Best Practice in FTSE 100 Annual Reporting and Accounts

1. hot
top
ic
wInter 2008/09
Trends in CorporaTe reporTing: BesT praCTiCe
in FTse 100 annual reporT and aCCounTs
Welcome to the new re-think supplements. For those of you familiar with our
publications, the re-think supplements are now replacing our previous Directions
supplements and, unless specifically requested, will only exist online at the re-think
tank or as pdf from now on.
For the winter 2008/09 edition we re-visit the subject of best practice in FTSE 100 annual
reports – but with the concept of best practice being rather vague and fluid we’ve focused
on what we see as three key areas. Richard Sheath of Independent Audit reviews the
progress being made in governance reporting; Dan Perrett of Hewitt New Bridge Street
looks at the tricky area of remuneration reporting; and Nigel Salter of salterbaxter identifies
genuine improvements in the ways companies are reporting on strategy.
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www.salterbaxter-rethinktank.com
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get i
touc n
About salterbaxter
Established in 1998, salterbaxter is one of the UK’s leading creative consulting businesses.
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We advise organisations on corporate branding, corporate responsibility, employee
engagement, corporate reporting and digital programmes.
If you would like to find out more about us please call or email Louise Dudley-Williams
T: +44 (0)20 7229 5720. E: ldudley-williams @ salterbaxter.com
joIn the debate: www.salterbaxter-rethinktank.com

2. rIchard sheath : co-founder : Independent audIt
yes – but why?
bIt by bIt, year by year, governance reportIng Is gettIng better. we’re
gettIng a bIt more InsIght Into what boards are actually doIng – and
every bIt helps. but there’s stIll a long way to go to get to the poInt
where we understand why companIes thInk theIr governance Is good.
Let’s start with the good news. It’s still a This year – given the failures of business
Annual Report 2007
curate’s egg with no company nailing all (or at models and risk oversight structures – we
It all starts here
least most) of what we’d like to see. Based on looked particularly closely at risk management
a review of the FTSE 100 governance reports, reporting. There are a few companies who
more companies have now recognised that stand out (see below) as good examples. Their
simply restating the Reserved Matters of the reports are effective in explaining how the
Annual Report 2008
committees’ terms of reference doesn’t give different bodies in the governance structure
us any particular insight into how they actually
ITV plc
200 Gray’s Inn Road
London WC1X 8HF
www.itv.com
ITV plc Report and accounts 2007
fit with risk oversight: understanding how the
Investors: www.itvplc.com
work. Many are beginning to give an indication board builds a picture of the internal control
of what they’ve focused on to give us a flavour and risk management structures helps given
Reuters Group PLC
Annual Report and Accounts 2007
(see below for examples) – particularly for the that it’s at the core of good governance. Clear
audit committee. We’re now hearing more explanations of the flow of risk information
about the nature of induction programmes (up and down the organisation structure) also
and how the board is briefed. There’s a lot gives confidence that it is actually happening.
Aviva plc
Annual Report and Accounts 2007
more information on the approach to board Explanation of what the risks actually are,
effectiveness reviews – and companies are Annual Report 2007
how the company defines them and how it
being more adventurous in giving a feel for the deals with them in practical terms – not just
Forty five
million
customers.
resulting changes. There’s progress from last a labelling or listing of risks with boiler-plate
Twenty seven
year – and it seems to be more widespread terminology – helps too. And discussion of
countries.
One Aviva.
as companies look at each others’ reports emerging risks reassures the reader that the
to see where things are heading. board’s looking ahead and not just relying on
Annual report and
But it’s all happening rather slowly. past experience or reacting to things that have
financial statements 2008
Companies still seem to be stuck in a groove already happened.
of telling us a lot about what we already Sadly though, reports of this nature are
know. We know that FTSE 100 companies very much the exception. On the whole,
are going to be following standard governance risk management reports are distinctly
processes, what boards and their committees uninformative, reading like a litany of standard
What’s inside?
do and that their members all have good risks with the predictable descriptions of risk
HOME RETAIL GROUP PLC
Annual Report and Financial Statements 2008
Quality Value Service Innovation Trust
business experience. We don’t want to hear mitigants. Discussion of risk management
all about the process. What we don’t know – is often text book in style – and, outside
and what we want to understand – is why the the financial services sector, largely absent.
