corporate reporting - pwc · 2017-04-07 · director of hsbc holdings plc and home retail group...

Corporate R

eporting - The Com

petitive Landscape

Corporate Reporting:The Competitive Landscape*

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Contents

Tax Reporting

People

Corporate Responsibility

Economic Performance

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Building Public Trust Awards Judges

Winners & Highly Commended

Introducing Best Practice

Other Publications 43

Introduction

In the year that we celebrate our fifth annual Building Public Trust Awards (BPTA), I am delighted to introduce our first compendium of best practice — Corporate Reporting: The Competitive Landscape. As with the awards event, in this publication we celebrate the best of corporate reporting by UK-listed companies and the public sector.

As we engage with companies on corporate reporting and consider the demands for greater accessibility and transparency, we find that an understanding of how others are responding is essential. The BPTA process provided us with valuable insights, as the initial part of the process consisted of a review of reporting by the FTSE 350 as well as more than 90 public sector bodies. During this process, we captured examples of best practice, which demonstrate what good reporting actually looks like. This publication brings our insights and best practice examples together in one compendium – I hope you find it useful.

The challenge for every business remains the same as in previous years: to get ahead of the curve and recognise that simply meeting regulatory reporting requirements is unlikely to satisfy the expectations of investors and other key stakeholders. If companies are to be properly understood and valued, there is a growing need for them to explain their full contribution to wealth creation and other aspects of life. This publication provides a snapshot of some of the key information that businesses need to report in order to win the trust of all those stakeholders who sustain the corporate sector, and who rely on it for their employment, taxes and pensions.

I am particularly pleased to note the continuing improvement in reporting that has occurred in the past 12 months, partly due − in my view − to the introduction of the Business Review. While this has been an obvious catalyst for change, and one I support for its principles-based framework, we should not ignore the many companies that have taken it upon themselves to improve their reporting way beyond the regulatory norm.

If your company is featured in this publication, I congratulate you. You are providing inspiration to others. You are helping to create a competitive mechanism that will continue to move reporting forward, and ensure that it fulfils its overriding objective: to communicate clearly with the capital markets and other key stakeholders.

Kieran PoynterUK ChairmanPricewaterhouseCoopers LLP

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Corporate Reporting: The Competitive Landscape

Philippa Foster Back OBE

Nick Anderson

Sir John Bourn is the Comptroller and Auditor General of the UK. He is also the Chairman of the Professional Oversight Board and a member of the Financial Reporting Council. In addition he is Chairman of the World Bank’s Multilateral Audit Advisory Group.

Sir Andrew is Professor of Management Practice at the London Business School. He is also a Non-Executive Director of Barclays Bank and the Bank of England. His previous posts have included Non-Executive Chairman of MORI and a Managing Director of HM Treasury.

Nick Anderson is Head of Research at Insight Investment, the asset management arm of HBOS. He has more than 20 years’ investment management experience, as both a fund manager and analyst. Nick joined Insight from Schroder Investment Management in 2003. He is a member of the UK Accounting Standards Board and the Corporate Reporting Users, Forum.

Philippa Foster Back became Director of the Institute of Business Ethics in 2001. She was formerly Group Treasurer at EMI. She holds Non-Executive Directorships including Institute of Directors and is a past president of the Association of Corporate Treasurers. She is Chair of the UK Antarctic Heritage Trust.

John Coombe is Chairman of Hogg Robinson Group plc and a Non-Executive Director of HSBC Holdings plc and Home Retail Group plc. He is a member of the Supervisory Board of Siemens AG and a Trustee of The Royal Academy of Arts Trust. Formerly he was CFO of GlaxoSmithKline plc and a member of the UK Accounting Standards Board.

John Coombe Professor Sir Andrew Likierman

Sir John Bourn KCB

Baroness Denise Kingsmill originally rose to prominence as an employment lawyer. She became Deputy Chair of the Competition Commission in 1997 and in 2001 headed the UK Government’s task force into women’s employment. She chaired the Accounting for People Taskforce and is a Non-Executive Director of British Airways and Senior Advisor to the Royal Bank of Scotland.

Baroness Denise Kingsmill CBE

Peter Elwin is Head of Accounting and Valuation research at Cazenove, advising institutions in Europe and the US, and corporate clients of JPMorgan Cazenove. He is a member of the UK Accounting Standards Board, the IASB’s Analyst Reporting Group, the Corporate Reporting Users Forum, and the ICAEW’s working party on reporting financial performance.

Peter Elwin

Anita Skipper joined Morley Fund Management as Head of Corporate Governance in 1993. She is currently on the Board of the International Corporate Governance Network and a member of several corporate governance committees, including those of the ABI. She has played an important role in developing governance practices in the UK and worldwide.

Anita Skipper

The Building Public Trust Awards judging panel is made up of the leading business figures below, and is led by the Chairman of the judges, John Coombe. Between them the judges cover a wide range of disciplines and hold an unparalleled array of knowledge about the key issues that businesses face today. In order to maintain its independence, PricewaterhouseCoopers does not hold a position on the final judging panel.

Professor David Begg, Principal of Tanaka Business School and Professor of Economics at Imperial College, previously taught at Oxford University and Birkbeck College. A CEPR Research Fellow since its inception in 1984, he has published widely on macroeconomics. He is a Fellow of the Royal Society of Edinburgh, and the City and Guilds Institute.

Professor David Begg

Building Public Trust Awards Judges

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The 2007 winners of the Building Public Trust Awards are shown below, along with the highly commended companies. Each company has excelled in their particular area through clear and transparent disclosures, and we congratulate each of them for their efforts. We would recommend that you take time to view these disclosures, which offer some of the best examples of reporting seen in the UK.

FTSE 100

FTSE 250

Winners & Highly Commended

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The Capita Group PlcAstraZeneca PLC

Land Securities Group PLC

Great Portland Estates plcSignet Group plc

Workspace Group PLC

Ministry of DefenceHighways Agency

Metropolitan Police Service

Severn Trent PlcCadbury Schweppes plc

Imperial Chemical Industries PLC

Lonmin PlcPunch Taverns plc

WPP Group plc

Cookson Group plcBT Group plc

HSBC Holdings plc

Vodafone Group PlcAnglo American plc

Diageo plc

Highly CommendedWinner

Winner Highly Commended




Highly CommendedWinner


Highly Commended in alphabetical order

Success


Capturing Best Practice

Over the past decade, PricewaterhouseCoopers has been acknowledged as a leader in promoting good corporate reporting and the monitoring of best practice. Throughout this period we have invested significant resources in research and thought leadership in order to advance our understanding of, and provide insights into, what creates value in corporate reporting. This extensive body of analysis underpins our judgement of the key areas of reporting and the criteria we use to assess them.

During 2007 PricewaterhouseCoopers undertook its most comprehensive review of corporate reporting in the FTSE 350 and public sector to date. This review covered six key areas – overall narrative reporting in both the public and private sectors, and the reporting of measures of success, executive remuneration, pensions and tax by FTSE 350 companies.

The review included all companies in the FTSE 350* and the 90 largest public sector bodies and was conducted using internal experts in each of the key areas.

We assessed each company’s report against a range of objective criteria specific to each key area. This criteria covered basic compliance with required regulations, but also included other elements that we believe companies should be reporting on: these are outlined in more detail over the following pages. As part of the process, reviewers looked beyond the specifics to consider the document as a whole. For example, was there something about a company’s disclosures that made it stand out against its peer group? Did the company do something notable that helped aid our understanding? A positive answer to these questions helped us to identify the best practices shown in the peer group.

The remainder of this publication is organised into sections that align with the key areas of our review. In each area we identify the specific areas of disclosure we were looking for, then we explain what we found, and finally provide recommendations for companies preparing their next report. To bring each area alive, we include some examples of best practice. We would encourage you to take the time to look at these companies’ reports in their entirety and see these disclosures in context in order to fully understand their impact.

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In addition, we continued to monitor good examples of reporting around other key areas - corporate responsibility, people reporting and economic performance, which are also featured in this publication.

Finally, at the end of this document, a PricewaterhouseCoopers expert in each area sets out their thoughts on the future and the challenges facing companies.

For further examples of best practice in corporate reporting please visit our website:

*As of 1st January 2007. All reports with years ending 2 April 2006 -1 April 2007 were reviewed, with the exception of 12 companies that were removed from, or newly listed on, the stock exchange, and two companies that failed to report in the period of the review.

PricewaterhouseCoopers would like to express our sincere thanks to all the companies that have allowed us to feature their work in this publication. We also offer congratulations for the commitment and energy that all these companies have shown in helping to elevate the quality of corporate reporting in the UK.

