Recently introduced Non-Financial Disclosure Regulation1 (the “Regulations”) require certain large companies to publish non-financial and diversity information in their annual financial statements. The Regulations apply for financial years commencing on or after 1 August 2017.
This briefing poses some questions on which company directors should focus in determining their obligations under the Regulations.
Scope of the Regulations
Do the Regulations apply to my company?
The Regulations apply to a company or a holding company which:
a) in relation to a financial year, qualifies as a “large company” under the Companies Act by fulfilling at least two of the following requirements:
(i) the balance sheet total exceeds €20m (or €24m gross, if a holding company);
(ii) the amount of its turnover exceeds €40m (or €48m gross, if a holding company);
(iii) the average number of employees of the company (or the aggregate average, if a group) exceeds 250.
b) has an average number of employees exceeding 500; and
c) is an “ineligible entity” for certain other purposes of the Companies Act. These include entities that:
(i) have transferable securities admitted to trading on a regulated market of any Member State;
(ii) are credit institutions;
(iii) are insurance undertakings; or
(iv) fall within certain categories of entity that are regulated by the Central Bank of Ireland).
What does an applicable company need to do?
The company directors must include in the directors’ report a statement containing non-financial information (the “non-financial statement”) which:
- contains information necessary to understand the development, performance, position and impact of the company’s activity on “required matters” (which are environmental matters, social and employee matters, respect for human rights and bribery and corruption);
- describes the company’s policies on the required matters;
- describes the principal risks related to the required matters and management of the risks;
- contains an analysis of the relevant non-financial key performance indicators; and
- includes a brief description of the company’s business model.
What form must the non-financial statement take?
In preparing a non-financial statement, an applicable company may rely on international, EU-based or national frameworks and should specify which of the frameworks it relies upon. The European Commission published non-binding Guidelines on non-financial reporting (methodology for reporting non-financial information)2 (the “Guidelines”) which are intended to help companies draft “relevant, useful, comparable” and compliant non-financial statements.
Must the non-financial information be included in the financial statements?
The non-financial information required may be set out in a separate statement provided that it is:
- published on the company’s website within 6 months of its financial year-end date and the directors’ report includes a statement to this effect together with the website address; or
- annexed to the company’s annual return; or
- in the case of an investment company, delivered to the Companies Registration Office (the “CRO”), with the statutory financial statements, directors’ report and auditors’ report;
- in the case of a UCITS investment company, delivered to the CRO, with the statutory financial statements, directors’ report and auditors’ report.
Where the company provides the non-financial information in a separate statement, this must be attached to every balance sheet that is laid before the company’s annual general meeting and signed by two company directors.
Are there circumstances in which a company may omit the non-financial information?
An applicable company may omit information on impending developments or matters which are the subject of negotiations if, in the opinion of the directors, to include it could seriously prejudice the company’s competitive position. However, the omission must not prevent a fair and balanced understanding of the applicable company’s development, performance, position and impact of its activity. Where such information is omitted, the non-financial statement must confirm this and provide a reason for the omission.
An applicable company which is a subsidiary company is exempt from the obligation to prepare a non-financial statement if that company and its subsidiaries are included in the group non-financial statement or the separate statement of another undertaking.
What happens if a company does not have the required non-financial information?
The obligation is ‘comply or explain’ in nature. The non-financial statement must include a clear and reasoned explanation for not having such policies.
The Regulations require that the directors of a “traded company”, that is a “large company”, must also include a “diversity report” on its diversity policy.
The Companies Act defines a “traded company” as (a) a public limited company; (b) a designated activity company; (c) a company limited by guarantee; or (d) a public unlimited company or a public limited company, that has no share capital; that in the case of a public limited company has shares or debentures, or in the case of any of the other foregoing types of company has debentures, admitted to trading on a regulated market in an EEA state.
However the obligation will not apply to a large traded company which only has securities, other than shares, admitted to trading on a regulated market, unless such a company has issued shares which are traded in a multilateral trading facility.
What information must be included in the diversity report?
The diversity report must include:
- a description of the diversity policy applied to the board of directors;
- the objective of that diversity policy;
- details of the implementation of the diversity policy; and
- the results of the policy.
Aspects of the policy should cover age, gender or educational and professional backgrounds. The Guidelines suggest that specific and measurable targets for these diversity aspects be disclosed.
What form must the diversity report take?
The diversity report does not form part of the company’s non-financial statement but must be included in the corporate governance statement in the directors’ report. Traded companies must separately have a statement relating to corporate governance arrangements such as composition and operation of the board of directors and the statutory auditor is obliged to consider and report on this corporate governance statement. The Regulations extend this obligation to the diversity report. The Guidelines are designed to provide assistance in preparing the board diversity policy.
What if a company is required to publish a diversity report but does not do so?
Once again, the obligation to publish a diversity report is ‘comply or explain’ in nature: where the company does not apply any diversity policy, the directors must include an explanation in its corporate governance statement as to why there is no such policy.
A person who fails to comply with the obligations (each of which, it should be recalled, is ‘comply or explain’) relating to the non-financial statement or the diversity report commits an offence and is liable (on summary conviction) to a fine of up to €5,000 or to imprisonment for a term not exceeding 6 months, or to both.
The Regulations empower the Director of Corporate Enforcement to investigate suspected offences and to enforce the Regulations including by prosecuting offences.
Directors should determine whether their company or group is in scope and, if it is, consider the precise form the non-financial statement and / or board diversity report. It is important that such statements meet the statutory requirements, or provide a reasoned explanation why not.