Strategy at the centre

This week’s Luminous spotlight shines on strategy: alongside the business model, strategy is one of the most important aspects of the annual report. If the business model is the beating heart of the annual report, strategy is the pivot around which the rest of the report revolves. Since the strategic report’s introduction in 2013, we have seen a marked improvement around strategy, yet businesses are not fully utilising strategy to its maximum potential when communicating the value creation story.

Coherent strategic disclosures are key to investor understanding, yet according to the PwC 2017 review of FTSE 350 reporting trends only a quarter of the FTSE 100 present the relationship between strategy and the business model, whilst less than half of FTSE 100 companies link strategy to either KPIs or risk.

How to achieve best practice

– Provide clear strategic objectives to represent how the strategy is being achieved.

– Link strategy to business model, KPIs and risk.

– Include short, medium and long-term priorities.

– Describe progress made against strategy in the previous year.

– Include the key resources used in the pursuit of strategic goals.

– Reflect a commitment to broader societal value creation by reflecting how sustainability is factored in to strategic thinking.

– Evidence how stakeholder engagement has influenced the strategy.

The Luminous view

In our experience, businesses generally provide an adequate review of strategy, but very little forward-looking strategic information. Many reporters also fail to give meaningful linkages to other parts of the report such as KPIs and risks. Unclear, or poorly linked, strategies can be indicative of greater issues within a company, such as a lack of leadership and strategic thinking that fall short of what is expected, and can undermine the rest of the report. Whereas businesses that get it right experience higher levels of investor confidence and are likely to be more successful over the coming years.

Several of Luminous’ clients are shifting the bar when it comes to strategy disclosures within the annual report:

National Express explains how vision and values underpin the strategy and includes an impressive degree of integration with other aspects of the report, including risk and KPIs.

Weir’s strategy includes priorities for the previous year, how they performed against these and further priorities for the following year. Inclusion of ‘Strategy in action’provides added context and reflects how Weir’s strategy is working in practice.

Unites most recent report provides disclosures of the ways in which governance supported strategy throughout the previous year. This includes specific examples of how the Board activity contributes to the achievement of strategy and linkage to principal risk.

CLS Holdings’ annual report clearly links business model to strategy, demonstrating how value is created and then maximised.

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Connor Lundy

As Investor Insight Executive, Connor works closely with Stephen Butler, Luminous' Director of Stakeholder Engagement to research the latest best practice regulations and trends across narrative reporting, digital, investor events, sustainability and integrated reporting.