Salterbaxter - Directions Supplement - Dissecting Best Practice in FTSE 100 Annual Reports and Accounts

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Information about Salterbaxter - Directions Supplement - Dissecting Best Practice in FTSE...
Business & Mgmt

Published on August 6, 2009

Author: salterbaxter



Dissecting Best Practice in FTSE 100 Annual Reports and Accounts - A special edition in association with the Independent Audit


INTRODUCTION FTSE 100 Annual Report and Accounts Analysis 2007 Issue 16 Welcome to this special bumper edition of Directions for Autumn – a review of best practice in corporate financial reporting in the FTSE 100. This edition has been brought to you as a collaboration between salterbaxter and Independent Audit, the experts in governance and board performance. The insights and analysis Lucie Harrild are from people with interesting views on what good reporting should now look and feel like. We hope you find this useful and enjoy the read – especially if your company is one of those spoken of in glowing terms. Pavan Athwal The big challenge we’ve tried to address is what, if anything, can be identified as best practice in reporting when so much is up for interpretation? Nigel Salter There have been numerous recent What we have set out to do is to look at what Director, salterbaxter developments in the world of corporate we see as the key areas of an annual report in financial reporting and the majority of these the new world of the business review and in have been technical in nature and left open to a climate where the very model of public Richard Sheath the individual companies to interpret in their share ownership has been so fundamentally Director, Independent Audit own way. This has added to the complexity challenged by the private equity model. of the disclosure requirements and led companies to think about the details and We have brought together a panel to look at structures of their reports more than ever the reports of the FTSE 100 and identify those before. So how have the FTSE 100 responded companies that appear to be ‘getting’ this new to this constantly shifting landscape and world and responding positively. The idea has what, if anything, can be identified as best been to highlight the beacons so that others practice in reporting when so much is up for may look, adapt ideas to their companies and interpretation and debate? keep the whole process evolving. First of all we want to explain that our approach This is, we believe, what is good about the to this analysis of best practice is very much UK model of reporting where we’ve largely about highlighting the positives rather than managed to avoid regulatory prescription. So pointing the finger and finding fault. This is there is no absolute guide for ‘good’ reporting in because we know, from our work with our the box ticking sense – but we think it is possible clients, that it can take a lot of time, energy to identify the leaders from the followers. And and persuasion to get the board to focus on what what’s interesting from our panel’s views is that can be seen as quite small details. It’s not always it’s often only small details and a bit of extra easy to see the strategic benefit. And when thought that make all the difference. they’re busy running the business, and with the reporting burden becoming ever more technical, We hope you find this review of interest. As ever, we know why some things are hard to achieve – please give us feedback and if you’d like to be and that in many cases it’s not for want of trying. involved in future editions of Directions in any way at all please just let us know. Having said that, there are a few examples of companies who really don’t appear to be embracing the new spirit and guidance in reporting, but these really are few and far between. Directions Monthly Special Edition, Autumn 2007

