Four pillars for improvement in reporting on strategy
Identifying some of the common pitfalls to good reporting and how companies can avoid them.
Clear communication of a company’s strategy is one of the most crucial aspects of the annual report, important for investors and wider stakeholders alike to appraise the company’s performance against its objectives. A company’s strategy is often as unique as the company itself, so a plethora of approaches is to be expected. However the variation in the quality of communication need not be as broad as we find it to be today.
To be fair, reporting of corporate strategy has come a long way in recent years. Emperor recently analysed the first twenty-five FTSE 100 December year-end annual reports, and we saw real evidence of quality strategy reporting, with progress coherently articulated and supported by intuitively linked KPIs.
However, there are still frequent issues and room for improvement. How often do we see the phrase ‘we have a clear strategy’ written, when in reality this is far from the case? With that in mind, we have identified four common strategy reporting pitfalls to be avoided.
Lack of clarity
Thankfully, nowadays, we rarely see ‘our strategy is to create shareholder value’ type statements. However, many companies still fail to define and distinguish between their objectives (what the company is trying to achieve) and their strategy (how the company intends to achieve its objectives).
There are many examples of blurring the lines between the investor proposition (strengths and advantages), the business model (how the resources, organisation and strengths create value) and the strategy (plans to achieve objectives). Although it is important to maintain a strong connection between the concepts, they are not interchangeable.
Some AIM companies leave it to readers to infer what the strategy is because they are hesitant to divulge their strategy for competitive reasons. Bizarrely, under the Companies Act, AIM companies are not required to state their strategy in their strategic report. However, compliance with the new QCA corporate governance code should close this loophole.
Our advice is to simply, boldly and clearly set out a strategic framework, so it is obvious exactly what the strategy is and how the company's performance is qualitatively and quantitatively measured against it. This strategic progress must not be confused with operational progress, and one good way to distinguish between the two is for the CEO to own strategic progress narrative and the CFO to own operational performance narrative. It can be helpful to supplement the qualitative evidence of strategic progress with ‘strategy in action’ case studies.
The best reports link strategy to purpose, risk, remuneration, KPIs and the business model, showing in a cohesive way how the business achieves its purpose. There should also be a clear line of sight to link strategies in different parts of the business (divisions, or distinct areas such as sustainability) to the overall group strategy, with an explanation of how they contribute to achieving this.
Annual reports are big documents and are only getting longer – our research saw a 7% growth in the length of strategic reports this year – and repetition of content is one of the contributing factors.
The issue of repetition is also driven by the increasing focus on stakeholders, such as customers and employees. For example, our research found 36% of companies had ‘People’ (in some form) as a strategic pillar. However, as well as then being covered when reporting on the company’s strategy, the same topic will likely also be included in a separate section on stakeholders, and/or the sustainability section. With additional incoming reporting requirements, such as the Section 172 statement, also asking companies to explain how they have considered their wider stakeholders, you can see how it is easy for companies to get into a muddle about what needs to go where and how best to comply without repeating the same message.
The key here is to map out your report ahead of time, what you want to cover in each section and what needs to be included from a regulatory perspective. Identify areas of repetition and, where possible, streamline content, using cross-references to signpost where the reader can find information without having to re-report it.
When companies transition to a new strategy, the rationale and process are rarely explained properly. Changing a strategy is a fundamental decision and it should be carefully and honestly explained in the annual report. Make sure to address the reasons you have made a change – for example, market trends – and the governance process you went through to arrive at the new strategy.
Often a new strategy is unveiled at year end and is the focus of the communications. However, if the old strategy has been in place for the entire year being reported against then progress (or lack thereof) against the old strategy should still be reported.
A common frustration for report readers is ‘strategic creep’, with current hot topics being added to the strategy, while legacy considerations are not being removed. The result is that it becomes bloated and unwieldy, and doesn’t reflect either the past strategy or the true approach of the business today.
Our advice here is to be ruthless in making your reporting of strategy material and tight. Question changes: are new components to the reported strategy genuine focus areas? Are there parts that are no longer relevant and can be removed?
Different companies, different challenges
These broad observations only scratch the surface of the issues we see in how some companies report their strategy and the improvements that can be made.
Each company will have to address their own unique challenges and will do so in different ways, so we can only go so far with generalised comments. If you would like us to make specific observations about how the way you articulate your strategy is likely to be received, please get in contact at [email protected].