board thinks its governance approach worked Particularly in the light of events in the
well in helping position the company for the financial markets and the risks that it creates
future, keeping an eye on the risks and for all sectors, you’d like to think that reporting
knowing that things are under control. What on governance and, in particular, risk
was good about the way that it applied the management might shift to a more informative
processes that was effective? How did it manage level over the next year. And for those
the best eXampLes
to avoid the pitfalls that boards can fall into? struggling with the question of “how?”, keep
How was the experience of the directors it simple! Don’t just say what you do (although
the board’s work: results of the
tate & lyle
applied in a relevant way? What made the effectIveness
that’s a good start), explain why it succeeds
board work as a team which provided revIew: tate & lyle, in doing what it’s supposed to do.
the audIt commIttee: marks & spencer, Itv
avIva, reuters, home
challenge and support to management?
retaIl, Itv We’re still largely left in the dark. rIsk reportIng:
home retaIl, reuters,
dIrector brIefIng: marks & spencer,
home retaIl, reuters, tate & lyle,
InternatIonal power, InternatIonal power,
marks & spencer prudentIal
ct
conta
contact: ldudley-williams@salterbaxter.com : salterbaxter, 202 kensington church street, london w8 4dp. t: +44 (0)20 7229 5720 us
joIn the debate: www.salterbaxter-rethinktank.com

3. dan perrett : partner : hewItt new brIdge street
RemuneRation Review
ImprovIng remuneratIon dIsclosure Is In large part
sImply about aImIng to make thIngs easIer to understand.
For UK listed companies the disclosure given has numbered sections, which in turn have
in the remuneration report is extremely bright sub-headings. Furthermore, colour is Chief
Executive
important as it is governed by: an important tool for making the report more
All other
attractive but also it can make the information executive
directors
1. Legislation much more simple and clear. Vodafone 0% 20% 40% 60% 80% 100%
– Directors’ Remuneration Report makes good use of this with red headings, Salary Target bonus (cash) Target bonus (deferred shares) Expected value of LTIP awards
Regulations 2002 which really stand out from the black text.
stacked bar chart from severn
Many reports now include a summary
trent report showIng breakdown
2. Combined Code of Corporate Governance table breaking down each element of total of remuneratIon
– ‘Comply or explain’ requirement remuneration. This gives a brief overview
of what the executive receives. This can be
3. Institutional Investors further improved by splitting the table into WPP Share Incentive Scheme dilution for 2003 to 2007 %
– ABI and NAPF Guidelines long term and short term remuneration as WPP
10
5.4 6.0 7.2 6.6 5.7
ABI Limit
– Best practice rather than mandatory WPP has done. 8
6
– Some areas now sacrosanct whilst others In fact, tables are a great way of setting 4
2
remain aspirational out information that could easily get swallowed 0
in a large body of text. RPS Group (outside 03 04 05 06 07
This leads to a high level of disclosure that the FTSE 100) makes a fantastic job of using
bar chart from wpp report IllustratIng
attracts significant attention from shareholders, tables, with everything from a Long-Term share scheme dIlutIon sInce 2003
the press and the directors’ family and friends. Incentive table, setting out the past four years
It is important that the remuneration report worth of awards including the grant level and
is structured in a way that not only follows performance conditions for each director to
certain guidelines, but also makes it simple the exact bonus payable for all 30 different
and easy to understand because shareholders performance levels. Every number has been
have an annual vote on the remuneration report. neatly ordered into a table.
To introduce the report many companies Another great way of splitting up text and
now have a letter explaining key changes making things clearer is by using charts.
to remuneration in the year. Lonmin Plc WPP has a bar chart illustrating share scheme
goes a step further by including a detailed dilution since 2003 and many companies, pIe charts from rps group’s report
showIng breakdown of remuneratIon
review of the committee’s agenda at meetings including Severn Trent, have a stacked bar
throughout the year. By disclosing this chart breaking down the split in remuneration
information shareholders are able to understand (i.e. what percentage is salary, bonus etc.).
what issues the committee are thinking about These graphical representations of data
and why the remuneration policy is structured are quick to find and hard to miss; and
in the way that it is. can therefore reassure shareholders of
The use of clear, bold headings to structure good policies that they may have missed
the report makes it much easier to navigate if they had been explained with only text.
through the text. Not only does it show A good remuneration report should be
investors what has been included but it also interesting, clear and easy to understand
allows them to locate the relevant sections and, as far as possible, try to follow good
easily. For example British Sky Broadcasting practice guidelines.
ct
conta
contact: ldudley-williams@salterbaxter.com : salterbaxter, 202 kensington church street, london w8 4dp. t: +44 (0)20 7229 5720 us
joIn the debate: www.salterbaxter-rethinktank.com

4. nIgel salter : dIrector : salterbaXter
RepoRting on stRategy
In last year’s revIew of best practIce In strategy reportIng we IdentIfIed
that, at last, most companIes were fInally takIng thIs subject serIously
and dedIcatIng space and tIme to It. thIs year the pIcture has moved on
agaIn – quIte consIderably.
