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co-authored with Neville Wells
The impact of Britain’s impending decision about its EU future seems to be of little consequence to most of our major companies according if their Annual Reports are to be believed. Of the 66 FTSE100 companies reporting to date since the new 2014 UK Corporate Governance Code required specifically a robust assessment of principal risks, 43 companies [65%] have nothing to say at all about the impact of a potential ‘Brexit’. Given the intense atmosphere building around the EU referendum it is difficult to believe that so many major businesses could have failed to remark, especially in their ‘Principal risks and uncertainties’ section [PRU’s], on what is clearly a significant uncertainty. So, are companies reflecting the reality that the UK’s position in the EU is far less consequential than some would have us believe? Or does the general omission say more about the general quality of risk evaluation and reporting that this oversight reveals?
The contributions of the 23 companies that have discussed the issue in their Annual Report are various – many are helpful, thoughtful and illuminating, with some stating that it is going to have an adverse impact and some that it will not. Others draw attention to the impact on clients and customers, but make no mention of the impact on the company and its shareholders.
It is not as though companies have been taken by surprise over the issue. Most of those 66 companies have had nigh on 3 years to reflect on David Cameron’s Bloomberg speech about an impending referendum on Britain’s position vis à vis the European Union.
Nor can companies claim insufficient notice in respect of the changes to the UK Corporate Governance Code. Most have had more than a year to assimilate the regulatory requirement for directors to carry out a robust assessment of the principal risks to business models and future performance. Besides, the FRC also sent letters to Audit Committee chairpersons and to investors on the issue in early March, mid-season, suggesting reports needed to reflect imminent changes and specifically highlighted ‘referendum’ and ‘Brexit’ as examples.
Every company has stated that it has complied with the relevant Code provisions, and all of the independent auditors’ reports give clean bills of health, so one has to assume a robust assessment of the potential impact of a ‘leave’ in the referendum has been diagnosed, deliberated and decided properly by every Board.
So, if the impact of a ‘Brexit’ would be immaterial or irrelevant to most major companies this leaves two opposing conclusions to be drawn – one in relation to the political debate, the other in respect of risk reporting more generally.
The heated discussion now emerging suggests that the referendum decision will be critical to the British economy, whatever its outcome. Companies are usually apolitical in their reporting, so we can therefore assume that Britain’s future position relative to the EU is far less consequential than politicians would have us believe.
Or, does the absence of any ‘Brexit’ reference in the PRU sections of recent annual reports say far more about the shortcomings of risk governance, risk management and their reporting by major listed companies? The EU referendum and its outcome clearly add up to major uncertainty. A ‘leave’ decision would have a short-term impact on the UK economy at least, so it must be material for FTSE100 companies with significant UK operations.
In reality, both conclusions are valid. How do we know? Because, of those 43 silent companies 14 have Chairmen or Chief Executives who seem to disagree with their Board’s settled (and audited) view and signed the letter to the Times [23/02/2016], declaring the critical importance of Britain remaining in the EU for their companies.
It is going to be interesting to see what the regulators make of all of this when the dust settles.