Introducing Best Practice

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FTSE 350It is clear from the findings of our review that there have been some real improvements in narrative reporting during the past year. Nowhere is this more evident than in the communication of strategicpriorities, key performance indicators (KPIs) and risk. Several factors have influenced these improvements, including: the bedding down of the Business Review, increased media attention and a growing recognition that corporate reporting is a competitive tool.

Good corporate reporting is not only about content but also quality and how well it all hangs together. Under content we were looking at the information the company chose to report – did it include all the elements we would expect to see and focus in on the key messages? Quality refers to the depth of the information – did the company use only qualitative information or did it support this with quantitative data, benchmarks and targets? Finally, on linkage, we considered how well a company demonstrated a clear and consistent message throughout its reporting, and whether the different elements of the report related back to the strategic themes set out as key to company success. Specific areas we focused on include:

• A clear explanation of what the company does, supported by a comprehensive analysis of its marketplace.

• An explicit statement of the company’s long-term direction supported by the strategies to pursue this, with clear use of specific targets.

• A consistent message/story running throughout, based on the stated strategic themes.

• An explanation of how strategic performance is measured over time, including identification of financial and non- financial key performance indicators accompanied by supporting trend data.

• An insight into the key resources and relationships managed by the company in order to fulfil its strategic objectives.

• Clear analysis of the principal risks the company faces in meeting its strategic aims.

• An innovative explanation of financial numbers, to help readers better understand the company’s key financial data.

What we were looking for: What we found:

We were very pleased to see the improved standards of reporting this year, particularly in areas we believe are key to providing a foundation to the report. 93% of companies provided an overall objective, with 88% providing their strategies. However, many remain reluctant to provide specific target information – only 35% of companies offered strategic targets when explaining their objective or strategy.

Less than half of all companies provided good market information about their competitive, macro and regulatory environments, with 25% providing clear quantitative, forward-looking market data. However, this area highlights a real difference in performance between FTSE 100 companies and those in the FTSE 250.

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Three-quarters of companies specifically identified their KPIs, with 64% of those making an attempt to link their KPIs to strategy. Those companies that stated their KPIs also provided a range of supporting information – 93% showed trend data to allow an analysis over time, while 55% clearly showed how the KPI has been defined or calculated.

Three-quarters of companies outlined their principal risks, with the average number of risks amounting to eight. Just over half (57%) of these companies also detailed how risks are managed, although few (9%) went further to quantify those risks.

The recent publication, Business Review: has it made a difference?, contains more information on our findings. For more details please refer to page 43.

The future challenge:The improvements in reporting seen this year are encouraging, but companies can still do more to ensure that they provide investors with a full understanding of their business. Some ideas to be considered include:

• Make strategy the foundation of the report and link all other elements to this.

• Ensure a logical and consistent flow of information throughout all company documents.

• Provide a complete picture of the market environment: competitive, regulatory and macro-economic factors.

• Signpost critical information.

• Offer quantitative data to support qualitative statements.

• Make use of externally-sourced data to support statements made.

• Benchmark data in order to show “real” performance. • Look to the future – investors want a reason to invest for the longer term.

• Avoid jargon and industry-specific terms, and provide a clear glossary.

• Where possible, cross reference to additional information.

• If CSR issues are important, integrate them and treat them the same as any other element of reporting.

• Don’t make unsupported statements or assume the reader already knows about an area of your business.

“There have been some real improvements in reporting this year as companies have raised the standard of their disclosures in order to embrace the spirit of the Business Review, rather than to just comply with the letter of the law.”

David PhillipsSenior Partner, Corporate Reporting

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FTSE 350Good Practice Examples:

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Strategy is probably the most important element of reporting, and this year has seen a big improvement in companies articulating their strategy. Best practice companies, however, have gone a step further and added specific and timely targets to their strategic intentions. HBOS, for example, offers targets – an exact figure or a range – for both its financial and operational strategic plans.

HBOS:

Unite Group:By clearly explaining its competitive, regulatory and macro-economic environments, a company provides context for the rest of its reporting. The Unite Group has provided some comprehensive data on its market environment: outlining factors driving change in its market; the regulations that it must adhere to; and the competition it faces. The company also offers a range of statistical information that shows how it believes its market will grow in the coming years. The fact that the data is externally sourced lends it further credibility.

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The Business Review makes key performance indicators (KPIs) a regulatory requirement, but many companies remain uncomfortable about reporting this information. Best practice companies contextualise their KPIs, offering a definition, explaining their aim and purpose, as well as providing a clear link between the strategy and KPIs disclosed. Capita has clearly summarised its KPIs and provided performance data alongside its aim for the forthcoming year. It has then expanded on this summary with more detail, diagrams and definitions of calculations made. Also, the company supports the financial KPIs shown below with non-financial performance indicators demonstrating how effectively the company is managing its key resources and relationships.

Capita:

PartyGaming:PartyGaming demonstrates best practice by making strategy the foundation of its report and using it to link all other elements together to show a consistent theme. The company offers a strategy progress table that shows “at-a-glance” how strategy links to business drivers and performance. Also, the strategic themes are reinforced throughout the report through the use of strategy symbols allowing the reader to easily identify where strategy is being discussed.

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FTSE 350Good Practice Examples (continued):

Good practice companies give clear insights into the value that their key resources and relationships deliver. These insights usually describe how the company is optimising the value of their resources or relationships, supported with quantitative data. Ladbrokes has used externally-sourced data to provide some clear insight into the awareness of its brand.

Tomkins:

Ladbrokes:

Risk disclosure has historically been one of the weakest areas of reporting by companies, although the introduction of the Business Review has seen some improvement in this area. Tomkins takes its risk disclosure a stage further by providing an awareness of their risk profile with the use of a simple grid diagram showing impact versus likelihood of key risks occurring.

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Companies tend to provide financial review sections that use financial information to describe the company’s own perception of its performance, without clearly explaining how this information reconciles to the financial statements. However, some are now taking steps to improve this and make information more understandable to retail investors in particular. Bradford and Bingley, for example, presents a clear breakdown of how its statutory statements compare to how its own board assesses this information.

Examples of note:

Bradford and Bingley:

BAT

BAT’s annual report is a good example of a company that has worked to develop the narrative content of its report by focusing on strategy. The report clearly identifies the company’s strategic themes by using a diagram showing how the different strands link together. Each theme is developed in more detail and the primary relationships with employees and the environment are discussed in great depth, with further credibility gained from the use of benchmark data. KPIs are clearly stated, linked to the theme of “Growth” and supported with explicit future targets.

Emap

From the outset, Emap’s report clearly explains what the reader will find within its pages and why they should be interested. This transparency continues throughout the document with an excellent, balanced section on strategy, which is underpinned by the company’s KPIs and principal risks. The market analysis included within the report is very extensive, with good detail on the macro-economic and competitive environments. The report also includes an insightful section on the company’s responsibilities and how it fulfils these.

Xstrata

Xstrata’s annual report makes a real commitment to transparency at both group and segmental level. The company sets out a very clear strategy incorporating both financial and non-financial objectives. This is supported by specific segment strategies and KPIs. The group then provides more detail on each of its segments, starting with a comprehensive overview of each key market, making good use of quantitative data and benchmarks. A detailed operational review adds further weight to the segmental disclosures.

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Public Sector

Best practice in the public sector should present a joined-up explanation of goals and objectives, the context in which strategic decisions are taken, the resources and relationships used to implement strategy, and operational and financial results. Designing and using the right KPIs remains a high priority, especially given the recent shift in the public sector from reporting on targets in a “tick box” fashion, towards reporting how organisations have truely added value. Calls for greater transparency and accountability affect both private and public sector organisations, and we were keen to recognise organisations that reported their challenges alongside their achievements – the bad as well as the good news.

Specific areas we focused on included:

• A clear statement of what the organisation does, supported by a comprehensive analysis of the environment in which it operates.

• An explicit statement of long-term direction, supported by the strategies in place to pursue this, with clear use of specific targets.

• An explanation of how strategic performance is measured over time, supported by trend data.

• An insight into the key resources and relationships managed by the organisation in order to fulfil its strategic objectives.

• Sustainability reporting – how organisations assess, measure and seek to reduce their environmental impacts, with statistics reporting against these aims.

• Clear analysis of the principal risks the organisation faces in meeting its strategic aims.

• A forward-looking perspective.

• A consistent message/theme running throughout the report.

