With UK annual reports continuing to steadily increase in length and demands for more disclosures the challenge remains for their preparers to keep reports clear and concise, according to Ernst & Young’s (EY’s) fourth annual review of FTSE 350 annual report and accounts.
The report notes that the expectation of more disclosure will arise as a result of the implementation of the EU Non-Financial Reporting Directive into UK law, as well as proposals by the government for companies of a significant size to explain how their directors comply with section 172 of the Companies Act to have regard to the interests of stakeholders.
Already there has been an average 25% increase in the size of annual reports between 2012/13 when they were an average of 148 pages in length and 2016/17 when they had reached an average of 186 pages.
In that time there has been the introduction of the strategic reports, the directors’ remuneration report regulations and the requirement to list all subsidiaries in financials reports.
EY found improved reporting on linkages between key performance indicators (KPIs), strategy,
risks and remuneration with 54% showing the link between strategy and KPIs (up from 50% last year); 60% showing the link between strategy and risks (up from 42% last year) and 39% made a link between strategy and remuneration up from 24% last year.
However, EY stated that consideration of the linkage between all these areas could still be improved in the majority of reports. In fact, just 8% of the companies made the link all the way through from strategy to KPIs, risks and remuneration which was down from 12% last year.
The review notes that there has been an increasing focus by regulators and outside stakeholders on corporate culture and the government has emphasised stakeholder engagement in its recent corporate governance proposals. However, EY found that company reporting has yet to catch up with these developments.
While 81% of companies do explain who wider stakeholders and in some cases companies do report on how they engaged with them very few disclosed topics discussed or issues raised and the company’s response. Stakeholder engagement is also rarely discussed in the governance report.
The review also found that the majority of sustainability reporting is still done in a separate
section rather than integrated throughout the report. Performance metrics used in the sustainability section only overlapped with the main KPIs in 18% of reports. EY suggested that a better approach would be to integrate the sustainability content with the strategy and therefore have one set of broad KPIs.