UK: Government proposals for reforming the structure of narrative reporting

The Department for Business, Innovation and Skills has published for consultation a draft of the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 through which changes to the narrative reporting framework will be made: see here (pdf). Amongst other things, the Regulations introduce the requirement for companies to produce a separate Strategic Report in place of the Business Review currently found in the Director's Report (small companies will be exempt). The Regulations will require quoted companies to include in their Strategic Report information that is currently not required in the Business Review including, for example, a break down by gender of the number of directors, managers and employees within the organisation.

UK: Government consults on executive remuneration and outlines new narrative reporting framework

The Department for Business, Innovation and Skills published a couple of consultation papers today. The first concerns executive remuneration and is available here (pdf). In this paper the Government asks fifteen questions concerning the structure of remuneration, the role of remuneration committees, the role of shareholders and promoting best practice. Question one, for example, asks whether providing shareholders with a binding vote on remuneration would improve their ability to hold companies to account on pay and performance.

The second paper, unlike the first, contains specific proposals. It sets out the Government's proposals for a new narrative reporting framework: see here (pdf). The Government proposes that the current Directors' Report should be abolished and that quoted companies and medium and large companies should publish a Strategic Report (replacing the Business Review). All companies will be required to prepare an Annual Directors' Statement. Major changes are proposed with regard to the Directors' Remuneration Report, which will become part of the Annual Directors' Statement with important information moving to the Strategic Report. In addition, changes to what quoted companies must disclose with regard to remuneration are proposed, including more information on the relationship between pay and performance.

UK: Rio Tinto's business review - FRRP secures greater environmental disclosure

The Financial Reporting Review Panel has secured greater disclosure by Rio Tinto plc in respect of the business review it is required to publish under the Companies Act (2006); the required contents of the business review are set out in Section 417. This followed a complaint received by the FRRP last summer. Rio Tinto's most recent business review, published earlier this week, now contains more information regarding, for example, the potential health risks posed by exposure to workers and communities surrounding uranium mines and an example of the potential for the group’s projects to impact on biodiversity. For further information see here.

UK: company reporting of risk and uncertainties - FRRP expresses concern

In a press release published earlier today, the Financial Reporting Review Panel (FRRP) has expressed concern with the way in which companies are reporting the principal risks and uncertainties facing their business within the business review (as required by Section 417 of the Companies Act (2006)): see here. In its press release the FRRP sets out some questions for boards to consider in respect of their disclosure of the principal risks and uncertainties facing the business.

UK: FRRP annual report published

The Financial Reporting Review Panel has published its annual report (previously known as its activity report): see here (pdf). For the period in question - the year to March 2010 - the Panel reviewed 308 sets of accounts; 146 companies were approached for further information or explanation and 3 companies agreed to restate amounts reported in prior periods.

The Panel found improvements in the general quality of IFRS reporting although with regard to capital management and share‐based payment disclosures, reporting was sometimes poor in terms of content, extent and usefulness. The Panel also had concerns with the quality of reports and accounts of some smaller listed and AIM quoted companies. Interestingly, the report contains a couple of pages dedicated to explaining what makes a "good set of accounts" (see pages 2 and 3).

The Panel's remit was extended last year to include monitoring company's compliance with the FSA Disclosure Rules and Transparency Rules (DTR) 7.1.5 and 7.2 relating, respectively, to audit committees and corporate governance statements. In this regard the Panel examined a sample of 30 accounts and found clear room for improvement; to quote from pages 7 and 8:

.. all provided a corporate governance statement and gave information on the composition and operation of their board and of their nomination, remuneration and audit committees as required by the rules. Companies that did not apply all the provisions of the Combined Code generally provided an explanation for the departures, although these could have been clearer at times. The areas of the code most often not complied with related to board balance and independence ...

Most companies provided some explanation of the key features of the internal control and risk management systems in relation to their financial reporting process although the level of detail provided was variable. Some companies provided boiler‐plate descriptions of their budgeting process while others had not adjusted their descriptions of the key features of their internal control system to focus specifically on the financial reporting process, as now required by 7.2.5. Few companies referred to the preparation of the consolidated accounts despite DTR 7.2.10 requiring a description to be given of the main features of the group’s internal control and risk management systems in relation to the process for preparing consolidated accounts".

UK: the future of narrative reporting - BIS consultation paper published

The Department for Business, Innovation and Skills has today published a consultation paper on the future of narrative reporting: see here (pdf). To quote from the paper:

This consultation is looking at how the narrative reporting framework is working in practice. How well are companies complying with the existing requirements? Are they focusing on their strategy, their principal risks and uncertainties and providing the right quality of relevant information on these matters to enable their members to hold them to account? Are shareholders actually using the information that companies provide? Do narrative reports generally reflect the intentions and spirit underlying the statutory framework? Are there ways to improve the narrative reporting framework as a whole?

The consultation focuses in particular on the business review provisions. In this context, the Coalition commitment to reinstate an Operating and Financial Review to ensure that directors’ social and environmental duties have to be covered in company reporting and investigate further ways of improving corporate accountability and transparency is particularly relevant. It also considers issues relating to remuneration, and in particular to the link between performance criteria for payment to directors and the company’s objectives and performance".

A consultation response form is available here (Word) and further background information is available here.

UK: non-financial reporting in FTSE100 company annual reports

CORE - the Corporate Responsibility Coalition - has today published research examining FTSE100 companies' business reviews: see here (pdf). The obligation to produce a business review is found in Section 417 of the Companies Act (2006). CORE's report, based on an analysis of a representative sample of FTSE100 reports, states:

There were three areas in which it was not clear how, if at all, companies were complying with the Act. Firstly, s417 says that the purpose of the Business Review is to ‘help them assess how the directors have performed their duty [to promote the success of the company] under section 172’. An obvious way to do this would be to describe the way the Business Review was prepared. Yet ... only a minority of companies did so.

Secondly, s417 requires that if a Business Review does not contain information about each of the specified key factors which underlie the business’ performance, then these omissions should be stated. This does not appear to have been done in any of the Annual Reports.

Thirdly, there was evidently considerable confusion as to what a Business Review actually was. At its worst this meant that in some cases, it was not possible to identify the Business Review: 8 Annual Reports appeared to have no identifiable Business Review section. This does not seem to be compliant with the Act and is certainly outside its spirit. Yet even where it was possible to identify the Business Review, there was a great variety of practices concerning the status and use of external sources of non-financial information. For example, some companies referred to more detail on their websites, others referred generally to their CR reports, while yet others made reference to an internet location at which further detail could be found. According to legal advice obtained by CORE, such general references should not be considered a part of a Business Review".