Salterbaxter - Trends In Corporate Reporting

Hot Top ic Winter 2008/09

Trends in Corporate Reporting: Best practice in FTSE 100 Annual Report and Accounts Welcome to the new re-think supplements. For those of you familiar with our publications, the re-think supplements are now replacing our previous Directions supplements and, unless specifically requested, will only exist online at the re-think tank or as pdf from now on.

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For the winter 2008/09 edition we re-visit the subject of best practice in FTSE 100 annual reports – but with the concept of best practice being rather vague and fluid we’ve focused on what we see as three key areas. Richard Sheath of Independent Audit reviews the progress being made in governance reporting; Dan Perrett of Hewitt New Bridge Street looks at the tricky area of remuneration reporting; and Nigel Salter of salterbaxter identifies genuine improvements in the ways companies are reporting on strategy. RE-THINK SUPPLEMENTS

www.salterbaxter-rethinktank.com The re-think supplements are regular feature pieces linked to our online research and debate forum, the re-think tank. The re-think tank is the place where commonly held views are challenged, new ideas flourish and boundaries are broken. Because we have a strongly-held belief that most things can be better – they just need better insight, brighter ideas and more creative thought. You’ll find articles, opinions and research on the big business and communication issues of the day, from sustainability to more effective digital marketing. Regular contributors include leading players and thinkers in all the fields we operate in – so you’ll be in good company.

About salterbaxter Established in 1998, salterbaxter is one of the UK’s leading creative consulting businesses. We advise organisations on corporate branding, corporate responsibility, employee engagement, corporate reporting and digital programmes. If you would like to find out more about us please call or email Louise Dudley-Williams T: +44 (0)20 7229 5720. E: ldudley-williams @ salterbaxter.com JOIN THE DEBATE: www.salterbaxter-rethinktank.com

get i touc n h

rIchard sheath : co-founder : Independent audIt

yes – but why? bIt by bIt, year by year, governance reportIng Is gettIng better. we’re gettIng a bIt more InsIght Into what boards are actually doIng – and every bIt helps. but there’s stIll a long way to go to get to the poInt where we understand why companIes thInk theIr governance Is good.

It all starts here

Annual Report 2008

Let’s start with the good news. It’s still a curate’s egg with no company nailing all (or at least most) of what we’d like to see. Based on a review of the FTSE 100 governance reports, more companies have now recognised that simply restating the Reserved Matters of the committees’ terms of reference doesn’t give us any particular insight into how they actually work. Many are beginning to give an indication of what they’ve focused on to give us a flavour (see below for examples) – particularly for the audit committee. We’re now hearing more about the nature of induction programmes and how the board is briefed. There’s a lot more information on the approach to board effectiveness reviews – and companies are being more adventurous in giving a feel for the resulting changes. There’s progress from last year – and it seems to be more widespread as companies look at each others’ reports to see where things are heading. But it’s all happening rather slowly. Companies still seem to be stuck in a groove of telling us a lot about what we already know. We know that FTSE 100 companies are going to be following standard governance processes, what boards and their committees do and that their members all have good business experience. We don’t want to hear all about the process. What we don’t know – and what we want to understand – is why the board thinks its governance approach worked well in helping position the company for the future, keeping an eye on the risks and knowing that things are under control. What was good about the way that it applied the processes that was effective? How did it manage to avoid the pitfalls that boards can fall into? How was the experience of the directors applied in a relevant way? What made the board work as a team which provided challenge and support to management? We’re still largely left in the dark. ITV plc 200 Gray’s Inn Road London WC1X 8HF www.itv.com Investors: www.itvplc.com

Reuters Group PLC Annual Report and Accounts 2007

Aviva plc Annual Report and Accounts 2007

Forty five million customers. Twenty seven countries. One Aviva.

