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The only constant is change
There has been much water under the corporate reporting bridge since our last blog. A plethora of legislative and regulatory changes have come into effect. Reporting companies have striven to apply, and comply with these changes with a range of outcomes in their Strategic and Governance Reports, some good, some indifferent and some that really should be an awful lot better than they are. This raises the question: ‘why do so many Annual Reports remain scarcely understandable?’ The regulatory landscape is also transforming, informed by the highly critical Kingman Review, but also driven by perceived social imperatives. The Financial Reporting Council is metamorphosing into an allegedly more muscular Audit, Reporting and Governance Authority. This new entity will supposedly oversee the reform of audit firms and remediation of the audits that they perform in the wake of yet another separate hypercritical examination, the Brydon Review. ARGA will manage audits and auditors in addition to its remit in respect of corporate regulation, governance and reporting. All the while, how companies report gets no better. The 31/12/19 year ends are the first full batch that have had to apply all the recent required changes of the last two years, and the evidence is plain to see. Now we will also have to cope with a new post-Covid-19 pandemic world where society, the economy and most companies will have to change radically to a ‘new normal’. How companies reassure their key stakeholders may be an important part of our way to that economic future.
Long, fragmentary and tedious documents
Looking at how companies have responded to the welter of recent regulatory and legislative reporting amendments shows that, whatever were the Government and the regulator’s intentions, resultant Annual Reports have become even longer, diffuse and more unfathomable. In other words, they struggle to be fair, balanced or understandable from the Report reader’s perspective; even if Boards have signed off these Annual Reports as having these qualities. Our evaluation of the current crop of Strategic Reports, replete with Section 172(1), Viability and Non-financial information statements, reveals them to be markedly longer, generally less coherent and focused predominantly on environmental and social issues and stakeholder engagement processes. There is so much marginally relevant content that shareholders cannot make a judgement about how Directors are promoting the sustainable commercial success of the company and the likely consequences of their decisions in the long term. Companies are struggling hard to comply with this myriad of requirements imposed upon them. The consequences of this are long, fragmentary, tedious documents focused too much on mere compliance and on trying to talk to a broad range of stakeholders. Materiality has become a relative issue.
The time for governance-led reporting
And it is not just Strategic Reports. The new Governance sections of Annual Reports compound the challenge. Companies have had to follow for the first time the new and fundamentally changed 2018 Code. It is now very clear to those focused on corporate governance that the new Code needed more refinement before its release. The fallout from the Carillion debacle may have hastened this regulatory edict ill-advisedly. Similarly, indecent haste could be attributed to the issuance of the Strategic Report Guidance in July 2018, only now amended in May 2020, twenty-one months after its first publication and four months after fundamental misinterpretations of the law were brought to the regulator’s attention, when companies have already published reports relying on the Guidance. One could almost hear the familiar sound of slamming stable doors at the FRC.
It is only when one analyses and writes governance reports to the new Code that the fragmentary and ill-fitting nature becomes apparent. Overlap and crossover issues lead to potential duplication with the Strategic Report making the production of a coherent, intelligible complete Annual Report difficult. Company Secretarial functions focus on the legal governance content while business and communication functions address the strategic reporting narrative. The time may have come to make Company Secretaries responsible for Strategic Reports as well as for Governance reporting. CoSecs may not welcome the added task but they know intimately the thinking of their Boards unlike the middle managers who are seemingly tasked to produce a corporate marketing brochure with a Strategic Report label that the Board will typically see once before publication. CoSecs are more likely to make Boards more sensitive to the key content and reflect more accurately their thinking.
The new regulator has a plan ….
One might expect that the new regulatory body, ARGA, will sort all these issues and challenges but what, from the corporate reporting perspective, is really likely to change beyond a change of name and Chief Executive and the addition of a lot more ARGA employees (and now yet another new Chairman)? On top of which, there is a distinct feel of regulatory capture about the FRC’s current activities, being driven by the auditors endeavouring to manage their own risks and needs. The scope and scale of work required to sort the audit issues will surely be the regulator’s main focus. Perhaps there will also be some tinkering with the Governance Code and refinements to Strategic Report guidance? A recent update on the ARGA transformation plan foresees enhancement of ‘Corporate Reporting Review processes’, whatever that means, but does not explain further. This review process will inevitably be little more than a tick-box exercise about compliance to the letter of legislation and regulation within the rather limp ‘principles-based’ approach. It is virtually impossible to hold companies to account on a meaningful basis for the Annual Reports they publish without a more prescriptive formula and defined strategy framework that demands greater rigour and consistency. This quaintly trusting old-school British system of narrative reporting is all well and good but it offers the investor little in the way of useful consistency and comparability between companies about future potential and performance. Equally, it makes a really critical review process by the regulator very difficult. They have no sound basis upon which to hold anyone to account, and then for what – only compliance failures?
The opportunities of post-pandemic reporting
The pandemic provides occasion and opportunity to get it right. Yet the first issuance from FRC (not yet re-badged as ARGA) on the impact of Covid-19 on corporate reporting (12/05/20) suggests the opportunity may ultimately be missed and the occasion passed up. Life will be challenging in a post-pandemic Covid-19-sensitive world for companies and for stakeholders alike. In this initial guidance note FRC correctly declares “The Strategic Report should always be forward looking, and especially so during the current crisis”, yet seems more concerned with tinkering around with Principal risks and uncertainties and the Viability statement. This is hardly going to address the challenges. We at least will consider these challenges, their implications and solutions in a series of carefully thought-through blogged articles over the coming months.
Co-author Neville Wells is an Associate of FutureValue and Managing Director of Bridgewell Corporate Communication Ltd