: Corporate Reporting Corporate Landscape* The Competitive *connectedthinking

Corporate Reporting: - The Competitive Landscape Building Public Trust Awards Judges 2 Contents

Winners & Highly Commended 3

4

Introducing Best Practice 5

6

12

18

22

26

Tax Reporting 30

People 34

Corporate Responsibility 36

Economic Performance 38

40

Other Publications 43 Introduction 2

In the year that we celebrate our fifth annual Building Public Trust Awards (BPTA), I am delighted to introduce our first compendium of best practice — Corporate Reporting: The Competitive Landscape. As with the awards event, in this publication we celebrate the best of corporate reporting by UK-listed companies and the public sector.

As we engage with companies on corporate reporting and consider the demands for greater accessibility and transparency, we find that an understanding of how others are responding is essential. The BPTA process provided us with valuable insights, as the initial part of the process consisted of a review of reporting by the FTSE 350 as well as more than 90 public sector bodies. During this process, we captured examples of best practice, which demonstrate what good reporting actually looks like. This publication brings our insights and best practice examples together in one compendium – I hope you find it useful.

The challenge for every business remains the same as in previous years: to get ahead of the curve and recognise that simply meeting regulatory reporting requirements is unlikely to satisfy the expectations of investors and other key stakeholders. If companies are to be properly understood and valued, there is a growing need for them to explain their full contribution to wealth creation and other aspects of life. This publication provides a snapshot of some of the key information that businesses need to report in order to win the trust of all those stakeholders who sustain the corporate sector, and who rely on it for their employment, taxes and pensions.

I am particularly pleased to note the continuing improvement in reporting that has occurred in the past 12 months, partly due − in my view − to the introduction of the Business Review. While this has been an obvious catalyst for change, and one I support for its principles-based framework, we should not ignore the many companies that have taken it upon themselves to improve their reporting way beyond the regulatory norm.

If your company is featured in this publication, I congratulate you. You are providing inspiration to others. You are helping to create a competitive mechanism that will continue to move reporting forward, and ensure that it fulfils its overriding objective: to communicate clearly with the capital markets and other key stakeholders.

Kieran Poynter UK Chairman PricewaterhouseCoopers LLP Corporate Reporting: The Competitive Landscape

Building Public Trust Awards Judges 2

The Building Public Trust Awards judging panel is made up of the leading business figures below, and is led by the Chairman of the judges, John Coombe. Between them the judges cover a wide range of disciplines and hold an unparalleled array of knowledge about the key issues that businesses face today. In order to maintain its independence, PricewaterhouseCoopers does not hold a position on the final judging panel.

John CoombeSir John Bourn KCB Professor Sir Nick Anderson Philippa Foster Andrew Likierman Back OBE

John Coombe is Chairman Sir John Bourn is the Sir Andrew is Professor of Nick Anderson is Head Philippa Foster Back became of Hogg Robinson Group plc Comptroller and Auditor Management Practice at the of Research at Insight Director of the Institute of and a Non-Executive General of the UK. London Business School. Investment, the asset Business Ethics in 2001. Director of HSBC Holdings He is also the Chairman He is also a Non-Executive management arm of HBOS. She was formerly Group plc and Home Retail Group of the Professional Oversight Director of Barclays Bank He has more than 20 years’ Treasurer at EMI. She holds plc. He is a member of the Board and a member of the and the Bank of England. investment management Non-Executive Directorships Supervisory Board of Financial Reporting Council. His previous posts have experience, as both a fund including Institute of Directors Siemens AG and a Trustee In addition he is Chairman of included Non-Executive manager and analyst. and is a past president of the of The Royal Academy of the World Bank’s Multilateral Chairman of MORI and Nick joined Insight from Association of Corporate Arts Trust. Formerly he was Audit Advisory Group. a Managing Director of Schroder Investment Treasurers. She is Chair CFO of GlaxoSmithKline plc HM Treasury. Management in 2003. of the UK Antarctic and a member of the UK He is a member of the Heritage Trust. Accounting Standards Board. UK Accounting Standards Board and the Corporate Reporting Users, Forum.

Professor David Begg Baroness Denise Peter Elwin Anita Skipper Kingsmill CBE Anita Skipper joined Morley Professor David Begg, Baroness Denise Kingsmill Peter Elwin is Head of Fund Management as Head of Principal of Tanaka Business originally rose to prominence Accounting and Valuation Corporate Governance in 1993. School and Professor of as an employment lawyer. research at Cazenove, She is currently on the Board of Economics at Imperial She became Deputy Chair of advising institutions in the International Corporate College, previously the Competition Commission Europe and the US, and Governance Network and taught at Oxford University in 1997 and in 2001 headed corporate clients of a member of several corporate and Birkbeck College. the UK Government’s task JPMorgan Cazenove. governance committees, A CEPR Research Fellow force into women’s He is a member of the UK including those of the ABI. since its inception in 1984, employment. She chaired Accounting Standards Board, She has played an important he has published widely the Accounting for People the IASB’s Analyst Reporting role in developing governance on macroeconomics. Taskforce and is Group, the Corporate practices in the UK and worldwide. He is a Fellow of the Royal a Non-Executive Director of Reporting Users Forum, Society of Edinburgh, and British Airways and Senior and the ICAEW’s working the City and Guilds Institute. Advisor to the Royal Bank party on reporting financial 2 of Scotland. performance. Winners & Highly Commended

3 The 2007 winners of the Building Public Trust Awards are shown below, along with the highly commended companies. Each company has excelled in their particular area through clear and transparent disclosures, and we congratulate each of them for their efforts. We would recommend that you take time to view these disclosures, which offer some of the best examples of reporting seen in the UK.

FTSE 100 Winner Highly Commended Winner Highly Commended The Capita Group Plc Lonmin Plc AstraZeneca PLC Punch Taverns plc Land Securities Group PLC WPP Group plc

FTSE 250 Winner Highly Commended Great Portland Estates plc Signet Group plc Workspace Group PLC Winner Highly Commended Cookson Group plc BT Group plc HSBC Holdings plc

Winner Highly Commended Ministry of Defence Highways Agency Metropolitan Police Service Winner Highly Commended Vodafone Group Plc Anglo American plc

Success Diageo plc

Winner Highly Commended Severn Trent Plc Cadbury Schweppes plc Highly Commended in alphabetical order Imperial Chemical Industries PLC Corporate Reporting: The Competitive Landscape

Capturing Best Practice

Over the past decade, PricewaterhouseCoopers has been acknowledged as a leader in promoting good corporate reporting and the monitoring of best practice. Throughout this period we have invested significant resources in research and thought leadership in order to advance our understanding of, and provide insights into, what creates value in corporate reporting. This extensive body of analysis underpins our judgement of the key areas of reporting and the criteria we use to assess them. 4

During 2007 PricewaterhouseCoopers undertook its most In addition, we continued to monitor good examples of reporting around comprehensive review of corporate reporting in the FTSE other key areas - corporate responsibility, people reporting and economic 350 and public sector to date. This review covered six key performance, which are also featured in this publication. areas – overall narrative reporting in both the public and private sectors, and the reporting of measures of success, Finally, at the end of this document, a PricewaterhouseCoopers executive remuneration, pensions and tax by FTSE 350 expert in each area sets out their thoughts on the future and the companies. challenges facing companies.

The review included all companies in the FTSE 350* and For further examples of best practice in corporate reporting please the 90 largest public sector bodies and was conducted using visit our website: internal experts in each of the key areas.

We assessed each company’s report against a range of objective criteria specific to each key area. This criteria covered basic compliance with required regulations, but also included other elements that we believe companies should be reporting on: these are outlined in more detail over the following pages. As part of the process, reviewers looked beyond the specifics to consider the document as a whole. For example, was there something about a company’s disclosures that made it stand out against its peer group? PricewaterhouseCoopers would like to express our Did the company do something notable that helped aid our sincere thanks to all the companies that have allowed understanding? A positive answer to these questions helped us to feature their work in this publication. We also offer us to identify the best practices shown in the peer group. congratulations for the commitment and energy that all these companies have shown in helping to elevate The remainder of this publication is organised into sections the quality of corporate reporting in the UK. that align with the key areas of our review. In each area we identify the specific areas of disclosure we were looking for, then we explain what we found, and finally provide recommendations for companies preparing their next report. To bring each area alive, we include some examples of best practice. We would encourage you to take the time to look at these companies’ reports in their entirety and see these disclosures in context in order to fully understand their impact.

*As of 1st January 2007. All reports with years ending 2 April 2006 -1 April 2007 were reviewed, with the exception of 12 companies that were removed from, or newly listed on, the stock exchange, and two companies that failed to report in the period of the review. Introducing 5 Best Practice Corporate Reporting: The Competitive Landscape

FTSE 350

It is clear from the findings of our review that there have been some real improvements in narrative reporting during the past year. Nowhere is this more evident than in the communication of strategic priorities, key performance indicators (KPIs) and risk. Several factors have influenced these improvements, including: the bedding down of the Business Review, increased media attention and a growing recognition that corporate reporting is a competitive tool.

