The Chartered Governance Institute awards ceremony is the largest event of its kind in the UK and the highlight of the governance social calendar. Each year we come together and celebrate excellence in the delivery, oversight and reporting of governance.
Our 2020 recognition of good practice in corporate reporting will, in a break with the traditional black tie dinner, will take a socially distanced approach and has been separated from the individual nominated awards.
This year’s recognition event takes the form of a series of 4 webinars, looking at specific sections of the annual report, with analysis of the strengths of the highlighted reports and a discussion with those responsible for how they developed their reporting.
These recordings are available to view by everyone, all you need to do is log into your MyCG account and click the 'view this recording' button. If you do not have a MyCG account, all you need to do is register as a Free Subscriber and then click the button.
The strategic report is the company’s opportunity to showcase itself – to tell its story of the successes and, because reporting must be fair, balanced and understandable, the challenges of the year. But far too often that opportunity is wasted and the strategic report becomes a mish-mash of operational detail, boiler plate and marketing language. And yet it can be done well. There are companies which use their strategic report effectively to provide information for shareholders that will enable them to assess how the directors have performed their duty to promote the success of the company and yet at the same time explain the investment case to potential investors. Typically, this will include a business model description which sets out how value is generated or preserved over the longer term, and how that value is captured, what the company does and why it does it, and what makes the company different from, or competitive with, its peers; a clear description of strategy, objectives, risks and reward and how these link together; and an explanation of the main trends and factors affecting the business with a fair assessment of its development, performance and position.
One of the key sections of the report from which investors can learn how the board functions is the governance section. Sometimes this is very well done but again we sometimes see boiler-plate reporting that, other than names, could apply to almost any company. A good governance report can, however, make a significant difference to how the company is perceived. This will include evidence that the chair is an effective leader of the board, discussing culture, succession planning and board refreshment. It will also offer an explanation of board activities – what the board has been doing during the year – and give reasons why board members should be elected or re-elected, especially in the light of their individual skills and other attributes and how these mix with those of other board members
Remuneration reporting and sustainability reporting are sometimes seen as discrete elements of the annual report and, all too often, have little in common with or linkage to the rest of the report. But good reporting will close those gaps and integrate these sections of the report with the whole.
A good remuneration report will explain how the company’s remuneration policy is explicitly linked to strategy, why particular targets have been chosen (or not) and why they are appropriate and/or commercially confidential. It will also look at how the external environment is factored into the policy and how it has been taken into account as well as alignment with culture. This will also take into account how the board seeks to mitigate any negative behaviours which may be encouraged by the chosen targets and how, if at all, the remuneration committee has exercised discretion.
Good sustainability reporting increasingly requires that the board looks beyond corporate social responsibility – reporting philanthropy – and focusses on what is necessary to keep the company viable in the future, with a recognition that long-term stakeholder interests and non-financial factors are critical and inextricably linked to a company’s strategy, objectives and ultimately, its sustainability. It will identify the value chain and value drivers and how the company positions itself on all the relevant ESG issues, including demonstrating the directors’ compliance with their obligations under s172 of the Companies Act 2006 and the company's compliance with TCFD guidelines. It will also discuss the choice of effective non-financial KPIs and the company’s performance against them.
Audit and risk reporting are two key and very closely linked aspects of an annual report, but they serve distinct purposes. One feature that they both have in common, unfortunately, is an over-reliance by some companies on boiler-plate text.
Good audit reporting requires an analysis of how the auditor and the audit committee have worked to ensure that the accounts have benefitted from a high quality audit and a clear explanation to shareholders of what this means and what it does not mean. There will be some issues, discussion of which is a feature of every good audit report – for example audit tendering, an explanation of why this is or is not appropriate and, if it is, a description of the process; an explanation of how the audit committee manages the relationship with the auditor; and an explanation of how the audit committee has satisfied itself of the auditor’s independence, especially in the light of any non-audit fees. More personal to every organisation will be the analysis of any specific accounting issues that were discussed between the finance team, the auditor and the audit committee and what the audit committee did to challenge the finance team and, where appropriate, the auditor on these issues.
An exhaustive list of risks that could apply to almost any company is of no help to users of corporate reports. Good risk reporting hinges on two fundamentals – a meaningful discussion of the specific risks arising out of the company’s strategy and its operations; and a clear description of the process of risk governance within the organisation and how the effectiveness of this is tested. Done well, this will demonstrate that risk management is seen as integral to strategy and operations rather than a compliance necessity, and that risks are managed appropriately with the principal risks being clearly identified and regularly discussed. The challenge of balancing clear risk reporting against the concerns of US lawyers is a particular issue for companies with secondary listings in the USA.
These are two areas of reporting that have become hot topics in the last year or so.
With the increased focus on stakeholder engagement in the 2018 UK Corporate Governance Code and the requirement that boards report on how the directors have complied with their obligations under s172 of the Companies Act 2006. This is the second year in which this reporting has been required and many companies have now worked out how best to report. This should not be too much of a challenge. As the Institute noted in its report on getting the stakeholder voice into the boardroom, there is a lot of good work being done. However, as the Financial Reporting Council highlighted in their recent report, “Companies are failing to provide sufficient information for investors and broader stakeholders in their s.172 statements”. Good reporting includes a clear identification of key stakeholders and explanation of how they affect the development and implementation of strategy, together with an analysis of the outcomes of that engagement and how decisions have thereby been better informed.
Reporting on board evaluation is an area in which companies need to strike a difficult balance between transparency and confidentiality and it is fair to say that although we have seen some improvement, far too many still err on the side of confidentiality, particularly as regards outcomes, even when reporting on the actions taken as a result of the previous years’ evaluation outcomes. Good reporting will include why the chosen approach was appropriate for the company, what the company learned from the evaluation and what the company will actually do or change as a result of the evaluation.