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Boards worldwide need to focus on value creation

Everything at Davos this week confirms that value creation is becoming an issue for corporates, regulators, investors and wider stakeholders alike, reinforcing the need for boards to focus on the long-term value of their organisations and for these discussions to be put firmly on boardroom agenda.

But that's not enough in my view.

Companies will need to be able to articulate what they mean by value creation to their various stakeholders. And this will require companies to look more holistically at their communications and reporting framework, to ensure that they are able to demonstrate the value of a board’s long-term strategy, as one that benefits investors while also taking into consideration the needs of wider stakeholders. Clear and compelling communication of this to stakeholders will be crucial to regain public trust and remain sustainable.

Here are our thoughts on top considerations for articulating a value creation story and some examples on how some of our clients are bringing their stories to life in their annual reports for some inspiration! Although the annual report is only one part of any company's external communications strategy - the annual report is audited and signed off by the Board and the process can be used to stimulate discussion internally and an opportunity to have one document that pulls together a common understanding across the whole business for internal and external audiences. 

  1. Express a clear statement of purpose, mission and vision. Ensure this communicates a clear understanding of your company’s role in society and then make sure that you translate this into tangible policies for the Board’s agenda. Also explain how stakeholders are engaged, their interests considered, and how business decisions are made with these in mind.
  • 66% of FTSE100 companies set out their corporate purpose, stating why they exist – up from 60% in 2016.
  • See Sage’s 2018 Report, for a good example of a purpose that is connected to the company’s vision.

2. Explain how the company’s business model creates long-term value by identifying key value drivers. Make sure you demonstrate the value creation process beyond purely financial returns, outlining how your organisation’s operations transform, create and destroy value.

  • 66% of FTSE100 companies use business models to articulate their value creation process and discuss the resources and relationships they depend on and the types of value they create – up from 63% last year.
  • See Taylor Wimpey’s latest report, recent winner of the Best FTSE100 Annual Report in the IR Society Awards 2018.

3)     State management’s view of the market, major trends impacting the market, potential for growth, the company’s relative positioning, and underlying assumptions. Remember to outline the trends that have a material impact on the company and its stakeholders and what these mean for the long-term future of your company, to provide context.

  • 54% of FTSE100 chief executive statements discuss how market conditions impact performance, and 44% outline future market trends.
  • See Hammerson’s latest report, recent winner of the ‘Annual Report of the Year – FTSE250’ at the ICSA Awards 2018.

4)     Highlight sources of competitive advantage such as talent, access to resources, or other assets that enable the company to execute its strategy and win in the marketplace. Focus on highlighting the characteristics that make your company different, such as purpose or reason for existing in the context of your stakeholders and value creation.

  • 32% of FTSE100 companies provide an investment proposition setting out strengths and opportunities, providing another layer to their value creation story.
  • See British Land’s 2017 Report, recent winner of the ‘Most effective communication of company investment proposition – FTSE100’ at the IR Society Awards 2018.

5)     Disclose strategic goals ultimately tied to drivers of value creation (e.g. returns on invested capital, organic revenue growth) in the context of current and future market trends, and the company’s competitive advantage.

  • 38% of FTSE100 companies position their strategy as responding to market opportunities.
  • See Coca-Cola Hellenic Bottling Company’s latest Report, recently shortlisted for the ‘Most effective communication of company investment proposition – FTSE100’ at the IR Society Awards 2018.

6)     Lay out a detailed roadmap that defines short, medium and long-term actions linked to key milestones and strategic goals targeted at long-term value creation. Specifically explain strategic priorities, provide strategic timeframes wherever possible and ensure you report back on previous strategic priorities, explaining whether the business has met these priorities or not.

  • Only 29% of FTSE100 companies lay out time frames for their strategy, and only 10% set out time frames for strategic priorities of five or more years into the future.
  • See Kingfisher’s 2018 Report for an example of long-term strategy.

7)     Provide medium and long-term metrics and targets that indicate the company’s ability to deliver on its strategy, such as customer satisfaction over time, brand strength, and product pipeline investment and returns. Demonstrate how your strategy has been designed with consideration of your key stakeholder groups. Explain how these priorities are measured and tracked.

  • 52% of FTSE100 companies have a sustainability priority as part of their main strategy, up from 30% in 2016.
  • See G4S’s latest report, recently shortlisted and highly commended for ‘Most effective integration of ESG – FTSE250’ at the IR Society Awards 2018.

8)     Explain how capital and non-capital investments, including mix of resource allocation, will yield sustained competitive advantage and the creation of long-term value. Ensure you provide insight into the areas of the business where you are investing.

  • 68% of FTSE100 companies explain the company’s capital management allocation strategy, and 49% explain how investments will generate value in the long-term.
  • See Burberry’s 2018 Annual Report for an example of good resource allocation reporting.

9)     Provide an overview of risks and their mitigation plans, including sustainability challenges (e.g. ESG issues). Clearly outline how the Board has assessed the company’s viability over the long-term and ensure that you demonstrate a direct link between strategic priorities and specific risks, showing also how this aligns with your company’s risk appetite.

  • 47% of FTSE100 companies demonstrate a clear link between risks and all strategic priorities or objectives, and 94% disclose environmental, social or governance risks such as culture, people, health and safety.
  • See Standard Life Aberdeen’s latest report, for a good example of direct links between principal risks and strategic priorities.

10)  Articulate how executive and director compensation ties in to long-term value creation and strategic goals. Make a clear link to the company’s values, explaining how the Board provides an oversight and embeds culture throughout your company.

  • 71% of FTSE100 companies evidence how the Board has oversight of culture and values.
  • See Croda International’s latest report, recently shortlisted for ‘Best Board Disclosure of the Year’ in the ICSA awards. 

The best annual reports look towards the future and connect effective governance, strategy and leadership, clearly demonstrating the effectiveness of business strategy and demonstrating management credibility − ultimately providing a window into the company and its culture. Try to make all of your communications, but particularly your reporting be something that employees look forward to seeing and are proud of and one that is written in a way that helps them and investors to understand what’s important to the future of the business.

Our top 10 considerations came from our Purpose beyond Profit: The Value of Value - Board-level Insights research report conducted in partnership with AICPA and IIRC, with the aim of gauging executives’ views on how their organisations understand, manage and communicate value creation. And if you haven't seen our latest research piece analysing the annual reports of all FTSE 100 companies; Less Perfection. More Authenticity - you need to! Click here for a summary of that research. 

 

If you’d like to learn more about the research, or are interested in a Board-level workshop focused on long-term thinking and value creation, please contact us at: insight@blacksunplc.com