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Narrative reporting: BIS consultation on a new framework
Practical Law UK Legal Update 4-508-2531 (Approx. 8 pages)
Narrative reporting: BIS consultation on a new framework
by PLC Corporate
| Published on 19 Sep 2011 • United Kingdom |
BIS has published a further consultation on the future of narrative reporting.(Free access.)
Speedread
On 19 September 2011, BIS published a further consultation on the future of narrative reporting. The consultation paper describes a new, simpler reporting framework for UK companies and proposes that the directors' report and the business review be replaced with a strategic report and an annual directors' statement.
It is proposed that the strategic report will be a key messages report setting out the company's strategy, business model, performance, principal risks and remuneration and include disclosures on social and environmental matters and the number of women on the board. Small companies will not be required to produce a strategic report.
It is proposed that the annual directors' statement will be an online publication setting out more detailed information, including the directors' remuneration report, corporate governance statement and audit committee's report. The government is keen to facilitate shorter annual reports and will encourage the use of cross referencing in the annual directors' statement to additional materials published by the company.
The government is also consulting on:
- The key information to be disclosed in the strategic report to help shareholders to assess executive remuneration, including a single figure summarising total remuneration for each director and disclosure of the pay of the most highly paid senior managers below the board.
- The removal of certain company law disclosures where the case for disclosure has diminished.
- Additional disclosures to be included in the audit committee report.
- The appropriate format for supporting guidance.
- Enhancing the profile of the Financial Reporting Review Panel.
Responses to the consultation are requested by 25 November 2011. The government's aim is that regulatory solutions will be effective for financial years beginning on or after 1 October 2012.
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Background
On 2 August 2010, the Department for Business Innovation & Skills (BIS) published a consultation on the future of narrative reporting. The consultation was part of the government's Coalition Agreement 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" (see Legal update, Narrative reporting: BIS consultation).
On 23 December 2010, BIS published a summary of responses to the consultation which showed that although, in general, UK companies produce high quality reports, there was room for improvement (see Legal update, Narrative reporting: BIS consultation: summary of responses).
As part of its Plan for Growth, the government announced on 23 March 2011 that it had decided to materially simplify narrative reporting for quoted companies (see Legal update, Corporate governance and narrative reporting: government announcement).
The government's objectives, as set out at the start of their narrative reporting review, are to drive up the quality of narrative reporting, empower shareholders and achieve coherence without increasing burden on business.
Narrative reporting consultation
The consultation paper seeks views on the proposed new narrative reporting framework described below.
The format of company narrative reporting
The government is seeking views on its proposal that the directors' report and the business review be replaced with a strategic report and an annual directors' statement.
Strategic report
It is proposed that the strategic report will provide key strategic information about the company, including key risks and forward looking analysis. It is proposed that the strategic report will be concise and readable and will provide meaningful information specific to the company, including how the board integrates long-term issues and risks into the company's strategy and business model.
The strategic report will contain high level disclosures on a company's:
- Strategy.
- Business model.
- Performance and key financial data (similar to the information provided in summary financial statements).
- Principal risks.
- Social, environmental information and human rights matters (where necessary).
- Key information on corporate governance and remuneration (particularly the linkage of the executive remuneration to the company's strategic objectives and performance).
The strategic report will focus on material issues and will be supplemented by, and contain links to, detailed disclosures in the annual directors' statement and financial statements. The strategic report will form part of the "annual report" but will also be a standalone document containing strategic and key financial information on the company. It is also proposed that each director and the company secretary will be required to sign the strategic report.
As is currently the case with the business review, it is proposed that small companies will be exempt from producing the strategic report, but will be encouraged to voluntarily report on environmental and social issues.
Annual directors' statement
It is proposed that the annual directors' statement will provide more detailed disclosures which will underpin the strategic report. The data will be more prescribed, by being grouped under standard headings, to assist comparability and searchability online. It is proposed that the annual directors' statement will contain the directors' remuneration report, corporate governance statement, the audit committee's report and detailed information and statements of policy, including those currently required by:
- The Small Companies and Groups (Accounts and Directors' Report) Regulations 2008.
- The Large and Medium-sized Companies and Groups (Accounts and Directors' Report) Regulations 2008 (including the Directors' Remuneration Report Regulations).
- The Listing Rules.
- UK Corporate Governance Code.
- Other relevant legislation and codes.
A framework will also be provided for companies to include voluntary disclosures on environmental and social issues (including charitable donations by the company and its employees). The government will be working with companies, investors, regulators and other stakeholders over the next few months to develop the appropriate framework.
The government is also keen to facilitate shorter annual reports and will encourage companies to cross-refer to additional data which does not change from one annual report to the next. However, to ensure that such data is regularly reviewed, where such information is included by cross reference, the directors will need to confirm that they have reviewed, and where necessary updated it.
Although designed for online publication, the government does not propose to change the law with respect to shareholders' right to request and receive a hard copy of the statement.
Scope
All companies will be affected by these proposals, however for non-quoted companies this will minimal.
