Part 5: Statements of corporate intent

5.1
This Part summarises the findings of a performance audit that assessed how well 54 public entities complied with their legislative requirement to produce an SCI and report against it in their annual reports. Our examination included Crown research institutes, energy companies, port companies, and State-owned enterprises required to produce an SCI. We also included council-controlled organisations and council-controlled trading organisations required to produce an SOI. The legislative requirements for SOIs are very similar to the legislative requirements for SCIs. We refer to both of these documents as SCIs for the purposes of this Part.

5.2
Overall, we found general compliance with most content requirements for the SCIs we examined. In total, 57% included all the content that we expected for their entity types, and a further 39% omitted only one or two requirements. Only 4% of the SCIs we examined omitted three or more requirements that we expected them to include. All but one of the SCIs we examined included performance measures or targets as required by legislation. However, we noted variations in the range of performance measures used, their ability to be usefully assessed and understood, and how clearly they linked to entities' stated objectives.

5.3
The content requirements for SCIs differ subtly, depending on the type of entity and its governing legislation. Common elements include a requirement to set out:

• the objectives of the entity, and the nature and scope of activities to be carried out;
• performance targets and other measures by which the performance of the entity may be assessed; and
• certain financial information that can help shareholders and other interested parties to assess the operation of the entity and its intended business success.

5.4
Performance targets are one of the most important ways an SCI provides public accountability. They enable a public entity to state how it intends to measure its success against its stated objectives. Performance targets and measures should therefore clearly link to the entity's stated objectives. The public entity should use a range of non-financial performance measures and targets, as well as financial ones, wide enough to enable a full assessment of its activities. Performance targets should be measurable, and their meaning and relevance should be easily understood by the readers of an SCI.

5.5
However, we acknowledge that, for many public entities operating in a competitive business environment, the information about their future intentions and objectives needs to be balanced against issues of commercial sensitivity.

Linking performance targets to stated objectives

5.6
To be useful, performance targets should be clearly linked to an entity's stated objectives. The link between targets and objectives is a legislative requirement for all the types of entity that we included in our sample. We examined how clearly performance targets in the SCI were linked to the entity's objectives.

5.7 A little more than one-third (19 out of 54) of the SCIs that we examined had performance targets that addressed all of the entity's stated objectives. The remainder mostly linked only some performance targets to objectives, while three council-controlled organisations did not link performance targets to their objectives at all.

5.8
In the good examples of linking of performance targets in SCIs – including all the Crown research institutes in our sample – all objectives were clearly covered by a range of both financial and non-financial performance targets. In these cases, it was easy to see how the entity would measure whether it was achieving its objectives during the three years covered by the SCI.

5.9
In several cases, the use of performance targets or other measures to assess how entities intended to meet their objectives was weak or non-existent. For example, council-controlled organisations, council-controlled trading organisations, and State-owned enterprises are all required under their governing legislation to be good employers and to exhibit a sense of social responsibility. However, we found several instances among these entity types where these objectives were not covered by performance targets or other measures.

Looking forward three years

5.10
All the types of entity we looked at are required to cover the next three financial years in their SCIs. The intention of this requirement is to provide shareholders and the wider public with information about the intentions and direction of a public entity for the medium term. In several cases public entities, especially smaller council-controlled organisations and council-controlled trading organisations, produced SCIs that covered only one year. This reduced their usefulness as forward-looking accountability documents.

5.11
Seventy-eight per cent of the SCIs we examined covered the required three financial years when setting out the entities' objectives, performance targets, and financial information.

5.12
The SCIs we examined that did not cover the next three financial years (22% of our sample) covered only one financial year.

5.13
Many council-controlled organisations are small trusts or incorporated societies that run on a non-profit basis, with substantial direct operational funding from their local authorities. These types of council-controlled organisations (and their shareholders) may consider the need to provide a multi-year statement of their intentions and direction to be less important for them than for entities that are required to be successful businesses. However, providing a three-year forecast of objectives or intentions can provide valuable accountability between council-controlled organisations and their shareholders. For example, a trust that operates a museum can advise shareholders of its longer-term intentions to change or expand its exhibitions that might require funding changes beyond the next financial year.

