News
Jane Leavens
Corporate Law & Governance Directorate
Department for Business, Innovation and Skills
1 Victoria Street
London
SW1H 0ET
14 October 2010
Dear Madam
Response to consultation on The Future of Narrative Reporting
Thank you for giving us the opportunity to respond to the above consultation.
The Investor Relations Society's mission is to promote best practice in investor relations; to support the professional development of its members; to represent their views to regulatory bodies, the investment community and government; and to act as a forum for issuers and the investment community.
The Investor Relations Society represents members working for public companies and consultancies to assist them in the development of effective two way communication with the markets and to create a level playing field for all investors. It has nearly 600 members drawn both from the UK and overseas, including the majority of the FTSE 100 and much of the FTSE 250.
Our response is based on feedback we have received from our members who are engaged in the preparation of Annual Reports both as companies and advisors.
We include below an overview of the issues which we consider are important as well as specific answers to your detailed questions where we are in a position to have an opinion.
Central to the investor relations task is ‘ two way communication': communication of the equity story, the business model, its financials and the current state of the business and its prospects, together with listening to feedback from the financial audience. IR aims to set the context in which the company's ambitions and achievements should be seen. An important aim is to achieve the right balance between long term ownership and liquidity. An excess of either is problematic.
"Shareholder engagement" is at heart of what IR teams do.
So, in preparing an annual report today, companies have to start by considering who the report is for. Companies with long retail investor tails will write for an audience entirely different from one that is largely institutionally owned. Unionised companies, environmentally sensitive companies, multi-national companies will have their own specific audiences in mind. Layering obligations for ALL of these audiences on to ALL companies creates a regulatory repository, rather than a communications opportunity. Nonetheless, we believe that there is a place for an audited record of required information.
We believe however that companies should be encouraged to take advantage of all communication channels. These include meeting investors, analysts and other stakeholders, during which an investor presentation is often used. The investor presentation has a number of merits; timeliness, an ‘informality' and absence of mandated structure. This allows the company's management team the flexibility to share the specific information that the investors need about their company. One size of information set does not fit all.
Regular, timely updates are also key. Through regulatory disclosures such as half yearly results, Interim Management Statements and compliance with the DTR regime, regular updates to the company's non financial position are also provided. In addition, companies choose to update the market with non-mandated information throughout the year. This may be sales statistics, market share, production volumes etc. These are heavily used by analysts and investors.
The annual report is therefore another opportunity to communicate. However the narrative section faces many limitations. From the experience of IR professionals, it is rarely relied on as a key document. Some of the information contained is already in the public domain through one of the above alternative channels. Our concern therefore is to avoid the annual report becoming a historical repository for regulators' mandated information - rather than a useful additional information source for the market.
We are concerned that the annual report is rooted in the earliest versions of the Companies Act, in a completely different information era. Changes in the ‘audience' for the report, changes in investor decision making, rising focus on governance, and of course the way we consume information have made the concept of the annual report very different from its original intent. For example, as more and more companies have gradually taken up the opportunity presented by changes in Company Law to allow ecomms, fewer printed copies of the Annual Report are now necessary as investors generally look to the internet to provide far more up to date/relevant information.
As a consequence of these and other changes, the required content of the annual report has grown exponentially. We are also concerned that this regulatory approach may be inconsistent. The FSA Handbook regularly makes the point in its Disclosure and Transparency Rules that no two companies are the same, and consequently a principles based regulation is appropriate, rather than fixing a set of required disclosures. By contrast, the Companies Act, and the Financial Reporting Council's Reporting Standard 1, creates a ‘standard' - regardless of whether the content of that standard is relevant or not.
The gap between those whose reports embrace best practice, and those who simply seek to comply, is growing larger. This is partly due to the variable audiences for the reports, and partly to variable resources at small and large companies.
So what do we suggest?
First, we believe that any changes should be in the form of principles based guidance and encouragement, rather than new standards or regulations. As noted, creating a mandatory standard to be followed does not allow companies the flexibility to tell their own story, and risks a templated box ticking approach.
We think that any changes to the narrative reporting regime should bear in mind the total flow of information to the investor. The annual report should not be regarded as a standalone communication.
Also, we are not persuaded that the differences between the Operating and Financial Review and Enhanced Business Review are sufficiently stark to warrant changes in regulatory standards.
Second, we believe that regulations should embrace the use of technology. We agree with the sentiment behind the question "Would report users welcome a way of limiting the narrative report to a summary of the strategic issues with the more detailed supporting information presented separately for those who wanted that extra level of information?" Companies already use their corporate websites to deliver more detailed information about their businesses; recognising that information as part of the narrative report would allow annual reports to become focussed, uncluttered communication opportunities.
Third, inclusion of the auditing process is very important. We believe that audited data should be identified as such.
Fourth, we do not believe that adding to an already crowded AGM agenda by including an advisory vote on the Business Review would make a difference to the quality of narrative reporting.