What we were looking for: What we found:

Good corporate reporting is not only about content We were very pleased to see the improved standards of but also quality and how well it all hangs together. reporting this year, particularly in areas we believe are key 6 Under content we were looking at the information the to providing a foundation to the report. 93% of companies company chose to report – did it include all the elements provided an overall objective, with 88% providing their we would expect to see and focus in on the key messages? strategies. However, many remain reluctant to provide Quality refers to the depth of the information – did the specific target information – only 35% of companies company use only qualitative information or did it support offered strategic targets when explaining their objective this with quantitative data, benchmarks and targets? or strategy. Finally, on linkage, we considered how well a company demonstrated a clear and consistent message throughout its reporting, and whether the different elements of the report related back to the strategic themes set out as key to company success.

Specific areas we focused on include: o • A clear explanation of what the company does, supported by a comprehensive analysis of its marketplace. Less than half of all companies provided good market • An explicit statement of the company’s long-term direction information about their competitive, macro and regulatory supported by the strategies to pursue this, with clear use environments, with 25% providing clear quantitative, of specific targets. forward-looking market data. However, this area highlights a real difference in performance between • A consistent message/story running throughout, based FTSE 100 companies and those in the FTSE 250. on the stated strategic themes.

• An explanation of how strategic performance is measured over time, including identification of financial and non- financial key performance indicators accompanied by supporting trend data.

• An insight into the key resources and relationships managed by the company in order to fulfil its strategic objectives.

• Clear analysis of the principal risks the company faces in meeting its strategic aims.

• An innovative explanation of financial numbers, to help readers better understand the company’s key financial data. “There have been some real improvements in reporting this year as companies have raised the standard of their disclosures in order to embrace the spirit of the Business Review, rather than to just comply with the letter of the law.” David Phillips Senior Partner, Corporate Reporting

The future challenge:

Three-quarters of companies specifically identified their The improvements in reporting seen this year are KPIs, with 64% of those making an attempt to link their encouraging, but companies can still do more to ensure KPIs to strategy. Those companies that stated their KPIs that they provide investors with a full understanding of 7 also provided a range of supporting information – 93% their business. Some ideas to be considered include: showed trend data to allow an analysis over time, while 55% clearly showed how the KPI has been defined or • Make strategy the foundation of the report and link all calculated. other elements to this.

• Ensure a logical and consistent flow of information throughout all company documents.

• Provide a complete picture of the market environment: competitive, regulatory and macro-economic factors.

s • Signpost critical information.

• Offer quantitative data to support qualitative statements.

Three-quarters of companies outlined their principal risks, • Make use of externally-sourced data to support with the average number of risks amounting to eight. statements made. Just over half (57%) of these companies also detailed how risks are managed, although few (9%) went further • Benchmark data in order to show “real” performance. to quantify those risks. • Look to the future – investors want a reason to invest for the longer term. 100 average 75 • Avoid jargon and industry-specific terms, and provide a 50 clear glossary. 25 8 average • Where possible, cross reference to additional information.

• If CSR issues are important, integrate them and treat them the same as any other element of reporting. The recent publication, Business Review: has it made a difference?, contains more information on our findings. • Don’t make unsupported statements or assume the For more details please refer to page 43. reader already knows about an area of your business. Corporate Reporting: The Competitive Landscape

FTSE 350 Good Practice Examples:

Unite Group: By clearly explaining its competitive, regulatory and macro-economic environments, a company provides context for the rest of its reporting. The Unite Group has provided some comprehensive data on its market environment: outlining factors driving change in its market; the regulations that it must adhere to; and the competition it faces. The company also offers a range of statistical information that shows how it believes its market will grow in the coming years. The fact that the data is externally sourced lends it further credibility.

8 Unite Group AR 2006 Unite Group HBOS: Strategy is probably the most important element of reporting, and this year has seen a big improvement in companies articulating their strategy. Best practice companies, however, have gone a step further and added specific and timely targets to their strategic intentions. HBOS, for example, offers targets – an exact figure or a range – for both its financial and operational strategic plans. HBOS AR 2006 PartyGaming: PartyGaming demonstrates best practice by making strategy the foundation of its report and using it to link all other elements together to show a consistent theme. The company offers a strategy progress table that shows “at-a-glance” how strategy links to business drivers and performance. Also, the strategic themes are reinforced throughout the report through the use of strategy symbols allowing the reader to easily identify where strategy is being discussed.

9 PartyGaming AR 2006

Capita: The Business Review makes key performance indicators (KPIs) a regulatory requirement, but many companies remain uncomfortable about reporting this information. Best practice companies contextualise their KPIs, offering a definition, explaining their aim and purpose, as well as providing a clear link between the strategy and KPIs disclosed. Capita has clearly summarised its KPIs and provided performance data alongside its aim for the forthcoming year. It has then expanded on this summary with more detail, diagrams and definitions of calculations made. Also, the company supports the financial KPIs shown below with non-financial performance indicators demonstrating how effectively the company is managing its key resources and relationships. Capita AR 2006 Corporate Reporting: The Competitive Landscape

FTSE 350 Good Practice Examples (continued):

Ladbrokes: Good practice companies give clear insights into the value that their key resources and relationships deliver. These insights usually describe how the company is optimising the value of their resources or relationships, supported with quantitative data. Ladbrokes has used externally-sourced data to provide some clear insight into the awareness of its brand.

10 Ladbrokes AR 2006 Ladbrokes

Tomkins: Risk disclosure has historically been one of the weakest areas of reporting by companies, although the introduction of the Business Review has seen some improvement in this area. Tomkins takes its risk disclosure a stage further by providing an awareness of their risk profile with the use of a simple grid diagram showing impact versus likelihood of key risks occurring. Tomkins AR 2006 Tomkins Bradford and Bingley: Companies tend to provide financial review sections that use financial information to describe the company’s own perception of its performance, without clearly explaining how this information reconciles to the financial statements. However, some are now taking steps to improve this and make information more understandable to retail investors in particular. Bradford and Bingley, for example, presents a clear breakdown of how its statutory statements compare to how its own board assesses this information.

11 Bradford and Bingley AR 2006 Bradford Examples of note:

BAT Emap Xstrata

BAT’s annual report is a good example of a company From the outset, Emap’s report clearly explains what Xstrata’s annual report makes a real commitment that has worked to develop the narrative content of the reader will find within its pages and why they to transparency at both group and segmental its report by focusing on strategy. The report clearly should be interested. This transparency continues level. The company sets out a very clear strategy identifies the company’s strategic themes by using throughout the document with an excellent, incorporating both financial and non-financial a diagram showing how the different strands link balanced section on strategy, which is underpinned objectives. This is supported by specific segment together. Each theme is developed in more detail by the company’s KPIs and principal risks. strategies and KPIs. The group then provides and the primary relationships with employees and The market analysis included within the report more detail on each of its segments, starting the environment are discussed in great depth, with is very extensive, with good detail on the with a comprehensive overview of each key further credibility gained from the use of benchmark macro-economic and competitive environments. market, making good use of quantitative data and data. KPIs are clearly stated, linked to the theme of The report also includes an insightful section on the benchmarks. A detailed operational review adds “Growth” and supported with explicit future targets. company’s responsibilities and how it fulfils these. further weight to the segmental disclosures. Corporate Reporting: The Competitive Landscape

Public Sector

As in the private sector, good reporting in the public sector is characterised by the quality and relevance of content. Linkage – a clear and consistent message running through the document and connecting each part to the rest – is also critical.

in association with the

What we were looking for: What we found:

Best practice in the public sector should present a joined- Almost 70% of organisations provided a clear statement up explanation of goals and objectives, the context in articulating what they do. The majority of other which strategic decisions are taken, the resources and organisations alluded to what they do, but could have relationships used to implement strategy, and operational improved their disclosures. Only 49% of organisations and financial results. Designing and using the right provided sufficient contextual information of their macro KPIs remains a high priority, especially given the recent and regulatory environments. A further 39% provided 12 shift in the public sector from reporting on targets in a some limited contextual information. Many organisations “tick box” fashion, towards reporting how organisations assumed the reader would know what the organisation have truely added value. Calls for greater transparency did, and left questions unanswered regarding the and accountability affect both private and public environment in which they operated. sector organisations, and we were keen to recognise organisations that reported their challenges alongside Sufficient contextual information their achievements – the bad as well as the good news. No contextual information Specific areas we focused on included: 39% Limited contextual information

• A clear statement of what the organisation does, supported by a comprehensive analysis of the environment in which it operates. 12% • An explicit statement of long-term direction, supported by the strategies in place to pursue this, with clear use of specific targets. 49%

• An explanation of how strategic performance is measured over time, supported by trend data. However, organisations were generally very good at stating their overall goals and objectives, with 83% • An insight into the key resources and relationships providing good disclosures. 65% of these companies also managed by the organisation in order to fulfil its strategic provided a good level of quantitative forward-looking data, objectives. with a further 22% providing limited data of the same type.

