Shanks Group plc set out to make its 2011 annual report compelling and not just compliant. Alison Thomas explains how the European waste management business got its message across and started winning reporting awards.
What investors and analysts really want from corporate reporting is a consistent, coherent and realistic communication that helps them judge how well your company is tackling its challenges and exploiting market opportunities. No matter what industry they happen to be in, companies that are committed to improving their reporting by working hard on the narrative section of their report stand out from the crowd.
Shanks, one of Europe's leading waste management businesses with operations in the Netherlands, Belgium, the UK and Canada, is a case in point. Its approach to making its 2011 annual report a key communications vehicle for the group holds valuable lessons for any company looking to meet investors' information needs. According to Chris Surch, group finance director: "It starts from really understanding the purpose of an annual report. It is our platform for describing the company. It really is a key document." Mr Surch and his team worked with PwC on ways of raising the report above pure compliance to give a deeper insight into the business.
The narrative report’s first task is to answer the question 'what business are you in?' by clearly setting the context in which you operate. What are the key drivers shaping your industry? What are the key challenges and opportunities – regulatory, competitive, and technological – that influence the choices you need to make to succeed? In other words, what is the basis of your company strategy and how do you choose to compete?
Shanks' reporting team realised that what they took for granted about their market, wasn’t necessarily clear to others. So they put Shanks' strategy in the context of a market overview section that explains the dynamics of a highly regulated industry characterised by changing legislation and tax incentives that are "forcing and encouraging everyone to think about recovering more resources from waste". Shanks' strategic focus on recycling and energy recovery (rather than landfill and mass incineration), for example, makes more sense when the increasing cost of landfill is explained.
While working to improve the effectiveness of their reporting, the Shanks team quickly realised that they couldn’t assume knowledge of their business model. If you are a shareholder and new to the industry, you need to understand its dynamics and you need to understand the value creation process. In short, you need to know the answer to the question: how do you make money?
“Our business is about taking a tonne of waste and trying to minimise the amount that goes off to landfill,” said Mr Surch. “For us it’s simple to see how we derive value from that, but for others it was difficult because we had not explained it very well in the past. In most businesses, prices go up and volumes go down. In Shanks it is a little bit more complicated than that. People did not understand the interrelationships, so we thought we needed to explain it better.”
The challenge for companies is to give a clear picture of the business by providing just enough information to get the message across effectively without burying key messages and links in a welter of detail. Shanks decided to show how it makes money by taking the reader on a structured and clearly signposted tour of the dynamics of the waste management business, along with a clear articulation of the three legs of its business model.
Management can drill down into areas where a newcomer to the industry might struggle. For example, Shanks offers descriptions of the technology processes it uses. This was not to indulge the ‘techies’ – it was a necessary step in explaining Shanks’ competitive edge in an increasingly high-tech business. And just to make things even more accessible to the lay reader, each technology and its associated industry terms and acronyms are explained on a single page and the processes are depicted in graphics that are themselves ‘recycled’ from investor and analyst presentations.
"We didn’t talk about commercially sensitive aspects of the business but we had to go the extra step in our explanations because there are no other businesses quite like ours for investors and potential investors to compare us to," Mr Surch noted.
"We talked about external market drivers, which is all public domain information, and the internal drivers, which are management actions. But we focused on the interrelationships to help people get a better understanding."
Credible reporting depends on providing an honest and open analysis of opportunities and challenges facing the company. Investors are natural sceptics who quickly tire of reports that only focus on the positives. Sections that outline risks are therefore important.
Shanks acknowledges the importance of explaining its risk analysis by clearly categorising its main risk areas and explaining their potential to have an impact on the business. It use of tables and charts in this section is an effective way of presenting the company’s approach.
"We are very clear about where there are pressures and where there are not," said Mr Surch. "We spent a lot of time on the risks and opportunities section and people have found it very helpful. Some people might argue that you should avoid talking about risks and only talk about the good points. But our view has always been that it’s tough in any business and therefore you must set out the things that are going well and the things that are more challenging. It’s just not credible otherwise."
Failure to link key performance indicators (KPIs) to company strategy is a common weakness in reporting. Just as strategic statements need to be set in the context of the company’s market environment, KPIs need to be presented so that the reader can assess whether the company’s game plan is on track.
Shanks sets the context for its financial and non-financial KPIs in terms of its business objectives and presents them clearly in tables. The management team has taken the unusual, but effective, step of quantifying targets for the returns it expects from its portfolio of projects. And it has repeated this approach across all its reporting outputs - including the annual report, its website and investor presentations. Setting out the company's performance measures in this way helps to spell out the company's investment potential. Just as important, it sends the message that management is confident and is in control of the business.
For Shanks, the net result is corporate reporting that has attracted positive comment from investors. The company was 'Best investor communication' winner at the PLC reporting awards and was highly commended in the Building Public Trust Awards for being "highly innovative in the way it brings risks to life and links them to strategy, performance and other aspects of the business... one of the most joined‑up examples of reporting we have seen, giving a real sense that one person has written the whole thing".
Establishing the links within the document and with the group’s other presentations – including the website and presentations to the City of London – was a key focus of the exercise and strongly influenced the look and feel of the annual report. "When we stand up and do our year-end presentation to the City, we do it quite pictorially, with waterfall charts and other diagrams. But we tended not to do that in the annual report. We used to just put in a load of really dry information." Mr Surch explained.
"PwC was very keen on us being consistent between the way we presented to the City, on our website and in the annual report, and this really helped. A lot of the charts in the report are direct lifts from the ones we present to the City. We also spent a lot of time trying to get the information from various sources in the company to hang together and make it read like one person had written the whole thing. That was not the case, but it’s pleasing to get comments to that effect."
Shanks is not inclined to rest on its laurels. Praise for its 2011 annual report was welcome, but came after year one of a two-year project to change the group’s approach to reporting. Chris Surch, group finance director, shares some of the lessons learned as the team looks for further reporting improvements.
Be evolutionary – don’t try to do it all in one year. You are always under pressure to get reports done and a lot of effort goes in across the organisation, so be realistic.
Set the timetable – this is key to making it work. Get the inputs from people in the organisation early and give yourself time to achieve a consistent style and messaging.
Clarity is key – be sure about why you are taking your approach and be consistent. For Shanks, the focus was on explaining things better.
Be relatively brave – you may think explaining your business model could be harmful, but if it is done in the right way the benefits are good and you don’t actually give up anything in the process.
Be consistent – there may be obstacles to including information that you use in investor presentations in the annual report, but overcoming them is worth the effort. Your website and online communications need to be consistent, too.
Look to improve – view better communication as a work-in-progress. For example, this time around Shanks will again be focusing on the timetable for inputs to its reporting and expanding its coverage of the group’s corporate responsibility and sustainability activities.