Corporate Reporting
Guide to forward-looking information Don’t fear the future: communicating with confi dence*
*connectedthinking pwc I have for many years urged companies to use the narrative aspects of their reporting in as an imaginative and informative way as possible so that they may provide their investors with real insight into their business and the strategies that they as Management have adopted. I welcome this publication as a powerful contribution to helping make this a reality.
Tony Good Chair of Accounting Advocacy, UK Society of Investment Professionals
Evolving good practices in corporate reporting should provide investors with far greater transparency on a company’s internal performance targets and how management assesses the company’s performance against those targets. This publication provides very useful guidance on how management can provide the information valued by investors, in a practical way.
Lindsay Tomlinson Vice-Chairman, Barclays Global Investors Europe Introduction
The corporate reporting debate is gathering pace worldwide whether in the form of legal requirements, guidance or evolving good practices. Aspects of this debate are, understandably, causing concern amongst preparers of annual reports. Not least of these is the provision of a “forward-looking orientation” which, in our experience, many companies fi nd a real challenge. But what does this mean in practice? Will it require providing competitively- sensitive information? What about the reliability of such forward-looking information? Will companies face the threat of litigation? Will this mean making profi t forecasts?
Put simply, the reporting of of examples from some of these forward-looking information is a companies that demonstrate aspects critical component of effective of what we believe is effective communication to the market communication of the future that and this “how to” guide has been others can learn from. developed to provide practical guidance on how it can be achieved. So regardless of whether it is described as a management This guide is not just a theoretical discussion and analysis, operating paper – progressive companies and fi nancial review, or something worldwide are already adopting a else, the issue remains “how well forward-looking orientation in their does your reporting articulate the corporate reporting. direction of travel, in relation to the markets in which you operate, To bring forward-looking reporting your chosen strategy and the alive, we have included a collection performance that is delivered?”
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 Kingdom) or, as the context requires, other member fi rms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. As a strong supporter of broader corporate reporting, CIMA has an active interest in ensuring that concerns of companies surrounding exposure to litigation do not result in boilerplate statements. This publication provides companies with a practical approach to reporting appropriate forward-looking information.
Charles Tilley Chief Executive, Chartered Institute of Management Accountants Contents
Page Why the future matters 2
A change in mindset towards reporting
A view of the future 5 Going beyond historical fi nancial reporting
Forward-looking information 6 Putting the concerns into perspective
Facing up to the challenge 9 Realising the benefi ts
Making it happen 10 The seven pillars for effective communication of the future
Bringing the seven pillars alive 14 Practical examples of reporting on the future
1 Why the future matters A change in mindset towards reporting
Companies worldwide are increasingly being encouraged to place an emphasis on providing a more forward-looking orientation in their reporting whether through regulatory requirements, guidance or evolving good practice. This has raised a number of concerns amongst companies. Some fear that the publication of forward-looking information could compromise competitive advantage. Others think the quality of information provided could provoke legal and regulatory sanctions. Yet those companies who approach reporting with the right mindset – one of transparency, not merely a perceived response to increasing red tape, will have a real opportunity to leverage their reporting to increase investor understanding.
Increasing demands An overview of some of the worldwide regulatory requirements and good for a view of the future practice guidance is shown in Exhibit 1 below:
Exhibit 1: Examples of legislation & guidance on forward-looking information GUIDANCE Global “MC should have an orientation to the future” – IASB discussion paper on Management Commentary (published October 2005) “The purpose of the MD&A is to provide management’s… assessment of factors and trends which are anticipated to have a material effect on the company’s fi nancial condition and results of operations in the future” – International Organization of Securities Commissions (IOSCO) General Principles Regarding Disclosure of Management’s Discussion and Analysis of Financial Condition and Results of Operations (published February 2003)
Australia “…the Review should also address known trends and those factors relevant to forming a view as to likely future performance” - Group of 100’s Guide to review of operations and fi nancial condition (published 1998, updated 2003)
Canada “A forward-looking orientation is fundamental to useful MD&A reporting” - CICA guidance on MD&A disclosure ((published November 2002, updated May 2004)
United Kingdom “The OFR should have a forward-looking orientation, identifying those trends and factors relevant to the members’ assessment of the current and future performance of the business and the progress towards the achievement of long-term business objectives.” – Accounting Standards Board Reporting Statement: Operating and Financial Review (published January 2006)
United States “One of the principal objectives of MD&A is to provide information about the quality and potential variability of a company’s earnings and cash fl ow, so that readers can ascertain the likelihood that past performance is indicative of future performance.” – SEC Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations (published December 2003)
LEGISLATION Germany “The main factors which could infl uence changes in the value of the enterprise in the future should be disclosed and discussed” – German Accounting Standard 15, Management Reporting (adopted December 2004)
United Kingdom “…the main trends and factors likely to affect the future development, performance and position of the company’s business” – Companies Act 2006 Section 471 (date of implementation tbc)
2 “Telling the future by looking at the past assumes that conditions remain constant. This is like driving a car by looking in the rear-view mirror.” Herb Brody
Fear of the future Many companies fear the increasing reviews that provide no benefi ts demand for forward-looking to investors, or to the companies information will force them to themselves. Like any new initiatives, disclose competitively-sensitive these demands will bring a number information, make profi t forecasts or of risks for companies that fail to expose themselves to the threat of prepare adequately for them. But litigation. However, companies need it should also bring real business to understand what the demand for benefi ts, notably: enhanced business this forward-looking information really understanding, governance and means. board effectiveness; improved relationships with key stakeholders; The danger is that, without such and heightened effi ciencies an understanding, they will take fl owing from the proper alignment fright at the call for ‘forward-looking’ of reporting and communications statements, taking refuge instead strategies. in bland and highly-caveated
Giving investors what Transparent information on current As things stand, existing fi nancial they need and future corporate performance is statements are not, of themselves, the raw material of effective decision- suffi cient to meet the needs of making in the capital markets. This investors to assess the quality I couldn’t stress more the is demonstrated by the comments and sustainability of corporate two things that I spend most highlighted in this section, all performance. The current reporting of my time doing: trying to drawn from research conducted by status quo is unsatisfactory. Investors understand what’s happening PricewaterhouseCoopers with buy- know this – and so do the regulators. to the underlying business and sell-side analysts. and getting any help I can to understand how it will look in fi ve to ten years’ time.
3 Giving investors what In its ‘Framework for the Preparation The rest of this guide will highlight: they need (continued) and Presentation of Financial Statements’ the International The issues and challenges facing Accounting Standards Board (IASB) companies tasked with providing says: forward-looking information. … As much forward-looking “The objective of fi nancial statements Offer some practical ideas on information as possible. That’s is to provide information about the how companies might success- the most interesting thing. fi nancial position, performance and fully meet the needs of investors, changes in fi nancial position of an whilst addressing regulations and entity that is useful to a wide range of good practice guidance, and …But really what we are users in making economic decisions.” Provide examples, drawn from trying to do is to get a view of “Financial statements prepared companies reporting worldwide, the economic picture of the for this purpose meet the common that demonstrate how some have company and how that is going needs of most users. However, genuinely embraced the spirit to change into the future. fi nancial statements do not provide of providing a forward-looking all information that investors may orientation need to make economic decisions since they largely portray the fi nancial effects of past events and do not necessarily provide non- fi nancial information.”
4 A view of the future Going beyond historical fi nancial reporting
Despite a recognition that investors need more forward-looking information very few companies come close to providing the breadth of information required. Instead of providing a clear and balanced discussion of the trends and factors likely to impact future prospects, Companies have continued to take refuge behind historical information. From now on, given the increasing demand for a more forward-looking orientation in companies reporting, a different approach will be called for.