• Sustainability reporting – how organisations assess, measure and seek to reduce their environmental 100 impacts, with statistics reporting against these aims. 75 Overall goals and objectives 50 Quantitative forward looking data • Clear analysis of the principal risks the organisation 25 Limited quantitative forward looking data faces in meeting its strategic aims. 0 • A forward-looking perspective. Public Sector

• A consistent message/theme running throughout the report. “Public Sector organisations are often required by statute to report against targets. The best organisations link disclosure of their KPIs to strategy in a manner that engages the reader.” Janet Eilbeck Partner, Public Sector “An open and honest account of strategy and performance is essential to building trust between a public sector organisation and the people it serves.” Sir John Bourn KCB Comptroller and Auditor General

The future challenge:

The weakest area reviewed was disclosure of principal There are a number of improvements that public sector risks. Only 34% of organisations identified these, with organisations can make to ensure that they provide fewer providing detail on how these risks are mitigated stakeholders with a full understanding of their role and and managed. Nearly a third (31%) of organisations activities. These include: did not make any disclosures beyond the statutory requirement of the Statement on Internal Control (SIC). • Use the same layout and format in the annual report as in the strategy or corporate plan. Strategy should be the 13 foundation of the report and all other elements should Identification of principal risk link to it. No disclosure of principal risks

No disclosure of principal risks beyond the • Go beyond the basic requirements of the Statement of statutory requirement to produce a SIC Internal Control to enhance disclosures concerning risks. 35% • Improve definitions and explanations of value for money, 31% including evidence to support assertions about the efficiency of new methods of working.

• Provide commentary on how the macro economic 34% environment affects the organisation.

• Avoid jargon and industry-specific terms; where used, define these terms in a glossary.

• Use qualitative data to support qualitative statements where possible – assertions should be developed and supported with evidence.

• Enhance disclosures about employees and fully integrate them into strategies.

• Incorporate specific environmental targets into key strategies and report against them.

• Continue to develop disclosures on sustainability – ensuring that they include definable goals and objectives and are incorporated into key strategies.

• Use the annual report to present key findings from other workstreams rather than making reference to reports that are not publicly available.

• Don’t neglect the future. Current-year results should be set against both historical data and future targets. Corporate Reporting: The Competitive Landscape

Public Sector Good Practice Examples:

Ministry of Defence: When public sector organisations set clear KPIs, these are generally reported on concisely. Quality of presentation varies, however, with few organisations using innovative methods to report KPIs, or being completely transparent. The Ministry of Defence’s target relating to the effectiveness of the UK’s contribution to conflict prevention is a good example of the organisation’s innovative approach to reporting, and of its transparency regarding sensitive issues.

14 MOD AR 2006/07

Linking an organisation’s mission statement to its strategy, its strategy to its objectives, and the structure of the report as a whole, is a key criterion for good reporting. The Ministry of Defence is exceptional at linking strategy to objectives, using a Balanced Scorecard to help it translate strategy into operational objectives. MOD Defence Plan 2007 Ministry of Defence: Reporting regarding employees and diversity is often passed over briefly. The Ministry of Defence however included causes of employee dissatisfaction and statistics relating to ethnic minority recruitment, even when targets were not met, in its annual report. In both instances the annual report went on to give a narrative commentary against both indicators.

15 MOD AR 2006/07

Highways Agency: Environmental reporting is a relatively new challenge for public sector organisations, and it is one at which few organisations excel. The Highways Agency incorporated environmental concerns within its Business Plan, by recognising its impacts on the environment and developing relevant KPIs. Highways Agency Business Plan 2007/08 Corporate Reporting: The Competitive Landscape

Public Sector Good Practice Examples (continued):

Highways Agency: The Highways Agency includes a section on corporate social responsibility in its annual report, which has environmental indicators on water and electricity usage to measure performance at a detailed level. Highways Agency AR 2006/07

16 Driver and Vehicle Licensing Authority: Best practice public sector organisations provide context for their KPIs, defining them and explaining their purpose, as well as providing a clear link to the strategic aims the KPIs are measuring. The Driver and Vehicle Licensing Authority (DVLA) has clearly summarised its KPIs relating to ‘Customer Service’ – one of the three categories against which activities are analysed in its Directors’ Report. The DVLA has also been transparent in reporting where it has failed to meet targets. DVLA AR 2006/07 DVLA Metropolitan Police: Many public sector organisations provide a wealth of statistics and KPIs, but fail to provide focus on the measures that “really matter”, i.e. those that are absolutely fundamental to the organisation’s mission. The Metropolitan Police used a bold style to present KPIs relating to satisfaction levels, leaving the reader of the annual report in no doubt about the organisation’s critical success factors.

17 Met Police AR 2006/07 Met Police

Examples of note:

Her Majesty’s Courts Service Legal Services Commission Northern Ireland Roads Service

Her Majesty’s Courts Service uses the balanced The Legal Services Commission produced The Northern Ireland Roads Service has scorecard in its business plan to drive the a clear, well-structured annual report, and produced a clear, concise, well-structured structure of the annual report, ensuring clear made good use of case studies to bring the annual report. It includes good narrative linkage between planning and reporting. document to life. The use of colour coding commentary on each of its eight strategic Furthermore, the annual report is presented in the body of the report makes the link objectives, providing detail and commentary in an engaging manner. It is clear that it has between corporate priorities and outcomes on relevant statistics. Key elements of been designed with a target audience of the clear, enabling the reader to assess the the business plan are supported by key general public in mind. The use of case studies performance of the organisation against its performance targets, ensuring a good and the customer focus of the report further targets. degree of linkage between planning and emphasises this. reporting. Corporate Reporting: The Competitive Landscape

Measures of Success

As one of the requirements of the Business Review, we’ve seen a marked improvement in the communication of key performance indicators (KPIs). While KPIs are only one element of how companies measure their success, the legislation has clearly encouraged companies to give more thought to what information is important in monitoring strategic progress.

What we were looking for: What we found:

Annual reports have traditionally focused on financial Three-quarters of companies explicitly identify their key performance, providing a large amount of information to performance indicators in their annual report. Of these, support the figures in the financial statements. However, 42% explicitly link them to their stated strategies, while 22% changing regulation, along with recognition that financial provide some linkage between the two. numbers on their own do not provide a full picture of business performance, has led to a greater demand for the communication of strategic objectives of the company, as well as performance against those objectives. As we 36% 42% Explicit linkage have already noted earlier in this publication, we believe Some linkage 18 that strategic disclosures should form the foundation of No linkage corporate information. Equally importantly, corporate reports should clearly identify how management assesses success, or failure, in achieving these strategic objectives – their measures of success. Specific areas we focused on include: 22% • An explicit statement of the company’s strategic plans with clear quantitative targets. Customers, people and physical assets are the resources and relationships most frequently identified as key to • An understanding of the timescale of the strategy and strategic success. However, there is only limited correlation appropriate supporting information. For example, if the between those resources and relationships, and the KPIs current report is explaining the third year of the strategy it outlined by the company. should outline what has been achieved to date, and what the previous targets were.

• An explanation of how each strategic theme is monitored and measured over time.

• Clear quantification of the measures of strategic performance and supporting detail on these measures, such as definition, trend data and source.

• The relationship between key performance indicators and other defined measures, and the significance given to each.

• A strong relationship between the defined measures of success and the company’s key resources, relationships and risks. “The best companies provide a broad range of measures of success, including both financial and non-financial measures. Non-financial measures are particularly important, as they are often lead indicators of future financial performance.”

Janice Lingwood Director, Corporate Reporting

The future challenge:

Those companies that have indentified their KPIs provide In an area of reporting that’s still in its infancy, a number of varying levels of detail relating to each KPI. Trend data opportunities for companies to improve their disclosures is commonly presented, but there is still more that can be remain. We would encourage preparers to take a look at done by companies to provide information on targets and what other companies have done, and to draw from the benchmark data. examples we present on the following pages.

For example, it is important to:

• Ensure that strategic plans for the company are clearly set out. 19

• Provide a clear explanation of what success looks like for each strategic theme.

Purpose Definition Trend data Benchmark Future Future • Outline the processes in place to monitor the qualitative quantitative targets targets development of strategy over time.

• Set out the quantitative measurements the board uses to monitor the progress of strategy over time. Only 5% of companies bring all of the elements of their strategy together in a tabular form in order to demonstrate • Be clear on interim goals and measurements if the the linkage between the strategy and the measures used to strategy is long term. monitor progress. • Provide a clear insight into the resources and relationships required as key to achieving strategic success and detail how their progress is measured.

• Be realistic about factors that may prevent strategic success. If goals aren’t met then provide a clear insight into why – outlining both internal and external circumstances.

