Corporate reporting: By Gabrielle Moll

Corporate reporting:
how words value add
add
The primary function of corporate reporting is to provide investors with management, reporting and auditing. The aim was to substantially boost
information. However, these days, companies are also recognising the the quality and transparency of financial reporting, strengthen auditor in-
media value of the annual report, which is the main vehicle of corporate dependence, and to ensure a rigorous audit.
reporting, and are concluding that it’s an efficient means of communi-
cation between the business and their stakeholders. Corporate report- The Sarbanes-Oxley Act triggered a veritable accounting and auditing rev-
ing also assists in building image. Additionally in recent years there has olution – not just in the United States, but globally. Currently companies
been an increasing trend in value reporting, which can be defined as: a and auditors are facing global regulatory pressure. Modern financial re-
new form of reporting where words are as important as figures. porting standards have made corporate reporting much more transparent
for financial analysts, institutional investors and banks, therefore allowing
the performance of companies to be analyzed over time and across indus-
“Continuing long-established methodologies may be a virtue in winemak- tries. The disadvantage of this is that financial statements are now so de-
ing, performance of classical music, and safeguarding human rights as tailed and complex that only experts are able to interpret them.
political ideas. In contrast, maintaining the status quo in financial reporting
is a sure recipe for disaster.”1 These are the words of Gerhard G. Mueller, However, by definition, communication should be understandable. Thus,
a professor of accounting in the United States. Mueller’s colleague William the accounting revolution has to be accompanied by a reporting revo-
Beaver2 goes even further, proclaiming for an “accounting revolution”. lution. The watchword of this revolution is value reporting. The principal
goals of value reporting is to transform a backward-looking account of a
Both professors criticise what they see as an outdated form of reporting company’s finances into a forward-looking account of its business and the
that refers only to the past. This form of reporting describes events occur- factors that are driving it now and in the future.
ring in preceding business years, namely balance sheets, profit and loss Investors, financial analysts and the public have a greater need for in-
statements. This particular system used – double entry accounting – is formation than they did, twenty years ago. The type of information they’re
more than 500 years old, and traces its origin back to a mathematician looking for is different too. For example, stakeholders now demand future-
and Franciscan monk called Luca Pacioli. oriented information on strategies; market positions, investment and R&D.
Stakeholders expect companies to report more openly on social and en-
The accounting revolution vironmental responsibility. The financial world demands a detailed insight
The first time Mueller and Beaver voiced their criticism was at the end of into a company’s finances and strategy in order to make the right invest-
the 1990s. Subsequently, a lot of action has been taken within the world ment decisions.
of the financial reporting, enabling stakeholders with the benefit of greater
transparency. In Europe, the International Financial Reporting Standards The reporting revolution
(IFRS) have been implemented for all stock-exchange-listed companies In addition to giving investors a clear picture of the company’s financ-
since 2005. Corporate and accounting scandals at prestigious companies es, the annual and quarterly report, together with the company websites
such as Enron, WorldCom and Parmalat reverberated around the world, – can help build stakeholder trust. However, companies have to ques-
provoking drastic regulatory measures. tion precisely which information their various stakeholders require. This is
In July 2002, the United States introduced the Sarbanes-Oxley Act, a where value reporting comes in.
stringent piece of legislation containing thorough new rules on corporate

1
Mueller, Gerhard G.: The Evolving (New) Model of Business Reporting, in: Börsig/Coenenberg: Controlling und Rechnungswesen im internationalen Wettbewerb, Stuttgart 1998.
2
Beaver William L: Financial Reporting: An Accounting Revolution, 3rd edition, Upper Saddle River/New Jersey 1998.
 Even Odd
26 27