Determining what is There are no hard and fast rules Relevant factors will be those required dictating what forward-looking that have affected a company’s information a company must provide. development, performance and Companies must decide which position during the fi nancial year information to include – and which – as well as those likely to affect its to leave out – on the basis of their future development, performance own unique business dynamics and position. These might include the and those of the industry sectors in development of new products and which they operate. Our companion services, current and planned levels ‘Preparers’ Guide’ goes into further of investment expenditure, and clear detail on what should be considered explanations of how that expenditure in reaching this decision. is to be used to achieve business objectives. However, the provision of a forward- looking orientation will mean In forming a view on what to report, identifying and communicating companies should also consider whatever trends and factors are whether robust, quantifi able fi nancial relevant to an investor’s assessment and non-fi nancial key performance of current and future business indicators (KPIs) are available to performance. It also means support whatever assertions have communicating the progress that has been made and, to the extent been made towards achieving long- necessary, whether they should be term business objectives. disclosed. Assuming that they are, good practice would also encourage the inclusion of information on future targets. As we explain later, however, this does not mean that profi t forecasts must be provided.
5 Forward-looking information
Putting the concerns into perspective
The ever increasing demand for forward-looking information has raised a number of frequently-voiced concerns amongst companies (see below). The fact is that, by concentrating too closely on these perceived risks, real opportunities are being overlooked. The value, for companies, of providing a clear forward-looking picture lies in the potential it has to challenge internal perceptions and reporting, as well as the insights that it provides investors into the health and sustainability of the business and the way in which it helps put fi nancial performance into context.
In seeking to avoid these demands for a forward-looking orientation the danger is that companies may miss out on these benefi ts. By resorting to bland statements, these companies will do nothing to enhance investors’ understanding of their business, while exposing themselves to a potential loss of competitive advantage if competitors steal a march with their reporting.
Frequently-voiced Amongst the most commonly-heard concerns provoked by the increasing concerns demand for a forward-looking orientation, the following stand out: Does this mean having to provide potentially competitively-sensitive information?
What can be done to ensure the supportability of forward-looking information?
Does this mean that we have to publish profi t forecasts?
The following sections address each of these concerns.
6 Competitively-sensitive For any company, there will be market size – without prejudicing information certain information which – were it to their competitive position. Specifi c be disclosed – would undermine its information on the underlying patent market position. However, this should formulations is withheld. With this not be seized upon as a convenient approach, they provide investors smokescreen for avoiding full and with information which is critical to frank disclosure. understanding the sustainability of their performance, without Companies need to approach compromising the interests of the the disclosure of forward-looking company. information with the right mindset. Instead of adopting a compliance- Arriving at a balancing point based approach and asking ‘What between disclosing and withholding are we going to report?’, companies forward-looking information needs need to ask themselves: ‘What to be a realistic process. In reality, should we withhold?’. For example, competitors are already likely to be pharmaceutical companies disclose better informed than people realise, details of their products – in terms as the fl ow of people and information of pipeline, stage of development, from one organisation to another has planned launch and potential never been greater.
Supportability of forward- Clearly, forward-looking information in historical fi nancial statements. looking information cannot, by its nature, be 100% Because it is based on assumptions supportable. But companies that that might prove to be wrong (rather attempt to rely on this as a reason than being based on actual facts), for opting out of providing a forward- there is no expectation that it should looking orientation are missing the be 100% accurate. point. Forward-looking information is different from information found
7 Supportability of forward- Obviously though, the fact that The overall intention is for investors looking information information has been disclosed may to assess this information themselves raise an expectation of reliability before deciding whether or not to rely (continued) in investors. Companies are on it. For them to do so effectively, it therefore expected to scrutinise is important that they should have a whatever evidence has been used to clear understanding of how certain underpin this information and, where (or uncertain) it is. appropriate, to explain its source and the extent to which it is objectively supportable.
What about profi t Concerns are often raised that Non-fi nancial drivers of performance forecasts? communicating about future can be used as lead indicators prospects means providing profi t of future fi nancial performance. forecasts with all the additional Similarly, market trends and clearly regulatory attention that such presented strategic priorities will information can attract and the provide investors with valuable potential for short-term pressure to insights on which to base their meet those forecasts rather than investment decisions. And, of course, focus on value delivery. targets for these non-fi nancial drivers and market trends can also be However, with due consideration important aspects of this information, given to local regulations, forward- communicating companies’ looking information can be provided aspirations to the market – without without specifi c reference to profi ts, straying into the realms of profi t looking instead to the broader picture forecasts. of the company shown by contextual information. Failure to do so can mean investors relying on historical fi nancial performance, thereby exacerbating ‘short-termism’.
8 Facing up to the challenge
Realising the benefi ts
Nothing to fear – Businesses that are well run on the If they take advantage of this much to gain basis of comprehensive and accurate opportunity, they will be able to: information about all aspects of their operations have nothing to improve the quality of fear from providing forward-looking management by making sure the information. Indeed, they have much information that really matters is to gain. Provided management available, aired and acted upon can adopt the right mindset – one at board level; of transparency, communicating help stakeholders to differentiate fi nancial and non-fi nancial good management from bad, information as a way of increasing judgement from luck; genuine market understanding of the business and its sources of value simplify and clarify their – they have an opportunity to secure corporate reporting, particularly signifi cant competitive edge. where the presentation of non-fi nancial information is concerned; and
start to move beyond the ‘earnings game’, where a company is only considered to be as good as its latest fi gures.
9 Making it happen
The seven pillars
for effective communication of the future
10 1 Explain the resources available to your company that help to attain your objectives and how they are managed.
2 Describe the principal risks and uncertainties that may affect your company’s long-term value or prospects.
3 Clarify the signifi cant relationships with stakeholders that are likely to infl uence the performance of your company and its value.
4 Provide quantifi ed data relating to trends and factors likely to affect your company’s future prospects.
5 Spell out any uncertainties underpinning forward-looking information.
6 Communicate targets relating to those key performance indicators (KPIs) used to manage your business.
7 Demonstrate the linkage of other content areas within your reporting to your longer-term objectives and the strategies to achieve those objectives.
11 Making it happen
The seven pillars for effective communication of the future
By considering the following factors, companies will be providing investors with the forward-looking orientation increasingly demanded worldwide.
An explanation of your company’s Instead, an explanation of the 1 Explain the resources available to your principal resources, both tangible resources currently available, how company that help to and intangible, employed in you expect them to develop going attain your objectives executing your strategies, is a key forward, as well as how they are and how they are pillar to providing forward-looking managed and how success is managed information. Simply stating, for measured, using quantifi able data, example, that “our employees provides valuable insights into your are our greatest asset” without commitment to these resources and articulating how employees are vital future prospects. to your future success provides little information of use to investors.
A description of your principal risks Effective reporting of risk will set 2 Describe the principal risks and uncertainties and uncertainties is an essential out how your company identifi es that may affect your aspect of providing a forward-looking its principal risks, what these risks company’s long-term orientation. Providing a generic list are, whether the level of risk, value or prospects of all the risks facing companies in or opportunity, is increasing or your industry, that fails to refl ect the decreasing, and your approach to changing external environment, your mitigating them. company’s particular circumstances, or how the risks are managed, results in bland, ineffective reporting.
The behaviour of your stakeholders, The explanation should include the 3 Clarify the signifi cant relationships with from regulators through to suppliers nature of the relationship, the current stakeholders that and customers, can have a profi le of signifi cant stakeholders are likely to infl uence considerable impact on your future and how these relationships the performance of prospects. Accordingly, explaining are managed. Articulating, and your company and its which stakeholders are signifi cant quantifying where possible, any value to your company is an essential dependency on stakeholders and feature of effective forward-looking how well the relationship is being information. managed is also important.
