Essential Corporate News – Week ending November 17, 2017

Publication | November 17, 2017

Introduction

Welcome to Essential Corporate News, our weekly news service covering the latest developments in the UK corporate world.

FRC: 2018/19 thematic reviews to promote improvement in corporate reporting and auditing

On November 17, 2017 the Financial Reporting Council (FRC) announced a series of thematic reviews to be conducted in 2018/19 concerning certain aspects of corporate reporting and auditing where there is particular shareholder interest and room for improvement, as well as scope for learning from good practice.

Corporate reporting

The topics are:

  • Certain aspects of smaller listed and AIM company reports and accounts. The FRC aims to write to 40 smaller listed and AIM quoted companies prior to their year-end, informing them that it will review two specific aspects of their next published reports and accounts. The aspects under inspection will be drawn from five areas where the FRC has published examples of what better quality disclosures might look like in recent reviews or Financial Reporting Lab reports.
  • The effect of the new International Financial Reporting Standards (IFRS) on revenue and financial instruments on companies’ 2018 interim accounts.
  • The expected effect of the new IFRS for lease accounting.
  • The effect of Brexit on companies’ disclosure of principal risks and uncertainties.

Audit

The topics are:

  • Transparency Reporting – a comparative analysis of transparency reports of firms with public interest entity audits.
  • Audit Quality Indicators (AQIs) – an assessment of the development and use of AQIs by UK audit firms.
  • “The Auditors Work on the Front Half of the Annual Report”the FRC will complete its extended review as a part of its thematic inspection programme.

Priority sectors and areas of focus

The corporate reports and audits selected for review in 2018/19 will have regard to the following priority sectors:

  • financial services, with particular emphasis on banks, other lenders and insurers;
  • oil and gas;
  • general retailers; and
  • business support services.

(FRC, Press release on 2018/19 thematic reviews, 17.11.17)

PLSA: An analysis of corporate reporting and workforce-related issues in FTSE 100 companies

On November 15, 2017 the Pensions and Lifetime Savings Association (PLSA) published new research on corporate reporting of workforce-related issues. The research, carried out by Lancaster University Management School, examined the annual reports of FTSE 100 companies to see how they explain their employment models and working practices in relation to company strategy, and what performance measures they use to underpin the narrative reporting. The research was based on the framework set out in the PLSA’s stewardship toolkit published in 2016.

The findings include the following:

Composition – make-up of the company’s workers and terms on which they are employed

  • 64 per cent of FTSE 100 companies provided some narrative commentary on the composition of their workforce in corporate reporting.
  • 99 per cent of companies provided data on gender diversity in the workforce but only 15 per cent provided data on ethnic diversity of their workforce.
  • All companies addressed the pay ratio of their CEO’s compared with other executive directors, but only 7 per cent addressed the pay ratio between the CEO and the average or median worker (although, this will soon be a legal requirement).
  • Only 4 per cent of FTSE 100 companies provided a breakdown of their workforce by full time and part time workers.

Stability – how stable and secure the current workforce is, and how it might change over time

  • Stability was the least discussed in corporate reporting out of the four themes covered (the others being composition, skills and capabilities and engagement and voice). Only 10 per cent of companies provided meaningful narrative commentary.
  • 18 per cent of companies provided figures on staff turnover.
  • Statistics on accidents in the work place differed between sectors, with high risk sectors like mining or construction providing more detailed disclosures. 52 per cent of companies provided at least one metric in this respect, the most commonly reported being deaths in the workplace (34 per cent),  accidents in the workplace (32 per cent) and time lost to injuries (26 per cent).

Skills and capabilities – how well-equipped the workforce is to meet the company’s future skills needs

  • 52 per cent of companies acknowledged their approach to the skills and capabilities of their workforce.
  • 21 per cent provided data on their contributions to investment in training and development. The report notes that this figure is surprisingly low given how much FTSE 100 companies are likely to have invested in training processes, and also stakeholder interest in economic productivity. It comments that the lack of disclosures may be due to commercial sensitivity, a lack of investor interest, or challenges generating data.

Engagement levels of the workforce – how motivated the workforce is and how fulfilled in their jobs and committed to corporate goals they are

  • 42 per cent of companies provided results of an employee engagement survey, but many lacked any useful explanatory context.
  • 34 per cent of companies provided meaningful commentary on ways in which they foster and measure employee engagement.
  • 64 per cent of companies disclosed mechanisms for dialogue between the workforce and senior management. Only 9 per cent gave details of trade union membership and 15 per cent reported processes for whistle-blowing.

Conclusion

The research found that there are substantial variations in the quality of reporting of workforce-related issues. Ultimately, most reports do not comprehensively detail the composition, stability, skills and capabilities and engagement levels of their workforce effectively or explain how these themes relate to the company’s long-term strategy and purpose. The report urges companies to improve on reporting in these areas as better disclosures are helpful to investors. It also urges companies and investors to engage with recent initiatives designed to promote better reporting, including the Investment Association’s long-term reporting guidance published in May 2017 and ShareAction’s Workforce Disclosure Initiative launched in 2016.

(PLSA, Hidden talent: What do companies annual reports tell us about their workers?, 15.11.17)

DCMS and HM Treasury: Growing a culture of social impact investing in the UK – Independent report

The Department for Digital, Culture Media & Sport (DCMS) and HM Treasury published a report from an independent advisory group on developing a culture of social impact investing in the UK on November 14, 2017. Social impact investing is defined in the report as “investment in the shares or loan capital of companies and enterprises that not only measure and report their wider impact on society — but also hold themselves accountable for delivering and increasing positive impact.”

