The changing face of UK reporting and the need to focus on long-term value creation

Today, reporting practices in the UK are moving swiftly towards an integrated approach, reflecting consideration of long-term value drivers which are critical to the success of a company.

This approach is considered best practice and is becoming increasingly aligned with the principles of integrated reporting. Even though companies may not overtly link their efforts the <IR> Framework, they do seem to be realising the benefits of applying some of its core principles in producing better reports.

This year marks Black Sun’s 13th consecutive year of analysing the corporate reports of FTSE 100. This year’s research is titled ‘Less Perfection. More authenticity’, and reveals the steady trend of companies reporting beyond financials, integrating broader value-influencing factors into their reports. Despite the progress, data suggests that companies could do a bit more in telling an authentic story that truly communicates their distinctiveness and value creation in a way that builds trust with investors and other stakeholders.

The legislative and regulatory regime in the UK is shifting. Back in June, the Government published the Companies (Miscellaneous Reporting) Regulations 2018, which introduced a new requirement to include a section 172 statement in the strategic report. The requirement is to explain how directors’ have considered wider stakeholders and the long-term in exercising their duty to promote the success of the company. The regulations also added new requirements for companies to discuss employee and wider stakeholder engagement in the directors’ report, and added new remuneration reporting requirements.

Earlier this month, the Financial Reporting Council (FRC) followed this up by publishing the new Corporate Governance Code, which emphasises the need for the board to set the purpose, culture, and longer-term strategy of the company while also increasing the focus on section 172. The FRC’s Guidance on the Strategic Report, which is expected later in the month, is the latest element in a clear push to improve transparency around stakeholders and directors’ duties. The Guidance will encourage directors to explain how their regard for the long-term and wider stakeholders has impacted their decision-making, and will also highlight additional areas of best practice for reporting.

These changes place greater emphasis on the board taking a longer-term perspective and a more holistic view of value creation. This expectation is grounded in a company’s genuine consideration of its key stakeholders, which is particularly relevant in reflecting sound corporate governance and developing trust. Similarly, we are also finding that enlightened investors are placing more attention to long-term value when making their decisions.

So, at a time when companies are pressured to think more about the future and the manner in which they are creating value – the purpose driven, multi-capital, stakeholder and outcomes focus inherent to integrated reporting is beginning to emerge in UK reports. It seems that companies are increasingly understanding that these concepts help them to demonstrate their unique culture, wider value creation, long-term thinking and other highly relevant but intangible elements that collectively contribute towards corporate trust and a company’s social licence to operate.

It’s a challenge, but effectively communicating with investors and wider stakeholder groups today require messages that are clearer and more consistent than ever before. Companies that succeed with this will be the ones that view their communications and reporting framework holistically, and convey the board’s long-term strategy effectively. Specifically, these communications will demonstrate the value of the board’s strategy, explain benefits for investors and show how the needs of wider stakeholders have been considered.

Here are some of the key elements we’ve seen in our research this year:

Purpose used as a lens to define value creation

Building trust in business is inextricably linked with long-term value creation. It is no wonder we are seeing many organisations come back to the foundation of ‘why they exist’. This year 66% of companies set out their purpose in the annual report, up from 27% two years ago. Trends suggest that companies are starting to think about purpose as the lens through which they prioritise, operate and plan, and also as a compass to guide strategic analysis and decision-making.

Business models with a value creation focus are providing more insights

Companies are increasingly using the business model section of their report as a means of ensuring that stakeholders have a genuine understanding of their business. These business models are answering challenging and pertinent questions, such as: ‘How does our business model create value?’, ‘What is our relationship with stakeholders?’, and ‘Why is our business model sustainable for the long term?’ Significantly, a majority of the FTSE 100 (66%, up from 25% in 2013) now take a value creation approach to business model reporting, giving a clear overview of the inputs, outputs and, in some cases, the outcomes it generates. Some ambitious reporters are beginning to discuss how the business’ activities impact its stocks of capitals.

Sustainability is integral to business models and long-term strategies

We are also seeing a clear move towards setting out a strategic framework for long-term value creation and evidencing how sustainability issues relevant to the company are embedded in its strategy. This year, 52% of FTSE 100 annual reports feature strategies that incorporate a sustainability focus. 74% of companies highlighted non-financial KPIs, demonstrating that value is being viewed and measured through a financial as well as a long-term sustainability lens.

Stakeholder focus needs to become more strategic

Most FTSE 100 companies conduct some form of formal stakeholder engagement. Our research found that although 52% outline what stakeholders expect of the company (up from 7% last year), only 19% provide evidence of how stakeholder expectations have impacted their strategy. Stakeholder consideration is becoming increasingly necessary to successful operation and regulation is supporting this change.

As we move forward, we are bound to see UK reporting and integrated reporting becoming even more aligned and ultimately contributing to a more sustainable capital market system.
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Black Sun Insights and Engagement: We focus our efforts on tracking trends, demonstrating best practice and building the business case for better communication to stimulate thinking and drive change in the marketplace. This is just a snapshot of what we get up to, but if you would like any more detail, want to join us at one of our events or want to know when the next edition of any of the research will be out, please get in touch with me.