Inside: Reporting On Shareholder Value

Inside
Out
Reporting on
Shareholder Value
Inside Out: Reporting on Shareholder Value
Contents
Page
Preface 2
Summary 3
1. The need for shareholder value reporting 6
1.1. What is shareholder value? 6
1.2. Creating shareholder value 7
1.3. Reporting on the creation of shareholder value 9
2. Limitations of the annual report 10
3. Investors’ needs 12
4. A ‘stakeholder’ perspective? 14
5. Management’s pivotal role 15
5.1. Strategy development 15
5.2. Performance indicators 16
6. Reporting performance – past and potential 18
7. Our recommendations 19
8. Examples from current reporting practice 22
Conclusion 36
Appendices
I The principal shareholder value measures 37
II Evidence of investors’ information needs 42
III Examples of performance indicators 46
IV Members of the Steering Group 47
© The Institute of Chartered Accountants in England and Wales 1

Preface
This discussion paper is issued by the ICAEW Financial Reporting Committee at a time of growing awareness
of the limitations of external corporate reporting. Its proposals come from a broadly based Steering Group of
senior financial managers from business together with key representatives from the accounting profession,
investor relations, fund management, financial analysts and the academic community.
As a response to calls for change the Institute has instigated a review of the entire process of
communicating information externally in ‘The Corporate Report-New Horizons’. This wide-ranging review
will consider, inter alia, the demand for more information on intangibles, future prospects and stakeholder
issues together with the impact of globalisation and information technology on reporting.
This paper brings to that over-arching review a perspective on the accountant’s traditional contribution
to the communication process, the annual report. We make proposals designed to meet investors’
increasing focus on ‘shareholder value’ creation and, therefore, their growing demand for information
about the future prospects of a business.
The paper builds on the Financial Reporting Committee’s earlier work on financial performance and risk
reporting. The January 1999 discussion paper “Financial Performance: Alternative views of the bottom
line” noted that the underlying financial performance of a business is best represented by the change in
its economic value, that is, the change in the net present value of its expected future cash flows.
However, it concluded that, because the future is uncertain, changes in economic value cannot be
reported as a matter of fact. We need, therefore, to supplement measures of performance with narrative
disclosures and indicative measures of future potential for creating value.
In December 1997, our discussion paper “Financial Reporting of Risk: Proposals for a Statement of
Business Risk” made recommendations for the enhanced reporting of that aspect of future prospects. A
follow-up report in July 1999 “No Surprises: The case for better risk reporting” reaffirmed the view that
enhanced disclosures about key business risks and how each risk is managed and measured would
provide practical forward looking information and help meet investors’ needs. The report also
acknowledged that companies’ risk management could only be understood in the context of the
strategies adopted by management. The present discussion paper focuses on disclosure about those
management strategies and indicators of their effective implementation.
The common thread linking these projects, including the present paper, is the need for enhanced
information about business performance reflecting a more forward looking focus.
We encourage readers of this paper to send us their views:
● If you support our proposals let us know and, even better, send us examples of
corporate reporting consistent with them.
● If you believe that there are further implementation issues that should be addressed
tell us what they are.
● Or, if you believe that our proposals are wrong in principle, tell us why.
Comments on this paper will be analysed for ‘The Corporate Report-New Horizons’ project and should
be received by 31 January 2000. Unless a commentator requests confidentiality, comments will be placed
on the public record. They can be sent by email to [email protected] or by post to:
Robert Langford, Head of Financial Reporting,

Institute of Chartered Accountants in England and Wales,
2 Chartered Accountants’ Hall, PO Box 433, Moorgate Place, London EC2P 2BJ.
Summar y
Investors’ needs
Investors today want information about a company’s potential for creating shareholder value. Value is
created by enhancing a company’s prospects and this, to a large degree, stems from a company’s
competitive advantage together with the ability of management to choose and implement a strategy
which exploits that advantage.
Annual reports give a primarily historical perspective and provide limited information on these matters.
The Accounting Standards Board statement on the Operating and Financial Review (OFR) already
recommends the inclusion of a discussion of the main factors that may influence future results,
including the principal risks and uncertainties, but the reporting of forward looking information by
companies is generally very sparse.
When given the opportunity to question management, it is our experience that analysts and
institutional investors are keen to understand a company’s strategy and the key ‘drivers of value’ that
must be managed in order to execute that strategy. Questions asked include:
● What is the company’s strategic vision and strategy for achieving it?
● Why is that the appropriate direction?
● Does the organisation have the capability to implement the chosen strategy?
● What does management need to manage in order to achieve its objectives?

These are important issues that should be addressed in the annual report. We believe it to be undesirable
for the answers to be restricted to those able to attend a briefing meeting. Indeed, companies could
benefit by communicating to a wider audience the clarity of management’s purpose and the linkage
between their strategic direction and their performance.
Management’s pivotal role
Many managers believe that a gap exists between the internal perception of a company’s potential and
that of the stock market. One of the roles of effective management is to act as a bridge between the
external world and the company, ensuring that the external perception of a business reflects the way in
which the company operates. To do this, management must understand the investment process, and
understand investors’ valuation models in order to ‘speak their language’.
At the same time, implicitly or explicitly, management will have its own business model and will have
chosen strategies expected to optimise future performance. Many companies have developed value
related measures of performance and lead indicators that reflect progress towards achieving the chosen
strategy. The measures and the lead indicators used, at board level, to manage a business are equally
important to the stock market in ensuring a fair judgement of the business and reliable forecasts of
future returns.
The challenge for management is to link the internal and external perspectives, thus making key aspects
of a company’s capabilities more transparent to investors. The phrase ‘Inside Out’ in the title of this
paper reflects our belief that management must be more open in the external disclosure of key elements
of the information used internally to manage the business.
3
The future is uncertain and cannot be reported as a matter of fact, but reporting the past alone is no
longer enough. We believe that the annual report should be designed with the aim of encouraging
managers to report both why their strategies are expected to lead to the creation of value over the long
term and their view of performance. These together will enable investors to make their own assessments
of the future prospects of a business and take better-informed decisions.
We propose structured, qualitative disclosures, supported by trends of the most important performance
indicators and measures used by management. We are aware that commercial sensitivity may impose
limitations on the disclosure of forward looking performance measures and targets but we are of the
opinion that there remains considerable scope for additional information to be disclosed.
Our recommendations
Our proposals are relevant to all companies whose shareholders are remote from management. The
proposals are, therefore, aimed principally at listed companies.
We believe it is important for explanation of a company’s strategy and the progress it is making towards
achieving that strategy to be placed within a structured framework. Therefore, we recommend that a
listed company should disclose, either in its OFR or in a similar statement, the key features underpinning
its internal ‘model’:
For the company as a whole:
● Its ambitions;
● Its strategic direction, together with targets or milestones towards achieving its
objectives;
● A description of the strategic decision-making process;
● A description of the performance management process;
● The preferred measures used internally to monitor economic performance.

In addition to the above, for each significant business activity as identified for management purposes:
● A description of the key drivers of value in the business, derived from, inter alia:
- A description of the market in which the business operates, using both qualitative
terms and quantitative data;
- Why management believes it is the right market to be in;
- The business’s competitive position within the market;
- Future trends anticipated in the market;
- How management intends to maintain or alter the business’s position within the
market.
● Measures of performance appropriate to the business, including non-financial

measures, and/or lead indicators, derived from the key drivers of value, that are used
internally to monitor potential in that business.
4
We see these proposals as providing a practical framework for the introduction of a more forward
looking perspective into annual reports. They should not be considered a theoretical ‘wish list’. Our
proposals are incremental, building upon and giving a structure to the practice which is already
emerging around the world, largely outside the UK. The final section of the paper brings together some
examples from current corporate reporting which illustrate the thinking behind our recommendations.
We ask companies to experiment immediately with the additional disclosures we propose. There is
nothing radically new in our proposals but putting these disclosures together can present a sharper
image and differentiate a company in increasingly demanding capital markets.
The proposals create a link between external reporting and the processes and performance indicators
used internally. We believe that this more transparent disclosure will lead to an improved understanding
of management objectives and of the risks and opportunities associated with an investment. An
improved understanding of the business and management’s objectives will permit investors to assess
performance against the targets set by management and should, therefore, build management credibility.
Better information about the risks and opportunities faced by the company should help investors to
value a company more accurately and with less uncertainty, which may reduce capital market volatility.
5
1. The need for shareholder value reporting