12 Analysing current and future Whether these are, for example, 4 Provide quantifi ed data relating to trends and development, performance demographics for an insurance factors likely to affect and position of any company is company, buying habits for a your company’s future impractical without the provision consumer products company, or raw prospects of relevant contextual information, material costs for a manufacturing including the quantifi cation of company, quantifying prospective appropriate trends and factors trends provides investors with impacting the business. a better understanding of the environment your company operates in.
Forward-looking information cannot, investors to assess for themselves 5 Spell out any uncertainties by its nature, be 100% supportable. the extent to which they wish to rely underpinning on the information. Further, you forward-looking Where appropriate, you should might consider providing a statement information explain the source of the information of caution. and any uncertainties, to allow
A simple narrative description For each KPI, trend information 6 Communicate targets relating to those key of the key resources, risks and should be provided, including performance indicators relationships that are fundamental information for at least the (KPIs) used to manage to the successful implementation of current and prior year, along with your business your strategies is not suffi cient. It quantifi cation and/or commentary on is only by providing the KPIs used future targets. by you in managing your business that investors will be able to assess the potential for your strategy to succeed.
A key objective of reporting is to Accordingly, it is essential you 7 Demonstrate the linkage of other help investors assess the strategies demonstrate and communicate content areas within adopted and their potential to how the external environment, and your reporting to your succeed. management of resources, risks longer-term objectives and relationships, underpins the and the strategies achievement of your objectives to achieve those and strategies. These elements are objectives related and should not be presented in isolation.
13 Bringing the seven pillars alive Practical examples of reporting on the future
The importance of Although we have set out seven The challenge for companies is to alignment and linkage pillars, each of these pillars should communicate their view of the future not be considered in isolation. Each across all pillars relevant to their one represents a logical building business, thereby demonstrating block for effective communication of a forward-looking orientation in a the future. consistent and coherent way.
Real-life examples Some companies are already these examples clearly demonstrate incorporating the spirit of a forward- that each company has genuinely looking orientation into their annual embraced the spirit of providing reporting, publishing broad-based a forward-looking orientation by information that provides valuable reporting one, or more, of the seven insights into the sustainability of their pillars of effective reporting on the business performance – succinctly, factors affecting future business effectively and persuasively. In the performance. following pages we set out examples from the reporting of some of these We urge you to look through the companies. While no single company following good practice extracts to has communicated their view of get a feel for what is already being the future across all seven pillars, achieved by progressive companies.
14 How to get the most The accompanying illustration To the companies that allowed out of the real-life serves as a guide for “reading” the us to feature their work, examples found in the following PricewaterhouseCoopers expresses examples pages. its sincere appreciation.
2 Describe the principal risks and uncertainties that may affect your company’s long-term value or prospects
A number of companies already try international airport”. One of the due to come into force in 2010”. to provide a connection between strategies to achieve this is to obtain corporate responsibility issues approval from the Government to Accordingly, by describing how and their future sustainability. build a third runway. As set out in current activities have the potential However, in this example, BAA the extract below, the Government to impact on future regulatory goes considerably further, linking an concluded in its White Paper that decisions, BAA provides a clear PricewaterhouseCoopers’ commentary environmental factor, namely local “it could not support the building of understanding of the risks associated air quality, to its long-term objective a third runway at Heathrow without with these activities and links current on the extracts presented. The of ensuring that Heathrow “remains clear evidence that the area will non-fi nancial activities with its future comments indicate how each example the world’s busiest and leading comply with EU air quality standards, fi nancial performance. demonstrates the characteristics of the BAA plc featured pillar /K99;II0>HEK=>%DDEL7J?ED 88?+6$/:9<>
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However, in development prospects, including prospects. this example, British Land clearly the potential impact on future rental identifi es active development of income. the Group property portfolio as The British Land Corporate Strategy Company PLC British Land seeks to achieve long-term growth in shareholder value by: Annual Report&Accounts 2005 • enhancing property returns through active management and development; and Operating and Financial Review Development Process Development programme Development prospects, as shown below, are those sites and properties Obtaining planning permissions for the Company’s development where we have identified opportunities and are progressing with design, programme is a complex and expensive process involving many planning applications and site preparation for development projects. For organisations and expert consultants. example, at The Leadenhall Building a detailed planning consent has The professional expertise needed, from architects, engineers, been obtained for a new 47 storey tower to provide 55,800 sq m ecologists, environmental consultants and other specialist consultants means that securing planning permissions gets more expensive Development Process– the Leadenhall Building (601,000 sq ft) of office accommodation; that is three times the floor every year. space of the existing building. Obtaining planning permissions for the Company’s development Focusing on one particular planning application, the proposal for programme is a complex and expensive process involving many organisations and expert consultants. The professional expertise needed, from architects, engineers, ecologists, environmental consultants and other specialist consultants the redevelopment of 122 Leadenhall Street in the City of London cost means that securing planning permissions gets more expensive every year. Development prospects Focusing on one particular planning application, the proposal for the redevelopment of 122 Leadenhall Street in the City of London cost some £5 million alone, demonstrating the technical expertise and some £5 million alone, demonstrating the technical expertise and resource commitment which is required. The first stage in the process Sq ft Cost was the identification of the opportunity, which initially arose from changes in planning policy. 1 resource commitment which is required. The first stage in the process Increasingly the technical assessment work needs to be done Project Sector 000 £m Planning as part of a formal, detailed Environmental Statement covering all the relevant issues, which is submitted as part of the application. Within each heading there can be a range of issues. So, for example, Transportation might include road transport, public transport, Our strategy was to work with English Heritage and the pedestrians, parking, servicing of the building, deliveries and refuse collection. A great deal of effort goes into ensuring that the technical 201 Bishopsgate City office 836 279 Revised assessment is comprehensive and accurate. Government’s advisors on architecture, the Commission for Architecture For a long time the City Corporation’s view was that tall buildings were not acceptable in the City of London. This was supported by English Heritage, the Government’s advisor on listed buildings and submitted conservation matters. However in the late 1990s a number of factors and the Built Environment (CABE) at an early stage, and to secure came together to change that view. The election of Ken Livingstone as the first Mayor of London in 2000 was important as he is a serious enthusiast for well designed, tall buildings as part of his overall growth The Leadenhall Building City office 601 270 Detailed strategy for London. The City of London’s Unitary Development Plan agreement to the application from the City Corporation. Review and the London Plan changed the planning policy by promoting the development of a cluster of tall buildings at the heart of the City of Ludgate West City office 123 47 Detailed London to rival Canary Wharf. At Leadenhall Street the appointment of team members was key; most importantly the selection of the Richard Rogers Partnership, which We held a number of briefing sessions with owners and occupiers had designed the Lloyds Building on the opposite side of Leadenhall Regent’s Place West End 1,036 370 Osnaburgh Street. The sketch (shown opposite) was part of the original Richard