The future of narrative reporting: consulting on a new reporting framework. Response form

Please send your response by: 25 Nov 2011

About You

Name: Stephen Hine

Organisation (if applicable): EIRIS

Email: stephen.hine@eiris.org

Address: EIRIS, 80 - 84 Bondway, London, SW8 1SF

I am responding on behalf of

(please tick)

Quoted company

x

Other company

Investor or investment manager

Business representative organisation

Investor representative organisation

Non governmental organisation (NGO)

Trade Union

Lawyer or accountant

X responsible investment research organisation

Other (e.g. consultant or private individual)

Questions

Question 1

Do you agree in principle with restructuring the current reporting framework into a Strategic Report and an Annual Directors’ Statement?

Yes No

Yes

Comments

We welcome the restructuring of the current reporting framework. We are also very pleased to see the high-level of importance given to reporting on environmental, social and governance (ESG) matters, including human rights, in the consultation.

We fully support the statement in section 2.1 that narrative reporting “is a key element in the framework that allows investors to hold companies to account”. EIRIS provides research data on ESG issues to responsible investors and our comments in this response form reflect our awareness and role.

Making a compelling business case to investors involves, amongst other aspects, a company’s analysis of its risks from so-called ‘externalities’ and doing so in a forward-looking manner using ESG factors as part of long-term business strategy and planning. If this disclosure is thorough and complete, it can save time in the long run, by proactively reporting on these issues and reducing the necessity for investors and others subsequently asking basic questions.

We support the top-level risk analysis in the Strategic Report, including environmental and social information with key financial information and a forward-looking analysis by directors in the Strategic Report. However, we question whether this should be voluntary for quoted companies. Included only in voluntary form, companies may not disclose top-level ESG risks at all, and more importantly, they are not being encouraged to integrate these into overall risk analysis by corporate management.

In EIRIS’ opinion, ESG risks (and opportunities) have a potential impact on the financial health of a company. Often financial value can be placed upon such information by analysts. If significant, a company should be evaluating and disclosing these issues. Management should be required to inform stakeholders of key risks to a company, including any ESG risks that are material. If companies are merely required to consider and

disclose ESG issues on a voluntary basis, ESG issues will remain a separate consideration apart from key financial risks.

Without these amends, the result of the Strategic Report as proposed will not be ‘an integrated report demonstrating, where relevant, the links between’ social and environmental information and ‘the analysis of the company’s strategy and risks’ (2.11). We think that BIS could go further, by working with the International Integrated Reporting Committee, to develop annual reports that are more ‘integrated’.

To this effect, we would encourage BIS to create guidance explaining how companies are required to mandatorily disclose on key financial information and key risks in forward-looking analysis, including environmental and social risks, if material. ‘Material’ would need to be defined. Without stipulating materiality, the information included may not be comparable or useful.

We fully accept that if our proposal above were taken forward, the disclosure of key risks by companies may not always include ESG risks, as these may not be found to be material. EIRIS is keen to see that an annual report and accounts highlight material points. It is useful for investors to consider whether the risks identified by management are the same as those identified by investors themselves using their own research and analysis. Any mismatch here is valuable information for investors.

An annual report that mandatorily identifies key business risks and opportunities, including ESG risks as relevant, would not replace existing CSR (corporate social responsibility) / sustainability reports, which could complement the annual report by providing sustainability information in greater detail, and including information that may not be material, but valuable in terms of sustainability impact.

We feel that the term ‘CSR’, whilst helpful and still commonly used, is perhaps not the best term to use in the context of a strategic report. Rather we feel that the terms ESG and sustainable reporting better capture the essence of what forward-looking companies should be reporting on. Mainstream investors, such as those who are signatories to the Principles for Responsible Investment, are increasingly looking for such key material ESG issues to be fully and appropriately reported on.

Although currently CSR/ sustainability reports are patchy in coverage and quality, disclosure of information in CSR / sustainability reports is invaluable in order to provide the depth of analysis and research that research organisations such as EIRIS provide. We do not want to lose CSR / sustainability reports. However, CSR/ sustainability reports do need common metrics and other bodies are working towards these. Stakeholders need to access information that is meaningful, measurable and verifiable, to help investors fully understand a company’s full

activities.

It is important that the revised Strategic Report and Annual Directors’ Report are considered in the context of other current reporting developments. BIS will be aware of the recent EU consultation on non-financial reporting, the development of integrated reporting by the International Integrated Reporting Committee, and the consultation by the Global Reporting Initiative on the metrics for its G4 reporting standard.

