IP monitor: Federal Court raises the bar to grant protective orders
Canadian National Railway Company v BNSF Railway Company adds to recent case law that has seen the Federal Court refuse to issue routine protective orders.
There have been a number of corporate governance developments since the Summer of 2017, as well as developments in the narrative aspects of annual reports and accounts. This briefing summarises those developments and looks at some of the future developments in these areas that companies need to start preparing for.
In September 2017, the Business, Energy and Industrial Strategy Committee (BEIS Committee) published the Government's response to the BEIS Committee’s report on corporate governance which was published in April 2017. Since then, the Government, in August 2017, published its own response to its Green Paper consultation on corporate governance, which supports a number of the BEIS Committee’s recommendations.
The Government’s response to a number of BEIS Committee’s recommendations is as follows:
Promoting good corporate governance
The Government shares the BEIS Committee’s view that good corporate governance is relevant to all companies, not just those with a public listing, and notes the steps it has taken in the response to the Green Paper for the development of an appropriate code or set of principles for large private companies.
The Government believes that companies should continue to have the flexibility to choose the long-term share remuneration policies and models that they put to investors for approval. At the same time, companies and shareholders should aim to be more open to alternatives to the currently dominant LTIP model. The Government notes the proposals it set out in its response to the Green Paper in this area. This includes steps taken by companies that receive significant shareholder dissent on executive pay, the position of chair of remuneration committees, the broader responsibilities of the remuneration committee in overseeing pay and reward across the company, and the requirement to publish the pay ratio between the CEO and average employee pay, as will be required by secondary legislation.
Composition of boards
In response to the BEIS Committee’s report, the Government is not preparing to mandate that, from May 2020, at least half of all new appointments to senior and executive management level positions in the FTSE 350 and all listed companies should be women as it believes the Hampton-Alexander Review targets of 33 per cent women on FTSE 350 boards and 33 per cent women on executive committees and their direct reports by 2020 should be met first in terms of diverse workforces. The Government also continues to believe that a non-legislative solution is the right approach for now, rather than legislation requiring FTSE 100 companies to publish their workforce data, broken down by ethnicity and by pay band. The Government also does not intend to guarantee the FRC an increased role in overseeing the rigour of the board evaluation process by the external facilitator.
The Department for Business, Energy & Industrial Strategy (BEIS) published the Government’s response to its Green Paper on corporate governance reform (Green Paper) in August 2017. The response document identifies nine proposals for reform which the Government intends to take forward. It also includes a summary of the responses to the Green Paper.
Background to the Green Paper
The Green Paper was published in November 2016 and its purpose was to consider changes that might be appropriate to the UK’s corporate governance regime to help improve business performance and ensure that the economy works for all. The Government consulted on three specific aspects of corporate governance, namely executive pay, strengthening the employee, customer and supplier voice and corporate governance in large privately-held businesses. The nine proposals for reform relate to these aspects of corporate governance.
The Government is to invite the Financial Reporting Council (FRC) to revise the UK’s Corporate Governance Code:
The Government is to introduce secondary legislation to require quoted companies:
The Government intends to invite the Investment Association to maintain a public register of listed companies encountering shareholder opposition to pay awards of 20 per cent or more, along with a record of what these companies say they are doing to address shareholder concerns.
Other issues in relation to executive pay
The Government notes in the response paper that it will commission an examination of the use of share buybacks to ensure that they cannot be used artificially to hit performance targets and inflate executive pay. The review will also consider concerns that share buybacks may be crowding out the allocation of surplus capital to productive investment and the Government will announce more details shortly.
In terms of other options included in the Green Paper in relation to executive pay, the Government will not be taking these forward at the moment. These are as follows:
Strengthening the employee, customer and wider stakeholder voice
The Government intends to introduce secondary legislation to require all companies of significant size (private as well as public) to explain how their directors comply with the requirements of section 172 Companies Act 2006 to have regard to employee and other interests. The Government notes that the operation of this new reporting requirement will be subject to further consideration. It envisages that it would include a requirement to explain how the company has identified and sought the views of key stakeholders, why the mechanisms adopted were appropriate and how this information has influenced decision-making in the boardroom. Such disclosures might have to be included on the company’s website as well as in its annual strategic report.
In terms of determining which companies should be subject to the new reporting requirement, the Government’s initial view is that a threshold based on employee numbers would be reasonable and its initial view is that a threshold of 1000 employees should be used. However, this will be subject to further consideration.
