Exposure Draft: Amendments to Guidance on the Strategic Report
The IR Society's response to the FRC's draft amendments to guidance on the Strategic Report.
Financial Reporting Council
125 London Wall
London EC2Y 5AS
19th October 2017
Dear Ms Raval,
Re: Exposure Draft: Amendments to Guidance on the Strategic Report
Thank you for giving us the opportunity to comment on your discussion paper around draft amendments to guidance on the Strategic Report.
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 over 800 members drawn both from the UK and overseas, including the majority of the FTSE 100 and much of the FTSE 250.
The Annual Report is an important tool for communicating a company’s recent and historic performance. It is a key part of the strategic reporting requirements of companies and forms the basis of systematic and regular communications to investors. As a valuable opportunity to engage with stakeholders, annual reporting should never be ‘boilerplate’ and must aim to provide more than a basic level of compliance. The Strategic Report gives companies the opportunity to communicate strategy effectively and succinctly and explain how they create value over the long term to both shareholders and wider stakeholders.
We have answered your questions in our submission below, and our key points from our response can be summarised as follows:
We support amendments to the strategic report to focus on the additional non-financial disclosures that promote the long-term success of the company.
Companies should demonstrate clear communication of company strategy, performance, position and long-term value drivers to both investors and wider stakeholders but immaterial information should be excluded from the strategic report
Non-financial matters should be clearly integrated throughout narrative reporting, including areas such as ESG, corporate culture and governance
Do you agree with the approach for updating the Guidance for the changes arising from the implementation of the non-financial reporting Directive?
The IR Society agrees with the FRC’s approach for updating the guidance. There has been much regulatory change since the introduction of the Strategic Report in 2013. Not least, with the implementation of the non-financial reporting directive in 2017, as well as changes in audit reports. Non-financial reporting, is increasingly being seen as an important tool in recognising key sustainability risks and for providing an in-depth holistic view of company performance, so we welcome updates to the Strategic Report to support this change in reporting. Non-financial matters such as ESG, corporate culture and governance should be clearly integrated throughout narrative reporting.
Do you support the enhancements that have been made to Sections 4 and 7 of the Guidance to strengthen this link?
The Society supports the enhancements that have been made to Sections 4 and 7, and recognises the FRC’s efforts to create a stronger link between the Strategic Report and the Companies Act by placing more emphasis on directors’ duties under section 172. Furthermore, we support amendments to focus on the additional non-financial disclosures that promote the long-term success of the company.
Do you have any suggestions for further improvements in this area? No further comment.
Do you agree with the draft amendments to Section 5?
Yes, we agree with the amendments to Section 5 regarding ‘Materiality’ and enhancing the focus on non-financial information and aligning with long-term value creation. While non-financial reporting disclosures should be integrated throughout the report, reporting should be clear, concise and yet comprehensive. Companies should demonstrate clear communication of company strategy, performance, position and long-term value drivers to both investors and wider stakeholders but immaterial information should be excluded from the strategic report.
Do you have any suggestions on how the Guidance could encourage better linking of information in practice, or common types of disclosures that would benefit from being linked?
The IR Society promotes best practice reporting, and consistent communications across all disclosures including a clear alignment of company purpose, value, strategy and business model within the Strategic Report. Reporting of non-financial matters should be integrated throughout the report, but should be clearly linked to a company’s strategy, business model, KPI’s and principal risks and uncertainties. We support the FRC’s efforts to encourage this linking of related information in the annual report through the narrative. Emphasis on the linkages between KPI’s and remuneration policies to provide valuable context for investors’ assessment of management stewardship is welcomed.
Do you agree with how the sources of value have been articulated in the draft amendments to the sections on strategy and business model in Section 7?
Do you consider that disclosures on how value is generated would be helpful?
We agree with how the sources of value have been articulated in Section 7 of the guidance document, and furthermore disclosure on how value is generated will support investors long-term review of a company. In line with previous comments, we support the view that companies should be encouraged to consider the broader drivers of value that contribute to the long-term success of the company. This could include those relating to sources of value that have not been recognised in the financial statements and how those sources of value are managed, sustained and developed; for example ESG, corporate culture, and governance.
Do you consider that the draft amendments relating to reporting of non-financial information gives sufficient yet proportionate prominence to the broader matters that may impact performance over the longer term?
We concur with the draft guidance and amendments relating to the reporting of non-financial information.
Are there any other specific areas of the Guidance that would benefit from improvement?
No further comment at this stage.
In conclusion, the story of long-term value creation can only be told effectively by drawing on all the various business elements that contribute towards it. For companies that follow best practice, the strategic report is a chance to present a holistic picture of their business promoting investor engagement and understanding of its long-term strengths. With the implementation of the NFRD, as well as government proposals for companies to explains how their directors comply with 172, this will result in more disclosure. We would encourage annual report preparers to keep reports clear and concise.
We hope you find these comments useful and please do not hesitate to contact me if you require any further clarification.
Chair of The Investor Relations Society’s Policy Committee
020 7379 5151 / firstname.lastname@example.org
Published 19 October, 2017