Whilst we very much support integrated reporting (with the appropriate metrics) as it would permit and embed externalities into mainstream accounts, enabling the valuation of currently hidden costs (e.g. climate change and biodiversity) and the application of the ‘pollution pays’ principle (equally applicable for social issues), we are concerned that this development may effect a loss of sustainability information that is not ‘material’ for the purposes of the annual report, but of value in terms of sustainability impact.

We are keen to ensure that integrated reporting does not dilute company reporting on issues that may not always appear to be material, but have a sustainability impact. We would suggest including a link in the revised annual report (either Strategic Report or Annual Directors’ Report) to where the CSR / sustainability report can be found.

Top-level analysis in an annual report would be of little use without background evidence. This link to the CSR / sustainability report would give investors confidence that the reporting has been thorough enough and paid due attention to all relevant issues, and that management is accountable. If the depth of sustainability information is lost, it is less easy to hold management to account.

Question 2

Do you agree that the Strategic Report should include information on:

• company performance

• principal risks and uncertainties

• key performance indicators

• key financial information (similar to that currently required for the Summary Financial Statements)

and for quoted companies should include:

• strategy

• business model

• environmental and social information,

• key information on executive remuneration and its link to performance?

Yes No

Y

Comments

We believe that this information (strategy, business model, environmental and social information, executive remuneration and performance) should be provided by all quoted companies. For small companies, the level of reporting being suggested is not necessarily onerous, because it is likely that they have fewer material ESG and other business risks and therefore could more easily report on them. Yet, these risks are still of importance to investors and others. In addition, we feel that it would be best for there to be a mandatory requirement for non-quoted large and medium sized companies.

We would suggest that BIS include a statement in the requirements for Strategic Reports to the effect that when determining the principal risks and key information, directors are encouraged to give due consideration to all the key risks and indicators, including, but not limited to environmental and social and governance matters.

We also commend the reference after point 2.19 in the consultation to responsible business and open data. Reference is made to the ‘Every Business Commits’ framework. We would encourage this to complement current voluntary CSR / sustainability reporting, which could be renamed stakeholder reporting. It is important that the current availability of sustainability information is retained, to allow research organisations specialising in ESG research to continue to research companies, and provide data to investor analysts. It is also important that the quality of disclosed sustainability information is retained and improved upon. If the depth of sustainability information is lost, it is less easy to hold management to account.

Gathering and publishing this information will better inform company boards and investors about the long-term sustainable business strategy of a company. This disclosure can better help investors correctly assess the value of a company in the long term. This in turn could assist companies to attract capital, thereby making them more competitive in the global market place, which in turn assists the sustainable competitiveness of the UK economy in the long term. *

* See winner of Moskovitz prize in 2011 : “Does corporate social responsibility affect the cost of capital?” by Sadok El Ghoul, Omrane Guedhamib, Chuck C. Y. Kwok, and Dev R. Mishra http://responsiblebusiness.haas.berkeley.edu/documents/Moskowitz_2011_CSR_Cost_of_Capital.pdf

Question 3

Do you agree that the proposed Strategic Report should replace the Summary Financial Statements?

Yes No

Yes

Comments

Question 4

Do you agree that the Strategic Report should be signed off by each director individually?

Yes No

Yes

Comments

This would encourage directors to take individual responsibility for the content of the Strategic Report. It would also encourage board ownership of the report and could lead to greater disclosure.

Question 5

Do you agree that the Annual Directors’ Statement for quoted companies should include:

• disclosures required, regardless of materiality, by the Companies Act, the Listing Rules etc.

• the Corporate Governance Statement

• the Directors Remuneration Report

• financial information (for example, post-balance sheet events etc)

• information provided voluntarily by companies (for example, additional environmental and social disclosures)?

Yes No

Comments

If companies are only required to provide information voluntarily on environmental and social disclosures in the Annual Directors’ Statement, it gives companies the impression that this information is of little importance.

We would support guidance for the Annual Directors’ Statement that encourages companies to provide a link to their full CSR / sustainability report.

CSR / sustainability reports are a valuable resource of information and without this depth of sustainability information it is less easy to hold management to account.

Question 6

Do you agree that companies should be able to include material in the Annual Directors’ Report (for example information on policies and procedures) by cross reference to information published elsewhere (for example on the company’s website)?

Yes No

Yes

Comments

We would be in favour of guidance for the Annual Directors’ Statement that encourages companies to provide a link to their full CSR / sustainability report.

Question 7

If companies are able to include material in the Annual Directors’ Statement by cross reference (question 6), do you agree that they should make an annual statement confirming it has reviewed that information and noting any significant changes?

Yes No

Yes

Comments

Yes. Signing off on the content and inclusion of all the links included

could form part of the Annual Director’s Statement.