This paper starts from the view that the economic value of a business is the present value of its expected
future cash flows. The value created by a business is, therefore, best represented by the change in its
economic value, that is, the change in the net present value of its expected future cash flows.
However, because the future is uncertain, changes in economic value cannot be captured in a single
figure and reported as a matter of fact. The measurement of value created is, inevitably, subjective and a
system of financial reporting based upon expectations of future cash flows would not, currently, be
thought sufficiently reliable to be widely acceptable.
Many investors do, however, base share valuations on their forecasts of future cash flows and want
forward looking information to feed into their valuation models. Capital markets around the world have
become more competitive as a result of the removal of restrictions on cross-border flows of capital and
improved technology. So, active institutional investors, under ‘perform or perish’ scrutiny themselves,
are today looking for information from companies about their potential for creating value.
The objective of this paper is to stimulate the development of ways of giving this information.
1.1. What is shareholder value?
‘Shareholder value’ has become a widely used cliché but it is, perhaps, not widely understood. This may
be because the different measures of shareholder value capture different aspects of performance.
From the investors’ perspective, value created is commonly measured as the growth in a company’s share
price over a period together with dividends received from it, the Total Shareholder Return (TSR). This is
an essentially forward looking measure since share prices reflect the market’s expectations of future cash
flows. If a stock market prices shares efficiently, this will reflect the value created by management in a
period.
From management’s perspective, the insight offered by a ‘value’ focus is that the use of equity capital is
not ‘free’, it is invested in the expectation of earning a return and this required return defines the
company’s cost of equity capital. Management can only create value for shareholders if the company
consistently, over the long term, generates a return on capital which is greater than its cost of capital.
Companies can use this value focus both in their strategic planning process and in measuring
performance. Forecasts of expected cash flows are commonly used in project appraisal and Total Business
Return (TBR) applies this forward looking, cash flow perspective to an appraisal of the performance of a
whole company or business. Alternatively, economic profit measures of performance, including
Economic Value Added (EVA), are calculated historically. The different measures capture different aspects
of performance and there is no single ‘right’ measure of shareholder value created. Appendix I provides a
brief description of the more common shareholder value measures.
There are other issues too. Share prices react to factors outside the control of management in the short
term, for example, the raising of interest rates. Is it right that performance measurement reflects this, as a
measure based on share price will? There may, also, be a disconnect between the market’s measurement
of value, based on share price, and management’s view of the value created. A recent survey of 100 UK
senior executives by PricewaterhouseCoopers (PwC) found 34% believed the shares of their company to
be undervalued and 6% believed them to be overvalued.1 Share prices are volatile and, while most people
accept that the stock market prices shares efficiently in the long term, many believe that it over-reacts to
6 1
Reporting Gaps in the UK: The Chief Executive’s Perspective; R. Eccles, D. Phillips, H. Richards, PricewaterhouseCoopers, 1998.
news in the short term. Furthermore, the estimation of a cost of capital is not straightforward.2 For these
reasons, the measurement of value created is not easy and it is important to look at the creation of value
over several periods; whatever the measure used, the trend is as important as its size in a single period.
Figure 1 summarises key elements of the internal and external perspectives on shareholder value
creation. While management and investors both measure value created, it is management that creates
value by developing and implementing an appropriate strategy that recognises the cost of capital.
Figure 1: Investors’ and management’s perspectives on shareholder value
The cost
Performance
of capital measurement by
Investors’ investors
Perspective e.g.
● TSR
● Market Value Added
Company objective -
increase
shareholder value
Performance
measurement by
management
Management’ s
e.g.
Perspective Strategy ● Total Business Retur n
development and ● Economic profit
● CFROI
implementation
1.2. Creating shareholder value
In the highly competitive business environment of today, management seeks to enhance future cash
flows and create value by recognising and sustaining the company’s sources of competitive advantage.
Management’s ability to develop a strategy which builds on the business’s sustainable competitive
advantage is a significant factor in the creation of shareholder value. Equally important is the ability to
implement that strategy, to recognise and manage the risk inherent in the strategy and to identify future
sources of potential competitive advantage, including trends in markets.
2
Some companies compare the return on net assets with a weighted average of the costs of equity and debt capital
(WACC); others compare the return to shareholders with the cost of equity capital alone. Calculation of the cost of equity
capital poses a considerable challenge in practice as it relies on a number of assumptions and estimates, chiefly relating to
the relationship between risk and investors’ required return. An investor requires a return on his investment greater than
the risk free rate obtained from investing in government bonds and his required return increases as the perceived risk of
an investment increases but the exact relationship is unclear. 7
Management has two principal ways to create shareholder value:

● Obtain greater efficiency, either margin or asset, from the existing capital base. This is often referred
to as numerator management and denominator management. Numerator management is about
improving margins or achieving sales growth from the existing capital base. Denominator
management is about asset and cost efficiency.
● Growth, by investing in projects which are expected to generate a return in excess of the cost of
capital.
Managing for shareholder value creation has been criticised for emphasising efficiency at the expense of
growth.3 This is a misapprehension, as creating shareholder value need not be primarily about downsizing.
An important part of management’s strategy must be the search for profitable growth opportunities.
Competitive analysis is a widely used management tool in the search for investment opportunities. It is
used to identify markets in which a business has a strong and sustainable strategic position as a result of
its sources of competitive advantage. A good strategic position offers great potential and value should be
created by additional investment in these markets. Competitive analysis would, typically, examine the
strategic position of a business as a combination of the attractiveness of its markets and its individual
competitive position within each market, as illustrated in Figure 2. An attractive market is one in which
the average business expects to earn a positive return on its investment both now and in the future. The
competitive position of a business is derived from the specific sources of competitive advantage of that
business which can be sustained over time and exploited in that market.
Figure 2: Strategic positioning
High
Strong strategic
position - great
potential for the
creation of value
Market attractiveness
Low
Weak Strong
Competitive position
An understanding of the current and likely future strategic position of a business gained from
competitive analysis can be used to assess whether participation in a particular market is likely to create
value and to assist in the choice between alternative strategies for competing in that market.
The key insight offered by a ‘value’ perspective is that growth, or incremental investment, will not create
value for shareholders unless a return on capital in excess of the cost of capital is anticipated. This is
illustrated in Figure 3, where value is created only on the right-hand side of the diagram.
8 3
As recently in ‘What’s driving your share price today?’ A.T.Kearney, 1998.
Figure 3: Growth and retur n
+ve
Value destroying Value creating

- ‘bad’ growth - ‘good’ growth
Growth = Incremental investment 0
Value releasing Value limiting

- divestment & other - missed
remedial action opportunities
-ve
0
-ve +ve
Net return = Return on capital - Cost of capital
For the management of a business to continue to create value it must have a clear understanding of the
strategic position of the business to ensure resources are allocated to value enhancing investment
opportunities. Investing in projects that expand the business in markets in which it has a strong
strategic position has the greatest potential to create value. Where a business allocates resources to
projects expected to earn a return in excess of the cost of capital it will add to the present value of the
expected future cash flows and hence to the economic value of the business, creating shareholder value.
1.3. Reporting on the creation of shareholder value
Why should companies report on their potential for creating shareholder value? Surely, some would say,
it is nothing more than a passing fad.
On the contrary, we believe that the forward looking perspective adopted by management in the
strategic planning process, in general, and by a ‘shareholder value’ focus, in particular, matches
investors’ desire for long term, future-oriented information.
It has already been noted that an entirely quantitative approach to reporting is not currently, and may
never be, practicable. Instead investors look for softer, more qualitative evidence that management has
set its sights on achieving more than the market expects, in other words - on creating shareholder value.
In the subsequent sections of this paper:

● We argue that, in its present form, the annual report includes too little strategic and other future-
oriented information for it to retain its importance as a source of information for investors.
● We present evidence of investors’ keen interest in disclosures about the development and
implementation of a company’s strategy.
● We emphasise our belief that investors’ needs should be the main focus for the annual report.
● We call for management to report more transparently the information used to manage the
business.
● We justify our preference for structured narrative disclosures of a company’s strategy, supported by
a set of performance indicators, within the annual report.
9
2. Limitations of the annual report

Annual reports give a primarily historical perspective and provide limited information about strategic
strength or any other future-oriented matters. The financial statements themselves remain focused on
past events and financial performance. The Accounting Standards Board (ASB) recognises, in its proposed
Statement of Principles for Financial Reporting, that this focus does not provide a sufficiently
comprehensive view of performance and prospects and that financial statements need to be
supplemented by other reports:
“Financial statements have various inherent limitations that make them an imperfect
vehicle … for example:
…they focus on the financial effects of transactions and other events and do not focus
to any significant extent on their non-financial effects or on non-financial
information in general.
…they provide information that is largely historical and therefore do not reflect future
events or transactions that may enhance or impair the entity’s operations, nor do
they anticipate the impact of changes in the economic or potential environment.”4
The financial statements form the backbone of an annual report, but they are usually accompanied by other
material, principally the company’s Operating and Financial Review (OFR). The annual report is not the only
form of external corporate reporting but it has historically been at its heart, as is illustrated by Figure 4.
Figure 4 5 : The communication of decision-useful information
4
Revised Exposure Draft of the Statement of Principles for Financial Reporting, ASB, 1999, Ch.1 para.1.7-1.8
10 5
Developed from the diagram ‘Categories of Financial Information’ on p.16 of the above Exposure Draft.
The Cadbury Committee highlighted the need for a supplementary, future-oriented report to accompany
the financial statements and expressed the hope that the OFR would meet this need:
“The Committee recognises the advantage to users of reports and accounts of some
explanation of the factors likely to influence their company’s future progress. The
inclusion of an essentially forward looking Operating and Financial Review, along the
lines developed by the Accounting Standards Board … would serve this purpose.”6
Unfortunately, the OFR has not developed into ‘an essentially forward looking’ operating and financial
report. The ASB statement on the OFR recommends the inclusion of a discussion of the main factors that
may influence future results. However, surveys of OFR reporting 7 consistently show that companies have
been slow to respond to the needs of investors and the challenge of providing forward looking
information, both financial and non-financial.
In addition, the emphasis on historical, financial effects is unfortunate because accounting profit is an
unreliable indicator of the creation of economic value, especially where significant expenditure that is
expected to confer a future benefit is charged against profit in the financial statements. Such ‘revenue
investment’ includes spending on brands, research and development, people, knowledge management
and innovation.
These limitations are widely acknowledged but the annual report continues to be used by investors
despite its shortcomings. So why is change necessary? Chris Swinson, the immediate past President of
the ICAEW, gave an answer to this question in introducing a presentation on ‘The 21st Century Annual
Report’ when he called for ‘a formal and broad review of corporate reporting’:
“Why should we now pay more attention to complaints about the usefulness of
corporate reports? The answer to this may be that the assets and risks not measured by
historical cost accounts appear to be becoming more important as determinants of a
business’s future success.”8
Our view is that the annual report must include more information useful to investors’ decision-making
or it will become, at best, a secondary source of information.
6
Cadbury Report, para. 4.53
7
Operating and Financial Review: Experiences and Exploration, P. Weetman & B. Collins, ICAS, 1996; What’s the story? Arthur
Andersen, 1996 and A Critical Evaluation of Forward-looking Information in the OFR, J. Smith, 1997 dissertation, Heriot-Watt
University, Edinburgh. In particular the last of these references reported a pilot study of the 1995 annual reports of ten
FTSE 100 companies in which forward looking information averaged only 10% of the OFR.
8
The 21st Century Annual Report, ICAEW, 1998, p.5
11
3. Investors’ needs
The annual report can rarely provide the answers to every question that an investor may ask. However,
we believe that the significant gap in the reporting of future-oriented and value based information must
be addressed because historical financial information alone is increasingly perceived as lacking predictive
value.
We believe that investors place importance on forward looking information in general and information
about strategy in particular. Our perception is supported by evidence from recent surveys of investors’
needs, which are described in more detail in Appendix II, and by our own experience.
All the surveys confirm both investors’ desire for more forward looking information in a company’s
annual report and the importance to their investment decisions of key drivers of future performance,
especially strategy. However, particularly pertinent is evidence obtained from a large scale study by
researchers from the Ernst & Young Centre for Business Innovation in the USA9. They found that the
non-financial information most valued by portfolio managers was information relating to:
● Strategy execution
“how well management leverages its skills and experience, gains employee commitment
and stays aligned with shareholder interests”10
● Management credibility
which will primarily depend on the integrity of management and its ability to achieve
targets.11
● Quality of strategy
“management’s vision for the future, whether it can make tough decisions and quickly
seize opportunities, and how well it allocates resources.”12
When given the opportunity to question management in briefing meetings, it is our experience that
analysts and institutional investors want to look ahead to the opportunities and challenges of the future.
They are particularly keen to understand a company’s strategy and the key levers, or drivers of value,
that need to be managed in order to execute that strategy. Questions asked include:
● What is the company’s strategic vision and strategy for achieving it?
● Why is that the appropriate direction?
● Does the organisation have the capability to implement the chosen strategy?
● What does management need to manage in order to achieve its objectives?

