Blockchain law: A "Telegram" to SAFTs: "Beware!"
Robert Schwinger discusses one approach issuers have tried in order to avoid facing securities law requirements: SAFTs.
Since our Summer 2016 publication, there have continued to be a number of corporate governance and narrative reporting developments. This briefing summarises those developments and looks at future developments in a number of areas that companies need to start preparing for.
BIS Select Committee inquiry and general review of corporate governance in the UK
It is evident that reviewing corporate governance is high on the Government’s agenda. Theresa May made this clear in a speech soon after she secured the Conservative Party leadership nomination. In a statement to Parliament on the G20 Summit in China in early September 2016, she said that to restore greater fairness in society, the Government would be consulting this autumn on new measures to tackle corporate irresponsibility, including cracking down on executive pay, poor corporate governance, short-termism and aggressive tax avoidance and giving employees and customers representation on company boards, and she repeated this theme at the October 2016 Conservative Party Conference.
In addition, in September 2016, the Business, Innovation and Skills (BIS) Select Committee announced the launch of an inquiry on corporate governance, focussing on executive pay, directors’ duties and the composition of board rooms, including worker representation and gender balance in executive positions. The inquiry follows on from recent inquiries by the BIS Select Committee into BHS and Sports Direct. Written submissions were requested by October 26, 2016 and particular points on which the Select Committee sought submissions included the following:
Composition of boards
Tomorrow’s Company report on bringing employee voice into the boardroom
In November 2016, Tomorrow’s Company published a report presenting options to increase employees' voices in company governance structures. The report offers two options to achieve this. One option incorporates employees as insiders by introducing them as employee representatives on the board and the other is designed to give them a powerful channel of communication and challenge as outsiders based on some form of employee advisory panel.
Tomorrow’s Company suggests that, while offering companies flexibility, these options would apply to all companies with more than 500 employees in the UK. These companies would be required to demonstrate that they have offered effective employee voice within their governance structure. This could either be demonstrated by the formal introduction onto the board of one or more employee directors, or by the use of employee consultative structures outside the board. In both cases the company would be required to report on how its arrangements achieved employee voice. In the case of the second ’outside’ option the company would be required to give the employee advisory panel an opportunity to report publicly on its activities and its views of the effectiveness of the arrangements at the AGM, in its annual report, and on its website. There would be a transition period of two years during which the principle of ‘comply or explain’ would apply, as companies start to experiment with either option and explain what they are doing.
Companies with more than 50 per cent of employees in the UK would be required to demonstrate employee voice at the group level, while those below 50 per cent would have the option to demonstrate employee voice at the UK subsidiary level.
TUC report on worker representation on company boards
In October 2016, the TUC published a report setting out the case for worker board representation, how it works in practice in other European countries and detailed proposals for its implementation in the UK.
The report suggests the following:
The report notes that similar requirements are in place in 12 other EU member states, including Germany, Sweden, Austria and the Netherlands, and that surveys there reveal that the majority of businesses view employee representatives on the board positively. The TUC says that allowing workers to sit on company boards would encourage the long-term success of individual firms, as both employees and directors work together in the interests of long-term company performance, and it believes that the current approach of relying solely on shareholders to hold companies to account has delivered neither economic success nor social justice.
ICGN’s updated Global Governance Principles
In October 2016, the International Corporate Governance Network (ICGN) published an updated version of its Global Governance Principles (the Principles). There have been no significant changes from the previous version published in 2014.
The Principles describe the responsibilities of boards of directors and institutional investors respectively, and aim to enhance dialogue between the two parties. The Principles apply predominantly to publicly listed companies and set out expectations around corporate governance issues that are most likely to influence investment decision-making. They are also relevant to non-listed companies which aspire to adopt high standards of corporate governance practice. The Principles are relevant to all types of board structure, including one-tier and two-tier arrangements.
Institute of Directors’ 2016 Good Governance Report
In September 2016, the the Institute of Directors (IoD) published a report setting out the findings from its research into two key questions it asked of practitioners – what is good corporate governance and how can it be measured? The purpose of its research is to encourage the study of good governance among UK companies and stimulate public debate on the importance of corporate governance in rebuilding the reputation of the UK business community.