Rogers Partnership submission, made as long ago as 2001. This demonstrated a grasp of the key planning issue from the beginning; of neighbouring properties to ensure that they were fully informed the view of the building with the backdrop of the dome of St. Paul’s office/ submitted Cathedral as seen from the west along Fleet Street; the outline of the cathedral is shown in the circle. The basic shape of the proposed Leadenhall Building, deferring to the dome’s dominance, has remained and understood the scheme, and that we could take into account any The Leadenhall Building viewed from the east. much the same throughout the scheme’s design development. Residential NEQ pending Computer generated image courtesy of Cityscape. Our strategy was to work with English Heritage and the Government’s advisors on architecture, the Commission for Architecture and the Built Environment (CABE) at an early stage, and to secure concerns they may have. For example we met with two neighbouring agreement to the application from the City Corporation. Blythe Valley Park Business Park 751 115 Outline/Detailed churches who raised concerns about construction noise and its impact New Century Park Business Park/ 657 88 Outline on church services. We reassured them that when services are taking The British Land Company PLC Distribution 44 Meadowhall Casino Leisure 409 124 Pending place the noisiest activities would be kept to a minimum. Theale Residential 254 46 Submitted Illustration from the initial presentation by the Richard Rogers The view from the west with the Leadenhall Building ‘attached’ to the Computer generated image courtesy of Cityscape. A planning application checklist Partnership in 2001. north side of Fleet Street. Daventry (BLR) Distribution 335 5 Outline We held a number of briefing sessions with owners and occupiers of neighbouring properties to ensure that they were fully informed Planning and land use Air quality and understood the scheme, and that we could take into account any Redditch (BLG) Distribution 227 4 Detailed concerns they may have. For example we met with two neighbouring churches who raised concerns about construction noise and its impact on church services. We reassured them that when services are taking Transportation Noise and vibration place the noisiest activities would be kept to a minimum. Total 5,229 1,348 The application was submitted in February 2004, after over two years of intensive design development and pre-application discussion. Townscape and visual including Ground conditions, hazardous The City Corporation’s Planning and Transportation Committee resolved to grant planning permission in October 2004 and, following 1 lengthy negotiations on a legal agreement providing funding for estimated costs of construction excluding land and interest costs building heritage and contamination environmental improvements in the local area, transport improvements, affordable housing and training for local people, planning permission was finally granted in May 2005 for a building of 47 floors and Based on Group and 50% share of JVs (except areas which are at 100%) Ecology 600,000 sq ft net and a construction commitment in the order of Telecommunications £270 million. This increases the floor capacity, compared with the The existing 122 Leadenhall Street current building, by more than three times. Archaeology Sustainability A planning application checklist Planning and land use Air quality Transportation Noise and vibration We have planning permission for 58% of the development prospects for Daylight and sunlight Demolition and construction Townscape and visual including Ground conditions, hazardous building heritage and contamination Ecology Telecommunications Archaeology Sustainability commercial properties which, if they were built at a total cost to the Group Wind Water resources Daylight and sunlight Demolition and construction Wind Water resources Socio-economics Civil aviation of £529 million and fully let, would add further rental income of some Socio-economics Civil aviation £60 million per annum at current market rental values. This does not include 201 Bishopsgate where we have an existing permission but are Property development risk Principal risk in the process of seeking a revised planning consent for 77,630 sq m Letting risk for speculative developments; construction cost and time (835,600 sq ft). overruns; adverse changes in planning and/or planning policy which At current market rents, if all these development prospects were may cause delay and affect profitability. completed and let, they would add a further £151 million per annum to rental income. Principal control These include limiting the amount of speculative development; assessing letting potential and prospective profitability of developments prior to commencement of construction; on-going assessment of development expenditure by quantity surveyors with regular compari- sons of costs against budget; and ensuring executives are kept up to Source: The British Land Company PLC Annual Report & Accounts 2005 and used with kind permission. date with planning policies. 16 2 Describe the principal risks and uncertainties that may affect your company’s long-term value or prospects A number of companies already try international airport”. One of the due to come into force in 2010”. to provide a connection between strategies to achieve this is to obtain corporate responsibility issues approval from the Government to Accordingly, by describing how and their future sustainability. build a third runway. As set out in current activities have the potential However, in this example, BAA the extract below, the Government to impact on future regulatory goes considerably further, linking an concluded in its White Paper that decisions, BAA provides a clear environmental factor, namely local “it could not support the building of understanding of the risks associated air quality, to its long-term objective a third runway at Heathrow without with these activities and links current of ensuring that Heathrow “remains clear evidence that the area will non-fi nancial activities with its future the world’s busiest and leading comply with EU air quality standards, fi nancial performance. BAA plc Success Through Innovation Annual Report 2004/05 Local Air Quality Corporate Air quality management remains a key priority We’ve taken a number of actions to address among local and national stakeholders. In its air particle and NOx-related emissions, although White Paper, the Government concluded that airport emissions are only one source of local Operating and Financial Review 27 Responsibility In the News it could not support the building of a third air pollution. Emissions around Heathrow also September: Airport noise consultations launch September: ‘Make your Mark’ employee survey launches September: BAA named top of the transport runway at Heathrow without clear evidence come from non-airport sources, notably the sector in the Dow Jones Sutainability Index December: Receives RoSPA gold award for health and safety for seventh year running January: First employee volunteering awards Doing the M25, M4 and A4. One of the key initiatives January: The Board of ACI, our European Trade that the area will comply with EU air quality Association, approves a policy position supporting emissions trading February: ACCA commends BAA’s corporate reporting introduced in the past two years has been February: BAA Heathrow receives a highly- standards, due to come into force in 2010. commended award for biodiversity at the Livable Cities Awards, which celebrates excellence in the field of corporate responsibility March: Joint fifth in the Business in the Right Thing an aircraft emissions charging scheme under Community Corporate Responsibility Index 1 www.baa.com/corporateresponsibility 1 www.erm.com 1 www.forumforthefuture.org.uk which airlines pay according to their fleets’ NO 1 www.vso.org.uk BAA has worked closely with the Department x 1 www.bitc.org.uk BAA has always taken for Transport on this issue and is a prominent emissions. This programme, the first of its kind ethical and moral member of the Government-led expert group in the UK, has been in place at Heathrow for responsibilities seriously. which is assessing air quality monitoring and a year, and was introduced at Gatwick from We take our social and environmental considerable economic and social benefits of Corporate responsibilities seriously. This is the right aviation against its environmental and social It’s not just right, it is also approach for a private sector company that impacts: land take; pollution and noise. supplies a critical public service. That’s why we 1 April 2005. have embedded corporate responsibility so We are also engaged in many wider corporate modelling methodologies around Heathrow. Responsibility deeply into our business. responsibility issues. For example, Mike Clasper, BAA’s Chief Executive Officer, is chairing a in our commercial interests. BAA’s top-level corporate purpose is to pursue three-year Business in the Community Taskforce 30 Operating and Financial Review Doing the the profitable and responsible growth of air examining how companies can better manage travel. That means running airports which are their impacts in their own market places. A report on the findings is due in 2006. safe and secure and which take proper account of their environmental impacts. It also means What Corporate Responsibility Air Quality Monitoring – Heathrow Area Waste Disposal Sources Right Thing (in microgrammes per metre cubed) (000 tonnes) that BAA strives to deal with its employees, Means to BAA A Hounslow/Cranford f % Landfill f % Incinerate customers and business partners honestly, fairly BAA’s approach to corporate responsibility B Harlington f % Recycle/Compost BAA has always taken and with respect. is guided by our well-established policies on C Hillingdon 58.49 sustainable development and ethics. In 2003, 55.43 D Slough/Colnbrook 60 48 ethical and moral Operating to this vision has become ever-more we published a sustainable development policy, E Brentford Roadside 34 39 44 00% F Hillingdon Hospital 50 36 45.34 responsibilities seriously. demanding. For example, as people and based on input from a range of stakeholders, (40 microgrammes) governments become increasingly concerned including investors and community groups. 