At an event held at ICSA this week, Grant Thornton launched this year’s edition of its ‘Corporate Governance Review’, an analysis of governance practices and reporting in the FTSE 350.
As always, this year’s review is full of fascinating findings for governance geeks like me. And, also as always, one of the least surprising is that annual reports are getting longer. For the first time the ‘front end’ of the reports – excluding the financial accounts – now averages over 100 pages.
Grant Thornton can probably draft the equivalent paragraphs for the 2018 and 2019 reviews now, filling in the exact number of pages later. Next year, large companies will start reporting on the non-financial reporting regulations introduced in 2016, and the government is committed to introducing further reporting requirements on directors’ duties and remuneration by June 2018.
Longer reports need not be a bad thing if the increased length gives a deeper understanding of the company’s strategy, performance and future prospects. But the Grant Thornton review suggests at best the evidence for that is mixed.
In some areas, such as describing the principal risks facing the company, the accounting firm found most annual reports to be more insightful and informative than a few years ago. By contrast, only 50% of annual reports explained clearly how those risks impacted on long-term viability.
I was at the Financial Reporting Council (FRC) in 2014 when the requirement that companies should make a viability statement was added to the UK Corporate Governance Code. We did so because we believed such a statement could give investors a better understanding of the company’s position and prospects than the traditional ‘going concern’ statements.
But we always recognised there was a risk that some companies would produce heavily-caveated boilerplate, and that some advisors would provide them with ‘one we prepared earlier’.
There is a major risk we will see a similar response to the proposed regulations requiring companies to report on how their directors have exercised their duties under Section 172 of the Companies Act 2006.
It is impossible to prevent that entirely, but the way in which the regulations and any guidance are drafted can mitigate against it. Hopefully they will encourage description rather than prescription.
We are unlikely to see the trend for more reporting requirements and longer reports reverse any time soon, but there are things that both regulators and companies can do to alleviate them, as we heard at the Grant Thornton event.
Ben Mathews from HSBC explained how they had been able to cut the length of their annual report just by telling all authors that their contributions had to be 20% shorter than last year – and refusing to accept them until they were.
And David Styles from the FRC confirmed that the draft revised code, on which consultation will begin later in the year, has been pruned to remove now redundant provisions. These are disciplines that other companies – and other regulators – should be encouraged to follow.
Chris Hodge FCIS is policy advisor at ICSA: The Governance Institute