Corporate governance is assessed in the report across five key categories: board effectiveness; audit and risk/external accountability; remuneration and reward; shareholder relations; and stakeholder relations. The results indicate that different components of corporate governance have different impacts on practitioners' perceptions of it. Measures of board effectiveness have little effect on the perceived quality of corporate governance of a company. However, measures of the quality of audit and risk/external accountability are the most important determinant of the perception of good corporate governance, followed by shareholder relations, then by remuneration and reward, then stakeholder relations, in that order.
The study also confirms that there is no agreement across stakeholders about the definition of good governance. Although measures of the quality of audit and risk/external accountability are important across all types of respondents, different types of respondents emphasise different aspects of corporate governance. Customers care about audit and risk/external accountability and shareholder relations. Suppliers and the media care about audit and risk/ external accountability. Investors and analysts care both about audit and risk/external accountability and stakeholder relations.
LAPFF letter to chairs of FTSE 350 companies on discharging the contractual and statutory duties of directors
The Local Authority Pension Fund Forum (LAPFF) published a letter it sent in September 2016 to chairmen of FTSE 350 companies suggesting that the position of the Financial Reporting Council (FRC) should be disregarded if directors are to discharge their duties lawfully in preparing accounts and making lawful distributions.
The LAPFF first wrote to chairmen in November 2015 setting out this position, following an opinion of George Bompas QC that the LAPFF received in August 2015, and the purpose of this letter is to claim that the Department for Business, Energy and Industrial Strategy (BEIS, formerly BIS) has never disagreed with the LAPFF and would probably have informed the LAPFF if the LAPFF’s position had been incorrect.
The issue concerns the determination of a company’s distributable profits for the purpose of making a distribution. Mr Bompas states that if the numbers in the accounts do not enable the distributable profits to be determined, then they will not give a true and fair view. However, he believes that in following the FRC’s financial reporting standards, accounts may conflate realised profits with unrealised gains, or leave out losses altogether, so distributable profits cannot be determined from the numbers in the accounts. This means two sets of books are required which is not permitted by law.
The LAPFF states that following the advice of Mr Bompas carries no risk of illegality and is a safe option, whereas following the position of the FRC carries a significant risk that accounts will be defective, thus putting boards in a position of approving unlawful distributions, and potentially trading whilst insolvent whilst presenting accounts that show a healthy financial position.
ICSA Guidance Note on minute taking
The ICSA Governance Institute issued new guidance in September 2016 on minute taking. The Guidance Note recognises that minutes are as individual as the board to which they relate. However, it advises that decisions as to format, style and content should be taken from a position of knowledge of the law and of regulatory and market practice so as to provide an accurate, impartial and balanced record of meetings, but comments that this a deceptively difficult task.
The Guidance Note, which follows a consultation launched in May 2016, highlights the following key points:
The full Guidance Note is available to ICSA members only.
Executive Remuneration Working Group’s Final Report
In July 2016, the Executive Remuneration Working Group, established by the Investment Association in September 2015 to review pay structures in UK listed companies, issued its Final Report. The Working Group published its Interim Report in April 2016 and consulted widely throughout May and June 2016 with a wide range of stakeholders. The Working Group’s core recommendation in the Final Report is that companies be given the flexibility to select the remuneration structure that is most appropriate for their business, rather than focusing solely on the currently dominant Long Term Incentive Plan (LTIP) pay structure. The Working Group has set out a framework of structures to illustrate what this flexibility might look like in practice.
The Report contains the following ten recommendations aimed at rebuilding trust in executive pay structures in the UK:
Revised GC100 and Investor Group Directors' Remuneration Reporting Guidance
In August 2016, the GC100 and Investor Group (Group) published a second edition of its directors' remuneration reporting guidance (Guidance), which was initially published in September 2013. The second edition reflects changes resulting from a review by the Group of experience over the 2014 to 2016 AGM seasons, and feedback from companies, investors, advisers, other market participants and government. It is to be reviewed on a regular basis to ensure it remains relevant and useful.
The Guidance notes that there has generally been an improvement in the quality of remuneration reporting since the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended) (Regulations) were introduced, but the Group believes that companies should continue to focus on clarity and conciseness. It states that remuneration committees may find it helpful to consider:
New provisions in the revised Guidance include the following:
Restoring responsible ownership - Ending the ownerless corporation and controlling executive pay
In September 2016, the High Pay Centre published a report by Chris Philp, a Conservative MP and member of the Treasury Select Committee, on controlling executive pay. The report discusses the rise of the “ownerless corporation”, noting that fragmented shareholdings and short-term investor horizons mean that some shareholders are not exercising proper oversight of companies they own, that the market does not work if shareholders are not always responsible custodians of their capital, and that shareholder interests and the wider public interest are often not served by executives who over-compensate themselves, do not focus on the long-term or engage in unchallenged strategic initiatives, such as reckless acquisitions.
