Companies are encouraging short-term thinking on the part of investors by issuing annual reports that neglect a long-term view and focusing mainly on financials, according to a study by KPMG.
Most annual reports cover only poorly – if at all – operating measures of performance, customer satisfaction, brand and reputation and other areas that could give investors a longer-term perspective on the company’s outlook and goals, according to an international study of annual reports.
‘Businesses investing in their long-term future should have a strong incentive to make this investment more visible,’ says Matt Chapman, who authored the study for KPMG. ‘We need to recognize that the financials are only the start of the story, and better align performance measures with the drivers of shareholder value to support this.’
The study of 90 annual reports from around the world reveals that only 7 percent offer investors data on customer satisfaction or focus, KPMG says, while 85 percent do not identify brand and reputation as a key risk. The study also reveals that, while the average annual report measures 165 pages in length, they report an average of only four measures of operating performance each, while one in five report no measures of operating performance at all.
KPMG concludes that annual reports should focus more on showing how assets such as brand, customer base and intellectual property are being managed and enhanced with an eye on the company’s business strategy. They should also relate ‘information that will help readers understand progress in implementing strategy, developing business assets and creating new income streams,’ the report notes.
‘This should lead to reports that are far more aligned with investors’ own cash flow valuation models,’ the study concludes. ‘In particular, [they should provide] a clearer picture of how management’s plans and changes in the operating environment are likely to affect medium-term returns, and [help] investors assess the substantial element of value that is typically locked up in the ‘terminal value’ element of their models.’