38.25 36.66 40 about climate change, we recognise that On 7 March 2005, the Government published 46 It’s not just right, it is also 30.84 48 47 30 32 we must engage in the search for effective Securing the Future, its new strategy for 48 in our commercial interests. solutions. That requires us to take a leadership sustainable development. We will be reviewing 20 position on key issues. On climate change, our sustainable development policy in light of 20 we are helping to drive a campaign in the UK this new strategy, and will publish our revised 10 20 17 13 8 Recycle/Compost Target 40% Recycle/Compost Target and in Europe to bring aviation into the policy on our website. 2010 EU limit 0 forthcoming EU Emissions Trading Scheme. 1 www.baa.com/corporateresponsibility 01 02 03 04 05 A B C D E F 10 The scheme offers a genuinely effective, market- based mechanism to limit greenhouse gases. Our approach to corporate responsibility is supported by a series of other policies which Air Quality Surface Transport BAA supports the proposition that aviation provide detailed guidance on specific issues: Air quality monitoring is required by DEFRA to assess compliance should meet the external costs it imposes upon ethics; health and safety; bullying and with national air quality objectives and EU limit values. There are BAA continues to work with partners and BAA strives for performance improvement in a number of fixed monitoring sites at locations close to Heathrow. customers to offer improved choices for the management of the large volumesthe of environment. water That means balancing the harassment and environmentally sensitive This year’s figures indicate a non-compliance with future 2010 EU movements of people and goods to, from, that runs off an airport’s open spaces. All our UK materials. Our policies apply to the management limit for nitrogen dioxide at a number of locations. However, from and within our airports. airports have water quality strategies in place. and operation of BAA plc, its functions and 1 January 2004, a 30% margin of tolerance, applied to compliance with the limit value, meaning that only the Hounslow and Brentford We’ve developed surface access strategies at Our Communities Air Quality Monitoring – Heathrow Area sites exceeded the limit. Future compliance is the subject of a BAA Annual Report 2004/05 Department for Transport study on the sustainable development of each of our airports to meet Government aims BAA is committed to gaining and maintaining Heathrow. For more information visit 1 www.dft.gov.uk. of increasing public transport modal share. the trust of the communities around our Waste Disposal Sources airports. This year we launched a new The introduction of Heathrow Connect in community relations strategy which targets (in microgrammes per metre cubed) Total waste production increased by 4,195 tonnes to 58,090 tonnes in 2004/05. We met our target to recycle or compost 20% or more. summer 2005 should help public transport our resources on issues of greatest concern modal share, as should investment in bus and to them. As a result, over the past 12 months, coach facilities at Heathrow and Stansted. BAA’s airports have supported a wide-range of For example, Earlybird, a free daily coach community activities, including environmental service for early morning airport shift workers, projects, education partnerships, working was launched in June 2004 at Stansted. with community groups and implementing A Hounslow/Cranford vocational skills programmes. The Gatwick Express rail service came under threat in 2004 as a result of the Strategic Rail BAA Communities Trust Authority’s proposed changes on the Brighton BAA’s own charity, the BAA Communities B Harlington mainline. The service, which has topped the Trust, supports projects which are brought National Passenger Satisfaction survey in the forward by staff. Although these projects are last three years, is a vital link to central London local to our airports they have an international and a key element in Gatwick’s public transport element. They reflect our commitment to the C Hillingdon offering. Although BAA does not operate the local community and also to our links across 58.49 Gatwick Express, we conducted a robust public the world. BAA is the main source of income defence of the service and will continue to do so. for the charity, donating 0.15% of pre-tax profits, excluding exceptional items, to the 55.43 D Slough/Colnbrook Air Quality During the year, plans were announced to link charity, amounting to £955,500 for 2004/05. Glasgow and Edinburgh airports to the Scottish national rail network. BAA has been involved During the year, the Trust launched a pilot in the technical aspects of the projects, and partnership with Voluntary Service Overseas E Brentford Roadside supports the principle of improving public to support its World Youth Programme. Air quality monitoring is required by DEFRA to assess compliance transport links to our airports. The partnership encourages young people from around BAA airports to link with their Our focus for the coming year will be to review counterparts from around the world. F Hillingdon Hospital stakeholder responses to the surface access sections of the airport master plans, which are Our UK airports supported the humanitarian 45.34 being published from spring 2005. relief efforts following the tsunami disaster in with national air quality objectives and EU limit values. There are December 2004, including a charitable donation Waste of £50,000 from the Trust. In addition, BAA All airports exceeded their 20% recycling waived airport charges for all specially chartered target in 2004/05 – a further step towards our relief flights operating from our airports and (40 microgrammes) long-term goal to recycle 40% of waste by sited collection points in airport terminals to 38.25 2010. In the previous year recycling initiatives facilitate further donations from passengers 36.66 a number of fixed monitoring sites at locations close to Heathrow. focused on our tenanted areas only, but during and airport staff. this year, they were extended to include third parties such as retailers, airlines and property Volunteering tenants. In addition, a significant quantity of BAA supports staff volunteering efforts. They waste began being sorted by waste contractors bring benefits to the individuals involved and to at Heathrow and Gatwick from the mixed the communities in which they work. In January 30.84 This year’s figures indicate a non-compliance with future 2010 EU waste (card, metal and paper) collected from 2004, we held our first employee volunteering the airports prior to disposal. awards to celebrate the work of our staff who volunteer. Some 115 employees entered the limit for nitrogen dioxide at a number of locations. However, from BAA Annual Report 2004/05 1 January 2004, a 30% margin of tolerance, applied to compliance with the limit value, meaning that only the Hounslow and Brentford sites exceeded the limit. Future compliance is the subject of a 2010 EU limit Department for Transport study on the sustainable development of 1 A B C D E F Heathrow. For more information visit www.dft.gov.uk. Source: BAA plc Annual Report 2004/05 and used with kind permission. 17 3 Clarify the signifi cant relationships with stakeholders that are likely to infl uence the performance of your company and its value Engagement with stakeholders is integral to the future success of the discusses those instances where mentioned in many companies’ Group’s strategy. the target has not been met, thereby reports. However, in this example, retaining balance in its reporting. BT goes into more detail, identifying In order to assess progress in its customers as a key stakeholder managing customers, BT measures Further, BT describes the methods in the company’s business success, and communicates customer it uses to measure customer as well as providing a business satisfaction as one of its 12 key satisfaction and dissatisfaction, case to explain why investors performance indicators (KPIs). along with the initiatives for should consider corporate social For each KPI, BT reports historical improving performance in this area responsibility and customers as trend data, provides a target and in the future. BT Group plc Chief Executive’s statement Relentless customer focus Our 20 million customers are a wonderful asset and we have to continue to show how much we value every one of them. A key target for us was driving down y customer dissatisfaction – we’ve reduced Growth through transformation dissatisfaction levels by 23% on a Our business case compound annual basis over the past three Our CSR work is integral to the years. There is still more to be done and we BT strategy, and affects business must continue this focus. performance in five key areas: 2. Reputation