Annual report and financial statements 2008

Quality Value Service Innovation Trust

the best eXampLes the board’s work: tate & lyle the audIt commIttee: avIva, reuters, home retaIl, Itv dIrector brIefIng: home retaIl, reuters, InternatIonal power, marks & spencer

Annual Report 2007

ITV plc Report and accounts 2007

Annual Report 2007

What’s inside? HOME RETAIL GROUP PLC

Annual Report and Financial Statements 2008

results of the effectIveness revIew: tate & lyle, marks & spencer, Itv

This year – given the failures of business models and risk oversight structures – we looked particularly closely at risk management reporting. There are a few companies who stand out (see below) as good examples. Their reports are effective in explaining how the different bodies in the governance structure fit with risk oversight: understanding how the board builds a picture of the internal control and risk management structures helps given that it’s at the core of good governance. Clear explanations of the flow of risk information (up and down the organisation structure) also gives confidence that it is actually happening. Explanation of what the risks actually are, how the company defines them and how it deals with them in practical terms – not just a labelling or listing of risks with boiler-plate terminology – helps too. And discussion of emerging risks reassures the reader that the board’s looking ahead and not just relying on past experience or reacting to things that have already happened. Sadly though, reports of this nature are very much the exception. On the whole, risk management reports are distinctly uninformative, reading like a litany of standard risks with the predictable descriptions of risk mitigants. Discussion of risk management is often text book in style – and, outside the financial services sector, largely absent. Particularly in the light of events in the financial markets and the risks that it creates for all sectors, you’d like to think that reporting on governance and, in particular, risk management might shift to a more informative level over the next year. And for those struggling with the question of “how?”, keep it simple! Don’t just say what you do (although that’s a good start), explain why it succeeds in doing what it’s supposed to do.

rIsk reportIng: home retaIl, reuters, marks & spencer, tate & lyle, InternatIonal power, prudentIal

contact: [email protected] : salterbaxter, 202 kensington church street, london w8 4dp. t: +44 (0)20 7229 5720 joIn the debate: www.salterbaxter-rethinktank.com

ct conta us

DAN PERRETT : PARTNER : Hewitt New Bridge Street

Remuneration review IMPROVING REMUNERATION DISCLOSURE IS IN LARGE part simply ABOUT AIMING TO MAKE THINGS EASIER TO UNDERSTAND. For UK listed companies the disclosure given in the remuneration report is extremely important as it is governed by: 1. Legislation – Directors’ Remuneration Report Regulations 2002 2. Combined Code of Corporate Governance – ‘Comply or explain’ requirement 3. Institutional Investors – ABI and NAPF Guidelines – Best practice rather than mandatory – Some areas now sacrosanct whilst others remain aspirational This leads to a high level of disclosure that attracts significant attention from shareholders, the press and the directors’ family and friends. It is important that the remuneration report is structured in a way that not only follows certain guidelines, but also makes it simple and easy to understand because shareholders have an annual vote on the remuneration report. To introduce the report many companies now have a letter explaining key changes to remuneration in the year. Lonmin Plc goes a step further by including a detailed review of the committee’s agenda at meetings throughout the year. By disclosing this information shareholders are able to understand what issues the committee are thinking about and why the remuneration policy is structured in the way that it is. The use of clear, bold headings to structure the report makes it much easier to navigate through the text. Not only does it show investors what has been included but it also allows them to locate the relevant sections easily. For example British Sky Broadcasting

has numbered sections, which in turn have bright sub-headings. Furthermore, colour is an important tool for making the report more attractive but also it can make the information much more simple and clear. Vodafone makes good use of this with red headings, which really stand out from the black text. Many reports now include a summary table breaking down each element of total remuneration. This gives a brief overview of what the executive receives. This can be further improved by splitting the table into long term and short term remuneration as WPP has done. In fact, tables are a great way of setting out information that could easily get swallowed in a large body of text. RPS Group (outside the FTSE 100) makes a fantastic job of using tables, with everything from a Long-Term Incentive table, setting out the past four years worth of awards including the grant level and performance conditions for each director to the exact bonus payable for all 30 different performance levels. Every number has been neatly ordered into a table. Another great way of splitting up text and making things clearer is by using charts. WPP has a bar chart illustrating share scheme dilution since 2003 and many companies, including Severn Trent, have a stacked bar chart breaking down the split in remuneration (i.e. what percentage is salary, bonus etc.). These graphical representations of data are quick to find and hard to miss; and can therefore reassure shareholders of good policies that they may have missed if they had been explained with only text. A good remuneration report should be interesting, clear and easy to understand and, as far as possible, try to follow good practice guidelines.

