Post # 83
November 6, 2024
Claire Bodanis
Our response to the FRC consultation – opportunities for future digital reporting.
I was all set to tell you how the Falcon Windsor team party is, quite accidentally, inspiring the world of behavioural/organisational consultants – but you’ll have to wait til December’s blog for that hilarious tale. Because last Thursday, a reminder popped up in my calendar that the FRC’s consultation on the future of UK digital reporting was due to close on Friday, and I had done little more than skim its surface.
And, as I’ve said before, I can hardly complain about how regulation is made if I don’t offer my say when I have the chance. So last Friday I squeaked our response in just before the deadline – although I must confess (sorry, FRC) that I interpreted ‘responding to a consultation’ in quite a liberal fashion! You can read it in full below, but for busy reporters, here’s the 60-second version.
The challenge:
Discussions about digital reporting – tagging, filing and so on – focus on data and disclosure requirements; but tend to ignore the key point that, for the truth to be served, reports must tell a story too
One of the key challenges for reporting is that story and data/disclosure requirements are all mixed up together
If reporting is to continue to fulfil its truth-telling purpose in a more digitally-driven, disclosure-focused world, we must disentangle story and the data/disclosure requirements, and require companies to do both
The advent of the new sustainability reporting requirements gives regulators a golden opportunity to rethink reporting with the above criteria in mind, for the benefit of companies and audiences alike.
My proposal is for regulators to overhaul reporting in its entirety, and mandate two things:
A set of disclosures covering all aspects of data and information stakeholders require – financial, sustainability-related, governance and so on – that is structured and tagged consistently (namely the “valuable and high-quality data that is useful to investors, analysts, regulators, and others” quoted in the FRC’s consultation); and
A fair, balanced and understandable executive summary, authored by management and the Board – that tells a truthful story about the data, but allows companies freedom to do so in the way they think best; this story aspect would need only one tag, if any.
In doing so, the UK could lead the way in simplifying reporting so that it is far more useful for both people and machine readers, while being far less burdensome for companies to produce, and for auditors to audit.
This is not exactly a new idea, by the way. The Cadbury Report back in 1992 noted that “What shareholders (and others) need from the report and accounts is a coherent narrative, supported by the figures, of the company’s performance and prospects.” All that’s really changed since then is that the concept of performance has broadened from the principally financial, so for ‘figures’, read ‘data’.
I’d love to hear your thoughts, so please do get in touch if you’d like to follow up.
Thanks for reading.
Claire
E: claire@falconwindsor.com
M: +44 7966 196808
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Our response to the FRC consultation: Opportunities for future UK digital reporting
Background – our interest and expertise in reporting developments
I am writing in response to your consultation on the opportunities for future UK digital reporting. As reporting consultants, advisors and writers, at Falcon Windsor we are heavily involved in the writing and production of corporate reporting, principally for FTSE companies. We closely monitor developments in UK, EU and global reporting, and contribute to the debate by hosting webinars with experts from across the reporting spectrum to discuss the issues. (Experts including, on occasion, colleagues from the FRC.) As you may know, we are currently leading a piece of research into the responsible use of AI in reporting, in partnership with tech company Insig AI, based on a research plan developed with Imperial College London. So improving and enhancing reporting is never far from our minds.
A golden opportunity to enhance the effectiveness of reporting: disentangle disclosures from story, and mandate both
Rather than commenting on the individual questions in your consultation paper, I’d like to suggest a proposal for the future of reporting that’s been evolving in my mind for some time, and is further prompted by your consultation.
The key point that struck me in reading your paper is that it’s all about the data side of reporting, and does not discuss the story side – yet it purports to be about reporting as a whole. Your executive summary begins with “All organisations report business and financial data.” It mentions the importance of “improving the accuracy, comparability, accessibility, and value of reported data for investors and other stakeholders.” And it concludes: “As digital reporting becomes even more widespread in the UK and internationally, it is important that policy decisions lead to the production of valuable and high-quality data that is useful to investors, analysts, regulators, and others.” [My italics throughout.]
