Last week the Financial Reporting Council (FRC) began consulting on draft updated guidance on the strategic report – that part of the annual report in which the directors explain how they have undertaken their duty to promote the current and future success of the company.
Formally the guidance is being updated to reflect new reporting requirements that large companies will need to meet in their next annual reports, in relation to employees, the environment, human rights and other matters.
Unsurprisingly given the interest in the subject since the Government’s green paper last year, the FRC has taken the opportunity to emphasise the need for companies to consider how to report on relations with stakeholders more generally.
As the FRC notes: ‘For many entities, a key source of value that helps ensure that an entity’s success is sustainable over the longer term is the existence of mutually beneficial relationships with key stakeholders.’
Alongside the Investment Association, ICSA will shortly be issuing its own guidance on how to get the stakeholder voice into the boardroom.
While developing that guidance we have found that, even when companies have put a lot of effort into identifying and engaging with their stakeholders, you would not necessarily know that from reading their annual reports.
We have also heard from investors that they are increasingly looking at how companies deal with other stakeholders as an indicator of whether they can anticipate a long-term return on their investment.
While the draft FRC guidance provides welcome encouragement, there is also a need for caution.
This is not exactly the first time that political and public interest has led to companies being expected to report more fulsomely on different aspects of their activities – the history of corporate governance and reporting over the last 25 years is full of such examples.
And while in many cases this has resulted in more transparency and better practices, there are also many examples that demonstrate some of the potential pitfalls.
There are three dangers to watch out for when introducing new reporting requirements: boilerplate, bloated reports, and believing that reporting will solve the underlying problem on its own.
To be fair to the FRC, it has recognised these potential problems. The draft guidance emphasises that the strategic report must be company-specific and jargon-free, and that only information that is material to the economic decisions taken by shareholders should be included.
Some might quibble with that definition of materiality, and argue if companies need to engage better with other stakeholders then the annual report should be written more with those stakeholders in mind.
I do not agree with that argument. Many companies can do a better job of communicating with their key stakeholders – but how many of those stakeholders are going to want to wade through the annual report?
One of the principles that ICSA and the Investment Association will be emphasising in our forthcoming guidance is that when designing engagement and communication mechanisms, companies must think about what would be most effective and convenient for their stakeholders, not just for the company.
We have already begun to see some interesting ideas being tried, such as Rolls-Royce’s ‘Meet the board’ event, and we hope to encourage and publicise other innovative approaches.
More information in the strategic report about how companies engage with and take account of the interests of stakeholders can help investors make a better balanced assessment of the company’s long-term prospects.
But it is not going to bridge the communications gap between the company and those stakeholders themselves where there is one, and it would be a mistake to assume it will. Companies need to think more broadly about their communications if they are to do so.
Chris Hodge FCIS is policy advisor at ICSA: The Governance Institute