UK regulator the Financial Reporting Council (FRC) has set out areas for companies to improve their reporting under the revised UK Corporate Governance Code. The code applies to accounting periods beginning on or after 1 January 2019.
The FRC has also proposed a principles-based framework for the future of corporate reporting — to “explore ideas for a new model, challenging the status quo”.
The FRC’s CEO Sir Jon Thompson said in the Review of Corporate Governance Reporting that “much of what we have analysed is formulaic”. He added: “Too often the objective of reporting appears to be to claim strict compliance with the code, concentrating on achieving box-ticking compliance, at the expense of effective governance and reporting.”
He added that this was not in the interests of shareholders and other stakeholders and “undermines trust”.
The FRC recommended governance reporting should be improved in the following ways:
- Companies need to have a well-defined purpose and to clearly show the progress towards achieving it.
- Reporting should discuss issues raised, topics considered, and feedback received during engagement with shareholders and employees.
- Companies should clearly show the impact of engagement with stakeholders, including shareholders, on decision-making, strategy, and long-term success.
- Focus should be increased on assessing and monitoring culture, including consideration of methods and metrics used.
- Attention should be increased and reporting improved on succession planning, diversity, and board evaluation.
- The impact of engagement with shareholders on remuneration policy and outcomes should be clearly shown.
- The impact of the engagement within the workforce in relation to executive remuneration policy should also be clearly shown.
The review looked at a random selection of 100 companies from the FTSE 100 and FTSE 250 as well as Small Cap companies. The impact of COVID-19 was not captured in most of the reports assessed, the regulator said.
Future of reporting
Meanwhile, the FRC delivered a webinar in November following the release of its discussion paper, A Matter of Principles: The Future of Corporate Reporting, which proposes a principles-based reporting framework be developed for the future.
The proposals include:
- Unbundling the existing purpose, content, and intended audiences of the current annual report by moving to a network of interconnected reports;
- A new common set of principles that applies to all types of corporate reporting;
- Objective-driven reports that accommodate the interests of a wider group of stakeholders rather than the perceived needs of a single set of users;
- Embracing the opportunities available through technology to improve the accessibility of corporate reporting; and
- A model that enables reporting that is flexible and responsive to changing demands and circumstances.
The FRC’s executive director of regulatory standards, Mark Babington, said in a press release:“As the UK’s corporate reporting framework has evolved, annual reports have become a vehicle of convenience for ever-more information.”
He added that this had “undermined their purpose and usability” and that the discussion paper proposes “a more agile approach that is responsive to the needs of users of accounts”.
The deadline for comments on the paper — to be sent to firstname.lastname@example.org — is 5 February 2021.
— Oliver Rowe (Oliver.Rowe@aicpa-cima.com) is an FM magazine senior editor.