Corporate reporting – FRC Lab report on disclosures around stakeholders and decisions

The Financial Reporting Council’s Financial Reporting Lab has published a Report on stakeholders, decisions and Section 172 statements. The report sets out investors’ expectations in relation to disclosures on stakeholders and the impact of decisions on them and gives best practice examples.

The requirement for companies to report on how directors have had regard to the matters in section 172 of the Companies Act 2006 (see our briefing for further detail) has driven companies to increase reporting on their stakeholders. However, the Report says that there are still calls for better information on how companies are having regard to their stakeholders and taking their perspectives into account.

Recommendations in the Report include:

  • Stakeholders – When providing information on stakeholders, companies should:
    • identify key stakeholders and their respective interests by reference to the company’s business model and strategy, noting where particular stakeholders’ importance may vary over time;
    • describe stakeholder engagement processes, including feedback received, outcomes identified and the impact on decision-making;
    • assess opportunities and risks which could impact stakeholder relationships and describe what measures are being taken to manage these relationships; and
    • determine appropriate and reliable metrics to monitor stakeholder engagement and report against these metrics consistently.
  • Decisions – When setting out the significant decisions taken during the year, companies should:
    • link each decision back to the company’s purpose and strategy;
    • explain how the decision was reached, including how stakeholders were considered and the potential impact of the decision on each group of them;
    • be open about any difficulties or challenges in making the decision, including any prioritisation of particular stakeholder groups or offsetting of short-term negative consequences for long-term benefits; and
    • cover the expected and/or actual outcomes of the decision and the long-term implications for the company.

The report also considers the section 172 statement more broadly, cautioning that the statement should cover all aspects of the section 172 duty, not just stakeholders.

Alongside the report, the Lab has also published a summary of key questions, which companies can use to enhance the quality of information provided to investors on stakeholders and decisions, and further guidance on Section 172 statements.

Sarah Hawes
Sarah Hawes
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Alex Kay
Alex Kay
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Ben Ward
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Investment Association statement on shareholder priorities

The Investment Association (IA) has published a document discussing its listed company shareholder priorities for 2021.

The IA first published its shareholder priorities in January 2020. It focused on four key areas: climate change, audit quality, stakeholder engagement and employee voice and diversity (see our earlier blog post). The 2021 priorities document provides insights into the progress made by companies on these issues in 2020 and investors’ expectations for 2021. It also sets out how the Institutional Voting Information Service (IVIS), which is part of the IA, will analyse these issues for companies with year-ends on or after 31 December 2020.

  • Climate change – All companies in a high-risk sector (being financials, energy, transportation, materials and buildings, and agriculture, food and forest products) that do not address all four pillars of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) (being governance, risk management, strategy, and metrics and targets) will receive an amber top from IVIS. IVIS will also highlight to investors those FTSE companies that include a statement in their annual report that the directors have considered the relevance of material climate-related matters when preparing and signing off the company’s accounts.
  • Audit quality – The IA says that the quality and robustness of the audit is essential for investors but notes that, in practice, audit committee reports do not adequately demonstrate how the audit committee has challenged management’s judgments and do not describe how the audit committee has assessed the quality of the audit. IVIS will continue to focus on these issues in 2021.
  • Stakeholder engagement and employee voice – The IA notes that the Covid-19 pandemic has significantly impacted companies and their stakeholders. It says that investors expect companies to make quality disclosures outlining the approach taken to engaging, communicating and supporting the company’s stakeholders during the disruption caused by the pandemic and that this should include how the board reflected the views of their stakeholders in key decision making.
  • Diversity – IVIS will issue an amber top to any FTSE 350 companies that do not disclose either the ethnic diversity of their board or a credible action plan to achieve the Parker Review targets (see our earlier blog post). IVIS will also issue a red top to any FTSE 350 company that has female representation of 30% or less on their board, or female representation of 25% or less in their Executive Committee and its direct reports. FTSE Small Cap companies will receive an amber top in those circumstances.

 

Sarah Hawes
Sarah Hawes
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Alex Kay
Alex Kay
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Gareth Sykes
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FRC annual review of the UK Corporate Governance Code

The Financial Reporting Council (FRC) has published its Annual Review of the UK Corporate Governance Code.