The report notes that out of a recent survey of 1,800 individuals in the UK, 56 per cent had a moderate interest in social impact investing, but only nine per cent had actually invested already.

The independent advisory group sets out a number of recommendations in five key action areas:

Improve deal flow and the ability to invest at scale

  • The Government should support co-investment models to encourage the provision of capital to social impact investments.
  • The financial services industry should support the Government in identifying investment approaches that can be used to distribute capital that will tackle entrenched social and economic problems.
  • Companies should increase their focus on creating demonstrable positive social impact alongside financial returns. Companies should provide more consistent outcome reporting linked to the UN Sustainable Development Goals (SDGs).

Strengthen competence and confidence within the financial services industry

  • Regulators and other statutory bodies, such as the Financial Conduct Authority, Prudential Regulatory Authority and the Financial Reporting Council (FRC), should continue to build capability in relation to social impact considerations so that social impact is embedded in regulatory frameworks and understanding.
  • The financial services industry should: engage widely to help improve professional skills for social impact; work with academics, service providers and industry bodies to ensure quality as the market develops; and provide training for pension scheme trustees and independent financial advisers.
  • Professional bodies, such as the CFA Institute, the Chartered Institute for Securities & Investment (CISI) and the Chartered Insurance Institute (CII), should work together with industry bodies to ensure the use of common terms across educational materials.

Develop better reporting of non-financial outcomes

  • The financial services industry should develop consistent non-financial reporting methods. Industry should work with the Investment Association and CFA Society UK to develop consistent good practice and set common standards for social impact investing. This would include determining processes and reporting, potentially using the SDGs as a framework.
  • The Government and the FRC should explore sustainability and SDG reporting and encourage UK businesses to increase transparency on the contribution business makes towards the achievement of the SDGs. Separately, the FRC should explore ways in which material information can be reported in the context of the SDGs having regard to its consultation on companies' strategic reports.
  • The FRC should ensure its review of the UK Corporate Governance Code encourages more companies to be purposeful, engaged with wider stakeholders and committed to assessing and communicating their social impact in the context of the SDGs.
  • The FRC should consult with investors and others on how signatories to the Stewardship Code can better evaluate the contribution that the social impact of businesses, including environmental factors, is making to the long term sustainability and success of the business; as well as monitor and engage with the work of boards of directors in discharging their responsibilities to wider stakeholders under section 172 Companies Act 2006.
  • Companies and social enterprises should align their reporting standards with the investor community, and scale up capabilities in respect of data marshalling and dissemination of sustainability and SDG metrics as part of a wider effort to increase their investability.

Make it easier for people to invest

  • The Government should publish educational material and work with industry on a communications campaign to raise awareness among consumers about the power they have to apply their own values to investment choices.
  • The financial services industry should develop consistent standards to indicate product integrity to individual investors and trustees.
  • The Investment Association should develop a flagging system that highlights social impact funds.
  • Pension scheme trustees and employers are encouraged to engage better with pension scheme members regarding their investments.

Maintain momentum and build cohesion across initiatives

  • The financial services industry should monitor progress and ensure sustained positive momentum continues. A thought-leadership conference should be held by summer 2018 as part of this process.
  • The financial services industry and professional bodies should stimulate and reward progress in social impact investment through high profile awards.
  • The financial services industry should engage the media and mainstream press to increase awareness.

(DCMS and HM Treasury, Growing a culture of social impact investing in the UK, 14.11.17)

European Commission: Institutional investors and asset managers’ duties regarding sustainability – Consultation

On November 13, 2017 the European Commission (the Commission) published a consultation on the duties of institutional investors and asset managers regarding sustainability. The Commission has decided to start work on an impact assessment to assess whether and how a clarification of the duties of institutional investors and asset managers in terms of sustainability could contribute to a more efficient allocation of capital, and to sustainable and inclusive growth. The consultation aims to collect views and opinions from the public in order to inform the impact assessment process.

The Commission seeks views on the following matters:

  • Whether relevant investment entities should consider sustainability factors in their investment decision-making.
  • What sustainability factors the relevant investment entities should consider.
  • The criteria on which they should base their consideration of those factors.
  • Which investment entities (insurance and pension providers) should consider sustainability factors in their investment decision-making.
  • Whether the investment entities should consider sustainability factors even if it would lead to lower returns to beneficiaries/clients in the medium and/or short term.
  • Whether the current set of corporate disclosures provides investment entities with adequate information to perform sustainability risk assessments in respect of investee companies.
  • A proposed uniform criteria regarding sustainability risk assessments and whether it should be developed to an EU level.
  • Whether investment entities should disclose how they consider sustainability factors within their investment decision-making.

Next steps

The Commission has asked for comments to be submitted by January 22, 2018 through an online questionnaire.

(European Commission, Consultation on Institutional investors and asset managers’ duties regarding sustainability, 13.11.17)

House of Commons: Briefing paper on corporate governance reform

On November 16, 2017 the House of Commons Library research service published a briefing paper for Members of Parliament and their staff on the corporate governance reform programme. The briefing paper looks at the current corporate governance framework and at the current reform programme, including the Government’s August 2017 response to its 2016 Green Paper on corporate governance reform and the Business, Energy and Industrial Strategy Select Committee report into the subject (BEIS report) published in April 2017.

The briefing paper also looks at the German example of workers on boards and it includes a section on pay ratios in the UK based on data from mainly FTSE 350 companies. It compares the “comply or explain” and the “comply or else” approaches to corporate governance and also sets out the BEIS report recommendations and the Government’s response in appendices.

(House of Commons, Briefing paper on corporate governance reform, 16.11.17)


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