Almost 70% of organisations provided a clear statement articulating what they do. The majority of other organisations alluded to what they do, but could have improved their disclosures. Only 49% of organisations provided sufficient contextual information of their macro and regulatory environments. A further 39% provided some limited contextual information. Many organisations assumed the reader would know what the organisation did, and left questions unanswered regarding the environment in which they operated.

However, organisations were generally very good at stating their overall goals and objectives, with 83% providing good disclosures. 65% of these companies also provided a good level of quantitative forward-looking data, with a further 22% providing limited data of the same type.

in association with the


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Public Sector

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Limited quantitative forward looking data

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As in the private sector, good reporting in the public sector is characterised by the quality and relevance of content. Linkage – a clear and consistent message running through the document and connecting each part to the rest – is also critical.

The weakest area reviewed was disclosure of principal risks. Only 34% of organisations identified these, with fewer providing detail on how these risks are mitigated and managed. Nearly a third (31%) of organisations did not make any disclosures beyond the statutory requirement of the Statement on Internal Control (SIC).

There are a number of improvements that public sector organisations can make to ensure that they provide stakeholders with a full understanding of their role and activities. These include:

• Use the same layout and format in the annual report as in the strategy or corporate plan. Strategy should be the foundation of the report and all other elements should link to it.

• Go beyond the basic requirements of the Statement of Internal Control to enhance disclosures concerning risks.

• Improve definitions and explanations of value for money, including evidence to support assertions about the efficiency of new methods of working.

• Provide commentary on how the macro economic environment affects the organisation.

• Avoid jargon and industry-specific terms; where used, define these terms in a glossary.

• Use qualitative data to support qualitative statements where possible – assertions should be developed and supported with evidence.

• Enhance disclosures about employees and fully integrate them into strategies.

• Incorporate specific environmental targets into key strategies and report against them.

• Continue to develop disclosures on sustainability – ensuring that they include definable goals and objectives and are incorporated into key strategies.

• Use the annual report to present key findings from other workstreams rather than making reference to reports that are not publicly available.

• Don’t neglect the future. Current-year results should be set against both historical data and future targets.

“Public Sector organisations are often required by statute to report against targets. The best organisations link disclosure of their KPIs to strategy in a manner that engages the reader.”

Janet EilbeckPartner, Public Sector

Sir John Bourn KCBComptroller and Auditor General

The future challenge:

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“An open and honest account of strategy and performance is essential to building trust between a public sector organisation and the people it serves.”

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No disclosure of principal risks

No disclosure of principal risks beyond thestatutory requirement to produce a SIC


Public SectorGood Practice Examples:

When public sector organisations set clear KPIs, these are generally reported on concisely. Quality of presentation varies, however, with few organisations using innovative methods to report KPIs, or being completely transparent. The Ministry of Defence’s target relating to the effectiveness of the UK’s contribution to conflict prevention is a good example of the organisation’s innovative approach to reporting, and of its transparency regarding sensitive issues.

Ministry of Defence:

Linking an organisation’s mission statement to its strategy, its strategy to its objectives, and the structure of the report as a whole, is a key criterion for good reporting. The Ministry of Defence is exceptional at linking strategy to objectives, using a Balanced Scorecard to help it translate strategy into operational objectives.

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Highways Agency:Environmental reporting is a relatively new challenge for public sector organisations, and it is one at which few organisations excel. The Highways Agency incorporated environmental concerns within its Business Plan, by recognising its impacts on the environment and developing relevant KPIs.

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Ministry of Defence:Reporting regarding employees and diversity is often passed over briefly. The Ministry of Defence however included causes of employee dissatisfaction and statistics relating to ethnic minority recruitment, even when targets were not met, in its annual report. In both instances the annual report went on to give a narrative commentary against both indicators.

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Public SectorGood Practice Examples (continued):

The Highways Agency includes a section on corporate social responsibility in its annual report, which has environmental indicators on water and electricity usage to measure performance at a detailed level.

Highways Agency:

Best practice public sector organisations provide context for their KPIs, defining them and explaining their purpose, as well as providing a clear link to the strategic aims the KPIs are measuring. The Driver and Vehicle Licensing Authority (DVLA) has clearly summarised its KPIs relating to ‘Customer Service’ – one of the three categories against which activities are analysed in its Directors’ Report. The DVLA has also been transparent in reporting where it has failed to meet targets.

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Examples of note:

Northern Ireland Roads Service

The Northern Ireland Roads Service has produced a clear, concise, well-structured annual report. It includes good narrative commentary on each of its eight strategic objectives, providing detail and commentary on relevant statistics. Key elements of the business plan are supported by key performance targets, ensuring a good degree of linkage between planning and reporting.

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Many public sector organisations provide a wealth of statistics and KPIs, but fail to provide focus on the measures that “really matter”, i.e. those that are absolutely fundamental to the organisation’s mission. The Metropolitan Police used a bold style to present KPIs relating to satisfaction levels, leaving the reader of the annual report in no doubt about the organisation’s critical success factors.

Metropolitan Police:

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Legal Services Commission

The Legal Services Commission produced a clear, well-structured annual report, and made good use of case studies to bring the document to life. The use of colour coding in the body of the report makes the link between corporate priorities and outcomes clear, enabling the reader to assess the performance of the organisation against its targets.

Her Majesty’s Courts Service

Her Majesty’s Courts Service uses the balanced scorecard in its business plan to drive the structure of the annual report, ensuring clear linkage between planning and reporting. Furthermore, the annual report is presented in an engaging manner. It is clear that it has been designed with a target audience of the general public in mind. The use of case studies and the customer focus of the report further emphasises this.


Measures of SuccessAs one of the requirements of the Business Review, we’ve seen a marked improvement in the communication of key performance indicators (KPIs). While KPIs are only one element of how companies measure their success, the legislation has clearly encouraged companies to give more thought to what information is important in monitoring strategic progress.

Annual reports have traditionally focused on financial performance, providing a large amount of information to support the figures in the financial statements. However, changing regulation, along with recognition that financial numbers on their own do not provide a full picture of business performance, has led to a greater demand for the communication of strategic objectives of the company, as well as performance against those objectives. As we have already noted earlier in this publication, we believe that strategic disclosures should form the foundation of corporate information. Equally importantly, corporate reports should clearly identify how management assesses success, or failure, in achieving these strategic objectives – their measures of success.

Specific areas we focused on include:

• An explicit statement of the company’s strategic plans with clear quantitative targets.

• An understanding of the timescale of the strategy and appropriate supporting information. For example, if the current report is explaining the third year of the strategy it should outline what has been achieved to date, and what the previous targets were.

• An explanation of how each strategic theme is monitored and measured over time.

• Clear quantification of the measures of strategic performance and supporting detail on these measures, such as definition, trend data and source.

• The relationship between key performance indicators and other defined measures, and the significance given to each.

• A strong relationship between the defined measures of success and the company’s key resources, relationships and risks.

Three-quarters of companies explicitly identify their key performance indicators in their annual report. Of these, 42% explicitly link them to their stated strategies, while 22% provide some linkage between the two.

Customers, people and physical assets are the resources and relationships most frequently identified as key to strategic success. However, there is only limited correlation between those resources and relationships, and the KPIs outlined by the company.


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42%36% Explicit linkageSome linkageNo linkage

In an area of reporting that’s still in its infancy, a number of opportunities for companies to improve their disclosures remain. We would encourage preparers to take a look at what other companies have done, and to draw from the examples we present on the following pages.

For example, it is important to:

• Ensure that strategic plans for the company are clearly set out.

• Provide a clear explanation of what success looks like for each strategic theme.

• Outline the processes in place to monitor the development of strategy over time.

• Set out the quantitative measurements the board uses to monitor the progress of strategy over time.

• Be clear on interim goals and measurements if the strategy is long term.

• Provide a clear insight into the resources and relationships required as key to achieving strategic success and detail how their progress is measured. • Be realistic about factors that may prevent strategic success. If goals aren’t met then provide a clear insight into why – outlining both internal and external circumstances.

• Think long term – is part of the reward for those responsible for implementing strategy assessed using the same measures of success?

“The best companies provide a broad range of measures of success, including both financial and non-financial measures. Non-financial measures are particularly important, as they are often lead indicators of future financial performance.”

Janice LingwoodDirector, Corporate Reporting


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Only 5% of companies bring all of the elements of their strategy together in a tabular form in order to demonstrate the linkage between the strategy and the measures used to monitor progress.

Those companies that have indentified their KPIs provide varying levels of detail relating to each KPI. Trend data is commonly presented, but there is still more that can be done by companies to provide information on targets and benchmark data.

