Annual reporting in 2014

Reflections on the past, direction for the future

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Annual reporting in 2014: reflections on the past, direction for the future highlights trends, developments, and opportunities for improving annual reports and accounts (ARAs) in order to better communicate with the investor community.

Following our review last year, Out with the old, in with the new , which concluded that preparers of ARAs had responded well to changes, but that there was still work to do, we have reviewed 100 ARAs from the FTSE 350 this year to see how they have developed. The second year of reporting under the 2012 UK Corporate Governance Code provided companies with the opportunity both to let the changes they had made bed in, and to innovate.

Our review found companies have continued to make progress. In particular, the ‘fair, balanced and understandable’ (FBU) requirement has led to some making changes to the look and feel of their ARAs, which was one of the requirement’s key objectives. However, in some areas we were unable to find examples of a company meeting all of our hallmarks of leading practice. Business model reporting seems to be particularly tricky.

EY - Annual Reporting in 2014 42% of ARAs
do not clearly explain how the company makes money.

Companies also continue to struggle to make linkages throughout their reports, mainly because many are unable to clearly articulate their business model and strategy, which should form the basis of everything else they report and disclose.

EY - Annual Reporting in 2014 9% of ARAs
had a clear link all the way from strategy, to KPIs, to principal risks through to remuneration.

In governance reporting terms, nomination committee reporting lags behind that of the other board committees. Disclosures on shareholder engagement and board evaluation findings are also key areas for improvement. We hope our recommendations support companies in making improvements in these areas.

The updated 2014 UK Corporate Governance Code (the ‘Code’) will soon impact 2015 ARAs; disclosures on risk management and the viability statement are top of mind for preparers. We provide guidance on how to prepare for making these new disclosures, and a summary of other upcoming regulatory developments that will affect ARAs.

Throughout the report we have also highlighted those demonstrating leading practice, through case studies, and our ‘acid test’ for the narrative report acts as an overview of the key information that should be included.

Finally, Sacha Sadan, Legal and General Investment Management’s (LGIM) Director of Corporate Governance, has shared insights on why annual reporting is important to LGIM, how it uses ARAs, and, as investors, what improvements they would like to see.

Our aim is for this report to support preparers in improving their ARAs.