As those who have been wrestling with the new format for the end of 2013 will already know, new regulations require the ‘front half’ of the annual report to include a Strategic Report, featuring, among other things, company strategy, business model, and information on social and community issues; while the back half must include a Directors’ Report incorporating supporting information. As before, there will also need to be a governance section, including the corporate governance report and reports of board committees.
With new requirements applying to annual reports after 30 September 2013, the main wave of new reports is expected to be the December year-ends coming through from March to May this year. But for now it is important to start the process earlier than usual. Traditionally people have left it until after the end of year to start work on the annual report but the trend is to bring it forward. Design agencies working on annual reports have been working on pitches much earlier this year.
Form over substance
To a certain extent the creation of the Strategic Report appears to be more about form than substance; however, there are still challenges in deciding what information needs to be presented where in the front half of the annual report. Therefore, by acting early and giving it a bit of thought, there is a good opportunity to differentiate your business from its competitors and communicate something of its story to shareholders and stakeholders, thus making your annual report a marketing document as much as a regulatory document.
The Financial Reporting Council guidance encourages companies to “tell their own story” and report “smarter” rather than just adding more layers of information to comply with requirements. Avoid boilerplate text and consider how you can incorporate the new information required into what you already do. Try to be as concise and structured as possible and where applicable make the information more easily digestible by using graphics, graphs and tables.
By acting early and giving it a bit of thought, there is a good opportunity to differentiate your business from its competitors
Corporate governance reporting strategy
The area causing the most angst among many company secretaries is the Directors’ Remuneration Report, which is expected to be split into three main sections and is, overall, expected to show a clear link between strategy and remuneration policy and will be subject to two votes at the next annual general meeting. The policy should include a table setting out a three-year policy for each element, subject to a binding vote every three years. The annual report on remuneration (subject to an annual advisory vote) covers implementation of the policy during the year. Whilst investor groups will respect good “honest” disclosure under the new regulations, it is likely that they will take a dim view of companies that do not embrace the spirit of the new remuneration reporting regulations.
Another new requirement to consider for premium listed companies is the new UK Corporate Governance Code requirement, which challenges boards to approach their review of the new annual report so as to ensure that it is fair, balanced and understandable. Company secretaries, among others, will need to think through how the board satisfies itself of this and how it communicates this in its corporate governance reporting. Again boards are likely to want to look at drafts of the report earlier and, indeed, plan their whole approach to reviewing it at an earlier stage.
These changes are unlikely to be the final word on annual reports. Lessons will be learned from the 2013 annual report, and there will be some taking stock at the end of the year-end reporting season from both the regulatory and corporate points of view. There may not be further major structural changes but after the first year’s reports have been published under the new regulations, there may be more guidance provided to companies. Also on the horizon is an initiative coming out of the European Parliament on corporate governance reporting and that could have an impact in two or three years’ time. So, watch this space.
For those who feel they need assistance there are a number of players in this field depending on where help is required. There are design agencies, which can help with the structure and layout and there are remuneration consultants specifically focusing on remuneration reporting. But for company secretaries who need a resource to assist in assessing and implementing the new requirements, help with drafting and proofing, or advice on the new corporate governance report, Prism Cosec can assist, bringing all our company secretarial knowledge and experience to bear.
For more on this subject, please contact Chris Stamp at Prism Cosec, 020 3008 6446 or Chris@prismcosec.co.uk.