A SPECIAL EDITION IN

DIRECTIONS ASSOCIATION WITH

INDEPENDENT AUDIT
MONTHLY
SUPPLEMENT
SPECIAL EDITION
AUTUMN 07

TRENDS AND ISSUES IN THE WORLD

OF CORPORATE REPORTING

DISSECTING BEST PRACTICE IN FTSE 100

ANNUAL REPORT AND ACCOUNTS
Directions Monthly Special Edition, Autumn 2007
 INTRODUCTION FTSE 100 Annual Report and Accounts Analysis 2007
Welcome to this special bumper edition of Directions
for Autumn – a review of best practice in corporate financial
reporting in the FTSE 100.
This edition has been brought to you as a collaboration
between salterbaxter and Independent Audit, the experts in
governance and board performance. The insights and analysis
are from people with interesting views on what good reporting
should now look and feel like.
We hope you find this useful and enjoy the read – especially
if your company is one of those spoken of in glowing terms.
The big challenge we’ve tried to address is what, if anything,
can be identified as best practice in reporting when so much is
up for interpretation?
Nigel Salter There have been numerous recent
Director, salterbaxter developments in the world of corporate
nsalter@salterbaxter.com financial reporting and the majority of these
have been technical in nature and left open to
Richard Sheath the individual companies to interpret in their
Director, Independent Audit own way. This has added to the complexity
richard.sheath@independentaudit.com of the disclosure requirements and led
companies to think about the details and
structures of their reports more than ever
before. So how have the FTSE 100 responded
to this constantly shifting landscape and
what, if anything, can be identified as best
practice in reporting when so much is up for
interpretation and debate?
First of all we want to explain that our approach
to this analysis of best practice is very much
about highlighting the positives rather than
pointing the finger and finding fault. This is
because we know, from our work with our
clients, that it can take a lot of time, energy
and persuasion to get the board to focus on what
can be seen as quite small details. It’s not always
easy to see the strategic benefit. And when
they’re busy running the business, and with the
reporting burden becoming ever more technical,
we know why some things are hard to achieve –
and that in many cases it’s not for want of trying.
Having said that, there are a few examples
of companies who really don’t appear to be
embracing the new spirit and guidance in
reporting, but these really are few and far between.
Directions Monthly Special Edition, Autumn 2007
Issue 16
Lucie Harrild
Pavan Athwal
What we have set out to do is to look at what
we see as the key areas of an annual report in
the new world of the business review and in
a climate where the very model of public
share ownership has been so fundamentally
challenged by the private equity model.
We have brought together a panel to look at
the reports of the FTSE 100 and identify those
companies that appear to be ‘getting’ this new
world and responding positively. The idea has
been to highlight the beacons so that others
may look, adapt ideas to their companies and
keep the whole process evolving.
This is, we believe, what is good about the
UK model of reporting where we’ve largely
managed to avoid regulatory prescription. So
there is no absolute guide for ‘good’ reporting in
the box ticking sense – but we think it is possible
to identify the leaders from the followers. And
what’s interesting from our panel’s views is that
it’s often only small details and a bit of extra
thought that make all the difference.
We hope you find this review of interest. As ever,
please give us feedback and if you’d like to be
involved in future editions of Directions in any
way at all please just let us know.
 THE PANEL FTSE 100 Annual Report and Accounts Analysis 2007 Issue 16

Meet the panel

We’d like to thank our contributors panel for their time and for their valuable insights.

Each panel member has been given the freedom to approach this task in their own way and by bringing their
own expertise and views to bear, so there is no attempt made to be absolutely uniform in approach and method.

The one thing we have tried to encourage is a focus on whether the reports in question serve to enlighten the
reader on the way a company is managed and is performing. We’ve also encouraged people to try to identify
where companies go further than box ticking, and ideally even break new ground.

We must also point out that each panel member’s views are their own and not necessarily those of this
publication or of the organisations they represent.