The Government will invite the FRC to consult on the development of a new UK Corporate Governance Code principle establishing the importance of strengthening the voice of employees and other non-shareholder interests at board level as an important component of running a sustainable business. As part of this, the Government will ask the FRC to consider and consult on a specific provision requiring premium listed companies to adopt, on a “comply or explain” basis, one of three employee engagement mechanisms:
The Government notes that many companies already have mechanisms in place to ensure that employee and other stakeholder voices are heard and taken into account in boardroom decision-making but it wants to ensure that good practice is adopted more widely and more consistently, including potentially to larger private companies.
The Government intends to encourage industry-led solutions by asking the Institute of Chartered Secretaries and Administrators (ICSA) and the Investment Association to complete their joint guidance on practical ways in which companies can engage with their employees and other stakeholders. This is something that they are already developing. The Government will also invite the GC100 to complete and publish new advice and guidance on the practical interpretation of directors’ duties in section 172 Companies Act 2006. The Government notes that it has no plans to amend section 172 but it does consider that it would be useful to have more guidance for companies of all sizes on how the “enlightened shareholder value” model enshrined in section 172 should work in practice. It notes the recommendations in relation to employee voice made by Matthew Taylor in his Review of Modern Working Practices published in July 2017 and the Government will consider these and respond to the whole report later in 2017.
Corporate governance in large privately-held businesses
The Government is to invite the FRC to work with the Institute of Directors, the CBI, the Institute for Family Businesses, the British Venture Capital Association and others to develop a voluntary set of corporate governance principles for large private companies under the chairmanship of a business figure with relevant experience. In making application of these principles voluntary, the Government notes that private companies would be able to continue to use other industry-developed codes and guidance if they are considered more appropriate. Companies will also be able to adopt, or to continue to use their own preferred approaches.
Secondary legislation will be introduced to require companies of a significant size to disclose their corporate governance arrangements in their directors’ report and on their website, including whether they follow any formal code. This requirement will apply to all companies of a significant size unless they are subject to an existing corporate governance reporting requirement. The Government will also consider extending a similar requirement to limited liability partnerships of equivalent scale. Further consideration is to be given to the size of company that would be covered by the new reporting requirement, but the Government’s initial view is that it should apply to companies with over 2000 employees. It will apply to privately-owned and public companies but there will be an exemption for premium listed companies required to report against the UK Corporate Governance Code or companies required by the Disclosure Guidance and Transparency Rules to issue a corporate governance statement. The disclosure will include details of any UK Corporate Governance Code or other formal set of corporate governance principles that the company has adopted. Where a company departs from any of the provisions in the adopted code or principles, it should explain which parts these are and the reasons for the departure. If a company has decided not to adopt a formal code or set of principles, it will be required to explain the reasons.
Other issues relating to strengthening the UK’s corporate governance framework
The Government notes that consultation on the Green Paper revealed questions over whether the FRC has the powers, resources and status to undertake its functions effectively. To address this, the Government is to ask the FRC, the Financial Conduct Authority and the Insolvency Service to conclude new, or in some cases revised letters of understanding with each other before the end of 2017 to ensure the most effective use of their existing powers to sanction directors and ensure the integrity of corporate governance reporting. In light of this work, the Government will then consider whether further action is required.
The Government notes that the FRC intends to consult on amendments to the UK Corporate Governance Code in the late Autumn. The Government intends to lay before Parliament draft secondary legislation, where required, before March 2018. The work on developing voluntary corporate governance principles for large private companies will commence in the Autumn.
The current intention is to bring the reforms into effect by June 2018 to apply to company reporting years commencing on or after that date.
The Government notes that many of the recommendations set out in the House of Commons Business, Energy and Industrial Strategy Committee’s report on Corporate Governance published April 2017 are concerned with potential amendments and enhancements to the UK Corporate Governance Code and guidance. While the Government supports many of these recommendations, it notes that they are ultimately matters for the FRC to consider and states that many will be addressed in the consultation on the UK Corporate Governance Code that the FRC intends to undertake in the Autumn.
The Government also notes that the reforms set out in the response document will complement wider work that the Government and others such as Mathew Taylor, Sir Philip Hampton, Sir John Parker and Baroness McGregor-Smith have done and are leading in relation to matters such as increasing gender and ethnic diversity in the boardroom and the workforce.
In October 2017, the Institutional Shareholder Services (ISS) published its 2018 benchmark policy consultation, seeking views on changes to certain of its voting policies for 2018. In relation to its UK/Ireland policy and its European policy, ISS is considering adding a new policy on virtual/hybrid shareholder meetings. While ISS notes that the practice of holding virtual shareholder meetings is rare in the UK, it comments that a growing number of companies have sought shareholder approval for article amendments that allow for the possibility of hybrid or virtual shareholder meetings in the future. While in continental Europe the practice of holding virtual or hybrid shareholder meetings has not been observed, it notes that it is thought that the practice could emerge at some point if UK and US-based companies continue to adopt it.
