March 15, 2021 Transparent and effective reporting
When it comes to reporting do you tick all the boxes? Well maybe you should think again because an FRC survey in November 2020 revealed that in far too many instances companies opt for tick box compliance over good quality reporting.
Sometimes ticking all the boxes just isn’t enough. After all, it’s one thing to say ‘we did this’ or ‘we discussed that’. But what factors underlined your decision, what impact did it have on the company, and how might this affect its future viability? The company report isn’t just some tick box exercise. Rather it is an intrinsic element of the contract between an organisation and its investors and stakeholders.
That’s why the ‘comply or explain’ rule is so important when it comes to company reporting. Giving companies the flexibility to provide a meaningful and transparent commentary sits at the heart of the UK’s reputation for good governance and reporting. With this in mind the FRC has issued a guide which aims to improve the quality of ‘comply or explain’ reporting.
This new guidance builds on the findings of the November 2020 survey; breaking advice down into three sections. The first calls on companies to “offer clarity about the Provisions of the Code that they have departed from by making it easy for a reader to find this in their annual reports.” This, the FRC suggest can best be highlighted within the compliance statement and, rather than delivering a vague comment, should expressly state which provisions of the code have not been met.
However, the FRC is concerned at the number of companies which are not clear about their level of compliance with the code with some even incorrectly claiming full compliance. This leads on to the second tranche of guidance which states that “companies should report any departure from any provision of the Code.” This section goes on to examine a number of key areas which the FRC have identified as particularly lacking in clarity including stakeholder’s interests, workforce engagement, chair tenure, and the work of various committees.
Finally, the FRC calls for “clear and meaningful explanations for departures from the Code”. In the earlier review the FRC found 74 instances of departures from the Code but only four explanations which they considered to be adequate. Good explanations, they say, should include context and background, rationale, risks, timescales and mitigating actions. Moreover explanations should be understandable and persuasive; written in plain language with a good level of detail. Only then, say the FRC, can companies offer a “full and honest explanation, which should be welcomed by investors, service providers, regulators and wider stakeholders.”