On the rise of excessive executive pay, the reports states that one symptom of the rise of the ownerless corporation is the rapid rise in total executive pay, with FTSE 100 CEO total pay in the UK now averaging £6 million per year, or 150 times average worker income. This ratio has doubled in 10 years as worker pay has stagnated. The author comments that this level of inequality is socially divisive and public opinion is firmly against it.
The report suggests three main proposals to address these issues:
IA’s Principles of Remuneration 2016
In October 2016 the Investment Association (IA) published its revised Principles of Remuneration (the Principles) for 2016 and an accompanying letter which outlines the key changes to the Principles. These changes reflect the IA’s response to the Executive Remuneration Working Group’s July 2016 Final Report (see above) and highlights some issues IA members will be focusing on ahead of the 2017 AGM season.
The main changes to the Principles are as follows:
In relation to issues to consider for 2017 AGMs, in particular, IA members have asked for the following aspects of the Principles to be re-emphasised:
ISS’s benchmark policy 2017 consultation
In October 2016 Institutional Shareholder Services Inc. (ISS) announced the launch of its 2017 benchmark voting policy consultation. ISS is consulting on changes to its policy on executive remuneration, its policy on audit and remuneration committee composition, and its policies on European pay for performance methodology.
Policy on executive remuneration
ISS is consulting on changes to its UK & Ireland executive remuneration policy to clarify that when forming a view on new remuneration arrangements, ISS will pay particular attention to the following points:
Furthermore, ISS is considering recommending a vote against the re-election of the chair of the remuneration committee (or, where relevant, another member of the remuneration committee) in cases where a serious breach of good practice is identified, and typically where issues have been raised over a number of years. ISS also requests comment on whether, if serious concerns have been raised with pay practices over a number of years but the remuneration committee chair position is being rotated, respondents support the view that the longest serving member of the remuneration committee should be held accountable.
Policy on audit and remuneration committee composition for smaller companies
The change under consideration is that ISS' voting guidelines for audit and remuneration committee composition at AIM companies should reflect the Quoted Companies Alliance (QCA) position, namely that these committees should comprise independent non-executive directors only. ISS is consulting on whether to recommend voting against non-independent non-executives being members of such committees.
Policies on European pay for performance methodology
ISS is proposing to formalise the existing process on assessing pay performance by including a formal reference to the European pay-for-performance methodology in its UK and Ireland and continental European voting guidelines. The reference to the methodology will be as part of the current policy principles.
ISS plans to publish its final 2017 policies shortly. The revised policies will be applied to shareholder meetings taking place on or after February 1, 2017.
ICGN’s guidance on executive director remuneration
In October 2016, the International Corporate Governance Network (ICGN) published an updated version of its Guidance on Executive Director Remuneration. The Guidance on Executive Director Remuneration replaces guidance published in 2012 and aims to provide a consistent and global perspective focused on major aspects of remuneration policy and practice that will assist companies in better understanding long-term shareholders’ views, as well as serve as a tool for investors when engaging with companies.
The updated Guidance discusses the remuneration committee, remuneration structure and contractual provisions and includes four main changes from the previous edition:
ICGN’s guidance on non-executive director remuneration
In October 2016, the International Corporate Governance Network (ICGN) published an updated version of its Guidance on Non-executive Director Remuneration. The Guidance replaces a previous version published in 2013 and sets out the ICGN’s position regarding remuneration structures for non-executive directors (NEDs), including board chairs. The updated Guidance discusses structure, accountability and transparency in NED remuneration and contains two main changes, specifically:
High Pay Centre’s briefing on executive pay
Following its annual survey of FTSE 100 CEO pay packages, the High Pay Centre published a briefing on executive pay in August 2016, revealing that rewards at the top continue to grow at a double digit rate.
In summary, the High Pay Centre found:
ICSA calls for fresh approach to tackle remuneration
In September 2016, the Institute of Chartered Secretaries and Administrators (ICSA) published a press release noting that its Governance Institute questions whether increasing shareholder voting rights will curb executive remuneration excesses and that it has written to the Prime Minister to advise caution in adopting such an approach.
