16 May 2019 by Ben Harber and Jumoke Kupoluyi
Tips for end of year reporting
Corporate Governance continues to be a hot topic as the government continues to focus on improving the UK’s corporate governance framework. 2018 brought significant changes in corporate governance in the UK and the introduction of reporting on areas such as s1.72/the Companies Miscellaneous Reporting regulations 2018 has only made it harder to keep up with disclosures to be included in the annual report. These changes together with ensuring compliance with Market Abuse Regulation, DTR’s and Listing Rules company secretaries now have to navigate a myriad of change with respect to annual reporting disclosures.
Many company secretaries are either about to embark on or are currently in the process of drafting annual reports for their companies. The growing list of corporate governance disclosures to be included in the annual report can sometimes be overwhelming and make this a daunting experience. The removal of some exemptions available for smaller companies in the Financial Reporting Council’s (FRC) UK Corporate Governance Code 2018 (2018 Code) and the introduction of the Wates Principles has also increased the level of corporate governance reporting for both small and large listed and unlisted companies.
To help keep track of this growing list, we have suggested some ways company secretaries can keep on top of the ever changing corporate governance changes and disclosures.
The increased number of regulations applicable to company secretaries can mean that compliance with regulations or some disclosures are missed either on the company’s website or in its annual report (depending on the requirement). Often this is discovered when it is too late to make changes to the annual report or put before the Board for discussion or a decision.
The introduction of a Corporate Governance Tracker will help the company secretarial department keep track of the growing list of corporate governance requirements that need to be complied with or reported against and should include things such as Modern Slavery Reporting, Gender Pay Gap reporting, the Companies Miscellaneous Reporting regulations amongst others. There are many benefits of putting in place such a tracker some of which include:
The Companies Miscellaneous Reporting Regulations 2018 is one example of why companies may benefit from such a tracker as there are various thresholds which need to be met before companies are required to report against each of the provisions contained in the regulations. Take for example the requirement under the regulation to publish CEO pay ratios which only applies to quoted UK incorporated companies with more than 250 employees. Whilst this is just one provision within the regulation, it is easy to see how company secretaries can become overwhelmed with the increased number of laws and regulations in the corporate governance arena.
The publication of the UK Corporate Governance Code in 2018 also had a domino effect and led to a number of other corporate governance codes being amended e.g. QCA Corporate Governance Code 2018, the 2019 AIC Code of Corporate Governance 2019 etc.
It is becoming common practice for companies to now undertake an assessment of their compliance with its chosen code of governance on an annual basis. This is especially relevant and useful this year given the changes to corporate governance codes published in 2018/2019 as companies will need to start considering the arrangements and processes they should put in place so that they are able to report against compliance with the 2018 Code when they produce their annual report and accounts in 2020.
The robust gap analysis allows companies to assess its compliance with principles and/or provisions of the relevant code of governance and highlight areas of non-compliance. Once the analysis is completed and the company has assessed the extent of its compliance (perhaps using rating metrics), it will provide the company secretary and the Board with a clear overview of any additional work required internally that will need to be carried out to achieve compliance with relevant code provision(s). In addition to this and on some occasions, it may also assist the company secretary when drafting disclosures in the annual report as the company’s current position or steps that are being taken to achieve compliance with a certain provision can be accurately reported on.
For example, the FRC’s UK Corporate Governance Code 2018 requires companies to have in place a method of engaging with the company’s workforce and keep these methods under review. For most companies, this is a provision that would need to be discussed both at Board or Committee level and sometimes internally so a decision can be made as to who/where this responsibility lies going forward. Conducting a gap analysis on an annual basis and ahead of the company’s year-end will allow these discussions to be had early on, processes to be implemented or committee structures to be reviewed ahead of the relevant disclosure being made in the annual report. This should help avoid the inclusion, and sometimes replication, of standard boiler plate language in the annual report often seen when companies are non-compliant with certain areas.
The gap analysis can also be used to assess compliance with any corporate governance requirement, legislation or guidance such as the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 which requires qualifying companies to include certain disclosures within their strategic report.
This year companies have the option to report against the FRC’s 2016 UK Corporate Governance Code in their annual report or adopt the 2018 Code early. Whilst some areas will not be relevant for the 2019 annual report, it is never too early to be prepared. The gap analysis and corporate governance tracker will serve as useful tool to all company secretaries and their departments in doing this.