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Leaders of about two hundred organisations have made the news over the past week. They have appended their signatures to a letter in The Times supporting the UK “staying in” the EU. The basis of their argument is that, “We believe that leaving the EU would deter investment, threaten jobs and put the economy at risk. Britain will be stronger, safer and better off remaining a member of the EU.”
Whatever one’s position, there is a riveting and revealing quadrille about to take place as it becomes apparent which companies truly think Brexit is a principal risk or uncertainty for them and explain their rationales clearly to their shareholders in their Annual Reports.
Bear with me while I give some background context. Annual reports this year are subject to new provisions in the UK Corporate Governance Code 2014.
Any company subject to the Code has to make a statement of compliance, setting out whether it has complied with the provisions of the Code; if not, then a detailed explanation is required for each non-compliance.
If they have complied with the provisions, then they will, amongst other things, have conducted a robust review of their principal risks and uncertainties and provided a “Viability Statement”. It is reasonable to assume that, to do this, each reporting company will have conducted scenario-planning, sensitivity analyses and reverse stress tests in order to make the appropriate statements and reports.
The whole lot signed off by the board of directors, under pain of personal legal sanction for making a false statement.
It seems fair to say that Brexit might have cropped up at least as an “uncertainty to future performance” in most companies’ execution of this process during the last 12 months – the issue has been no secret and might even be significant, at least to the letter’s signatory companies.
This suggests that, in theory, we will have a good idea of UK PLC’s collective view of Brexit, as endorsed by every company director from 90% of the quoted companies, in time for the referendum on 23rd June. Each company will have taken an official, and very public, position.
Where will this position be found? In the Principal Risks and Uncertainties disclosures within the Annual Report.
If Brexit does not feature as a principal risk or uncertainty, this is because it is not a material concern – the Board will have collectively confirmed this, after careful and robust analysis, by signing. That is an interesting and helpful result.
If it features as a principal risk or uncertainty, then there could well be some insightful best-practice disclosures – likelihood and potential impact assessments, mitigation strategies, appetite, tolerance – another interesting and very helpful result.
So far, ten FTSE100’s have published their reports since the regulations came into force. All have confirmed that they have complied with the relevant Provisions of the Code, so they have done the business on risk and uncertainty analysis.
Three touch on Brexit explicitly, but lightly, in their principal risks and uncertainties disclosures and the rest don’t – in doing so, seven boards have confirmed that Brexit itself is not a significant risk or uncertainty to their companies after conducting a careful, thorough and robust analysis… apparently.
“Apparently” because three of these seven have leaders who are signatories to the warning letter. In their corporate capacities, they think Brexit is a very significant risk or uncertainty, but their statutory Annual Reports suggest otherwise.
One wonders how shareholders are supposed to understand what a company is up to if the Board doesn’t communicate to them with one voice?