Purpose Definition Trend data Benchmark Futurequalitativetargets

Futurequantitativetargets

George Wimpey does a good job of linking its KPIs to strategic objectives and making it clear that these are what the company uses to measure strategic progress and success. Each KPI is supported by a definition and a future target demonstrating the clear direction of the company. These KPIs are also used throughout the report, with each indicator prominently displayed and discussed in more detail.

George Wimpey:


Measures of SuccessGood Practice Examples:

Some best practice companies utilise a tabular format to provide a clear link between strategy, measures of success and performance. Aviva, for example, has clearly stated its strategic priorities and then provided brief boxes of information on how it measures progress against them, what it achieved in the previous year, and what it hopes to achieve in the next.

Aviva:

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Cadbury Schweppes: Cadbury Schweppes’ annual report has a strong strategic focus, providing information on both the company’s three-year strategic plan, the specific priorities for the year in question, and detail on previous years’ strategy targets. The report then analyses how the company has performed against these targets. For each of the strategies outlined, the company provides a specific section on what it is trying to achieve, and how it is monitoring and measuring progress over time.

Examples of note:

Astra Zeneca

Astra Zeneca uses consistent headings and themes throughout its report, enabling the reader to easily understand how the different elements of the document fit together. Where the company has not provided measures of success, it provides clear reasoning for not doing so, and states its future intentions for introducing this data.

Friends Provident

Friends Provident approaches the main body of its report from a segmental level, providing a set of pages for each segment. The strategy pages are set out in a tabular style, showing each strategy along-side information on how the company measures success against the objective, and the priorities for the forthcoming year.

Standard Life

Standard Life begins its report with a clear graphic showing how the strategic themes link to the measures, in this case its KPIs, that are used to monitor progress over time. These strategies and KPIs are then picked up throughout the report, along with further financial measures, and expanded on to provide more detail about how these measures are monitored.

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Executive RemunerationExecutive remuneration is one of the most sensitive and heavily-scrutinised areas of corporate reporting. The remuneration report is an account of the outcomes during the year from prior decisions made by the remuneration committee. It is also a description of its actions, if any, to change the directors’ remuneration arrangements for future periods. All too often, such reports are largely dissertations on those matters that are required to be disclosed by statute, but do not provide a great insight into the business drivers of executive remuneration.

Good reporting in this area opens the window on boardroom discussions by explaining how the remuneration committee has spent its time during the year and how it has arrived at its decisions.

Specific areas we focused on included the disclosure of:

• Details of the current remuneration policy and how this might vary for subsequent years.

• A clear alignment of remuneration to strategy through the use of key performance metrics, with personal objectives being linked to overall business objectives.

• The process for setting basic salaries and references to internal relativities.

• Structure and performance metrics for the annual bonus. Basis of calculation for current year bonus payments, illustrating the linkage between reward payouts and company performance.

• Details of long-term incentive programmes with an explanation of grant sizes and the rationale for the performance conditions.

• The impact of current performance on long-term incentives, both at the end of the vesting period, and for partially completed periods.

• Expected values, or year-end values, of long-term incentives, allowing an assessment of the likely benefit accruing to executives.

• Evidence of an assessment of the total value of the remuneration package, as well as how it compares with the chosen peer group companies.

• Use of tables and charts to break up dense text; and the inclusion of colour, headings and eye-catching design.

As in the other key areas, no one company excelled in all categories of disclosure, but every category had at least a handful of companies that achieved a high standard. The reporting of executive remuneration in FTSE 100 companies was generally more comprehensive than in FTSE 250 companies.

The statutory requirement is to disclose the bonus paid in respect of the year under review. However, significantly more information is being disclosed by many companies. This may be because institutional investors have been pressing for greater clarity over performance metrics and how the achievement of targets results in the bonus paid. Many more companies (particularly those in the FTSE 100) are providing useful tables detailing the structure on which bonus payments are based.

Clear disclosure of the relative importance of the fixed and variable elements of remuneration can be very powerful, particularly where companies attach values to the individual elements of the package. However, it is disappointing to note that several companies in the FTSE 350 are meeting this legislative disclosure requirement with a simple policy statement of broad proportionality.


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Achieved KPIs

Disclosure of

fixed/variable

split

Explanation

of split

Rationale for

each constituent

of package

Reference

to internal

relativities

FTSE 100

FTSE 250

0

25

50

75

100

A growing number of companies are making disclosures of the overall package, yet the way in which the information is being provided varies. Furthermore, it is encouraging to note that, as shown below, an increasing proportion of companies are benchmarking total compensation against a peer group (rather than considering each element of remuneration separately).

Non-executive directors’ fees have increased significantly in recent years and, in many cases, are subject to annual review. A reasonable proportion of FTSE 350 companies now provide detail on the make-up of non-executive directors’ fees. It is encouraging to find many companies displaying tables of annual rates of non-executive directors’ fees. However, in some cases it was difficult to reconcile the numbers in the emoluments table back to the fee rates.

There are still a number of opportunities for companies to improve their remuneration reporting. The first step is to consider the remuneration report as part of an overall communication package, which is set against the backdrop of the company’s business strategy and the demands of its particular industry.

Other suggested improvements include:

• Disclosure of remuneration strategy in the context of business strategy and performance.

• Clear alignment between corporate performance and executive remuneration.

• A more forward-looking approach to the remuneration report with disclosure of prospective packages for the forthcoming year.

• Justification for the choice of comparator group and benchmarks for setting remuneration.

• A greater level of discussion on the annual bonus to allow the reader to understand why the bonus was paid.

• Disclosure of expected values of long-term incentive awards made in the year.

• Explanations of changes in transfer values and funding rates for defined benefit pensions.

• The use of commentary boxes rather than footnotes.

“There is no doubt that the quality of the reporting of executive remuneration is improving in many companies, but there is still only a handful of reports that we considered to be close to achieving a very high standard of disclosure.” Sean O’Hare

Partner, Executive Remuneration


23FTSE 100 FTSE 250

0

25

50

75

100

Excellent

Good

Average

Limited

None


Executive RemunerationGood Practice Examples:

Disclosure of the relative importance of the fixed and variable elements of directors’ remuneration packages is a legislative requirement that elicits hugely divergent approaches. As a minimum, companies disclose the percentages attributable to the fixed and variable parts of the package. However, some companies use this disclosure to describe the value expected to arise from the package, as illustrated by SAB Miller. This disclosure stands out as a rare example of a company including both the quantum of the overall package and the proportion represented by each element of remuneration.

SAB Miller:

It is a requirement of the UK Listing Authority that companies disclose their long-term incentive grant policy and any changes or divergence from that policy in the year under review – many companies overlook this requirement. Punch Taverns sets out the prospective grant under the LTIP for the year following the year under review, both in terms of face value of the awards as a percentage of salary and the fair value (calculated for IFRS 2 purposes) as a monetary amount. The size of the awards is then compared (in fair value terms) with those in the company’s chosen comparator group.

Punch Taverns:

Emap:It is becoming more common for companies to have a shareholding requirement for executive directors, expressed as a multiple of base salary. However, it is still relatively unusual for a company to disclose the extent to which executive directors have met the shareholding requirement or, indeed, the basis on which shares will count towards the shareholding requirement. Emap also presents the value of vested but unexercised options.

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SA

B M

iller

AR

200

7Em

ap A

R 2

007

Punc

h Ta

vern

s A

R 2

006

Mitchells & Butler is one of the few companies that made a clear reference to internal relativities. The disclosure below identifies the proportion of the salary bill that is attributable to directors and executive committee members, and compares the average cash compensation of executive directors with that of a non-board employee.

Mitchells & Butler: Good remuneration reporting establishes how executives are incentifised by reference to metrics that are clearly linked to their business strategy. We found very few companies that were using specific and relevant business objectives to drive their incentive programmes. One example that stood out from the rest was that disclosed in the United Utilities remuneration report.

United Utilities:

Examples of note:

WPP

WPP’s 2006 remuneration report is highly readable, making it very different from any other we came across in the FTSE 350. Although it is not as comprehensive as some of the others, there is a clear summary of the remuneration packages of executive directors, giving a high-level insight into the company’s remuneration policy for the executive team.

Cadbury Schweppes

Cadbury’s 2006 remuneration report is clearly presented and comprehensive. It contains a useful diagram to explain the structure of the long-term incentive plan, and clear disclosure of the outstanding dilution capacity for employee share plans. The structure of the remuneration package is clearly summarised in tabular format, in terms of minimum and maximum outcomes, and the relative importance of the fixed and variable elements of executive remuneration.