The four key areas that we have defined as central to the best practice debate are:

• The description of a company’s strategy – reviewed by Nigel Salter of salterbaxter

• The approach to forward-looking statements and risk – reviewed by Robert Bruce, journalist and FT columnist
• The approach to corporate governance reporting – reviewed by Richard Sheath of Independent Audit
• The remuneration report – reviewed by Dan Perrett of New Bridge Street Consultants

Robert Bruce Dan Perrett Nigel Salter Richard Sheath

Columnist Partner Director Director
Financial Times New Bridge Street Consultants LLP salterbaxter Independent Audit

Robert Bruce is the UK’s leading
commentator on accounting, financial
reporting, corporate governance
and management issues. He writes
regular articles and columns on
accountancy and financial reporting
for the Financial Times. He also writes
a monthly column on management
issues for Accountancy magazine
as well as writing articles for a wide
range of other publications. In
2007 he was named IIA Journalist
of the Year.
Dan Perrett is a partner of New
Bridge Street Consultants LLP, the
UK’s leading executive remuneration
consultancy. New Bridge Street
Consultants act for over a third of
FTSE 350 companies, as well as
other quoted and private companies.
Dan works on the design and
implementation of annual bonus
and longer term share plans
ensuring that they support the
corporate strategy and meet
HR goals. This often requires
consultation and communication
with institutional investors and the
preparation of the remuneration
report is critical in this process.
Nigel Salter is founding director
of corporate communications and
design company salterbaxter.
He advises major UK and European
companies on a broad range of
communications and branding issues
and frequently writes on corporate
reporting, corporate responsibility
and corporate governance. His clients
currently include 11 of the FTSE 100.
Richard Sheath is a Director of
Independent Audit Limited, a
governance consultancy specialising
in helping boards make sure that
strategic leadership and control are
working well in supporting corporate
performance. He advises boards in
the UK and overseas on board and
audit committee effectiveness,
risk oversight, control culture and
internal audit. Richard also advises
companies on narrative reporting
and has authored guides on the
business review and governance
reporting. He is the audit committee
chairman of Eurochem, a major
Russian fertiliser company.

Directions Monthly Special Edition, Autumn 2007

STRATEGY FTSE 100 Annual Report and Accounts Analysis 2007 Issue 16

Description of Strategy
Nigel Salter
Director
salterbaxter
Noteworthy reports:
➜ AstraZeneca Annual Report 2006
➜ Aviva Annual Report 2006
➜ BAE Systems Annual Report 2006
➜ BHP Billiton Annual Report 2006
➜ Capita Annual Report 2006
➜ Friends Provident Annual Report 2006
➜ GlaxoSmithKline Annual Report
and Accounts 2006
➜ HBOS Annual Report and Accounts 2006
➜ Kelda Annual Report and Accounts 2007
➜ Kingfisher Annual Report 2006
➜ Marks & Spencer Annual Report 2007
➜ Reuters Annual Review 2006
➜ SABMiller Annual Report 2007
➜ Severn Trent Annual Report and
Accounts 2006/07
➜ Shell Annual Report 2006
➜ Smiths Group Annual Report and
Accounts 2006
➜ Vodafone Annual Report and
Accounts 2006
Rather surprisingly, it’s only really in the
last few years with the prompting of first
the OFR and now the Business Review that
companies have really paid attention to
describing their strategy effectively in
the annual report. There were of course
some leading companies who were very
clear about this but they were actually
few and far between.
Today, a description of the strategy is pretty
much standard and so the debate is one of
quality – although I have to say that in a few
cases I still actually struggled to find anything
at all about business strategy, let alone a
clearly defined section. And in some cases
what was labelled strategy was in fact some
bland boilerplate that shed no light at all.
The good news is that the good ones are
now genuinely worthwhile.
❝ The key factors that make a few
stand out are actually quite simple: Is the
section clearly demarcated as strategy?
Is the reader left knowing more about the
business? Is it written in simple English?
Is there some sense of performance
against the strategy? ❞ goals’ then discovered that all of these
My long list of noteworthy companies is:
AstraZeneca; Aviva; BHP Billiton; BAE
Systems; Capita; Friends Provident; HBOS;
Kelda; Kingfisher; Marks & Spencer;
Reuters; SABMiller; Severn Trent; Shell;
Smiths Group and Vodafone.
But the best ones are Aviva, Capita,
GlaxoSmithKline and Kingfisher. Capita is
slightly different in that the heart of the
report is structured around its four key
strategic points. This is thorough and
provides a real insight into the way the
business is run and why, but if anything the
huge amount of detail about the strategy
ends up making it rather hard to understand
– or at least it takes a long time read which
means that it probably doesn’t quite pass
the ‘keep it simple’ test. But it’s a great
example of some clear management
thinking. The other three are all similar in
that they dedicate a clear section to the
strategy, (the design demarcates it clearly
too), they lay out the key points in a simple
tabular form and then report progress
against the objectives. For me this is what
best practice is all about – simple, straight
to the point and informative. I also like
GSK’s as it neatly refers the reader out
to other pages for more detail on the
particular strategic point in question. No
clear winner though – these four are ideal
examples for any other company looking to
get this right. They explain their priorities
then say how they’re doing against them –
not rocket science, but very convincing.
A few pitfalls to watch out for:
• some companies only put the strategy
content in the full report and not in the
annual review – I can’t see any good
reason for this.
• I noticed that a number of companies
have an identical approach and structure
using the words ‘Delivering on strategic
were being done by the same design
company. I think this is disappointing –
sausage factory strategy strikes me as
a bit lame.
• very few companies separate their
strategy out as a section on their websites.
This would be a useful step forward.
➜ My favourite(s):
Aviva, Capita, GlaxoSmithKline
and Kingfisher

