The recent letter from the FRC’s Chief Executive to institutional investors ahead of the shareholder-meeting season is an interesting collection of some current critical topics. But it could also be seen as suggesting that the investment community at large has yet to value, or even understand, the significant benefits of effective corporate reporting.
The letter is, in part, a useful aide-mémoire of questions for investors to ask at annual general meetings, and Mr Haddrill also reminds investors of the overall aim of the Annual Report, the intentions underlying the Strategic Report and the critical importance of persuasive governance reporting.
In the UK’s light-touch regulatory environment, with its principles-based reporting framework, all parties are supposed to play their part to make it work. Mr Haddrill’s missive, however, taken together with the FRC’s recent review of corporate governance and stewardship, may also imply that investors might not be engaging as intended.
These communications hint at a sense of concern, or possibly even frustration. Most investment managers signed up to the FRC’s Stewardship Code in 2011. The January 2016 ‘Developments in Corporate Governance and Stewardship 2015’ shows that the FRC is concerned that many investors who signed up are not following through on their commitment: “… there is evidence that action is needed to ensure appropriate momentum is maintained in implementing the Stewardship Code, with a mixed picture of progress”.
Corporate reporting, and the quality of insight it imparts, is a fundamental part of the whole engagement process but the typical response from many investment managers comes across as scepticism at best and it seems that they have, in the main, ignored the value of good quality, long-term focused narrative reporting.
There is a feel of this in the quality of documents published by the UK’s quoted institutional investors themselves – their own Annual Reports. In the 2014-5 reporting cycle only two of the listed investment management companies we assessed (all FTSE100, some FTSE250 and including life offices with major investment management operations) achieved first quartile scores in our combined ranking of Strategic Reports and Governance Reports quality. Aviva and Henderson Group are commendably those two first quartile scores; the standard of reporting by other listed institutional investors is, in the main, “very average” at best.
In fact, a high proportion of all these listed institutional investors we have assessed achieve only fourth quartile scores in our index. Some may argue that investment companies’ own reporting doesn’t reflect how they engage with their investees. The FRC comments on stewardship and the array of topics addressed in Mr Haddrill’s letter suggest that this may be too charitable an interpretation.
Maybe the evidence suggests that institutional investors at large do not value corporate reporting as a means to appraise the performance of investee companies? This is intriguing, as a notional fund based on company’s included in FutureValue’s annual short lists for our awards over the last eight years would have outperformed the FTSE350 by a country mile, or even three.
The imminent launch of The Professional Reporting Masterclass Programme is our innovation in support of the FRC’s aim to create a self-reinforcing virtuous spiral in reporting. It is intended to enable listed companies to develop more effective Annual Reports and is an action-learning open course for reporting teams in listed companies.
This is our latest contribution to breaking the log-jam – to make reports high-value sources of information, explanation and insight for investors. We believe that showing companies actively how to report better and the benefits that will accrue, means they can engage with their investors more effectively.
This thought piece raises interesting questions about: the wider role of corporate reporting, whether it can or should change Boards’ behaviours and what action will be needed if reporting regulation doesn’t succeed?