These are not, of course, the only questions raised but they are important issues and they could be
addressed in the annual report.
9
Reported in Measures that Matter, Ernst & Young LLP, 1998.
10
Measures that Matter, p.1
11
These were two of the factors found to be very important to investors in a study conducted by the Institute of Chartered
Accountants in Scotland and described in Appendix II.
12 12
Measures that Matter, p.2
We believe it to be undesirable for the answers to these questions to be restricted to those able to attend
a briefing meeting. In this country, it has long been established that factual information disclosed should
be equally available to all investors. Indeed, companies could benefit by communicating to all users of
the annual report the clarity of management’s purpose and the linkage between its strategic direction
and performance.
Some companies recognise this and make statements about strategy and objectives in their annual
reports that go some way towards dealing with the issues, as illustrated by the examples of existing
disclosures in the final section of this paper. But such disclosure is not common and is usually restrained
or fragmented.
This does not mean that we are opposed to briefing meetings, just that we believe that these issues are
too important to be reported only to a minority of shareholders because companies simply do not have
the resources to meet all those with a legitimate interest in the information. The disclosures that we
propose are intended to improve investors’ understanding of a business, enabling briefing meetings to
become more of a dialogue, with feedback given to management by investors.
To summarise, the evidence from recent surveys supports our experience of investors’ needs. We
therefore consider it vital that external corporate reporting reflects the long term future-oriented
perspective, often shared in briefing meetings, between some investors and management.
13
4. A ‘stakeholder’ perspective?
Some have called for the annual report to adopt a ‘stakeholder’ rather than a ‘shareholder’ perspective.13
In its review of company law14 the Department of Trade and Industry (DTI) referred to this as the
‘pluralist’ approach. A contrast was drawn with the ‘enlightened shareholder value’ approach and views
were sought on which approach should now be enshrined in company law. We prefer the ‘enlightened
shareholder value’ approach. We believe that adopting as a company’s governing objective the creation
of wealth, or value, for its investors is, in principle, also the best way of securing overall prosperity
through economic growth and international competitiveness.
However, adopting this objective for a company does not mean that the needs of other stakeholders can
be ignored. Critical to this definition of shareholder value is a forward looking perspective which
requires the company to build long term relationships to succeed, as the DTI notes:
“Very often [co-operative and long term] relationships are important ingredients of
success. Relationships founded on mutual trust make it more likely that employees will
acquire high levels of skill and knowledge. Similarly suppliers will make investments in
plant geared to the needs of a particular customer. Such relationships between the
company and its customers also lead to stable and efficient markets downstream in the
supply chain.”15
In many cases, some or all of the other stakeholders will be critical to the success of a business and it will
only be by meeting the needs of those stakeholders that a company will create the greatest shareholder
value. A survey of 20 listed companies has provided some evidence that companies which adopt an
‘enlightened shareholder value’ approach do value their long term relationships with all stakeholders
and also, therefore, rank well in terms of the ‘stakeholder’ value they create. 16
Because we believe that the creation of shareholder value is the appropriate objective of a company, we
believe that external reporting should continue to focus on investors’ information needs.
Another, commonly expressed, reason for preferring to report primarily for shareholders is that, by
providing equity capital, investors take the greatest risk and, therefore, require the greatest level of detail
about the company. So information designed to meet their needs is also likely to meet many of the
needs of other stakeholders. We believe that this too continues to be true.
13
For example the Royal Society for the Encouragement of Arts, Manufactures and Commerce project Tomorrow’s Company.
14
In Modern Company Law for a Competitive Economy: Strategic Framework, DTI consultative document, para.5.1.12, 1999.
15
From the same document para. 5.1.10
14 16
Reported in Shareholder Value, I. Cornelius & M. Davies, FT Financial Publishing 1997, pp.199-204.
5. Management’s pivotal role

Many managers believe that a gap exists between the internal perception of a company’s potential and
that of the stock market. Management has a pivotal role to play in the communication process, acting as
a bridge between the external world and the company, to ensure that the external perception of the
business reflects the way in which the company is positioned and operates. Implicitly or explicitly,
management will have a model of business performance and will have chosen the strategies it believes
most likely to achieve optimum levels of future performance, based on that model. To implement the
strategy management must understand the internal processes and performance drivers and operate in
that ‘language’. However, to communicate effectively with the external world management must also
understand the investment process and investors’ valuation models in order to be able to ‘speak their
language’. The key, in our opinion, is greater transparency in the external reporting of internal processes
and measures.
We are therefore proposing the disclosure only of information already available to management. In
today’s global markets, management need to be able to meet the challenges of greater competitiveness in
both capital and customer markets and be in a position to take advantage of potential world-wide
opportunities. Successful companies usually focus on where they want to be and how they are going to
get there, rather than where they have been. So, typically, managers no longer rely on a small number of
historical, financial measures to manage their company. Increasing emphasis is placed on forward
looking strategic processes and measures useful in monitoring progress towards the successful
implementation of a strategy. These are likely to include both leading indicators of financial performance
and non-financial measures.
5.1. Strategy development
The process of developing strategy is more formalised in some companies than others but the same
questions usually need to be addressed:
“The first stage is the selection and analysis of all relevant information: What is our
current situation? How do we seem to our customers? How do we stand competitively?
Do we see trends - and if so, in which direction? …
Then: What is possible for the future? What is our most desirable (practical)
destination? …
And then finally: How do we get there? What actions, deeds, changes, inventions,
investments do we need to make that will make our arrival at that destination most
probable?”17
It is impossible to be successful long term without a view of the future direction to be taken by a
company. A focus on strategy is, therefore, vital to the management of a company and recent research
shows it to be of significant importance to investors.
Fundamental to an assessment of a company’s strategic position is a review of the market place and its
positioning within that market vis-à-vis competitors. This information is vital to an understanding of a
company’s ability to compete and create value in the future. While many investors undoubtedly perform
their own competitive analysis, we believe that they also want to understand the options considered by
management and the rationale underlying management’s choice of strategy.
17
Edited from an essay Why we exist: Time-and-Motion Man and the Mad Inventor by Jeremy Bullmore, included in the 1998
Annual Report and Accounts of WPP Group plc at p.18. 15
5.2. Performance indicators
But a strategy does not exist in a vacuum. The choice of strategy will both affect, and be affected by, the
key drivers of value of a business – those areas in which a business must perform well for its strategy to
be successfully implemented. Many businesses have developed performance indicators to monitor their
progress towards achieving their chosen strategy.
Performance indicators are, as the name suggests, intended to give early indications of performance rather
than measure performance itself. The financial measures of sales growth, profit margins and capital
investment will be important lead indicators of performance for all businesses; but many businesses also
use other measures, derived from their specific value drivers and individual circumstances.
For example, a company operating in a new and developing market will probably have identified a
strategy of market penetration as likely to create the most value. In this case, the key process is
marketing and the indicators used to manage the business could include measures of market growth,
market share and customer acquisition.
Another business, manufacturing products to sell in a very competitive, mature market, may choose a
strategy of being the lowest cost producer. The purchasing of raw materials and the manufacturing
conversion may then be the processes that drive value and the performance indicators used would focus
on the critical aspects of those processes, perhaps monitoring input price inflation, asset utilisation and
employee productivity.
Appendix III provides some examples of performance indicators. Some of the performance indicators
provide information about ‘assets’ that are hard to quantify such as the efficiency of a company’s processes
or intellectual capital. Others are lead indicators of either external or internal conditions, for example:
● a prediction of market growth;
● the trend in customer retention; or
● an indicator of employee morale such as the trend in employee turnover.
Investors’ primary interest is in a company’s ability to produce value in the future. Their main concern
with traditional accounting based measures is their lack of predictive power. However, the primary
reasons for this perceived deficiency are the same as those which have led management to use a more
extensive set of performance indicators. The needs of investors and management, therefore, overlap to a
considerable degree and indicators that are used internally are equally important to the stock market in
making a fair judgement of the business and forecasts of future returns.
A business may use a wide range of performance indicators internally for different levels of management.
We propose the disclosure only of those monitored at board level as the key measures. We do not believe
this would be too onerous. For example, for Jack Welch of General Electric Inc. there are three key
measures to track:
“The three most important things you need to measure in a business are customer
satisfaction, employee satisfaction and cash flow. If you are growing customer
satisfaction, your global market share is sure to grow too. Employee satisfaction gets
you productivity, quality, pride and creativity. Cash flow is the pulse – the vital sign of
life in a company.”18
18
Quoted in Performance Measurement: The New Agenda; Using Non-financial Indicators to Improve Profitability, J. Geanuracos
16 and I. Meiklejohn, 1993, p.6.
In addition to using performance indicators, companies are increasingly monitoring underlying, or

economic, performance using one or more of the shareholder value measures described in Appendix I.
We encourage the external disclosure of these measures where they are believed to be important
measures internally.
The challenge for management is to link the internal and external perspectives thus making key aspects
of a company’s capabilities and underlying performance more transparent to investors. The phrase
‘Inside Out’ in the title of this paper reflects our belief that management must be more open in the
external disclosure of key elements of the information used internally to manage the business.
17
6. Reporting performance – past and potential