THE PANEL FTSE 100 Annual Report and Accounts Analysis 2007 Issue 16 Meet the panel We’d like to thank our contributors panel for their time and for their valuable insights. Each panel member has been given the freedom to approach this task in their own way and by bringing their own expertise and views to bear, so there is no attempt made to be absolutely uniform in approach and method. The one thing we have tried to encourage is a focus on whether the reports in question serve to enlighten the reader on the way a company is managed and is performing. We’ve also encouraged people to try to identify where companies go further than box ticking, and ideally even break new ground. We must also point out that each panel member’s views are their own and not necessarily those of this publication or of the organisations they represent. The four key areas that we have defined as central to the best practice debate are: • The description of a company’s strategy – reviewed by Nigel Salter of salterbaxter • The approach to forward-looking statements and risk – reviewed by Robert Bruce, journalist and FT columnist • The approach to corporate governance reporting – reviewed by Richard Sheath of Independent Audit • The remuneration report – reviewed by Dan Perrett of New Bridge Street Consultants Robert Bruce Dan Perrett Nigel Salter Richard Sheath Columnist Partner Director Director Financial Times New Bridge Street Consultants LLP salterbaxter Independent Audit Robert Bruce is the UK’s leading Dan Perrett is a partner of New Nigel Salter is founding director Richard Sheath is a Director of commentator on accounting, financial Bridge Street Consultants LLP, the of corporate communications and Independent Audit Limited, a reporting, corporate governance UK’s leading executive remuneration design company salterbaxter. governance consultancy specialising and management issues. He writes consultancy. New Bridge Street He advises major UK and European in helping boards make sure that regular articles and columns on Consultants act for over a third of companies on a broad range of strategic leadership and control are accountancy and financial reporting FTSE 350 companies, as well as communications and branding issues working well in supporting corporate for the Financial Times. He also writes other quoted and private companies. and frequently writes on corporate performance. He advises boards in a monthly column on management Dan works on the design and reporting, corporate responsibility the UK and overseas on board and issues for Accountancy magazine implementation of annual bonus and corporate governance. His clients audit committee effectiveness, as well as writing articles for a wide and longer term share plans range of other publications. In ensuring that they support the currently include 11 of the FTSE 100. risk oversight, control culture and 2007 he was named IIA Journalist corporate strategy and meet internal audit. Richard also advises of the Year. HR goals. This often requires companies on narrative reporting consultation and communication and has authored guides on the with institutional investors and the business review and governance preparation of the remuneration reporting. He is the audit committee report is critical in this process. chairman of Eurochem, a major Russian fertiliser company. Directions Monthly Special Edition, Autumn 2007

STRATEGY FTSE 100 Annual Report and Accounts Analysis 2007 Issue 16 Description of Strategy Rather surprisingly, it’s only really in the means that it probably doesn’t quite pass last few years with the prompting of first the ‘keep it simple’ test. But it’s a great the OFR and now the Business Review that example of some clear management companies have really paid attention to thinking. The other three are all similar in describing their strategy effectively in that they dedicate a clear section to the the annual report. There were of course strategy, (the design demarcates it clearly some leading companies who were very too), they lay out the key points in a simple clear about this but they were actually tabular form and then report progress few and far between. against the objectives. For me this is what Nigel Salter best practice is all about – simple, straight Director Today, a description of the strategy is pretty to the point and informative. I also like salterbaxter much standard and so the debate is one of GSK’s as it neatly refers the reader out quality – although I have to say that in a few to other pages for more detail on the cases I still actually struggled to find anything particular strategic point in question. No at all about business strategy, let alone a clear winner though – these four are ideal Noteworthy reports: clearly defined section. And in some cases examples for any other company looking to what was labelled strategy was in fact some get this right. They explain their priorities § AstraZeneca Annual Report 2006 bland boilerplate that shed no light at all. then say how they’re doing against them – § Aviva Annual Report 2006 not rocket science, but very convincing. The good news is that the good ones are § BAE Systems Annual Report 2006 now genuinely worthwhile. A few pitfalls to watch out for: § BHP Billiton Annual Report 2006 • some companies only put the strategy § Capita Annual Report 2006 c The key factors that make a few Is the stand out are actually quite simple: content in the full report and not in the annual review – I can’t see any good § Friends Provident Annual Report 2006 section clearly demarcated as strategy? reason for this. Is the reader left knowing more about the § GlaxoSmithKline Annual Report • I noticed that a number of companies business? Is it written in simple English? and Accounts 2006 have an identical approach and structure Is there some sense of performance using the words ‘Delivering on strategic § HBOS Annual Report and Accounts 2006 against the strategy? d goals’ then discovered that all of these § Kelda Annual Report and Accounts 2007 were being done by the same design My long list of noteworthy companies is: § Kingfisher Annual Report 2006 company. I think this is disappointing – AstraZeneca; Aviva; BHP Billiton; BAE sausage factory strategy strikes me as § Marks & Spencer Annual Report 2007 Systems; Capita; Friends Provident; HBOS; a bit lame. Kelda; Kingfisher; Marks & Spencer; § Reuters Annual Review 2006 Reuters; SABMiller; Severn Trent; Shell; • very few companies separate their § SABMiller Annual Report 2007 Smiths Group and Vodafone. strategy out as a section on their websites. This would be a useful step forward. § Severn Trent Annual Report and But the best ones are Aviva, Capita, Accounts 2006/07 GlaxoSmithKline and Kingfisher. Capita is § Shell Annual Report 2006 slightly different in that the heart of the § My favourite(s): report is structured around its four key § Smiths Group Annual Report and strategic points. This is thorough and Accounts 2006 Aviva, Capita, GlaxoSmithKline provides a real insight into the way the business is run and why, but if anything the and Kingfisher § Vodafone Annual Report and Accounts 2006 huge amount of detail about the strategy ends up making it rather hard to understand – or at least it takes a long time read which c explain their priorities They then say how they’re doing against them – not rocket science, but very convincing. c Kingfisher’s strategy overview Directions Monthly Special Edition, Autumn 2007

