Rethinking the Annual Report: Lessons From FTSE 350 Companies

When drafting annual reports, preparers face a difficult balancing act. They must satisfy regulators and provide a comprehensive overview for stakeholders, but too much information can make a report difficult to digest.

The annual reports of FTSE 350 companies now average 186 pages, up 26% over the past five years, according to EY’s most recent study on the topic, Annual Reporting in 2016–17: Broad Perspective, Clear Focus. And that means report preparers must work harder than ever to make sure they remain focused and relevant in their reporting.

“The temptation is to layer more and more information as rules change or as your company and business model change, rather than taking a complete fresh look”

A similar Deloitte study that has been published for the past 12 years examines annual reports of 100 FTSE companies of various sizes (some companies in the Deloitte study overlap with companies in the EY study). While FTSE 350 companies included in the Deloitte study had annual reports averaging around 180 pages, the reports of smaller listed companies Deloitte analyzed had reports that averaged around 120 pages.

Twenty years ago, the average report was 43% narrative and 57% financial statements. Narrative now makes up 61% of the average report included in the Deloitte study.

While growth in report length can often be tied to new or increased regulatory disclosure requirements, lately companies are also being challenged to demonstrate a broader contribution to society. As public trust in business has declined, companies have been expected to engage with a wider group of stakeholders.

EY and Deloitte offer tips for preparers looking to streamline their companies’ annual reports, particularly when it comes to structuring that increasingly important narrative. Among them:

Let strategy and business model guide the narrative

“It all comes back to linking very clearly to your strategy and business model,” said Mala Shah-Coulon, associate partner in EY UK’s corporate governance team and one author of the EY report. “If you are able to link things back to your strategy or your business model, then you will be able to remain cohesive and also clear and concise.”

Although 60% of the reports EY reviewed clearly linked principal risks to strategic objectives, only 8% of companies linked all the way through from strategy to KPIs, risks, and remuneration.

“A company’s purpose should be more than simply an explanation of what the company does,” Veronica Poole, Deloitte’s global IFRS leader and UK head of corporate reporting, wrote in the firm’s Annual Report Insights 2017 report. “But it should also reflect consideration of how value creation is sustainable, in the longer term, for its broader stakeholders.”

When it comes to the increasing pressure to publish an annual report for a wider range of stakeholders, companies can manage report length by making sure that information relates back to strategy.

“If a company is going to talk about culture, it should cover what the culture is, why it is relevant to the strategy and business model, how it is measured and assessed, and, if relevant, what is being done to embed or change the culture,” Shah-Coulon said.

“You need to have a materiality filter to ensure that disclosures that are present are relevant to your readers. The filter should be to the extent those disclosures will help inform their assessment of the company’s development, its position, or its prospects.”

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