Performance snapshot CSR for investors When people trust a company they Highlights • Reviewed and improved our key performance indicators (KPIs) - Included a measure of our sickness absence rate for the • Connected 5 million UK customers to broadband – first time The key issue for investors is meeting our target a year early This helps identify health issues early so that we can We are on target to make broadband available to reduce the number of people taking time off sick. The in effect deliver a societal ‘licence exchanges serving 99.6% of UK homes and businesses implementation of our company-wide mental health by summer 2005. programme in our customer contact centres has reduced stress by 24% and saved £500,000 in sick pay. • Became the world’s biggest user of green energy - Developed an Ethics Performance Measure the business case for sustainable We now source nearly all our UK electricity needs from For some time we have measured awareness of our environmentally friendly sources, such as hydro, wind and to operate’. This is reflected in the Statement of Business Practice, The Way We Work. combined heat and power plants. Since 1996, we have The development of an Ethics Performance Measure takes reduced carbon dioxide emissions by 53%. Our green energy Annual Review and summary financial statement 2005 us away from a purely perception-based measure towards contract, signed in October 2004, equates to an additional a performance-based one. 325,000 tonnes of carbon dioxide emissions savings a year, development and corporate social equivalent to those produced by approximately 100,000 cars. • Reduced the amount of waste sent to landfill by 8% company’s reputation which, in • Provided online and telephone donation facilities • Improved our safety record – Lost Time Injury rate to the Disasters Emergency Committee (DEC) after was 23% better the Asian tsunami disaster • Invested £9.1 million in community projects and We set up a temporary call centre at the BT Tower responsibility (CSR) and how social, provided £11.7 million support in kind in London and provided DEC with facilities to We are committed to give a minimum of 0.5% of our BT’s case, we know directly affects process telephone and online donations quickly, UK pre-tax profits to direct activities in support of society securely and efficiently. and a further 0.5% via in-kind activities. • Achieved certification for BT Ireland’s environmental environmental and ethical risks and management system to ISO 14001 Our experience in Ireland is the model we will use as we customer loyalty. extend certification to other countries where we operate. • Followed up 100% of actions identified through our supply chain risk assessment process opportunities are managed to preserve As part of our commitment to high standards in our supply chain we ask all new suppliers to complete a risk assessment questionnaire. Where we identify areas for improvement we take appropriate action within three months. and grow shareholder value. Lowlights Through this relationship we have • Missed two key diversity targets While we met our objective on the number of ethnic minority employees, the number of women in BT fell by 0.3% last year, and although the number of disabled employees increased, we fell 0.3% short of our disabled employees target. understood how CSR is critical to We connected our five millionth BT’s approach customer to broadband – • Undershot our customer satisfaction target meeting our target a year early We reduced customer dissatisfaction by the equivalent of 23% per annum over three years against our target of 25%. Please see our online report for further details. optimising customer satisfaction. All our KPIs are shown on page 20. We want to present investors with “The actions of leading companies such as BT are living proof that significant cuts in greenhouse For example, we estimate that gas emissions need not come at the cost of economic growth.” Tony Blair, UK Prime Minister a forward-looking, quantitative BT’s CSR performance accounts BT Social and Environmental Report Summary and Highlights 2005 02 business case for CSR and sustainable development. Our business case sets for over 25 per cent of the image out how good CSR performance is and reputation element of customer critical to the delivery of BT’s strategy. satisfaction. Further statistical analysis shows that a one per We measure our CSR performance cent improvement in the public’s through a series of key performance perception of our CSR activities indicators (KPIs) which have been translates to a 0.1 per cent increase developed in consultation with in our retail customer satisfaction stakeholders. figures. Source: BT Group plc Annual Review and summary fi nancial statements 2005, BT Group plc Social and Environment Report 2005, www.btplc.com and used with kind permission. 18 Key performance indicators and targets Category Indicator 2005 2004 2003 Target 2006 Customers Customer Dissatisfaction – 23% 29% 37% To increase the number against an objective of compound compound compound of extremely and very reducing the number of reduction* reduction* reduction* satisfied customers by 5%† dissatisfied customers by 25% per year over three years Satisfaction measures Initiatives to improve customer To improve levels of customer satisfaction satisfaction, we need a thorough Our customers have told us that understanding of what makes we must: customers satisfied and dissatisfied. • Be easy to contact • Keep them informed (we shouldn't To achieve this, we carry out more need to be chased) than 3,000 face-to-face interviews with residential customers every • Take ownership of their issues month. We ask them about their and champion their cause overall perception of BT and the • Live up to the commitments quality of service. Customers who use we make to them. competitors are asked how satisfied they are with our competitors. The interviews also examine image and reputation, price and value, contact and experience, and products and services. BT Global Services uses three types of survey to measure customer satisfaction: • Face-to-face interviews, normally with senior decision-makers in the larger organisations • Tracker surveys, an overall satisfaction survey conducted over the telephone • An Event Driven Customer Satisfaction Survey, which is a telephone survey conducted immediately after a repair or provision event. We publish customer-satisfaction and quality-of-service measures every six months. Source: BT Group plc Annual Review and summary fi nancial statements 2005, BT Group plc Social and Environment Report 2005, www.btplc.com and used with kind permission. 19 4 Provide quantifi ed data relating to trends and factors likely to affect your company’s future prospects While a number of companies Whilst Emap could have provided This forward-looking orientation is are starting to take positive steps its own company metrics relating to useful to investors in assessing the in this direction, others already growth prospects, it has chosen to market in which Emap is likely to incorporate this information into use data from an accepted external be operating in the coming years their annual reports. In this extract industry benchmark. A number of and provides a context for them to from Emap’s 2005 Annual Report, companies provide similar external assess the potential success of the investors are shown market data on market information. However, Emap company’s strategies and future both historical and future estimated balances this data with alternative performance. advertising growth rates. This external views, which in this case are provides information relating to less optimistic about future growth trends and factors underlying historic rates. performance and likely to affect future performance. emap plc emap plc annual report & accounts 2005 Macro-economic environment In the UK, the current advertising growth AA is recognised by the industry as a good forecasts from the Advertising Association benchmark of future growth rates. However, (AA), set out in the table, indicate some other forecasters have started to reduce their improvement in most of Emap’s markets. expectations for 2005/06, for example These forecasts are updated quarterly. Deutsche Bank reduced their advertising growth forecast from 4.9% to 2.2%, operating & financial review Lehman Brothers have also taken a view Emap is a broad-based media group located in the UK. It is listed that is more pessimistic for the sector than on the London Stock Exchange and is part of the FTSE 100 Index. Its business covers consumer magazines, radio, music television, b2b magazines, exhibitions, events and information products. Its core business is based in the UK and France. these AA forecasts. market overview Emap’s revenue mix 12% Advertising – consumer UK 4% Other and strategy 10% Advertising – consumer France 8% Exhibitions 2% Advertising – consumer 4% Circulation – trade International 2% Circulation – consumer Competitive environment 5% Advertising – trade recruitment International Many of the specific markets in which 5% Advertising – trade 18% Circulation – consumer France 21% Circulation – consumer UK Emap operates experience a high degree 8% Airtime – radio 1% Airtime – TV of competitive intensity. Over the years Emap has developed a creative, innovative and competitive culture which enables it to thrive Emap’s revenue split GDP growth (UK) in these markets. +3.1% +3.0% +3.0% 43% Advertising 57% Other +2.3% In consumer magazines in the UK, Emap’s +2.2% +1.8% key competitors are IPC, now part of Time Warner; Bauer; BBC