The use and quality of performance targets

5.14
Most entities in our sample provided a wide range of targets with which their performance could later be measured, including non-financial measures. The Crown research institutes, energy companies, and State-owned enterprises in our sample used the widest range of performance targets and measures. However, there were several examples among other entity types where only a narrow range of financial targets was used.

5.15
Only two-thirds of the SCIs we examined had performance targets that could all be measured. In several cases, the performance targets were so vague that no meaningful assessment could be made later about whether the targets had been met.

5.16
More than half of the SCIs (30 out of 54) used performance targets that were all easy to understand or explained any technical terms. However, among the remainder, we found financial variables or technical terms that might not be easily understood by readers.

5.17
The usefulness of some entity objectives in the SCIs (for example, being a good employer) was diminished when the entity failed to provide performance targets or other measures for those objectives.

Range of targets

5.18
Most of the SCIs in our sample (81%) presented a range of performance targets and measures, including a mix of financial and non-financial ones.

5.19
All the SCIs in our sample that were produced by Crown research institutes and energy companies, and most of those produced by State-owned enterprises, presented a wide range of financial and non-financial targets and measures to assess the entity's performance against. For example, Crown research institutes routinely presented performance measures covering the full range of their activities, including measures for financial performance, research output, being a good employer, and customer satisfaction.

5.20
Where we found only a narrow range of performance targets (including among some council-controlled organisations and a couple of port companies), this was usually because only a few financial targets were set out. For one council-controlled trading organisation, the only performance target given was to achieve a specified profit level.

Measurable targets

5.21
Of the one-third of the SCIs that we examined that did not include quantifiable and measurable performance targets, many simply listed a number of financial variables, without specifying the target. For example, one entity stated that a couple of its financial targets would aim to be within an “agreed budget”, but included no information for readers about what the budget was or might be.

5.22
In several other cases, we found non-financial information presented in such a way that a reader would not be able to assess whether the targets had been achieved. For example, one entity gave as a performance target “To undertake an appropriate level of sponsorship”. In this example, the entity did not define what an “appropriate level” of sponsorship was.

5.23
We found several other similar cases where the performance targets provided were actually objectives. For example, two entities stated as performance targets that they would deliver, or put in place, business plans. In another case, a council-controlled organisation (an economic development agency) set a performance target for its region to grow faster than the national economy. As well as being an objective or vision, rather than a performance target, achieving this goal was largely outside the direct influence of the entity.

Technical terms

5.24
As noted in paragraph 5.17, more than half of the performance targets in our sample were easy to understand.

5.25
However, for the rest of the SCIs in our sample, only some of the performance targets were likely to be easily understood without specialist knowledge, or the entity did not explain the technical terms. Often, SCIs presented financial measures in abbreviated form or without explanations of their meaning or relevance – for example, EBITDA¹ and Acid Test². In our view, readers without financial or accounting knowledge would be unlikely to understand these measures.

5.26
The tendency to abbreviate financial measures was more pronounced in the SCIs of council-controlled organisations and council-controlled trading organisations than in the corresponding annual reports. The annual reports were more likely to express financial measures in full and in plain language.

5.27
In some cases, the performance measures were so vague that we could not understand their meaning or significance as targets. For example, two council-controlled organisations simply stated as performance targets: “add value”, “cashflows”, or “balance sheet”.

5.28
Many of the entities in our sample are involved in technical activities (for example, energy companies and council-controlled organisations involved in utility or infrastructure businesses). They therefore use technical performance targets. We identified several instances where the lack of explanation of these technical targets made their meaning or significance difficult to understand. For example, energy companies typically and justifiably use several measures relating to interruptions to electricity supply as performance targets. Some of the companies in our sample clearly defined these targets, while others stated them as abbreviated technical terms that are unlikely to be readily understood by all readers.

1: Earnings before interest, taxes, depreciation, and amortisation.

2: Also known as the Quick Ratio – the ratio of cash and readily realisable assets to current liabilities.