What’s the purpose of annual reports?
I’ve just been re-reading the IR Society’s letter to the Financial Reporting Council about ‘Effective Company Stewardship – Enhancing Corporate Reporting and Audit’.
In summary, the letter addresses the role of the annual report, the complexity of the reporting task and whether or not further guidance on how to do it will be a good thing – there is after all a complex mass of rules and guidance already in existence that preparers of reports must respond to.
It wasn’t the ‘more rules and guidance debate’ that struck me most on a second reading of the letter. It was the diminished role the IR Society gives annual reports. An interesting stance when pushes for more and better disclosure have theoretically made annual reports the most content rich and informative they’ve ever been.
Here are four points from the IR Society’s letter that really sprung out as challenges to the usefulness and purpose of annual reports today:
1. ‘To focus on [the annual report] as the key vehicle for investor communications is to misunderstand its role.’
2. ‘IR teams rarely – if ever – face questioning from investors on something disclosed in the annual report.’
3. ‘…the timeframe in which annual reports are produced do not make them a document on which to base even medium term trading decisions.
4. Within annual reports ‘there should be no surprises‘
Annual reports do, however, say the IR Society, enable the piecing together of individual disclosures which otherwise would be fragmented and dissonant. Also, they ensure management stands back and reviews progress against stated objectives on a regular basis.
But is that enough? Are annual reports worth all the effort that goes in, if information already out there in the public domain is only being sewn together within them?
If investors are better served by other pieces of communication in ‘the continuum of real time and periodic reporting’ and have no questions on them, should annual reports be produced for investors at all? Would, in fact, some other audiences be better served by annual reports?
If the focus is to remain on investors, what would a radical new annual report look like that truly serves investors’ interests?
It would be great to get the debate going around why have annual reports, as opposed to what else should go in. Not because we at Zephyr want to see an end to annual reports but because we’d like them to work much harder against a clear statement of purpose with particular audiences in mind.