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Can’t live with it, can’t live without it - the continuing role of the annual report

Posted 26 May, 2017

“Why should I improve my annual report? My board doesn’t see the value in spending the time and none of my investors ever ask about it? What I really focus on is the results announcement and presentation.”

If I had a pound for every time I’ve heard this, I’d be a lot richer than I am now!

Ongoing debate

The argument is a reasonable one: it’s the communications around the results that move the share price, not the annual report – at least in the short term. And in today’s technologically-driven, data-fuelled, interconnected world, a paper-based, backward-looking document that comes out months after the year-end can seem increasingly irrelevant.

This has led to debates around whether the role of the auditor should change – the argument being that if the results announcement is so important, then surely there should be a more systematic approach to auditor involvement.

On the other hand, research does suggest that a company’s annual report is one of the most important sources of information for investors. We at PwC have certainly always believed that the unique mix of content (strategic, governance and performance) and oversight and assurance (executive, board and auditor) means the annual report still plays a key confirmatory role in a company’s year-round reporting strategy.

Our research

So does this focus on results announcements and presentations mean they’re now the place where really insightful reporting that informs investment decisions can be found? And are the other communication channels cited by companies as becoming more significant threatening the traditional role of the annual report as a compendium of information on the company – the corporate website in particular?

Over the last few weeks we’ve done some research into UK companies to test both of these propositions out, using the top and bottom 10 reporters and a further random sample of 10 in-between from our 2016 survey of FTSE 350 strategic reports.

We looked at how well these companies reported on seven key content elements (market drivers, business model, strategy, risks, governance, resources and relationships and performance) across six reporting channels (annual report, preliminary results announcement, prelim presentation, investor/strategy presentation, sustainability report and website).

The aim was to explore which channel had been used to communicate the seven key content elements best. We also looked at how consistent the reporting was across the different channels.

Our findings

I think the initial findings make for an interesting read.

In particular we found that:

  • There’s a direct correlation between the quality of the annual report and the quality of information reported elsewhere. Companies who produce annual reports that include little more than what’s required by regulation provide little else in their other reporting channels.
  • The higher the quality of reporting in the annual report the more the same content, or a more detailed version of it, can be found in other reporting channels.
  • The annual report (maybe not surprisingly) remains the key, and usually the only, source for information on business models, risks, governance and key performance indicators.
  • Preliminary announcements are almost exclusively focused on financial performance.
  • Information on market trends and strategic priorities is the type most commonly found consistently across reporting channels.
  • Investor presentations (other than results) are rarer than you might think – or they aren’t being posted on websites, which would be concerning.
  • Corporate websites are used as repositories for documents rather than as a means to communicate a strategic narrative.
  • Sustainability reports are usually only loosely connected with the annual and strategic reports, perhaps reflecting the fact that they are principally targeted at a wider range of stakeholders.

Without more analysis and discussion with companies about their reporting process, it’s difficult to determine which comes first – a reporting strategy based on transparency, or a high quality annual report. However, what’s clear is that the quality of a company’s annual report is indicative of the quality of reporting across other channels. We’ve always seen the ability to produce a good annual report as a sign of good reporting discipline within a company generally and this seems to bear that out.