FORWARD-LOOKING STATEMENTS & RISK FTSE 100 Annual Report and Accounts Analysis 2007 Issue 16 c It is a little thing. But it suggests that they are thinking for themselves in how they present the information rather than relying on the lawyer’s template. c Reuters Annual Review 2006 Forward-looking statements & Risk There is a fundamental problem with the something like this, which probably makes section of any business review which deals sense internally, is going to help externally. with forward-looking statements and with With hindsight in these troubled times it is risk. And that problem is lawyers. Here is the sentence on page 19 which is the most the standard wording from the 2006 report significant for a mortgage lender. ‘Credit of Rio Tinto, the international mining group. risk is defined as the potential financial loss It can be found in many other companies, if a customer or counterparty fails to meet as the legal boilerplate takes control. their obligations to us as they become due’. ‘The words “intend”, “aim”, “project”, Too right. “anticipate”, “estimate”, “plan”, “believes”, Robert Bruce “expects”, “may”, “should”, “will”, or Too often companies do not use the Columnist similar expressions, commonly identify straightforward language which their users Financial Times such forward-looking statements’, it says. would prefer. So it is good to see another This is then followed by a statement that mining group, Xstrata, taking a positive the group‘ cannot guarantee that its view of the forward-looking strategy forward-looking statements will not differ section. Too often such stuff is described materially from actual results’. passively. Xstrata understands, quite rightly, that only verbs will do. They are For the user of a business review this may active and strategy should be active. So be what Monty Python used to refer to across a spread of proposed strategies by as a statement of the ‘bleeding obvious’. sector on page 20 of its 2006 report every It is a shame because forward-looking sentence starts with a verb. information is increasing in scope, usage and value. But to have it damned by But, if one was looking for a winner in the legalese boilerplate takes the gloss and current clutch of accounts you would have some of the value off it. At least Rio Tinto to choose Reuters annual review for 2006. puts its caveat upfront, on page 7, rather The key section here is what it calls its ‘risk than losing it in the depths of more radar’ on page 9. Issues are grouped under verbage. And it comes immediately after ‘risk’, ‘impact’ and ‘action’. They are clearly a page of serious risk factors. So readers, expressed, and in one thoughtful aspect, assuming they work from front to back, which others could do with following, each § My favourite(s): will have all these warnings ringing in their one is linked to the section and page where ears as they move forward to meatier things. the answers will be found. It is a little thing. But it suggests that they are thinking for Reuters Annual Review 2006 They are probably better suited than themselves in how they present the readers of the 2006 effort from Bradford & information rather than relying on the Bingley, the building society. This features lawyer’s template. an extensive diagram of the risk reporting structure but you do wonder whether Directions Monthly Special Edition, Autumn 2007

