Corporate Law Update
- The FRC publishes a “set of tips” to assist companies with preparing section 172 statements
- The FRC puts forward a bold proposal to radically overhaul the UK’s corporate reporting framework
- The FRC’s Lab publishes a review of the use of video in corporate reporting and AGMs
- The Investment Association calls for greater transparency on boardroom ethnic diversity
- ISS is consulting on changes to its benchmark voting policy for 2021
Covid-19 is affecting the way people conduct their business, retain their staff, engage with clients, comply with regulations and the list goes on. Read our thoughts on these issues and many others on our dedicated Covid-19 page.
The Financial Reporting Council (FRC) has published a new “set of tips” designed to assist companies with preparing a section 172 statement.
Under the Companies Act 2006 (the Act), large UK companies must include a statement in their annual strategic report describing how their directors have had regard to the matters set out in section 172(1)(a) to (f) of the Act when performing their statutory duty to promote the company’s success. This is known as a “section 172(1) statement” (or, more informally, a “section 172 statement”).
The requirement applies in relation to financial years beginning on or after 1 January 2019.
The tip sheet complements the FRC’s existing Guidance on the Strategic Report, which also contains recommendations for section 172 statements.
The key recommendations in the new tip sheet include the following.
- The section 172 statement should not merely duplicate the requirements of section 172(1) and affirm compliance. Rather, it should reflect on how the requirements were met, what happened during the year and what is planned for the future.
- In particular, the board should consider explaining any emphasis placed on particular stakeholders and why it believes it has effectively engaged with them.
- Companies should consider explaining where decisions have been made in the short term to benefit the long term, or where one stakeholder group has benefitted more than another.
- The statement could include appropriate key performance indicators (KPIs) on key stakeholders, such as net promoter scores, as well as case studies of significant strategic decisions.
- Companies might consider sequencing the section 172 statement ahead of their narrative reporting on engagement with stakeholders to provide helpful context for investors.
- Finally, directors may wish to highlight key decisions and engagement activities during the financial year which could ultimately contribute towards the section 172 statement. They might also want to tailor board papers to include reminders to consider stakeholders.
The Financial Reporting Council (FRC) has published a new discussion paper in which it has mooted proposals to replace the UK’s existing corporate reporting system with a new “principles-based framework”.
What does the current reporting framework involve?
Corporate reporting requirements for larger UK companies derive from a patchwork of legislation and regulation, including the Companies Act 2006 and the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008.
Additional requirements apply to publicly traded companies (depending on the market to which they are admitted), such the Financial Conduct Authority’s Listing Rules and Disclosure Guidance and Transparency Rules, securities exchange rules (such as the AIM Rules for Companies) and applicable corporate governance frameworks (such as the FRC’s UK Corporate Governance Code), as well as a host of investor and regulator guidance.
Typically, a larger company must prepare financial statements, a directors’ report (which sets out key aspects of how the company has been run) and a strategic report (which sets out the future strategy of the company). In addition, certain publicly traded companies must prepare a directors’ remuneration report (which sets out directors’ pay for the last year and, every three years, a binding policy for future pay) and many will also publish separate reports prepared by their various board committees.
What is the FRC proposing?
The FRC believes the current format of a company’s annual report has become “confused about its intended audience and purpose”, leading to “fragmented and sometimes incoherent content”. It is therefore proposing a “radical overhaul”.
To tackle this, the FRC is proposing to unbundle corporate reporting by unpacking the annual report into a series of separate “network reports” that, together, would form a new “reporting network”. The reporting network would comprise two elements:
- Core reports. The network would be built around three core (mandatory) reports: the company’s financial statements, a stakeholder-neutral Business Report (based on the current strategic report) and a Public Interest Report (covering impact on stakeholders and the environment). The paper sets out suggested content requirements for each of these three core reports. The Business Report would focus primarily on impact on the company itself, whereas the Public Interest Report would focus primarily on the impact on internal and external stakeholders and wider society.