Key changes under consideration
Under the proposed policy, ISS will generally recommend FOR proposals that allow for the convening of hybrid shareholder meetings and will generally recommend AGAINST proposals that allow for the convening of virtual-only shareholder meetings.
ISS is proposing these changes in light of investors’ views on virtual shareholder meetings. It notes that some investors are concerned about moves to completely eliminate physical shareholder meetings, arguing that virtual meetings may hinder meaningful exchanges between management and shareholders and enable management to avoid uncomfortable questions. However, investors generally support “hybrid” meetings, where companies employ technological means to allow for virtual participation as a supplement to the physical shareholder meeting.
Questions for comment
While ISS welcomes any comments on the topic, it specifically seeks feedback on the following:
ISS expects to publish its final 2018 benchmark policy changes in the second half of November 2017 and it will apply the revised policies to shareholder meetings on or after February 1, 2018.
In October 2017, the Investment Association (IA) announced that it is writing to FTSE companies that are due to appear on the Public Register of shareholder votes. The letter is being sent to companies in the FTSE All-Share who received votes of 20 per cent against any resolution or withdrew a resolution in 2017.
The Government announced the setting up of the Public Register in its August 2017 response to the Green Paper on corporate governance reform. The IA is prompting companies to provide a public explanation on how they have addressed their shareholders concerns since the shareholder vote before the Public Register goes live later this year. The main aim of the Public Register is to focus attention on those companies who have received a significant vote against and to track whether and how they are responding to shareholder concerns.
The Public Register will be launched in the fourth quarter of this year and will be updated regularly. The Public Register will include:
In September 2017, the Governance Institute of the Institute of Chartered Secretaries and Administrators (ICSA) and the Investment Association issued joint guidance on stakeholder engagement which is aimed at helping company boards think about how to ensure they understand and weigh up interests of their key stakeholders when taking strategic decisions (Guidance).
In the Government’s response to its Green Paper consultation on corporate governance reform published in August 2017, in the context of its proposals for strengthening the employee, customer and wider stakeholder voice, the Government said that it would be encouraging industry-led solutions in this area by asking ICSA and the Investment Association to complete the joint guidance they announced in January 2017 on practical ways on which companies can engage with their employees and other stakeholders. This is the Guidance which has now been published.
The Guidance is designed to take boards through the different elements involved in understanding and assessing the company’s impact on key stakeholders, noting that while almost all companies will have common key stakeholders such as workers and customers, for each company the list will be different depending on factors such as their size, location and the nature of their activities and business relationships. As a result, the mechanisms used by boards to gain an understanding of the views of their key stakeholders will vary and each company’s approach needs to be informed by its purpose, culture and value.
In light of this, the Guidance does not attempt to set out a comprehensive range of different approaches that should be considered but it includes a list of ten core principles that should guide the way boards approach the issue and the Guidance also contains illustrative examples of how some companies have gone about the process. In addition, the Guidance considers a potential change to the UK Corporate Governance Code, as announced by the Government in its August 2017 response document, which would require listed companies to have either a designated non-executive director, a formal employee advisory council or a director from the workforce, or to explain why they do not have one. The Guidance covers these approaches, among others, but states that companies should choose whichever approach or approaches are, in the opinion of the board, most likely to lead to effective engagement and an enhanced understanding of the impact of their decisions on their key stakeholders.
The Guidance is divided into seven sections as follows:
The Guidance notes the general statutory duties of directors set out in sections 171-181 Companies Act 2006, noting in particular the duty to promote the success of the company set out in section 172.
The Guidance points out that boards should identify and prioritise their stakeholders. They should identify the groups which have a positive or negative impact on the company’s ability to operate or are potentially impacted by the company’s activities. They could then conduct a mapping exercise to prioritise these stakeholders for the purposes of engagement by identifying the key stakeholders and/or the issues or activities with the most material impact on a range of stakeholders. The Guidance notes that once the prioritisation exercise has been completed, it should lead to a discussion of the extent to which the board needs information on and from those stakeholders, how extensively the company should engage with them, and how best to do so. It includes, as an example, a matrix developed by the Royal Bank of Scotland Group to identify the significant issues that impact on its different stakeholder groups.