Question 8

Do you agree that the Annual Directors’ Statement should be presented online with a hard copy available to shareholders only on request?

Yes No

Yes

Comments

This is more environmentally-friendly, saving paper by not automatically printing copies of the Annual Directors’ Statement. The same could be done for the Strategic Review.

Question 9

Do you support removal of the disclosure requirements, arising from company law, identified in Table 1? If not, please provide evidence of their relevance to users, including why disclosure in the Annual Directors’ Statement is necessary for meeting their needs.

Are there any other disclosure requirements arising from company law that in your view could be simplified or removed?

Yes No

No

Comments

We are in favour of reducing unnecessary disclosure requirements.

However, we are in favour of the retention of the requirement in the current Director’s Report to disclose the amount and charitable purpose, where charitable donations exceed £2,000.

This information is relevant for stakeholders, such as investors, to understand what efforts / projects their money has contributed towards. Investors may wish to know what proportion of their potential returns have been given in the form of charitable donations. Removal of this information also reduces transparency about giving to particular causes and why they are chosen. We would be happy for this information to be included in a CSR / sustainability report, but creating this is voluntary, not a legal obligation. Potentially, without inclusion in the Annual Directors’ Statement, this information will be lost.

We would also urge the retention of reporting on ‘policy and practice on payment of creditors’ as this provides an easy reference point to understand how companies handle this issue.

Question 10

Are there areas where the Listing Rules, IFRS, company law and the Corporate Governance Code are inconsistent or require similar disclosures? If so, how could these best be resolved?

Yes No

Comments

Question 11

Should quoted companies be explicitly required to include information about human rights (to the extent necessary for an understanding of the development, performance or position of the company’s business) in the Strategic Report?

Yes No

Yes

Comments

We strongly support the reporting on human rights in light of the Ruggie principles.

We recognise that the need to report on human rights may not be necessary for all businesses depending on the location of their operations and supply chains.

We believe that this information should be provided by all quoted companies. For small companies, the level of reporting being suggested is not necessarily onerous, because it is likely that they have fewer human rights issues in most instances and therefore could more easily report on them. Yet, these risks are still of importance to investors and others. In addition, we feel that it would be best for there to be a mandatory requirement for non-quoted large and medium sized companies. A link could also be made to the CSR / sustainability report

for further information.

It would be helpful if UK company law relating to the reporting of material human rights issues could be clarified here.

This is very important. A set of standards or principles that covered the disclosure on human rights by companies should be based upon the work of the Special Representative of the United Nations Secretary-General on business and human rights, John Ruggie.

John Ruggie's work is based on extensive global consultation with stakeholders including companies, lawyers, NGOs and communities, and is based on best practice concepts regarding policies (that they should be based on the key human rights instruments), systems (including risk assessment, consultation and monitoring) and disclosure on human rights.

A company's responsibility for direct or indirect human rights impacts extends to its overseas subsidiaries, contractors, joint ventures and its supply chain.

Question 12

Do you support the Government’s proposals for company disclosure of the proportion of women on boards and in companies as a whole?

Yes No

Yes

Comments

We are in favour of these proposals to disclose the proportion of female employees for the parts of the organisations for which gender information is available and an explanation of the approximate proportion of the global workforce that the gender figure relates to.

We think it is essential that the government also take forward its proposal to require a brief description of the jurisdictions or regions where gender information is unavailable or onerous to obtain.

It would be useful if the proportion of female employees in the organisation were analysed by department, sector and seniority.

We would be happy to contribute to a definition of “senior executive position”. This definition should not be just those on boards, but those in managerial roles that are considered the organisation to be senior.

Question 13

Do you agree that the current UK liability regime does not discourage companies from making meaningful forward looking statements? If you believe that there are issues with the current regime, do these relate to:

• companies listing in the US as well as in the UK,

• companies contemplating a prospectus,

• common misunderstandings about the UK liability regimes.

• other concerns?

Yes No

Yes

Comments

Question 14

Would improved understanding and awareness of the UK liability regime help encourage more meaningful, formal looking statements? Are there other activities or changes that the UK Government could make that you believe may be necessary?

Yes No

Yes

Comments

We are in favour of any additional guidance that could be given to directors and auditors, to encourage greater disclosures on a forward-looking basis.

Question 15

Do you agree that the key information on remuneration should be included in the new Strategic Report? If so, would a standard format for this information be helpful?

Yes No

Yes

Comments

We would be in favour of these proposals applying to all quoted companies and, in addition, we feel that it would be best for there to be a mandatory requirement for non-quoted large and medium sized companies. For small companies, the level of reporting being suggested is not necessarily onerous.