Value reporting is a new form of reporting that includes forward-looking “In the 1990s, a new view of shareholder value is taking root in
and non-financial information. Examples of forward-looking information the minds of executives and investors in many parts of the world
include; details of the company’s proposed capital expenditure, returns it – and a new type of reporting is emerging. We call it value report-
expects on this investment; details of intended costs on staff training. In ing (VR). In essence, value reporting focuses on long-term cash
other words this is precisely how this money will be invested; or examples – i.e., cash that will come through the company’s door at some
to illustrate the organisation’s power of innovation. Relevant non-financial future date – and other types of performance information that im-
information may include details of the company’s customer structure, an pact shareholder wealth, the company’s prospects, and the finan-
assessment of customer satisfaction, a profile of the company’s staff (as cial markets’ assessment of the company. The discipline of VR
an indication of employee commitment), and a description of how the or- promises to integrate the principles of traditional financial report-
ganisation has maintained their structural processes and management. ing, investment reporting, and management reporting.”3

Value reporting makes investment planning and the management infor- Since the publication of this brochure, PricewaterhouseCoopers has reg-
mation system an integrated part of the financial statements, and pro- ularly consulted financial analysts and institutional investors to find out
vides stakeholders with an idea of what the company’s most important what they view as the most important information for making investment
objectives are, and to what extent can it manage value to achieve these decisions. Research has shown that the most interesting information for
targets. Value reporting is thus a form of publicity that, unlike a tradition- them is the information that management needs to direct the business.
al backward-looking annual or quarterly report, gives an insight into the Therefore it follows that value reporting should be based on the inter-
way business will develop and move forward. The aim is to provide in- nal information utilized by the company’s management. On the basis of
vestors with all the information they need, in order for them to make the survey findings and academic research into value-driven management,
right investment decisions. This also means providing background infor- PricewaterhouseCoopers have developed the ValueReporting™ Frame-
mation on products (for example innovative new products, the expiration work, a model enabling a consistent yet complex picture to be painted of
of important patents, the way margins are developing), markets (which a company in the medium term.
may include industry developments, an analysis of the competition, or an
assessment of the company’s market position), strategic success factors The framework consists of four levels, each of which has an influence on
(such as core competencies and know-how in specific areas) and corpo- those that follow. The report starts with a market overview. The dynamics
rate governance. In its report, management must analyse trends and ex- of the external operating environment, the macroeconomic and regulatory
plain changes in the financial statements and investment portfolio. This environment, and the competitive situation within the industry. These typi-
type of qualitative information is designed to help the reader interpret the cally exert significant influence on a company’s strategic options, current
quantitative information contained in the report and place the company in performance, and future prospects. For this reason it is the logical start-
the context of the industry in which it operates. ing-point for the reporting framework.

The Value Reporting Framework Subsequent to this market overview, the next level of the reporting frame-
The concept of value reporting was shaped by the auditing and advisory work describes and explains the company’s structure and strategy. A
firm PricewaterhouseCoopers. In 1997, advisors Philip D. Wright and Dan- company has to define its strategy within the context of its economic and
iel P. Keegan published a small but visionary brochure on the art of report- regulatory environment. Structures must enable the company to function
ing on the future. In the introduction they say: and succeed in any given competitive situation. These factorss should be

3
Wright, Philip D./Keegan, Daniel P.: Pursuing Value: The Emerging Art of Reporting on the Future, published by Price Waterhouse LLP, 1997
Corporate reporting: By Gabrielle Moll

Facts

No room for empty words in management reports

Management reports have to say something meaningful;
they have to contain concrete facts, interpretations and
assessments. What they should not contain is empty words
and phrases that could have been copied from some other
business report.

Definitely no-no is the kind of throwaway statement

found in just about any annual report you care to look at:
“We deliver services that benefit our customers.” “We
create customised solutions tailored to the individual
needs of our clients.” “Our people are our most important
asset.” “We do everything in our power to add value for
our shareholders.” “We take our responsibility to society
seriously.” These are empty words that do little to enhance
the image of the company, and fail to give the reader any
insight whatsoever into its strategy or value management.
They merely gloss over the fact that the management
is either unable or unwilling to formulate a meaningful
statement. In both cases it would be better to say nothing.

