Something’s been happening to narrative reporting. A series of regulatory measures, together with greater focus from companies themselves, has led to a broader scope of information being reported in what is now the strategic report.

The change is to be welcomed—most annual reports now provide a wider perspective on performance that aligns more closely with the strategic priorities of the business.

So, we now have a more effective shareholder communication tool built around a combination of financial and non-financial information.

The challenge for non-executive directors is to ensure that the quality of this new reporting is consistent with that of their financial reporting. Many of the operational measures now being reported are as least as price-sensitive as the financials themselves. It can help to break this challenge into two broad areas:

1. The right information?

Reporting processes have traditionally been dominated by the need to meet an extensive set of compliance requirements. Narrative reporting requires a different approach.

Judgement is required to ensure what’s reported aligns with the specific value drivers and strategic priorities of the business. There is no checklist of disclosures to fall back on.

Non-executives can play an essential role in challenging how this judgement has been applied, stepping back from the detail to ask whether it conveys a “fair” message, focusing on:

• The picture of the business presented in the report: Are the key drivers of business success over the long term as well as the short term addressed? Are the aspects of the business receiving the most management attention covered in the report?
• Whether the report leaves any unanswered questions: Where issues are raised, are shareholders getting the most relevant information to support their assessment of the potential implications? Is key information being communicated through other channels instead of the annual report?
• Balance: Do the performance measures presented provide a balanced view of progress and prospects that is consistent with the board’s own perspective?

2. The quality of non-financial information

It is easy to assume that all the “numbers” being reported will have the same level of governance and systems behind them. But the reality may be that whilst the financial information is supported by an extensive array of reporting systems and controls, there may be less rigour behind other information.

Typical challenges relating to non-financial information include IT systems that don’t support the information needed for the report; heavy reliance on manual processes; subjectivity in data collection and unclear data definitions; inherent judgement in the measures being reported; and reliance on third parties such as research agencies. On top of this, there is a constant need to adapt what’s reported as the business strategy and environment evolves.

It’s unlikely that these issues will be resolved in a single reporting cycle. Indeed, a piecemeal approach to fixing them is unlikely to be effective.

However, the right questions can help to ensure that the board understands the inherent limitations in the information reported, and encourage development of the right processes and systems to underpin both the internal and external non-financial reporting needs of the business in the future.

Non-executives can support this by prompting the board to ask whether it is satisfied with:

• the process behind the report, including the extent of management ownership/sign-off that all significant matters are covered and all relevant information is being communicated?
• the level of verification and challenge over the underlying non-financial data and related processes; and
• the extent to which price-sensitive information reported outside the annual report (for example, in investor presentations) is also covered by this process.

There are plenty of challenges for companies as they develop the scope of their reported non-financial information, but this is important information for shareholders and recognised as such in the direction of regulatory change. Non-executives have a key role to play in providing the right level of challenge to drive the scope and quality of what’s being reported without becoming a barrier to better disclosure.

Matt Chapman is senior manager, Better Business Reporting, KPMG (UK).