Has the directors’ report had its day?

By John Patterson, Corporate reporting at PwC

With December year end companies now publishing annual reports, it’s become clear that the advent of the strategic report has led to a downgrading of the directors’ report. It’s still a statutory requirement, so all annual reports need to have one for the time being, but I’m left wondering whether the directors’ report will soon have had its day.

Right content, better context

If we work through some of the main items remaining in the directors’ report, the issue really becomes clear:

• Future developments, employees, GHG emissions and dividends are all likely to have some strategic importance and therefore should be part of the strategic report.
• If significant, post balance sheet events, research and development, and financial instruments should also be part of the strategic report.
• Directors and directors’ interests – would fit far more appropriately (and indeed are also required) in the governance report and remuneration reports respectively.
• Political donations – if these are material (to the recipient!) they may well be strategic; however for most an “Other statutory information” section is likely to be most suitable. Directors’ indemnities would also sit well in an “Other statutory information” section.

…and so the list goes on.

So all of this information is required by law, but most of it can be addressed better somewhere else in the annual report. And there is no issue with the safe harbour provisions in relation to forward-looking statements: if safe harbour was available for the directors’ report, it’s available for the strategic report and that’s where the forward-looking information should be.

Trends from December year ends

In this context it’s no surprise that a number of the annual reports published so far treat the directors’ report as little more than an index to where the required content can be found. But this certainly doesn’t make for an easily useable report and it relies heavily on what are effectively cross-references. Even where the directors’ report remains a separate section of the annual report in the traditional way, it can look pretty insignificant.

Other companies have felt that the solution is to make the whole of the front half the directors’ report, with the strategic report nested within it. This is a legitimate approach too, but it makes it difficult to identify the directors’ report requirements within the rest. With the auditors still reporting on its consistency with the financial statements and their knowledge acquired from the rest of the audit, it needs to be reasonably clearly identifiable!

Either way, it’s clear that the directors’ report is becoming something of an inconvenient spare part. With the FRC soon to issue its final guidance on implementing the strategic report within the context of narrative reporting as a whole, it would be good if they offered some help with how to give the required content in the most appropriate way. It must be time to revisit again the use of online reporting – it’s ideal for this kind of legal standing data.

John Patterson
Tel: +44 (0) 12 2355 2413