It is a common complaint that the value marketing adds to an organisation is not fully appreciated. But help may be at hand. New government regulations on financial reporting represent an unprecedented opportunity for marketers to convey the worth of their activities to a broad internal and external audience and to raise their standing as a result.

 

Under the updated rules, publicly quoted firms must produce an Operating and Financial Review (OFR) for financial years beginning on or after 1 April 2005. In these documents, companies must disclose information about customers, employees and the environment in which they are trading, as well as financial information. According to Patricia Hewitt, secretary of state for trade and industry, the OFR will 'improve the quality, usefulness and relevance of information provided by quoted companies, helping investors, shareholders and other interested parties get a better understanding of a company's operations and its future business prospects'.

 

This information, argues Peter Fisk, former chief executive of the Chartered Institute of Marketing and a value-based marketing specialist, will also aid marketers. Reporting on customer measures will create a virtuous circle of greater awareness and heightened focus that will enhance marketing's reputation inside and outside the business, benefiting customers accordingly. 'This is not about getting more marketers onto the board, but getting marketing better understood in boardrooms and by the outside world,' says Fisk.

 

Ian Ryder, vice-president for brand and communications in the EMEA region for technology firm Unisys, agrees that the OFR should result in a greater focus on the customer. 'For the first time customers will be viewed explicitly as a primary driver of value on the balance sheet,' he argues.

 

Companies have a few months to work out how to comply with the OFR, but they already face new rules compelling them to put their acquired brands on the balance sheet. International Financial Reporting Standard 3 (IFRS3), which came into effect on 1 January, requires companies to identify the value of brands they have acquired and enter them on the balance sheet at the cost at which they were bought. Previously such costs could be classified as 'goodwill' and written off over a maximum of 20 years. Now a company can decide a brand has an indefinite life and leave it at the same value on the balance sheet year after year, provided an annual impairment review demonstrates that the value of the brand has not fallen.

 

Limited reform
According to Allan Caldwell, consultant at brand valuation firm Intangible Business, entering acquired brands on the balance sheet 'demonstrates professionalism and encourages more rigorous brand management'. But he believes the accounting changes do not go far enough, as companies can neither revise balance-sheet brand valuations upward nor include existing brands, making comparisons between different companies largely meaningless.

 

The prevailing view, however, is that the long-running debate about putting brands on the balance sheet is little more than a sideshow, and that extending the rules would serve no useful purpose. Potential acquirers and vendors, along with the City, make their own judgments about what companies are worth. And there is nothing to stop businesses revaluing their brands on an annual basis for internal brand management purposes, as companies including Diageo have done for years.

 

'It is sensible to put the cost of the brand at acquisition on the balance sheet in order to balance the balance sheet. But that's as far as it goes,' says Tim Ambler, senior fellow at the London business School. 'The right and proper place for the kind of information that would help stakeholders understand the health of the brand and whether it is improving or declining is the OFR. The real debate for the marketing industry is which marketing metrics should be disclosed in the OFR.'

 

Wary of turning the annual review into a 'box-ticking' exercise, the DTI has been deliberately vague about the information it wants companies to disclose in the OFR, preferring each to focus on the factors it believes to be important. The Accounting Standards Board (ASB), in its recent draft on how to draw up the OFR, is only a little more forthcoming. It cites measures such as brand strategy, market position and share, number of customers, average revenue per customer, products sold per customer, percentage of revenue from new products, products in development and how customers feel about the product or service.

 

The ASB has invited responses to its draft by 28 February, and a working group consisting of senior representatives of The Marketing Society, Institute of Practitioners in Advertising (IPA) and Worshipful Company of Marketors, as well as Ambler, Fisk and Brand Finance chief executive David Haigh, hopes to influence the final guidance so that the kind of marketing information companies should provide is made much more explicit.

 

IPA director-general Hamish Pringle believes communicating the right information in the right language is key if marketing is to be understood and taken seriously by investors and other interested parties. 'The marketing industry has not served itself well in communicating with the non-expert community,' he says. 'We arrogantly assume that, because we are "experts", others need to listen to us, without our needing to explain ourselves. It is not surprising that our standing is in decline.'

