An Outcome Based Approach to Corporate Reporting

Is this scenario a familiar one? It’s that time of year again to produce the annual report. The accounts and statutory notes are circulated by the accounts department amongst the executive team for comment. The narrative includes words underlined from last year’s reports. Your team is asked to include this year’s figures in the spaces and the report is sent to the board so that they can undertake ‘checks’ and add the chair’s statement. It reminds me of the incremental budgeting process of looking at last year’s budget as the baseline has already been approved and adding a percentage rather than a zero based budgeting approach, starting from first principles or a blank piece of paper. This involves a fresh budget every year without reference to the past.

 

Integrated Reporting (IR)

Wouldn’t being able to read the annual reports of an organisation or company and understand clearly how it is fulfilling it’s corporate objectives, how well it is governed and be able to benchmark this against other companies be more pragmatic? Wouldn’t clear evidence of robust corporate governance and how this is applied within the company or organisation give more assurance? The introduction of the International Integrated Reporting Framework (IR) was instigated to promote the adoption of Integrated Reporting across the world. Released after consultation, the Framework underwent rigourous testing by businesses across the world. The purpose of the Framework is to establish Guiding Principles and Content Elements that govern the overall content of an integrated report, and to explain the fundamental concepts that underpin them.

 

Also of note is the IOD’s work to compile an index to identify what good governance is and how it can be measured (see ‘The Great Governance Debate – Towards a Good Governance Index for Listed Companies’). Despite the creation of this index, we still see that only 57% of FTSE 350 companies fully comply with the UK Corporate Governance Code, down 4% from 2014. (Grant Thornton Corporate Governance Review 2015). These figures are not dissimilar in the public and voluntary sectors.

 

Corporate reporting is a complex and sometimes daunting task as it is used to satisfy the needs of a variety of stakeholders whether to fulfil statutory disclosures, the needs of investors and funders or the general public. Reports need to be comprehensive but not too lengthy, they should be simple enough to read and understand but detailed enough to provide meaningful analysis. The Grant Thornton Review found that the longest annual report was 516 pages!
Organisations in the private, public and voluntary sector are increasingly being expected to report not just on profit or surplus but also detail their impact, impact in this case being the evidence of outcomes and engagement to those who influence or who are influenced by the activities of the organisation across the wider economy, society and on the environment.

 

The annual requirement to produce a report (including the non-financial information or ‘Narrative Reporting’) provides the framework and audience for this communication. By adopting an IR approach, organisations can provide concise communication of their strategy, performance and governance, the latter of which I will focus on here.

 

The ‘Comply or Explain’ section of the UKCGC states: “The Listing Rules require companies to apply the Main Principles and report to shareholders on how they have done so.” As a starting point, I would recommend that best practice would be that all organisations include details of how they have applied the Main Principles of the code that they have adopted in their annual reports.

 

Corporate governance reporting whether in the chairman’s report, as part of the statutory disclosures or other appropriate parts of the narrative should explain how the composition and organisation of the entity’s governance structures support the achievement of its objectives. It presents an opportunity to demonstrate that the organisation is well run and can provide readers with much more than just descriptions of processes and procedures. Despite some of the challenges, there are some improvements that have been made and Corporate Governance Reporting is on the up.

 

Typical Disclosure Reporting

This type of reporting is normally set out to fulfil statutory requirements. Even where reporting is comprehensive, it doesn’t integrate general reporting to provide an overall picture of governance.

Typical Disclosure Reporting usually only includes the basic information necessary to show that governance has been considered, rather than it being fully integrated and expanded upon. For example, it will explicitly state compliance with relevant governance code, give a full description of the appraisal process, how the board operates and include details of board evaluation. Alongside this, it is commonplace to include a biographical list of board members, details of induction and training processes and a list of committees, the number of meetings that have taken place and a high level statement of matters reserved for the board. While informative, this is not necessarily reflective of the depth of the governance work undertaken by the organisation.

 

Enhancing Integrated Reporting

So, the question is, how can Typical Disclosure Reporting be enhanced? The multi-stakeholder group Report Leadership propose 5 areas to consider when reporting on governance in their report ‘Corporate Governance – Simple, practical proposals for better reporting of corporate governance’. Using the headings, I have compiled below my recommendations on how standard governance reporting can be enhanced by transitioning the focus in reporting from compliance to outcomes of the governance system.

 

Tone from the top – The chairman’s statement should include a summary of their reflections on strategy, risk and board evaluation. This presents an opportunity to demonstrate the importance and interrelationship of the governance and leadership.

 

How the board works as a team – Here, emphasis should be placed on the diversity of the board and the unique skills and experience that each board member brings rather than just presenting a list of board members which lacks purpose. An important dynamic is how the executive and non-executive work together and a description of this would be beneficial.

 

The key actions of the board and its committees – Reporting on the issues that the board and committees focused their attention on is more useful than just including a list of the terms of reference of the committees.

 

Board effectiveness – Make a note of the key findings identified by the evaluation process and any actions instead of merely offering a description of the process.

 

Communication and engagement with stakeholders– Provide an integrated report of the corporate integrity, social value and Value For Money.

 

Checklist for Enhanced Integrated Reporting

An Enhanced Integrated Report (EIR) will provide users with a better understanding of the organisation and how it is led. This detail is interwoven into the fabric of the report negating the need for a separate governance report. An EIR may include:

 

• Chairman’s statement to set the tone,

 

• Evaluation criteria linked to strategy and performance,

 

• Achievement of KPIs,

 

• Frequency of risk register reviews and key mitigations agreed,

 

• Stakeholder feedback and Investor Relations communication,

 

• Attendance of board members,

 

• Relevant skills and experience of the board,

 

• Evidence that the evaluation process is robust and subsequent findings,

 

• Outcomes of evaluations and action plans,

 

• Evidence of progress on actions included in evaluations,

 

• Highlighting of significant changes to governance processes during the year,

 

• Description of the work carried out by the audit, remuneration and nomination committees throughout the year,

 

• Demonstration of how the main principles of your chosen governance code are applied.

 

Corporate governance is an important facet of the functioning of every company and so it is crucial that reporting reflects this in a way that is user friendly, informative and adds value to the appreciation and understanding of how effective an organisation is.

 

Reporting in this area shouldn’t be just about compliance. Good reporting can give users a clear picture of the competency of the board, drawing out the balance of skills and expertise which serve the organisation and documenting the work of the committees and the framework that they operate under. The reporting should highlight not only what the board evaluation processes are but what they have uncovered and how the organisation is acting on the findings and any future plans for improvement.

 

Until next time…