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November 17, 2015

Myth buster: the annual report through the investors’ eyes

By Vincent Huck

In producing their annual reports companies need to consider what type of shareholders they want, Paul Lee, head of corporate governance at Aberdeen Asset Management, told members of the Institute of Chartered Accountants of England and Wales (ICAEW) at an event held jointly with the UK Financial Reporting Council.

Lee was part of a panel discussion on financial reporting for small listed and AIM quoted companies. And in expressing the investors view he said there are three myths that companies should move away from.

"The recurring theme in my remarks today is that company need to consider what sort of shareholders they want," he added.The first myth, Lee said, is that nobody reads the annual report. "It’s just not true; investors read and use annual report."

He acknowledged that some investors are not interested in the annual report but that those are traders who come in for the quick buck.

"This comes back to the kind of investors you want to attract, the good investors who are coming into the business thinking of a long term investments read the annual report," Lee said.

The second myth, according to him, is that reporting is only a compliance exercise. While there is a compliance element in financial reporting, the annual reports are communication documents he argued.

"You yourselves are investing a great deal in the companies you work for in terms of time energy and effort," Lee said. "You see the value of that investment and the task in the annual report is to explain why it is worth the investors’ investment too."

The third myth is that smaller companies are at a disadvantage because of their lack of resources, He said, arguing that the limitation of resources at smaller companies can be used as an advantage.

"The best annual reports have a clear story to tell and a continuity of message that runs right through the chairman statements, through the strategic report, through the financial review, through the governance review, and through the financial numbers," he explained.

That clarity of thoughts running through the report is what investors really value, Lee argued, and because the reports of smaller companies are going to be written by somebody on the board or very close to the board there are more opportunities of having that message running consistently.

Whereas at large companies, the report is divided into segments and each segment is written by a different committee hence losing some of the consistency.

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