The report discusses the quality of reporting against the Corporate Governance Code in 2020, and the FRC’s expectations for companies reporting in 2021. The report is based on an assessment of the annual reports of up to 100 companies, including FTSE 350 and FTSE Small Cap companies.

Companies were reporting on their application of the 2018 edition of the Code for the first time in 2020 and overall the FRC says that reporting does not demonstrate the high quality of governance that it expects. It says that reporting often took a formulaic and box-ticking approach at the expense of effective governance and reporting.

The FRC says that it expects companies to move away from boilerplate statements and provide a more meaningful narrative in support of their application of the Code’s principles.

Other key messages from the report include:

  • Compliance with the Code – The report discusses Code compliance and the provisions that companies most often said they did not comply with. The FRC expresses concern that an unexpectedly high number of companies in its sample claimed full compliance with the Code but could not demonstrate this in their reports. The FRC says that it expects companies to be clear and transparent about the provisions of the Code which they have not complied with.
  • Purpose, culture and values – The FRC says that the quality of purpose statements was variable. In particular, a number of companies conflated purpose statements with marketing slogans, mission statements or vision statements. It also says that it expects companies to take a more rigorous approach to culture and establish effective ways of monitoring and assessing both the culture and its alignment with purpose, values and strategy.
  • Stakeholders – The FRC says that companies should identify their key stakeholders and explain their relevance in the context of their strategy, as well as identifying key issues relating to each group. It also says that reporting on stakeholder engagement should include a discussion on how feedback received from stakeholders has informed company decisions and strategy. Companies should also report on how stakeholder information is passed to the board and how often the board reviews engagement methods. The report also discusses the workforce engagement mechanisms adopted by companies in line with provision 5 of the Code.
  • Succession planning – The FRC says that it found little improvement in the quality of succession planning disclosures. It says that the reports it reviewed provided minimal insight into succession planning, with many focusing on the appointment process rather than providing information on how companies plan for succession.
  • Diversity – The FRC says that companies should have both a board and a workforce diversity policy and that it expects companies which have not published those policies to do so in 2021. Guidance is also provided on how to improve diversity-related disclosures.
  • Remuneration – Reporting on remuneration issues is of mixed quality according to the FRC. It says that improvements have been made in reporting on workforce pay, discretion, and the requirements of provision 40 of the Code, but that reporting is disappointing in relation to KPIs, pension contributions, and workforce engagement.
Gareth Sykes
Gareth Sykes
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Antonia Kirkby
Antonia Kirkby
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Ben Ward
Ben Ward
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FRC expectations for corporate reporting for 2020/21

The Financial Reporting Council (FRC) has published its annual letter to audit committee chairs and finance directors on key developments and areas for improvement that listed companies should consider when preparing their next annual report and accounts.

Key points discussed in the letter include:

  • 2020 year-end reporting environment – The letter notes that the annual report in 2021 will be published against a backdrop of uncertainties, including as a result of the ongoing Covid-19 pandemic and the UK’s exit from the European Union. As such, the FRC encourages companies to consider carefully whether they should lengthen their reporting timetables for 2021, making use of the extensions to reporting deadlines announced by the FCA (see item 1 above). The letter discusses how companies should approach reporting in light of Covid-19 and refers companies to the FRC and FRC Lab’s previous publications on Covid-19 issues, including the FRC Lab’s recent update reports on Resources, action, the future and Going concern, risk, and viability (see our recent blog post). The letter also confirms the FRC’s expectation that all UK companies that use Alternative Performance Measures (APMs) in their annual reports continue to apply the ESMA Guidelines on APMs, notwithstanding the UK’s exit from the European Union.
  • Section 172 statements – Following a review of section 172 statements, the FRC says that many companies did not sufficiently explain how their directors discharged their section 172 duty, and in particular how they had regard to the consequences of decisions in the long term. In relation to stakeholder engagement, the letter notes that many companies did not explain how feedback from stakeholders affected the board’s decision making. The FRC says that it expects companies to improve their section 172 statements by discussing how employee-related issues and concerns are elevated to the board; the basis on which views are promoted to board discussion; direct actions arising from board discussions; and how the company relays its decisions on feedback provided by its workforce activities. The letter also refers companies to the FRC Lab’s recent infographic on section 172 statements (see our recent blog post).
  • Insights from thematic reviews – The letter discusses the key insights and observations from the FRC’s recent thematic reviews on climate change (see item 4 below), cash flow and liquidity, IFRS 15 (Revenue from contracts with customers) and IFRS 16 (leases).