Finally, costs of preparation are an obvious concern for all companies. By simplifying the guidance on what companies should include, regulators would encourage companies to invest more on those areas that matter to them and to their stakeholders.
A copy of our response form to the detailed questions is included with this letter. If you would like to discuss any of the matters raised in this response please do not hesitate to come back to us.
Yours faithfully,
Michael Mitchell
General Manager
The Investor Relations Society
Consultation response form: The Future of Narrative Reporting
A copy of the consultation available at: http://www.bis.gov.uk/consultations.
Responses to the Consultation by be received by 19 October 2010
Name: Michael Mitchell
Organisation (if applicable): The Investor Relations Society
Address:Bedford House, 3 Bedford Street, London WC2E 9HD
Email: michael.mitchell@irs.org.uk
Return completed forms to:
Jane Leavens
Corporate Law & Governance Directorate
Department for Business, Innovation and Skills
1 Victoria Street
London
SW1H 0ET
Tel: 020 7215 1686
Narrativereporting@bis.gsi.gov.uk
Please tick the box from the following list of options that best describes you:
Quoted company
Other company
Investor or investment manager
x Business representative organisation
Investor representative organisation
Non governmental organisation (NGO)
Trade Union
Lawyer or accountant
Other (e.g. consultant or private individual)
Value of narrative reporting
Question 1: Are company directors providing useful and relevant information on the company's:
i) forward-looking strategy and
ii) principal risks and opportunities?
Comments
Over the last 10 years the Investor Relations Society has encouraged improvements in narrative reporting thorough its Best Practice Awards. Over this period we have seen significant improvements. The introduction of the Enhanced Business review in the Companies Act 2006 accelerated this process. We believe that the best companies are now communicating strategy, risks and opportunities in a much more joined up way. However, we think that there is still room for improvement in this area by those companies which have not yet focused on these challenges. We believe that the current framework provides all the necessary regulation to develop meaningful narrative reporting. We do not think that it would be helpful at this stage to open up the debate on changing the Business Review requirements as the current act provides substantially all that was proposed in the original OFR. We believe that a combination of peer review pressure and guidance from organisations such as the FRC, FRRP and BIS will help to push forward further improvements in this area of narrative reporting.
Question 2: What are the constraints on companies providing information on these issues?
Comments
In the past companies did not like talking about risk as it was perceived to be negative. However the introduction of the requirements of the CA2006 and the major problems encountered by many companies in the aftermath of the credit crisis have made companies recognise that it is important to show how they assess risk in their organisations, how it is balanced as part of the strategy of the business and what they do to mitigate it. Companies have also felt unwilling to discuss future strategy in too much detail as they are concerned that they will give away potentially useful information to their competitors. Companies have also felt constrained by the requirements to not provide profits forecasts which might involve them in additional verification work in a future M&A situation. However we believe that companies are beginning to recognise the benefits of increased transparency in reporting, which outweigh the potential problems outlined above. We believe that more pertinent questioning from investors as part of their increased involvement through the new Stewardship Code should encourage companies to be more open in their discussion of these issues.
Question 3: Does the information provided reflect the issues discussed by the directors in board meetings?
Comments
From our reviews of best practice reporting we have noted that some companies have specifically mentioned the issues which have been discussed at their Board meetings. We believe that this sort of disclosure is much more meaningful and is a welcome move away from the ‘box ticking' mentality which is prevalent in some reports. Obviously we are not able to comment in detail on what is discussed in Board meetings but we believe that the process of reporting on annual basis on these issues should provide a useful focus for Board discussions.
Question 4: Does the information help shareholders to press directors on key issues relating to strategy and risk, or inform their business decisions?
Comments
There is now a significant amount of useful information for investors which is required to be disclosed. How much use is made of this depends to a large extent on the resource which shareholders are prepared to put into assimilating this information. Through our Best Practice Guidelines and Awards we encourage companies to improve the quality of their presentation as this makes it easier for shareholders to use the information.
Question 5: If a company does not provide sufficient or material information to you, do you challenge it? Is there anything which could help you to do so?
Comments
As noted above we encourage better disclosure and transparency through our Best Practice Guidelines.
Question 6: What other sources of company information do you use and how valuable are they (e.g. information provided on the website, analysts' briefings, dialogue with the company, corporate social responsibility report)?
Comments
We believe the website is now the first port of call for many interested parties.
We also believe that companies should be encouraged to take advantage of all communication channels.
These include meeting investors, analysts and other stakeholders, during which an investor presentation is often used. The investor presentation has a number of merits; timeliness, an ‘informality' and absence of mandated structure. This allows the company's management team the flexibility to share the specific information that the investors need about their company. One size of information set does not fit all.
Regular, timely updates are also key. Through regulatory disclosures such as half yearly results, Interim Management Statements and compliance with the DTR regime, regular updates to the company's non financial position are also provided. In addition, companies choose to update the market with non-mandated information throughout the year. This may be sales statistics, market share, production volumes etc. These are heavily used by analysts and investors.
