Strategic Report Changes Ahead
The Guidance was first published in June 2014, since when there has been an upward trend for large companies to report more broadly on their impact on society, with specific reference to the directors’ duty under section 172 of the Companies Act 2006 i.e the duty to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:
(a) the likely consequences of any decision in the long term;
(b) the interests of the company’s employees;
(c) the need to foster the company’s business relationships with suppliers, customers and others;
(d) the impact of the company’s operations on the community and the environment;
(e) the desirability of the company maintaining a reputation for high standards of business conduct; and
(f) the need to act fairly as between members of the company.
The consultation paper reflects the UK’s recent implementation of Directive 2014/95/EU (Non-Financial Reporting Directive) by way of the Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016. The amendments proposed in the consultation paper do not constitute a fundamental review of the Guidance, but reflect these recent legislative changes to the strategic report requirements and apply in relation to financial years beginning on or after 1 January 2017.
In summary, the proposed changes include:
Amendments to sections 4 (purpose) and 7 (content elements) to reinforce the link between strategic reporting and the directors’ section 172 duty. Section 7 changes seek to encourage companies to evaluate issues that may impact the value of the company over the longer term and to underscore how value is generated.
Amendments to section 5 (materiality) seek to clarify the use of the concept “material” in the guidance, to focus on non-financial information and long term value, and to scrutinise the exceptions from the over-arching requirement to disclose material information.
Amendments to section 6 (communication principles) seek to facilitate companies to better integrate related information in their annual reports and to ensure shareholders have access to information that will enable them to assess the factors that may impact the long-term success of the business.
The consultation paper is set against the backdrop of the government’s Corporate Governance Reform Green Paper. This consultation ended in February and the government’s response is expected shortly. One of the specific issues on which the government consulted was the option of introducing clearer requirements for companies to report on how they are giving consideration to the different stakeholder interests specified in section 172 of the Companies Act 2006. Depending on the outcome of that consultation and any other legislative changes affecting the strategic report requirements, amendments may need to be made to the Guidance on the Strategic Report.
The deadline for responses to the FRC consultation is 24 October 2017.