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.
In a nutshell, we have two new initiatives to consider: a Government green paper on corporate governance; and a new consultation on changes to the strategic report by the Financial Reporting Council (FRC).
The first thing to say about the FRC consultation is that the timing is poor – and that’s being kind. 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 really isn’t much help to December year-end content generators who will face a last minute scramble to comply, once the guidance has been finalised.
That aside, we welcome the process, which 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 our own and the IIRC’s push for greater disclosure around these issues.
Three other key points to note from the FRC work: 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 – some reporters seem to have taken more concise to mean less content.
The Government’s green paper on Corporate Governance Reform has already made the headlines, largely due to its proposals on executive pay. The key changes here 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.
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.
So the reporting landscape shifts yet again. Our view is that this is 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.