Narrative reporting is non-financial information which is required by statute or regulation to be included in the annual report and accounts to provide a broad and meaningful picture of a company's business, its market position, strategy, performance, and future prospects.

Currently, section 417 of the Companies Act 2006 (2006 Act) requires all companies other than small companies to produce a business review as part of the directors' report in a company's annual report and accounts. There are enhanced requirements for quoted companies in relation to non-financial information.

BIS launched its first wide-ranging consultation on the future of narrative reporting in August 2010 (www.practicallaw.com/9-503-1558). The issue is also being looked at by the Financial Reporting Council (FRC) and the European Commission (for more information, see feature article "Corporate governance: a long way to go", www.practicallaw.com/1-507-1652).

The proposals for the strategic report and the annual directors' statement include the following:

Strategic report. This will give a concise overview of the company supported by key financial and other information. It should provide enough material information for interested parties to make an assessment of the company's historic performance and future prospects, and will cross-refer to more detailed information in the annual directors' statement (see below).

Like the summary financial statement, which it will also replace, the strategic report will be available as a stand-alone document.

In addition to disclosing the company's strategy, the report should include high-level disclosures that are material to a company as a whole about the company's business model, its performance and key financial data, significant changes to governance, and principal risks. Quoted companies should also include social, environmental, human rights and remuneration information (see "Disclosure requirements" and "Reporting remuneration" below).

To ensure full board responsibility for the report, the consultation proposes that it should be signed by each director and the company secretary.

Small companies will not be required to produce a strategic report, although they will be encouraged to report voluntarily on environmental and social issues.

Annual directors' statement. The strategic report will be supported by more detailed narrative disclosures set out in an annual directors' statement, and can include information on aspects of company performance or governance that are not material to the company as a whole (for example, environmental, social or employee issues).

The format for the statement will be more prescribed than has previously been the case (including layout and headings), to make the content suitable for online publication and searches. However, shareholders will continue to have the right to access printed versions. This approach shares some common themes with the US Securities and Exchange Commission's initiative to introduce plain English and other proposals for narrative disclosures made to investors.

The statement should set out information and statements of policy currently required by legislation and codes, including the various reporting regulations, the Listing Rules and the UK Corporate Governance Code. Information that is likely to be unchanged from previous annual reports can be cross-referred and linked to, rather than set out again in full. However, directors will need to confirm that they have reviewed that information on an annual basis.

A company will also be able to include voluntary disclosures (for example, on corporate social responsibility and environmental reports).

Commenting on the new framework, Fergusson says: "It is helpful that there will be flexibility in the arrangement of the strategic report, while the annual directors' statement, with its more prescriptive structure and headings, will make finding and comparing information easier". However, trying to decide where to put certain types of information may prove tricky in practice. "For example," says Fergusson, "companies may find it difficult to assess which corporate governance information is ‘critical' and, for some companies, gender diversity information may seem more appropriate for the directors' statement rather than the strategic report."

To help lighten the load, the consultation sets out a list of disclosure requirements under the 2006 Act that the government proposes removing (including on share buybacks, asset values, and charitable donations). BIS will also be working with the Financial Services Authority to look at removing inconsistencies between the 2006 Act disclosure requirements, and those under the Listing Rules and the International Financial Reporting Standards.

In addition, the consultation seeks views on whether quoted companies should be explicitly required to include information about human rights in the strategic report and, following on from Lord Davies' report "Women on boards", whether, and in what way, companies should disclose the proportion of women on boards and in companies as a whole (for background, see News brief "Women on boards: targeting diversity", www.practicallaw.com/8-505-3051).

Some companies have raised concerns that the fact that directors can be liable for making fraudulent and reckless misstatements under the 2006 Act can discourage them from including meaningful, forward-looking statements in the current narrative report. The consultation therefore asks whether improved understanding and awareness of the UK liability regime would help address this concern.

Quoted companies are currently required to produce a directors' remuneration report (including prescribed information), which is subject to an advisory shareholders' vote (section 437, 2006 Act). However, while this requirement has led to more information being produced, remuneration reports have, like annual reports, become more cumbersome. The consultation therefore sets out proposals (for quoted companies only) aimed at clearer and more upfront remuneration reporting.

In particular, remuneration should be reported on in the strategic report, including the total remuneration for each director, an explanation of how remuneration in the relevant financial year is related to performance, the proposed remuneration policy and performance measures for the year ahead, information on service contracts, and a summary of how the remuneration committee came to its decision.

Detailed information on any calculations should be provided in the annual director's statement. The consultation also raises a number of related questions, such as whether companies should disclose the pay of the highest earning executives below board level, and the performance criteria for annual bonuses.

"The proposals on remuneration in the consultation, together with those in the related discussion paper, are effectively the first consultations on pay in ten years," says Nicholas Stretch, a partner at CMS Cameron McKenna LLP, "and they amount to a ragbag of every idea that has been floating around during that time. In addition, some of the measures proposed are out of kilter with the real level of discontent about executive pay shown by investors and shareholders, which is not as high as is often made out in the press and by some politicians. Issues such as a company's strategy and performance usually take priority."

Particularly problematic, according to Stretch, are the suggestions in the discussion paper for a binding shareholder vote to approve executive pay (the precedents for this in Australia are not very encouraging), and requiring employee representation on remuneration committees, "which could make people feel very uncomfortable".

However, it is unlikely that any changes will be made in this area until the final recommendations come through from Professor John Kay's review of UK equity markets in summer 2012 (which is currently carrying out a call for evidence) (www.practicallaw.com/7-507-0065).

The consultation proposes amending the current audit requirement in the 2006 Act, so that auditors must state whether, in their opinion, the information given in the strategic report and annual directors' statement for the financial year for which the accounts are prepared is consistent with those accounts. The government will be liaising with the FRC on its proposals in this area following the FRC's consultation on effective company stewardship (see "FRC: corporate reporting and audit").

The consultation also asks what guidance should be provided to preparers and users of the strategic report and directors' annual statement, and whether the Accounting Standard Board's reporting statement should remain voluntary. The final section considers whether the Financial Reporting Review Panel, which seeks to ensure large companies' compliance with the 2006 Act and accounting standards, should retain its remit, while enhancing its profile and working practices.

Companies and interested parties have until 25 November 2011 to respond to the 35 questions (which are also listed in Annex A). The government will then publish draft regulatory and non-regulatory solutions, with a view to the regulatory solutions becoming effective for financial years beginning on or after 1 October 2012.