In fact these statements are not only devoid of content,

they’re dishonest too. Companies should have the courage
to admit what everybody knows anyway: their sole aim
is to earn as much profit as possible. Naturally this can
only happen if customers are satisfied with their products
and services, staff stay loyal and keep their know-how
in the company, and shareholders don’t take their money
elsewhere. A management report really isn’t the place to
air this kind of business platitude. communicated in its reporting alongside strategic objectives and risk poli-
cies for the organisation as a whole and for specific areas of its business.
Your readers are interested in other things: Did we attain
Since managing for value must always be done in the light of the com-
our strategic objectives? If so, how? If not, why not?
pany’s strategic objectives, the next consecutive step is to describe the
What are we doing to strengthen our company’s position
management and quantify the value drivers of the business. To execute its
in the market? How do we differentiate ourselves from
strategy, an organisation must identify, manage and disclose the factors
the competition? How does management see things that have the greatest influence on its performance and that have contrib-
developing in future? These are the sort of pithy, practical uted to its professional success. Businesses operate in a complex web of
statements – underpinned by figures – that distinguish a relationships between clients, business partners, suppliers and staff, proc-
good management report. esses that make up the value chain, and the control mechanisms set up to
monitor these processes – all of which can potentially be important driv-
Glossing things over, by contrast, is counterproductive. ers of value. While the factors that actually drive a particular business de-
The real villain is that harmless looking little word “even”. pend to a significant extent on the industry in which it operates, custom-
Look at most annual reports and you’ll see that processes ers, people and the brand are always key value drivers.
have been made even more efficient (instead of just more
efficient), and staff aren’t more satisfied, they’re even more Finally, the fourth level describes performance, in other words the results
satisfied. The idea is that without the word “even”, people of the company’s efforts in the management for value. Ultimately the com-
might think that processes weren’t efficient before, and pany’s results – both financial and non-financial – are the litmus test of its
that staff weren’t satisfied. But this linguistic trick is so strategy, structure and value management; an implicit indication of how
transparent that it’s better to leave it out altogether. well management has understood its market, executed its strategy, and
managed its value-creating resources and relationships.
Writing a management report is no easy job. Besides a
willingness to be frank and open, you need the ability to The ValueReporting™ Framework has two key advantages. It is flexible
present the complex realities of business accurately and enough to be adapted to the environments of different industries, yet it
clearly. The people writing and editing the report have still manages to provide enough scope for describing, explaining and in-
terpreting a company’s business and performance.
to ensure that the text is relevant, truthful and clearly
understandable. And above all, they must be masters of
The management’s view
the language.
The secret to all this is so-called narrative reporting. Narrative reporting
can be defined as a verbal commentary from management that accom-
 Even Odd
28 29

panies the financial statements. This component of the report is often re- Swiss academic research
ferred to as the management report or management discussion, but the For more than a decade, the Swiss Banking Institute, (under the leadership
importance of language in the process is best captured by the term “nar- of Professor Rudolf Volkart,) has been carrying out intensive research on
rative reporting”. The idea is that management must explain the business value reporting, a corresponding checklist has been drawn up based on
to readers in its own words, from its own perspective, and from the basis criteria and examples of best practice. As the introductory remarks to the
of its own knowledge and information. This requires a willingness to be checklist show, the institute’s researchers have come to a similar conclu-
open and frank. Transparency means that all the information management sions. To that of PricewaterhouseCoopers:
will communicate externally should be consistent with its internal man-
agement reporting. The management report should contain the following: “[Value reporting] goes way beyond the information provided in
 Information on the context of the business that provides a deeper in- standard annual financial statements. In addition to information
sight into the company’s position, at present and in the future that tends to be related to results and oriented to the past, value
 Additional information on financial and non-financial performance reporting should also contain forward-looking information relat-
 Forward-looking information to help evaluate likely future performance ed to value generation. In particular this includes prospective key
 Information on the key performance indicators (KPIs) that the company performance indicators of a non-financial type.”4
utilizes as an aid to manage for value
The checklist is intended as a supplementary to a company’s end of year
The management report should give reasons for changes that have oc- financial statements. Thus it contains non-financial and forward-look-
curred on the financial and operational level. Investors, financial analysts, ing indicators as well. For the Swiss Banking Institute, explanations from
business journalists, staff, customers and suppliers also have a vested in- management are particularly important. Background information on prod-
terest in the way the company’s market acceptance is developing, includ- ucts, markets, strategic success factors and corporate governance should
ing productivity, the way costs are developing, profitability, innovation, the be given and they should analyse trends and explain changes in the fig-
company’s financial situation, customer loyalty, and employee satisfac- ures and investments. This enables readers to interpret the figures and
tion. Additionally, the management report should list the most important evaluate the company within the context of its industry.
market and industry trends and discuss their implications.

