The future of reporting
Paul George, of the Financial Reporting Council (FRC), explains the thinking behind the regulator's new review of corporate reporting.
“The concept of the annual report is at breaking point,” Paul George, the FRC's executive director of corporate governance and reporting told Reuters in reference to the FRC’s new project to review the state of corporate reporting.1 The aim of the review is to challenge the thinking around corporate reporting and examine how companies can better meet the needs of shareholders and other stakeholders.
The project will review current financial and non-financial reporting practices, consider what information investors and other stakeholders require and, fundamentally, the purpose of corporate reporting. The different types of corporate communications produced by companies will also be examined.
Breaking with tradition
I spoke to Paul about the FRC’s project, to find out just what he views to be the problems with corporate reporting and why now is the right time to conduct this review.
“The annual report has potentially become overburdened for its traditional role,” he explains.
“We at the FRC – or more accurately, everybody, including government and other regulators – have been putting more and more demands on the annual report. It is creaking. Creaking under the weight of obligations, while trying to deliver its original purpose.”
“There is now a tension between whether it should be a reporting mechanism to shareholders or to all stakeholders.”
When even the regulator’s executive director thinks there is something wrong with corporate reporting, you have to take notice.
The very purpose of the annual report is being placed under review. “The mantra of the FRC has always been that the report is where the directors tell the company’s story,” Paul says. “However, as we place more and more information demands as a result of shareholder and stakeholder pressure and government policy and regulatory initiatives, it has become difficult for it to remain a story book.”
“We need to have another look at the purpose of the annual report. If it is for shareholders, we should be concentrating on relevant information for shareholders. Then we need to consider the information corporates report as part of their obligations to wider society – what would be the communication method for that?”
Or has the annual report gone beyond a story? Should we stop kidding ourselves and recognise the annual report is actually an encyclopaedia? Maybe the answer is better utilisation of technology to help users of the report dip in and out and find the relevant information more easily.
Brexit is also a factor in the timing, adds Paul. “At a time when the UK is leaving the EU, and because legislation will be reviewed as part of that, it provides a rare opportunity to consider the UK’s reporting legislation.”
“We need to stand back and get some perspective,” he adds.
Digital advances could clearly have an important role to play. Leon Milligan, Head of Reporting at Emperor, calls for an ‘enlightened approach’ and suggests that by utilising different channels for different disclosures, companies can achieve the twin aim of reducing the burden on the annual report, while also maintaining the levels of transparency the public is demanding. “It is not about less communication, as greater transparency can help rebuild public trust in companies,” he says. “Rather it is about finding the right avenue for each different disclosure and engagement.”
Chris Stamp, Emperor’s Corporate Governance Advisor, agrees and identifies board practice as an area that could potentially be split out from the annual report. “That only changes at a glacial pace and doesn’t need to be disclosed continually in the annual report; it could go on the website. Dynamic and developing content can go in the annual report, while standard un-changing disclosures could go on the website.”
But Leon warns that any review has to go further than purely replicating the current process in a digital format: “In the past, proposals such as a digital annual report, have missed the mark as they simply tried to replicate the printed annual report, minus the paper and ink. This challenge requires new and innovative thinking to find a solution.”
Have your say
The FRC does not want to lead the witness when it comes to areas for improvement. “We do not want to stifle debate or stakeholders bringing ideas to the review,” Paul says. “If we started articulating our ideas now, the debate would be about those – not the ‘art of the possible’.”
Paul is keen to stress the important role of consultation and feedback to the review, particularly the advisory group, and is calling on everyone, from companies, investors, academics, and technology providers, to get involved: “We have set up an avenue for people to put forward their ideas about the future of corporate reporting and we really want to encourage people to submit their views.”
Emperor will be one of those companies; we will be collating the views of our clients and participating in shaping the future of reporting.