 

Barnaby Hinnigan
Barnaby Hinnigan
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Antonia Kirkby
Antonia Kirkby
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Gareth Sykes
Gareth Sykes
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FRC Lab report on section 172 statements

The FRC’s Financial Reporting Lab has published a guidance note on section 172 statements.

The Companies (Miscellaneous Reporting) Regulations 2018 (SI 2018/860) introduced a range of stakeholder reporting measures, including a requirement for certain companies to include in their strategic report a statement that describes how the directors of the company have had regard to the matters set out in section 172(1)(a) to (f) of the Companies Act 2006 when performing their duty under section 172 (see our briefing for further detail).

The FRC Lab guidance note seeks to help companies consider what content to include in a section 172 statement, how to present it and how to facilitate the process of preparing the statement.

Key points discussed in the guidance note include:

  • Content – The statement should explain why particular stakeholders are considered to be key; why particular engagement methods were effective; and the key decisions and planned actions in light of engagement and feedback. There should be appropriate linking to the company’s strategy and business model. The report also says that the statement should include discussion of the board’s oversight of stakeholder engagement.
  • Presentation – The statement should be clearly labelled, and cross-refer to further detail in other parts of the annual report. Case studies of significant decisions taken during the year are also helpful.
  • Process – Board agendas and board papers can be used to include helpful prompts on stakeholder-related issues.

 

Gareth Sykes
Gareth Sykes
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Antonia Kirkby
Antonia Kirkby
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Alex Kay
Alex Kay
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Updated ICSA guidance on the duties under the Companies Act 2006

ICSA, the Chartered Governance Institute, has updated its guidance note on directors’ duties under the Companies Act 2006. It now includes a section on the requirement to report on compliance with the section 172 duty to promote the success of the company. The guidance is particularly aimed at public companies but will also be useful for directors of private companies.

Under the section 172 reporting requirement (contained in section 414CZA of the Companies Act), the strategic report of a large company must include a statement describing how the directors have had regard to the factors set out in section 172(1)(a) to (f) when performing their duty under section 172. The updated guidance sets out matters that could be included in the section 172(1) statement for each of these factors. For example, on relationships with suppliers, customers and others, the guidance says that the statement could include information on: a company’s methods to engage with suppliers and customers and others to obtain their views, and the effect on board decisions; customer relations; prompt payment to suppliers; supply chain sustainability and resilience; and responsible sourcing.

The guidance has also been updated generally in relation to compliance with the duties set out in sections 171 to 177 of the Companies Act and a section has been added on the consequences of a breach of duty.

The guidance is available to members and subscribers on the ICSA website.

Sarah Hawes
Sarah Hawes
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Barnaby Hinnigan
Barnaby Hinnigan
+44 20 7466 2816

Ben Ward
Ben Ward
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Investment Association statement on shareholder priorities

The Investment Association (IA) has published a document discussing Listed company shareholder priorities for 2020. It focuses on four areas that IA members consider to be key drivers to long-term value. It also discusses the approach that IVIS, the IA’s corporate governance research service, will take in these areas when highlighting issues relevant to shareholders exercising their votes.

The four areas of focus are:

  • Climate change – The IA says that investors are looking for significant progress from listed companies in implementing the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) recommendations (see our corporate update 2017/14).  IVIS will introduce a new section to its ESG report (on environmental, social and governance issues), highlighting to investors whether a company has made climate change-related disclosures.
  • Audit quality – The document notes that the quality and robustness of the audit is essential for investors but that, in practice, audit committee disclosures are often generic. The IA says that audit committee reports need to properly disclose where challenges have been raised, how professional scepticism has been applied and how a quality audit has been delivered. IVIS will revise its questions to encourage better disclosures around audit.
  • Stakeholder engagement and employee voice – The IA says that investors are keen to better understand how directors are fulfilling their duties and taking account of the views of the company’s material stakeholders. IVIS will introduce two new questions to ascertain whether the board has identified a company’s material stakeholders and its engagement with them, and which of the four options for workforce engagement outlined in the Corporate Governance Code a company has adopted.
  • Diversity – The IA notes the progress that has been made in relation to gender diversity on boards in light of the Hampton-Alexander Review. It also notes that investors expect companies to place  greater emphasis on ethnic diversity, in particular in light of the Parker Review (see item 1 above). The IA says that IVIS will red top any FTSE 350 company where:
    • women represent 20% or less of the board;
    • there is one or less women on the board (unless the one third target is achieved i.e. a board of three directors); or
    • women represent 20% or less of the Executive Committees and their direct reports.

