Although this is communication fundamental, it is often (usually?) forgotten!
The FRC Guidance provides a clear reminder: “The purpose of the annual report is to provide shareholders with relevant information that is useful for making resource allocation decisions and assessing the directors’ stewardship.” This means your annual report is also likely to be relevant to other existing or potential investors, lenders and creditors (referred to as ‘primary users’ by the FRC).
This is your audience – focus on what’s material to, and use language effective for, them. Your audience for this communication isn’t other stakeholders (eg customers, employees etc).
The FRC has repeatedly stressed annual reports should be a communication tool, not a compliance checklist. It should read as an explanation of the business rather than be a compilation of regulatory disclosures.
Your annual report should explain:
This may require a mindset change for people responsible for preparing dn producing the annual report. Starting with the ‘story first’ will be different to the ‘disclosure first’ approach many businesses have used by default in the past.
Key question for corporate boards to ask: Does the report explain our strategic story in a way investors can understand?
The FRC emphasises connectivity throughout the annual report. Strategy, risks, KPIs, governance, sustainability matters and financial results should relate to each other and form a consistent narrative. Investors should be able to follow a clear thread:
Purpose → Strategy → Business model → Risks → Performance → Future Prospects
Example
If cyber security is identified as a principal risk, readers should understand:
Company secretaries have a key role as editors-in-chief in ensuring corporate reporting is readable and accessible.
Annual reports should be understandable to an informed shareholder without needing specialist knowledge. This means you need to:
The FRC’s materiality guidance clearly warns against excessive reporting and unnecessary disclosure – materiality should drive both what is reported and what is excluded. We look at how less can be more, with immaterial information potentially obscuring what matters most to investors and other primary users, in our related article – The strategic report: the most underused governance tool in corporate reporting?
Good practice includes:
Key questions for boards: If this disclosure were removed, would investors lose something important? Are we helping investors understand the business, or overwhelming them with information?
Reports perceived as overly promotional can undermine trust.
While good news should be reported, you should be equally transparent about challenges, setbacks and uncertainties. This translates into:
Not all information deserves equal weight. Material matters should be more visible, explained in more detail and better positioned in the report. Less important matters should not obscure key messages.
A useful governance discipline is to ask: What are the five issues investors most need to understand? These issues should dominate the narrative.
Investors are particularly interested in understanding how current risks may influence long-term value creation. This is increasingly important for issues such as climate, technology, geopolitical and supply-chain risks.
This reflects principle (3) and here connections should be made between principal risks, strategic decisions, resilience, viability and future performance.
The FRC highlights the importance of consistent terminology, assumptions, metrics and messages throughout the annual report. Consistency enhances credibility.
Key things to check to avoid boardroom frustration are:
The FRC’s materiality guidance now explicitly references digital consumption, digital tagging, signposting, hyperlinks and navigation. Your audience is no longer reading sequentially from page 1.
This means company secretaries and governance teams should increasingly consider:
This could represent a whole new skill set and support may be needed from your internal communications team or an external specialist.
In essence, the FRC’s communication principles amount to a simple but powerful objective: produce an annual report that enables investors to quickly understand the company’s strategy, value drivers, risks, performance and future prospects, while eliminating information that detracts from that understanding.
How Bridgehouse can help
If your board wants the strategic report to work harder as a communication tool, Bridgehouse can help. We combine corporate governance insight with communications expertise to review your current approach, identify opportunities to improve clarity and connection and help you tell your organisation’s story in a way that supports investor understanding and strategic growth.
Get in touch to discuss how we can support your next annual report.
We would be pleased to answer any queries or have an informal chat to discuss your possible governance needs.