Looking back on the financial crisis, it is perhaps not surprising to find that – although nobody saw it as their fault – everyone sees it as their responsibility to contribute to the solution.
As a result, there is a raft of different bodies trying to “revamp” various aspects of corporate governance, reporting and disclosure. And the Investor Relations and Markets (IR&M) Committee of the Hundred Group has had a full agenda in recent months reviewing and commenting on the various proposals. These cover everything from the role of auditors (and their independence or otherwise) through to trying to ensure that the “front half” of the report and accounts is not just consistent with the “back half”, but also provides a fair and balanced view of a company’s activities.
Along the spectrum come the usual cries for more disclosure based on the assumption that you can’t have too much information. But such an approach can lead to reporting heading down the route of boiler plating, with large quantities of bland disclosures leaving the reader none the wiser and, arguably, worse off when trying to pick out the real nuggets buried deep within the noise.
One of the primary objectives of the IR&M committee is to try to make sure that the reporting in which we all have to engage is focused, company-specific and, most importantly, necessary. All too often there are already mechanisms to achieve the desired goals, if the current rules and regulations are enforced appropriately: layering on yet more regulations is not the answer.
One such proposal working its way through the consultation process is the FRC’s draft paper, Effective Company Stewardship Enhancing Corporate Reporting and Audit. It includes many positive suggestions, notably regarding the role that the internet and company websites can play in ensuring that communication with stakeholders is both timely and dynamic. That said, there are many areas where the case for change is far from robust and out of line with the experience of the Hundred Group.
Many of the paper’s recommendations focus on giving the reader comfort in the integrity of those statements. It’s suggested there should be a narrative reporting standard aimed at ensuring that the “front half” of the report and accounts provides a fair and balanced report on their stewardship of the business. However, the IR&M committee believe this is adequately covered under existing legislation, namely through the requirements of the Companies Act 2006. Another layer of rules would add little, if anything.
The draft also suggests that investors should play a greater role in the appointment of auditors. But the experience of the IR&M committee is that there is little investor appetite in such areas and, where there is appetite, it is already covered through a combination of existing legal requirements, including the UK Corporate Governance Code and Companies Act 2006.
The drive for more engagement seems to stem from a belief that the more frequent rotation of audit firms would result in better audits, another view with which the IR&M takes issue. Many companies that do go through an audit tender process end up staying with the same firm because the loss of continuity and understanding is seen as a greater risk to an effective audit than any benefit that might accrue from a change. In that context, the mandatory rotation of audit partners provides a good compromise by delivering most of the upsides with none of the downsides.
There are a number of other proposals in the draft all tending towards similar theme: a solution looking for a problem that is not actually there, or for which there are already perfectly adequate solutions in place. It is in the interest of all businesses, not just those represented by the Hundred Group, to make sure that proposals such as this are supported where they fill gaps within our governance frameworks, but are challenged when they merely duplicate their goals.
Luke Savage is the finance director of insurance market Lloyd’s of London