25

Mit

chel

ls a

nd B

utle

r AR

200

6

Uni

ted

Uti

litie

s A

R 2

007

Lonmin

Lonmin’s 2005/6 comprehensive remuneration report describes the company’s South African business to provide context for its discussion of executive remuneration. The report includes descriptions of the remuneration committee’s processes, the comparator groups used to benchmark executive pay, and progress against performance conditions for long-term incentives.


PensionsOver recent years, large deficits and more onerous legislation to protect members’ benefits have brought the issues around defined benefit schemes higher up the agenda. However, traditional pensions disclosures have been insufficient to allow investors to properly understand the risks and rewards around these schemes.

Investors want to understand the inherent uncertainties in the calculation of scheme liabilities and costs, and the risk of higher contributions or other actions in the future.

Specific areas we focused on include:

• Non-technical disclosure of the material assumptions affecting the calculation of the scheme’s liabilities, including the longevity assumption.

• Disclosure of the sensitivity of liabilities and costs to material assumptions and changing markets.

• Description of how liabilities are measured under IAS 19 and disclosure of other alternative measures of the pensions deficit.

• Information that enables an understanding of future company cash contribution requirements.

• Disclosure of the company’s policy for managing the pensions risk.

• Additionally, as this is one of the more complex areas of reporting, we were looking for clear, non-technical descriptions and a logical layout for what is often a very detailed disclosure.

As expected, we found a wide variation in quality of disclosures. Nearly 30%* of the FTSE 350 companies with defined benfit schemes surveyed did not provide any additional disclosures beyond the bare minimum required by the standard. Where companies did provide additional information, the impact was sometimes lessened because the disclosures were highly technical in nature.

Just 50% of companies provided longevity disclosures, with sufficient information to allow an understanding of current assumed rates of longevity and how these are expected to change in the future.

*Our statistics exclude the 30% of companies that either do not have defined benefit schemes or immaterial schemes not requiring disclosure


2650%

50% No disclosure

Longevity disclosure

Current accounting rules only require disclosure of an estimate of the contributions that will be paid over the next year, despite the fact that the pension scheme is a long-term commitment. Only 20% of companies went beyond this requirement to provide sufficient information to allow an understanding of company cash contribution commitments beyond the next year.

Just 20% of companies provided details of pension risks and the steps they were taking to manage these risks, such as the mismatch between assets: typical schemes are heavily invested in equities, yet liabilities are bond-like in nature.

Only five companies disclosed the buy-out deficit - the shortfall of assets relative to the cost of securing the liablities with an insurance company.

Companies have started to work towards best practice reporting guidelines proposed by industry bodies such as the Accounting Standards Board, but there is still some way to go. Potential areas for improvement include:

• Provide a clear link between the pensions surplus/deficit in respect of the material plans and the asset/liability included on the balance sheet (and also costs in the p&l).

• Ensure key information is easy to find; for example, total pensions deficit, p&l costs.

• Include definitions of key terms, such as current service cost, interest cost, expected return on assets, in clear and non-technical language.

• Provide complete longevity disclosures, including how longevity is expected to change over time.

• Disclose all material assumptions, such as an allowance for members to take a cash lump sum on retirement.

• Provide sensitivity of p&l costs, as well as pension liabilities, to changes in key assumptions.

• Disclose IAS 19 calculation of pension liabilities, as well as alternative methodologies, such as the buy-out level.

• Present the company’s long-term funding commitment, including, where appropriate, separate disclosure of any contributions needed to repair any shortfall of assets compared to liabilities; when the shortfall is expected to be removed; and use of any contingent assets (assets payable to the pension scheme on triggering of certain events).

• Provide a clear articulation of the company’s policy for managing the pensions risk.

“The best companies provide well-articulated, detailed and comprehensive disclosures around their pension risks and long-term funding obligations.”

Jill Williamson Senior Manager, Pensions


27

20%80% No disclosure

Company contributionsbeyond the next year

20%80% No disclosure

Pensions risks disclosed


PensionsGood Practice Examples:

Longevity is one of the most significant assumptions when valuing pension scheme liabilities. Best practice disclosures include the underlying actuarial tables and implied life expectancies of current pensioners and how these are expected to change for future pensioners. Prudential’s disclosure is simple, neat and complete.

Prudential:

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Prud

enti

al A

R 2

006

Best practice disclosures describe how assets and liabilities are measured under IAS 19 and disclose and describe other measures of the pensions liabilities. BT provides an overview of: how both liabilities are measured under IAS 19;how funding has been assessed; and discloses the buy-out level.

BT:

BT

AR

200

7B

T A

R 2

007

BT

AR

200

7

Cookson Group:Best practice disclosures include an explanation of how the company is managing and mitigating its pensions risk. Cookson Group provides an explanation of the main pensions risks, and a non-technical description of the steps it is putting in place to manage these risks.

29

Cook

son

Gro

up

AR

200

6

Best practice disclosures provide details of the sensitivities of the liabilities and p&l costs to key assumptions, HSBC provides sensitivities for the discount rate and rate of inflation. It then goes on to provide sensitivities to rates of increases to both pensions and pay, as well as to changes in mortality assumptions.

HSBC Holdings:

HS

BC

AR

200

6

Examples of note:

Friends Provident

Clear layout and design. Also includes a section setting out the company’s future cash commitments.

Aggreko

Comprehensive disclosure presented in an easy-to-read format.

Barclays

Logical, clear layout with good funding and governance sections, including disclosure of who has the power to set the contribution rate of the scheme.

Reproduced with permission from HSBC Holdings plc Annual Report and Accounts 2006

HSB

C H

oldi

ngs

AR

200

6


Tax ReportingA wide range of stakeholders are demanding more and clearer information on tax. Tax can no longer hide behind technical complexity, and companies are responding by providing more communication on tax than is required by accounting standards. Leaders in the field provide significant disclosure across all areas, but there is a wide disparity between the best and many of the rest of the FTSE 350.

We look for tax reporting in three key areas: strategy and risk management; numbers and performance; and the wider impact of tax, including information on a company’s total tax contribution. These three broad areas encompass a “Tax Transparency Framework”, and we would expect to see good reporting covering more specific criteria in each of these areas:

• Tax strategy and risk management

• Clear discussion of the company’s tax objectives and strategy. • Disclosure of how the company’s tax strategy and function is managed and who in the organisation has responsibility for governance and oversight. • Clear disclosure of the material tax risks the company faces.

• Tax numbers and performance

• A clear explanation of why the current tax charge is not simply 30% of accounting profit. • A transparent reconciliation of the company’s cash tax payments to the tax charge included in the income statement. • Disclosure of the forward-looking measures for tax, including forecast accounting and cash tax rate.

• Total tax contribution and the wider impact of taxes

• Detail as to how tax impacts on the company’s wider business strategy and results. • Disclosure of the impact of tax on shareholder value. • Clear communication of the economic contribution of all taxes paid by the company.

We attach particular significance to the discussion of a company’s tax strategy, as this provides context for the remainder of the tax reporting; and without disclosure of a strategy, the other information can lose some of its value.

We were pleased to see that both the quality of disclosures and the amount of information on tax increased this year, though this clearly remains an emerging area.

Tax strategy and risk management

Though the number of companies disclosing their tax strategy remains low, with only 20% of companies doing this, this is a significant improvement over the last year and we expect this trend to continue.

Many more companies, 40%, discuss the significant tax risks they face and how those risks are managed. However, the companies that do this well remain in a minority.

Tax numbers and performance

Accounting standards require significant disclosure of tax numbers as part of the financial statements, but there is a wide variation in the transparency of the information provided. It is often difficult for a non-tax specialist to understand this information. The leading companies are those that use simple, clear language and link the impact tax has on the business performance throughout their reporting.


3060%40%

No disclosure of specific tax risks

Disclosure of specific tax risks

Total tax contribution and the wider impact of taxes

This year we saw a range of companies providing a link between tax and corporate citizenship, with an increasing number of reports describing the economic contribution made via the payment of taxes.There was a similarly pleasing increase in the number of companies who discussed the wider impact tax had on their business, with 18% of companies now doing this.

Both features were to some extent industry and issue specific. For example, the impact of the introduction of the REIT regime on property groups was generally very well described. The better reporting, by almost a third of companies, of the overall economic contribution made in taxes paid, was generally from companies in the extractive industries.

Communication of tax issues is an area of increasing focus and there has been a definite improvement in the tax information reported in the past two years, but there is still some way to go.

Some key communication challenges for companies to consider are:

• How do you best communicate your tax strategy to investors and other stakeholders?