The Guidance also points out that boards should consider in the identification process the types of individuals or groups that they will use as points of contact for a particular stakeholder group. The board should also have a process in place for reviewing the groups identified as key stakeholders to make sure that engagement remains appropriate for the relevant audience. It notes the manner in which Intu Properties conducted a review of its stakeholder programme in 2016.
The Guidance notes that the board’s knowledge and understanding of the interests of the company’s key stakeholders should be among the factors considered when assessing the overall composition of the balance of the board and whether there is a need to recruit new directors. In relation to the approach to acquiring expertise, it suggests that one broad approach would be to reserve one or more board positions for directors drawn from a stakeholder group, such as the workforce. Another approach would be to extend the selection criteria and search methods for non-executive directors to identify individuals with relevant experience or understanding of one or more stakeholder groups. It considers the merits of both of these approaches and points out that they need not be mutually exclusive.
Given that directors share collective responsibility for the board’s actions and have the same legal responsibilities and liabilities, the Guidance recommends that unless there are exceptional considerations, the terms of appointment for these directors should be the same as for other directors.
The Guidance looks at the selection and search procedures in relation to finding a new director and sets out a number of questions to be considered if it is decided that one or more new directors are needed to bring an understanding of particular stakeholders. It also sets out particular questions to be considered by a board if it is decided that one or more directors should be appointed to represent the views of the workforce and it suggests companies may also wish to consider whether there is a case for appointing one or more non-executive directors with specific responsibility for other key stakeholders.
Induction and training
The Guidance notes that directors will be more effective in their role if they have benefited from a well-thought-out and effective induction programme which enables them to build an understanding of the nature of the company, its business and its markets, build a link with the workforce and build an understanding of the company’s main relationships.
The Guidance looks at designing a directors’ induction programme and it suggests a non-exhaustive list of activities that could be considered to give the new director an understanding of the role and nature of the company’s principal stakeholders. The Guidance also stresses the need for ongoing director training.
The Guidance points out that having relevant expertise on the board is only of limited use if that expertise is deployed and engaging with important stakeholders is only of limited value unless the results of that engagement are used to inform the board’s decisions. It notes that many boards suffer from a shortage of time and an excess of information so it looks at the following:
The Guidance also looks at the approach of designating to one or more individual directors the task of understanding the views of, and impact on, key stakeholders in ensuring these are fed into the board’s discussions. It considers issues that will arise if this approach is adopted and sets out a list of points for boards to consider if they do decide to designate one or more non-executive directors.
This section of the Guidance gives some illustrative examples of approaches already being used by companies to engage with their important stakeholders, with the aim of prompting companies to review their own existing mechanisms and to consider whether there would be value in adopting alternative or additional ways of engaging with the stakeholders concerned. In assessing the overall engagement carried out by the company, the Guidance sets out a number of key questions boards should consider.
In terms of engagement mechanisms, it looks at forums and advisory panels, as well as at other engagement mechanisms such as surveys and social media. It also considers staff engagement mechanisms and includes examples in each case.
Reporting and feedback
This section of the Guidance considers both how companies should report to shareholders and to their other stakeholders. It notes that reporting to shareholders will primarily be done through the annual report and accounts and through subsequent ongoing or specific engagement, such as meetings or discussions at and before the annual general meeting. It notes that reporting should cover the following three questions:
The Guidance notes that one approach would be for the board to disclose its key stakeholders and explain concisely the processes that the board has in place to receive input and information from stakeholders. It could then demonstrate how the directors have fulfilled their duties under section 172 by explaining how information gathered through engagement with stakeholders has informed the board’s decisions during the year.
The Guidance also considers reporting to other stakeholders and notes that companies should consider what other reporting and feedback mechanisms might be necessary. It considers publications and online resources as well as other forms of reporting and feedback. It also points out that different stakeholders may want or require reporting on different timescales so while annual reports may be appropriate for groups such as shareholders, social media and other forms of communication could be used to update other stakeholders on a more regular basis.
The Guidance notes that the Government’s intention is that the various reforms to corporate governance that it announced in August 2017 will come into effect by June 2018. ICSA and the Investment Association will update the Guidance if necessary to reflect the new reporting requirements and potential changes to the UK Corporate Governance Code. They state that in any event, they will review the Guidance in the second half of 2019 to learn from companies’ experience of applying it.
In August 2017, the Investment Association (IA) published a press release containing an analysis of voting data from the 2017 AGM season.
When compared to voting data from the 2016 AGM season, the IA notes that:
In October 2017, the Best Practice Principles Group (BPP Group) launched a consultation that seeks views from investors and companies on whether the Best Practice Principles for Shareholder Voting Research and Analysis (the Principles) have been effective in ensuring the integrity and efficiency of the services provided by shareholder voting analysts and advisors.