 

Crucially, says Pringle, the City does not understand what marketers mean when they refer to brands. 'We use the word "brand" as shorthand for a very complex set of things. We need to get back to basics - and that means talking about customers.'

 

Qualitative reporting
Judging by a survey of annual reports conducted by Ambler, most companies have a long way to go to comply with the OFR requirements. While 66% of companies provide some qualitative information about their brands and marketing in their reports, there is little quantification, with just 16% reporting marketing spend.

 

'Understanding what motivates customers to buy, what would cause them to buy more and more often, and how the firm fares relative to its competitors is crucial to evaluating any business. Yet the typical profit-and-loss account has just one line for sales revenue and fills the rest of the page with details of how the company uses its cash flow,' says Ambler.

 

Even Diageo's 2003 annual report, which includes a great deal of brand and marketing information and which Ambler describes as 'one of the most open reports by a major British company', contains little information about either consumers or competitors. 'Diageo must have the data somewhere internally, but we cannot tell from its report whether the board sees them or considers them important,' he adds.

 

David Phillips, partner and value reporting leader at PricewaterhouseCoopers, believes that, to be credible to the outside world, boards must report four things. 'The first,' he says, 'is a clearly articulated market overview showing opportunities for the business, how it sees its markets and competitors, and what it believes is its competitive advantage. The second is its strategy.

 

The third is its critical value-creating activities, including brands, innovation, customers, people, supply chain and social policies. The fourth is its financial performance.'

 

Few firms report in this order. 'Most companies start at four and work backward, with very few articulating at the front end what drives their financial performance,' says Phillips. 'The overall objective of the OFR is to give stakeholders information on the strategies of the business and the likelihood of those strategies succeeding; this is the yardstick to which companies must keep coming back.'

 

Disclosure dilemma
Many companies fear that they will have to give away too much competitive information in their OFR. Although Phillips dismisses such concerns as 'a smokescreen for lack of transparency', Brand Finance's Haigh believes they are justified, arguing that deciding what to disclose will be 'a challenge'. In particular, there may be a temptation not to publish metrics that appear unfavourable. Yet Haigh believes companies should not leave them out, since the outside world will notice their absence.

 

'The point about having to disclose this information is that you can see where you are going wrong and do something about it,' he says. 'That is part of the valuable rigour needed when preparing information. The more robust and transparent information companies provide, the greater the trust and credibility they will engender.'

 

One of the aims of the OFR is to present an even-handed picture of a company - something that has not always been achieved in the past, according to Ken Lever, finance director of engineering group Tomkins. 'Too many firms try to use annual reports as marketing documents, and the trouble with this is that it overplays the upside and underplays the downside,' he says. 'The requirement to ensure the marketing information reported is robust and verifiable will exert a useful discipline on marketers.

 

You won't be able to claim you have the biggest market share unless you can prove it, so marketers will have to be more precise and more accountable.'

 

Lack of interest
Despite Lever's optimism, Sara Weller, managing director of Argos, suggests there is a long way to go before the OFR serves its purpose. She believes it will take marketers 'some considerable time' to understand the requirements, and argues that investors are not greatly interested in customer measures.

 

'They do not see the link between satisfied customers and success,' she says. 'They cannot turn customer metrics into hard numbers and put them into spreadsheets to create earnings valuations.'

 

Indeed, for all the customer information promised in the OFR, analysts' requirements of reports and accounts remain focused on the effectiveness of companies' advertising. 'The big FMCG companies spend billions of pounds a year on promotional activities, but there is little disclosure of whether that is in advertising, promotions or price cuts, for example, or of the relative return on their investment,' says Michael Steib, consumer staples research analyst at Morgan Stanley.

 

As for marketers, they too have yet to embrace the implications of the change in financial reporting rules. 'Marketers ought to be taking the OFR seriously, and they are not,' concludes Ambler. 'They will wait until it springs out and hits them like a rake from long grass. The time to deal with the problem is now, while the grass is short.'