• Think long term – is part of the reward for those responsible for implementing strategy assessed using the same measures of success? Corporate Reporting: The Competitive Landscape

Measures of Success Good Practice Examples:

Aviva:

Some best practice companies utilise a tabular format to provide a clear link between strategy, measures of success and performance. Aviva, for example, has clearly stated its strategic priorities and then provided brief boxes of information on how it measures progress against them, what it achieved in the previous year, and what it hopes to achieve in the next.

20 Aviva AR 2006 Aviva

George Wimpey: George Wimpey does a good job of linking its KPIs to strategic objectives and making it clear that these are what the company uses to measure strategic progress and success. Each KPI is supported by a definition and a future target demonstrating the clear direction of the company. These KPIs are also used throughout the report, with each indicator prominently displayed and discussed in more detail. George Wimpey AR 2006 Wimpey George Cadbury Schweppes:

Cadbury Schweppes’ annual report has a strong strategic focus, providing information on both the company’s three-year strategic plan, the specific priorities for the year in question, and detail on previous years’ strategy targets. The report then analyses how the company has performed against these targets. For each of the strategies outlined, the company provides a specific section on what it is trying to achieve, and how it is monitoring and measuring progress over time.

21 Cadbury AR 2006 Schweppes

Examples of note:

Astra Zeneca Friends Provident Standard Life

Astra Zeneca uses consistent headings and Friends Provident approaches the main body of its Standard Life begins its report with a clear graphic themes throughout its report, enabling the reader report from a segmental level, providing a set of showing how the strategic themes link to the to easily understand how the different elements of pages for each segment. The strategy pages are set measures, in this case its KPIs, that are used to the document fit together. Where the company has out in a tabular style, showing each strategy along- monitor progress over time. These strategies and not provided measures of success, it provides clear side information on how the company measures KPIs are then picked up throughout the report, reasoning for not doing so, and states its future success against the objective, and the priorities for along with further financial measures, and intentions for introducing this data. the forthcoming year. expanded on to provide more detail about how these measures are monitored. Corporate Reporting: The Competitive Landscape

Executive Remuneration

Executive remuneration is one of the most sensitive and heavily-scrutinised areas of corporate reporting. The remuneration report is an account of the outcomes during the year from prior decisions made by the remuneration committee. It is also a description of its actions, if any, to change the directors’ remuneration arrangements for future periods. All too often, such reports are largely dissertations on those matters that are required to be disclosed by statute, but do not provide a great insight into the business drivers of executive remuneration.

What we were looking for: What we found:

Good reporting in this area opens the window on boardroom As in the other key areas, no one company excelled in all discussions by explaining how the remuneration committee categories of disclosure, but every category had at least has spent its time during the year and how it has arrived at a handful of companies that achieved a high standard. its decisions. The reporting of executive remuneration in FTSE 100 companies was generally more comprehensive than in Specific areas we focused on included the disclosure of: FTSE 250 companies.

• Details of the current remuneration policy and how this The statutory requirement is to disclose the bonus paid in might vary for subsequent years. respect of the year under review. However, significantly more information is being disclosed by many companies. • A clear alignment of remuneration to strategy through This may be because institutional investors have been the use of key performance metrics, with personal pressing for greater clarity over performance metrics and 22 objectives being linked to overall business objectives. how the achievement of targets results in the bonus paid. Many more companies (particularly those in the FTSE • The process for setting basic salaries and references to 100) are providing useful tables detailing the structure on internal relativities. which bonus payments are based.

• Structure and performance metrics for the annual bonus. Basis of calculation for current year bonus payments, illustrating the linkage between reward payouts and company performance.

• Details of long-term incentive programmes with an Achieved KPIs explanation of grant sizes and the rationale for the performance conditions. Clear disclosure of the relative importance of the fixed • The impact of current performance on long-term incentives, and variable elements of remuneration can be very both at the end of the vesting period, and for partially powerful, particularly where companies attach values to completed periods. the individual elements of the package. However, it is disappointing to note that several companies in the FTSE • Expected values, or year-end values, of long-term 350 are meeting this legislative disclosure requirement incentives, allowing an assessment of the likely benefit with a simple policy statement of broad proportionality. accruing to executives.

• Evidence of an assessment of the total value of the 100 FTSE 100 remuneration package, as well as how it compares with 75 FTSE 250 50 the chosen peer group companies. 25 0 • Use of tables and charts to break up dense text; and the Disclosure of Explanation Rationale for Reference inclusion of colour, headings and eye-catching design. fixed/variable of split each constituent to internal split of package relativities “There is no doubt that the quality of the reporting of executive remuneration is improving in many companies, but there is still only a handful of reports that we considered to be close to achieving a very high standard of disclosure.” Sean O’Hare Partner, Executive Remuneration

The future challenge:

A growing number of companies are making disclosures of There are still a number of opportunities for companies the overall package, yet the way in which the information to improve their remuneration reporting. The first step is being provided varies. Furthermore, it is encouraging is to consider the remuneration report as part of an to note that, as shown below, an increasing proportion of overall communication package, which is set against the companies are benchmarking total compensation against backdrop of the company’s business strategy and the a peer group (rather than considering each element of demands of its particular industry. remuneration separately). Other suggested improvements include:

100 • Disclosure of remuneration strategy in the context of 75 business strategy and performance. 50 25 • Clear alignment between corporate performance and 0 23 executive remuneration. FTSE 100 FTSE 250 • A more forward-looking approach to the remuneration report with disclosure of prospective packages for the forthcoming year. Non-executive directors’ fees have increased significantly in recent years and, in many cases, are subject to annual • Justification for the choice of comparator group and review. A reasonable proportion of FTSE 350 companies benchmarks for setting remuneration. now provide detail on the make-up of non-executive directors’ fees. It is encouraging to find many companies • A greater level of discussion on the annual bonus to displaying tables of annual rates of non-executive allow the reader to understand why the bonus was paid. directors’ fees. However, in some cases it was difficult to reconcile the numbers in the emoluments table back to • Disclosure of expected values of long-term incentive the fee rates. awards made in the year.

• Explanations of changes in transfer values and funding rates for defined benefit pensions.

Average • The use of commentary boxes rather than footnotes. Good Excellent None Limited Corporate Reporting: The Competitive Landscape

Executive Remuneration Good Practice Examples: SAB Miller:

Disclosure of the relative importance of the fixed and variable elements of directors’ remuneration packages is a legislative requirement that elicits hugely divergent approaches. As a minimum, companies disclose the percentages attributable to the fixed and variable parts of the package. However, some companies use this disclosure to describe the value expected to arise from the package, as illustrated by SAB Miller. This disclosure stands out as a rare example of a company including both the quantum of the overall package and the proportion represented by each element of remuneration. SAB Miller AR 2007 Punch Taverns: It is a requirement of the UK Listing Authority that companies disclose their long-term incentive grant policy and any changes or divergence from that policy in the year under review – many companies overlook this requirement. Punch Taverns sets out 24 the prospective grant under the LTIP for the year following the year under review, both in terms of face value of the awards as a percentage of salary and the fair value (calculated for IFRS 2 purposes) as a monetary amount. The size of the awards is then compared (in fair value terms) with those in the company’s chosen comparator group. Punch Taverns AR 2006 Taverns Punch Emap: It is becoming more common for companies to have a shareholding requirement for executive directors, expressed as a multiple of base salary. However, it is still relatively unusual for a company to disclose the extent to which executive directors have met the shareholding requirement or, indeed, the basis on which shares will count towards the shareholding requirement. Emap also presents the value of vested but unexercised options. Emap AR 2007 Mitchells & Butler: United Utilities:

Mitchells & Butler is one of the few companies that made Good remuneration reporting establishes how executives a clear reference to internal relativities. The disclosure are incentifised by reference to metrics that are clearly below identifies the proportion of the salary bill that linked to their business strategy. We found very few is attributable to directors and executive committee companies that were using specific and relevant business members, and compares the average cash compensation objectives to drive their incentive programmes. One of executive directors with that of a non-board employee. example that stood out from the rest was that disclosed in the United Utilities remuneration report.

25 Mitchells and Butler AR 2006 United Utilities AR 2007

Examples of note:

Cadbury Schweppes Lonmin WPP

Cadbury’s 2006 remuneration report is clearly Lonmin’s 2005/6 comprehensive remuneration WPP’s 2006 remuneration report is highly readable, presented and comprehensive. It contains a report describes the company’s South African making it very different from any other we came useful diagram to explain the structure of the business to provide context for its discussion across in the FTSE 350. Although it is not as long-term incentive plan, and clear disclosure of of executive remuneration. The report includes comprehensive as some of the others, there is a the outstanding dilution capacity for employee descriptions of the remuneration committee’s clear summary of the remuneration packages of share plans. The structure of the remuneration processes, the comparator groups used to executive directors, giving a high-level insight package is clearly summarised in tabular format, benchmark executive pay, and progress against into the company’s remuneration policy for the in terms of minimum and maximum outcomes, and performance conditions for long-term incentives. executive team. the relative importance of the fixed and variable elements of executive remuneration. Corporate Reporting: The Competitive Landscape

Pensions

Over recent years, large deficits and more onerous legislation to protect members’ benefits have brought the issues around defined benefit schemes higher up the agenda. However, traditional pensions disclosures have been insufficient to allow investors to properly understand the risks and rewards around these schemes.

