The future of narrative reporting has been on the Government’s agenda for some time now. Last year saw a consultation on this subject and in light of responses and as part of the Government’s “Growth Review”, a further consultation has now been published.
The Government proposes to remove the existing Business Review and Directors’ Report and replace this with a Strategic Report (Report) and an Annual Directors’ Statement (Statement).
The proposals detailed below are likely to have a significant impact on companies, particularly in respect of the cost implications of complying with a new reporting structure. The Government has, however, acknowledged that there are a number of sources for regulation in this area so as part of its review it will work closely with the FSA and other relevant partners to ensure legislation is as user-friendly and consistent as possible. It has also concluded not to introduce a statutory reporting standard, which would have introduced a further layer of regulation, but to ask the Accounting Standards Board to review and update its guidance in line with the new structure.
The Strategic Report (currently the Business Review)
The Report should provide shareholders with key strategic data about the company. For non-quoted companies the changes are minimal. However, for quoted companies, the Report will include, in addition to the existing requirements of the enhanced business review:
- a description of the company’s strategy;
- a description of the company’s business model;
- a description of critical changes to the company’s governance;
- information regarding human rights matters;
- key information on executive remuneration (this will include a table showing remuneration awarded to each director in the relevant financial year, a cumulative total and a concise commentary on the link between previously agreed performance measures and the pay awarded that year); and
- disclosure on the number of women on boards.
Annual Directors’ Statement
The Statement will contain the more detailed disclosures which underpin the Report. It will have a prescribed structure to make it easier to search online and make comparisons. The Statement will accommodate existing mandatory as well as voluntary disclosure requirements. Data/Policies can be included by links/cross-references to information published elsewhere but directors will be required to confirm that they have reviewed and updated information annually, where necessary. The Statement will also include the Directors’ Remuneration Report, the Corporate Governance Statement and the Audit Committee Report.
Alongside the consultation on narrative reporting, the Government has published a discussion paper on executive remuneration. This paper considers, amongst other things, whether (i) there should be a binding vote on remuneration (ii) it would be advantageous to follow the Swedish model and have shareholders as representatives on nominations committees (iii) remuneration committees should include independent members or employee representatives (iv) the typical vesting period for LTIPs and other plans should increase from the minimum three years to five years and (v) is there a role for an independent body with responsibility for improving the quality of information on and practice in respect of executive pay.
Comments must be received on both papers by 25 November 2011 with a view to any changes to narrative reporting becoming effective for years beginning 1 October 2012.