ICSA believes that the issue with excessive executive remuneration is not that shareholders lack the rights that would enable them to hold companies properly to account, but that they are often reluctant to use them and that, unless investors become more willing to use the powers they already have, it may be necessary to consider different reforms.
QCA’s revised Remuneration Committee Guide
In July 2016, the Quoted Companies Alliance (QCA) published its revised Remuneration Committee Guide for Small and Mid-Size Quoted Companies. The Guide, prepared to assist remuneration committee members of small and mid-size quoted companies in setting pay for executive directors and senior management in a fair and reasonable manner, was last published in 2012, and it has been revised and updated to address new remuneration regulations and developments in governance behaviour and best practice.
Key changes include:
The Guide is available for purchase on the QCA website.
PwC’s “Time to listen” - Report on public attitudes to executive pay and inequality
PricewaterhouseCoopers (PwC) published a report in July 2016 on public attitudes to inequality and executive pay in response to Theresa May’s campaign launch speech in which she discussed corporate irresponsibility.
PwC discusses the following in the report:
PwC concludes that new regulation in this area is best avoided. The appropriate locus of power is with shareholders but there needs to be a change in attitudes and behaviour to rebuild trust. PwC then sets out actions for companies and actions for shareholders to follow.
Actions for companies
Actions for shareholders
Hampton-Alexander review: FTSE Women Leaders – Improving gender balance in FTSE leadership
In November 2016, the Hampton-Alexander Review led by Sir Philip Hampton and Dame Helen Alexander published a report on improving gender balance in the leadership of FTSE companies. The report extends the recommendations of the Davies Review by increasing the target of representation of women.
The report’s recommendations include the following:
Women on boards
FTSE 350 companies should aim for a minimum of 33 per cent women’s representation on their boards by 2020. More women should be appointed to the roles of chair, senior independent director and executive director positions on FTSE 350 boards and FTSE companies which have yet to address gender imbalance on their boards should take prompt action to address any shortfall.
FTSE women leaders
Government reporting requirements
Executive search firms
The report also contains evidence for the rationale for improving diversity, a ‘how to” for companies to consider for improving diversity, CEO comments, emerging research, focus features on several industries, and a discussion on the progress for women on boards, as well as detailed analysis of progress in FTSE 100 and 350 companies.
Parker Review Committee’s report into ethnic diversity of UK boards
In November 2016, the Parker Review Committee led by Sir John Parker published a consultation version of a report into the ethnic diversity of UK boards. The report highlights that ethnic minority representation in the boardrooms across the FTSE 100 is disproportionately low, especially when looking at the number of UK citizen directors of colour, and it makes recommendations for increasing diversity, underpinned by strong industrial logic and the need for UK companies to be competitive in the increasingly challenging and diverse marketplace.
The report’s recommendations are as follows:
Increase the ethnic diversity of UK boards
Develop candidates for the pipeline and plan for succession
Enhance transparency and disclosure
The appendices to the report contain a set of questions for directors and a resource toolkit to help boards meet the report's recommendations. The questions have been drafted to be consistent with the key considerations that directors need to make in the satisfaction of their statutory duties under the Companies Act 2006 and in a manner that is consistent with the UK Corporate Governance Code.
Comments on the consultation version of the report are requested by the end of February 2017 and a report containing the final recommendations and findings of the review will be published in 2017.
ICGN’s guidance on diversity on boards
In October 2016, the International Corporate Governance Network (ICGN) published Guidance on Diversity on Boards which builds upon the ICGN Guidance on Gender Diversity on Boards published in 2013. The original guidance identified the responsibilities of shareholders and companies alike to promote gender diversity on boards, ultimately to enhance corporate governance and the overall success of companies. The new Guidance recognises that a range of social and economic factors contribute to a fully diverse board, beyond gender diversity.
The Guidance identifies principles, policies and practices which promote board diversity in general, such as the adoption of robust board evaluation processes and shareholder engagement to promote good governance practices. As such, the Guidance aims to enhance dialogue on the subject between companies and investors. It also aims to provide a balanced view on the respective roles of companies and shareholders alike in promoting and supporting diversity on boards.
The ICGN encourages companies to develop and disclose board diversity objectives. Boards play a role in fostering diversity and inclusiveness within a company’s operations through overseeing recruitment and human capital management strategies. Boards should provide oversight on diversity measures and ensure that there is reporting across the organisation.