What we were looking for: What we found:

Investors want to understand the inherent uncertainties in As expected, we found a wide variation in quality of the calculation of scheme liabilities and costs, and the risk disclosures. Nearly 30%* of the FTSE 350 companies of higher contributions or other actions in the future. with defined benfit schemes surveyed did not provide any additional disclosures beyond the bare minimum required Specific areas we focused on include: by the standard. Where companies did provide additional information, the impact was sometimes lessened because • Non-technical disclosure of the material assumptions the disclosures were highly technical in nature. affecting the calculation of the scheme’s liabilities, including the longevity assumption. Just 50% of companies provided longevity disclosures, with sufficient information to allow an understanding of current • Disclosure of the sensitivity of liabilities and costs to assumed rates of longevity and how these are expected to material assumptions and changing markets. change in the future.

• Description of how liabilities are measured under IAS Longevity disclosure 19 and disclosure of other alternative measures of the 26 pensions deficit. 50% No disclosure

• Information that enables an understanding of future 50% company cash contribution requirements.

• Disclosure of the company’s policy for managing the pensions risk.

• Additionally, as this is one of the more complex areas of reporting, we were looking for clear, non-technical descriptions and a logical layout for what is often a very detailed disclosure.

*Our statistics exclude the 30% of companies that either do not have defined benefit schemes or immaterial schemes not requiring disclosure “The best companies provide well-articulated, detailed and comprehensive disclosures around their pension risks and long-term funding obligations.” Jill Williamson Senior Manager, Pensions

The future challenge:

Current accounting rules only require disclosure of an Companies have started to work towards best practice estimate of the contributions that will be paid over the reporting guidelines proposed by industry bodies such as next year, despite the fact that the pension scheme is a the Accounting Standards Board, but there is still some way long-term commitment. Only 20% of companies went beyond to go. Potential areas for improvement include: this requirement to provide sufficient information to allow an understanding of company cash contribution commitments • Provide a clear link between the pensions surplus/deficit beyond the next year. in respect of the material plans and the asset/liability included on the balance sheet (and also costs in the p&l).

Company contributions • Ensure key information is easy to find; for example, total beyond the next year pensions deficit, p&l costs. 80% 20% No disclosure

• Include definitions of key terms, such as current service cost, interest cost, expected return on assets, in clear and non-technical language. 27 • Provide complete longevity disclosures, including how longevity is expected to change over time.

• Disclose all material assumptions, such as an allowance Just 20% of companies provided details of pension risks and for members to take a cash lump sum on retirement. the steps they were taking to manage these risks, such as the mismatch between assets: typical schemes are heavily • Provide sensitivity of p&l costs, as well as pension invested in equities, yet liabilities are bond-like in nature. liabilities, to changes in key assumptions.

Pensions risks disclosed • Disclose IAS 19 calculation of pension liabilities, as well as alternative methodologies, such as the buy-out level. 80% 20% No disclosure

• Present the company’s long-term funding commitment, including, where appropriate, separate disclosure of any contributions needed to repair any shortfall of assets compared to liabilities; when the shortfall is expected to be removed; and use of any contingent assets (assets payable to the pension scheme on Only five companies disclosed the buy-out deficit - the triggering of certain events). shortfall of assets relative to the cost of securing the liablities with an insurance company. • Provide a clear articulation of the company’s policy for managing the pensions risk. Corporate Reporting: The Competitive Landscape

Pensions Good Practice Examples:

Prudential:

Longevity is one of the most significant assumptions when valuing pension scheme liabilities. Best practice disclosures include the underlying actuarial tables and implied life expectancies of current pensioners and how these are expected to change for future pensioners. Prudential’s disclosure is simple, neat and complete. Prudential AR 2006 Prudential

BT: Best practice disclosures describe how assets and liabilities are measured under IAS 19 and disclose and describe other measures of the pensions liabilities. BT provides an overview of: how both liabilities are measured under IAS 19; 28 how funding has been assessed; and discloses the buy-out level. BT AR 2007 BT BT AR 2007 BT BT AR 2007 BT Cookson Group: Best practice disclosures include an explanation of how the company is managing and mitigating its pensions risk. Cookson Group provides an explanation of the main pensions risks, and a non-technical description of the steps it is putting in place to manage these risks. Cookson Group Cookson Group AR 2006

HSBC Holdings:

Best practice disclosures provide details of the sensitivities of the liabilities and p&l costs to key assumptions, HSBC provides sensitivities for the discount rate and rate of inflation. It then goes on to provide sensitivities to rates of increases to both pensions and pay, as well as to changes in mortality assumptions. 29 HSBC AR 2006 HSBC Holdings AR 2006

Reproduced with permission from HSBC Holdings plc Annual Report and Accounts 2006 Examples of note:

Aggreko Barclays Friends Provident

Comprehensive disclosure presented in an Logical, clear layout with good funding and Clear layout and design. Also includes a section easy-to-read format. governance sections, including disclosure of setting out the company’s future cash commitments. who has the power to set the contribution rate of the scheme. Corporate Reporting: The Competitive Landscape

Tax Reporting

A wide range of stakeholders are demanding more and clearer information on tax. Tax can no longer hide behind technical complexity, and companies are responding by providing more communication on tax than is required by accounting standards. Leaders in the field provide significant disclosure across all areas, but there is a wide disparity between the best and many of the rest of the FTSE 350.

What we were looking for: What we found:

We look for tax reporting in three key areas: strategy We were pleased to see that both the quality of and risk management; numbers and performance; disclosures and the amount of information on tax and the wider impact of tax, including information on a increased this year, though this clearly remains an company’s total tax contribution. These three broad areas emerging area. encompass a “Tax Transparency Framework”, and we would expect to see good reporting covering more specific criteria in each of these areas: Tax strategy and risk management

• Tax strategy and risk management Though the number of companies disclosing their tax strategy remains low, with only 20% of companies doing • Clear discussion of the company’s tax objectives and strategy. this, this is a significant improvement over the last year • Disclosure of how the company’s tax strategy and function is and we expect this trend to continue. managed and who in the organisation has responsibility for governance and oversight. • Clear disclosure of the material tax risks the Many more companies, 40%, discuss the significant company faces. tax risks they face and how those risks are managed. However, the companies that do this well remain in a • Tax numbers and performance minority. Disclosure of specific tax risks • A clear explanation of why the current tax charge is not simply 30% of accounting profit. 30 No disclosure of specific tax risks • A transparent reconciliation of the company’s cash tax payments to the tax charge included in the income statement. • Disclosure of the forward-looking measures for tax, including 60% forecast accounting and cash tax rate. 40%

• Total tax contribution and the wider impact of taxes • Detail as to how tax impacts on the company’s wider business strategy and results. • Disclosure of the impact of tax on shareholder value. • Clear communication of the economic contribution of all taxes Tax numbers and performance paid by the company. Accounting standards require significant disclosure of tax We attach particular significance to the discussion of a numbers as part of the financial statements, but there is company’s tax strategy, as this provides context for the a wide variation in the transparency of the information remainder of the tax reporting; and without disclosure of a provided. It is often difficult for a non-tax specialist to strategy, the other information can lose some of its value. understand this information. The leading companies are those that use simple, clear language and link the impact tax has on the business performance throughout their reporting. “We were pleased to see a marked improvement in the quality and quantity of tax information provided.”

Susan Symons Partner, Tax

The future challenge:

Furthermore, the leaders also often make forward-looking Communication of tax issues is an area of increasing statements in relation to future tax rates, with almost 20% focus and there has been a definite improvement in the of companies providing such a perspective. However, tax information reported in the past two years, but there is less than 10% of companies provided any detail on the still some way to go. link between the accounting tax charge and the cash tax actually paid. Some key communication challenges for companies to consider are:

Companies provide reconciliation of cash tax payment to accounting tax charge • How do you best communicate your tax strategy to

7% No reconciliation provided investors and other stakeholders? 93% • What is the best way to communicate your major tax risks, who manages them and how?

• Have you given sufficient information in your financial statements to enable investors and other users to make accurate estimates of your future cash tax rate?