In January 1999, the ICAEW published a paper on reporting performance 19 to encourage people to think
beyond current financial statements to how performance might be reported. The paper described six
possible ways of measuring financial performance. Any historical measure of performance will not
capture the effect of actions and decisions already taken whose financial effect lies in the future. The
paper therefore concluded that the underlying performance of a business is most completely represented
by the change in its economic value, i.e. the change in the net present value of its expected future cash
flows. A few companies have begun to experiment with use of this kind of measure internally. However,
because the future is uncertain, the calculation inevitably involves a higher degree of subjectivity than is,
currently, likely to be acceptable for an external financial reporting system.
When ‘performance’ incorporates expectations about future events, it cannot be reported as a matter of
fact and cannot, therefore, be perfectly captured within a single measure. Our preference is therefore for
the annual report to include, not a single measure of shareholder value created, but a set of data,
supported by structured narrative disclosures from which investors and their advisors can draw to meet
their own individual needs. Our preferred approach is for the historical cost financial statements20 to be
supplemented with future-oriented reporting which reflects a long term perspective.
We propose structured qualitative disclosures about the nature of a company’s strategic and performance
management processes and its position within the markets in which it operates. These should be
supported by trends in any value based performance measures used by management and those
performance indicators identified by them as relating to the key value drivers for their business.
We are aware that there will be some information that management believes to be too commercially
sensitive to disclose either because it would damage a business’s competitive advantage or because it
could prejudice the outcome of a future event. It is for management to decide upon the extent of
additional disclosures. However, in exercising their judgement, we ask that they do not consider only the
potential costs of disclosure but weigh against that the benefits that increased transparency can offer,
either directly through an improved relationship with investors, or indirectly as a result of competitors’
disclosures. We are of the opinion that there remains considerable scope for additional information that
is useful to investors to be disclosed. In particular, we believe that factual disclosures made in analyst and
investor briefing meetings should be incorporated into the annual report.
We are also aware that, in asking for disclosure about processes, there is a risk that the disclosures made
may become the standardised, non-specific and uninformative statements known as ‘boilerplate’.
However, we believe that investors will place little value on such statements. Further useful disclosure is
possible and we believe the market will reward those companies able to demonstrate that they have a
clear strategic vision and the capability to implement it effectively.
We are not proposing the disclosure of detailed profit or cash flow forecasts but recommend that
companies should make some predictive statements, for example, the expected growth in the market for
its products over the next three years. Companies will be aware of the need to guard against the making
of over optimistic predictions and, to promote balance, we encourage companies to report back against
the predictions previously made in a company’s annual report.
In addition, we recommend that forward looking and predictive statements are identified as such and
that the nature of such statements is made clear. UK companies with a US listing will already incorporate
a cautionary statement in their 20-F report, in order to come within the US ‘safe harbour’ legislation. We
do not propose such legislation for this country, but a cautionary statement would still be appropriate to
clarify the nature of prospective information.
Financial performance: Alternative views of the bottom line, ICAEW, January 1999
19
18 We acknowledge that current values are already incorporated into a balance sheet for certain assets - but the focus of the
20
financial statements remains historical.

7. Our recommendations
Our recommendations start from the view that management should report more transparently to
investors on the foundations of their business model, in particular, management’s strategy and the key
indicators of successful implementation of that strategy. We believe that our proposals are relevant to all
companies whose shares are, primarily, held by those not involved in the management of the company
or represented on its board. The proposals are, therefore, aimed at listed companies but would also be
appropriate for private companies with shareholders remote from management.
The proposals are intended to provide a framework for explaining a company’s strategy, and the progress
that the company is making towards achieving that strategy. As narrative disclosures and non-financial
measures form an important part of our proposals we believe that the appropriate place for these
disclosures is in a company’s Operating and Financial Review, or in a similar statement.
Our proposals are based upon disclosures relating to:
● Strategy;
● Markets and competitive positioning;
● Key performance indicators and ‘value’ based measures of performance.

In presenting this information, we believe it to be essential that companies report in a structured way,
demonstrating how these elements relate to and/or are derived from each other.
We propose that a company make the following disclosures, both for the company as a whole and, in
addition, for each significant business activity of the company:
● Describe the strategic ambitions.

We recognise that a company with diverse businesses may only be able to express its ambitions as
a numerical target. This overall goal would, usually, be translated into one or more specific
objectives for each business activity and we would expect a more detailed description to be
possible at that level.
● Indicate the strategic direction, together with targets or milestones towards

achieving its objectives.
We are asking for disclosure of how management intends to achieve these ambitions. Some
companies already disclose this information for the company as a whole. However, it is difficult to
assess the overall corporate strategy without an understanding of the alternatives available and the
strategy adopted by the individual business activities. We, therefore, go beyond recommending
disclosure of the corporate strategy and propose both disclosure of the strategies adopted by
significant business activities and information relevant to the choice of that strategy.
● Describe the strategic decision-making process.

Although it can be difficult to avoid standardised statements when describing a process we believe
that there are differences in the way companies or business activities operate which can usefully
be disclosed. These include the degree of decentralisation of strategic decision-making and the
way in which companies ensure that the strategic direction of individual business activities is
consistent with the corporate strategy.
19
● Describe the performance management process.

Performance management incorporates but is not limited to performance measurement.
Performance management seeks to ensure that a business delivers the planned performance or,
where actual performance diverges from plan, action is taken to change either the strategy or the
planned performance. As part of this process performance measurement seeks to identify and
monitor the most appropriate intermediate measures for managing a business. In addition,
performance measures are increasingly used to align managers more closely with shareholders’
interests through performance related incentive schemes.
We propose that a company describes its performance management process and, as companies
move away from traditional accounting based performance measures to manage a business, we
believe it will be helpful to disclose how the performance measures monitored are developed from
and align with the corporate strategy or that of the business activity.
Incentive schemes for senior management are, usually, already well documented in a company’s
annual report. We are not proposing any additional disclosures except that it would be helpful if
management could indicate links between an incentive scheme and the key drivers of shareholder
value.
● Provide a calculation of the preferred measures used internally to monitor economic

performance.
Most businesses will use shareholder value measures to some extent. For example, the use of
discounted cash flow analysis in project appraisal is widespread. Any value based measure depends
upon an estimate of the cost of capital, either to calculate the measure or as a comparator. Where
any value based measure is used internally, we recommend disclosure of a management estimate
of the cost of capital, together with the principal elements of the calculation. It would also be
helpful for a company to indicate whether management believes its current financial structure to
be appropriate and, if not, the target gearing.
As indicated in Appendix I, there are a number of different shareholder value measures which
capture different aspects of performance. Where one, or more, of these measures is important to
management, we recommend that it is disclosed externally, together with sufficient detail for the
calculation to be reconciled to the financial statements, if the measure is derived from those
statements, or any other supporting detail needed for a proper understanding of the measure.
Whatever the measure used, the trend is as important as its size in a single period. Consequently,
where management has the information available, we propose that a five year trend is reported,
calculated on a comparable basis.
In addition to the above, we propose the following disclosures for each significant business activity:
● A description of the key drivers of value in the business activity

The key value drivers are those processes or factors that are critical to the creation of value for the
strategy adopted by a business activity. The choice of strategy is likely to have been influenced by
an analysis of the market place and the business’s competitive position within that market.
Therefore, we recommend that a company provide:
20
- A description of the principal market in which the business operates, using both
qualitative terms and quantitative data;
- An explanation of why management believes it is the right market to be in;
- A description of the business’s competitive position within the market;
- A prediction, in general terms, of the likely future trends anticipated in that

market;
- A statement of how management intends to maintain or alter the business’s

position within the market.
Although this disclosure is likely to be most informative at the level of a business, we recognise
that, for companies with a considerable number of significant businesses, it is likely only to be
practicable at the level of a business activity as identified for management purposes.
● Measures of performance appropriate to the business, including non-financial

measures, and/or key lead indicators, derived from the key drivers of value, that are
used internally to monitor potential in that business.
Again, we recommend that the trend in a performance indicator or measure is shown over five
years and that sufficient supporting detail is provided for a proper understanding of the measure
used. We do acknowledge, however, that the measures monitored internally will change over time
and we would not expect a company to disclose a value for a measure for a period during which it
was not regarded by management as an important internal measure.
We see these proposals as providing a practical framework for the introduction of a more forward
looking perspective into annual reports. They should not be considered a theoretical ‘wish list’. Our
proposals are incremental, building upon and giving a structure to the practice which is already
emerging around the world, largely outside the UK. The final section of the paper brings together some
examples from current corporate reporting, which illustrate the thinking behind our recommendations.
21
8. Examples from cur rent reporting practice

In this final section we bring together some examples from current corporate and public sector reporting
to illustrate our proposed disclosures. We cannot illustrate all our recommendations from the annual
report of any one body but many companies provide some of the disclosures we suggest. These examples
are not intended as templates to be copied but should, rather, be seen as an indication of the route we
propose.
We ask that a company:
● Describes its strategic ambitions;
● Indicates its strategic direction, together with targets or milestones towards

