The Department for Business, Innovation and Skills (“BIS”) aired some interesting and radical proposals during the consultation phase, proposing a “simpler framework for narrative reporting that would reduce the burden on companies that are currently producing large, complex reports that lie unread by investors.” Unfortunately, the new Regulations fall a long way short of achieving that goal. As companies report for the first time under the new Regulations, the question is whether they too will miss the opportunity.
The Regulations do not include the earlier proposals relating to an online Annual Directors Statement – intended to be a repository outside the annual report for all the detailed information.
The requirement for a Strategic Report survived, but is essentially the same as the Business Review it replaces; albeit quoted companies will in addition be required to include a description of the company’s strategy and business model, and (to the extent necessary for an understanding of the business) any human rights issues. It’s not clear how much of a change in requirements this represents. Most quoted companies already addressed these items and disclosure of the business model has long been a prerequisite of compliance with the UK Corporate Governance Code. The omission of the online Statement is, in my opinion, a real opportunity missed. The process of radically changing the look and feel of the annual report would, of itself, have encouraged preparers to reflect on what should, and should not, be included in the Annual Report and where it should be included. Instead, the new requirements largely reflect the status quo and, with the contents of the Strategic Report having been prescribed so closely, a compliance approach could, unfortunately, be only a short step away.
But while an opportunity may have been missed to enhance Annual Reports this time around, it’s not too late for companies to demonstrate what good looks like, enhancing their narrative reporting, even within the constraints of the new legislation. If they do this there is the hope that BIS may rethink its requirements and facilitate some of the more innovative proposals to enhance corporate reporting further.
I believe that the new narrative reporting requirements are an opportunity for Boards to take a fresh look at their annual report, and to deliver a much clearer explanation of strategy, business model, risks and performance. Their communication with shareholders could be much improved for it.
Tim Copnell is an Associate Partner at KPMG in the UK