In addition to the broader push for more tax information, Total tax contribution and the wider impact of taxes the introduction of new US reporting requirements (for 31 periods beginning after 15 December 2006) is likely This year we saw a range of companies providing a link to have a significant impact on tax reporting. These between tax and corporate citizenship, with an increasing requirements demand additional disclosure and specific number of reports describing the economic contribution recognition and measurement of uncertain tax benefits, made via the payment of taxes.There was a similarly and will see analysts using new measurement metrics to pleasing increase in the number of companies who determine exposure to tax risk. discussed the wider impact tax had on their business, with 18% of companies now doing this. • While this will have the greatest impact on companies that report in the US, the focus on tax risk management should increase the standard of communication in this

Discuss wider impact of tax area, as companies are going to be under pressure to match the standards of reporting of the “best in class”. 18% No discussion of wider impact of tax • Risk processes will come under more scrutiny, with 82% stakeholders demanding more information about the company’s tax aims and how these fit with the wider business strategy.

• We would also expect tax to be included in broader corporate responsibility discussions. The majority of Both features were to some extent industry and issue companies discussing their wider contribution did so in specific. For example, the impact of the introduction of the context of their corporate responsibility reporting. the REIT regime on property groups was generally very well described. The better reporting, by almost a third of companies, of the overall economic contribution made in taxes paid, was generally from companies in the extractive industries. Corporate Reporting: The Competitive Landscape

Tax Reporting Good Practice Examples:

Anglo American: The link between the wider business and tax strategy is becoming increasingly important in some industries. This trend is likely to increase as tax authorities and other stakeholders take more interest in the amount of tax paid by companies and where it is paid. Anglo American links its tax strategy explicitly to its economic value add, and is clear how the tax strategy fits into its business model. The company also provides a breakdown of total taxes paid to government (borne and collected) by country. Anglo American Report to Society 2006

Diageo: Changes in tax legislation and tax rates can significantly impact on the way a company does business. Diageo succeeds not 32 only in communicating the impact of taxes and duties on its business, but goes further to discuss how it structures its affairs within this fiscal environment and gives clear guidance on its tax strategy. Diageo Corporate Citizenship Report 2006 Citizenship Diageo Corporate Vodafone:

Some companies provide very explicit information on their tax strategy and governance. Vodafone is clear what its tax strategy is and what risks it is exposed to, who has responsibility for setting and managing the strategy and how its tax professionals should act. It is unique in the FTSE 350 in publishing a tax code of conduct. Vodafone, Corporate responsibility report responsibility 2007 Corporate Vodafone,

33 Examples of note:

GKN Kazakhmys Workspace

GKN provides a good discussion on what Kazakhmys provides a good overall level of Workspace sets out the impact that the its tax strategy is, and how its performance detail across each area of the Tax Transparency introduction and election into the REIT on tax is measured. This is linked well to Framework, in particular around governance regime will have on future business strategy. narrative around its cash tax rate. It also and risk. Kazakhmys is particularly successful Workspace gos on to set out clearly how the provides forward looking statements on in describing the uncertainties provided by regime will affect the returns to shareholders, estimated future tax rates. operating in a developing taxation system. while also explaining the technical details to those users who will be interested. Corporate Reporting: The Competitive Landscape

People

What we were looking for: What we found:

Annual reports have traditionally focused on financial People reporting is an area of corporate reporting that has performance, with any reference to employees being evolved rapidly in recent years, and while it was not an left to the Chairman or Chief Executive to thank them for area we focused specifically on this year, we can glean another good year. However, employees are recognised some trends from our wider survey of FTSE 350 narrative as a critical resource in most companies, making this an reporting. important area for reporting. We believe that good people reporting stems from the clarity with which employees are Just over 60% of companies stated that employees are identified as a critical resource in delivering on strategic a key part of their strategy, but only 39% of these same success. From this starting point, corporate reports should companies provided a key performance indicator on clearly identify management actions to invest in, and people. develop, its employees. Finally, relevant people metrics should be monitored, and reported on, so that readers can assess progress against stated employee strategies. 100 75 FTSE 100 More specifically, in looking for best practice people 50 FTSE 250 reporting, we focused on: 25 • A clear alignment of employees to the company’s 0 strategy. State people Have a people KPI as key to strategy • Definition of who is deemed an employee – eg, do they include part-time employees, agency workers, or staff in roles that you have outsourced? Overall 41% of FTSE 350 companies had a people KPI, with 12% of all KPIs used in the FTSE 350 falling into the • Explanation of the key actions necessary to invest in, people category. manage, and develop a company’s employees. Just over a quarter (27%) of companies stated the failure • Identification of appropriate people metrics, and peer to recruit or retain key employees as a key risk to their group comparisons where the data is available, to business. monitor a company’s progress.

• Details on future people strategies/initiatives. 34 The future challenge: It follows that a key challenge for companies in the future is to publish people information relevant to business performance in a location within the report that best reflects its nature. We too often find statements around strategies focused on people engagement and productivity within a CSR report.

We also find that some companies report a very large volume of people information with very limited description of the relevance of the data. It is important that the relevance of people data is discussed in public reports, along with clear statements around the targets and/or benchmarks associated with data. Good Practice Examples:

Amlin: BT:

Amlin refers to employees as an important asset throughout The key strength of BT’s people reporting is the its report, and dedicates a very strong section to how it is accountability for the performance of people strategies. developing its employees. Its belief in the importance The key performance indicators are identified and tracked of employees is underlined by the use of one of its most over time, with targets and benchmarks in place where important people key performance indicators at the front relevant. There has also been an improvement in BT’s of the annual report. reporting of the relevance of each people measure in this year’s report. BT Changing World Report 2007 World Changing BT BT Changing BT Report World Amlin AR 2006 BP: Examples of note:

The improvement needed in explaining the relevance of The companies shown below – McAlpine and Standard people data can come through better qualitative description Chartered – make a real attempt in their reporting to focus of that data; it can also come with the addition of more on their people reporting and to provide clear insight into detailed data identifying the key drivers of a particular how they manage this key resource in order to get the most people metric. BP performs well in this area as the example from it. They support their information with clear charts and 35 below shows. In the area of diversity, recruitment is a key graphs, helping the reader more easily identify where the topic. Detail on the different nationalities an organisation methods put in place have been a success, and also where is recruiting from is rarely published, but is very powerful in there is more to be done. demonstrating the tangible results of human capital policies.

McAlpine Standard Chartered BT Changing World Report 2007 World Changing BT BP Sustainability Report 2006 BP Corporate Reporting: The Competitive Landscape

Corporate Responsibility

What we were looking for:

As with people reporting, good practice is about • In terms of reporting performance, only 8% of the KPIs used integrating corporate responsibility (CR) into core are CR-related. business strategies. Companies at the forefront of CR are reforming their business models to capitalise on value • 38% of companies with a CR-related KPI also highlight CR as a key creation opportunities as well as manage CR-related priority within their strategy. risks. Clarity in reporting also includes discussing which CR risks and opportunities are material to the strategic • 10% of FTSE 350 companies have some sort of CR metric in senior success of the business, and explaining how those executives’ annual performance plan, most of which are health relevant issues are managed. Hardwiring management and safety related. of relevant issues into critical organisational structures and processes is also key. An example would be the approach taken to align CR performance to executive remuneration. Clarity in reporting on measurement and performance is also critical. The future challenge:

Traditional approaches to CR have focused on risk, with reporting being seen as a PR exercise. Going forward, What we found: the challenges of reporting on CR include: • Greater integration of CR with strategy and management We found that companies are good at including processes, reflected in integration throughout narrative information on CR and how they are managing aspects reporting rather than separate reports and sections. of CR. However, few companies are clearly integrating CR into their strategy and management processes. Our • Consideration of CR as a value driver, moving CR survey of narrative reporting practices found that: management and reporting from a PR/communications exercise to value creation. • 83% of FTSE 350 companies provide a CR section in their annual report and explain how important CR is to • Identification and communication of clear and meaningful the entity, yet only 17% of companies embed CR as one metrics for measuring CR performance in line with wider of their strategic priorities. business performance.

