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Anne Kirkeby

Long-term thinking: actions beyond words

Last week we kicked off our countdown to the launch of the 12th edition of our Complete 100 flagship research report with a blog focusing on the importance of value creation in corporate reporting. Building on the discussion, this week we put the spotlight on the importance of long-term thinking.

Something of a hot topic in the current environment of conversations of corporate reporting- the dialogue concerning long-term thinking is of great relevance within organisations such as The Investment Association, BlackRock, and notably Larry Fink - as well as many others in the corporate reporting community stressing its importance in connection to value creation.

In focus: Long-term thinking

For companies who want to ensure a stable shareholder base and attract long‑term investors, the Annual Report is an opportunity to set out the road map for long‑term sustainable value creation. This can be achieved by including a forward-looking market outlook, a distinct strategy designed to respond to future market drivers, an explanation of the link between succession planning and strategy, and discussions of how remuneration is designed to promote shareholder alignment and long‑term value creation.

What we are seeing…

Explaining how the Company is investing in its capabilities is a key element of the long-term value creation story. We found that 77% of companies provide casual narrative throughout the report that suggests that they are making investments in improving existing capabilities and 55% in building new capabilities.

When companies discuss investment in their capabilities more specifically it is clear that investment in human capital has been a key focus area. 56% of companies reported on investments made in this area this year compared to 22% last year.

Aside from investment, we are also seeing a greater focus on the long term with regard to remuneration with more deferral of bonuses, additional holding periods for vested awards and higher shareholding requirements. While the most common shareholding requirement for Chief Executives remains 200% of base salary, more that 20% of companies now have a requirement of 300% and more than 20% have a requirement of 400% or more.

What we are not seeing…

We find that most Annual Reports talk about long‑term value creation, but for many the long‑term element is foremost a non‑binding commitment rather than a truly evidenced vision. Rather than becoming more long‑term in their view, companies have actually gone slightly backwards compared to last year.

We find that only 31% set any kind of timeframe for their strategy and in the market review only 30% of companies provide a specific future oriented discussion of the market outlook.

Outside of the strategy and market review, only 38 companies outline the role of the Board in succession planning and while companies are casually discussing investment in their capabilities, only slightly over a quarter of the FTSE 100 provide a discussion of how capital is being invested back into the business in a way that makes it clear that this is part of the capital allocation strategy.

The road to long-term thinking

It is clear that companies are not being specific enough in their discussions of their forward-looking strategies and asset allocation. Companies often acknowledge the importance of long-term thinking in principle, paying lip service to it but are failing to walk the talk. Companies should, therefore, focus on disclosing information that evidences action rather than providing vague commitments. Actions beyond words should be the slogan that guides companies when putting together their strategic reports.

Opportunities to improve
  • More forward-looking market reviews that focus less on contextualising past performance and focus more on identifying future drivers of value
  • More systematic and better integrated narrative around how investment in existing and new capabilities will support strategy execution
  • More forward looking strategies that provide a stronger road map for the future

Next week we will be back with our final blog completing the trio of this year's key themes. This will focus on the equally topical issue of stakeholder expectations and will be our final instalment before the launch of the full report on 22nd June. Until then, companies should remember to keep 'actions beyond words' at the forefront of their minds as they gear up for the 2017 reporting season.

If you are interested in attending the event, or want a copy of the Complete 100, please contact Sarah Myles