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The six elements of a great annual report
QUALITY disclosure and transparency are essential to properly assess a company. Investors and other stakeholders like employees, customers, creditors and the general public would otherwise be left in the dark about company performance and prospects. Annual reports written simply to meet mandated guidelines are thus of little value compared to those that tell a coherent story.
To encourage excellence in corporate reporting through transparent, informative and stakeholder-relevant annual reports that go beyond minimum regulatory requirements, the Best Annual Report Award was introduced in 1974. It is part of the Singapore Corporate Awards, organised by the Institute of Singapore Chartered Accountants (ISCA), the Singapore Institute of Directors and The Business Times.
Competition for the Best Annual Report Award 2018 was keen, with winners selected from more than 600 entries after two rounds of rigorous screening. Sembcorp Industries Ltd, Banyan Tree Holdings Limited and Qian Hu Corporation Limited emerged champions in the large (above S$1 billion), medium (S$300 million to below S$1billion) and small (below S$300 million) market capitalisation categories respectively. Capitaland Commercial Trust topped the REITs and business trust category, and Frasers Logistics & Industrial Trust was best among first-year listed entities.
The quality of the entries has improved greatly over the years. However, there is some room for improvement to provide more transparent disclosures, especially in the small-market-cap category.
What sets the award winners apart? Below are six key elements of an annual report and how they enhance its usefulness.
Performance review: Relevant, balanced and entity-specific
Information on operations, financial analysis and corporate developments are fundamental parts of an annual report that help stakeholders appreciate a company's performance.
The award winners produced excellent, balanced performance reviews, covering not only areas where the company fared well but also where it did poorly. They also explained the reasons for poor performance and put forward proposals on what could be done to improve the situation.
Other features of good performance reviews include full-page summaries of key financial data and ratios with footnotes explaining important events/factors, good use of charts and diagrams in operating/financial reviews and benchmarking on yields/returns.
Sembcorp Industries Ltd had an informative financial review with quarterly figures and detailed analyses by business segments, supported with clear charts and visuals. It also included strong commentary on historical financials. Capitaland Commercial Trust did well in its operations review, with useful information on lease profile of malls, tenants, sector analysis and shopper traffic.
Quarterly financial information and value-added statements were common in the big- and medium-market-cap categories - something that companies in the small-market-cap category can take a leaf out of. Benchmarking against competitors is also an area that all companies can work on to create better informational value to stakeholders.
Strategy and prospects: The future is what matters most
A coherent annual report should explain how the company's vision and mission can be achieved by clearly articulating its strategic thrusts. Content should reflect a company's business philosophy and future direction.
Forward-looking annual reports give readers a good idea of a company's strategies, current fit in its competitive environment, and direction.
Features of better reports include charts and diagrams showing value creation, mapping goals, discussions in chairman/CEO statements, and clear dividend policies. Again, Sembcorp Industries Ltd excelled with good discussion of its value-creation process and three strategic pillars. It addressed why, what and how it pursues its strategy.
Sustainability reporting adds certainty to strategy and prospects
A relevant and informative sustainability report should have balanced coverage on sustainability of environment, employees and the wider community, with appropriate reference to reporting frameworks like the Global Reporting Initiative (GRI). It should also include quantitative information, disclose key performance indicators/targets, include plans and achievements to date and highlight key information with charts and diagrams.
Banyan Tree Holdings Limited shone here with comprehensive coverage on all aspects of sustainability pertinent to its business. It reported its quantitative achievements alongside industry averages and best-practice benchmarks.
Qian Hu Corporation Limited's sustainability report was thoughtful - it articulated its approach, strategy and mapped out what mattered most to external and internal stakeholders. It was also explicit in its achievements and targets.
As 2018 is the first year of mandatory sustainability reporting, it will be interesting to monitor how this will evolve over time. We look forward to more consistent and reliable information to come.
ERM reporting: Connecting performance, strategy and sustainability reporting
Award winners produced significantly stronger enterprise risk management (ERM) reporting. They include discussions on risk identification, covering topics like ethical behaviour/anti-corruption/money laundering, cyber risks and data protection, business disruptions/continuity, and indicate their mitigation plans. Sembcorp Industries Ltd was one of the rare few that clearly articulated its approach to risk management through a comprehensive risk appetite framework.
Companies are encouraged to provide greater insights on their risk-management approach, how they promote a risk-awareness culture and specific risks and mitigation plans. Only then will readers appreciate how these companies integrate risk management into their strategy-setting to create value.
Corporate governance reporting: An over-arching disclosure that adds credibility
Good corporate governance reporting should clearly explain a company's governance policies and practices. This greatly boosts stakeholders' confidence and the value of the company.
Award winners were significantly more substantive in their corporate governance reporting, with transparent disclosure of executive directors' and key management's remuneration and policies, and discussions in assessing independence, details of director's training, whistleblowing policy and key areas considered by directors such as key audit matters in the auditor's report. Sembcorp Industries Ltd and Qian Hu Corporation Limited showed exemplary reporting with transparent detailed disclosures on key management personnel remuneration.
Some areas of improvement include greater disclosures on succession planning for management, addressing diversity and independence of the board and the whistle-blowing policy. Companies could also improve on the disclosure of key management's remuneration. Many companies chose to disclose the remuneration by bands; some do not disclose the names of key management personnel in these bands. Such non-compliance with the Code of Corporate Governance was explained with remarks such as "sensitivity and confidentiality" and "disadvantages to the interest of the group to divulge". There is certainly greater scope for more transparency in pay disclosure of key management personnel.
Layout and presentation: A differentiating factor dressing up the content
It is encouraging to see more appealing annual reports with attractive layouts and innovative designs, enhanced use of infographics and the minimising of wordiness and clutter.
Banyan Tree Holdings Limited impressed with an attractive design and refreshing visuals in its operating and financial review. It did an excellent job of leading readers through its business. Frasers Logistics & Industrial Trust also used appealing visuals, summaries and infographics, making it easy for investors to understand the report.
The Best Annual Report Award is judged on disclosure and presentation standards beyond the mandatory requirements of performance reporting. With informative, transparent and stakeholder-relevant annual reports, companies stand to benefit, winning in the long term greater stakeholder trust and confidence, lower cost of capital, higher firm value and, ultimately, a higher share price.
- The writer is a senior lecturer from the Nanyang Business School at Nanyang Technological University. He is a member of ISCA's Best Annual Report Award judging panel for the Singapore Corporate Awards.