A Provide a CR section in the 17% annual report No CR section included 36 83%

B Corporate Responsibility 17% embedded as a strategic priority Corporate Responsibility not embedded 83% Good Practice Examples:

Marks & Spencer: Anglo American:

M&S has reshaped its business model to integrate Anglo American recognises that embedding sustainable environmental, social and economic challenges within its development within the company depends on raising business strategy. The much hailed “Plan A” is brought to its employees’ understanding of sustainability concepts life in the Business Review, and it is clear where this fits and practices. The Report to Society 2006, therefore, into the company’s business strategy. Further on in the includes information on Anglo American’s efforts to train report, the company re-emphasises the importance of staff to assess the impacts of less quantifiable, sustainable “responsible retailing” to its future success – even listing development criteria on a project’s return on investment; a failure “to manage, measure and communicate progress and reports on the tools it is training staff to use to assist against our Plan A commitments” as one of the company’s them in planning mines with an eye to a sustainable future. principal risks in the Corporate Governance statement. Supported with numerous examples of how the company is incorporating Plan A commitments into its stores and supply chain, the annual report’s message to readers is that sustainability is now part of M&S’s core business strategy. Anglo American Report to Society 2006 M&S AR 2007 BT: Carillion:

BT’s Changing World 2007 report includes a two-page Carillion’s online-only report differs from many peers’ reports discussion on how BT identifies its material issues (and in disclosing some of the detailed tools and frameworks the resolves differences in opinion with stakeholders) and company uses to talk about, and to manage, sustainability and 37 where it believes CR presents risks and opportunities CR performance. Carillion uses a Sustainability Excellence within its business. Model to guide progress and measure its sustainability performance. The model has been adopted within the company, and a baseline score for 2006 has been established and targets set for improvement in 2007. Carillion Website BT Changing World Report 2007 World Changing BT Corporate Reporting: The Competitive Landscape

Economic Performance

What we were looking for: What we found:

In recent years there has been a growing emphasis on Overall we found that there are a few companies that perform accounting guidelines and regulations; however, from consistently well in this area: the top five companies have an investor’s perspective, the clarity and communication remained very stable over the past five years. In addition of economic value created, continues to be a priority. we found: Investors’ key interests include how their capital is being invested, the returns that have been generated and how • Good reporting around wider market and regulatory impacts these compare to key trends, targets or the benchmark cost on company economic performance, but less reporting on the of capital. impact of economic factors (such as interest rates and GDP growth). Specific areas of good economic performance reporting we looked for include: • An increased disclosure of value-centric strategic goals and aims, linked to performance indicators with better monitoring • Management commitment to clearly report on business of progress against such indicators. and financial issues affecting the company’s economic value. • A minority of companies provide good frameworks for assessing and reporting economic performance, including • A clear and dedicated set of objectives aligned to economic profit, economic returns, cash value added and economic performance. return on capital compared to a cost of capital.

• A framework that can be used to assess the company’s • Little disclosure by companies on their view of the company’s economic value and how it is performing in comparison to cost of capital, or target capital structure. its targets.

• Appropriate measurement and reporting metrics; in particular, the extent to which a company provides information on its capital base, cost of capital and cash returns. The future challenge:

There are very good examples of economic reporting in the top tier of companies that we looked at. The main challenge is for this type of reporting to become more commonplace. Particular challenges include:

• Explain how value creation links to strategy, performance measurement, risk assessment and metric reporting. This requires: • An explaination of the key management processes. • Explaining the company’s appetite for risk. 38 • Providing metrics that help investors measure economic performance and value creation.

• Set out the macro economic drivers of performance, for example business confidence, consumer demand, GDP growth and demographics. In an increasingly connected world, economic effects on one side of the world can impact on performance on the other side.

• Provide a more rounded description of all the sources of capital employed by the company, including both tangible and intangible assets. Good Practice Examples:

Tomkins:

Tomkins provides detailed descriptions and supporting calculations for key concepts and metrics related to economic value, including cash flow metrics, cash added value and economic returns. Tomkins AR 2006 Tomkins

Rexam: Barclays: Rexam clearly sets out its overall strategy and the Barclays shows the quantification of its economic profit, a key relevant KPIs to measure its success. This sets up a economic measure, which is linked to the company’s value- simple, transparent snapshot of company performance, creation strategy and targets earlier in its report. The table which aligns with overall strategy for value creation. also provides the previous two year’s comparatives.

39 Rexam AR 2006 Rexam Barclays AR 2006 Corporate Reporting: The Competitive Landscape

PwC experts look to the future:

[email protected] [email protected] [email protected]

Public debate over how the UK’s major The public sector entrants continue to impress, The Business Review legislation has put companies report their performance has with several organisations demonstrating a the spotlight on the explicit reporting of never been more intense. On the one hand, good standard of reporting. However, most the measures, used by management, to assess the advent of the Business Review and rising organisations have some catching up to do – the progress against their objectives and monitor investor expectations are driving companies best companies in this sector have remained the the delivery of their strategies. It is not surprising, towards greater transparency on a broader best for several years. then, that reporting in this area has evolved range of financial and non-financial metrics. significantly over the past two reporting seasons. The implementation of International Financial We expect to see this evolution continue over On the other, scepticism over what’s reported Reporting Standards (IFRS) for financial coming years. statements, starting in 2008/09, will be a huge and companies’ real engagement with the No new legislative requirements are expected challenge for the public sector. Organisations reputation agenda remains rife. Meanwhile, the in this space; instead the impetus for need to start planning for this now – and subprime crisis and credit crunch have focused improvements is likely to come from market consider how they will go about explaining the attention once again on what companies report forces, including engagement with stakeholders. changes caused by IFRS in their annual reports. and what they do not. The best companies are already reporting measures that align with the critical actions In short, the time is ripe to re-examine the There may, for example, be some significant and resources necessary to deliver on their way companies report, and will report in the Private Finance Initiative (PFI) schemes that stated strategies. future. In our view, today’s reporting model come on to the balance sheet of the public is still too complex and financially-orientated, sector. Organisations will need to explain the Interestingly, the improvements witnessed in the while also omitting many critical pieces of financial implications, and explain how the communication of strategy and the measures of information. It would benefit all companies and schemes are managed. their stakeholders if reporting could become success make it much easier for observers, both internally and externally, to challenge whether more trusted, effective and relevant. This In the face of increasing pressure to be these two are aligned, whether companies are can be achieved − but only by recasting the accountable to its stakeholders, the public sector able to support narrative statements, and – by current reporting model to harness market should be more prepared in future to share extension – whether management is measuring forces in a more efficient and transparent way. bad news. Only then can the public properly the key aspects of business performance to Policymakers and professional advisers have judge the efficiency and effectiveness of an monitor business progress. Accordingly, it is this a role to play in supporting the move to such a organisation. market-driven reporting model. But, ultimately, aspect, namely the alignment of the measures of success to articulated strategies, that is the impetus must come from the central Many areas of public sector reporting require likely to continue to be the key challenge for participants themselves: companies and their improvement and refinement – for example, most companies if they are to provide a clear investors. reporting of executive remuneration and pension understanding of the quality and sustainability of fund accounts in local government, productivity their strategy and performance. In addition, the Delivering such a model requires two major measures in the NHS and transparent reporting pressure will continue on companies to report steps. First, the establishment of a new set of against KPIs in central government. parameters for “high-quality corporate reporting”, a broad set of measures, as it is this broader capturing the breadth and nature of the required set, including measures around employees, information − including non-financial information customers etc, that are often the lead indicators around people, external market trends and of future financial performance. so on. And second, a recasting of the current financial reporting model to reduce its complexity and embody the new parameters. Nobody says this will be easy. But if we are to rebuild and sustain trust in reporting, there is no alternative. 40 Jill Williamson 020 7804 3836 [email protected] [email protected] [email protected]

We are optimistic that the reporting of executive There has undoubtedly been an improvement There has been a definite improvement in tax remuneration is at a turning point and that the in pensions reporting over the last few years. communications over the past two years. We focus on meeting legislative requirements With the increased focus on pensions risks anticipate that this trend will continue into the future. at the expense of providing more accessible among investors and potential acquirers, A wide range of stakeholders are looking for more disclosures will recede. Increasingly, companies we are optimistic for the future. and clearer information on tax – their view is that tax are recognising the merit of using the can no longer hide behind technical complexity. remuneration report to communicate a positive The accounting standard setters have recently taken steps to improve the disclosure message on executive pay. A recently-published National Audit Office report requirements for pensions. For example, the UK highlighted that almost a third of Britain’s largest It is likely that recent legislative changes standard setter published a set of best practice businesses paid no tax. This was picked up by will require companies to explain how the reporting guidelines, including recommendations the media and splashed across the front page remuneration committee takes into account pay for the disclosure of the buy-out level and of the Financial Times. This renewed focus will and employment conditions elsewhere in the sensitivities to key assumptions. We noted a inevitably lead to more pressure on companies group when determining executive remuneration. number of companies making some of these to clearly explain why they are not paying tax at Although the National Association of Pension additional disclosures in our review. We suspect the statutory rate. Funds (NAPF) issued guidelines in 2004, that the gentle encouragement offered now including a recommendation that companies may turn into compulsion in the future as the We would also expect to see tax included in disclose the ratio of average director pay to standards are revised and updated. broader corporate responsibility discussions, average non-director pay, we have as the sustainability community becomes more only identified a handful of companies One area where we feel that disclosures are still aware of the part tax plays in the economic making reference to such a ratio in their lacking is around the adequacy of benefits, and value added. It is interesting to note that already remuneration reports. the fundamental question of why companies the majority of companies discussing their provide pensions at all. Over the last few years, wider contribution do so in the context of their It will be interesting to observe whether the much attention has been given to the flight from corporate responsibility reporting. We expect this changes to executive compensation disclosure defined benefit schemes to defined contribution trend to continue as companies recognise the requirements in the US will have an impact on arrangements, where the employee bears link between tax and corporate responsibility. the expectations of investors in UK companies. the risk. Many question whether these new We anticipate that there may be more pressure arrangements will provide sufficient benefits New US accounting standards have introduced on companies to include an overall compensation in retirement. Indeed, many companies who the assessment and disclosure of tax risks into table in their reports or to disclose the expected have made the change are questioning whether the formal world of financial reporting standards. value of long-term incentive awards made in the they may have gone too far, and whether there The resulting focus on tax risk management year or the value of awards vesting in the year should be some element of risk-sharing between should increase the standard of communication under review. the employee and employer. We believe that in this area, as companies are going to be under companies should be encouraged to disclose pressure to match the standards of reporting by In summary, we believe that the standard of how their pensions schemes are expected to “best in class”. As risk processes come under reporting of executive remuneration is improving meet their employees needs, and how their more scrutiny, stakeholders will demand, and and that this is likely to continue over the next pensions strategy fits into their wider corporate are likely to see, more information about the 12 months. We would be disappointed if further objectives. company’s aims around tax and how that fits legislative provisions were to be introduced, with the wider business strategy. as we consider that the current disclosure We are also beginning to see the use of more requirements are now beginning to be sensibly complex methods for reducing pensions deficits Overall, this is still an emerging and developing interpreted into a more cohesive communication. and managing the pensions risks, such as area. We anticipate more innovation in tax the use of derivatives. Companies should be communications as more companies conclude encouraged to describe these steps. However, there is a business benefit of providing better tax care will be needed in the communication of information to their stakeholders. these complex ideas to ensure that they can be understood by the non pensions specialist. 41 Corporate Reporting: The Competitive Landscape

