Corporate governance

Annual reporting – is more, better?

Simon Lowe Simon Lowe

What is the implication of calls for more disclosure in annual reporting?

With decreasing public confidence in business, the government and the regulator are turning up the heat on corporate governance.  While the ‘comply or explain’ governance model places reporting at the heart of good governance, the pressure is on companies to produce more and more information in their annual reports. So how are companies responding to this pressure in what they write?

Our latest  Corporate Governance Review  examines how companies embrace the principles of governance and meet the requirements of the corporate governance code. By looking at the strategic report and the viability statement, we can see how companies are using these areas of the annual report to communicate their company’s strategic aims to shareholders and stakeholders.

The viability statement - a new challenge

The viability statement has been challenging for boards. This is the first full year FTSE 350 companies are required to provide a viability statement.  Almost all have provided some form of statement, although 52% of companies provide only basic disclosure.

Companies are stating how long they can continue to operate, with a short explanation of how they arrive at this conclusion, but it is not specific to the company and not clearly linked to other areas of the report. These companies are meeting the terms of the code but are not changing the way they do governance and how they report on what they do. Only 5% of companies are really embracing what the FRC set out to achieve, by explaining why they chose their period of time (most instead provide a generic statement just saying it maps their strategic planning), and offering detail on their methodology, stress testing and scenario planning.

The strategic report

We see a similar pattern in companies’ strategic reporting. The introduction of the strategic report guidelines in 2014 was the single biggest change to annual reporting in recent years. It required a significant change to the way that report preparers approach the annual report and encouraging connectivity between strategy, governance and the financial reporting. Although this has made reports far longer – a 50% increase in the last five years – it hasn’t necessarily meant companies are writing something new and insightful. The majority of companies are still tending to take what they already had and repackage it, rather than using it as an opportunity to start from scratch.

There is work to be done, and companies will face increasing challenges as governance remains in the spotlight. If the regulator and the government move to expand reporting requirements even further in an attempt to shake up governance, we may find even more scrutiny being placed over what is in the annual report and what is going on in the boardroom.

To receive a hard copy of our review or a copy of our supporting data appendix, please email Alex Worters.

More information

For further information on our corporate governance research, visit Governance Matters.

To learn more about our work contact Simon Lowe.