• What is the best way to communicate your major tax risks, who manages them and how?

• Have you given sufficient information in your financial statements to enable investors and other users to make accurate estimates of your future cash tax rate?

In addition to the broader push for more tax information, the introduction of new US reporting requirements (for periods beginning after 15 December 2006) is likely to have a significant impact on tax reporting. These requirements demand additional disclosure and specific recognition and measurement of uncertain tax benefits, and will see analysts using new measurement metrics to determine exposure to tax risk.

• While this will have the greatest impact on companies that report in the US, the focus on tax risk management should increase the standard of communication in this area, as companies are going to be under pressure to match the standards of reporting of the “best in class”.

• Risk processes will come under more scrutiny, with stakeholders demanding more information about the company’s tax aims and how these fit with the wider business strategy.

• We would also expect tax to be included in broader corporate responsibility discussions. The majority of companies discussing their wider contribution did so in the context of their corporate responsibility reporting.

“We were pleased to see a marked improvement in the quality and quantity of tax information provided.”

Susan SymonsPartner, Tax


31

Furthermore, the leaders also often make forward-looking statements in relation to future tax rates, with almost 20% of companies providing such a perspective. However, less than 10% of companies provided any detail on the link between the accounting tax charge and the cash tax actually paid.

18%

82%

Discuss wider impact of tax

No discussion of widerimpact of tax

93%

7%Companies provide reconciliationof cash tax payment to accountingtax charge

No reconciliation provided


Tax Reporting Good Practice Examples:

The link between the wider business and tax strategy is becoming increasingly important in some industries. This trend is likely to increase as tax authorities and other stakeholders take more interest in the amount of tax paid by companies and where it is paid. Anglo American links its tax strategy explicitly to its economic value add, and is clear how the tax strategy fits into its business model. The company also provides a breakdown of total taxes paid to government (borne and collected) by country.

Anglo American:

Changes in tax legislation and tax rates can significantly impact on the way a company does business. Diageo succeeds not only in communicating the impact of taxes and duties on its business, but goes further to discuss how it structures its affairs within this fiscal environment and gives clear guidance on its tax strategy.

Diageo:

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lo A

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Dia

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Corp

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Some companies provide very explicit information on their tax strategy and governance. Vodafone is clear what its tax strategy is and what risks it is exposed to, who has responsibility for setting and managing the strategy and how its tax professionals should act. It is unique in the FTSE 350 in publishing a tax code of conduct.

Vodafone:

Examples of note:

GKN

GKN provides a good discussion on what its tax strategy is, and how its performance on tax is measured. This is linked well to narrative around its cash tax rate. It also provides forward looking statements on estimated future tax rates.

Kazakhmys

Kazakhmys provides a good overall level of detail across each area of the Tax Transparency Framework, in particular around governance and risk. Kazakhmys is particularly successful in describing the uncertainties provided by operating in a developing taxation system.

Workspace

Workspace sets out the impact that the introduction and election into the REIT regime will have on future business strategy. Workspace gos on to set out clearly how the regime will affect the returns to shareholders, while also explaining the technical details to those users who will be interested.

33

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People

People reporting is an area of corporate reporting that has evolved rapidly in recent years, and while it was not an area we focused specifically on this year, we can glean some trends from our wider survey of FTSE 350 narrative reporting.

Just over 60% of companies stated that employees are a key part of their strategy, but only 39% of these same companies provided a key performance indicator on people.

Overall 41% of FTSE 350 companies had a people KPI, with 12% of all KPIs used in the FTSE 350 falling into the people category.

Just over a quarter (27%) of companies stated the failure to recruit or retain key employees as a key risk to their business.



Annual reports have traditionally focused on financial performance, with any reference to employees being left to the Chairman or Chief Executive to thank them for another good year. However, employees are recognised as a critical resource in most companies, making this an important area for reporting. We believe that good people reporting stems from the clarity with which employees are identified as a critical resource in delivering on strategic success. From this starting point, corporate reports should clearly identify management actions to invest in, and develop, its employees. Finally, relevant people metrics should be monitored, and reported on, so that readers can assess progress against stated employee strategies.

More specifically, in looking for best practice people reporting, we focused on:

• A clear alignment of employees to the company’s strategy.

• Definition of who is deemed an employee – eg, do they include part-time employees, agency workers, or staff in roles that you have outsourced?

• Explanation of the key actions necessary to invest in, manage, and develop a company’s employees.

• Identification of appropriate people metrics, and peer group comparisons where the data is available, to monitor a company’s progress.

• Details on future people strategies/initiatives.

It follows that a key challenge for companies in the future is to publish people information relevant to business performance in a location within the report that best reflects its nature. We too often find statements around strategies focused on people engagement and productivity within a CSR report.

We also find that some companies report a very large volume of people information with very limited description of the relevance of the data. It is important that the relevance of people data is discussed in public reports, along with clear statements around the targets and/or benchmarks associated with data.

34

FTSE 100

FTSE 250

0

25

50

75

100

State people as key to strategy

Have a people KPI

Good Practice Examples:

Amlin refers to employees as an important asset throughout its report, and dedicates a very strong section to how it is developing its employees. Its belief in the importance of employees is underlined by the use of one of its most important people key performance indicators at the front of the annual report.

Amlin:The key strength of BT’s people reporting is the accountability for the performance of people strategies. The key performance indicators are identified and tracked over time, with targets and benchmarks in place where relevant. There has also been an improvement in BT’s reporting of the relevance of each people measure in this year’s report.

BT:

The improvement needed in explaining the relevance of people data can come through better qualitative description of that data; it can also come with the addition of more detailed data identifying the key drivers of a particular people metric. BP performs well in this area as the example below shows. In the area of diversity, recruitment is a key topic. Detail on the different nationalities an organisation is recruiting from is rarely published, but is very powerful in demonstrating the tangible results of human capital policies.

BP:The companies shown below – McAlpine and Standard Chartered – make a real attempt in their reporting to focus on their people reporting and to provide clear insight into how they manage this key resource in order to get the most from it. They support their information with clear charts and graphs, helping the reader more easily identify where the methods put in place have been a success, and also where there is more to be done.

Examples of note:

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McAlpine Standard Chartered

BT

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BT

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Traditional approaches to CR have focused on risk, with reporting being seen as a PR exercise. Going forward, the challenges of reporting on CR include:

• Greater integration of CR with strategy and management processes, reflected in integration throughout narrative reporting rather than separate reports and sections.

• Consideration of CR as a value driver, moving CR management and reporting from a PR/communications exercise to value creation.

• Identification and communication of clear and meaningful metrics for measuring CR performance in line with wider business performance.



Corporate Responsibility

As with people reporting, good practice is about integrating corporate responsibility (CR) into core business strategies. Companies at the forefront of CR are reforming their business models to capitalise on value creation opportunities as well as manage CR-related risks. Clarity in reporting also includes discussing which CR risks and opportunities are material to the strategic success of the business, and explaining how those relevant issues are managed. Hardwiring management of relevant issues into critical organisational structures and processes is also key. An example would be the approach taken to align CR performance to executive remuneration. Clarity in reporting on measurement and performance is also critical.

What we were looking for:

We found that companies are good at including information on CR and how they are managing aspects of CR. However, few companies are clearly integrating CR into their strategy and management processes. Our survey of narrative reporting practices found that:

• 83% of FTSE 350 companies provide a CR section in their annual report and explain how important CR is to the entity, yet only 17% of companies embed CR as one of their strategic priorities.

What we found:

36

• In terms of reporting performance, only 8% of the KPIs used are CR-related.

• 38% of companies with a CR-related KPI also highlight CR as a key priority within their strategy.

• 10% of FTSE 350 companies have some sort of CR metric in senior executives’ annual performance plan, most of which are health and safety related.

17%

83%Corporate Responsibility not

embedded

Corporate Responsibility embedded as a strategic priority

17%

83%No CR section included

Provide a CR section in the annual reportA

B


Anglo American recognises that embedding sustainable development within the company depends on raising its employees’ understanding of sustainability concepts and practices. The Report to Society 2006, therefore, includes information on Anglo American’s efforts to train staff to assess the impacts of less quantifiable, sustainable development criteria on a project’s return on investment; and reports on the tools it is training staff to use to assist them in planning mines with an eye to a sustainable future.

