Narrative Financial Reporting

FRC Lab report on risk and viability

The Financial Reporting Council's (FRC) Financial Reporting Lab has published a report examining the key attributes, value and use of principal risk and viability reporting. It also provides illustrative examples of reporting favoured by investors. The report is the latest in a series of project reports which started with a focus on business model reporting and takes into account the views of companies (ranging in size from FTSE 100 to AIM) and the investment community.

In summary, the report:

  • poses a series of questions on which companies should reflect when making and testing their principal risk and viability statement disclosures;
  • sets out the attributes of good principal risk reporting; and
  • highlights the two-stage nature of the process in developing a viability statement. This comprises, first, an assessment of the company's prospects (taking into account current position, a robust assessment of principal risks and the business model) and, second, an assessment of its viability (taking into account stress and sensitivity analysis, linkage to principal risks, qualifications and assumptions and level of reasonable expectation).

Investors point to the sustainability of the business model as a key consideration when discussing long-term prospects of a company and they expect directors to be able to discuss its resilience to risk and adaptability to market challenges.

FRC Thematic Reviews – Report of Findings

The FRC has published reports sharing its detailed findings from three targeted thematic reviews. The findings, to which companies may wish to refer when preparing their Annual Reports, aim to help improve the quality of reporting in acknowledged areas of difficulty: judgments and estimates, pension disclosures and alternative performance measures.

What do companies’ annual reports tell us about their workers?

The Pensions and Lifetime Savings Association (PLSA) has published a new report which focuses on the FTSE 100's employment models and working practices. It highlights the substantial variations in the quality of reporting and a considerable lack of clarity on workforce related issues. The report is based on the framework set out in the PLSA's 2016 stewardship toolkit.

The report examined how companies report on their workforce in general terms, noting that only 43% link to how employees add value to company strategy. The report focused, in particular, on the disclosure of workforce composition, pay and stability and the manner and extent of employee engagement. For a summary of the findings – click here.

Market Trends

Lexis publish review of 2017 AGM season

Lexis Market Tracker’s latest trend report "AGM season 2017" analyses the latest market practice and trends emerging from the FTSE 350 2017 AGMs and includes comments from a number of Addleshaw Goddard's Governance & Compliance team as well as Peter Swabey from ICSA: The Governance Institute. For a summary of the findings and to download the report – click here.

Market Abuse Regulation in Practice

ESMA updates MAR Q&As

ESMA has published further updates to its Q&A document dealing with the EU Market Abuse Regulation (MAR). A new Q&A (Question 10) relates to Insider lists (Art 18, MAR) and clarifies that persons who act on behalf or account of an issuer and who come into possession of inside information have their own duty, distinct from that of an issuer, to keep an insider list. Conversely, where a third party keeps an insider list on behalf of an issuer, the issuer remains primarily responsible for it.

New Questions 7.8 and 7.9 also deal with the permissibility of trading by PDMR during a closed period and the need to consider if doing so might constitute insider dealing and, therefore, market abuse.

Voting Guidelines

ISS 2018 Proxy Voting Guidelines updated

Institutional Shareholder Services (ISS) has updated its UK benchmark proxy voting policies for 2018. A new policy on virtual meetings has been added, broadly along the lines proposed in its October consultation, stating that ISS will generally recommend voting FOR proposals allowing for the convening of "hybrid" shareholder meetings (i.e. where companies employ technology to allow for virtual participation in addition to a physical meeting), but AGAINST proposals allowing for the convening of virtual-only shareholder meetings. Holding a hybrid meeting is likely to increase hosting costs, whereas cost reduction was seen as one of the perceived benefits of a virtual shareholder meeting.

Other amendments include changes to ISS's policy on "overboarding" (which are mainly clarificatory but which may impact on the re-election of certain chairs), a clarification that audit and remuneration committee members should be independent as well as a clarification of threshold vesting levels for LTIPs (where a 25% vesting threshold may be considered to be inappropriate) and share issuances without pre-emption rights (i.e. cash-box placings). The new policies will be applied to shareholder meetings taking place on or after 1 February 2018.