The Principles, introduced in 2014, were developed by the industry to provide a voluntary performance and reporting framework, to promote a greater understanding of its role, and to promote the integrity and efficiency of processes and controls related to the provision of these services and management of any conflicts of interest.
The BPP Group has also published a consultation questionnaire, which asks various questions including the following:
The BPP Group is keen to hear from investors, companies and other providers of voting research and related services on their experience by December 15, 2017. A decision has not yet been taken on whether there will be a second consultation on draft revised Principles and reporting arrangements. This is likely to depend on the extent of any revisions proposed, and will be informed by the responses to this consultation. If it is decided that a second consultation is not necessary, then the aim would be to publish a report setting out the findings and conclusions of the review, together with the revised Principles and details of the reporting and monitoring arrangements in April 2018. If there is a second consultation, it will begin in April 2018 and the revised Principles and other documents will be published in July or August 2018.
In July 2017, the Pre-Emption Group announced that the Investment Association and the Pensions and Lifetime Savings Association will continue to support the current overall limit of a ten per cent disapplication authority, as specified in the 2015 Statement of Principles – Disapplying Pre-Emption Rights (and the two template resolutions for the two separate five per cent authorities), despite the newly introduced exemption from the obligation to publish a prospectus for up to a 20 per cent increase in securities admitted to trading.
The provisions in the Prospectus Regulation that introduce the new threshold came into force on July 20, 2017 (although the majority of its provisions will apply 24 months thereafter and will take effect from July 2019). However, the Financial Reporting Council (FRC) notes that no change to the flexibility permitted by the Statement of Principles is expected as a consequence of the Prospectus Regulation.
In November 2017, the Hampton-Alexander Review published a “one year on” report, summarising how women’s representation is progressing on FTSE 350 boards and in the “executive pipeline”, the executive committee and those who report to members of the executive committee. This follows the targets set in November 2016 by the Hampton-Alexander Review which included a target of 33 per cent women on FTSE 350 boards and 33 per cent women in FTSE 100 leadership teams by 2020. The target of 33 per cent women in leadership teams also now applies to FTSE 250 companies.
The report includes the following:
Executive committee and direct reports
Women on boards
In October 2017, the Parker Review Committee, led by Sir John Parker, published its final report (Report) into the ethnic diversity of UK boards. This follows the report that the Parker Review Committee published in November 2016 which summarised the findings of their review so far and was prepared for consultation purposes.
The Report notes that UK citizen directors of colour represent only about two per cent of the total director population and 51 out of the FTSE 100 companies do not have any directors of colour. The Parker Review Committee believes that it is important that FTSE 100 and FTSE 250 companies change the way they approach the issue of ethnic diversity in the boardroom and the pipeline and as well as highlighting clear business reasons for increasing ethnic diversity on UK boards, the Report includes a number of recommendations as follows:
Increasing the ethnic diversity of UK boards
Development of candidates for the pipeline and plan for succession
Enhanced transparency and disclosure
The Report includes “Questions for Directors” in Appendix A and a “Directors Resource Toolkit” in Appendix B to help existing boards deliver on the recommendations of the Report. Appendix C sets out case studies, with organisations providing practical examples of the steps they have taken to improve diversity in their organisations and within their executive and board ranks.
The Report notes that based on the current rates of turnover amongst FTSE 100 directors, the Parker Review Committee estimates that to reach an ethnically diverse mix similar to that of the overall adult working population by 2021 (approximately 15 per cent), one in five new board appointees would need to be a person of colour. Taking into account typical board appointment cycles, they calculate that this would mean that, on average, each FTSE 100 company would need to appoint one minority director in the period to 2021.
The Parker Review Committee plans to stay intact at least through 2021 and will meet at least annually to assess efforts being made and progress in relation to the Report’s recommendations. It encourages FTSE 350 companies to adopt the recommendations on a voluntary basis but notes that if there is insufficient progress it may endorse that the recommendations (or relevant parts) become mandatory.
In November 2017, the Investment Association published their updated Principles of Remuneration (Principles) which set out, through over-arching Principles and general guidance, the views of Investment Association members on the role of shareholders and directors in relation to remuneration and the manner in which it should be determined and structured. While predominantly aimed at Main List companies, the Investment Association notes that the Principles are also relevant to companies on other public markets, such as AIM, and other entities.