Anglo American:M&S has reshaped its business model to integrate environmental, social and economic challenges within its business strategy. The much hailed “Plan A” is brought to life in the Business Review, and it is clear where this fits into the company’s business strategy. Further on in the report, the company re-emphasises the importance of “responsible retailing” to its future success – even listing a failure “to manage, measure and communicate progress against our Plan A commitments” as one of the company’s principal risks in the Corporate Governance statement. Supported with numerous examples of how the company is incorporating Plan A commitments into its stores and supply chain, the annual report’s message to readers is that sustainability is now part of M&S’s core business strategy.

Marks & Spencer:

BT’s Changing World 2007 report includes a two-page discussion on how BT identifies its material issues (and resolves differences in opinion with stakeholders) and where it believes CR presents risks and opportunities within its business.

BT:Carillion’s online-only report differs from many peers’ reports in disclosing some of the detailed tools and frameworks the company uses to talk about, and to manage, sustainability and CR performance. Carillion uses a Sustainability Excellence Model to guide progress and measure its sustainability performance. The model has been adopted within the company, and a baseline score for 2006 has been established and targets set for improvement in 2007.

Carillion:

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BT

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What we were looking for: In recent years there has been a growing emphasis on accounting guidelines and regulations; however, from an investor’s perspective, the clarity and communication of economic value created, continues to be a priority. Investors’ key interests include how their capital is being invested, the returns that have been generated and how these compare to key trends, targets or the benchmark cost of capital.

Specific areas of good economic performance reporting we looked for include:

• Management commitment to clearly report on business and financial issues affecting the company’s economic value.

• A clear and dedicated set of objectives aligned to economic performance.

• A framework that can be used to assess the company’s economic value and how it is performing in comparison to its targets.

• Appropriate measurement and reporting metrics; in particular, the extent to which a company provides information on its capital base, cost of capital and cash returns.

What we found: Overall we found that there are a few companies that perform consistently well in this area: the top five companies have remained very stable over the past five years. In addition we found:

• Good reporting around wider market and regulatory impacts on company economic performance, but less reporting on the impact of economic factors (such as interest rates and GDP growth).

• An increased disclosure of value-centric strategic goals and aims, linked to performance indicators with better monitoring of progress against such indicators.

• A minority of companies provide good frameworks for assessing and reporting economic performance, including economic profit, economic returns, cash value added and return on capital compared to a cost of capital.

• Little disclosure by companies on their view of the company’s cost of capital, or target capital structure.

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The future challenge: There are very good examples of economic reporting in the top tier of companies that we looked at. The main challenge is for this type of reporting to become more commonplace. Particular challenges include:

• Explain how value creation links to strategy, performance measurement, risk assessment and metric reporting. This requires:

• An explaination of the key management processes. • Explaining the company’s appetite for risk. • Providing metrics that help investors measure economic performance and value creation.

• Set out the macro economic drivers of performance, for example business confidence, consumer demand, GDP growth and demographics. In an increasingly connected world, economic effects on one side of the world can impact on performance on the other side.

• Provide a more rounded description of all the sources of capital employed by the company, including both tangible and intangible assets.

Rexam clearly sets out its overall strategy and the relevant KPIs to measure its success. This sets up a simple, transparent snapshot of company performance, which aligns with overall strategy for value creation.


39

Rexam:

Tomkins: Tomkins provides detailed descriptions and supporting calculations for key concepts and metrics related to economic value, including cash flow metrics, cash added value and economic returns.

Barclays: Barclays shows the quantification of its economic profit, a key economic measure, which is linked to the company’s value- creation strategy and targets earlier in its report. The table also provides the previous two year’s comparatives.

Rexa

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PwC experts look to the future:

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Public debate over how the UK’s major companies report their performance has never been more intense. On the one hand, the advent of the Business Review and rising investor expectations are driving companies towards greater transparency on a broader range of financial and non-financial metrics.

On the other, scepticism over what’s reported and companies’ real engagement with the reputation agenda remains rife. Meanwhile, the subprime crisis and credit crunch have focused attention once again on what companies report and what they do not.

In short, the time is ripe to re-examine the way companies report, and will report in the future. In our view, today’s reporting model is still too complex and financially-orientated, while also omitting many critical pieces of information. It would benefit all companies and their stakeholders if reporting could become more trusted, effective and relevant. This can be achieved − but only by recasting the current reporting model to harness market forces in a more efficient and transparent way. Policymakers and professional advisers have a role to play in supporting the move to such a market-driven reporting model. But, ultimately, the impetus must come from the central participants themselves: companies and their investors.

Delivering such a model requires two major steps. First, the establishment of a new set of parameters for “high-quality corporate reporting”, capturing the breadth and nature of the required information − including non-financial information around people, external market trends and so on. And second, a recasting of the current financial reporting model to reduce its complexity and embody the new parameters. Nobody says this will be easy. But if we are to rebuild and sustain trust in reporting, there is no alternative.

The implementation of International Financial Reporting Standards (IFRS) for financial statements, starting in 2008/09, will be a huge challenge for the public sector. Organisations need to start planning for this now – and consider how they will go about explaining the changes caused by IFRS in their annual reports.

There may, for example, be some significant Private Finance Initiative (PFI) schemes that come on to the balance sheet of the public sector. Organisations will need to explain the financial implications, and explain how the schemes are managed.

In the face of increasing pressure to be accountable to its stakeholders, the public sector should be more prepared in future to share bad news. Only then can the public properly judge the efficiency and effectiveness of an organisation.

Many areas of public sector reporting require improvement and refinement – for example, reporting of executive remuneration and pension fund accounts in local government, productivity measures in the NHS and transparent reporting against KPIs in central government.

No new legislative requirements are expected in this space; instead the impetus for improvements is likely to come from market forces, including engagement with stakeholders. The best companies are already reporting measures that align with the critical actions and resources necessary to deliver on their stated strategies.

Interestingly, the improvements witnessed in the communication of strategy and the measures of success make it much easier for observers, both internally and externally, to challenge whether these two are aligned, whether companies are able to support narrative statements, and – by extension – whether management is measuring the key aspects of business performance to monitor business progress. Accordingly, it is this aspect, namely the alignment of the measures of success to articulated strategies, that is likely to continue to be the key challenge for most companies if they are to provide a clear understanding of the quality and sustainability of their strategy and performance. In addition, the pressure will continue on companies to report a broad set of measures, as it is this broader set, including measures around employees, customers etc, that are often the lead indicators of future financial performance.

The public sector entrants continue to impress, with several organisations demonstrating a good standard of reporting. However, most organisations have some catching up to do – the best companies in this sector have remained the best for several years.

The Business Review legislation has put the spotlight on the explicit reporting of the measures, used by management, to assess progress against their objectives and monitor the delivery of their strategies. It is not surprising, then, that reporting in this area has evolved significantly over the past two reporting seasons. We expect to see this evolution continue over coming years.

[email protected] [email protected] [email protected]

We are optimistic that the reporting of executive remuneration is at a turning point and that the focus on meeting legislative requirements at the expense of providing more accessible disclosures will recede. Increasingly, companies are recognising the merit of using the remuneration report to communicate a positive message on executive pay.

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It is likely that recent legislative changes will require companies to explain how the remuneration committee takes into account pay and employment conditions elsewhere in the group when determining executive remuneration. Although the National Association of Pension Funds (NAPF) issued guidelines in 2004, including a recommendation that companies disclose the ratio of average director pay to average non-director pay, we have only identified a handful of companies making reference to such a ratio in their remuneration reports.

It will be interesting to observe whether the changes to executive compensation disclosure requirements in the US will have an impact on the expectations of investors in UK companies. We anticipate that there may be more pressure on companies to include an overall compensation table in their reports or to disclose the expected value of long-term incentive awards made in the year or the value of awards vesting in the year under review.

In summary, we believe that the standard of reporting of executive remuneration is improving and that this is likely to continue over the next 12 months. We would be disappointed if further legislative provisions were to be introduced, as we consider that the current disclosure requirements are now beginning to be sensibly interpreted into a more cohesive communication.

There has undoubtedly been an improvement in pensions reporting over the last few years. With the increased focus on pensions risks among investors and potential acquirers, we are optimistic for the future. The accounting standard setters have recently taken steps to improve the disclosure requirements for pensions. For example, the UK standard setter published a set of best practice reporting guidelines, including recommendations for the disclosure of the buy-out level and sensitivities to key assumptions. We noted a number of companies making some of these additional disclosures in our review. We suspect that the gentle encouragement offered now may turn into compulsion in the future as the standards are revised and updated.

