Insights from #illumination1 / The changing landscape of corporate reporting

In line with the theme of long-term value creation explored in Issue 2 of ‘Reporting Matters‘, Luminous held the first of three #illumination events, at the Zetter Townhouse, on the topic of the changing landscape of corporate reporting. Moderated by our Investor Engagement Director Stephen Butler, we were delighted to welcome our two speakers: Debbie Crawshawe, Project Director at the Financial Reporting Council (FRC); and Peter Swabey, Policy and Research Director at ICSA: The Governance Institute.

There is a great deal of change on the horizon for corporates, which includes secondary legislation, revisions to the FRC’s guidance on strategic reports, and fundamental changes to the UK Corporate Governance Code – all of which are intended to help companies better communicate their integrated thinking and long-term value creation.

Below are the key elements that corporates should be thinking about, but first, here’s a short film of the event..

The voice of the stakeholder rings louder

In an attempt to strengthen the stakeholder voice, Boards will be required to include a statement in their annual report explaining how they have complied with section 172(1) of the Companies Act.

It’s important that Boards remember that while stakeholder engagement is an important part of s172, the legislation has six parts, and the statement will need to touch on all them.

The legislation can be viewed here.

The legislation will apply to listed and unlisted companies that satisfy two or more of the following criteria: over 250 employees; a turnover of more than £36 million; or a balance sheet of more than £18 million.

All UK-registered companies with more than 250 employees will have to include a statement in the directors’ report (or strategic report) summarising how the directors have had regard to the need to foster the company’s business relationships with suppliers, customers and others; and the effect of that regard, including on the principal decisions taken by the company during the financial year and how those decisions have influenced strategy. This expands on the information about employee engagement matters that companies already have to include in their directors’ report.

It’s also important to note that subsidiary companies have to comply with these new s172 reporting requirements. This is because directors of subsidiaries are not puppets of their parent companies and under the Companies Act, the duty of directors is owed to their company.

See the ‘The Companies (Miscellaneous Reporting) Regulations 2018 – Q&A’ for more details.

A continued focus on pay

Quoted companies with over 250 UK employees will be required to disclose and explain the pay ratio within the annual report each year and illustrate the effect of future share price increases on executive pay outcomes, to inform shareholders when voting on long-term incentive plans.

A new dawn for governance

The updated Corporate Governance Code comes with a raft of proposed changes in an attempt to make the Code shorter and sharper. The new Code is split into five broad sections:

– Leadership and purpose
– Division of responsibilities
– Composition, succession and evaluation
– Audit, risk and internal control
– Remuneration.

The Code is expected have a greater focus on purpose and values and how they align to strategy along with diversity and culture, and stakeholders and in particular employees.

The revised Code will be resealed on Monday 16 July 2018.

Corporate governance in large privately held businesses

The ‘Corporate governance in large privately held businesses’ has a greater focus on broader stakeholder issues, notably the treatment of staff. The statement must be published on the company website and must specify which corporate governance code has been applied, and state any departures from that code. Companies who decide not to apply a governance code must provide an explanation for this decision. This legislation was laid in Parliament on 11 June 2018 and applies to companies who satisfy at least one of the following criteria: more than 2,000 employees globally or a turnover of more than £200 million, and a balance sheet of more than £2 billion.

AIM grows up

From September 2018, all AIM-listed companies must include a statement on their website disclosing which ‘recognised corporate code’ they apply, on a ‘comply or explain’ basis.

Purpose and culture

Both speakers spoke about the increasing importance and role of purpose and culture for corporates. All the recent changes are underpinned by a recognition that it’s not just about profit and it’s not just about the Board; it’s also about long-term value creation and accountability, and about all the employees and stakeholders.

And, in addition:

Non-financial information statement

Companies who fall under the remit should include a statement expressing how the EU Non-Financial Reporting Directive has been satisfied within the annual report, cross-referencing to relevant sections of the annual report.

The Luminous view

Given the number of recent changes within corporate reporting and the road map of regulations, some degree of confusion is expected. We at Luminous consider the above changes to be completely necessary and believe that any adjustment problems will be a small price to pay to ensure, and improve, business resilience and long-term value creation.

Join us, and guest speakers from the International Integrated Reporting Council (IIRC) and Deloitte, on Thursday 27 September, at #illumination3 / Integrated reporting: future or fad?, for a look at the future of the integrated reporting framework.

And if you’d like to find out best to implement these new changes into your next annual report, contact [email protected] for an initial conversation.

Read our insights on #illumination2 / Beyond words: purpose and culture >

 

 

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Connor Lundy

As Investor Insight Executive, Connor works closely with Stephen Butler, Luminous' Director of Stakeholder Engagement to research the latest best practice regulations and trends across narrative reporting, digital, investor events, sustainability and integrated reporting.