What do the world's largest companies say about themselves? A new PricewaterhouseCoopers survey of narrative reporting practice

Primary communications of financial condition and performance from large companies typically include both financial statements and narrative discussion. But what do those narratives actually communicate? Are companies meeting the information needs of investors - a priority audience for these strategic communications? These, in broad terms, are the questions asked and answered in a new PricewaterhouseCoopers survey of the narrative reporting practices of the world's largest companies, the Fortune Global 500 (G500). The survey was released online on April 20th, 2007. Hard copies are also available.

The G500 includes businesses headquartered in the US, Japan, Europe, Australia, Canada, and many developing economies. The survey benchmarked these companies' reporting of narrative and contextual information against an information set that more than a decade of PricewaterhouseCoopers research has shown to be important to investors.

The survey's key messages are simple. Companies do provide what some call 'contextual and non-financial information' in narrative form about their performance and prospects but top reporters among the G500 provide a great deal more than average ones. For example, the survey findings show that two-thirds of the G500 (65%) demonstrate consistency between their narrative and financial reporting on their business segments, and 60% offer performance highlights. On the other hand, only 15% report specific key performance indicators of the kind that management routinely uses to operate the business, and just 10% of narrative reporting that includes quantitative information is forward-looking.

Whatever individual companies may be doing, the overall findings indicate that the concept itself of corporate reporting has reached a crossroads. From the investor community's perspective, there is plenty of room for improvement. From the companies' perspective, enriching their narrative presentations and accompanying metrics offers the opportunity to provide a view 'through the eyes of management' that investors would highly value.

Choices for preparers and users

Companies have a legitimate concern that calls for enriched reporting would mean putting even more effort and cost into reporting when they already produce substantial reports subject to extensive regulatory guidance. PwC's commentaries throughout the survey propose that companies have enough latitude to make choices, and to control effort and cost, even as they adhere to regulatory requirements. They can delete routine but superfluous disclosures. They can provide insights and related numbers that management already uses to operate the business. Taking a top-down, investor-centric approach may be the future, where corporate reporting is concerned. To that end, it's important to know the broad situation today. That is what the survey offers.

The traditional reporting model has been dominated for decades by financial information, which is clearly important but provides only part of the picture. As companies respond to the growing demand from investors and other stakeholders for broader and more relevant information on areas such as market challenges, strategy, risks and available resources, companies and the users of their reported information face important choices.

One option is that companies and investors can continue to leave it essentially to standard setters and regulators to decide what information companies report and how much information investors receive. However, there is another option. Can companies and investors work together to address the shortcomings of the reporting model by entering into a dialogue about how the model could be improved to the benefit of both parties?

Such a dialogue could open the way to a better corporate reporting framework, one that will improve communications between companies and investors, supplement and complement the financial reporting model with appropriate non-financial measures, and provide a more consistent picture of the key building blocks of performance. Further, recommendations emerging from this dialogue might respond far more effectively to the distinctive dynamics of different industries. In our view, a narrowly prescriptive, one-size-fits-all solution would not serve the legitimate interests of either companies or investors. The new dialogue could lead to recommendations that standard setters and regulators would take very seriously. It would be a new voice in the capital markets, a voice of authority and practical good sense.

Choosing between these two very different courses - laissez-faire and isolated or proactive and cooperative - is a critical decision now facing both preparers and users of corporate reporting. If this survey and others to come from PricewaterhouseCoopers prove effective, corporate executives and senior investors will understand that the future of the corporate reporting framework rests to some real degree in their hands. Standard setters and regulators build that framework. The accounting profession contributes to its development. But companies and investors are fundamental stakeholders in what it is and how effectively it serves its purposes. They need to talk the issues through in a new dialogue. Together they may be able to influence the 21st-century framework through which companies report and investors listen and respond.

The 'win-win' opportunity

The new PricewaterhouseCoopers survey shows that many leading companies worldwide are already using enriched narrative to cut through the complexity of today's financial reporting. The 'win' for companies is that it enables them to tell their own story through management's eyes and using management's key performance indicators - while also shifting the focus away from short-term financial gains and toward long-term value creation. The 'win' for investors lies in increased transparency, leading to better-informed investment decisions. These are 'wins' that can help to power the world's capital markets in the coming decades.

Read more by downloading our Corporate reporting: A time for reflection (893kb)