For FTSE Small Cap companies, IVIS will amber top any company where women represent 25% or less of the Board; there is one or less women on the Board (unless the one third target is achieved); or women represent 25% or less of the Executive Committees and their direct reports.

Alex Kay
Alex Kay
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Caroline Rae
Caroline Rae
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Gareth Sykes
Gareth Sykes
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FRC report on workforce reporting

The Financial Reporting Council’s (FRC) Financial Reporting Lab has published a Report on Workforce-related corporate reporting to give companies practical guidance on how to improve their reporting in this area.

The Report says that reporting on workforce-related matters has become an area of increased investor focus in recent years but that there remains a gap between the reporting which investors are looking for and what is being disclosed. Workforce-related reporting is also a focus for companies in light of the requirements introduced by The Companies Act (Miscellaneous Reporting) Regulations 2018 and the 2018 UK Corporate Governance Code.

The Lab encourages companies to report on:

  • the oversight of workforce-related matters, including how the board engages with the workforce and what impact the board’s consideration of workforce matters has had on strategic decisions;
  • who the company considers its workforce to be (including headcount, demographics and employment status), how each aspect of the workforce creates value for the organisation and what opportunities there are to grow that value;
  • the risks and opportunities related to the workforce, how the company is responding to these, how the risks were identified and where they are in the business, including health and safety metrics;
  • how the desired culture is being driven from the top, and how culture and values help achieve the strategy; and
  • how the company is enhancing and incentivising its workforce to deliver value.

The Report is accompanied by a list of Questions for companies to consider in relation to workforce reporting.

Sarah Hawes
Sarah Hawes
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Antonia Kirkby
Antonia Kirkby
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Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Caroline Rae
Caroline Rae
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Ben Ward
Ben Ward
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Stephen Wilkinson
Stephen Wilkinson
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FRC annual review of corporate reporting and developments for 2019/20 annual reports

The Financial Reporting Council (FRC) published its annual review of corporate reporting for 2018/2019 in October 2019. It also published a letter to audit committee chairs and finance directors on key developments and areas of improvement that listed companies should consider when preparing their next annual report and accounts.

Annual review of corporate reporting

Topics covered in the report include:

  • Strategic reports – The FRC frequently challenges the adequacy of disclosures around principal risks and uncertainties.
  • Non-financial information statements – The Companies Act 2006 requires large “public interest entities” (including listed companies) to set out prescribed non-financial information in their strategic reports. The FRC highlighted that disclosures are often generic and do not identify a company’s policies in these areas, the outcomes of those policies or the due diligence carried out in relation to them.
  • Dividends – The FRC continues to challenge companies that pay interim dividends in excess of the distributable reserves shown in the last published accounts.

2019/20 annual reports

The FRC’s letter to audit committee chairs and finance directors provides guidance on the key developments and areas of improvement that listed companies should consider when preparing their next annual report and accounts.

Key points from the FRC’s letter include:

  • Section 172 statements – The FRC encourages boards to make specific disclosures, in the context of directors having regard to the matters set out in section 172(1) Companies Act 2006 when performing their section 172 duty, including issues, factors and stakeholders they consider relevant, the main methods used to engage with stakeholders and information on the effect of this on the company’s decisions and strategies.
  • Environmental disclosures – Companies should be reporting on the direct and indirect effects of climate change on their business. Disclosures should discuss actions the board has taken to account for resilience of the company’s business model as well as its risks, uncertainties and viability in the immediate and longer term, in light of climate change.
Sarah Hawes
Sarah Hawes
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Greg Mulley
Greg Mulley
+44 20 7466 2771

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Caroline Rae
Caroline Rae
+44 20 7466 2916

Ben Ward
Ben Ward
+44 20 7466 2093

Stephen Wilkinson
Stephen Wilkinson
+44 20 7466 2038