Many companies already state their strategic ambition, but we believe that the usefulness of this
disclosure is greatly enhanced by linking the ambition to the direction a business intends to take and by
providing targets or milestones against which subsequent achievement can be monitored.
In these extracts, from the Cadbury Schweppes 1998 Annual Report, clear statements are made about the
company’s overall objective, its business philosophy, the long term targets management has set itself and
the strategic direction pursued in each of the business segments. In addition, performance against target
is reported for the three year period since the introduction of those targets.
22
23
We commend the clarity of the reporting of Cadbury Schweppes of its targets for the company as a
whole and the reporting back against those targets. However, we would also like to see the overall target
linked to the targets for individual business segments, as in the following extracts from the 1998 Annual
Report of the Swedish company, Ericsson.
In the first extract the company states its growth target for each segment and relates the overall target, of
20% annual growth, to targets for other financial indicators. The second extract gives the target market
position for each business segment and growth expectations for markets within those segments.
24
25
● Describes its strategic decision-making and performance management processes.
There is little current disclosure about these processes. However, the following extracts from the 1998
Annual Report and Accounts of Stakis do give some clues.
channelled to the projects with rates of return in excess of

the highest internal rates of our 10.5% hurdle rate. ... In
return. All projects are subject to making capital expenditure
a post-completion audit to ensure and acquisition decisions we
that returns are as expected and routinely forecast our results
We place a great deal of that lessons are learned. We do and cash flows for the
emphasis on generating cash and not claim that this is rocket current and following two
reinvesting it. Managers at all science, but we do claim that we financial years to indicate the
levels are encouraged to create do it diligently, that it avoids impact upon our financing
high return projects and enter under-performing investment and ratios of the investments
these in an internal competition that it does drive growth. ... We being considered.
to ensure that funds are make investments with internal
This, rather general, extract from the 1998 Annual Report of Skandia gives some indication of the scope
of its new Navigator model and IT system.
- The Navigator
Starting in 1999, Skandia no longer prepares a budget First-class data support is needed to make the
at the group level. Instead, the group uses the Navigator the effective real-time tool that we are
Navigator concept - developed internally at Skandia - striving for. Toward this end the Dolphin system has
for its business planning. been developed internally within Skandia. Dolphin is
an IT system that became available to all Skandia
Through use of the Navigator, the group's planning employees in October 1998 on Skandia’s intranet.
work is widened to encompass the five focus areas of Dolphin provides a platform for the various Navigators
the Navigator: within the group, giving the employees concerned
immediate access to updated planning material.
● FINANCIAL FOCUS
● CUSTOMER FOCUS In Dolphin we have created the conditions for a new
● HUMAN FOCUS structure for development, knowledge-sharing and
● PROCESS FOCUS strategic analysis.
● RENEWAL & DEVELOPMENT FOCUS
Today every business unit and subsidiary in Skandia
Through this approach, consideration is given to has its own Navigator. The system enables the
historical data as well as to the current situation and creation of process models and Navigators on the
future outlook in every planning process. The individual level, and the goal is to broaden the
Navigator creates conditions for continuous planning concept so that every Skandia employee will have his
based on a moving follow-up. Time-consuming budget or her own personal Navigator.
work has thereby been replaced by a real-time
planning process. This creates flexibility and
adaptability. Less time is spent following up activities
and more can be used for future-oriented action.
In addition to the five focus areas, each Navigator

includes a process model that is built upon Objectives
and Visions through Success Factors and Indicators to
Action Plans.
26
● Provides a calculation of the preferred measures used internally to monitor economic

performance.
The measure of group performance preferred by the Boots Company PLC is long term total shareholder
return. In this extract from the Report and Accounts for the year ended 31 March 1998 Boots states the
time period over which the calculation is made, indicates the basis of the calculation, and lists, on that
basis, the total shareholder returns of comparator companies.
Performance measurement The company’s governing objective is to

maximise the value of the company for the benefit of its
shareholders.
In line with this we believe that the best overall measure of group
performance is total return to shareholders calculated from the
movement in the share price and the value of dividends as if
reinvested when paid. We monitor our performance on a rolling five
year basis against ten peer companies, the results of which are shown
in the adjoining table.
The German Metallgesellschaft Group prefers a calculation of economic profit. In this extract from its
website the company states its cost of capital, gives its definition of return on capital and shows how
both the numerator and denominator are derived.
27
And in addition to the above, for each business activity, we ask for:
● A description of the key drivers of value in the business, derived from:
- A description of the market in which the business operates, using both qualitative
terms and quantitative data;
- An explanation of why management believes it is the right market to be in;
- A description of the business’s competitive position within the market;
- A prediction, in general terms, of the likely future trends anticipated in that market;
- A statement of how management intends to maintain or alter the business’s

position within the market.
The following extracts are taken from the 1998 Annual Report of SCA, a Swedish company in the paper
products industry, and relate to its hygiene products segment. The key drivers of value for the segment
are identified as continuously updating the segment’s products and expanding its business, being a low
cost producer and being able to offer both branded and retailers’ own label products. A good description
of the segment is provided, with the principal markets identified and quantified and predictions are
made about expected market growth. Indications are also given about competitive position, although the
disclosures could be more complete. Good use is made of charts, for example, to indicate the maturity of
the market for each of the principal product groups and the company’s market share.
To meet market demand, SCA sells products

under its own brands as well as under private
labels - retailers’ brands.
The business area has sales in more than 40
countries, with Europe being its principal
market. SCA is a world leader in incontinence
products and is Europe’s second-largest supplier
of tissue.
The Hygiene Products business area is one of
Europe’s leading manufacturers of tissue and MARKET
fluff products for personal hygiene and other The world market for absorbent hygiene
applications. The tissue products include products amounts to nearly SEK 400 billion in
kitchen towels and toilet paper, handkerchiefs the production chain, of which Europe accounts
and napkins. The range also includes tissue for for one third.
personal hygiene and for wiping and cleaning Sales of tissue and fluff products in Europe
applications in industry, commercial companies, amount to approximately SEK 65 billion and
hotels, restaurants and institutions - known as SEK 55 billion, respectively. The growth for
the Away From Home (AFH) market. The fluff tissue products amounts to approximately 3%
products comprise incontinence products, annually. Among the fluff products, there is a
feminine hygiene products and baby diapers. strong 10% growth in incontinence products.
The business area’s customer groups consist of Sales of baby diapers are rising sharply in
the retail trade (sales to private consumers), the Central and Eastern Europe, while demand is
AFH market and the market for incontinence increasing only slightly in Western Europe. The
products. same situation applies in the case of feminine
SCA is continuously launching new products hygiene products.
as a means of strengthening its competitiveness. Such American producers of hygiene
28
AFH market
The principal items sold in the AFH market are
tissue products used in industrial and
commercial companies, hotels and restaurants,
health-care institutions and other public
establishments. These products are distributed
products as Procter & Gamble and Kimberly- via wholesalers and service companies or directly
Clark market their products mainly under their to individual customers. The market in Europe is
own brands. Fort James, like SCA, sells its valued at approximately SEK 25 billion. The
products under its own brands and under growth amounts to approximately 3% per year.
retailers’ private labels. New, higher-quality Hand wiping products, along with toilet
products are being introduced continuously paper, are the dominant products. The tissue
and constitute an increasingly important products for hand wiping products are taking
competitive weapon. market shares from other drying systems such as
Up to now the financial uneasiness those employing hot air and textile hand towels.
throughout the world has had a limited impact Important competitive advantages include
on sales of hygiene products. Demand in Russia offering customers a complete concept of
has declined, however, while markets in Asia installation-ready paper products (paper and
and South America are relatively unaffected. holder, etc.) along with good service and
The growth in sales of hygiene products in deliveries.
these less developed markets is expected to be
substantial in the future. Market for incontinence products
Incontinence products used in health care and
Retail trade nursing facilities are distributed directly to
Sales to consumers in Europe of such hygiene hospitals and nursing homes, as well as via
products as tissue and feminine hygiene items, as pharmacies or the retail trade, depending on
well as baby diapers, are made to a large extent the health insurance system in the individual
via retailers. Equal amounts of tissue products are country. The products provide protection for
sold under the manufacturers’ brands and the light and heavy incontinence.
brands (private labels) of retailers. Private labels Sales in the markets in Western Europe and
account for 20% of the sales of baby diapers and North America amount to approximately SEK
feminine hygiene products. The total retail 10 billion in each region. The growth, on
market is valued at SEK 90 billion. Growth is average, amounts to between 8% and 10% per
relatively slow, approximately 2% per year. year. Growth in regions of Southeast Asia and
A concentration and internationalization is South America is higher. In Western Europe,
taking place among the retail chains. The sales of products for light incontinence are
chains have a growing interest in selling high- being made through more and more channels
quality hygiene products under private labels. and the annual growth amounts to 20%. The
The retail trade outside Europe and the total potential throughout the world is
United States is more fragmented. Brand name substantial, since only 20% of all persons who
products are showing strong growth in these need help are using, or have access to,
areas. incontinence products.
29
plant was installed.

Production capacity was expanded in the
Netherlands to meet rising demand for SCA’s
pant diaper, a product area in which the
company is a clear market leader.
SCA’s STRATEGY AND
MARKET POSITION Acquisitions
Through organic growth and acquisitions, A number of acquisitions were made during the
SCA will strengthen its position as one of year in line with SCA’s growth strategy for
Europe’s leading manufacturers of hygiene hygiene products. The financial uneasiness in
products. Expansion will take place in such the regions where SCA is expanding has created
markets as Southern Europe, Central and favourable opportunities for acquisitions
Eastern Europe, as well as in Latin America although there is some uncertainty about
and Southeast Asia, when favourable profitability in the immediate future. Viewing
opportunities arise for acquisitions and joint the situation in a longer perspective, SCA still
ventures. The goal is to increase both sales believes that future growth will be strong.
and cash flow by 12% per year. In Russia, SCA acquired all the shares of
Comprehensive and continuous product Svetogorsk Tissue from Tetra-Laval. Svetogorsk
development, low production costs and the Tissue has the most modern tissue machine in
ability to offer the market both SCA brands and Russia, built in 1989. Its production amounts
private labels are key elements in the Group’s to approximately 20,000 tons per year, equal to
strategy. The market for AFH and incontinence about 20% of the Russian market. The
products is a priority customer segment. acquisition offers possibilities to produce
SCA’s average share of the market for hygiene diapers and feminine hygiene products locally.
products in Europe in 1998 amounted to In Colombia, SCA increased to 50% its stake
approximately 20%. SCA has its strongest in the Productos Familia tissue company,
positions in northern and central areas of which in turn owns the Tecnopapel tissue
Western Europe. company in Ecuador. Negotiations regarding
Up to now, SCA’s sales in Asia and Latin the acquisition of 50% of the Brazilian tissue
America have not been affected to any larger company Melhoramentos Papeis, which was
extent by the financial uneasiness throughout announced in 1998, are as yet not completed.
the world. Export sales to Russia have declined. SCA has also increased its involvement in
However, SCA is still in the build-up phase of Asia with the acquisition of Holland Pacific
operations in these regions and sales there Paper, a Philippine tissue company. The
amount to 4% of total turnover. company currently has the capacity to produce
The rationalization of existing mills is 22,000 tons of tissue per year, plus capacity for
continuing and production is being 8,000 tons of specialty paper that can be
concentrated to certain strategic mills. converted to tissue production. The market
A new tissue machine was built during the share in the Philippines amounts to 22%.
year in Mannheim and will be completed In Western Europe, SCA acquired three
during the summer of 1999. Kitchen towel rolls distributors of incontinence products in France
and handkerchiefs will be produced with new whose total sales amount to SEK 140M. SCA is
converting facilities. Production of tissue was thereby becoming the market leader in
also increased in Poland, where a converting incontinence products in that country.
30
In the following extract from its 1998 Annual Report and Accounts WPP gives its view of its own and its
competitors’ likely positions in an industry undergoing structural change.
will probably make life more

