In today’s business world, everyone I encounter and every business service offered is ‘strategic’. If you’re not strategic, you must be tactical or just not very bright. Strategy is up there with the most used and abused words in the English language.
In annual reports at least, some of that abuse may be about to change. All companies with a year-end after October 2013 will be required to include in their annual reports a new bit, called the strategic report.
The sceptic will question whether this development will just add to the length of the already hefty annual report, but do nothing to improve a real understanding of the company – and indeed to reinvigorate the dwindling perceived importance of the report.
But on this occasion, it’s just possible that the sceptics may be wrong.
Firstly, the new strategic report will replace the business review, so page numbers may not increase.
Next, the Corporate Code is very specific on what should be included in the strategic report: ‘An explanation of the basis on which the company generates or preserves value over the longer term (the business model) and the strategy for delivering the objectives of the company.’
Thirdly, the new report will require companies to focus on the principal risks they face – the known and unknown unknowns - and how they might affect future prospects.
Up until now, strategy and risk have been treated as separate elements in many annual reports. Strategy reporting has emphasised future growth opportunities, while risk reporting dealt with the control systems in place to mitigate potential threats. In the future, the two will need to be brought together and founded on the recognition that future uncertainty provides both opportunity and threat.
The skills required to handle all these different dimensions are broad. Auditors, it could be argued, are trained to deal with past events, so they may not be the best equipped to advise on issues which relate to future factors and risk, which lie more in the natural domain of risk management consultants.
But who deals with the development and articulation of the strategy in the report?
Herein lies perhaps the most interesting and exciting opportunity. A strategy cannot of course be communicated before it’s defined and agreed. The introduction of the strategic report should force companies to focus on the true definition of strategy and, equally important, to ensure the board understands and signs up to what has been agreed.
If my own experience is anything to go by, this presents a considerable challenge. Individual board members may be eloquent on the objectives of their company, but there’s less consistency around the board table on the understanding and communication of its strategy as defined by the Corporate Code.
Moreover, the incorporation and distillation of that strategy in the corporate narrative (think of that opening descriptor in the annual report) will require thoughtful scripting.
If consultancies like ours can do our bit to redefine the ‘S’ word and return it to its true status, so much the better.
- Neil Hedges is a partner at financial and corporate communications consultancy Headland