Putting together an annual report is challenging, at the best of times. Doing it against a background of changing guidance is doubly so – especially when the timing of that guidance is less than ideal.
We are also waiting to see the affects of the European Securities and Markets Association (ESMA)’s European Single Electronic Format for reporting, which will come into play from 2020.
FRC Strategic Report guidance consultation
The first thing to note about the FRC consultation is that the timing is poor. The consultation period doesn’t finish until the end of October 2017 and the guidance update is not due until the first half of 2018. This means December year-end content generators will face a last-minute scramble to comply, once the guidance has been finalised.
That aside, the process should ensure that a report considers the company’s wider impact on society – in particular through increased focus on resources and relationships, in line with Radley Yeldar’s and the IIRC’s push for greater disclosure around these issues.
There are other key points to note from the FRC work. Firstly, the guidance is non-mandatory, but aims to encourage best practice. There’s no need to create a separate non-financial statement and the requirement to be concise has been amended to read ‘concise yet comprehensive’. This latter change is small yet significant. Many reporters have seen concise to mean fewer pages and less content. This was never the aim of the FRC – it is rather to encourage narratives that are clear and transparent and don’t obfuscate.
There has also been much confusion among reporting owners on how to implement the EU non-financial directive introduced earlier this year. Although the FRC consultation is clear about not needing a separate non-financial statement, it is still unclear exactly how much content is required within the report, especially around environmental policies and due diligence.
The FRC has supported its consultation with the publication of its annual review of corporate reporting for 2016/17. This report identifies the key elements of a rounded annual report, emphasising many of the changes made in the consultation, stating:
“…the changes we are currently proposing are aimed at encouraging companies to include content that goes beyond the law where information is material to the long-term success of the company.”
Government green paper on Corporate Governance Reform
The Government’s green paper on Corporate Governance Reform has already made the headlines, largely owing to its proposals on executive pay.
The key changes include reporting the pay ratio between the CEO and the average employee and bringing greater clarity to remuneration policies, particularly complex, share-based incentive schemes.
The green paper also highlights the need to strengthen the employee, customer and supplier voice, and includes a requirement to explain how directors have complied with Section 172 of the Companies Act, with regard to the interests of employees and others. Both the executive pay and Section 172 requirements will be supported by secondary legislation.
It is clear from Radley Yeldar’s research that communication of executive remuneration is still a major downfall of most reports in the FTSE100.
There is the occasional shining light in terms of attempting to summarise policies, targets and performance, and clearly linking remuneration to the company’s strategy and KPIs. However, the majority of remuneration sections’ primary role seems to be to mystify rather than communicate. The average score across the sample for communication of remuneration was 3.6/10.
In addition, the green paper includes a recommendation that the FRC should consult on the development of a new Code principle which could extend to companies being required to adopt, on a ‘comply or explain’ basis, formal employee engagement mechanisms.
Finally, there are plans to introduce secondary legislation that will require large privately-held businesses to disclose governance arrangements in the Directors’ Report.
European Single Electronic Format
While the Government, the FRC, the IIRC and report generators such as RY are encouraging further transparency and clarity in reporting, there is a further future complication in the form of ESMA’s European Single Electronic Format for reporting.
The proposal, which will become regulation as of January 2020, requires companies initially to file an XHTML document for the entire annual report and XBRL tagging of the primary financial statements. UK listed groups do not currently have any XBRL or iXBRL filing requirements, except for their tax returns.
The legislation is being driven by Europe, but Britain’s decision to leave the EU is unlikely to prevent it. The new requirement will be implemented as an aspect of the updated Transparency Directive, which has already been transposed into UK law. That means reporters with a December year end have two more reporting cycles before they stop filing a PDF and start filing an electronic report.
Regardless of whether this initiative offers any benefits, it raises a number of practical issues. Some companies may choose to produce a full PDF and extract the copy to file electronically. At the opposite end of the scale, others may decide to produce an electronic report and embrace a ‘digital first’ stance, which will involve overhauling their entire reporting process.
Whichever approach they adopt, there is also the small matter of finding enough coding capacity to deal with such a huge change. And how will companies approach communication in the new environment? Will they embrace the drive for further transparency or take the simpler route towards a US SEC EDGAR type reporting environment?
So, the reporting landscape shifts yet again. Many of these initiatives are for the better, especially the renewed emphasis on providing a wider discussion of performance beyond financial return. Of course, much of this will cover familiar ground for the UK’s most accomplished reporters – but what a shame that the timing of the FRC consultation couldn’t have been as sensible as the thinking behind it, and with a clear direction of travel coming from future regulation.
Brett Simnett is director of investor engagement at Radley Yeldar.