Worldwide; and The National Magazine Company, part of the Hearst Corporation. In radio, Emap competes 2001 2002 2003 2004 2005E 2006E primarily with GCap, formed from the Source: Citigroup recently merged Capital Radio and GWR, UK Advertising growth forecasts and Chrysalis. In music television Emap AA is recognised by the industry as a good competes with MTV, part of Viacom. In b2b benchmark of future growth rates. However, GDP growth (France) +2.4% +2.3% key competitors are Reed and UBM, and in other forecasters have started to reduce their +2.1% France they are Lagardère and Prisma, part expectations for 2005/06, for example +2.0% of the Bertelsmann group. Deutsche Bank reduced their advertising growth forecast from 4.9% to 2.2%, +1.1% 2002 2003 2004 2005 2006 Macro-economic environment Lehman Brothers have also taken a view +0.6% In the UK, the economic environment over that is more pessimistic for the sector than 2001 2002 2003 2004 2005E 2006E the last year has been relatively benign, but these AA forecasts. Source: Citigroup remains one of low growth. GDP growth is estimated to have been 3.1% in 2004, the In France, advertising growth has 43% of Emap’s revenues are derived from highest for four years, but is forecast to drop historically been weaker and is expected advertising. Consumer magazine advertising back slightly in 2005 and 2006. to be somewhat weaker than in the UK, in the UK accounts for 12% of total revenues, as shown in the table on page 5. Total advertising 1.6% 3.9% 5.4% 6.3% 5.6% and around half of this is endemic – for In France GDP growth has lagged the UK and is expected to continue to do so, with UK Advertising growth forecasts a slight recovery forecast for 2006. In both 2002 2003 2004 2005 2006 of Emap’s core markets, therefore, 2005 is expected to be a little tougher than 2004. Total advertising 1.6% 3.9% 5.4% 6.3% 5.6% Consumer magazines 0.8% (0.2%) 4.5% 4.2% 4.4% In the UK, the current advertising growth Business/professional mags (9.4%) (3.6%) 3.2% 3.6% 2.9% forecasts from the Advertising Association Radio 1.1% 6.8% 3.4% 5.3% 5.2% Consumer magazines 0.8% (0.2%) 4.5% 4.2% 4.4% (AA), set out in the table, indicate some TV 4.9% 3.4% 5.4% 6.7% 4.6% improvement in most of Emap’s markets. Source: Advertising Association These forecasts are updated quarterly. Business/professional mags (9.4%) (3.6%) 3.2% 3.6% 2.9% emap plc < 4 > annual report & accounts 2005 Radio 1.1% 6.8% 3.4% 5.3% 5.2% TV 4.9% 3.4% 5.4% 6.7% 4.6% Source: Advertising Association Source: emap plc annual report and accounts 2005 and used with kind permission. 20 5 Spell out any uncertainties underpinning forward-looking information Companies often include a statement In the example below from BAA, Furthermore, examples from British within their reporting advising the uncertainties relating to future Land and Tate & Lyle demonstrate readers to treat forward-looking forecast growth in passenger simple statements of caution. information with caution. Many numbers are highlighted and clearly incorporate “hold harmless” or “safe explained. harbour” statements, often geared towards the US markets. BAA plc, The British Land Company PLC, Drivers of Future Performance Tate & Lyle PLC As passenger numbers are set to continue growing for the foreseeable future and our airports become increasingly busy, the Group Success Through Innovation is focusing ever more on improving the quality Annual Report 2004/05 of service delivered across the whole range of airport activity – from first impressions on arrival, through check-in and security and on to departure. The move to an airport-led operating model will ensure maximum accountability as close to the customer as possible and a more effective and agile organisation. Annual Report&Accounts 2005 Operating and Financial Review From March 2006 British Land is required to publish an Operating and Financial Review in accordance with new regulations. Although guidance on its preparation is not finalised, this OFR aims to anticipate most of the new requirements. In preparing this operating and financial review, we are required to advise the reader that by their nature, all forward looking statements made involve uncertainty since future events often cause outcomes and results to differ from those anticipated. Creating the world’s leading renewable Cautionary statement ingredients business This Annual Report and Accounts contains certain forward-looking statements with respect to the financial condition, results, operations and businesses of Tate & Lyle PLC. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward- looking statements and forecasts. Nothing in this Annual Report and Accounts should be construed as a profit forecast. Annual Report 2005 Source: BAA plc Annual Report 2004/05; The British Land Company PLC Annual Report and Accounts 2005; Tate & Lyle PLC Annual Report 2005 and used with kind permission. 21 6 Communicate targets relating to those key performance indicators (KPIs) used to manage your business Companies often present performance to use different measures, giving “as the most important customer- indicators based on traditional frank descriptions where common related measure”, it goes further fi nanical information alone. We, measures such as total customers by providing the rationale for the however, would encourage companies can be meaningless, and identifi es selection of this measure and its to present the KPIs and accompanying the key measures – fi nancial and importance to current and future targets – both fi nancial and non- non-fi nancial – that it believes fi nancial performance, namely that fi nancial – used by management matter most, and provides targets “about 80 percent of our revenue to measure progress in delivering for each one. growth comes from selling more against their stated strategies and in products to existing customers”. managing their business. Wells Fargo goes on to measure The disclosure is made more readily progress in achieving those targets, understandable by good use of In this example, Wells Fargo as shown here for cross-selling. Not graphics. clearly explains why it chooses only does it identify cross-selling Wells Fargo & Company any fancy new theories. We are simply Which Measures suggesting a new set of value-creation measures for financial services companies Really Matter? so there is an apples-to-apples way to We measure success differently compare companies’ performance across than our competitors.We believe the industry in the measures that really these measures matter most. matter. That’s why we say financial They’re the most important Which Measures long-term indicators of success in Really Matter? services companies measure the wrong We measure success differently than our competitors.We believe the financial services industry. Last year,we called for a new set of financial performance measures—to reflect more accurately how financial services companies these measures matter most. like ours create value for customers and stockholders.We believe this new set of measures is more suited to the faster growing, They’re the most important dynamic, diversified, knowledge-based financial services industry than to the stagnant, old banking segment.The more precisely things, often based on the traditional long-term indicators of success in that service companies can measure the value they create, the more accurately the marketplace can measure the value of their stock. Our proposal prompted such significant interest and discussion that we’ve expanded on it in our report to you this year. the financial services industry. - Revenue Growth Wells Fargo & Company Annual Report 2004 Which measures really matter? - Earnings Per Share measures of the banking industry. - Revenue Growth - Return On Equity - Revenue vs. Expense Growth - Assets Managed, Administered For example: - Managing Risk - Earnings Per Share - Retaining Team Members - Team Member Engagement - Retaining Customers • Asset size and return on assets — - Customer Service - Return On Equity - Customer Access Options - Cross-Selling important to banks in the “old days”— - Product Solutions (Sales) Per Banker Per Day - Market Share - Revenue vs. Expense Growth - Total Stockholder Return do not reflect contributions from such fee-based businesses as mortgage, - Assets Managed, Administered insurancep and money management. - Managing Risk Letty Cantero Wells Fargo Bank Corona, California • Total customers can be a meaningless - Retaining Team Members Team member since: 1994 measure — it gives you little or no insight - Team Member Engagement into breadth and depth of relationships. - Retaining Customers Think of the profit difference between - Customer Service ten customers who entrust you with 100 percent of their business versus - Customer Access Options 100 who give you just ten percent of it. - Cross-Selling - Product Solutions (Sales) Per Banker Per Day - Market Share - Total Stockholder Return Source: Wells Fargo & Company Annual Report 2004 and used with kind permission. 22 Our 10 Strategic Initiatives guide us toward our vision and help us achieve double-digit revenue and earnings growth. Here’s a brief progress report on each: Cross-Selling 2.“Going for Gr-Eight” • Cross-selling:our most important Our average banking household has 4.6 customer-related measure. products with us (about double the industry • About 80 percent of our revenue average). Our average commercial/corporate growth comes from selling more customer has 5.3. But both purchase about products to existing customers. 