difficult for its key agencies as
alternatives will open up.
The private Procter agencies
such as Leo Burnett and The
MacManus Group will become
even more acutely aware of
their lack of financial resources
and will either seek a public
listing or merger partner or
sale.
It is difficult to see how
Burnett’s proposed one way
partnership with Dentsu will
give it sufficient financial fire-
power without surrendering
control. The public Procter
agencies, Grey and Saatchi &
Saatchi, have either succession
issues to deal with or lack of
coverage in functional or
geographic areas such as Latin
America. All have to raise their
games in the media planning
and buying areas. Finally,
Cordiant, having supposedly
split with Saatchi & Saatchi
specifically because of the
restrictions of the previous
The big five DYR and another that would Procter conflict policy, needs to
Recent major consolidation in follow from their negotiations strengthen itself geographically
such industries as oil and to acquire a rumoured stake of and functionally to offer a
automobiles has been and between 10% and 40% in Leo credible organisation to multi-
probably will continue to Burnett, although the latter national clients.
be reflected in the deal does seem to be delayed. Finally, for the first time, the
communications services Many other groups find major Japanese agencies are
industry. Our industry will themselves in difficult strategic prepared to consider real
probably become increasingly positions. True North, having equity-based partnerships, such
concentrated around five or so increased its size significantly as WPP’s alliance with Asatsu-
groups. Currently these will through the acquisition of DK, Japan’s third largest
include Omnicom, IPG, Young Bozell, still has to develop the agency, as they wrestle with
& Rubicam, Dentsu and WPP. latter’s international servicing the global expansion
Dentsu will shortly be capabilities and prove that of Japanese based multi-
following the example of their resources can attract and nationals and worry about de-
Young & Rubicam’s successful retain multi-national clients. regulation and increased
public offering and will secure Both Havas and Publicis competition in their own
the clout given by a public remain heavily concentrated in market.
listing. They have already France and Europe, the latter The communications
secured a powerful position by having been unable to forge a services industry is going
almost developing three relationship with True North through an unprecedented era
‘chains’ - their own, their joint itself. Procter & Gamble’s of structural change.
venture with Young & Rubicam revision of its conflict policy
31
An example of reporting at the level of a business activity of disclosures linking strategic direction to
market attractiveness and competitive position can be derived from the 1998 Annual Report and
Accounts of Stakis and relates to its chain of health clubs:
● Indicates its strategic direction, together with targets or milestones towards

members to around 100,000. ... counter the recession effect.

Our approach is to continue Indeed, if the industry does slow
development of this business down then experience in the
partly because the recession USA suggests that a recession
impact is unclear but mainly would create difficulties for
By the end of 1999 we aim to because the unsatisfied demand smaller operators and could
open a further 7 premier clubs will continue even in a recession represent a very good
and to increase our number of and market growth could competitive opportunity for us.
● Explains why management believes it is the right market to be in.
The LivingWell chain of health this business because we have a health club of our type -
clubs is relatively new in our recognised that there was large units offering swimming
portfolio having been acquired in massive demand and very little pool, gymnasium, aerobics studio
1996 although we have a long supply. Our research in 1996 and ancillary features such as
history of operating health clubs indicated that there were many hairdresser and beauty treatment.
within our hotels. We came into towns in the UK which did not
● Describes the business’s competitive position within the market.
Since we have moved into but we are well placed with l a rgest by number of
the business several the largest circuit by number members.
competitors have emerg e d of outlets and the second
● Predicts, in general terms, the likely future trends anticipated in that market.
The impact of a recession upon are two schools of thought: on hand it is lifestyle expenditure
this business is unclear since the the one hand health and fitness is and anecdotal evidence is that
industry is too new to have discretionary spend and might be customers sacrifice it with great
experienced one before. There an early sacrifice, on the other reluctance.
● States how management intends to maintain or alter the business’s position within
the market.
The initial strategic thrusts are systems are now standardised. the year end the total portfolio
to standardise operating In particular, in October 1998, was 9 premier clubs and 54
procedures [in an embryonic we moved the membership hotel clubs. By the end of 1999
industry] and to carry out a administration centre ... we aim to open a further 7
programme of new openings ... reducing cost and providing premier clubs.
32 the operating and control greater security of service. At
● Discloses measures of performance appropriate to the business, including non-

financial measures, and/or lead indicators that are used internally to monitor
potential in that business.
The following example from the 1998 Annual Report of the Bank of Montreal illustrates comprehensive
disclosures relating to its expense-to-revenue ratio, one of the ten key measures monitored by the bank.
It also illustrates how shaded boxes can be used to highlight forward looking and predictive statements.
33
The examples given earlier in this appendix have included lead indicators such as market growth, market
share and the ‘hurdle rate’ for investment in new projects, which are likely to be important drivers of
value for most businesses.
Another example which effectively indicates market potential comes from the PepsiCo website:
Courtesy, PepsiCo, Inc. © 1998.
Some measures are likely to be specific to a particular industry.
Room occupancy is an important performance indicator in the hotel industry, and is illustrated in this
example from the 1997/8 Annual Report of Whitbread:
For the pharmaceuticals industry innovation is crucial and SmithKline Beecham indicates in its 1998
Report and Accounts the progress made towards achieving its target for the speed of its product
development cycle:
Speed to market is as critical as ever, and our ‘2,000 in

2000’ programme, to reduce the average product
development cycle to 2,000 days by the year 2000,
remains on target. Progress has been significant in the
past five years, and we are now within 10% of achieving
our goal.
34
The publication of performance indicators is an area of reporting developing rapidly in the public sector.
The Audit Commission prescribes and publishes a wide range of performance indicators for local
authorities and the Health Service. In addition, under the new ‘Best Value’ regime local authorities will
be expected to set their own local measures and indicators and report performance against them. Central
government departments and agencies set their performance targets within regimes established by the
Government and the reporting of a 5 year trend in performance is mandatory for Executive Agencies and
recommended practice elsewhere.
Companies House discloses its performance against target for each of the nine main targets agreed by
Ministers and the trend in performance for up to 5 years, together with the targets agreed for the
following year. The following extract from its 1998/9 Annual Report shows the performance against
target for two of its information processing objectives. These are targets for the speed and the quality of
document processing.
Performance
Throughput
Against a target of making 97% of statutory documents available for inspection within
five working days of receipt, we achieved 98% overall. The document processing target
has been raised to 99% for 1999-2000 in line with our performance for much of this year.
It remains, however, a very stretching, and possibly an over-ambitious target, if we seek to
stabilise staff numbers at a time when more and more documents are being presented.
Quality
The fiche quality target for 98% of current fiche to be error-free was missed by 2%, largely
due to difficulties in our London office. These were primarily difficulties of timing, rather
than quality, which fortuitously came to be measured in the quality target. The target for
1999-2000 remains at 98%.
35
Conclusion
Advances in information technology and, in particular, use of the Internet, will undoubtedly affect the
future development of the structure of external corporate reporting. ‘The Corporate Report-New
Horizons’ project will, inter alia, consider the impact of new technologies on the form and frequency of
corporate reporting. In this paper we have limited ourselves to making proposals for additional
disclosures in a company’s annual report. We do not believe that this document should be allowed to
become of secondary importance to investors and, therefore, believe that it must adopt a more forward
looking perspective.
Our proposals reflect this more forward looking perspective and we ask companies to experiment
immediately with the additional disclosures we propose. There is nothing radically new in our proposals
but putting these disclosures together can present a sharper image and differentiate a company in
increasingly demanding capital markets.
The proposals create a link between external reporting and the processes and performance indicators
used internally. We believe that this more transparent disclosure will lead to an improved understanding
of management objectives and of the risks and opportunities associated with an investment. An
improved understanding of the business and management’s objectives will permit investors to assess
performance against the targets set by management and should, therefore, build management credibility.
Better information about the risks and opportunities faced by the company should help investors to
value a company more accurately and with less uncertainty, which may reduce capital market volatility.
Whatever the future medium and frequency of external reporting, we believe that reports must better
reflect a company’s potential for creating value. To do this they must become more forward looking,
must take a long term perspective and, through greater transparency, provide a clearer picture of internal
operations.
36
Appendix I
The principal shareholder value measures
The company’s perspective
For the company, the implication of the insight ‘shareholder value is created by earning a return on
capital greater than the cost of capital’ is that all decisions, from long term investment decisions to day-
to-day operating decisions, should reflect the cost of using equity capital in addition to the cost of debt.
This is often referred to as a ‘value’ focus. Projects which are undertaken should be expected to generate
more than the company’s cost of capital and measures used subsequently to monitor performance
should reflect this cost.
When a ‘value’ perspective is given to long term, future-oriented decisions, the cost is usually reflected
by discounting future cash flows at the company’s cost of capital. This is the aspect of shareholder value
addessed by Shareholder Value Analysis (SVA) and similar discounted cash flow (DCF) measures.
However companies also want to monitor their short term historical performance. When looking at the
results of a single period, a calculation based on accounting profit less a charge to reflect the cost of
equity capital is generally considered to be a less volatile indicator of the creation of value than a
calculation based on cash flows. This is the justification for use of ‘economic profit’ measures of
shareholder value, including Economic Value Added (EVA).
The shareholders’ perspective

From the shareholders’ perspective, the creation of value is reflected in the growth in a company’s share
price and dividends received. If the stock market prices shares efficiently, the shareholder value created
in a period is measured by Total Shareholder Return (TSR). Market Value Added (MVA) similarly measures
the total value created by a company since its formation.
The key features of the principal shareholder value measures are listed in Table 1 on the following pages.
37
Table 1: The principal shareholder value measures
Measure: Basis of calculation: Principal uses:
Management’s ● Internal i.e. made ● Strategic

valuation of a by management planning.
strategy, business ● Future cash flows
or company e.g. discounted at a
Shareholder Value cost of capital
Analysis (SVA) (DCF).
Total Shareholder ● External i.e. ● Performance monitoring

Return (TSR) stock market based at company level
● Dividends plus ● Management remuneration.
share price
movement as a .
proportion of the
opening share price.
Total Business Return ● Internal ● Performance

(TBR) equivalent of TSR monitoring at
● Free cash flow business level.
plus change in the
valuation of a
business as a
proportion of its
opening valuation.
Economic profit ● Internal ● Performance

measures, including ● Accounting profit monitoring at
Economic Value less an additional either business
Added (EVA) charge for the use or company
of equity capital. level.
38
Key features: Practical challenges Principal Limitations as an

and estimations assumptions: externally reported
necessary: measure:
● Forward looking ● The estimation of ● The ‘fade’ ● Subjectivity.

● Long term cash flows in the assumption for the
● Incorporates period explicitly calculation of the
management’s forecasted value of residual
expectations about the ● The cost of capital. cash flows.
future benefits likely to
flow to a business as
a result of decisions made
or about to be taken.
● TSR is calculated over a ● No estimations are ● Stock market ● It can only be

historical period but has a necessary in the prices accurately calculated by quoted
forward looking calculation of TSR reflect all available companies.
perspective because it itself. However it information.
incorporates the stock needs to be
market’s expectations compared to the cost
about the future benefits of equity capital or
flowing to a company. to an appropriate
peer group.
● TBR is calculated over a ● The valuation of a ● The ‘fade’ ● Subjectivity, if the

historical period but has a business assumption for the business valuations
forward looking ● In common with calculation of the are based on a DCF
perspective if the TSR, TBR needs to value of residual calculation.
valuations used are based be compared to the cash flows, if the
on a DCF calculation cost of equity capital business valuations
because it then or an appropriate are based on a
incorporates internal peer group. DCF calculation.
expectations about future
benefits flowing to the
business.
● Historical ● Adjustments made ● That accounting ● Could encourage a

● Short term, it is usually to accounting profits profit is an unbiased short term focus.
calculated over one year so they better reflect indicator of economic
● These measures reflect economic profitability.
the cost of using all capital profitability, e.g. by
employed rather than just EVA, add to the
debt capital complexity of the
● However, they share the calculation
limitations of accounting ● The cost of capital.
profit in providing
information about future
potential and economic
profitability, particularly
where ‘revenue investment’
is significant.
39
Table 1: The principal shareholder value measures
Measure: Basis of calculation: Principal uses:
Cash Flow Return on ● Internal ● Performance

Investment (CFROI) ● Free cash flow as monitoring at
- usage 1 a proportion of either business
capital invested. or company
level.
CFROI - usage 2 ● Internal ● Strategic

● Current level of planning.
free cash flow is
assumed to
continue over the
remaining life of
the asset base and
CFROI calculated
as the IRR
equating this to the
current value of the
asset base.
Market Value Added ● Hybrid, ● Performance

(MVA) incorporating both over the whole
stock market and period since
accounting values. incorporation of a
● Market company.
capitalisation less
total capital
invested, including
retained earnings.
40
Key features: Practical challenges Principal Limitations as an

and estimations assumptions: externally reported
necessary: measure:
● Historical ● Current value, ● That cash flow is a ● Could encourage a

● Short term, it is usually rather than book reliable indicator of short term focus.
calculated over one year values, may be used performance as it is
● A return on investment for capital invested subject to more
calculation reflecting a ● CFROI needs to be volatility than profit.
focus on cash rather than compared to the cost
profit. of capital.
● Forward looking but ● Current values, ● Future cash flows ● Subjectivity.

simplistic assumptions rather than book remain at the current
made values, are used for level for the life of
● An indicator of whether the asset base the existing asset
it is appropriate to replace ● Calculation of the base
the asset base. average life of the ● Cash flows during
asset base the remaining life of
● CFROI needs to be the asset base can be
compared to the cost reinvested at the
of capital. CFROI.
● MVA is calculated over ● Adjustments made ● Stock market ● Comparisons

the life of a company but to accounting values prices accurately between companies
has a forward looking so they better reflect reflect all available are of limited use as
dimension, being based on economic values add information. different periods of
market capitalisation to the complexity of time and different
● If the total capital the calculation. company sizes are
invested is based on book being compared.
values the calculation is
distorted, e.g. by
intangibles such as
research and development,
which are written off for
accounting purposes but
which do have an
economic value.
41
Appendix II
Evidence of investors’ information needs
Recent surveys of investors’ demand for and use of information confirm their desire for more forward
looking information in a company’s annual report and the importance of drivers of future performance
to their investment decisions. These surveys are summarised in the table below.
Table 2: Surveys of investors’ demand for and use of information
Conducted by and Areas User group(s): Focus of No. Inter- Survey

reported in: covered: survey/report: views
ICAS UK Institutional and Investors’ and lenders 93 13 80

Business Reporting: private investors, information needs,
The Inevitable analysts and including a postal
Change? 1999 bankers. survey of performance
drivers.
DTI UK Institutional Institutional 13 13

Creating Quality investors. investors’ need for
Dialogue, 1999 forward looking
information.
Shelley Taylor & UK, US Institutional Investors’ optimal 25 25

Associates and investors. disclosure.
Full Disclosure 1998 Switzer-
land
Ernst & Young US Portfolio Use of non-financial 275 275

Measures that managers. factors in the
Matter, 1998 investment decision.
PwC UK, US Financial analysts Importance of 21 Approx Approx

e.g. Pursuing Value: and 12 and institutional specific measures and 700 700
Reporting Gaps in other investors. the adequacy of their
the United Kingdom, countries reporting.
1997
The demand for forward looking information

The reports of the interviews conducted by the Institute of Chartered Accountants in
Scotland (ICAS), the Department of Trade and Industry (DTI) and Shelley Taylor &
Associates21 all confirm an increasing demand for future-oriented information by investors.
ICAS quotes the following as comments typically made by users of the annual report:
“Investors demand for increased information is growing strongly.
I would prefer to see far more information of a prospective nature.
Additional information on expectations of future performance would be useful.”22
21
Reported in Full Disclosure 1998, Shelley Taylor & Associates.
42 22
Business Reporting: The Inevitable Change? ICAS, March 1999, p.53.
In addition, the DTI notes in its report:
“Fund managers we interviewed … criticise a concentration [by smaller quoted

companies or SQC’s] on the past and a reluctance to volunteer the information they
need to reach an informed view about the company and its prospects. …[They] want
SQC’s to publish more forward looking information.”23
Drivers of future performance

The surveys by ICAS, Shelley Taylor & Associates and the Ernst & Young Centre for
Business Innovation 24 consider, in different ways, indicators of future prospects. A
consistent conclusion is the pivotal role of management, its strategy and the challenges and
risks that must be managed to execute that strategy successfully.
As part of its investigation of users’ needs, ICAS conducted a postal survey of drivers of
company performance. It was found that the most important generic drivers of performance
were considered to be:
● Quality of management;
● Company strategy;
● Industry within which the company operates.
And, of the 29 factors surveyed, the most important specific factors were:
● Integrity of management;
● Vulnerability of company to competition;
● Ability of management to achieve targets;
● Acquisition strategy (past performance and future plans);
● Recent changes in quality of management, corporate succession and management style;
● Experience of management;
● Corporate strategy for the development of existing operations.
Institutional investors interviewed for the report “Full Disclosure 1998” confirmed this focus
on the ‘quality of management’. To help them form a view on this, they wanted enhanced
disclosures relating to accountability, more industry, market and segmental data and more
future-oriented information, as summarised in Table 3 below.
23
Creating Quality Dialogue between Smaller Quoted Companies & Fund Managers, DTI, February 1999, pp.9 and 11
24
Reported in Measures that Matter, Ernst & Young LLP, 1998. 43
Table 3: Highlights from “Full Disclosure 1998” 25
Accountability Industr y and Market The Future Segmental
Objectives Industry Forward Looking Statements Capital Expenditure

Objectives vs. Results Competitors Strategy R&D Activities
Strategy Brands Challenges / Risks R&D Spending
Values / Management Holdings
Philosophy Segmental – Business
Mission/Purpose Segmental – Geography
Challenges/Risks
Bad News
Researchers from the Ernst & Young Centre for Business Innovation took their analysis a step further.
They obtained evidence not only about the non-financial factors portfolio managers said were useful to
them but also, through a simulation of the share purchase decision, they collected evidence of the actual
use of such non-financial data. In the simulation they altered the non-financial information presented to
portfolio managers about a company but held constant the financial information presented. They found
that the decision whether to purchase that company’s share was affected by the changing non-financial
information.
Again the focus on the quality of management and its strategy was apparent, with the information of
the greatest value to portfolio managers being information relating to:
● Strategy execution;
“how well management leverages its skills and experience, gains employee commitment
and stays aligned with shareholder interests.”26
● Management credibility;
which will, primarily, depend on two of the factors found to be very important to
investors in the ICAS study; the integrity of management and its ability to achieve
targets.
● Quality of strategy;
“management’s vision for the future, whether it can make tough decisions and quickly
seize opportunities, and how well it allocates resources.”27
However, the importance of particular non-financial factors varied across industry groups, with
information about the strength of a company’s market position most valuable in the oil and gas industry
and information about the effectiveness of new product development most important in the
pharmaceuticals industry.
PricewaterhouseCoopers has commissioned telephone surveys of financial analysts and institutional

investors in 14 countries over the past four years.28 This work focused on the importance to financial
25
As shown at the ICAEW Breakfast Briefing on Full Disclosure 1998 by Shelley Taylor.
26
Measures that Matter, Ernst & Young LLP, 1998 p.1
27
Measures that Matter, Ernst & Young LLP, 1998 p.2.
44 28
The UK survey is reported in Pursuing Value: Reporting Gaps in the United Kingdom, I Coleman & R Eccles; Price Waterhouse 1997
analysts and institutional investors of 21 specific measures of performance, both financial and non-
financial, and the adequacy with which they are currently reported. The work confirmed the importance
of traditional financial measures but also highlighted the desire for market share and market growth
information, investment in research and development, capital expenditure and statements of strategic
goals. Those who wanted this information were dissatisfied with the adequacy of its current reporting.
Other non-financial performance indicators were, overall, viewed as being less important. Table 4
indicates the percentage of the analysts and investors surveyed who found a particular measure valuable
in the UK survey.
Table 4: Usefulness of specific performance measures to analysts and investors
UK data
Perfor mance measur e: Analysts Investors
% %
Cost data 94 31
Segment performance data 88 22
Earnings data 85 87
Cash flow data 85 83
Market growth data 85 71
Market share data 82 75
Capital expenditure 78 52
R&D investment 73 29
Statements of strategic goals 72 52
Employee productivity 70 16
New product development 66 34
Customer retention 51 9
Product quality 50 7
R&D productivity 48 19
Intellectual property 39 13
The other performance measures surveyed, which were considered valuable by less than a third of either
group overall, were: process quality data; employee training levels and expenditures; customer
satisfaction measures; employee turnover rates; environmental compliance data and employee
satisfaction measures.
The PwC survey did not indicate a strong demand from investors for the majority of the non-financial
measures. We believe that there are two reasons for this survey undervaluing the potential usefulness of
these measures. Firstly, investors prefer ‘hard’ measures such as cash flow data to ‘softer’ measures such
as satisfaction ratings because ‘hard’ data is thought more difficult to manipulate. However, in a follow-
up survey of the use by management of the same measures, customer satisfaction was said to be
important by 66% of senior executives and employee satisfaction by 44%29.
Secondly, we believe that the important value drivers and, therefore, indicators of performance derived
from them, vary from industry to industry and business to business. This belief is supported by evidence
from the Ernst & Young survey described earlier that the relative importance of specific non-financial
factors varied across industry groups. We therefore propose only disclosure of those indicators that relate
to the key ‘value drivers’ for a particular business and are, therefore, central to the successful
implementation of strategy.
29
Reporting Gaps in the UK: The Chief Executive’s Perspective; R. Eccles, D. Phillips, H. Richards, PricewaterhouseCoopers, 1998. 45
Appendix III
Examples of performance indicators
Summary indicators:
Non-financial Financial
● Market share ● Revenue growth
● Market growth ● Economic profit
● Customer retention ● Return on capital
● Customer satisfaction ● Market/customer
● Price premium profitability
Indicators relating to specific drivers of value:
Process quality Timeliness Productivity

● Reject rate ● On time delivery ● Employee productivity
● Scrap ● Customer response time ● Asset utilisation
● Warranties/returns ● Cycle time
Flexibility Marketing Information Technology

● Changeover time ● Customer acquisition ● IT investment
Innovation Human Resources Environmental

● New product ● Competence ● Compliance with
development ● Training (hrs/spend) legislation
● % of sales from new ● Morale
products ● Employee turnover
● Product pipeline ● Employee satisfaction
● R&D investment ● Application rates
● R&D productivity
46
Appendix IV
Members of the Steering Group
The members of the Steering Group are:
Ken Lever, Chairman
Ken Lever has recently been appointed Finance Director of Tomkins PLC and is a non-executive director
of VEGA Group PLC and Merewood Group Limited. He is a Chartered Accountant and a member of the
ICAEW Financial Reporting Committee. He has held executive directorships at Albright & Wilson plc,
Alfred McAlpine plc and Corton Beach plc and was a partner in Arthur Andersen.
Guy Ashton
Guy Ashton is responsible for equity analysis and valuation methodology at HSBC Securities. He is a
Chartered Accountant and prior to joining HSBC was a consultant on equity valuation for brokers, fund
managers and corporates.
Lesley Davey
Lesley Davey is Group Finance Director of The African Lakes Corporation PLC. She is a Chartered
Accountant and a member of the ICAEW Financial Reporting Committee. She has previously been
Finance Director at Ladbroke Casinos Limited, Borthwicks plc and Rage Software plc.
Chris Higson
Chris Higson is Professor of Accounting at London Business School. He has taught financial analysis and
valuation on all of the School’s major programmes and researches in company valuation and mergers
and acquisitions. He is a Chartered Accountant and has advised many leading financial institutions and
industrial companies.
Robert Langford
Robert Langford is the ICAEW’s Head of Financial Reporting. He is a Chartered Accountant and has
previously held positions at Lloyds Bank Plc and the IASC. He is also responsible for supporting the
Institute’s work on environmental reporting and auditing.
Kathy Leach
Kathy Leach is the Project Manager supporting this project for the ICAEW. She is a Chartered Accountant
and previously lectured at Warwick Business School. Prior to that she worked in financial reporting and
corporate taxation in the motor industry.
47
Cameron Maxwell
Cameron Maxwell is a non-executive director of Avesco Plc and was formerly its Finance Director. He is a
director of a number of private companies. Cameron is a Chartered Accountant and both a member of
the Council of the ICAEW and its Technical Advisory Committee.
David Munns
David Munns is Corporate Controller at the Financial Times Group, moving recently within Pearson plc
from a group role as Head of Financial Planning & Analysis. He is a Chartered Accountant and holds an
MBA from the University of Chicago, noted for its shareholder value program.
David Phillips
David Phillips is a partner in PricewaterhouseCoopers’ Assurance /Business Advisory Services and leads its
European ValueReporting™ initiative. He is a Chartered Accountant and co-author of a paper analysing
the use of and external communication of a range of performance measures by UK executives.
Ian Roundell
Ian Roundell is Head of Investor Relations at Barclays PLC and prior to that worked in both financial and
regulatory reporting within the group. He is a Chartered Accountant and previously worked in corporate
finance and management consultancy at Deloitte and Touche.
David Thompson
David Thompson is Joint Group Managing Director and Group Finance Director of The Boots Company
PLC, where he is responsible for Boots Healthcare International and Halfords Limited as well as all
finance related matters. He is a Chartered Accountant, a member of The Hundred Group of Finance
Directors and a non-executive director of Cadbury Schweppes PLC.
Steve Webster
Steve Webster is Group Finance Director of Wolseley plc. He is a Chartered Accountant and Chairman of
the Midlands Industry Group of Finance Directors. Steve was previously a partner in Price Waterhouse.
Mike Weston
Mike Weston is a director of the UK Institutional Division of Merrill Lynch Mercury Asset Management
where he has responsibility for co-ordinating research into the global consumer goods sector. Mike is a
member of the IIMR and was formerly a director of Hermes Investment Management.
48
Chartered Accountants’ Hall
P O Box 433
Moorgate Place
London
EC2P 2BJ
Telephone: 020 7920 8100
www.icaew.co.uk
This project has been supported by a

financial contribution from the
Chartered Accountants’ Trustees Limited,
provided out of funds of the
P D Leake Trust - a registered charity.
ISBN no. 1-84152-013-6

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1. The need for shareholder value reporting 6

1.1. What is shareholder value? 6

1.2. Creating shareholder value 7

1.3. Reporting on the creation of shareholder value 9

2. Limitations of the annual report 10

5. Management’s pivotal role 15

5.1. Strategy development 15

5.2. Performance indicators 16

6. Reporting performance – past and potential 18

8. Examples from current reporting practice 22

I The principal shareholder value measures 37

II Evidence of investors’ information needs 42

III Examples of performance indicators 46

IV Members of the Steering Group 47

© The Institute of Chartered Accountants in England and Wales 1

We encourage readers of this paper to send us their views:

Robert Langford, Head of Financial Reporting,

● Why is that the appropriate direction?

● What does management need to manage in order to achieve its objectives?

Management’s pivotal role

For the company as a whole:

● A description of the strategic decision-making process;

● A description of the performance management process;

● The preferred measures used internally to monitor economic performance.

● Measures of performance appropriate to the business, including non-financial

1. The need for shareholder value reporting

1.1. What is shareholder value?

Figure 1: Investors’ and management’s perspectives on shareholder value

1.2. Creating shareholder value

Management has two principal ways to create shareholder value:

Figure 2: Strategic positioning

Figure 3: Growth and retur n

Value destroying Value creating

Growth = Incremental investment 0

Value releasing Value limiting

Net return = Return on capital - Cost of capital

1.3. Reporting on the creation of shareholder value

In the subsequent sections of this paper:

2. Limitations of the annual report

Figure 4 5 : The communication of decision-useful information

● Why is that the appropriate direction?

● What does management need to manage in order to achieve its objectives?

5. Management’s pivotal role

5.1. Strategy development

5.2. Performance indicators

● the trend in customer retention; or

● an indicator of employee morale such as the trend in employee turnover.

In addition to using performance indicators, companies are increasingly monitoring underlying, or

6. Reporting performance – past and potential

financial statements remains historical.

Our proposals are based upon disclosures relating to:

● Markets and competitive positioning;

● Key performance indicators and ‘value’ based measures of performance.

● Describe the strategic ambitions.

● Indicate the strategic direction, together with targets or milestones towards

● Describe the strategic decision-making process.

● Describe the performance management process.

● Provide a calculation of the preferred measures used internally to monitor economic