Integrated thinking pays off: Strategic reporting's measurable impact
How can integrated strategic reports provide investors with a connected narrative on corporate performance, strategy and sustainability?
When Barclays, one of the UK's largest banks, overhauled its annual report in 2013, the company took a bold new approach. Instead of producing a dense, jargon-filled document, Barclays created an integrated strategic report that clearly outlined its business model, risks, and future plans. The revamped report connected financial and non-financial information in a cohesive narrative, providing investors with a holistic view of the company's performance and outlook.
The annual report marked a significant departure from previous years. It opened with a clear articulation of the company's business model, followed by a candid discussion of strategic progress and future priorities. It also integrated financial performance with governance initiatives, presenting a comprehensive picture of how the board was addressing the group's recent issues.
This new approach garnered recognition from the investment community. The report won the inaugural Building Public Trust corporate governance award from PwC in 2014. The judging panel praised Barclays for its clear communication of strategy and the connectivity between different sections of the report. One judge noted, "Barclays' report shows that the board has really got 'stuck in' to how it drives the organisation – and it's also a good read".
Barclays' shift in reporting style was not an isolated case. In 2013, the UK government mandated that all large companies produce a strategic report as part of their annual reporting. This new framework aimed to provide investors and stakeholders with a more comprehensive and forward-looking account of a company's operations, risks, and strategic direction.
The Financial Reporting Council (FRC), the UK’s independent regulator responsible for setting the UK Corporate Governance Code, provided guidance on the implementation of strategic reports. This guidance emphasised the importance of clear, concise, and entity-specific reporting that connects different strands of information to tell a cohesive story about the company’s performance and prospects.
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A recent study published in The British Accounting Review examined the impact of this reporting change on UK companies. The study’s findings suggest that high-quality strategic reports deliver tangible benefits, including improved stock liquidity and lower costs of capital, according to co-author Roger Simnett, Emeritus Professor in the School of Accounting, Auditing and Taxation at UNSW Business School and currently Professorial Research Fellow at Deakin University.
Prof. Simnett, who was a Member of the International Integrated Reporting Committee working group (2010-2013) that developed the international reporting framework with which the integrated reporting framework was closely aligned (with a group of researchers from the University of Sydney) were keen to explore whether integrating this information with the information in the annual report achieved the desired benefits for the reporting entity and its report users – particularly in the current environment where more sustainability information is required to be reported. As such, the researchers focused on the strategic reporting initiative of the UK as the most appropriate setting to provide evidence on these issues.
The value of integrated reporting
The strategic report framework represents a significant evolution in corporate reporting. Unlike previous approaches that often treated financial and non-financial information separately, strategic reports encourage companies to present a cohesive narrative that links strategy, performance, risks, and sustainability, according to the research paper, Is greater connectivity of financial and non-financial information in annual reports valued by market participants?
Co-authored by Prof. Simnett, together with Professor Wai-Fong Chua and Associate Professor Shan Zhou at The University of Sydney Business School, and Ruizhe Wang, lecturer at Macquarie University, the paper explained that strategic reporting provides new value-relevant information, in addition to current financial statement disclosures and footnotes, which can enhance analysts’ understanding about an entity’s performance as they seek to forecast earnings.
This integrated approach aligns closely with the International Integrated Reporting Framework, which promotes connected thinking in corporate reporting. By requiring companies to discuss their business model, strategy, and key risks alongside financial results, strategic reports aim to give investors a more holistic view of a company’s value-creation potential.
The study found that companies producing high-quality strategic reports enjoyed several measurable benefits: “Entities with higher strategic reporting quality enjoy greater economic benefits. Specifically, we find a positive (negative) relation between strategic report quality and liquidity (cost of capital),” the researchers reported.
In practical terms, this means that companies with better strategic reports typically saw improved stock liquidity, lower costs when raising capital, and more accurate analyst forecasts. These benefits were more pronounced compared to the previous reporting regime in the UK.
Quality matters in strategic reporting
The researchers used proprietary data from PwC UK to assess the quality of strategic reports produced by FTSE 350 companies. This scoring system evaluated reports based on factors like strategic clarity, risk disclosure, and the integration of financial and non-financial information.
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Importantly, the study found that not all strategic reports are created equal. Companies that invested more effort in producing high-quality reports saw greater benefits, and the researchers identified four key components that contributed most significantly to these benefits. The first component that significantly contributes to economic benefits is strategy and objectives, with the second being enhanced discussions of environmental, employee, social, community and human rights matters. The third component is the connectivity of different types of information connectivity, and the fourth and final component is the provision and quality of forward-looking information.
The researchers suggested that investors particularly value clear strategic direction, comprehensive sustainability information, and a forward-looking perspective when assessing companies. “While the specific key sustainability information may differ by industry and entity, importantly, the ability to integrate this additional information with current reporting is highly valued by investors and thus benefits the reporting entity,” Prof. Simnett explained.