The ICGN also encourages shareholders to establish a dialogue with companies and, if necessary, hold the board accountable in instances of company non-compliance with market regulations or deficient disclosure with market protocols. Companies which do not meet such protocols should expect heightened shareholder interest. Shareholders may be able to facilitate greater board diversity by submitting their own nominees for consideration to the board. The ICGN notes that significant shareholders in some developed markets are increasingly able to nominate director candidates through equitable proxy access rules allowing them a voice in advocating for qualified, diverse nominees. Where proxy access is not assured, the ICGN notes that shareholders should consider petitioning their securities regulators for the right to have proxy access so as to facilitate boards that are more responsive to their shareholder base.
Cranfield School of Management’s Female FTSE Board Report 2016
In July 2016, Cranfield School of Management published its 2016 Female FTSE Board Report. The Report notes that the percentage of women on FTSE 100 boards had increased to 26 per cent in March 2016, significantly more than in March 2015 (23.5 per cent), but similar to the recorded 26.1 per cent in the final report by Lord Davies published in October 2015.
The Report comments that progress among executive ranks and in the executive pipeline remains very slow. Female executive directorships stand at 9.7 per cent in the FTSE 100 and 5.6 per cent in the FTSE 250,with only 19.4 per cent of women holding roles on executive committees of FTSE 100 companies. The Report notes that this shortage of women in top senior roles will make it difficult to reach and sustain Lord Davies’ target of 33 per cent women on FTSE 350 boards by 2020.
The Report identifies some key points to be considered for future action to maintain momentum moving forward, including:
HM Treasury reports that 72 firms have signed up to the Women in Finance Charter
In July 2016, HM Treasury announced that 72 financial services firms have now signed up to its Women in Finance Charter which commits financial services firms to link the remuneration packages of their executive teams to gender diversity targets and to set internal targets for gender diversity in their senior management, publish progress reports annually against these targets, and to appoint a senior executive responsible for gender diversity and inclusion.
FRC report on corporate culture and the role of boards
In July 2016, the Financial Reporting Council (FRC) published a report, “Corporate Culture and the Role of Boards”, which looks at the increasing importance which corporate culture plays in delivering long-term business and economic success. The report is the culmination of the FRC’s Culture Coalition project in collaboration with a number of partners as well as interviews with more than 250 chairmen, CEOs and leading industry experts, from the UK’s largest companies. The report explores the importance of culture to long-term value and how corporate cultures are being defined, embedded and monitored.
The FRC outlines key elements boards should take into consideration to create a healthy corporate culture:
A number of case studies are included in an Appendix to the report and the FRC proposes to take feedback to the report into account when reviewing its Guidance on Board Effectiveness in 2017.
Tomorrow's Company’s consultation on governing culture, risk and opportunity
In July 2016, Tomorrow's Company published a consultation paper, “Governing culture: risk and opportunity? – A guide to board leadership in purpose, values and culture”, which is intended to help boards determine how they might approach the key questions around culture.
Through its past research, Tomorrow's Company have identified six “pillars” of success for boards:
Tomorrow's Company recommends that boards take time every year to review and discuss progress towards achieving the desired culture, its maintenance and development. To aid these discussions, Tomorrow's Company has provided an agenda for these discussions, using the six pillars and providing core questions a board might ask itself, and a roadmap for boards showing the behaviours boards should expect to see that address the questions in the agenda.
Tomorrow’s Good Governance Forum: Improving board evaluation to achieve greater board effectiveness
In September 2016, Tomorrow’s Company released guidance produced by its Good Governance Forum on improving board evaluations, focusing on how this is a process of shared learning and feedback. The guidance addresses matters such as critically evaluating self-performance and tackling weaknesses as part of the evaluation process, which as a result will enhance shareholder and stakeholder confidence in the board’s effectiveness and adaptability.
The guidance sets out factors which contribute to an effective board evaluation and it considers points arising from the action plan resulting from the board discussion about the review of the evaluation, issues in relation to disclosing the results of the board evaluation, appointing an external evaluator, widening the sources of feedback in the evaluation process and the roles of the chair, senior independent director and company secretary in the process.
IBE report on stakeholder engagement
In July 2016, the Institute of Business Ethics (IBE) published a report, “Stakeholder engagement: values, business culture and society”, which was commissioned by the Financial Reporting Council as part of its Culture Coalition project. The report contains a series of case studies detailing how companies have brought ethical values to bear in dealing with stakeholders.
