06 Feb 2014
One element of the new regulations – the strategic report – saw most companies continue with their previous approach to reporting, albeit with a re-ordering of the content. Those companies who had been standout reporters prior to the regulations remained standout; there was little change in substance. The attempt to address human rights and diversity left something to be desired, with limited attempts to explain the relevance or importance of either to the specific company.
Nor was the style of the strategic report as concise or innovative as had been explicitly encouraged by the FRC. Only one company had used the ‘core and supplement’ approach suggested in the guidance.
“It’s a positive sign that a lot of companies have spent more time debating their reporting,” said Mark O’Sullivan, a director in Corporate reporting at PwC. “There’s a greater level of debate by boards over the content, messages provided and whether they are fair, balanced and understandable.”
Mark O'Sullivan, Corporate reporting director, PwC
But Mr O’Sullivan added that there is further to go: “There’s no doubt that companies could have done more. But to be fair, with the sheer volume of changes, the timing of the regulations for the September year ends and the lack of concrete guidance available, it’s perhaps unsurprising that change hasn’t been radical. Looking at reporting year on year, there is no doubt that the greater level of debate has led to companies providing more insight, and more strategic links into some of their key disclosures, such as the business model and risks.”
Remuneration reports also increased in length, from an average of 11 to 17 pages, broadly in line with expectations considering the requirement for new disclosures. “There was a reluctance to drop existing information not explicitly required under the new regulations,” said Elaine Forrest, a reporting specialist at PwC. “So there’s scope to trim the length of reports, once investors have fed back.” But length shouldn’t be put before linkage, Ms Forrest warned: “Companies need to link remuneration to their strategy, KPIs and financial performance – this is a really key area of focus for investors. They have to provide context.”
It is hoped that the December year ends will apply the FRC’s communication principles in more innovative ways, resulting in more concise and well-linked reports. As well as looking at current best practice companies should, said Mr O’Sullivan, “go out on a limb, think more radically about what’s material to the business and then get that report reviewed by professionals or even join in with the FRC’s reporting lab, so they can experiment in a safe space.”