One area where we feel that disclosures are still lacking is around the adequacy of benefits, and the fundamental question of why companies provide pensions at all. Over the last few years, much attention has been given to the flight from defined benefit schemes to defined contribution arrangements, where the employee bears the risk. Many question whether these new arrangements will provide sufficient benefits in retirement. Indeed, many companies who have made the change are questioning whether they may have gone too far, and whether there should be some element of risk-sharing between the employee and employer. We believe that companies should be encouraged to disclose how their pensions schemes are expected to meet their employees needs, and how their pensions strategy fits into their wider corporate objectives.

We are also beginning to see the use of more complex methods for reducing pensions deficits and managing the pensions risks, such as the use of derivatives. Companies should be encouraged to describe these steps. However, care will be needed in the communication of these complex ideas to ensure that they can be understood by the non pensions specialist.

A recently-published National Audit Office report highlighted that almost a third of Britain’s largest businesses paid no tax. This was picked up by the media and splashed across the front page of the Financial Times. This renewed focus will inevitably lead to more pressure on companies to clearly explain why they are not paying tax at the statutory rate.

We would also expect to see tax included in broader corporate responsibility discussions, as the sustainability community becomes more aware of the part tax plays in the economic value added. It is interesting to note that already the majority of companies discussing their wider contribution do so in the context of their corporate responsibility reporting. We expect this trend to continue as companies recognise the link between tax and corporate responsibility.

New US accounting standards have introduced the assessment and disclosure of tax risks into the formal world of financial reporting standards. The resulting focus on tax risk management should increase the standard of communication in this area, as companies are going to be under pressure to match the standards of reporting by “best in class”. As risk processes come under more scrutiny, stakeholders will demand, and are likely to see, more information about the company’s aims around tax and how that fits with the wider business strategy.

Overall, this is still an emerging and developing area. We anticipate more innovation in tax communications as more companies conclude there is a business benefit of providing better tax information to their stakeholders.

There has been a definite improvement in tax communications over the past two years. We anticipate that this trend will continue into the future. A wide range of stakeholders are looking for more and clearer information on tax – their view is that tax can no longer hide behind technical complexity.

Jill Williamson020 7804 3836 [email protected]@uk.pwc.com [email protected]


PwC experts look to the future:

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The impact of drivers such as economic output, consumer spending, business confidence, liquidity, and demographic change all contribute significantly to economic performance, and while companies can’t control these drivers, they can explain to investors how they impact on company performance and how this influences resource-allocation decisions.

We have seen a significant improvement in the reporting of risks, covering their identification, measurement and mitigation strategies. Over the next 12 months, this is likely to be extended by showing investors why certain risks are being taken and how they relate to overall strategy and create value. Risk is not a bad thing – as long as the return is sufficient; then bearing risk is a way of creating value.

One key area where all companies are likely to improve their economic reporting is information on the amount and breakdown of invested capital. The UK economy is becoming more knowledge and service-oriented, so economic capital increasingly relates to intangible assets such as brands, licences, intellectual property and customer relationships, and indeed start-up and development expenditure. In future, companies will take more of a lead in describing and reporting all uses of capital, and show how intangible assets are creating economic value.

The reporting of economic performance has improved significantly over the past years, but there are still many companies that do not report extensively in this area, in particular the use of economic performance metrics. It is likely that reporting of these metrics will remain the preserve of the committed few, but we do expect to see wider reporting of the economic drivers of business.

People Corporate Responsibility (CR)


Richard Phelps Geoff Lane Nick Forrest

As issues like climate change, water scarcity, natural resource conservation, labour standards, health and safety, and ethical procurement continue to become more significant for business, we expect companies to place more focus on explaining why and how these issues impact on core strategy.

Echoing other areas of reporting covered by this guide, we believe we will also see trends in CR reporting around:

• Development of clear and meaningful CR- related metrics and targets that are linked to strategic priorities and embedded within performance management and measurement systems.• Improved governance, controls and assurance both internal and external, over CR-related reporting.• Greater connection between the traditional environmental and social aspects of CR reporting and other emerging reporting areas with a strong CR component, such as people, tax and economic performance and contribution.• Inclusion of critical CR information in the annual report and greater consistency between this information and CR-related information reported elsewhere by the company.• More systematic evaluation of the major risks presented by CR issues as part of a wider evaluation of key non-financial risks.

Recent feedback – from 180 Non Executive Directors of FTSE 250 companies – indicates that 75% are unhappy with the reliability of the CR-related information they currently see and do not feel this information is relevant in addressing the business strategy, risks and opportunities or governance.

While the number of companies moving beyond the simple acknowledgement that “our people are our greatest asset” to including a section relating to their people is encouraging, there is still more to do. We expect to see more cases where people reporting is less of a “stakeholder engagement” exercise and more of a “strategic imperative”, in which companies recognise it is no longer good enough to deal with people issues as a peripheral communications issue but to appreciate that the management of employees needs to be “hardwired” into core business activities. There is evidence that this is already starting to occur – people are the most likely resource/relationship identified as key to strategic success in our survey. However, only 39% of these companies provided a key performance indicator on people.

It is only when companies provide investors with a clear articulation of the people actions needed for a company to achieve its goals, along with relevant measures to monitor progress, that the company will be providing the necessary information for investors to understand the business more fully.

Discussions relating to the reporting around people have been given momentum by the regulatory agenda. For years beginning 1 October 2007, changes introduced in the Companies Act 2006 will require quoted companies to include information on employees, where relevant, within their Business Reviews.

[email protected] [email protected] [email protected] 7804 7044 020 7213 4378 020 7804 5695

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Other publications:

Report LeadershipReport leadership, a multi-stakeholder group, focused on the annual report to develop simple, practical ways to improve narrative and financial reporting to the capital markets. The publication outlines our initial thinking and reflects input and feedback from a range of investors.

The contributors to this initiative are the Chartered Institute of Management Accounts (CIMA), PricewaterhouseCoopers LLP, Radley Yeldar and Tomkins plc.

Guide to forward-looking informationThe reporting of forward-looking information is a critical component of effective communication to the market. This guide provides practical guidance on how it can be achieved, together with examples from progressive companies, both in the UK and elsewhere, who are already adopting a forward-looking orientation in their narrative reporting.

Guide to key performance indicatorsThis guide is a practical publication that has been developed to highlight the increasing demand for reporting key performance indicators (KPIs). It addresses many of the questions posed by these demands and demonstrates what good reporting of KPIs looks like with a collection of examples, drawn from the UK and elsewhere.

Business Review: has it made a difference?A survey of the narrative reporting practices of the FTSE 350, assessing whether the UK government’s approach to narrative reporting legisation (the Business Review) has been successful. The survey covers two aspects of reporting:

• How well companies responded to the Business Review legislation. • Whether companies are moving towards best practice.


Tax Transparency FrameworkThe PricewaterhouseCoopers Tax Transparency Framework was developed in discussions with numerous different stakeholder groups with an interest in tax. We suggest that companies may wish to consider providing information on nine aspects of their tax affairs, which are grouped into three key areas (tax strategy and risk management; tax numbers and performance; and total tax contribution and the wider impact of taxes). The publication also provides further good practice examples in each of these key areas, taken from a review of the FTSE 350 undertaken as part of the 2006 Building Public Trust Award for Tax Reporting.

Managment information and performanceA survey of 193 finance executives at companies, with annual revenues of $750 million (£375 million) or more, to establish how finance executives view the quality of the management information they produce, collect and distribute, and how well their organisations use management information to aid decision-making.

Contact usFor more information on the implications of evolving corporate reporting practices, both internally and externally, and to obtain copies of other corporate reporting publications, please contact your local PricewaterhouseCoopers contact, the corporate reporting team at [email protected] or visit our website www.corporatereporting.com

Measuring Assets And Liabilities: Investment Professionals’ ViewsHow do investment professionals use the balance sheet? How do they want assets and liabilities to be measured? This publication offers thoughts from participants in the major global capital markets.44

Corporate R

eporting: The Com

petitive Landscape


This publication contains certain text and information extracted from third party documentation and so being out of context from the original third party documents; readers should bear this in mind when looking at this publication. The copyright in such third party text and information remains owned by the third parties concerned, and PricewaterhouseCoopers expresses its sincere appreciation to these companies for having allowed it to feature their information. For a more comprehensive view on each company’s communication, please read the entire document from which the extracts have been taken. Please note that the inclusion of a company in this publication does not imply any endorsement of that company by PricewaterhouseCoopers nor any verifi cation of the accuracy of the information contained in any of the examples.

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specifi c professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2007 PricewaterhouseCoopers LLP. All rights reserved. ‘PricewaterhouseCoopers’ refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kindom) or, as the context requires, other member fi rms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

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