FRC consults on revised Guidance on the Strategic Report

04 September 2017

In mid-August the FRC published its much anticipated consultation on amendments to the Guidance on the Strategic Report.

We’ve been eagerly awaiting the FRC’s proposals, not only because we were expecting the updates to reflect the new non-financial reporting regulations, but also because they are an important part of its response to the ongoing debate around corporate governance reform (and particularly how businesses consider the interests of stakeholders).

It’s clear from the Government’s recent response to last year’s Green Paper on governance reform that much of the task of closing out the debate is going to fall to the FRC, given the lack of government time for matters other than Brexit: the FRC’s consultation on the UK Corporate Governance Code will reflect many of the Government’s proposals and is due to start in November. Given the timing, that consultation is likely to be influenced by responses to this document, so it’s important for all concerned to feed in their views by the closing date of 24 October.

Purpose

The three main goals for the current consultation are to:

  • emphasise the connection between section 172 of the Companies Act (with its requirement to consider long-term consequences and a range of stakeholders in board decisions) and the purpose of the strategic report
  • reflect changes arising from the UK implementation of the EU Non-Financial Reporting Directive
  • incorporate a number of other recent developments and hot topics in reporting.

Reflecting the governance reform debate

It’s clear that emphasising the role of section 172 is the heart of the consultation and it’s particularly striking how this has led to a number of initiatives that are related to the ‘stakeholder agenda’ being much more clearly incorporated into the Guidance than before. It’s hard to miss the influence of integrated reporting and the Investment Association’s productivity action plan in the proposals around emphasising wider ‘value creation’, for instance. Also reflected are a number of stakeholder issues that have been emphasised by investors and built into the FRC’s communications leading up to the last couple of reporting seasons, including cyber security and climate change risk.

Non-financial reporting regulations

On the new non-financial reporting regulations, the proposals are set in the context of the key themes of the Guidance overall, but do not expand much upon the legal requirements. However it is made clear that, whilst the regulations use the term ‘non-financial information statement’, the information necessary to meet the requirements does not need to be presented as a separate statement – it should be integrated into the rest of the strategic report where appropriate.

Disclosure recommendations

In terms of the specific disclosure recommendations in the proposals, not surprisingly the most notable ones relate to the stakeholder agenda: three new ‘content elements’ are discussed, focusing on stakeholder identification and engagement in particular.

Investors have been very focused on encouraging companies to provide better information on their longer-term prospects (which are key to stakeholders including employees and pensioners) and several recommendations in the revised Guidance reflect this: for instance companies are encouraged to discuss risks beyond the horizon of the strategic plan on which the formal viability statement is based.

Overall, it feels as though the FRC is taking this opportunity to firm up its expectations and push companies harder, perhaps reflecting the external influences (from investors and others) that we discussed above. It’s striking for instance how one of the examples of linkage in the Guidance encourages country-by-country reporting of effective tax rates as a way of reporting on a company’s impact on the communities in which it operates; this is a case of the stakeholder agenda (and the implementation of the non-financial reporting regulations) leading the FRC to recommend a disclosure which it has not previously specifically advocated.

Some of the other areas addressed that could also be challenging in practice include:

  • using the ‘commercial sensitivity’ exemption from disclosure in a more limited way, only where: “disclosure would negatively impact impending developments or ongoing negotiations which are not in the public domain, for instance where the entity is in talks to acquire another entity”
  • better consistency and connection between disclosures such as KPIs and the measures used for executive pay, and the business review and segmental analysis
  • KPI disclosures that reflect how the business is really managed.

So, plenty for us all to consider as we work on our responses over the next couple of months…

Sarah Allen | Corporate Reporting Senior Manager

 

More articles by Sarah Allen

Twitter
LinkedIn
Facebook
Google+

Comments

Verify your Comment

Previewing your Comment

This is only a preview. Your comment has not yet been posted.

Working...
Your comment could not be posted. Error type:
Your comment has been saved. Comments are moderated and will not appear until approved by the author. Post another comment

The letters and numbers you entered did not match the image. Please try again.

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.

Having trouble reading this image? View an alternate.

Working...

Post a comment

Comments are moderated and will not appear until the author has approved them.