The Budget 2011, on 23 March 2011, saw the launch by the government of "The Plan for Growth", which sets out reforms aimed at supporting private enterprise and its contribution to UK economic growth. One of the areas dealt with in the report is corporate governance, under which heading the government suggests various actions which it intends to take, including materially simplifying narrative reporting for quoted companies.
The Growth Review
"The Plan for Growth" followed on from the Growth Review launched by the Chancellor and Business Secretary in November 2010, which called on business and industry to challenge government departments on the measures they are taking to allow the private sector to flourish. The Growth Review is intended to continue for the rest of this Parliament to provide an on-going focus on what the government can do to support growth.
Initiatives to reform narrative reporting
There are various current initiatives to reform and improve narrative reporting.
- The latest government review into narrative reporting was launched by BIS in May 2010 ("The Future Of Narrative Reporting – A Consultation"). That consultation had three objectives:
- driving up the quality of narrative reporting to the level of the best, including on social and environmental issues
- empowering shareholders so they can act as effective owners in the long-term interests of the companies they invest in by ensuring that companies report on their activities in a material and relevant manner
- achieving coherence without increasing the regulatory burden on business.
- In January this year, as part of the government's review, the Financial Reporting Council published a report entitled "Effective Stewardship: Enhancing Corporate Reporting and Audit", which included specific proposals to improve reporting.
- In February, the Financial Reporting Review Panel, which examines the annual accounts of public and large private companies to assess compliance with the Companies Act 2006, including applicable accounting standards, issued a press release highlighting its concern over the reporting of principal risks and uncertainties. The FRRP is concerned that too many companies do not describe in their accounts, simply and clearly, the principal risks and uncertainties facing the company and therefore leave shareholders unclear as to whether the directors have satisfied their duty under the Companies Act 2006 to promote the success of the company.
- The UK Corporate Governance Code will require, for accounts for reporting periods starting on or after 29 June 2010, an explanation of the basis on which the company generates or preserves value over the longer term (the business model) and the strategy for delivering the objectives of the company. The aim of this new requirement is to cut through the complexity of reporting to provide a clear message for shareholders.
- The European Commission also recently held a public consultation on disclosure of non-financial information by companies, looking at ways of improving disclosure.
The proposal in "The Plan for Growth"
The government states in "The Plan for Growth" that it will materially simplify narrative reporting for quoted companies to make it clearer and more focused. There are two limbs to the proposal, neither of which will be particularly easy to achieve in practice:
- simplifying the reporting framework - simplifying the reporting framework by removing specific requirements may leave shorter and superficially simpler reporting obligations which are harder to satisfy because they lack clarity. Conversely, there are areas of overlap between the different sources of reporting obligations in company law, accounting standards, corporate governance guidelines and transparency rules. An official framework which combines the obligations and maps overlaps might be helpful
- splitting reporting between a shortened report and more detailed information available on company websites - splitting reporting by reducing the contents of annual reports and incorporating the further detailed information from additional materials on corporate websites is of questionable benefit. Companies will still be producing the information and shareholders will expect it to be of the same standard and easily accessible. The Financial Reporting Council has recently consulted on the abolition of the obligation on companies to produce hard copies of annual reports and accounts. The article entitled "Holding the annual report to account?" in the March 2011 issue of this newsletter looked at the issues which arise in connection with reducing the amount of information potentially available in hard copy form to shareholders. A move to the production of annual reports in a common format using eXtensible Business Reporting Language (XBRL) (software already mandated in the USA that allows investors to search annual reports and find specific items or data) might be a more effective solution.
The government states that it will seek views on proposals on the best ways to reduce burdens by the end of July 2011, so we can expect a further consultation shortly.