GOVERNANCE FTSE 100 Annual Report and Accounts Analysis 2007 Issue 16 c few have taken a good step …very back, well away from the boilerplate, and asked how the real essence of their governance can be shared. c Reuters Governance spread Governance Boards can make a fundamental difference effectiveness will be brought to life by at to corporate performance. Get the mix of least a few examples to show that this is a people wrong, fail to get them working board looking for continuous improvement together well, lose focus or miss crucial and not resting on its laurels. developments, and you can soon find that the business is at sea. So you’d think that boards The audit committee will explain what it did would make a real effort to give shareholders to evaluate the effectiveness of the external confidence that their interests are in the and internal auditors – not just tell us that good hands of a well-functioning board. they did it. The nomination committee will give us reassurance that they’ve not just Richard Sheath The governance section of the annual report responded to immediate needs but have also Director is a good opportunity to get the message actively reviewed success and contingency Independent Audit over. But most companies are still missing it. planning from a strategic perspective. And the remuneration committee will explain how, You have to sympathise (a bit at least). in making sure rewards support strategic Noteworthy reports: The compliance statements have to be there, goals, they’ve managed to tackle the technical and trying to get the chairman interested complexities and form an independent view. § BAE Systems Annual Report 2006 in adopting a different style can be an uphill § Barclays Annual Report and struggle, especially if time’s running short. With a picture like this, the reader can start Financial Statements 2006 But most companies are still missing it. getting more comfort that governance is working well and seeing how the board is § Imperial Tobacco Annual Report It’s not all bad news. For the past four supporting strong performance. It’s difficult 2006/07 years since the introduction of the revised to get this from a report that reads like a § J Sainsbury Annual Report 2006 Combined Code we’ve looked at FTSE 100 textbook description of what a board does, governance reports and in many cases they’ve interspersed with compliance statements. § Marks & Spencer Annual Report improved: there’s more reporting in the past Some are getting there. Reports sticking out 2006/07 tense (telling us what was done, not just what from the crowd for particular features include § National Grid Annual Report and is supposed to be done), clearer explanations Barclays and Marks & Spencer (for their Accounts 2006 of what’s been done to assess effectiveness, insight into board activity), Imperial Tobacco more insight on independence issues and, and National Grid (for their useful detail on § Reuters Annual Review 2006 here and there, examples of particular issues board evaluation), and J Sainsbury (useful that have cropped up and how the board examples of board and remuneration has responded. Audit committee reporting committee focus). in particular has got markedly better. But it remains a curate’s egg: even those c A good report doesn’t just repeat the Reserved Matters. It uses a few examples of reports that are strong in some areas provide little insight in others. And very few have how the board has focussed its work during taken a good step back, well away from the the year to drive strategic performance or boilerplate, and asked how the real essence § My favourite(s): respond to developing risks or problems. of their governance can be shared. It will explain how the mix of skills on the BAE Systems and Reuters board is right for today’s business and in Two of the FTSE 100 who have made a good supporting the future strategy. d start in doing this are BAE Systems and Reuters so they become my ‘favourites’ They stand out by using interview and letter style to give the reader better The way the board is driving the right for the past year. They stand out by using insight into the role of governance behaviour through leadership and through interview and letter style to give the reader and how the board works. That little reward will be discussed. The board will better insight into the role of governance bit of extra thought goes a long way explain how it has got new insights through and how the board works. That little bit of in bringing board governance to life. better information, briefings or management extra thought goes a long way in bringing interaction. And the improved reporting board governance to life. on what was done to assess the board’s Directions Monthly Special Edition, Autumn 2007

