As we head into the main corporate reporting season, it’s time to have a look at some of this year’s hot topics.
The good news is that there are no additional disclosure requirements for the strategic report this year. Companies therefore have more freedom to focus on improving their annual reports.
The less good news is that even though the rules haven’t changed, there are several areas that are interesting the government, the Financial Reporting Council, the media and even the general public. In no particular order, these are culture, risk, tax, executive pay, boardroom behaviour and business models. We think every company should be looking hard at how they discuss these items.
Earlier this year, the FRC issued its report on corporate culture. The FRC sees a healthy culture as critical to long-term success and to avoiding the scandals we’ve seen so often in recent years. The board is responsible for defining, instilling and overseeing that culture.
Successful reporting on culture is difficult. It’s one thing to describe the culture the board believes is in place, but how to evidence it? No doubt practice in this area will develop but in the meantime, Black Sun has done some interesting work on reporting corporate culture.
The general standard of risk reporting has improved hugely in recent years buts it’s staying under the spotlight for two reasons.
First, the Corporate Governance Code requires boards to conduct a robust assessment of risk every year. That assessment should be reflected in each company’s risk disclosures, making clear how the world has moved on in the last 12 months. Rolling forward last year’s text just doesn’t cut it.
Second, we have Brexit. Many companies were complacent about Brexit in their risk reporting ahead of the referendum and there will be a lot of interest in what everyone is saying this time around. In the wake of the vote, the FRC put out some reminders on post-Brexit reporting, which remain pertinent. PwC has also published its thoughts on how companies can report Brexit-related risks.
The amount of tax major companies pay – or don’t – is high on the political agenda and a key reason that trust in big business is so low. Investors also have a significant interest in your tax charge. If your tax strategy is unsustainably aggressive, then your earnings and cash flow are unsustainable too.
Part of the government’s response is a new requirement for large companies to publish their tax strategies. As PwC’s research shows, many companies are already summarising their approaches to tax in their annual reports, as well as talking about their overall tax contribution. Pressure on companies to show they’re paying their fair share is only going to grow, so you should be thinking now about what your story is.
There were major investor revolts over executive pay this year and the focus on this subject is intensifying. Theresa May has boardroom excess in her sights, promising among other things a binding annual vote on remuneration and reforms to bonus schemes, to ensure they’re in the long-term interests of companies and their shareholders. The House of Commons Business, Innovation and Skills Committee has also launched an enquiry into corporate governance, which will cover executive pay.
While we wait for the PM’s soundbites to become actual policy, there are things companies can do to improve how they talk about pay. First, there needs to be a clear line of sight from strategy to performance to reward. That means KPIs that genuinely show strategic delivery and variable pay that’s linked to those KPIs. If your company’s pay schemes have that link, make it clear in your report.
Second, we’re probably going to see more companies talking about pay within the strategic report. If levels of pay are genuine drivers of performance and provide strong incentivisation, then that’s an important aspect of your culture that deserves discussion.
At the same time as attacking excessive pay, the Prime Minister is intent on tackling what she sees as bad behaviour by big business. Whether or not we end up with employees and consumers on company boards, the onus more than ever is on companies to provide real insight into how the board operates and its role in ensuring the company’s long-term success. This can be uncomfortable for directors used to hiding behind boilerplate disclosures but the political pressure isn’t going away and boards have to show they’re effective stewards. We expect to see more detail on:
- the board’s priorities
- the board’s involvement in approving and monitoring strategy
- performance evaluations
- how boards have spent their time
- examples of how boards have reached key decisions, such as acquisitions and investments, and
- the rationale for appointments to the board.
Companies can also make better use of the chair’s introduction to governance to talk about the board’s culture and the main issues it has tackled.
The FRC’s Financial Reporting Lab has been running a project on business model reporting since July 2015. Its report is expected this month, which will give December year ends time to review their disclosures in the light of its recommendations.
Check out our other blog posts on corporate reporting.