The Non-Financial Reporting Directive A call for evidence

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1 Mr Mark Jackson Business Environment Third Floor, Piccadilly gate Store Street Manchester M1 2WD 29 March 2016 Dear Mark The Non-Financial Reporting Directive A call for evidence Thank you for giving the Institute of Directors (IoD) the opportunity to provide written evidence in response to the consultation on the non-financial reporting directive. Issues of this nature are of considerable interest to the IoD and its membership and we are therefore pleased to present our views in respect of your proposals. About the IoD The IoD was founded in 1903 and obtained a Royal Charter in It is an independent, non-party political organisation of approximately 35,000 individual members. Its aim is to serve, support, represent and set standards for directors to enable them to fulfil their leadership responsibilities in creating wealth for the benefit of business and society as a whole. The membership is drawn from right across the business spectrum. IoD members organisations are entrepreneurial and growth-orientated, and more than half (57%) export goods and services internationally. Overall response Since the financial crisis, extensive work has been carried out by European and national regulators to improve the quality of annual reports. From the FRC s cutting clutter initiative through to the introduction of the Strategic Report, the information our largest companies provide to shareholders and other stakeholders has changed considerably. The narrative report now includes much more relevant information, although this is an organic process and we acknowledge change may be slow as companies get to grips with changing reporting requirements. We acknowledge that annual reports remain a crucial communications channel for businesses to demonstrate their strategy for ensuring long-term growth. Ensuring that there is a pan-european model for non-financial reporting is a welcome step in the right direction. The purpose of the Capital Markets Union Directive is to provide a more conducive environment for the investment. Generic guidance to elevate cross-border standards to the same level could, therefore, help investors more easily read annual reports across the EU. 1

2 The introduction of a viability statement in 2014 places a requirement on all companies to inform shareholders of potential threats beyond 12 months, embedding a longer term assessment in companies minds. Whilst we believe this policy initiative was folly, arguing that it is almost impossible for any company to predict the future beyond 12 months, we nonetheless accept that good reporting is symptomatic of a company that has strong governance. The context for this reform is clear: the UK is a world-leader in reporting and governance. The European Commission mirrors the policy positions here in the UK and these reforms, the focus of this consultation paper, again correlate closely to the current UK framework which, broadly speaking at least are a set of pragmatic proposals. Whilst they may, in time, drive up the quality of reporting by companies across member states, we must be wary of companies duplicating these proposals or interpreting them incorrectly. That said, ensuring there is a pan-european standard for non-financial reporting is welcome. We would, therefore, like to draw the attention of department to the following substantive points: We believe that in the UK the Companies Act (2006), as well as the reporting standards introduced by the FRC since 2010, strikes the right balance between prescriptive requirements and providing the framework to report what companies believe is material/strategically important, emphasised by the introduction of the Strategic Report in It is important that the requirements of the directive should not be particularly onerous for the UK s large companies and PIEs (defined as having a combined average of 500 employees over their financial year) because, as we have already made clear, they are already broadly reflected in the UK narrative reporting framework that was introduced in October According to a report recently published by the Institute of Chartered Accountants for England and Wales, it is important that assurance providers, who are used to working out materiality in relation to financial information, help preparers ensure that non-financial information is relevant to an investor s needs. The report, which was published in 2015, makes clear that there is an appetite by investors to know about a company s corporate social responsibility (the CSR ), carbon emissions, diversity and ethics. Indeed, one need only look at the recent diesel car emissions scandal to understand how important these non-financial aspects can be. We welcome the government s decision to canvass the views of stakeholders on reducing unnecessary regulations and burdens, a commitment made at the time of the last General Election. We welcome the government s decision to ask for views on how technology can be harnessed better in presenting non-financial information and broadly support the idea of allowing companies to choose whether or not to place their separate non-financial statement on the company s website. 2

3 That the Commission will be modelling the guidance on the UK FRC guidance for the preparation of a strategic report is, as I have alluded to, very welcome, indeed. However, that does not mean that the Strategic Report itself is a panacea for corporate reporting. We would welcome more consideration by the government on the practical benefits associated with integrated reporting. In the Commission s FAQs that accompanied the directive, they described this initiative as a step ahead. We are not sure what this really meant and would, nevertheless, urge the government to look at how integrated reporting can deliver specific benefits (derived from integrated thinking and communication of a single strategy and business model) that isolated disclosure requirements cannot achieve. The argument of the International Integrated Reporting Council is that, in order to deliver real tangible benefits to businesses, there needs to be a clear connection from data to strategy. This is something that we are sympathetic towards and would hope the government may signpost this in its final guidance, prior to implementation in December Responses to specific questions 1. What is your view on permitting companies flexibility to place information where they feel most appropriate within the boundaries laid out by the EU NFR Directive? Please explain your reasons. We are broadly supportive of permitting companies a degree of flexibility when it comes to deciding where to place non-financial information. However, the information that is to be contained within the statement (environment, social and employee matters, respect for human rights, anti-corruption and bribery matters) should not just be uploaded on the company website in some obscure location. These issues are material matters and it is important that they are included within the Strategic Report, although companies should be given the flexibility to provide more detailed information online so long as this is advertised to shareholders. It is important that guidance is clear in its expectations and does not contradict the purpose of the Strategic Report. 2. We would welcome suggestions for information, currently required by law that could be placed in the separate report. I would reiterate that it is important the Strategic Report includes all relevant non-financial information and not just on the website. 3. What do you see as the advantages and disadvantages for your organisation of the separate statement? Shareholders and other key stakeholders may struggle to find the relevant information if it s not all included in one statement or report. Of course, it s important that whatever solution is agreed all parties are aware of what the requirements are. 3

4 For Questions 4 6 inclusive, we have no comments to make. 7. Assurance of Non-Financial Information: Should the Government require that the non-financial statement be verified by an independent assurance service provider? Yes. Assurance providers, who are used to working out materiality in relation to financial information, must work with preparers to ensure that non-financial information is relevant to an investor s needs. 8. What do you see as the advantages and disadvantages of requesting third party assurance? 9. Are there any other options the Government should consider for Third Party Verification? No, but we would refer the government to our response to Q What do you see as the advantages and disadvantages of preparing or receiving the nonfinancial statement electronically via a company s website? We broadly welcome the government s decision to ask for views on how technology can be harnessed better in presenting non-financial information and support the idea of allowing companies to choose whether or not to place their separate non-financial statement on the company s website. 11. Considering your response to Q7, are there any additional protections that the government should consider? We have nothing to add to Q We are interested in the number of companies that currently send their annual report electronically. Considering your shareholders, how many, as a percentage, opt to receive their annual report as a printed copy? This is not relevant to the Institute of Directors 13. Definition of Senior Manager: BIS would welcome suggestions as to how this definition may be improved to reflect better the intention of this requirement. We are satisfied with your definition but would be interested to understand what impact the recent announcements by government on gender reporting will have on the scope of this definition. 14. Other comments on this requirement 4

5 15. Reporting Regulations: What other reporting regulations would you suggest that could be repealed? 16. Other Information: Is there any information that could be moved outside the Annual Report? We would refer the government to our earlier response in this paper. For Questions inclusive, we have no comments to make. Conclusion Thank you for the opportunity to respond to this consultation paper. We would be happy to discuss any of our comments in this document. Kind regards Oliver Parry Allie Renison Head of Corporate Governance Head of Europe and Trade Policy Institute of Directors Institute of Directors Tel: Tel: Mob: Mob: