How does a Company demonstrate strategic leadership in narrative reporting? It shows clarity and rigour in its strategic thinking through a well-articulated and robust framework. It demonstrates implicit understanding that effective strategic management is as much about where it has been as where it is now and where it is going – past, present, future. It illustrates how it is investing in the capabilities its strategy will require in future. It embraces and integrates social, environmental with the economic dimensions of the business within that framework.
Each of the four short-listed companies makes a strong claim on this award. Anglo has made great strides and is at the van of the mining sector. BAE Systems too has shown its stakeholders increasing strategic effectiveness, while Man Group has more recently developed its compelling strategic framework. But, of all four, Rolls-Royce Holdings is, in the judges' opinion, the most deserving of the 2012 Strategic Leadership Award. Rolls-Royce published here another high quality strategy-centric Annual Report that does credit to the Group and to its brand. The judges added that this is a suitable valedictory award too, maintaining the standard that Sir John Rose, the now retired Chief Executive, has set and presided over in recent years.
This award is for Companies with multiple business segments. More complex corporate structures require even greater clarity of strategic thinking and robust strategic frameworks to show unequivocally that the Group as a whole is worth more than the mere sum of its parts. The truly effective Group strategy discussion will demonstrate: how the Group's business model applies effectively to its underlying businesses, how its declared objectives are relevant to all its business units and how its strategy adds value not otherwise achievable independently.
The four short-listed companies here all presented a quality of strategy reporting that will have persuaded respective Report users of the depth of strategic thinking and, in their related divisional performance commentaries, effective strategic management across each Group. Lloyds Banking Group was, in the judges' opinion, the best on both aspects, capturing divisional strategy and providing evidence through the performance commentaries of divisional strategy in action.
The business model is the foundation of a Company's strategic framework, defining the logic of the business. The business model provides both data and evidence to demonstrate how an enterprise, whether group of business units or single entity business, creates and delivers value distinctively to its core markets. This requires a Company to understand the sources of competitive advantage that contribute to its profitability across the value system of its enterprise. A well-defined business model enables clearly defined and consistent corporate goals, objectives and strategy.
In this reporting cycle the application of the UK Corporate Governance Code, with its requirement of compliance [or explain why not] in presenting a Company's business model, effectively applied only to a minority of companies – those with year-ends of 30 June 2011 or after. But, the best strategic reporters have long recognised the importance of presenting the foundation of their strategic framework. The judges concluded that of the four short-listed, Man Group is the most deserving. Man Group produced a truly strategic business model in its March 2011 Annual Report to make its complex financial business intelligible to the widest range of stakeholders.
Too often a Board seems remote from the essential processes of setting a Company's strategic agenda – evaluating risk sensitivity, addressing integral social and environmental dimensions, and applying strategy oversight in using KPIs to monitor performance. It is a remoteness that emanates from references to Board involvement that are all too often little more than compliant boilerplate buried in corporate governance statements. Strategically effective companies focus not only on the 'what' of strategy but also on the 'how' that makes it a living driver of value and future potential.
No company does this better than BAE Systems where the narrative in the 2010 Annual Report addresses intrinsically strategic governance processes. All four companies are clearly sensitive to the strategic processes around KPIs and risk as well as strategy. But, for BAE it is fundamental as evidenced by the Chairman who opened his letter in the Directors' Report with an explanation of the Group's strategic framework and the various roles in keeping this current.
Key Performance Indicators
Effective strategy is about the past and the present as well as about the future. Of crucial importance are the metrics that measure a company's operational performance on a regular basis to provide senior Executives and the Board with an effective means to monitor strategic achievement. So, the quality of these 'key performance indicator's reveals a Company's potential for good strategic management.
For each of the four short-listed companies Key Performance Indicators have a fundamental strategic role. But, one more than the other three puts its Key Performance Indicators at the centre of the discussion of strategy and performance. ARM Holdings's uses its six non-financial KPIs for a strategic evaluation of its performance over the year. 'Future opportunities' also show how KPIs are central to ARM's strategy for long-term growth.
How a Company thinks about, evaluates and reports risk is an important aspect of the quality and rigour of its overall strategic thinking. There are broadly two elements to reporting risk in the Annual Report. One concerns the processes for managing risk. The other concerns the capacity for identifying and prioritising principal risks and uncertainties. Good risk reporting explains risk management processes, recognises that risk can have an upside as well as a downside and focuses on specific factors that may influence the achievement of a Company's desired goals and objectives. It reveals a Company's sensitivity to its future and is a further confirmation of strategic literacy.
Each of the four short-listed companies shows distinct merits in how it reports risk, its governance and management. But, Marks and Spencer Group is the best of these addressing its comprehensive approach to risk under the principle of Accountability in its application of the new UK Corporate Governance Code. Here M&S uses diagrams to explain how mitigation reduces likelihood and impact of a risk factor and to position risk factors on a radar map to show how the M&S facilitates wider Executive and Board discussion of risk in its strategic context.
Growth strategy requires continuing investment in the enterprise. Most of this investment in customers, employees, partners, suppliers, distributors and the organisation itself is beyond the balance sheet in hidden assets 'expensed 'off the balance sheet. These are the strengths and resources essential to future growth. Companies that think strategically understand how these capabilities are fundamental to their future success. They also know that it is important to show how they continue to invest in those capabilities that will enable them to deliver their strategy and achieve their goals.
Of the four companies short-listed for this award one is more effective at showing how it is investing in and develop the strategic capability its resource-based strategy will require – in successful pursuit of its vision "to be the world's greatest service company". Serco Group makes 87 identifiable references to its investment in intangibles. The emphasis here is on employee and organisational drivers with knowledge the most referenced intangible element. This rich and expansive narrative is particularly readable.
Companies are increasingly sensitive to the value of their Annual Reports and to the benefits good narrative can confer. But, experience suggests that much of the change and improvement made by Companies in narrative reporting is at best incremental. Only a few attempt to do anything more radical to enhance significantly the strategic value of their next Annual Report. This is usually because substantial improvement of reporting narrative presents a major challenge – a challenge that often has as much to do with the impact of such change within the business as it does with how the business reports.
This year four companies vied for the honour of being the most improved. Of the four the judges considered that Telecity Group achieved the most notable improvement of +1.6 in the strategic value added in its 2010 Annual Report to second quartile score of 6.5 on FutureValue's scoring scale. The deciding factor was the fact that this was the second year running that Telecity achieved a marked increase ascending from a low of 3.7 in 2008.
Shared strategic value is about good stewardship and the fundamental sustainability of a business to the advantage and benefit of all its stakeholders. Sustainability is central to strategic thinking and strategic management, blending social, environmental and economic dimensions. Although many companies prepare a separate sustainability or corporate responsibility report, what really matters is for a Company to show how it integrates its approach to social and environmental matters into its overall strategy for the business, and shares value with all.
This year three mining companies made the short list for this award, reflecting the growing focus by the mining industry on embracing sustainability and sharing value appropriately with all its stakeholders. Anglo American demonstrates a wholly integrated strategic commitment to sustainable development that is credibly fundamental to its business. Its Chief Executive confidently reports that Anglo continues to lead change in the mining industry.