The government does not propose any changes to financial statements, including audited remuneration disclosures and the audit report, and the requirement to file annual reports with Companies House will remain unchanged.
Simplifying disclosure requirements
In addition to changing the framework of narrative reporting, the government proposes to make changes to the required content of disclosures and to simplify and streamline the requirements by removing duplication. The government proposes the removal of the CA 2006 disclosures (required to be disclosed in the directors' report) on asset values, share buy backs (for private companies), charitable donations, employee involvement and policy and practice on payment of creditors.
BIS will also be working with the FSA to see whether disclosures required under company law, the International Financial Reporting Standards, the Listing Rules and the Disclosure and Transparency Rules are consistent.
In addition to simplifying disclosure requirements, the government is also seeking views on whether quoted companies should be required to include in the strategic report:
- Information on human rights issues (to the extent necessary for an understanding of the development, performance or position of the company's business).
- Information on the proportion of women on the board, as proposed by Lord Davies in his report published in February 2011 (see Legal update, Corporate governance: Lord Davies' report on women on boards).
- For all companies, information on the proportion of female employees for the parts of the organisation for which gender information is available, an explanation of the approximate proportion of the global workforce that the gender figures relate to and a brief description of the jurisdictions or regions where gender information is unavailable or onerous to obtain.
Liability
Under the CA 2006, directors are liable for any reckless statement made in the directors' report or directors' remuneration report, or a dishonest concealment of a material fact in such reports (see Practice note, Statutory liability for false or misleading statements, omissions and dishonest delay: company reports and published information relating to securities . Some companies believe that the current liability regime discourages meaningful forward looking statements, especially companies who have a US listing or are contemplating issuing a prospectus. Therefore, the government is seeking views on what could be done to encourage fuller disclosure.
Reporting on remuneration
A quoted company is required to produce an annual directors’ remuneration report as part of its annual accounts and reports and propose an ordinary resolution at the meeting at which it lays its accounts (which is usually the AGM) to approve the directors’ remuneration report (although the shareholder vote on this resolution is non-binding). (For more information, see Practice note, Directors' remuneration report: regulations in force for accounting periods beginning on or after 6 April 2008).
The government proposes to reform these requirements so that a quoted company’s strategic report sets out key information to help shareholders to assess executive remuneration, including:
- A single figure summarising total remuneration for each director.
- Improved disclosure of the relationship between executive pay and performance.
- The proposed remuneration policy for the year ahead, including estimates of total directors’ remuneration if performance targets are exceeded, met or not met.
- The relationship of executive pay to pay across the organisation, and total executive pay expenditure as a proportion of profit for the year.
Views are sought on these proposals and on other possible reforms, including:
- A standard format for executive remuneration disclosure.
- Disclosure of the pay of the most highly paid senior managers below the board.
- Disclosure of performance targets for executives’ annual bonuses (possibly with some delay for commercially sensitive data).
- Disclosure of fees paid to remuneration consultants.
- Harmonisation of company law and listing rules remuneration disclosure requirements.
At the same time as publishing the consultation on narrative reporting, BIS published a discussion paper seeking views on remuneration disclosure reforms and other measures to improve the correlation between executive pay and long-term company performance. For more information on this discussion paper, see Legal update, Executive remuneration: BIS discussion paper.
Audit and assurance
The government proposes that company law will require auditors to state whether in their opinion the information given in the strategic report and the annual directors' statement is consistent with the accounts. The government is also seeking views on how companies and shareholders should agree on the areas of non-financial information that would benefit from a greater level of assurance. The government will be liaising with the FRC on its proposals in this area following its consultation on effective company stewardship (see Legal update, Financial reporting: FRC's next steps to promote effective company stewardship).
The government is also seeking views on whether audit committee reports should be required to state how long the auditor has been appointed, when a tender was last conducted and the length of time since the directors have had discussions with principal shareholders about the company's relationship with its auditor.
Guidance for preparers and users
Effective guidance is an important tool for improving the quality of company reporting. However, the government is not proposing to introduce a statutory standard. It is therefore proposing to request that the Accounting Standards Board revises and updates its existing voluntary reporting statement, RS1 in light of the changes to the reporting framework. The government welcomes views on the form of such revised best-practice guidance.
The government has also made a commitment that by 2012, it will publish new guidance for businesses on how to measure and report their corporate environmental impacts to complement existing guidance on corporate greenhouse gas emissions reporting (see Legal update, Defra publishes Natural Environment White Paper).
The role of enforcement and narrative reporting
The government believes that a greater statutory enforcement role for the Financial Reporting Review Panel (FRRP) would introduce a significant burden on companies and the FRRP. However, the government is of the view that the public profile of the FRRP needs to be enhanced and is proposing to take measures to improve the FRRP's profile and understanding in relation to its oversight of narrative reporting and that its remit extends beyond financial reporting.
Next steps
Responses to the 35 questions set out in the consultation paper are requested by 25 November 2011. Following which draft regulatory and non-regulatory solutions will be published with a view to the regulatory solutions becoming effective for financial years beginning on or after 1 October 2012. Early adoption will be facilitated where possible.