The Financial Reporting Council ("FRC") has proposed the abolition of the obligation on companies to produce hard copies of annual reports and accounts. The FRC's chief executive Stephen Haddrill has characterised hard copies of annual reports and accounts as "an enormous waste of paper and an enormous waste of time, and a waste of money". In doing so he has ensured that this is the most contentious of the recommendations made in its paper published in January on effective company stewardship.
The current position
To some extent, the electronic communications provisions contained in the Companies Act 2006 have already opened the door for companies to provide annual reports and accounts to shareholders electronically (for example, via email or a website). Currently, a company wishing to take advantage of these provisions, in addition to obtaining shareholder consent to the adoption of relevant provisions in the articles, must gain consent (whether deemed or actual) from each individual shareholder to stop sending hard copies. Any shareholder wishing to continue to receive hard copies is entitled to opt out and continue to receive the full annual reports and accounts by post. The result is that a company electing to go down this route may have to operate two regimes, sending hard copies to shareholders who have opted out while sending others, who have consented to website publication, a notification of availability, which some companies have decided to turn into a glossy, hard copy "super summary" of their annual report. An additional layer of complexity is that even members who have agreed to receive the annual report through a website are still entitled to request a hard copy of the document, a factor that must be taken into account when deciding the scale of the print run.
The FRC's proposal
The FRC's proposal is broad and at this stage lacks detail, but it is clear that a member's right to opt out of the electronic communications regime would be abolished, meaning that companies would no longer be under an obligation to request consent from individual shareholders before ceasing to send a hard copy. However, the proposal does not appear to advocate extinguishing the right of investors to request hard copies. It is unclear whether the obligation to notify members of website publication would remain.
The FRC believes that relieving companies of the burden of producing printed annual reports will
- allow companies to take advantage of technological developments
- increase the accessibility and transparency of the annual report.
The investment required to produce hard copy reports could be reallocated to improve the usage and accessibility of reports online. In the midst of concern over the increasing length of annual reports and its impact on the accessibility of such reports and the key information within them, the FRC has also suggested introducing mandatory use of eXtensible Business Reporting Language (XBRL) (software already mandated in the USA that allows investors to search annual reports and find specific items or data).
Reaction to the proposal
The proposal has sparked debate, including in the House of Lords, with those in support of the change quoting statistics such as the fact that in 2006 HSBC's 454-page annual report infamously weighed 1.5kg and that last year one FTSE 100 company sent out 22,000 copies of its annual report. These examples highlight the potential costs and environmental savings that may result from scrapping the obligation to provide hard copies.
By contrast, shareholder groups have spoken out against the proposals on the grounds that:
- the proposed abolition could result in the disenfranchisement of sections of the shareholder base, potentially resulting in those unable or unwilling to access the reports online being forced to sell their shares
- a move to online reporting will reduce transparency and hinder critical comparison between company accounts
- evaluation of corporate performance will be hindered, and the ability of shareholders to hold companies to account will be impaired
- the abolition of the hard copy obligation will simply serve to transfer the burden of the costs of producing printed copies of annual accounts and reports to shareholders.
Given that many companies have been reluctant to take full advantage of the electronic communications regime it seems that companies are reluctant to risk feeling the backlash of longstanding retail investors who eagerly await the annual report landing (often with a thump) on the mat and it will be interesting to see how many companies would actually abandon hard copy reports. Many will be interested in doing so only as part of a package which encourages shareholder engagement and improves shareholder communication in a wider sense.
The FRC is currently consulting on the proposal and seeking the views of investors, company directors and auditors. The deadline for responses is 31 March 2011.