Question 7: Is there scope to reduce or simplify the requirements on which companies report?
Comments
We are concerned that the Annual Report is becoming a historical repository for regulators' mandated information - rather than a useful additional information source for the market. As a consequence of these and other changes, the required content of the annual report has grown exponentially.
We believe that the annual report is rooted in the earliest versions of the Companies Act, in a completely different information era. Changes in the ‘audience' for the report, changes in investor decision making, rising focus on governance, and of course the way we consume information have made the concept of the annual report very different from its original intent. For example, as more and more companies have gradually taken up the opportunity presented by changes in Company Law to allow ecomms, fewer printed copies of the Annual Report are now necessary as investors generally look to the internet to provide far more up to date/relevant information.
We therefore think that there is scope for putting more non-statutory information on websites to supplement the Annual Report disclosures and we think that there is a case for simplifying and reducing the amount of information that has to be disclosed in the Annual Report and placing it on the website.
We believe that any changes should be in the form of principles based guidance and encouragement, rather than new standards or regulations. Creating a mandatory standard to be followed does not allow companies the flexibility to tell their own story, and risks a templated box ticking approach.
Question 8: Is there scope to arrange the information in a more useful way?
Comments
As discussed above we think that there is scope to reduce the amount of mandated information in the Annual Report, including some of this on the website.
Business Review
Question 9: Looking at an Operating & Financial Review and the existing business review (see Annex D), do you see value in reinstating elements of an OFR and if so what would they be? In particular, would a statutory reporting standard help to improve the quality of reporting?
Comments
We believe that the current framework provides all the necessary regulation to develop meaningful narrative reporting. We do not think that it would be helpful at this stage to open up the debate on changing the Business Review requirements as the current Act provides substantially all that was proposed in the original OFR. We believe that a combination of peer review pressure and guidance from organisations such as the FRRP and BIS will help to push forward further improvements in this area of narrative reporting.
We believe that any changes should be in the form of principles based guidance and encouragement, rather than new standards or regulations. We are concerned that a regulatory approach may be inconsistent. The FSA Handbook regularly makes the point in its Disclosure and Transparency Rules that no two companies are the same, and consequently a principles based regulation is appropriate, rather than fixing a set of required disclosures. By contrast, the Companies Act, and the Financial Reporting Council's Reporting Standard 1, creates a ‘standard' - regardless of whether the content of that standard is relevant or not.
We therefore believe that creating a mandatory standard to be followed does not allow companies the flexibility to tell their own story, and risks a templated box ticking approach.
Question 10: The business review provisions require quoted companies to report, to the extent necessary, on:
• main trends and factors likely to affect the future development, performance and position of the company's business
• information on environmental matters
• information on employees
• information on social and community matters
• persons with whom the company has essential contractual and other relationships
i) is this information useful to you? How do you use it?
ii) Could disclosure be improved? If so, how?
iii) Are there key issues which are missing? If so, please explain?
Comments
We have no specific comments to make on this question as it is mainly directed at users of accounts.
Question 11: Would more guidance be helpful? If so, what form should this take? For example, best practice example, sample Key Performance Indicators, etc?
Comments
We believe that a combination of peer review pressure and guidance from organisations such as the FRC, FRRP and BIS will help to push forward further improvements in the area of narrative reporting.
Question 12: Should there be a shareholder's advisory vote on the Business Review?
Comments
We do not believe that adding to an already crowded AGM agenda by including an advisory vote on the Business Review would make a difference to the quality of narrative reporting.
Question 13: Are there non-regulatory solutions to increasing quality through better guidance or publicising excellence in business reports? If so, what?
Comments
Over the last 10 years the Investor Relations Society has encouraged improvements in narrative reporting thorough its Best Practice Awards. Over this period we have seen significant improvements. We believe that a combination of peer review pressure and guidance from organisations such as the FRRP and BIS will help to push forward further improvements in the area of narrative reporting.
Directors' Remuneration Report
Question 14: Do the current disclosure requirements provide clear and usable information about:
• the total remuneration paid to directors, and how this is made up;
• the performance criteria for payments to directors, and how these relate to the company's strategic objectives;
• company performance against these criteria, so that there is a demonstrable link between pay and performance.;
• the process by which directors' remuneration is decided?
Comments
The UK's statutory disclosure requirements on directors' remuneration are amongst the most extensive in the world. We believe that presentation of this information is however of variable quality. In the best companies we have seen good linkage between performance and pay, but in others there is room for improvement.
We do not believe however that this is a case for more disclosure, rather better disclosure, and that this will be driven by peer group pressure and guidance rather than additional regulation.
Costs
Question 15:
If you can provide any information on costs associated either with the existing narrative reporting requirements eg preparing your business review or your views on potential costs and benefits in relation to any of the ideas in this consultation, please give details
Comments
Costs of preparation are an obvious concern for all companies. By simplifying the guidance on what companies should include, regulators would encourage companies to invest more on those areas that matter to them and to their stakeholders.
Published: 3 November, 2010