16 financial products from someone. We want our consumer and business customers Goal: Sell at least eight products to have at least eight products with us. to every customer. 21.3 20.5 18.9 18.0 16.2 14.8 13.2 12.6 11.0% 10.8% 00 01 02 03 04 00 01 02 03 04 Homeowner-Banking Customers Homeowner-Banking Customers with Mortgage Products with Home Equity Products percent percent 5.3 5.0 4.9 4.6 4.6 4.3 4.2 3.8 3.7 3.4 3.2 98 99 00 01 02 03 04 01 02 03 04 Products Per Banking Household Commercial/Corporate Products Per Banking Customer Source: Wells Fargo & Company Annual Report 2004 and used with kind permission. 23 7 Demonstrate the linkage of other content areas within your reporting to your longer-term objectives and the strategies to achieve those objectives Every company is affected by its Investors need to know that the their growth drivers. Furthermore, external environment and most Directors’ objectives for the business it provides detailed information on include some commentary on the and the strategies to achieve them each of its three strategic priorities, markets in which they operate. are reasonable in the context of the shown here by the third strategic Pilkington’s Operating and Financial external market. In this example, priority “Invest in profi table growth Review 2005 does this, but goes Pilkington links disclosures about opportunities”, including the specifi c further by providing a clear emphasis its markets to its strategy. It actions it will take to implement the on future growth opportunities and provides detailed information on the strategy and the risks involved in linkage to Group strategy. growth prospects of these markets pursuing it. – supported by clear graphics – and Pilkington plc OPERATING AND FINANCIAL REVIEW 2005 Making glass for the world’s buildings and vehicles Our industry GROWTH IN GLASS Over the past 20 years, glass demand has grown more quickly than GDP. Over the long-term, glass demand is still growing at around 3.9 per cent per annum. Demand growth for glass is driven not only by economic growth, but also by legislation and regulations concerning safety, noise attenuation and the response to the growing need for energy conservation. Architects and car designers are using increasingly more glass in buildings and vehicles. Glass is a growth industry. Global demand for glass outstrips economic growth around the world. Today’s architects and car designers are using larger surface areas of glass in their designs, increasingly with added functionality and complexity. 7 GROWTH IN GLASS GLOBAL GLASS GROWTH vs. REAL GDP GROWTH Over the past 20 years, glass demand has grown more quickly than GDP. ) Global glass demand growth: 3.9% p.a. 150 Over the long-term, glass demand is still growing at around 3.9 per cent per annum. Demand growth for glass is driven not only by economic growth, but also by legislation and regulations concerning safety, noise attenuation 100 Real GDP growth: 2.6% p.a. and the response to the growing need for energy conservation. Architects Index (1991 – 100 and car designers are using increasingly more glass in buildings and vehicles. 50 1991 1993 1995 1997 1999 2001 2003 2005 VALUE GROWTH – BUILDINGS VALUE GROWTH – AUTOMOTIVE DEMAND GROWTH DRIVERS DEMAND GROWTH DRIVERS Energy saving (heating) Energy saving legislation and building Complexity Designers see glazing as a crucial regulations; reduction of energy loss from element in designs to differentiate vehicles buildings and energy labelling of windows PILKINGTON plcPILKINGTON AND FINANCIAL REVIEW 2005 OPERATING Our strategy Curvature & surface Styling demands increase the complexity Energy saving (cooling) Energy saving legislation, reduction tolerance and depth of curves in vehicle glazing, of air-conditioning load in buildings. making surface tolerances critical, e.g. Preventing non air-conditioned buildings for efficient windscreen wiper operation from overheating Solar control Larger glass areas require tinted and Safety Increasing legislative requirement for coated glazing to reduce solar heat build-up safety glass in certain applications and air-conditioning load Security Requirement for transparency combined Security Crime and vandalism increase the with security features need for enhanced security, provided by Fire protection Requirement for good light transmission laminated side glazings and compliance with regulations on fire Glazing systems Reduced time to market and lean protection manufacturing require modularised Acoustic Increasing noise levels caused by traffic, glazing, including trim and other fittings, aircraft etc progressively backed by in one unit ACTION legislation Integrated systems Complex antenna arrays and electronics Self-cleaning Reduction in use of detergents, safety at integrated into glazing heights. Product range now extended to Acoustic Demand for increased vehicle comfort combine self-cleaning with additional features through noise reduction MOST FUTURE GROWTH OPPORTUNITIES WILL COME FROM EMERGING MARKETS WORLD LIGHT VEHICLE SALES GROWTH (Million Vehicles) WORLD FLAT GLASS MARKET (Million Tonnes) We will identify opportunities 100 50 80 40 Invest in 60 30 Developing Markets +21m for profitable growth in our Developing Markets +15m 40 20 Developed Markets +3m Developed Markets +7m 20 10 0 0 existing businesses, new 2002 2003 2004 2005 2006 2007 2008 2009 2010 2002 2004 2006 2008 2010 2012 2014 Source: Company estimates Source: Company estimates profitable growth products and emerging markets. opportunities We will consider organic 3 growth and/or acquisition. Source: Pilkington plc Operating and Financial Review 2005 and used with kind permission. 24 VALUE GROWTH – AUTOMOTIVE VALUE GROWTH – BUILDINGS DEMAND GROWTH DRIVERS DEMAND GROWTH DRIVERS Complexity Designers see glazing as a crucial Energy saving (heating) Energy saving legislation and building element in designs to differentiate vehicles regulations; reduction of energy loss from Curvature & surface Styling demands increase the complexity buildings and energy labelling of windows tolerance and depth of curves in vehicle glazing, Energy saving (cooling) Energy saving legislation, reduction making surface tolerances critical, e.g. of air-conditioning load in buildings. for efficient windscreen wiper operation Preventing non air-conditioned buildings Solar control Larger glass areas require tinted and from overheating coated glazing to reduce solar heat build-up Safety Increasing legislative requirement for and air-conditioning load safety glass in certain applications Security Crime and vandalism increase the Security Requirement for transparency combined need for enhanced security, provided by with security features laminated side glazings Fire protection Requirement for good light transmission Glazing systems Reduced time to market and lean and compliance with regulations on fire manufacturing require modularised protection glazing, including trim and other fittings, Acoustic Increasing noise levels caused by traffic, in one unit aircraft etc progressively backed by Integrated systems Complex antenna arrays and electronics legislation integrated into glazing Self-cleaning Reduction in use of detergents, safety at Acoustic Demand for increased vehicle comfort heights. Product range now extended to through noise reduction combine self-cleaning with additional features MOST FUTURE GROWTH OPPORTUNITIES WILL COME FROM EMERGING MARKETS GLOBAL GLASS GROWTH vs. REAL GDP GROWTH WORLD LIGHT VEHICLE SALES GROWTH (Million Vehicles) WORLD FLAT GLASS MARKET (Million Tonnes) 100 50 Global glass demand growth: 3.9% p.a. 150 80 40 60 30 Developing Markets +21m Developing Markets +15m 100 Real GDP growth: 2.6% p.a. 40 20 Developed Markets +3m Index (1991 – 100) Developed Markets +7m 20 10 50 0 0 1991 1993 1995 1997 1999 2001 2003 2005 2002 2003 2004 2005 2006 2007 2008 2009 2010 2002 2004 2006 2008 2010 2012 2014 Source: Company estimates Source: Company estimates ACHIEVEMENTS TO DATE NEXT STEPS RISKS ✓ Pilkington-constructed fourth float •Key factor influencing the timing • Demand growth in mature line in Brazil for our South American of our transition from Stage 2 to markets slows in both building joint venture is in full production. Stage 3 will be progress in and automotive sectors, ✓ Sound base established in China building our financial strength. emphasising the need to as a platform for future growth. • China, Russia, India and the grow in emerging markets. Automotive plants now fully under Middle East have been identified • Risks of operating in new Pilkington management. as top four priority areas for growth. territories minimised through ✓ Float line joint venture in Russia • Robust systems implemented to working with joint ventures on target to start production in assess viability of all growth and local partners where summer 2005. opportunities. appropriate and by spreading our investments over several • Groundwork laid for growth markets. investments during Stage 2, structured to minimise cash outlay until the transition to Stage 3. Source: Pilkington plc Operating and Financial Review 2005 and used with kind permission. 25 Other narrative reporting publications Report Leadership Report leadership is a multi-stakeholder group that aims to challenge established thinking on corporate reporting. The contributors to this initiative are the Chartered Institute of Management Accounts (CIMA), PricewaterhouseCoopers LLP, Radley Yeldar and Tomkins plc. Contact us For 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 the corporate reporting team at [email protected], or visit our website www.corporatereporting.com 26 www.corporatereporting.com pwc 27