❝
They explain their priorities
then say how they’re doing
against them – not rocket
science, but very convincing.
❝
Kingfisher’s strategy overview

Directions Monthly Special Edition, Autumn 2007

FORWARD-LOOKING STATEMENTS & RISK FTSE 100 Annual Report and Accounts Analysis 2007
❝
It is a little thing. But it suggests
that they are thinking for
themselves in how they present
the information rather than
relying on the lawyer’s template.
❝
Forward-looking statements & Risk
Robert Bruce
Columnist
Financial Times
➜ My favourite(s):
Reuters Annual Review 2006
Directions Monthly Special Edition, Autumn 2007
There is a fundamental problem with the
section of any business review which deals
with forward-looking statements and with
risk. And that problem is lawyers. Here is
the standard wording from the 2006 report
of Rio Tinto, the international mining group.
It can be found in many other companies,
as the legal boilerplate takes control.
‘The words “intend”, “aim”, “project”,
“anticipate”, “estimate”, “plan”, “believes”,
“expects”, “may”, “should”, “will”, or
similar expressions, commonly identify
such forward-looking statements’, it says.
This is then followed by a statement that
the group‘ cannot guarantee that its
forward-looking statements will not differ
materially from actual results’.
For the user of a business review this may
be what Monty Python used to refer to
as a statement of the ‘bleeding obvious’.
It is a shame because forward-looking
information is increasing in scope, usage
and value. But to have it damned by
legalese boilerplate takes the gloss and
some of the value off it. At least Rio Tinto
puts its caveat upfront, on page 7, rather
than losing it in the depths of more
verbage. And it comes immediately after
a page of serious risk factors. So readers,
assuming they work from front to back,
will have all these warnings ringing in their
ears as they move forward to meatier things.
They are probably better suited than
readers of the 2006 effort from Bradford &
Bingley, the building society. This features
an extensive diagram of the risk reporting
structure but you do wonder whether
Issue 16
Reuters Annual Review 2006
something like this, which probably makes
sense internally, is going to help externally.
With hindsight in these troubled times it is
the sentence on page 19 which is the most
significant for a mortgage lender. ‘Credit
risk is defined as the potential financial loss
if a customer or counterparty fails to meet
their obligations to us as they become due’.
Too right.
Too often companies do not use the
straightforward language which their users
would prefer. So it is good to see another
mining group, Xstrata, taking a positive
view of the forward-looking strategy
section. Too often such stuff is described
passively. Xstrata understands, quite
rightly, that only verbs will do. They are
active and strategy should be active. So
across a spread of proposed strategies by
sector on page 20 of its 2006 report every
sentence starts with a verb.
But, if one was looking for a winner in the
current clutch of accounts you would have
to choose Reuters annual review for 2006.
The key section here is what it calls its ‘risk
radar’ on page 9. Issues are grouped under
‘risk’, ‘impact’ and ‘action’. They are clearly
expressed, and in one thoughtful aspect,
which others could do with following, each
one is linked to the section and page where
the answers will be found. It is a little thing.
But it suggests that they are thinking for
themselves in how they present the
information rather than relying on the
lawyer’s template.
GOVERNANCE FTSE 100 Annual Report and Accounts Analysis 2007
❝
…very few have taken a good step
back, well away from the boilerplate,
and asked how the real essence of
their governance can be shared.
❝
Governance
Richard Sheath
Director
Independent Audit
Noteworthy reports:
➜ BAE Systems Annual Report 2006
➜ Barclays Annual Report and
Financial Statements 2006
➜ Imperial Tobacco Annual Report
2006/07
➜ J Sainsbury Annual Report 2006
➜ Marks & Spencer Annual Report
2006/07
➜ National Grid Annual Report and
Accounts 2006
➜ Reuters Annual Review 2006
➜ My favourite(s):
BAE Systems and Reuters
They stand out by using interview and
letter style to give the reader better
insight into the role of governance
and how the board works. That little
bit of extra thought goes a long way