REMUNERATION FTSE 100 Annual Report and Accounts Analysis 2007 Issue 16 Remuneration The remuneration report is one of the Committee may introduce the advisory most important parts of a company’s vote on remuneration at the Annual annual report because: General Meeting. (a) for quoted companies, shareholders must • Summarising remuneration policy in a be given the opportunity to vote on it; and succinct table. A very good example of this is National Express’ remuneration report. (b) it seems to be the first section sought out This clearly shows how the policy supports by journalists. Whereas they like to remind the company’s strategic objectives. us of an actor’s age after giving his/her Dan Perrett name, with company directors they seem • Using charts to show the balance of a Consultant to prefer to quote their pay! remuneration package. I think the leading New Bridge Street Consultants LLP example of this is WPP’s remuneration This attention has resulted in the quality of report. However, companies can take FTSE 100 remuneration reports improving different approaches to valuing certain considerably over the past few years. Noteworthy reports: elements of pay, particularly the equity incentives, meaning that it is harder than § National Express Annual Report Contents of a Remuneration Report you think to compare pay policies across 2006 For a fully quoted company there are different companies. statutory and best practice disclosure § Schroders Annual Report and requirements which have led to a fairly Accounts 2006/07 • Showing how pay compares to market standard structure for a remuneration rates. An example of this kind of disclosure § Severn Trent Annual Report and report, namely: is the remuneration report of SMG. While Accounts 2006/07 – details of the Remuneration Committee’s the inclusion of this information has been § SMG Annual Report 2006 role and composition; welcomed by many institutional investors, – the general policy statement on pay; I query whether this conflicts with the § Standard Life Annual Reports and investor criticism that pay is being ratcheted Accounts 2006 – descriptions of the individual components up by companies ‘chasing’ the median. § Vodafone Annual Report and that make up total remuneration; Accounts 2006 – details of the non-executive directors’ pay; • Retrospective disclosure of annual bonus outcome. This is not governed by the § Wolseley Annual Report and – explanation of the directors’ service legislation or Combined Code but is Accounts 2006 contracts; and increasingly being asked for by institutional § WPP Annual Report and Accounts – the audited tables of emoluments and investors. Over the coming years I expect 2006/07 rights to shares. disclosure on annual bonus plans to increase. Severn Trent is a good example of a company that already does this. Qualities of a Good Remuneration Report c It is easy to read, there is a key The standard format described above does support a clear structure because it separates the forward-looking policy sections from the backward-looking ‘what has been paid’ sections. • Giving an update on progress under outstanding awards. This is a good indicator of whether or not long term incentives are achieving their goals. One of the few companies that disclose this in the remuneration report is Wolseley. development section c In previous years, a common criticism showing what is new of remuneration reports was when they • Giving a summary of how employees merged the policy and the previous practice; share in a company’s success. Standard in the year, clear for example, combining the descriptions Life introduces its remuneration report of the share plans that the company by explaining how many of its employees policy statements that will use in future years with the ‘dead’ participate in share plans. avoid clichés and it share schemes that are in run-off mode. For FTSE 100 companies, this is much My favourite is the Schroders Annual makes good use of less prevalent now. d Report and Accounts 2006/07. Their 2006 c tables and charts. remuneration report continues to build Specific qualities from remuneration reports on the fundamental and market leading published in 2007 that I think are effective re-write done for their 2004 report. It is and can be viewed as market leading are: easy to read, there is a key development section showing what is new in the year, • Introducing the remuneration report with clear policy statements that avoid clichés § My favourite(s): a covering letter from the Chairman of the and it makes good use of tables and charts. Remuneration Committee. For example, Vodafone used this approach this year Schroders Annual Report and to explain the key principles of their Accounts 2006/07 remuneration policy and the changes that they had made during the year. This gives the report a personal touch and replicates how the Chairman of the Remuneration Directions Monthly Special Edition, Autumn 2007

ABOUT US SALTERBAXTER ADVISE COMPANIES ON STRATEGY, BRANDING, CORPORATE COMMUNICATIONS AND DESIGN. Our clients are extremely varied and include FTSE 100 companies; some of the world’s most exclusive brands; independent, entrepreneurial businesses; world leading educational establishments; law firms; private equity firms and media companies. We name companies, re-invent companies, and re-position companies. We help companies communicate with shareholders and advise them on how to address corporate responsibility. We launch, brand and re-brand. A key area of our expertise is corporate reporting and we advise leading UK and European organisations on strategy and design for their financial and CR communications programmes. We currently work with 11 of the UK FTSE 100. Contact: Lucie Harrild Pavan Athwal Tel: +44 (0)20 7229 5720 Tel: +44 (0)20 7229 5720 Directions Monthly supplements our main Directions report. This report is published each year and is now regarded as the UK’s most comprehensive analysis of the trends and issues in CR communications. If you want a copy of the full Directions Annual Survey and Report, call us on the number below or email This supplement is printed on Think Bright and is supplied 202 Kensington Church Street Holland House, Bury Street by Howard Smith. It is an FSC (Forest Stewardship Council) certified material and is 100% recyclable. London W8 4DP London EC3A 5AW Tel +44 (0)20 7229 5720 Tel +44 (0)20 7220 6580 Printed by CTD, an ISO 14001 certified and FSC accredited Fax +44 (0)20 7229 5721 Fax +44 (0)20 7220 6581 company. TT-COC-2142 ©1996 Forest Stewardship Council A.C

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