Key changes from the October 2016 Principles include the following:
In November 2017, the Investment Association wrote to chairs of remuneration committees outlining key changes to their updated Principles of Remuneration and highlighting items of focus for their members in the 2018 AGM season.
Issues to be considered for 2018 AGMs include the following:
In November 2017, the Financial Reporting Council (FRC) published three thematic reports to help companies improve the quality of their corporate reporting in acknowledged areas of difficulty, namely judgements and estimates, pension disclosures and alternative performance measures.
The Corporate Reporting Review (CRR) is responsible for the FRC’s thematic reviews. The CRR monitors company reports and accounts for compliance with the Companies Act 2006, including applicable accounting standards and other reporting requirements. In December 2016, the FRC approached 60 companies and informed them that the CRR would review one of the three themes in their next annual report and accounts.
Thematic review – Judgements and estimates
The report sets out the CRR’s principal findings on judgements in corporate reporting and the most commonly disclosed estimates. Overall the CRR found that:
Section 4 of the report sets out the review’s principal findings in more detail and includes examples of better disclosures that illustrate how companies could address these findings. Section 5 sets out the areas where the CRR will challenge companies, including where they do not:
Thematic review – Pension disclosures
A second report by the CRR on pension disclosures welcomes the new or extended commentaries in strategic reports focusing on how any pension deficit would be addressed and notes that:
Thematic review – Alternative Performance Measures
The CRR found that Alternative Performance Measures (APMs) were used by all the companies they reviewed. Compliance with ESMA’s Guidelines on Alternative Performance Measures was generally good and had improved from previous year’s annual reports. The CRR notes in its report:
The CRR was concerned with some of the language used in reports and recommends that companies remove descriptions, such as “non-recurring” from their definitions of APMs and select more accurate labels. A number of examples are given in sections 4 and 5 of the report.
In October 2017, the European Securities and Markets Authority (ESMA) updated its Q&As on its Guidelines on Alternative Performance Measures (APM Guidelines). ESMA’s APM Guidelines aim to promote the usefulness and transparency of APMs in prospectuses and regulated information.
ESMA has added six new Q&As:
In October 2017, the European Securities and Markets Authority (ESMA) published the priorities to be considered by listed companies and their auditors when preparing and auditing their 2017 financial statements. These priorities are set out in the annual Public Statement on European common enforcement priorities in which ESMA promotes the consistent application of International Financial Reporting Standards (IFRS).
The common enforcement priorities for the 2017 year-end are as follows:
In October 2017, the Financial Reporting Council (FRC) published its Feedback Statement following its consultation via a Discussion Paper published in April 2017on the role of the auditor in preliminary announcements.
The FRC notes that the majority of respondents believe the current regime for preliminary announcements is adequate and does not require significant change. As a result, the FRC is proposing only minor changes to its current auditor guidance as follows:
In October 2017, the Financial Reporting Council (FRC) published its annual review of corporate reporting in the UK, based primarily on the FRC’s own monitoring work in the year to March 31, 2017 and more recently performed thematic reviews. The report is aimed at helping preparers and auditors aid companies in improving the quality of their reporting. The FRC notes that while the standard of corporate reporting, particularly by the largest listed companies, remains generally good, there is still more work to be done in improving the quality of reporting.
The report notes that companies should pay particular attention to the following four areas:
Other areas the FRC comments on include the following:
The report notes that expectations of corporate reporting are evolving with an increased demand for information about how a company promotes its long-term success in line with section 172 Companies Act 2006. Requirements are also changing alongside the implementation of new standards for Financial Instruments, Revenue from Contracts with Customers and Leases (IFRS 9, 15 and 16) and the Non-Financial Reporting Directive.
The report sets out a number of future developments that may affect corporate reporting in coming years, in particular, the implications of Brexit for the UK’s accounting framework and developments in relation to the FRC’s Guidance on the Strategic Report, in respect of which a consultation document was published in August 2017.
In October 2017, the Financial Reporting Council (FRC) wrote to companies highlighting changes to UK reporting requirements and setting out key areas where the FRC believes improvements can be made when companies prepare their annual reports for the 2017/18 reporting season.
The areas that the FRC considers require improvement include the following:
In September 2017, the Investment Association (IA) reported that its call for companies to stop quarterly reporting is being heeded, with the number of FTSE100 and 250 companies issuing quarterly reports since October 2016 declining by 19 and 25 per cent, respectively.
In a bid to discourage companies from engaging in short-term behaviour, such as managing the business to meet quarterly targets rather than developing their long term strategies, in November 2016 the IA called on companies to stop issuing quarterly reports and earnings guidance.