There are now just a handful of companies who don’t discuss their excellent overview with lots of information in just one spread.
strategies and while it never ceases to amaze me that any company They’re all worth looking at and they’re all good efforts to make
can produce a report without talking about strategy, we won’t dwell what can be a complex subject easy to grasp. This type of tabular/
on the negatives here. graphic approach also translates well online.
The positive side is much more interesting. There appear to be four
distinct approaches to strategy reporting developing (over and above 4. Businesses demonstrating strategy in action, attempting to move
those who simply put a few paragraphs into the running copy but away from the purely theoretical and showing what it all really means
I’m not really counting that as an approach – more a box ticked). in terms of operations, people and performance.
At the risk of slightly over-simplifying I’d put the distinct approaches These businesses sometimes combine the table approach of category
in these categories. 3 or the priorities approach of category 2 but the real focus is on
showing strategy in action. There are four great examples – Anglo
1. Businesses which have seen troubled or difficult times who American (the title of the section is even ‘Strategy in Action’), BAE
are now reporting back on a clear action plan or a strategy. Systems (‘Implementing our strategy’ – a series of case studies of
The best examples of these are ITV’s ‘Action Plan’ and Compass what is actually happening), Centrica (‘Delivering on our strategy’)
Group’s ‘Map’ system – although the latter is rather complex at first and Prudential (all part of the Chief Executive’s statement).
sight. I’d also mention Cobham’s ‘3 phases’ approach to strategy
which is interesting but doesn’t really fit into the category of being Any business looking to improve the way it reports on its strategy would
for a troubled business – but it’s an effective way of describing how benefit from a quick look at any or all of these as they are all effective
the company’s strategy develops. in different ways. And because each is serving a very different purpose
and is undoubtedly responding to specific circumstance it’s hard to say
2. Businesses which divide their strategy into a number of strategic that one approach is better than another.
priorities and then report back on them. For me though, the two concepts of simplicity on the one hand and
The best of these are Aviva, BAT and SAB Miller. Aviva also manage showing strategy in action on the other appeal as they are very much
to keep their whole approach to this straightforward and easy for the driven by a desire to help clarify for the reader. So while I think all those
reader to digest so they score top marks. All of them structure their companies mentioned deserve credit I would highlight the BAE Systems
reports around the strategic priorities which makes for an easy to report for demonstrating strategy in action as possibly the best of this
follow narrative. type and then the 3i report for its simple, but extremely rigorous,
overview of strategy, progress, risk and performance.
3. Businesses looking to keep it simple (this is definitely a good The key point to come out of the whole analysis though is that
thing) and distilling information into a summary table/overview with the Business Review requirement for companies to talk about their
performance highlights. strategies in more detail and make them relevant to investors is
A few good examples here. 3i is excellent – it brings together strategy, working. The narrative approaches of the leading companies are
progress, risk and performance all in one table. International Hotels tailored to their own needs as opposed to boring boiler-plate. They
Group also manage to distil theirs down into a simple table. Likewise are effective pieces of communication and most importantly they
Legal & General, although this would benefit from some simpler serve to make clear what a company is trying to do and how it is
language and more information on performance against strategy. doing against these parameters. The conclusion is simple – good
Royal & Sun Alliance also do this well and Standard Life provide an reporting on strategy works.
n
ti
About salterbaxter
ge uch Established in 1998, salterbaxter is one of the UK’s leading creative consulting businesses.
to We advise organisations on corporate branding, corporate responsibility, employee
engagement, corporate reporting and digital programmes.
If you would like to find out more about us please call or email Louise Dudley-Williams
T: +44 (0)20 7229 5720. E: ldudley-williams @ salterbaxter.com
joIn the debate: www.salterbaxter-rethinktank.com