PwC experts look to the future: People Corporate Economic Performance Responsibility (CR)

Richard Phelps Geoff Lane Nick Forrest 020 7804 7044 020 7213 4378 020 7804 5695 [email protected] [email protected] [email protected]

Discussions relating to the reporting around Recent feedback – from 180 Non Executive The reporting of economic performance has people have been given momentum by the Directors of FTSE 250 companies – indicates improved significantly over the past years, but regulatory agenda. For years beginning 1 that 75% are unhappy with the reliability of there are still many companies that do not report October 2007, changes introduced in the the CR-related information they currently see extensively in this area, in particular the use of Companies Act 2006 will require quoted and do not feel this information is relevant in economic performance metrics. It is likely that companies to include information on employees, addressing the business strategy, risks and reporting of these metrics will remain the preserve where relevant, within their Business Reviews. opportunities or governance. of the committed few, but we do expect to see wider reporting of the economic drivers of business. While the number of companies moving beyond As issues like climate change, water scarcity, the simple acknowledgement that “our people natural resource conservation, labour standards, The impact of drivers such as economic output, are our greatest asset” to including a section health and safety, and ethical procurement consumer spending, business confidence, relating to their people is encouraging, there is continue to become more significant for liquidity, and demographic change all contribute still more to do. We expect to see more cases business, we expect companies to place significantly to economic performance, and where people reporting is less of a “stakeholder more focus on explaining why and how these while companies can’t control these drivers, they engagement” exercise and more of a “strategic issues impact on core strategy. can explain to investors how they impact on imperative”, in which companies recognise it company performance and how this influences is no longer good enough to deal with people Echoing other areas of reporting covered by this resource-allocation decisions. issues as a peripheral communications issue guide, we believe we will also see trends in CR but to appreciate that the management of reporting around: We have seen a significant improvement in the employees needs to be “hardwired” into core reporting of risks, covering their identification, business activities. There is evidence that this • Development of clear and meaningful CR- measurement and mitigation strategies. Over is already starting to occur – people are the related metrics and targets that are linked the next 12 months, this is likely to be extended most likely resource/relationship identified as to strategic priorities and embedded within by showing investors why certain risks are being key to strategic success in our survey. However, performance management and measurement taken and how they relate to overall strategy and only 39% of these companies provided a key systems. create value. Risk is not a bad thing – as long as performance indicator on people. • Improved governance, controls and assurance the return is sufficient; then bearing risk is a way both internal and external, over CR-related of creating value. It is only when companies provide investors with reporting. a clear articulation of the people actions needed • Greater connection between the traditional One key area where all companies are likely to for a company to achieve its goals, along with environmental and social aspects of CR improve their economic reporting is information relevant measures to monitor progress, that reporting and other emerging reporting areas on the amount and breakdown of invested the company will be providing the necessary with a strong CR component, such as capital. The UK economy is becoming more information for investors to understand the people, tax and economic performance and knowledge and service-oriented, so economic business more fully. contribution. capital increasingly relates to intangible assets • Inclusion of critical CR information in the annual such as brands, licences, intellectual property report and greater consistency between this and customer relationships, and indeed information and CR-related information reported start-up and development expenditure. elsewhere by the company. In future, companies will take more of a lead • More systematic evaluation of the major risks in describing and reporting all uses of capital, presented by CR issues as part of a wider and show how intangible assets are creating evaluation of key non-financial risks. economic value.

42 Other publications:

Business Review: has it made Report Leadership a difference?

Report leadership, a multi-stakeholder group, focused on the A survey of the narrative reporting practices of the FTSE annual report to develop simple, practical ways to improve 350, assessing whether the UK government’s approach to narrative and financial reporting to the capital markets. The narrative reporting legisation (the Business Review) has publication outlines our initial thinking and reflects input and been successful. The survey covers two aspects feedback from a range of investors. of reporting:

The contributors to this initiative are the Chartered Institute • How well companies responded to the Business Review of Management Accounts (CIMA), PricewaterhouseCoopers legislation. LLP, Radley Yeldar and Tomkins plc. • Whether companies are moving towards best practice.

Guide to forward-looking Guide to key performance information indicators

The reporting of forward-looking information is a critical This guide is a practical publication that has been developed component of effective communication to the market. This to highlight the increasing demand for reporting key guide provides practical guidance on how it can be achieved, performance indicators (KPIs). It addresses many of the together with examples from progressive companies, both in questions posed by these demands and demonstrates the UK and elsewhere, who are already adopting a forward- what good reporting of KPIs looks like with a collection of looking orientation in their narrative reporting. examples, drawn from the UK and elsewhere. 43 Corporate Reporting: The Competitive Landscape

Managment information and performance Tax Transparency Framework

A survey of 193 finance executives at companies, with The PricewaterhouseCoopers Tax Transparency Framework was annual revenues of $750 million (£375 million) or more, developed in discussions with numerous different stakeholder to establish how finance executives view the quality groups with an interest in tax. We suggest that companies may of the management information they produce, collect wish to consider providing information on nine aspects of their tax and distribute, and how well their organisations use affairs, which are grouped into three key areas (tax strategy and risk management information to aid decision-making. management; tax numbers and performance; and total tax contribution and the wider impact of taxes). The publication also provides further good practice examples in each of these key areas, taken from a review of the FTSE 350 undertaken as part of the 2006 Building Public Trust Award for Tax Reporting.

Measuring Assets And Liabilities: Investment Contact us For more information on the implications of evolving corporate Professionals’ Views reporting practices, both internally and externally, and to obtain copies of other corporate reporting publications, please contact How do investment professionals use the balance sheet? your local PricewaterhouseCoopers contact, the corporate reporting How do they want assets and liabilities to be measured? team at [email protected] or visit our website This publication offers thoughts from participants in the www.corporatereporting.com 44 major global capital markets.

Corporate Reporting: The Competitive Landscape . d liability partnership in the lusion of a company in this publication tion. For a more comprehensive view on employees and agents accept no liability, employees and agents accept no liability, e. You should not act upon the information You e. m the original third party documents; ns owned by the third parties concerned, formation contained in this publication or for cation of the accuracy of the information contained in any of the examples. cation of the accuracy of the fi Corporate Reporting: The Competitive Landscape rms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity fi c professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness fi This publication contains certain text and information extracted from third party documentation and so being out of context fro This publication contains certain text and information extracted from third party documentation and so being out readers should bear this in mind when looking at this publication. The copyright in such third party text and information remai readers should bear this in mind when looking at this publication. their informa and PricewaterhouseCoopers expresses its sincere appreciation to these companies for having allowed it to feature note that the inc communication, please read the entire document from which the extracts have been taken. Please each company’s does not imply any endorsement of that company by PricewaterhouseCoopers nor any veri and does not constitute professional advic This publication has been prepared for general guidance on matters of interest only, contained in this publication without obtaining speci its members, PricewaterhouseCoopers LLP, of the information contained in this publication, and, to the extent permitted by law, for the consequences of you or anyone else acting, or refraining to act, in reliance on the in and disclaim all responsibility, any decision based on it. (a limite refers to PricewaterhouseCoopers LLP All rights reserved. ‘PricewaterhouseCoopers’ © 2007 PricewaterhouseCoopers LLP. as the context requires, other member United Kindom) or,