Annual Reports – Communication tools

Apart from the information required by law, the annual reports of thets. FTSE-100 companies lack a lot of the data that investors need. Despite the attention paid to this subject over the years, it seems that companies are still not able to provide meaningful information in their communication with shareholders.

Shareholders need to understand the direction a business is taking, and to be confident that managers are controlling the issues faced. This requires a breadth of data on issues covering the enterprise, and a degree of detail. In its research document, ‘The Well Rounded Annual Report’, the Foundation for Performance Measurement has found that shareholders are short-changed on both counts.

How the scores were awarded

To test the breadth of data, we devised a set of 19 performance measures to cover a range of corporate information (see box).

To test the depth of the data, a scoring system was used that rewarded the provision of benchmarks. So, an assertion such as: ‘The company is committed to the highest levels of customer satisfaction’ – would score one point for the provision of a qualitative reference.

Similarly, ‘A recent survey indicated 90% customer satisfaction among all customers’ would score two points for the provision of a quantitative reference. ‘A recent survey indicated 90% customer satisfaction among all customers, up from 80% last year’ would score three points for the provision of two or more quantitative references. ‘A recent survey indicated 90% customer satisfaction among all customers, with a target next year of 95%’, would score four points for the provision of a quantitative target together with a current measure.

The reports of the FTSE-100 were marked accordingly. The scores were then aggregated across the performance topics for each company and translated into a percentage ‘excellence score’.

The findings were surprising and, in general, disappointing. Benchmarks to assess current or future performance are rarely disclosed. The top mark in the survey was 66% and the lowest, 33%.

The breadth of data fared little better. Data was provided in only 61% of the cases and this included those references that only score two points for a simple quantification. The remaining 40% either used a general comment with no data, or involved no comment at all.

The provision of data still focuses on the provision of statutory, financial data, at the expense of non-financial indicators, such as research and development, innovation and customer service.

Clearly, companies might cite arguments against the provision of benchmark data as defined by the Foundation. Publication of targets might reduce competitive advantage. Furthermore, what happens if a regularly reported performance measure suddenly drops through the floor?

Shareholders might gain the perception that the company is not being managed as they would like.

The aim of this investigation, however, is not prescription but improved information provision. The key point is to reassure the shareholder that the overall issue measured by each of the 19 performance topics is something that managers are tracking internally and that data is available for them to do this effectively.

Furthermore, target data is already included within many annual reports: it is simply that it is not used frequently enough. Indeed, when they were provided, targets were often focused on financial returns, potentially more revealing to competitors than a target for customer service or staff performance.

The Foundation’s view is that by publishing data on a particular issue in their report companies reassure their shareholders that this is being monitored internally. Take the outcome of the measure of customer service.

With an average score of 24% for this performance topic, there is an implication that customer service is an issue that fails to merit serious attention within a large number of the top companies in this country. This may not be so, but until shareholders find this issue addressed in a meaningful manner, they cannot be totally reassured.

How can these findings be used to move forward? Some companies were able to demonstrate strengths in particular areas. There is evidence that certain industry sectors are better at information provision than others. It may be that companies that are used to varying reporting regimes may be more comfortable with a greater level of information disclosure.

Further, it was noted that companies in fast-moving, technology-based sectors were more willing to provide data than those in more traditional, service-based industries. The conclusion is that, despite the disappointing overall outcome, a ‘best practice’ approach does exist in certain areas.

To this end, the Foundation will devise a best practice that may be used by annual report writers. The aim is to provide straightforward advice on how to make these documents of communication, rather than a litany of platitudes.

 Performance              Performance
 Theme                    Topic
 Financial                Financial returns
                          Cost control
                          Capital investment
 Activity                 Geographical analysis
                          Activity analysis
                          Productivity and quality
 Development              Research & development
                          Brand development
 Environment              Environment
                          Community relations
                          Health and safety
 Relations                Supply chain
                          Staff performance and learning
                          Customer service

Peter Webb is secretary of the Foundation for Performance Measurement. The report is available from the Foundation at Hanover House, Coombe Road, Kingston upon Thames, Surrey, KT2 7AH, or

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