Truth: why the story is as critical as the data
But, as the FRC itself advises companies, reports need to tell the story of the business (management’s/Board’s view), as well as providing the data that supports that story in the form of necessary disclosures. This is because the purpose of reporting is to build a relationship of trust with investors and other stakeholders through truthful, accurate, clear reporting that people believe because it tells an honest, engaging story.
Data is essential to that purpose but cannot by itself tell the truth about a business. That truth, as the FRC recognises, is (or is not) to be found in the story told about that data by management and the Board, through narrative in the strategic and governance reports. The critical importance of this story, promoted by the FRC, is echoed by almost everyone we talk to across the reporting spectrum – standard setters; auditors; investors; companies themselves – but seems to be forgotten when it comes to discussions of the future of reporting, which, as your consultation shows, tend to focus on data not story.
Digital approaches focus on data at the expense of story – we need a solution for both
It’s not surprising that developments in digital reporting so far have all been about enabling the machine reader, through easily identifiable and comparable data. They have not addressed – and I would argue probably cannot address – the challenges of storytelling. This is because the story of a business and its future cannot be classified and tagged in the manner of data.
The issue with the digital approaches we’ve seen so far is that ultimately, they treat the story elements of reporting in the same way as the data. That is, they aim to codify and standardise what cannot be codified or standardised; and in doing so, end up losing the story element almost entirely, prioritising the machine reader scouring data (or indeed the human reader wanting to look up granular information) at the expense of the human reader wanting to find out what makes a company tick.
The opportunity for rethinking reporting presented by the new sustainability reporting requirements
A real challenge for reporters is that, while both data and story are required, there is no clear distinction between disclosure-led and story-led information within the annual report. A number of companies are already trying to solve this challenge for themselves and their audiences by including ‘disclosure statements’ or ‘additional information’ sections in their annual reports to house lists of disclosures that can’t usefully be given a home anywhere else.
To my mind, rather than leaving this difficult task to companies to work out for themselves, the fact that the UK is on the cusp of a vast increase in disclosures coming from the new sustainability reporting requirements gives regulators a golden opportunity to rethink reporting for the benefit of companies and audiences alike. And in rethinking reporting, disentangling the story element from the disclosures, thus enabling excellence in reporting in both these aspects.
In this we can perhaps take inspiration from German reporting, which has a very prescriptive approach to disclosure in its management report, corporate governance statement and financial statements; but allows a freeform front end, in which companies can, if they wish, tell their story however they like – as long as it is consistent with and published together with the rest of the report. In practice, German companies do not seem to make the most of this opportunity, focused as they appear to be on the institutional shareholder rather than the broader stakeholder audience beloved of UK reporting.
Nonetheless, it’s an approach which, in my view, could be usefully enhanced to make UK reporting stand out as a leader in providing accurate, complete, comparable and useful information to all stakeholders, and to machine readers as well.
My proposal then, is that regulators overhaul reporting in its entirety, and mandate two things:
A set of disclosures covering all aspects of data and information stakeholders require – financial, sustainability-related, governance and so on – that is structured and tagged consistently (namely the “valuable and high-quality data that is useful to investors, analysts, regulators, and others” quoted in your consultation); and
A fair, balanced and understandable executive summary, authored by management and the Board – that tells a truthful story about the data, but allows companies freedom to do so in the way they think best; this story aspect would need only one tag, if any.
In doing so, the UK could lead the way in simplifying reporting so that it is far more useful for both people and machine readers, while being far less burdensome for companies to produce, and for auditors to audit.
This is not exactly a new idea of course. The Cadbury Report back in 1992 noted that “What shareholders (and others) need from the report and accounts is a coherent narrative, supported by the figures, of the company's performance and prospects.” All that’s really changed since then is that the concept of performance has broadened from the principally financial, so for ‘figures’, read ‘data’.
Claire Bodanis
Director
E : claire@falconwindsor.com
T: +44 7966 196808