A table included in the IA’s press release shows that in October 2016 a total of 70 FTSE100 companies reported quarterly, but only 57 did so by August 2017. Meanwhile 111 FTSE250 companies reported quarterly in October 2016, compared with 83 in August 2017.
In July 2017, the Corporate Finance Faculty of the ICAEW published a consultation paper setting out its plans to update “Prospective Financial Information: Guidance for UK Directors” published in 2003 (2003 Guidance). The 2003 Guidance sets out a framework of principles and application notes for preparing and publishing prospective financial information (PFI) in a capital markets transaction context. The definition of PFI comprises “primary financial statements and elements, extracts and summaries of such statements and financial disclosures drawn up to a date, of for a period, in the future”. As a result it includes profit forecasts and warnings, working capital statements, merger benefit statements and a range of other financial projections.
Following initial soundings on its proposals from stakeholders and market participants, the ICAEW is now seeking input on a number of proposals and consultation questions including the following:
In October 2017 the Department for Business, Energy and Industrial Strategy (BEIS) published a consultation paper seeking views on the UK Government’s proposals for a streamlined and more effective energy and carbon reporting framework. The consultation builds on responses to a consultation in 2015, “Reforming the business energy efficiency tax landscape” which showed support for mandatory reporting of energy use and carbon data by certain large organisations.
The proposals include the following:
The Government asks for responses by January 4, 2018 and encourages respondents to use the online e-Consultation platform.
In September 2017, the Climate Disclosure Standards Board (CDSB) launched The Reporting Exchange, a free online platform designed to help businesses understand sustainability reporting requirements.
The Reporting Exchange includes information on environmental, social and governance reporting requirements and resources from 70 sectors and 60 countries and it includes supporting guidance, voluntary standards and stock exchange listing requirements.
The tool is public and it is noted that it should assist people involved in preparing and delivering corporate sustainability, annual or integrated reports.
In August 2017, the Financial Reporting Council (FRC) published a consultation on draft amendments to its Guidance on the Strategic Report. The proposed amendments reflect changes to the strategic report requirements made by the Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016, which apply to companies and qualifying partnerships beginning on or after January 1, 2017.
The consultation encourages companies to provide better information on how they have fulfilled their duties to promote the long-term success of the company, as set out in section 172 of the Companies Act 2006 (CA 2006), to improve accountability to shareholders and other stakeholders.
The proposed amendments include (amongst other things) the following:
The FRC asked for all comments and feedback to be submitted by October 24, 2017.
In July 2017 the Financial Reporting Council (FRC) published a factsheet with an overview of the new regulations implementing the EU Directive on the disclosure of non-financial and diversity information (the Non-Financial Reporting Directive).
The 2017 regulations have amended the Companies Act 2006 requirements for strategic reports and the Financial Conduct Authority has revised DTR 7.2 in the Disclosure Guidance and Transparency Rules to require certain information about a listed company’s diversity policy to be disclosed in its corporate governance statement as a result of the Directive.
The factsheet sets out what companies caught by the 2017 regulations need to disclose in their strategic reports and corporate governance statements and how the new requirements fit within the narrative reporting framework.
In October 2017, the Home Office published updated statutory guidance for organisations on how to ensure that slavery and human trafficking is not taking place in their business or supply chain.
The statutory guidance was first issued in October 2015. The key revisions to the statutory guidance include the following:
In October 2017, CORE, a UK civil society coalition on corporate accountability, published a report which provides a snapshot of company slavery and human trafficking statements published in compliance with section 54 Modern Slavery Act 2015. The report looks at 50 companies’ statements. 25 companies source raw materials known to be linked to labour exploitation (cocoa from West Africa, mined gold, mica from India, palm oil from Indonesia and tea from Assam) and 25 operate in sectors known to be at risk of modern slavery (clothing and footwear, hotels, construction, Premier League football and service outsourcing).
Key findings include the following:
However, the report also notes examples of good practice reporting:
CORE concludes that overall compliance with the reporting requirement in the Modern Slavery Act is low with an estimated 9,000-14,000 companies still to publish. In relation to the published statements examined, in general, many are not compliant with the basic requirements of the legislation and the majority do not address in substantive detail the six topic areas listed in the Modern Slavery Act. Many companies are not reporting on human rights due diligence and are not considering how their own business models can create risks of severe labour rights abuses.
In October 2017, the Department for Business, Energy and Industrial Strategy (BEIS) updated its webpage which provides guidance on the reporting requirements for business payment practices and performance. This now states that businesses can publish their reports online.
