NARRATIVE REPORTING
The financial crisis has spawned a period of extraordinary
activity in the field of regulation. Much of this involves rulemaking, designed to make banks and other companies
safer so that they will no longer be at risk of imposing
shocks on the economy and needing government rescue.
Some, however, aims to make companies work better.
Narrative reporting, which has recently attracted the
attention of policy-makers, falls basically into this
second category. While the European Union and British
government are drawing up new rules, on the other side
of the Atlantic, the US accounting authorities are looking
at consistent standards. Meanwhile, the International
Integrated Reporting Council, a wide-ranging coalition
of dedicated practitioners, has come up with some
radical new thinking on how companies should present
their affairs.
While the proposed regulations are directed primarily at
listed companies, they are worth consideration by private
companies, too. Essentially they require companies to
describe what they are doing, the risks and opportunities
they embrace, and how that shapes both their results and
their impact on the broader community. This exercise is
a good one for any board because it requires directors
to think carefully what their company is all about.
Companies whose boards have understood this and can
articulate their purpose are likely to be better run.
This is called narrative reporting because it complements
in words the numbers that go into the annual report. The
numbers are fine but they don’t mean very much without
some explanation of how we got there. Thus, at the heart
of the debate about narrative reporting, is the description
of the business model. The numbers tell us what the profit
is, but the words around the business model tell us how
it is made.
Many years ago, when I was a financial journalist I
remember being told by Sir John Egan, then Chief Executive
of the company that ran London airport, that just being in
the airport business was not really the point. His company
sought to create value by understanding retailing – a large
part of most airports is in effect a shopping mall – and
understanding how to build well and cheaply so that he
could roll out new airports anywhere in the world in an
era of global privatisation.
What he was describing was his business model. He had
identified the particular factors that helped his company
create value and was shaping a strategy around them. The
business model is what makes a company unique, and, if
Narrative Reporting
Article by Peter Montagnon
Hawkamah issue02 56pages.indd 43
it is a good one, helps it to compete. It is different from
strategic vision. For example, Sir John might have told me
that he wanted to become the largest airport operator
in the world within ten years. But that would not be a
business model because he would not have been telling
me how he was going to get there and why his company
was uniquely placed to do so.
Many companies and boards have only a rather vague idea
of what their business model really is. Being obliged to
describe it under the new approach to narrative reporting
will concentrate their minds. As the board comes to
understand the business better, so directors will be more
confident in how their company is managed.
If the business model is a description of what the company
sees as its opportunity, then a description of the business
model leads on naturally to consideration of risk, which is
the obverse of opportunity. Understanding their business
model will help companies understand better the risks
they are running. Narrative reporting requirements which
oblige them to disclose these risks will help them set the
right priorities for dealing with them.
Up till now requirements on companies to disclose the
principal risks and uncertainties they are facing has led
to an unsatisfactory lawyer-driven result in which every
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9/19/13 10:08 AM