- Additional network reports. The three core reports would be accompanied by a series of additional financial and non-financial reports, each of which would be operate on a stand-alone basis and provide additional detail for specific purposes. Rather than being aimed at particular groups of stakeholders, network reports would be focussed on a particular purpose. The FRC believes this would best serve different stakeholder groups with overlapping expectations. Examples include investor presentations, half-year reports and divisional financial statements.
In addition, the FRC is proposing that future corporate reporting be based around a set of overarching principles, designed to maintain cohesiveness across the corporate reporting process.
- System-level attributes. At the top level, the FRC suggests four attributes that would inform the reporting process as a whole. These are that company reports are accessible, inter-connected, consistent in terms of information, and transparent.
- Report-level attributes. At the next level down, the FRC suggests two report-level attributes that would inform the characteristics of individual network reports. These are that individual reports be fair, balanced and understandable and that they show a true and fair view.
- Content communication principles. Finally, the FRC suggests four content communication principles that would guide the preparation of each individual report. These are that each report be brief, comprehensive and useful; contain only relevant information; contain company-specific information and avoid boilerplate; and be capable of comparison against the company’s historic reports and other companies’ reports.
Finally, the FRC is encouraging an increased use of technology in presenting corporate information.
- Digital reporting. The FRC envisages all reporting content being produced in a digital format. This might include media such as HTML, videos and presentation software.
- Tagging. Under this design, information and content would be tagged with machine-readable tags (using a system such as XBRL). Among other things, this would allow the company to connect and cross-refer across the different network reports.
- Principles-based reporting. Each report within the network would be “principles-based”. In other words, rather than having to meet specific information disclosure requirements, companies would report prosaically on how they have complied with or departed from a set of principles. Listed companies will already be familiar with this approach, as they are required to explain how they have applied the principles and provisions of the FRC’s UK Corporate Governance Code.
Thoughts and next steps
The FRC has raised 12 questions on its proposals and asked for comments by 5 February 2021. Following that, the FRC will publish a summary of consultation responses.
The new proposals are certainly bold and challenging. There is no doubt that the existing framework for corporate reporting in the UK is complex and difficult to navigate, with convoluted legislative requirements, a patchwork of guidance and regulation, and significant overlap between different parts of the annual report.
The FRC’s proposal to reconfigure this framework by redistributing this information across a series of interlinked and more dedicated reports has a lot to commend it. By providing more flexibility, particularly over non-financial reporting, the proposals might allow companies to explain their goals and position within wider society more clearly.
However, should the proposals gain support, it would be important to ensure this does not become a lost opportunity to streamline the UK’s framework and make legislation and guidance easier to follow. Unless properly structured, there is arguably a risk of a new “reporting network” simply becoming a re-packaging and re-labelling of existing content.
Also this week…
- FRC publishes report on video in corporate reporting. The Financial Reporting Council’s Financial Reporting Lab has published a report on the use of video in corporate reporting and annual general meetings (AGMs). The report examines the different types of video that can be employed and gives links and QR codes to recent examples of how companies have employed video in corporate reporting. It also gives tips for successfully integrating video into corporate reporting as well as different types of AGM.
- Investment Association calls for transparency on ethnic diversity. The Investment Association (IA) has published a press release calling for greater transparency on ethnic diversity on boards. According to the IA, almost 75% of FTSE 100 companies did not report the ethnic make-up of their boards in this year’s AGM season. The IA notes that, with FTSE 100 boards expected to reach the Parker Review target of at least one director from an ethnic minority background by 2021, investors need more information as part of their stewardship duties.
- ISS publishes 2021 benchmark policy consultation. Institutional Shareholder Services (ISS) has published a consultation on its proposed voting policies for 2021. The consultation applies to ISS’ policies worldwide. Proposed changes to the policy for the UK and Ireland include a focus on increasing board gender diversity and director accountability for ESG issues. ISS has asked for comments by 5:00 p.m. US Eastern Time on 26 October 2020.