The Reporting on Payment Practices and Performance Regulations 2017 and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017 came into force on April 6, 2017 and they have introduced a “duty to report” which requires qualifying companies and limited liability partnerships to publicly report twice a year on their payment practices and performance on a Government-provided web service.
The webpage provides a link to updated guidance for those businesses which have to comply with the new statutory reporting duty as well as details about the Government’s new digital service. Businesses can use the digital service to check if they need to publish a report, publish the report itself or search for a report. A contact address is also given for queries related to the reporting requirement or digital service.
The Investment Association (IA) has published a short guide summarising the Gender Pay Gap Regulations introduced in April 2017 and giving an overview of the requirements that these Regulations place on firms. The guide is intended to help the IA’s members and the asset management industry prepare for the April 8, 2018 deadline to publish their gender pay gap results.
In October 2017, the Financial Reporting Lab of the Financial Reporting Council published a report examining how companies have responded, in the second year of reporting, to suggestions for enhanced disclosure which were made in the Lab’s Disclosure of dividends – policy and practice report published in November 2015.
In the summer of 2016 the Financial Reporting Lab undertook a review of FTSE 350 dividend disclosures to assess how early practice had developed following the November 2015 report. The results of that review were published in a report published in December 2016.
For the purposes of this review, the Lab reviewed all the FTSE 350 annual reports published in 2016 that were also in the FTSE 350 at the end of 2015 to assess the extent to which disclosure practice had changed. It identified developments in how companies described their dividend policies, the risks to dividend payments and the factors considered in setting the dividend policy. 58 per cent of FTSE 100 companies now disclose information about distributable profits or distributable reserves, an increase from 40 per cent in 2015. However, progress in the FTSE 250 has been less significant, with only 30 per cent of companies making some disclosure on distributable profits or distributable reserves.
The study includes examples of practice in the following areas:
The Financial Reporting Lab believes that there are a number of areas where improvements could still be made, or where there are opportunities to take disclosures further. Key areas include the following:
The Financial Reporting Lab (Lab) published its quarterly newsletter in June 2017. The newsletter highlights the Lab’s most recent activities over the last three months:
In July 2017, the Financial Reporting Council (FRC) invited audit committee members, companies, investors and audit firms to take part in a pilot project of the FRC’s Audit and Assurance Lab, to explore the role of the audit committee reporting in promoting audit quality.
The project will investigate how investors’ confidence in the audit can be maintained through:
The Phase 1 project report will be published in time for consideration for December 2017 year-ends and will focus on the good practice elements of existing audit committee reporting, and encourage audit committees to consider adopting the practices, if appropriate, in the context of their own reporting. The Phase 2 project report will be published in the first half of 2018.
In October 2017’ the Financial Reporting Council (FRC) published FRED 69 following its annual review of FRS 101 Reduced Disclosure Framework. This annual review considers whether additional disclosure exemptions are needed as IFRS evolve and it is also used to respond to stakeholder feedback about other possible improvements.
Having considered the 2017/18 annual review of FRS 101, the FRC is proposing no amendments to FRS 101. More detailed consideration of IFRS 17 Insurance Contracts will be required, but this work will be deferred until a clearer picture of the progress with the endorsement of the standard is known.
The FRC asks for comments by February 2, 2018. It will publish a summary of the consultation responses, either as part of, or alongside, its final decision.
In June 2017, the Financial Reporting Council (FRC) published a Feedback Statement ‘Triennial review of UK and Ireland accounting standards: Approach to changes in IFRS’. The Feedback Statement summarises respondents’ comments to its consultation document on updating Financial Reporting Standards (FRS) 102 for changes in IFRS, published in September 2016.
The consultation document asked for views on whether FRS 102 should be kept up to date with IFRS as IFRS changes, particularly in relation to major new standards that have been issued. It outlined a timetable for the possible changes in relation to financial instruments, revenue and leases.
The Feedback Statement shows that almost all respondents agree with the proposed revised principles (set out in FRED 67: Draft amendments to FRS 102, March 2017). However questions were raised over the proposed timetable and implementation. Respondents felt that more IFRS implementation experience is needed before assessing if and how requirements based on these standards should be incorporated.
The FRC agrees that further evidence-gathering and analysis needs to be undertaken before a second FRED is issued. Currently there is no effective date for any changes to FRS 102 or FRS 103 and the FRC will consult on any detailed proposals in due course.
Canadian National Railway Company v BNSF Railway Company adds to recent case law that has seen the Federal Court refuse to issue routine protective orders.
Mexico’s Minister of Energy Rocío Nahle announced the start of the procurement procedure on March 18.