:
cross-referencing and safe harbour
However, the safe harbour does not cover information placed
outside the annual report, even if the annual report refers to it.
So far, large companies with complex operations are
leading the way. For example:
The Companies Act contains a safe harbour provision, which
limits the directors’ liability in the event of inadvertently
making untrue or misleading statements in, or omissions
from, the annual report. This safe harbour only applies to
the contents of the strategic report, the directors’ report and
the directors’ remuneration report (the ‘protected areas’).
This raises a question about whether directors are opening
themselves up to liability for information they include outside
these sections.
“…this strikes the appropriate balance between
ensuring that the statutory reports can be
written concisely and in a way appropriate
to each company, whilst also ensuring that
members have all relevant information
available to them in one place.”
• Barclays’ strategic report includes a two-page Group
FD’s review and a four-page strategic risk overview.
The detailed financial review (including divisional
performance) and around 150 pages on risk sit outside
the strategic report. Lloyds Banking Group adopts a
similar approach.
• BAE Systems includes summaries of risk and
sustainability in the strategic report, with fuller
explanations of both in the directors’ report.
• GSK includes its development pipeline, its products and
its detailed risk disclosures in an ‘investor information’
appendix to its report.
• BP provides a number of additional disclosures in a
separate section at the end of the report, including more
detailed information about the group and its operations.
This is information it felt was “useful but not fundamental
to understanding the performance and position of the
company”.2
• Tesco provides a dozen pages of supplementary
information, including financial disclosures about
Tesco Bank, a cash flow analysis, quarterly sales
trends, international sales and a detailed analysis
of its store portfolio.
The Department of Business, Innovation and Skills
(BIS) addressed this point in a letter to the FRC6. BIS
acknowledged the risk that the safe harbour provision
might encourage companies to include “inappropriately
large volumes of information” in the protected areas. This
was “not the intention behind the legislation”.
The way round this is to place material elsewhere in the
report but incorporate it into the relevant protected area
by cross-referencing it. In BIS’s view:
“…information incorporated by cross-reference
into one of the protected areas from other parts
of the annual report, and necessary to meet the
requirements in one of the protected areas, will
be covered by the safe harbour provision.”
Cross-referencing versus signposting
The quote above states that cross-referenced information
must be necessary to meet the requirements of a protected
area. For the strategic report, this means either a statutory
disclosure or a material subject. In these instances, the FRC
says that:
“Cross-referencing should be clear and specific.”
This means a text-based link with an explanation of what the
reader will find on the cross-referenced page. The graphical
devices with a page number that are often used in annual
reports won’t cut it.
Information that is complementary but not required by law
or regulation is signposted rather than cross-referenced.
Per the FRC’s guidance:
“Signposts to such information should
make clear that it does not form part of
the component from which it is signposted.”
Again, this means explanatory text rather than just
symbols and page numbers.
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Notes
NOTES
1 FRC’s Guidance on the Strategic Report
https://frc.org.uk/Our-Work/Publications/Accounting-and-Reporting-Policy/Guidance-on-the-Strategic-Report.pdf
2 Source: FRC’s Financial Reporting Lab Towards Clear & Concise Reporting
https://www.frc.org.uk/Our-Work/Publications/Financial-Reporting-Lab/FRC-Lab-Towards-Clear-Concise-Reporting.pdf
3 Source: PwC
http://www.pwc.co.uk/reporting-assurance/publications/reports-out.jhtml
4 Source: Black Sun The Concise Strategic Report Paradox. The increase is against the business review in the previous year’s report
http://www.blacksunplc.com/corporate/research/index.jsp
5 Source: The Guardian Financial Reporting Council wants clear and concise annual reports
http://www.theguardian.com/business/2014/jun/09/frc-wants-concise-annual-reports
6 Source: Letter from BIS to FRC
https://frc.org.uk/FRC-Documents/Accounting-and-Reporting/BIS-letter-guidance-on-narrative-reporting.pdf
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About us
RICHARD HOLLINS
ACCRUE FULTON AND RICHARD HOLLINS
& ASSOCIATES WORKING IN PARTNERSHIP
Richard Hollins is founder and director of Richard Hollins
& Associates, a copywriting agency based in London,
providing business and financial copywriting services with
particular specialism in annual reports and other investor
communications. Richard works in partnership with Accrue
Fulton, providing consultancy and copywriting services to a
wide range of clients from AIM and small cap companies to
FTSE 100.
Before founding the business, Richard worked in investor
relations for 12 years. As head of investor relations for
Serco Group plc, he wrote all of the company’s investor
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communications, from press releases to annual reports.
Richard was voted best investor relations officer in the IR
Magazine UK awards and won awards for Serco’s annual
report. Prior to Serco, Richard spent nearly eight years
at Makinson Cowell, the UK’s leading investor relations
consultancy. There he helped major companies to develop
their messages and to write and edit their communications.
His clients included companies in engineering, financials,
health, hotels, leisure, media, packaging, printing, property,
pubs and restaurants, retail, support services, telecoms
and utilities.
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Richard has a BA in Economics and an MA with distinction
in Creative Writing. He is also a chartered accountant,
a qualification he gained during five years with Deloitte.
www.richardhollins.com
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About us
Find out more at
accruefulton.com
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