Among the conclusions are that:
FRC’s reminders for half-yearly and annual financial reports of listed issuers following the EU referendum
In July 2016, the Financial Reporting Council (FRC) published a reminder for directors highlighting some matters for them to consider when preparing their forthcoming half-yearly and annual financial reports in light of the referendum vote for the UK to leave the EU.
The considerations discussed include:
FRC’s guidance to preparers of 2016 annual reports of listed companies
Subsequently, in October 2016, the Financial Reporting Council (FRC) published a letter addressed to audit committee chairs and finance directors of listed companies highlighting key issues and improvements that can be made to annual reports in the 2016 reporting season to help to foster investment in the UK.
The FRC’s advice addresses various issues within separate parts of the annual report, including the following:
Financial statement disclosures
Audit committee reporting
The FRC notes that investors would like to see more informative reporting about the specific actions taken by audit committees and the significant issues that they have considered. It also refers to its “Audit Quality Practice Aid” published in 2015 which helps audit committees evaluate and report on audit quality.
FRC’s discussion paper on improving the statement of cash flows
In October 2016, the Financial Reporting Council (FRC) published a discussion paper which presents ideas to improve the usefulness of the statement of cash flows. This is in the context of an IASB project on “Primary Financial Statements” which is examining the purpose, structure and content of the primary financial statements, including the statement of cash flows.
The statement of cash flow tells investors where their company’s cash has come from and where it has gone, providing an insight into the quality of earnings. The discussion paper suggests several ideas for improving the transparency and consistency of the statement, while providing the company’s own perspective on the management of liquid resources. These include the following:
The FRC has requested responses to the consultation by February 28, 2017.
Financial Reporting Lab’s report on business model reporting
In October 2016 the Financial Reporting Lab published a lab project report on business model reporting. Findings in the report include the following:
FRC’s annual review of corporate reporting 2015/2016
In October 2016, the Financial Reporting Council (FRC) published its Annual Review of Corporate Reporting for 2015/2016. This report provides the FRC’s assessment of corporate reporting in the UK based on broad outreach and evidence, including that obtained from the FRC’s own monitoring work, performed by its Corporate Reporting Review (CRR) team, on cases opened in the year to March 31, 2016, and from more recently performed thematic reviews.
The report includes:
Annual assessment of corporate reporting
The FRC concludes that although compliance with the accounting framework is generally good, particularly by larger public companies, certain areas of corporate reporting have, for several years, required general improvement. The profile of these issues has been raised through annual activity reports, discussions with audit firms and the use of generic press notices.
There have been improvements in some of these areas this year, for example in respect of the disclosure of principal risks and uncertainties (PRUs) and capital management policies. Fewer instances were in evidence this year of:
In addition, there were fewer issues relating to cash flow statements, in particular relating to misclassifications between operating, investing and financing activities.
The review sets out the more significant findings from this year’s monitoring activity relating to the financial statements and the strategic report.
Corporate reporting enforcement activity
This section provides an overview of the disciplinary cases which have been concluded under the FRC Accountancy Scheme in the year to 31 March 2016. In April 2016 the FRC introduced changes to its enforcement and disciplinary arrangements in preparation for the implementation of the EU Audit Regulation and Directive. With effect from June 17, 2016 the FRC implemented a new Audit Enforcement Procedure for new statutory audit cases.
Current and future developments
In this section, the FRC provides an overview of current and future developments in corporate reporting and the expected impacts, including:
A few days after publication of its Annual Review, the FRC published a presentation describing the accounting and corporate reporting issues most often raised by Corporate Reporting Review activity conducted in the year ended March 2016. This supplements the wider discussion of the quality of corporate reporting in the UK in the Annual Review.
The most frequent areas of questioning by the Financial Reporting Review Panel (FRRP) concerned the following:
FRC’s corporate reporting thematic review on tax disclosures
In October 2016, the Financial Reporting Council (FRC) published a corporate reporting thematic review on tax disclosures. This report shares the FRC’s findings from the targeted review of certain aspects of companies’ tax reporting, against which companies can assess and enhance their own disclosures to ensure they provide high quality information to investors in their annual reports and accounts.
In December 2015, the FRC wrote to 33 FTSE 350 companies informing them that the tax disclosures in their next annual report and accounts would be reviewed by the FRC’s Corporate Reporting Review. The objective of the review was to encourage more transparent reporting of the relationship between tax charges and accounting profit and the factors that could affect that relationship in the future, in accordance with existing requirements.