4
Labhart, Peter A./Volkart, Rudolf: 1. Beitrag im Fokus der Wirtschaft “Value Reporting – zentraler Stein im Shareholder-Value-Mosaik”,
in: Neue Zürcher Zeitung, Vol. 221, No. 123, 27/28 May 2000.
Corporate reporting: By Gabrielle Moll

A challenging task
Value reporting is a great opportunity for companies seeking more con- and holds responsibility for deciding on future business policy, this in-
vincing and credible ways of reporting on their business. It’s a means of formation (provided it is truthful and reliable) is an invaluable aid to in-
communicating a whole range of information that is difficult or impossi- terpreting the report. It also allows readers to assess the quality of man-
ble to quantify. It is an opportunity for discussing alternative strategies, agement on the basis of their own account of the business.
running through scenarios, and discussing subjective probabilities. This
primarily verbal form of reporting is a way of making a company’s value Commenting on financial and non-financial data can be a great challenge
generation process more transparent. Nevertheless, good value reporting for management. Some companies have faced the challenge, and have
is a challenge: used narrative reporting to substantially improve the quality of their busi-
ness reports. For every best example, there are many instances of reports
 The report has to be presented in such a way that the reader under- where the discussion and analysis of the company’s business are superfi-
stands the company’s business. The company’s financial performance cial and one-sided, and more confusing than illuminating.
is evidently the result of its business activities and the impact of spe-
cial events. Any analysis must first identify and clarify the connections The truth is that transparent reporting is within the management’s own
between the company’s business, financial results and the influence of interest. There are two reasons. Firstly, any weaknesses in the company’s
other events, regardless of whether they’re the result of the company’s value management or internal management system are exposed as soon
own strategic decisions or are based more on a macroeconomic ba- as work starts on preparing the relevant documentation and composing of
sis. Making forecasts means translating future business activities and the report. This is a valuable source of feedback that can be used to im-
events into figures. This means one must understand the connections prove the company’s management instruments. Secondly, value reporting
between the company’s decisions, external influences and resulting fi- helps management reduce information asymmetries, thus avoiding any
nancial effects. conflict with its stakeholders. Value reporting gives management extra
credibility that will work in its favour in times of crisis or conflict. The mere
 Readers expect a forward-looking approach. On the other hand, making fact that a company makes the effort to provide this type of information is
forecasts and predictions is a tricky business. If ones forecasts turn out an advantage in the financial world, and helps build stakeholder trust.
wrong, the credibility of management is damaged, or in the worst case
one might risk legal action. For this reason management should avoid Conclusion
the temptation of making quantitative financial predictions. Instead The rules and regulations governing financial reporting are becoming in-
conclusions should be derived from the current and historical data. In- creasingly complex. However, far from reducing the importance of lan-
dicators must be drawn on and internal plans disclosed. This would in- guage in corporate reporting, the trend is actually making language more
clude details of the company’s key success factors and an assessment vital. If reporting is to build trust, companies have to build understanding
of opportunities and risks. amongst all their stakeholder groups. This, of course, requires words. A
verbal narrative describing how a company manages for value, and de-
 Management should describe and explain its assessment of the busi- tailed financial statements, are two complementary poles of transparent,
ness situation. Since it is management that has the most information credible corporate reporting. 

Author

Business journalist Gabriele Moll and worked in Zurich for twenty years. Her PhD dissertation contributed
holds a PhD in economics. She owns to the research on value reporting done by the Swiss Banking Institute
and manages Graf Moll & Partner at the University of Zurich.
(www.grafmoll.ch), a Zurich-based
corporate publishing agency specialising
in financial communication, in particular
creating and producing high-quality
editorial concepts and text for annual
reports and other corporate publications. Copyright to all images, figures and drawings in this article
Born in Cologne, Gabriele Moll has lived courtesy of Ms. Moll and PrincewaterhouseCoopers.