Dear FutureValue Visitor

Convergent best practice and statutory annual reporting requirements provide a basis to fulfil what accountants have long sought to achieve - a means of estimating the future value of a company on a comparable basis. As the average difference between book value and market value of listed companies has inexorably grown in the last fifty years from a typical ratio of 1.25 to 1 to more than 5 to 1, so the need to be able to account for this intangible value has become ever more pressing. What makes up this growing pot of hidden value precisely? A suitable and robust methodology has defied even the brightest accounting minds. In their quest they have grappled both with an industrial era tax system that encourages the treatment of value-creating assets as expenses not assets, and a system of accounting that has, in its basic form, remained unchanged since first invented by Lombardy merchants in the sixteenth century.

An apparent correlation between the quantity of narrative disclosure in annual reporting and share price performance was identified first by authoritative academics in the US in the late 1990s. At FutureValue we have taken this a stage further. More than employing just crude measurement of the quantity of key words in narrative disclosure, the quality of strategic capability that a company puts into its narrative reporting provides an indicator of the potential to achieve high levels of performance and sustain growth. Each company uses the same regulatory guidance to produce its narrative, and so has the same opportunity to add the maximum value going forward. In this way narrative is to future value what accounting is to past performance.

So, narrative reporting - words more than figures - offers a means to indicate the future value of a company, and strategic value analysis provides a robust technique to make this effective. Indeed, the technique can identify equally the losers as well as it can point to the winners. This became clearly apparent when looking back on our first sector comparison report in July 2006. Comparing PE ratios for the ten banks in the FTSE Banking sector index against their respective FutureValue scores, we observed that: "NRK [Northern Rock] has not shown a standard of strategic capability in its annual reporting to sustain the sort of earnings growth that would match current investor expectations of what it will achieve". Summing up our observations in forceful terms, we stated: "We think investors should additionally question why these ex-Building Societies in general, and NRK in particular, are so weak in the strategic capability they are prepared to evidence in the non-financial narrative content of their annual reporting, and what the implications of this weakness might be". A radically innovative technique such as this was unlikely to be recognised as authoritative at the time, so the message went unheeded.

The beauty of strategic value analysis is that it benefits investees as well as investors. Listed companies and their advisors can use it to assess the relative quality of their own reporting narrative and its propensity to add value, while analysts and investors can use it as a powerful supplementary source of information on companies and sectors to assist decision making. Whichever fold you are in, we hope our research and related services prove to be of benefit to you.

Ian McDonald Wood