Who benefits most from strategic reporting?
While high-quality strategic reports generally delivered benefits, the researchers found that certain types of companies saw more significant gains:
1. Companies with previously low-quality disclosures: Firms that had poor reporting practices before the strategic report mandate saw the most dramatic improvements in market perception.
2. Companies with strong sustainability performance: Companies with strong sustainability performance saw greater financial benefits from high-quality strategic reports. These benefits included improved stock liquidity and lower capital-raising costs.
3. Complex organisations: Companies with complex business structures gained more from strategic reports. These reports helped simplify information for investors, who previously found it challenging to understand such companies.
These findings suggest that strategic reports are particularly valuable for companies looking to improve their market communication, showcase their sustainability credentials, or explain complex business models to investors.
Practical implications for business leaders
The study’s findings have important implications for corporate leaders and investor relations professionals:
Invest in high-quality reporting: The research demonstrates that companies benefit from producing comprehensive, well-connected strategic reports. This may require additional resources, including staff time and potentially external consultants. However, the potential for improved liquidity and lower capital costs can justify the investment. For instance, companies might consider training finance and sustainability teams in integrated thinking and reporting practices. They could also invest in data management systems that allow for easier integration of financial and non-financial information.
Focus on key components: When developing strategic reports, companies should pay particular attention to clearly articulating their strategy, sustainability efforts, and future outlook. These elements appear to be most valued by investors. This means going beyond boilerplate statements to provide specific, measurable goals and clear explanations of how sustainability initiatives tie into overall business strategy. Companies should also strive to provide forward-looking information that gives investors insight into future plans and potential risks.
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Use reporting to showcase strengths: Companies with strong sustainability performance or complex business models can use Strategic Reports as an effective tool to communicate their value to the market. For businesses with multiple divisions or intricate supply chains, the strategic report offers an opportunity to explain how different parts of the business work together to create value. Sustainability leaders can use the report to demonstrate how their environmental and social initiatives contribute to long-term financial performance.
Consider third-party assurance: The study found some evidence that having non-financial information in strategic reports externally assured provided additional benefits, particularly for analyst forecasts. While this represents an additional cost, it can enhance the credibility of reported information, especially around sustainability metrics. Even though external assurance of sustainability reporting requirements is to be introduced in Australia for large reporting entities, other companies should consider voluntary assurance over this broader set of information. They could start, for example, by having key non-financial indicators assured, gradually expanding the scope as they develop their reporting processes.
View reporting as a strategic tool: Rather than treating annual reports as a compliance exercise, companies should view strategic reports as an opportunity to shape market perceptions and highlight their competitive advantages. This might involve more senior leadership involvement in the reporting process, ensuring that the strategic report aligns with and supports broader corporate communication strategies. Companies could also use insights gained from the reporting process to inform strategic decision-making, creating a virtuous cycle of improved performance and reporting.
By implementing these practices, companies can maximise the benefits of strategic reporting, potentially leading to improved market perception, better analyst coverage, and ultimately, a lower cost of capital. While enhancing reporting practices requires investment, the study suggests that for many companies, particularly those with strong sustainability credentials or complex business models, the benefits can outweigh the costs.
Broader applications and the future of corporate reporting
The UK’s Strategic Report framework aligns with a global trend towards more integrated and forward-looking corporate reporting. As regulators and investors increasingly demand comprehensive information on both financial and non-financial performance, this style of reporting is likely to become more prevalent worldwide. “Our study has timely regulatory, practical, and theoretical implications,” the researchers concluded. “By highlighting the merits of such a reporting framework, we offer policy implications, particularly to the International Financial Reporting Standards Foundation and various countries considering the draft sustainability reporting standards issued by the International Sustainability Standards Board.”
The research, for example, is also relevant to other jurisdictions such as Australia, where the Australian Treasury and Australian Accounting Standards Board are mandating a separate report in the annual report for newly required sustainability information – which becomes mandatory for large reporting entities from 1 January 2025.
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“Such a siloed approach to reporting has the potential to set back the benefits that many organisations have achieved under an integrated reporting approach,” said Prof. Simnett, who cited a comment from John Stanhope AM, the current Chair of the Australian Business Reporting Leaders Forum: “Recent legislative, standard setting and regulatory developments in corporate reporting in Australia have not focused on integrated reporting or integrated thinking and this is having adverse consequences. It misses a major opportunity for more integration and less volume and complexity in Australian corporate reporting.”
For business leaders, the message is clear: investing in high-quality, integrated reporting can deliver tangible benefits. By providing a holistic view of their company’s performance, risks, and future prospects, strategic reports can improve market perception, lower capital costs, and ultimately support long-term value creation. As the business world grapples with increasing complexity and growing demands for transparency, the ability to tell a clear, coherent story about a company’s strategy and performance will likely become an even more critical skill for corporate leaders.