in bringing board governance to life.
Directions Monthly Special Edition, Autumn 2007
Boards can make a fundamental difference
to corporate performance. Get the mix of
people wrong, fail to get them working
together well, lose focus or miss crucial
developments, and you can soon find that the
business is at sea. So you’d think that boards
would make a real effort to give shareholders
confidence that their interests are in the
good hands of a well-functioning board.
The governance section of the annual report
is a good opportunity to get the message
over. But most companies are still missing it.
You have to sympathise (a bit at least).
The compliance statements have to be there,
and trying to get the chairman interested
in adopting a different style can be an uphill
struggle, especially if time’s running short.
But most companies are still missing it.
It’s not all bad news. For the past four
years since the introduction of the revised
Combined Code we’ve looked at FTSE 100
governance reports and in many cases they’ve
improved: there’s more reporting in the past
tense (telling us what was done, not just what
is supposed to be done), clearer explanations
of what’s been done to assess effectiveness,
more insight on independence issues and,
here and there, examples of particular issues
that have cropped up and how the board
has responded. Audit committee reporting
in particular has got markedly better.
❝ A good report doesn’t just repeat the
Reserved Matters. It uses a few examples of
how the board has focussed its work during
the year to drive strategic performance or
respond to developing risks or problems.
It will explain how the mix of skills on the
board is right for today’s business and in
supporting the future strategy. ❞ start in doing this are BAE Systems and
The way the board is driving the right
behaviour through leadership and through
reward will be discussed. The board will
explain how it has got new insights through
better information, briefings or management
interaction. And the improved reporting
on what was done to assess the board’s
Issue 16
Reuters Governance spread
effectiveness will be brought to life by at
least a few examples to show that this is a
board looking for continuous improvement
and not resting on its laurels.
The audit committee will explain what it did
to evaluate the effectiveness of the external
and internal auditors – not just tell us that
they did it. The nomination committee will
give us reassurance that they’ve not just
responded to immediate needs but have also
actively reviewed success and contingency
planning from a strategic perspective. And
the remuneration committee will explain how,
in making sure rewards support strategic
goals, they’ve managed to tackle the technical
complexities and form an independent view.
With a picture like this, the reader can start
getting more comfort that governance is
working well and seeing how the board is
supporting strong performance. It’s difficult
to get this from a report that reads like a
textbook description of what a board does,
interspersed with compliance statements.
Some are getting there. Reports sticking out
from the crowd for particular features include
Barclays and Marks & Spencer (for their
insight into board activity), Imperial Tobacco
and National Grid (for their useful detail on
board evaluation), and J Sainsbury (useful
examples of board and remuneration
committee focus).
But it remains a curate’s egg: even those
reports that are strong in some areas provide
little insight in others. And very few have
taken a good step back, well away from the
boilerplate, and asked how the real essence
of their governance can be shared.
Two of the FTSE 100 who have made a good
Reuters so they become my ‘favourites’
for the past year. They stand out by using
interview and letter style to give the reader
better insight into the role of governance
and how the board works. That little bit of
extra thought goes a long way in bringing
board governance to life.
REMUNERATION FTSE 100 Annual Report and Accounts Analysis 2007 Issue 16

Remuneration
The remuneration report is one of the Committee may introduce the advisory
most important parts of a company’s vote on remuneration at the Annual
annual report because: General Meeting.

(a) for quoted companies, shareholders must • Summarising remuneration policy in a