Overall, the FRC saw evidence of improvements in the transparency of tax disclosures included in companies’ strategic reports and saw examples of good practice in the following areas:
The FRC notes that there is scope for companies to articulate better how they account for tax uncertainties by explaining the bases for recognition and measurement and will continue to challenge companies who do not disclose the amount of uncertain tax provisions when these are subject to risk of material change in the following year. The audit of uncertain tax provisions is an area of particular focus of the FRC’s audit monitoring activities for 2016/2017.
Additionally, the FRC encourages companies to:
FRC's consultation on revised operating procedures for reviewing corporate reporting
In October 2016, the Financial Reporting Council (FRC) published for consultation a revised version of its Conduct Committee’s operating procedures for reviewing company reports and accounts. Earlier in 2016, the FRC made changes to its governance and executive structures which resulted in minor amendments to the Corporate Reporting Review (CRR), which came into effect on April 1, 2016. At the time, it was indicated that more extensive changes were likely to be proposed and that they would be subject to public consultation.
The consultation paper explains the rationale for the further proposed changes to the operating procedures. These are required to implement new ways of working to address requests for more transparency about CRR reviews and their outcomes, and to enhance the efficiency of CRR procedures without compromising the quality of decision-making. In addition, changes have also resulted from requests for greater transparency in respect of the review process and clarity in the content of the operating procedures.
Part 1 of the revised operating procedures sets out how reports are selected for review and it includes information on complaints and complainants. The FRC intends to publish lists of companies whose accounts and reports have been subject to review and where cases have been closed. The current two-stage review is to be reduced to a single stage review at the Review Group stage. Individual companies’ audit committee reports will need to disclose the nature of any FRC regulatory review or intervention, as noted in the FRC’s Guidance on Audit Committees.
The consultation paper sets out questions in Section 2 of the document and invites feedback from interested parties on or before January 4, 2017.
Amendments to DTR 7.2
In November 2016, the Financial Conduct Authority (FCA) amended DTR 7.2 in its Disclosure Guidance and Transparency Rules sourcebook in order to implement the new EU Non-Financial Reporting Directive requirement for issuers to disclose their diversity policy in their corporate governance statement.
New provision DTR 7.2.8AR requires listed companies (other than those which qualify as small or medium companies under the Companies Act 2006) to describe the diversity policy they apply to their administrative, management and supervising bodies, with regard to aspects such as age, gender or educational and professional backgrounds. They must also describe the objectives of that diversity policy, how it has been implemented and the results in the reporting period. If no such policy is applied, the statement must contain an explanation as to why this is the case.
This new reporting requirement applies to financial years beginning on or after January 1, 2017.
The Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016
On November 7, 2016 the draft Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016 were published, together with an explanatory memorandum. The Regulations amend Part 15 of the Companies Act 2006 (CA 2006) in order to implement articles 1(1) and (3) of the Non-Financial Reporting Directive (Directive 2014/95/EU) and to complete transposition of article 23(1) of the Accounting Directive (Directive 2013/34/EU).
Non-Financial Reporting Directive
The Regulations insert two new sections, 414CA and 414CB, into the CA 2006 in order to implement articles 1(1) and (3) of the Non-Financial Reporting Directive. Articles 1(1) and (3) amend the Accounting Directive, and insert a new requirement for certain companies to disclose certain non-financial information in a statement as part of the entity’s management report.
Section 414CA sets out the requirement for certain companies and groups which are not small or medium-sized and which have more than 500 employees to include a non-financial information statement in their strategic report. The companies to which section 414CA relates are traded companies, banking companies, authorised insurance companies and companies carrying out insurance market activities (public interest entities under the Non-Financial Reporting Directive).
Section 414CB provides that the non-financial information statement must contain information to the extent necessary for an understanding of the company’s development, performance and position and the impact of its activity, relating to, as a minimum: environmental, social and employee related matters, respect for human rights and anti-corruption and bribery matters (together "non-financial matters"). The information must include a brief description of the company's business model, a description of the policies pursued by the company in relation to such non-financial matters, the outcome of these policies, a description of the principal risks relating to such non-financial matters and how the company manages such risks. If the company does not pursue policies in relation to one or more of the non-financial matters, it must give a clear and reasoned explanation for not doing so. If a non-financial information statement complies with subsections (1) to (5) of section 414CB, it will be deemed to fulfil some of the requirements for non-financial information which are already contained in section 414C CA 2006 so as to prevent duplication. Section 414CB does not require disclosure of information about impending developments or matters in the course of negotiation, if the disclosure would, in the opinion of the directors, be seriously prejudicial to the commercial interests of the company, provided that such non-disclosure does not prevent a fair and balanced understanding of the company's development, performance or position or the impact of the company's activity.
