FRC guidance to listed companies on 2016 annual reports

The Financial Reporting Council (FRC) has published its advice to audit committee chairs and finance directors of listed companies, highlighting key issues and improvements it considers can be made to annual reports in the 2016 reporting season. The letter contains:

  • a reminder that the strategic report should be user­friendly, clear and concise;
  • encouragement for companies to consider a broad range of factors when determining principal risks and uncertainties facing the business and performing their analysis for the viability statement, such as cyber­risk, climate change and Brexit. In particular, companies are encouraged to disclose why the selected period of assessment is appropriate for the particular circumstances of the company, what qualifications and assumptions were made, and how the underlying analysis was performed;
  • an expectation that boards should provide increasingly company­specific disclosures with quantification of effects as the economic and political effects of Brexit become more certain;
  • a reminder that investors expect:
    • business model reporting to provide clarity of explanations as to  how the company makes money and what differentiates it from its peers;
    • a clear link to be made between the business model and the revenue recognition policies to be disclosed; and
    • dividend disclosures to detail how dividend policies operate in practice and how these policies may be impacted by risks and capital management decisions  -  facing the company.

The FRC believes that companies need to respond to increasing stakeholder scrutiny of tax strategies, including where they pay tax, and consider carefully whether they are sustainable and any material risks to which this gives rise are clearly described in the report and accounts. The FRC also suggests that investors would like to see "more clarity and brevity in remuneration reporting" as well as more informative reporting about specific actions taken by Audit Committees.

FRC consultation on revised reporting review procedures

The FRC has also published for consultation a revisedversion of its Conduct Committee's operatingprocedures forreviewingcompany reports andaccounts. These   focus on the way in which the FRC reviews annual reports of listed and larger private companies and publicises the results of those reviews. The revised operating procedures follow minor amendments introduced in April, and seek to increase transparency concerning reviews and their outcomes, enhance the efficiency and improve the overall clarity of the enquiry process.

The proposed changes to the operating procedures include:

  • introducing a new practice of publishing lists of companies whose accounts and reports have been the subject of a review and where the cases have been closed. The FRC intends to start publishing lists of closed cases in 2017, beginning with those reports of companies it reviewed with December 2015 year­ends. Publication will only take place once each company has had the opportunity of reporting the review in its next set of published accounts. To this end, the FRC has started writing to companies to advise them when it has completed a review but which did not identify any substantive matters requiring correspondence at the time; and
  • reiterating the FRC's Guidance on Audit Committees in respect of reporting, and the expectation that the audit committee report should disclose any FRC regulatory review or intervention, including the nature and extent of any interaction with the FRC’s team.

Responses to the consultation should be submitted by 4 January 2017.

Corporate Governance

Commons committee inquiry on corporate governance

The Department of Business, Energy and Industrial Strategy Select Committee has launched an inquiry on corporate governance, focusing on directors' duties, executive pay, and the composition of boardrooms.

The Committee wants to examine and asks for submissions on:

  • whether  company  law  is  sufficiently  clear  on  the  role  of  directors  and  non­ executive directors;
  • whether there is an effective voice and challenge to boardroom decisions;
  • whether executive pay should take account of companies' long­term performance and whether it should reflect the value added by executives relative to junior employees;
  • what  more  should  be  done  to  increase  the  number  of  women  in  executive positions on boards; and

proposals for worker representation on boards and remuneration committees. Submissions are required by 26 October 2016.

ICSA calls for governance reforms of larger private companies

In the same vein, ICSA has issued a press release having written to the Prime Minister with suggestions regarding the reform of the governance of larger private companies, following the collapse of BHS.

ICSA suggest that private companies of sufficient size to require them to produce Companies Act 2006 audited accounts in addition to a directors’ report should be obliged to disclose in their annual report the extent to which they comply with the UK Corporate Governance Code, and that larger private companies should be required to appoint a company secretary in the same way as public companies.

QCA publishes monthly Directors’ know how

The Quoted Companies Alliance has published its monthly Directors’know how, which includes:

Board minutes: ICSA guidance on minute taking

ICSA has also published guidance on the practice of minute taking following its consultation in May 2016 on the principal function of meeting minutes. The guidance notes that there is no "right way" to draft minutes and it is up to each individual organisation to decide how best to record its meetings. The degree of detail recorded will depend on the needs of the organisation, its operating sector, the requirements of any regulator and the working practices of the board.

The guidance is principles­based and not prescriptive. It discusses how quorum and conflicts of interest should be covered in board minutes, the style of writing, the level of detail and how to deal with dissent in the minutes.

The publication of the guidance has precipitated an interesting debate between the Chairman of the Treasury Select Committee (click here) and the Chief Executive of the ICSA (click here) as to the manner and extent to which dissent in the board room should be recorded in minutes.