Years of increased regulation and a lack of vision or appetite to break from tradition have led to stagnation in the evolution of corporate reporting, says Robert Bruce
This article was first published in the November/December 2016 UK edition of Accounting and Business magazine.
If you are out hill walking there is always a point you reach with the gloom of inevitability. You have been clambering up for what feels like weary hours. There is a ridge ahead. Surely from there you will see the summit beyond and can then rest in happy fulfilment. But it doesn’t work like that. Each ridge achieved reveals another ridge higher up. And it must be this that accountancy firm EY is talking about in its latest annual review of the published reports and accounts of the FTSE 350 companies.
Companies are still making progress in efforts at explanation and disclosure. But that progress has slowed to a crawl. EY suggests efforts may have reached a plateau. If so, that is even more depressing than having the summit just out of sight. A plateau is where you stop and wonder if it really is worth all this effort at all.
Over the years this debate has rolled onwards, with moments of exhilaration tempered with times of glum plodding. Yet we ought to be at the point where, insofar that it is at all possible, we should have cracked it. The years of producing an annual report and accounts by simply updating each different box of information from last year are long gone. But the new world has not managed to replace it fully. What should have happened is a transformation that reflects what regulators, investors, accountants and the world generally wants. This is what the Financial Reporting Council had in mind when its decree that directors had to sign an annual undertaking that their report and accounts was ‘fair, balanced and understandable’ came into force. It was the thinking behind the concept of the ‘strategic report’. It is the thinking that comes with integrated reporting. But if you delve deep into EY’s findings you come to the conclusion that the change in thinking really hasn’t happened yet.
Clutching at straws
To be fair, EY does say that, for example, the quality of reports was up this year and some people were being innovative with their disclosures. Strategic reports had improved, ‘although the quality of governance reporting continues to lag behind somewhat’. ‘Governance reports,’ EY points out, ‘are still largely process rather than outcome oriented’. Nomination committee reporting and shareholder engagement disclosures ‘continue to be areas for potential improvement’. You feel EY is clutching at the available straws here. And this is why, in their next breath, you find it saying: ‘The pace of improvement in overall reporting quality has slowed, however, which suggests that we may have reached a plateau’. They then suggest that this is partly because of the sheer number of changes in the regulatory landscape and that there may well be an element of taking stock going on as a result.
But this may not be the case. The real changes are at work but they are not being recognised properly nor implemented sensibly. What has been happening has been happening gradually. And there is a point, and it is possibly not a plateau, where changes are recognised fully for what they are. We are possibly at the moment when how companies are viewed and how they portray themselves changes utterly. The gradual shift from the report and accounts being a ragbag of regulatory disclosures and self-justifying corporate public relations to a genuine view of what makes one company different from another, and how those differences add up to a culture that will provide long-term and sustainable growth, may well soon be upon us.
A question of culture
The problem, as the EY report makes clear, is that word ‘culture’. ‘During our reviews,’ the report says, ‘we particularly looked for useful disclosures on the competitive advantages of the business model and how it differs from other companies in the industry.’ They found that only 42% of reports ‘explain this effectively’. Yet this is the heart of it all. This is where a company can explain to its investors, stakeholders, and the rest of the world, why they are doing better and will continue to do better than the competition.
This is where culture comes in. There is a telling figure in the EY report. A search of all the reports and accounts under scrutiny found that 97% included a mention of corporate culture – but only 10% explained why it might be important. And that is where the plateau lies. Companies have been told that their culture matters in but remarkably few have properly understood how it unlocks their route to being better understood and, more important, more competitive and successful.
EY makes the point that reporting on culture is not easy. But it is unavoidable. As we all know, culture is something that takes a long time to change and for that change to be recognised. And the only point where you can really see the benefits is after the long slog upward, when the clouds part and the sun beams down. All that is still far away from those trying to make the report and accounts show why the company is doing well, or what hazards may lie ahead. As Hywel Ball, EY’s managing partner for assurance in the UK and Ireland, puts it: ‘Many stakeholders, investors and regulators are hungry for new and greater insights into corporate culture and other such non-financial information. They recognise that culture is fundamental to a company’s performance, the risks it faces and how the business is valued. Yet the reality is that insights into culture remain largely absent from most corporate reports’.
He concludes that any company that manages to close this expectation gap is likely to be at an advantage. Corporate culture still suffers from the long hangover of being predominantly about compliance. All it needs is for companies to look outwards at what people want rather than inwards as they have always done.
Robert Bruce is an accountancy commentator and journalist
"The years of producing an annual report and accounts by simply updating each different box of information from last year are long gone."