The quality of FTSE 350 annual reports seems to have reached a plateau in many areas, according to new analysis by EY which suggests there have been only ‘fractional’ improvements in the quality of some key disclosures
The firm’s third annual review of FTSE 350 narrative reporting found that 59% of the FTSE 350 companies analysed had clearly articulated how the company makes money in their business model, but this was just a 1% improvement from last year.
In addition, only 12% of companies made comprehensive linkages across the annual report between their business model, strategy, key performance indicators, risks, and remuneration, which compares to 9% last year.
Mala Shah-Coulon, executive director in EY’s corporate governance team said: “It’s three years since the introduction of the strategic report and directors’ remuneration reports. In some ways it seems that a plateau has been reached and the pace of improvement in the quality and depth of disclosures is slowing.
‘The limited improvement in business model disclosure, which is one of the litmus tests for a good annual report, is disappointing.’
Over 97% of the companies analysed mentioned culture in some form in their annual report. However, in most cases it was mentioned as a statement affirming that the company considers culture to be important, without explaining the link to strategy or the business model, EY said.
Only 10% included culture as part of the strategy or business model, and only 9% of reports provided an explanation of how the board monitors or measures culture.
Hywel Ball, EY’s managing partner for assurance in the UK and Ireland, said: ‘Many stakeholders, investors and regulators are hungry for new and greater insights into corporate culture and other such non-financial information. Companies that seek to close this expectation gap are likely to be at an advantage, particularly when it comes to attracting investment.’
EY also highlighted areas for improvement around viability statements - a new requirement of the 2014 corporate governance code. The firm found that that many companies have been conservative in their first year of reporting and that more detailed information was needed around the disclosure and quantification of specific scenarios and assumptions. The majority of companies (74%) chose a viability period of just three years, compared to 5% who chose four years and 21% who chose five years.
EY’s analysis revealed that the average FTSE 350 annual report is now over 181 pages long – an increase of just over 8% from 2014.
EY’s report, Annual reporting in 2015: evolving communication in a changing world, is here.