Chief Executive All other executive directors 0% Salary

20%

Target bonus (cash)

40%

60%

Target bonus (deferred shares)

80%

100%

Expected value of LTIP awards

Stacked bar chart from Severn Trent report showing breakdown of remuneration

WPP Share Incentive Scheme dilution for 2003 to 2007 WPP ABI Limit

10 8 6 4 2 0

%

5.4

6.0

7.2

6.6

5.7

03

04

05

06

07

Bar chart from WPP report illustrating share scheme dilution since 2003

Pie charts from RPS Group’s report showing breakdown of remuneration

CONTACT: [email protected] : salterbaxter, 202 Kensington Church Street, London W8 4DP. T: +44 (0)20 7229 5720 JOIN THE DEBATE: www.salterbaxter-rethinktank.com

ct conta us

NIGEL SALTER : DIRECTOR : SALTERBAXTER

Reporting on strategy In last year’s review of best practice in strategy reporting we identified that, at last, most companies were finally taking this subject seriously and dedicating space and time to it. This year the picture has moved on again – quite considerably. There are now just a handful of companies who don’t discuss their strategies and while it never ceases to amaze me that any company can produce a report without talking about strategy, we won’t dwell on the negatives here. The positive side is much more interesting. There appear to be four distinct approaches to strategy reporting developing (over and above those who simply put a few paragraphs into the running copy but I’m not really counting that as an approach – more a box ticked). At the risk of slightly over-simplifying I’d put the distinct approaches in these categories. 1. Businesses which have seen troubled or difficult times who are now reporting back on a clear action plan or a strategy. The best examples of these are ITV’s ‘Action Plan’ and Compass Group’s ‘Map’ system – although the latter is rather complex at first sight. I’d also mention Cobham’s ‘3 phases’ approach to strategy which is interesting but doesn’t really fit into the category of being for a troubled business – but it’s an effective way of describing how the company’s strategy develops. 2. Businesses which divide their strategy into a number of strategic priorities and then report back on them. The best of these are Aviva, BAT and SAB Miller. Aviva also manage to keep their whole approach to this straightforward and easy for the reader to digest so they score top marks. All of them structure their reports around the strategic priorities which makes for an easy to follow narrative. 3. Businesses looking to keep it simple (this is definitely a good thing) and distilling information into a summary table/overview with performance highlights. A few good examples here. 3i is excellent – it brings together strategy, progress, risk and performance all in one table. International Hotels Group also manage to distil theirs down into a simple table. Likewise Legal & General, although this would benefit from some simpler language and more information on performance against strategy. Royal & Sun Alliance also do this well and Standard Life provide an

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excellent overview with lots of information in just one spread. They’re all worth looking at and they’re all good efforts to make what can be a complex subject easy to grasp. This type of tabular/ graphic approach also translates well online. 4. Businesses demonstrating strategy in action, attempting to move away from the purely theoretical and showing what it all really means in terms of operations, people and performance. These businesses sometimes combine the table approach of category 3 or the priorities approach of category 2 but the real focus is on showing strategy in action. There are four great examples – Anglo American (the title of the section is even ‘Strategy in Action’), BAE Systems (‘Implementing our strategy’ – a series of case studies of what is actually happening), Centrica (‘Delivering on our strategy’) and Prudential (all part of the Chief Executive’s statement). Any business looking to improve the way it reports on its strategy would benefit from a quick look at any or all of these as they are all effective in different ways. And because each is serving a very different purpose and is undoubtedly responding to specific circumstance it’s hard to say that one approach is better than another. For me though, the two concepts of simplicity on the one hand and showing strategy in action on the other appeal as they are very much driven by a desire to help clarify for the reader. So while I think all those companies mentioned deserve credit I would highlight the BAE Systems report for demonstrating strategy in action as possibly the best of this type and then the 3i report for its simple, but extremely rigorous, overview of strategy, progress, risk and performance. The key point to come out of the whole analysis though is that the Business Review requirement for companies to talk about their strategies in more detail and make them relevant to investors is working. The narrative approaches of the leading companies are tailored to their own needs as opposed to boring boiler-plate. They are effective pieces of communication and most importantly they serve to make clear what a company is trying to do and how it is doing against these parameters. The conclusion is simple – good reporting on strategy works.

About salterbaxter Established in 1998, salterbaxter is one of the UK’s leading creative consulting businesses. We advise organisations on corporate branding, corporate responsibility, employee engagement, corporate reporting and digital programmes. If you would like to find out more about us please call or email Louise Dudley-Williams T: +44 (0)20 7229 5720. E: ldudley-williams @ salterbaxter.com JOIN THE DEBATE: www.salterbaxter-rethinktank.com