be given the opportunity to vote on it; and
(b) it seems to be the first section sought out
by journalists. Whereas they like to remind
us of an actor’s age after giving his/her
Dan Perrett name, with company directors they seem
Consultant to prefer to quote their pay!
New Bridge Street Consultants LLP
This attention has resulted in the quality of
FTSE 100 remuneration reports improving
considerably over the past few years.
Noteworthy reports:
➜ National Express Annual Report Contents of a Remuneration Report
2006 For a fully quoted company there are
statutory and best practice disclosure
➜ Schroders Annual Report and requirements which have led to a fairly
Accounts 2006/07
standard structure for a remuneration
➜ Severn Trent Annual Report and report, namely:
Accounts 2006/07 – details of the Remuneration Committee’s
➜ SMG Annual Report 2006 role and composition;
– the general policy statement on pay;
➜ Standard Life Annual Reports and
Accounts 2006 – descriptions of the individual components
➜ Vodafone Annual Report and that make up total remuneration;
Accounts 2006 – details of the non-executive directors’ pay;
➜ Wolseley Annual Report and – explanation of the directors’ service
Accounts 2006 contracts; and
➜ WPP Annual Report and Accounts – the audited tables of emoluments and
2006/07 rights to shares.
Qualities of a Good Remuneration Report
succinct table. A very good example of this
is National Express’ remuneration report.
This clearly shows how the policy supports
the company’s strategic objectives.
• Using charts to show the balance of a
remuneration package. I think the leading
example of this is WPP’s remuneration
report. However, companies can take
different approaches to valuing certain
elements of pay, particularly the equity
incentives, meaning that it is harder than
you think to compare pay policies across
different companies.
• Showing how pay compares to market
rates. An example of this kind of disclosure
is the remuneration report of SMG. While
the inclusion of this information has been
welcomed by many institutional investors,
I query whether this conflicts with the
investor criticism that pay is being ratcheted
up by companies ‘chasing’ the median.
• Retrospective disclosure of annual bonus
outcome. This is not governed by the
legislation or Combined Code but is
increasingly being asked for by institutional
investors. Over the coming years I expect
disclosure on annual bonus plans to
increase. Severn Trent is a good example
of a company that already does this.

❝
It is easy to read,
there is a key
The standard format described above
does support a clear structure because
it separates the forward-looking policy
sections from the backward-looking ‘what
has been paid’ sections.
• Giving an update on progress under
outstanding awards. This is a good indicator
of whether or not long term incentives
are achieving their goals. One of the few
companies that disclose this in the
remuneration report is Wolseley.
development section ❝ In previous years, a common criticism
showing what is new of remuneration reports was when they • Giving a summary of how employees
merged the policy and the previous practice; share in a company’s success. Standard
in the year, clear for example, combining the descriptions Life introduces its remuneration report
of the share plans that the company by explaining how many of its employees
policy statements that will use in future years with the ‘dead’ participate in share plans.
avoid clichés and it share schemes that are in run-off mode.
For FTSE 100 companies, this is much My favourite is the Schroders Annual
makes good use of less prevalent now. ❞ Report and Accounts 2006/07. Their 2006
❝
tables and charts. remuneration report continues to build
Specific qualities from remuneration reports on the fundamental and market leading
published in 2007 that I think are effective re-write done for their 2004 report. It is
and can be viewed as market leading are: easy to read, there is a key development
section showing what is new in the year,
• Introducing the remuneration report with clear policy statements that avoid clichés
➜ My favourite(s): a covering letter from the Chairman of the and it makes good use of tables and charts.
Remuneration Committee. For example,
Vodafone used this approach this year
Schroders Annual Report and to explain the key principles of their
Accounts 2006/07 remuneration policy and the changes that
they had made during the year. This gives
the report a personal touch and replicates
how the Chairman of the Remuneration

Directions Monthly Special Edition, Autumn 2007

ABOUT US
SALTERBAXTER ADVISE
COMPANIES ON STRATEGY,
BRANDING, CORPORATE
COMMUNICATIONS AND DESIGN.

Our clients are extremely varied and include FTSE 100 companies; some
of the world’s most exclusive brands; independent, entrepreneurial
businesses; world leading educational establishments; law firms; private
equity firms and media companies.

We name companies, re-invent companies, and re-position companies.

We help companies communicate with shareholders and advise them on
how to address corporate responsibility. We launch, brand and re-brand.

A key area of our expertise is corporate reporting and we advise leading

UK and European organisations on strategy and design for their financial
and CR communications programmes. We currently work with 11 of the
UK FTSE 100.

Contact:
Lucie Harrild Pavan Athwal
lharrild@salterbaxter.com pathwal@salterbaxter.com
Tel: +44 (0)20 7229 5720 Tel: +44 (0)20 7229 5720

Directions Monthly supplements our main Directions report. This report is published each
year and is now regarded as the UK’s most comprehensive analysis of the trends and
issues in CR communications. If you want a copy of the full Directions Annual Survey and
Report, call us on the number below or email directions@salterbaxter.com

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