The SPS has responded to the Financial Reporting Council (FRC) consultation on the effectiveness of corporate reporting, warning that the process will fall short if the FRC assumes a level of strategic literacy that does not exist.
The consultation is designed to explore how the effectiveness of the stewardship role of boards and audit committees can be enhanced through corporate reporting and audit. This is one of an ongoing series of consultations aimed at improving the quality of narrative reporting. The SPS response, formulated by Chairman Ian McDonald Wood, highlighted that the consultation assumes that everyone understands what strategy is, and that this is not a safe assumption.
“Based on our extensive review of annual reports in conjunction with FutureValue we estimate that less than one third of FTSE350 companies display any rigour in their strategic thinking or clarity in their articulation of this thinking in their narrative. We do not believe that annual reports as a whole currently provide a fair and balanced report on the directors’ stewardship of the business. We maintain that every company should be able to demonstrate its strategic leadership by expressing clearly its strategic thinking and how this translates into action in the business. Only a minority currently show that they have the ability to do this. This undermines the value of the annual report and the insight it can afford investors, analysts and other stakeholders as to a company’s future potential,” he said.
He also highlighted that there is a need for better guidance, definitions of strategy and illustrative strategic frameworks.
Finally, he questioned whether this reporting should fall to auditors, given that the narrative purports to look forward. He explained: “As accountants they have a historical mindset. Nor are they skilled in strategy, strategic thinking or its application. We firmly believe that the shortage of strategic literacy in audit committees and among auditors validates our view that the present general reliance on strategy information in annual reports may even be dangerous.”