The letter from Stephen Hadrill, FRC chief executive, reminded investors that this is the first year of enhanced reporting on risk and internal control and the inclusion of a viability statement for companies which apply the UK’s corporate governance code. Hadrill said that the changes were designed to strengthen the focus of companies and investors on the longer term and sustainable value creation. Companies can choose the appropriate time period for their viability statements, although the period assessed should be significantly longer than 12 months, Hadrill stated. The FRC believes that investors should see an explanation of the period chosen, taking into account the circumstances of the company, and avoiding ‘boiler plate’ statements.
Hadrill said that the strategic report is intended to be an important source of forward-looking information about strategy and risk and should provide the most current view of the company’s prospects – a point also made in a separate recent letter to audit committee chairs. Companies are required to consider materiality in the reporting of their ‘principal’ risks and uncertainties as part of their strategic report Hadrill said. He said that the FRC encourages companies to disclose how those risks specifically affect them, the range of potential outcomes and any mitigating actions. Hadrill suggested that where key risks do not seem to be included then investors may wish to raise this with companies. For example, the FRC had recently heard some investors express surprise that cyber risk and climate-change related risks are not reported more often as principal risks.
The FRC letter reminded investors that the purpose of the annual report is to communicate relevant information to shareholders, and the annual report as a whole should be fair, balanced and understandable. This means avoiding boilerplate disclosures and ensuring that the report and accounts only contain material information, which is presented clearly and concisely. Hadrill said the FRC encourages investors to engage with companies to provide a steer on what information they believe is relevant and to challenge where reporting falls short of these expectations.
Where boards decode not to comply with key provisions of the Code, they should provide specific, meaningful explanations to investors, Hadrill said. Companies should set out the background to the matter, provide a clear rationale for the action being taken and describe any mitigating activities and if the non-compliance is intended to be temporary then the company should indicate when it expects to conform with the provision, Hadrill explained. The FRC encourages investors to challenge companies where they do not believe that explanations given are sufficiently persuasive.
With a referendum on whether the UK should remain part of the European Union due to take place on 23rd June, Hadrill said that companies may well be currently considering the risks and uncertainties associated with the UK’s renegotiation of its EU position and potential exit. If the board considers this to be a principal risk they should disclose that to their shareholders.