Reporting in uncertain times
Creative Studio
Reporting in uncertain times
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Reporting in uncertain times
Narrative reporting in uncertain times Until recently the biggest consideration for preparers of 2020 reports looked likely to be Brexit, then the COVID-19 pandemic arrived, bringing with it an unprecedented period of additional disruption and uncertainty. The impact on financial and strategic reporting is still in its infancy, however in March 2020 the FRC, FCA and PRA introduced a range of practical measures and guidance to “ensure information continues to flow to investors [and] support[s] the continued functioning of the UK’s capital markets”. To help maintain strong corporate governance, the recent guidance highlights several areas likely to require extra attention from boards in their reporting under the impact of Covid-19: • Implications for the company • Impacts on the business • Mitigating activities undertaken • Company resilience • Capital and business viability • Protection/retention of staff
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Reporting in uncertain times
Key areas for consideration The format of narrative reporting is unlikely to change this year, however the detail and presentation will require greater attention than in previous years. Investors require reassurance on continuity and resilience, both of which will need to be integrated across a number of areas of the report.
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Business shape, function and Purpose Who you are and what you do. Review and potentially update what your company does now and its societal purpose as needed post-pandemic
Investment case and business continuity Why the company is an investable proposition. Provide narrative and reassurance on resilience, future capability and availability of capital
Reporting in uncertain times
Business model
Strategic priorities
Articulate clearly how value is generated and delivered under the current conditions
Articulate how you have had to change, develop or adapt
Operating environment Give a true assessment of the challenges and opportunities, including assumptions, business context and impacts - what are the underlying drivers of commercial activity?
Uncertainties and Risk management Provide an active discussion of the business impacts, implications and mitigating activities driven by the new circumstances
People Develop your people disclosures highlighting them as a strategic resource/driver to be protected, with emphasis on continuity (safeguarding intellectual capital)
Viability statement Ensure you include a more rounded viability statement providing context: predictions, level of confidence, key assumptions, future scenarios considered 5
Reporting in uncertain times
Key areas for consideration
Business shape and function As the implications and impacts of Covid-19 unwind, many companies may need to reassess or renew their explanation of business function or shape. Consider: • Reassessing or renewing the explanation of business function or shape either upfront or in the At-a-Glance • Restating and explaining your Purpose and relevance to society to provide additional essential information • Reviewing these areas to reflect any impacts of COVID, ensuring greater accompanying context and explanation to these already well-established areas
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Reporting in uncertain times
Key areas for consideration
Business continuity For investors post Covid-19, business capability and resilience are likely to be key questions. Capital availability and allocation are also likely to be fundamental in understanding a company’s ability to weather the unpredictability of the business environment caused by the pandemic.
Currently few reports mention these factors clearly. Consider: • Inclusion of a section specifically highlighting capital availability • Highlighting capital availability in your strategic priorities and decision making • Discussion of resilience within CEO statement and financial review
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Reporting in uncertain times
Key areas for consideration
Investment Case A clearly and separately stated investment case is a relatively new, revived trend in strategic reporting – and one that is by no means being implemented widely across all reports. In the aftermath of the pandemic, it is likely that there will be a drive towards mechanisms that remind and reinforce the investor ‘reasons to believe’ clearly and persuasively. Consider: • Including your investment case • Giving the investment case space to stand out • Clearly detailing your business case through competitive advantages
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Reporting in uncertain times
Key areas for consideration
Business model and value process Reflecting its relatively recent development as a content item, the standards of the business model presentation and value discussion vary widely across narrative reporting, with some being neither models nor a description of the value process. The impact of the pandemic is likely to mean changes to many companies’ business models – the challenge in our current environment then being how easily could a reporting model change, develop or adapt to accommodate these changes whilst sufficiently, yet concisely, explaining their model and value process?
There are key elements however, which, when included, would be flexible enough in approach to accommodate any discussions needed on the impact of Covid-19. Consider: Ensuring inclusion of the key elements: • Competitive advantages/ resources • Factors determining growth • The underlying business processes • The value outcomes • Incorporating overviews of strategy, risk and governance
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Reporting in uncertain times
Key areas for consideration
Operating environment One area that can often fall short in narrative reporting is in fully describing the operating environment and its implications; the guidance mandates a description of the markets and competitive position, alongside any other significant features, to fully explain the trends and factors driving commercial activity. Presenting this understanding of both the context, and the implications and impacts on the business will likely be even more essential in future reports.
Consider: • Providing context and analysis • Ensuring there is clarity on how you are responding to market challenges • Clarifying the impact, or likely impact of any market challenges • Including a future outlook piece with timescales • Presenting the discussion by key topic for clarity
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Reporting in uncertain times
Key areas for consideration
Strategy As strategic reporting has developed, preparers have largely got to grips with strategy as a content item; the current practice of a simple statement at the very least is universally widespread. In future reporting however it is likely the inclusion of wider, essential context in the narrative will be required, including the underlying rationale for the strategy, and any future aspirations or implications. Consider: • Highlighting what is driving your strategy, beyond the mission or aim • Clarifying why the strategy is relevant • Discussion on context and future priorities • Evidencing performance against your strategic priorities
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Reporting in uncertain times
Key areas for consideration
People: resouce and retention As the recent guidance notes state: “the protection and retention of staff, and the associated corporate memory, may be crucial to a company’s ability to weather the current storm and to rebuild when the opportunity arises”. Many reports already contain a ‘People’ discussion of varying sophistication and level of disclosure, often presented within a separate sustainability section. Going forward current practices will need to accommodate a likely focus on People as a strategic resource. Additionally, articulation of essential activities around retention and protection will be required in terms of continuity, business drivers and safeguarding intellectual capital.
Consider: • Explaining the role of your people in an integrated and consistent way throughout the strategic report, e.g. linked across the Strategy, Business model, Stakeholder focus and Risk sections • Identifying and referencing intellectual capital as a key resource in your business model, risk management and viability statement pages • Including a detailed People section which explicitly discusses their attraction, retention and development
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Reporting in uncertain times
Key areas for consideration
Integrate risk discussion Most plcs’ have a wellestablished risk function, with thorough disclosures on the risk process, approach and activity, usually presented in a separate risk section. Much less common however, is a more integrated and active risk discussion within the strategic narrative. As per the guidance, the discussion on “trends and factors [...] affecting future prospects” should be explicitly reflected and integrated in the strategic content. Consider integrating risk into: • Operating environment • Business model • Strategy • KPI sections Looking ahead, this will be essential in order for companies to maintain investor confidence and trust going forwards post-pandemic.
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Reporting in uncertain times
Key areas for consideration
Viability narrative Companies are still coming to terms with the format and execution of the viability statement, including its positioning, with only some treating the statement as an essential element of the strategic report. It is likely that there will be added imperative to this content in the future, due to the pandemic and ongoing reporting developments. Consider: • Disclosing key information earlier in the narrative • Rounding out the statement with more context: - Predictions - Level of confidence - Key underlying assumptions and assessments - Future scenarios
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Reporting in uncertain times
Contact Us Sally Eggeling, Director sally.eggeling@fhflondon.co.uk Richard Costa, Client director richard.costa@fhflondon.co.uk
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