One of the best things about advising companies on corporate reporting is talking to investors about what they like, what they don’t like and what they expect (and hope) to see whenever new rules come in.
Those conversations generally contain a fair amount of exasperation and typically involve investors asking me to remind my corporate clients that the price a company pays for limited liability is transparency. (Another request from a fund manager I know: ditch the photos in the annual report.)
There is a long history in this. When companies began raising capital from diverse outside shareholders and creditors, investors needed a way to know how their money was being used and how those uses have performed. The annual report was born, and its objective – to inform investors – is still the same today. Yet investors wonder why, after decades of reporting, companies seem to have such a hard time doing it well. The annual report has, over time, turned into one of the best examples of the great enemy of communication: the illusion of it.
We don’t hear much about how investors use the information in the real world
Much has been said about what makes ‘good’ corporate reporting, generally focusing on the ‘supply side’ – that is, what companies can do to meet the requirements and communicate well while doing so. But we don’t hear as much about the ‘demand side’ – how investors actually use the information in the real world and therefore what delights and frustrates them.
Companies do try, of course; they love to benchmark themselves against others to see what they’re doing and how much they say about it. But just because someone else is doing it a particular way doesn’t mean that’s how you should communicate to your investors.
More is less
And herein lies one of the biggest problems with reporting today: when companies try to be like others, they lose out on the benefits of thinking through what works best for themselves. This is partly driving why companies feel that investors always seem to want more from them. Because companies focus on what they have to supply, and look at how others have done it, they fail to understand that the demand for ‘more’ is in fact an almost desperate hope that what comes next will be, at least, ‘better’. And so the quest for ‘better’ (by requesting ‘more’) continues.
What investors are looking for is pretty basic, not unlike what the original users of annual reports wanted to know: what does the company make or do? How does it do it? Is it making money doing it? If not, when might it? Where is the business going? What might make it fall apart? How confident is the company that it knows this and is on top of it?
Don’t try to imitate what others say and do
These are all things that, arguably, any company should be able to talk about without needing inspiration from others. Explaining this shouldn’t, in principle, be difficult to do. Here are a few points companies can keep in mind as they do it.
Stay different
First of all, don’t try to imitate what others say and do. Although it’s human nature to follow someone else’s lead when they inspire you, always remember that it’s your report, and it needs to look and feel and read like it’s about your company. Everything in it must be relevant to understanding your particular business – even the boilerplate language.
Years ago, an investor told me one of his tests for assessing management quality: if you cover up the name of the company, can you tell from reading the text whose report it is? Or, at the very least, what industry it’s in? If not, your annual report isn’t doing its job.
Next, don’t forget the context and how it all fits together. When I read annual reports, I never look at anything in isolation, and neither do (most) investors. Make sure your materiality assessment outcomes map across to your strategy and risk disclosures. Make sure your financial statements reflect assumptions that are evident in your management commentary. Make sure your commentary about taking a long-term view matches up with your remuneration policies and KPIs.
Don’t feel you need to create a disclosure just because someone’s asked you for it
Ask yourself: If you read different sections of the report, can you tell they’re all from the same document? Your annual report should paint an easy-to-follow, cohesive picture of your business.
Avoid people-pleasing
Finally, don’t try to make everyone happy. Trying to meet everybody’s information needs at once means you’re likely not to meet anyone’s. There will be too much, with too much detail, obscuring what really matters. Different people have different views on what’s important for their purposes. Don’t feel you need to create a disclosure just because someone’s asked you for it. But do pay attention to what is being requested; it can inform you about what else should (or soon will) matter.
Annual reports came about in a different time, with simple rules and a clear objective. Today’s many reporting rules and constant stakeholder requests don’t make it easy for companies to communicate, although there can be the illusion of it. But adding content doesn’t need to mean making the annual report longer.
‘Perfection is achieved not when there is nothing more to add, but when there is nothing left to take away,’ as the French writer Antoine de Saint-Exupéry said. So, don’t just keep adding to your report; make sure what you add is necessary for understanding your business and fits in with what was there before.
Transparency doesn’t mean giving everyone everything. It means giving enough, and making it tailored to you, so investors no longer need to ask for ‘more’.
Watch and learn
See AB’s ‘Investor insights’ series of videos. See also other articles by Hilary Eastman on good reporting: ‘AI forces reporting rethink‘, ‘AI’s corporate reporting potential‘ and ‘How to make reporting meaningful’
