Essential Corporate News: Week ending October 16, 2020

FRC: Section 172 statements and tips on how to make them more useful

On October 14, 2020 the Financial Reporting Council’s Financial Reporting Lab published  a short document setting out tips for companies on how to make their Section 172 Companies Act 2006 statement (a statement in the annual report that describes how the directors had regard to the specified factors in Section 172(1) when performing their duty under Section 172 to promote the company’s success) a tool that provides better insight and more accountability. The tips are also aimed at helping companies consider what content to include in such a statement, how to present it, and how to facilitate the preparation process.

Building in useful content

Tips in this area are as follows:

• Be specific and genuine, and avoid box-ticking – The Section 172 statement should not be a compliance exercise but an authentic reflection of what happened and what is material to the company.
• Explain the why – The board should explain why it identifies particular stakeholders as key, why particular engagement methods were effective and why key decisions were taken in light of engagement and feedback.
• Link to strategy – How do stakeholders and other matters impact the business model and company strategy?
• Include difficulties and not just positives – Where have trade-offs/decisions been made in the short-term to benefit the long-term for example?
• Reflect the board’s oversight – How does the board challenge and oversee management’s engagement with stakeholders?
• Include material KPIs on key stakeholders – Net promoter scores is given as an example. These should be included in the statement or cross-referred to elsewhere in the annual report where material.
• Address future consequences and planned actions – In relation to disclosure of engagement undertaken and decisions made, the implications of feedback received and the impact of decisions on relevant stakeholders should be disclosed.
• Be consistent – Section 172 reporting should be consistent with the rest of the company’s story in the annual report.

Presented in a way that makes sense

Tips in this area are as follows:

• Think of the flow and content – Section 172 statements should reflect the strategic link and be clear about the board’s role, as well as providing context to other areas, for example by putting the statement immediately  ahead of the section on stakeholders.
• Make it visible –The Section 172 statement should be clearly labelled and referred to in the annual report’s contents page.
• Use cross referencing to enhance understanding – Cross-referencing should expand on points made in the Section 172 statement and provide further context but not make the statement a contents page or list of links.
• Include case studies – Examples and case studies of significant strategic decisions, explaining how stakeholders were taken into account, can bring life to Section 172 statements.

Supported by process

Tips in this area are as follows:

• Start early – Key decisions and engagement activities to be included in the Section 172 statement should be considered for inclusion as they happen and not at the year end.
• Include prompts on stakeholders and Section 172 responsibilities – Templates for board agendas, papers and minutes could include reminders for boards and management to consider which stakeholders are relevant for decisions.

(FRC, FRC Lab tips on Section 172 statements, 14.10.2020)

FRC: Going concern, risk and viability – COVID-19 and reporting in times of uncertainty – a look forward

On October 15, 2020 the Financial Reporting Council’s Financial Reporting Lab published a report which looks at recent reporting practice in relation to going concern, risk and viability. This was previously looked at in a report on the subject published in June 2020 which looked at the limited reporting practice on this that had developed by then. This new report looks at how reporting has evolved in this area since then and it provides examples of more recent practice.

In relation to each of the areas of going concern and viability, and risk reporting, the report looks back at key messages from earlier Lab reports. It then provides an update on recent developments in corporate reporting in these areas and provides practical examples from reports and presentations released since June 2020. In addition, the report provides ideas on how it expects disclosure to evolve in these areas going forward.

(FRC, Lab report, Going concern, risk and viability – COVID-19 and reporting in times of uncertainty – a look forward, 15.10.2020)

FRC: Resources, action, the future – COVID-19 and reporting in times of uncertainty – a look forward

On October 15, 2020 the Financial Reporting Council’s Financial Reporting Lab published a report which looks at recent reporting practice in relation to the areas of resources, action and the future.  This was previously looked at in a report on the subject published in June 2020 which looked at the limited reporting practice on this that had developed by then. This new report looks at how reporting has evolved in this area since then and it provides examples of more recent practice.

In relation to each of the three themes of resources, actions and the future and the key questions around these highlighted in the June 2020 report, this new report looks back at key messages from earlier Lab reports. It then provides an update on recent developments in corporate reporting in these areas and provides practical examples from reports and presentations released since June 2020. In addition, the report provides ideas on how it expects disclosure to evolve in these areas going forward.

(FRC, Lab report, Resources, action, the future – COVID-19 and reporting in times of uncertainty – a look forward, 15.10.2020)

Investment Association: Investors call for greater transparency on ethnic diversity on boards

On October 9, 2020 the Investment Association issued a press release calling for greater transparency on ethnic diversity on boards, noting that almost three-quarters of FTSE 100 companies failed to report the ethnic make-up of their boards this year in their annual reports, despite investors requesting that information alongside gender diversity reporting.

The press release notes that the Parker Review recommended that FTSE 100 companies have at least one director from ethnic minorities by 2021 and comments that the lack of reporting on this means investors cannot assess progress. It also notes that investors want companies to state both whether they meet the Parker Review targets and to disclose the percentage of the board with an ethnic minority background.

(Investment Association, Investors call for greater transparency on ethnic diversity on boards, 09.10.2020)

ISS: Proposed Benchmark Voting Policy Changes for 2021 – Consultation

On October 14, 2020 Institutional Shareholder Services Inc (ISS) announced the launch of a consultation on its proposed changes to its annual benchmark voting policies, including some proposed changes to its voting policies for the UK and Ireland.

The key proposed changes to the ISS voting policy for the UK and Ireland are as follows:

• Board diversity and gender – ISS will generally recommend a vote against the nomination committee chair (and possibly other directors) if a FTSE 350 company does not have at least 33 per cent female representation on the board (although in 2021 only, FTSE 350 companies that publicly commit to reach this target by the next AGM will not receive this voting recommendation). Companies (other than investment trusts) in the FTSE Small Cap index, ISEQ 20 or on AIM (and with a market capitalisation of over £500 million) will receive such a voting recommendation if there is no female board member.
• Director accountability –  ISS will make it clear that if it considers there has been significant risk oversight failures by board members in relation to environmental and social concerns, ISS may recommend votes against board members’ re-election.
• Capital issuances for investment companies – ISS proposes to support share issue requests when investment trusts provide an explicit commitment that the shares will only be issued above net asset value, in line with the Pre-Emption Group’s requirements.

Comments are requested by October 26, 2020. The policy changes will be announced in November 2020 and will be applied to company meetings taking place on or after February 1, 2021.

(ISS, Proposed Benchmark Voting Policy Changes for 2021 – Consultation, 14.10.2020)