The Regulations remedy a gap in the transposition of article 23(1) of the Accounting Directive. The amendments ensure that the parent company of a small group cannot benefit from an exemption from the requirement to produce group accounts under section 399 CA 2006 if a member of the group is established in an EEA State and is a public interest entity.
The Regulations will come into force on the seventh day after they are made and apply to financial years of companies and qualifying partnerships commencing on or after January 1, 2017.
In September 2016, the Climate Disclosure Standards Board (CDSB) published a handbook on EU environmental reporting. Directive 2014/95/EU on the disclosure of non-financial and diversity information (NFR Directive), which amends the Accounting Directive 2013/34/EU to require certain large companies to disclose information on policies, risks and outcomes as regards environmental matters, social and employee aspects, respect for human rights, anti-corruption and bribery issues, and diversity in their board of directors, is due to be implemented by Member States by December 6, 2016.
The transposition of the NFR Directive is still being worked on but this publication sets out a series of examples from annual reports of European companies to show how companies could respond to these new requirements. Examples are also provided which are focused solely on environmental matters, but some recommendations may also be useful for reporting other non-financial information.
Amendments to DTR 4.3A
In July 2016, the Financial Conduct Authority (FCA) published Handbook Notice No. 35 setting out a number of changes to the FCA Handbook, including amendments to the Disclosure Guidance and Transparency Rules so as to prescribe the reporting format for the annual reports on payments to governments prepared in accordance with DTR 4.3A.
The same reporting format and relevant schema as that prescribed by the Department for Business, Innovation and Skills and Companies House for Accounting Directive reports on payments to governments is prescribed and issuers need to file their reports with the FCA and upload them on the National Storage Mechanism. The changes came into force on July 29, 2016 and apply to issuers with a financial year beginning on or after August 1, 2016.
European Commission’s Implementing Decision on equivalence of reporting requirements of Canada on payments to governments to the requirements in the Accounting Directive
In October 2016, Commission Implementing Decision (EU) 2016/1910 of October 28, 2016 on the equivalence of the reporting requirements of certain third countries on payments to governments to the requirements of Chapter 10 of the Accounting Directive (Directive 2013/34/EU) was published in the Official Journal.
Chapter 10 requires large undertakings and all public-interest entities active in the extractive industry or the logging of primary forests to prepare and make public a report on payments made to governments on an annual basis. EU companies may choose to prepare their reports in compliance with the reporting requirements of a third country that have been assessed as equivalent to the requirements of Chapter 10.
This Commission Implementing Decision provides that, since adopting reporting requirements on payments to governments that deliver substantive outcomes equivalent to the provisions contained in Chapter 10, the reporting requirements of Canada should be considered as equivalent to requirements of Chapter 10 of the Accounting Directive on payments to governments regarding their activities in the extractive industry.
In July 2016, the Financial Reporting Council (FRC) published amendments to FRS 101 on the Reduced Disclosure Framework, which is an optional accounting standard intended to enable cost-efficient financial reporting within groups, particularly for those applying EU-adopted IFRS in their consolidated financial statements. The amendments follow a review of FRS 101 by the FRC and contain some minor changes to draft amendments published in December 2015, providing certain disclosure exemptions in relation to IFRS 15, “Revenue from Contracts with Customers”, and clarifying the order in which the notes to the financial statements are presented.
As a result of comments received during the consultation process, the FRC is separately consulting, in FRED 65, on a further amendment to FRS 101 to remove the requirement for a qualifying entity to notify its shareholders in writing that it intends to take advantage of the disclosure exemptions in FRS 101. A similar, consequential amendment is also proposed to FRS 102. The FRC aims to finalise the amendments in December 2016, with them applying to accounting periods beginning on or after January 1, 2016.
Robert Schwinger discusses one approach issuers have tried in order to avoid facing securities law requirements: SAFTs.
The COVID-19 pandemic has resulted in an unusual complex global economic dis-equilibrium where disruption seems to be the only constant.
While capital markets rely on companies to provide timely and accurate information, and investors, shareholders and others rely on companies to provide financial reports that have been through a rigorous audit process, government and regulators in the UK recognise that the COVID-19 pandemic is creating huge challenges for both corporate reporting and audit processes.