What is the purpose of a company annual report? The top answer on a quick internet search, and probably your first thought too, is that annual reports are there to provide information to shareholders. Some responses also add investors or other interested parties into the mix but they too put shareholders first.
And that is hardly surprising. The Financial Reporting Council’s (FRC) latest annual review of corporate governance and reporting which was issued in October 2018 comments that strategic reports “provide an opportunity for boards to present a single, coherent narrative explaining and complementing the company’s financial statements.” It goes on to highlight the way in which information from a variety of sources including social media can affect investors’ assessments and therefore it is “all the more important for boards to ensure that their formal reporting is fair, balanced and comprehensive.”
However, when written in a fair, balanced and comprehensive way, annual reports don't just tell a story for prospective investors, they can also inform and impact customer decisions. Now we are not suggesting here that before you head off to your local store for a pint of milk you stop and read the annual report. But if you were about to embark on a significant project and looking to appoint one or more key suppliers then you would be remiss if your pre-contract due diligence didn’t include an annual report review.
Finances, infrastructure and culture
Firstly, and most obviously, you may be looking for reassurance that the company’s finances and infrastructure were strong enough to support delivery of your project. So you might be investigating the debt ratio or lines of finance, taking a look at the existing order book or at comments within the accounts on trading conditions. This may open up further lines for enquiry or even highlight areas in which it may be prudent to build certain guarantees or checks and balances into the eventual contract.
Aside from the purely financial aspect, annual reports can also provide an indication of the company’s outlook in areas such as social conscience, diversity and sustainability. Studies have shown that consumers, particularly those from Generation Z, now expect organisations to do far more than simply deliver products and services. Taking steps to ensure that your culture and ethos is replicated across your supply chain can help to deliver the outcomes which end consumers are expecting. Here again, a review of the annual report can act as a trigger to further investigations and dialogue.
Annual reports may well be written with investors in mind, but the story reaches far wider, impacting customer decisions and potentially marking the start of new business relationships.
Director of Elemental CoSec, a company secretarial firm. Lawyer. Triathlete.
Elemental is one of the leading corporate services firms in the UK, providing company secretarial services, administrative services, accountancy services and corporate services to a full range of clients.