We would encourage BIS to create guidance that provides structure and a standard format for disclosing this information.

Question 16

Which elements of the current disclosure requirements could be moved to the Annual Director’s Statement, or removed entirely?

Yes No

Comments

Question 17

Do you agree that quoted companies should be required to disclose the total remuneration of each director in a single cumulative figure?

If so, how should be calculated so that it accounts appropriately for the various elements of remuneration packages, including share options, LTIPs and pensions?

Yes No

No

Comments

We do not believe that this information could be accurately reduced into a single figure. There is also a danger that a single figure would hide various elements of directors’ remuneration packages. Investors and other stakeholders would be keen to understand such remuneration formulae.

Public disclosure of workings encourages transparency. Investors and other stakeholders will no doubt be interested to see if initiatives have

been developed that link to long-term performance, or performance related to environmental and social risk targets, for example.

It is also essential that bonuses are included in the calculation of this figure, otherwise its meaning, value and comparability is lost.

Question 18

Would there be benefits in introducing a requirement to disclose the pay of the highest earning executive officers below board level and, if so, to which companies and individuals should such an obligation be extended?

Are there alternative ways of improving shareholder oversight of the performance and pay of influential non-board executive officers?

Yes No

Yes

Comments

We would encourage that this proposal apply to at least tier 1 and tier 2 officers (in seniority), extending beyond board officers.

We believe that this proposed disclosure should be applicable to all quoted companies. For small companies, reporting may not necessarily be onerous, because they may have fewer executive officers below board level and therefore could more easily report on this. Yet, these risks are still of importance to investors and others. In addition, we feel that it would be best for there to be a mandatory requirement for non-quoted large and medium sized companies.

Question 19

Do you agree that quoted companies should be required to disclose how remuneration awarded relates to performance in the relevant financial year and to the company’s strategic objectives?

Yes No

Yes

Comments

We agree with the proposals, but we believe that this disclosure should be applicable to all quoted companies and in addition, we feel that it would be best for there to be a mandatory requirement for non-quoted

large and medium sized companies. For small companies, the level of reporting being suggested is not necessarily onerous.

In many cases the remuneration structure for board members currently does not reflect long-term incentives. There is a need for appropriate remuneration frameworks for sustainable success. Shareholders need sufficient information on remuneration in order to actively engage in dialogue with companies on this issue, should they have concerns – and reserve the right to vote against what they deem to be inappropriate packages.

Disclosure of this information will help with discussions between investors (and other stakeholders) and companies, contributing to the increased long-term effectiveness of capital markets.

Question 20

Should quoted companies be required to illustrate performance and the total remuneration of the CEO for the last five financial years, to enable shareholders to assess the relationship between total pay and performance over time?

If so, which performance measure would be the most appropriate?

Yes No

Yes

Comments

We agree with the proposals. However, this proposed disclosure should be applicable to all quoted companies and, in addition, we feel that it would be best for there to be a mandatory requirement for non-quoted large and medium sized companies. For small companies, the level of reporting being suggested is not necessarily onerous.

Companies could be encouraged to develop and disclose their own performance measures, reflecting individual performance targets set. We would encourage that these are linked in some way to environmental, social as well as financial risks, and that they link to long-term (as well as shorter-term) indicators of corporate performance.

In many cases the remuneration structure for board members currently does not reflect long-term incentives. There is a need for appropriate remuneration frameworks for sustainable success. Shareholders need to engage with companies to actively vote against unacceptable remuneration; perhaps ask for disclosure / explanation behind packages and the integration of environmental, social and governance

issues into both short and long-term variable pay. Disclosure of this information will aid discussions between investors (as well as other stakeholders) and companies.

Question 21

Should quoted companies be required to explain how the performance criteria for remuneration policy for the year ahead relates to the company’s strategic objectives, as set out in the new Strategic Report?

Yes No

Yes

Comments

Explanation on the basis given above would aid stakeholders, such as investors, when analysing the financial worth of a company and the level of remuneration given to senior executives.

Investors (and other stakeholders) will no doubt be interested to see if initiatives have been developed that link to long-term performance, or performance related to environmental and social risk targets, for example.

Question 22

Should quoted companies be required to provide estimates of the total future remuneration of executive directors if they exceed, meet or do not meet their performance criteria?

Yes No

Yes

Comments

Disclosure of this information makes it easier to hold management to account.

Question 23

Should quoted companies be required to disclose the performance criteria for annual bonuses?

If so, should companies be permitted to delay the publication of commercially sensitive performance criteria for up to two years?

Yes No

Yes

Comments

Without disclosure of this information, disclosure of remuneration details is inaccurate.

Delay of commercially sensitive performance criteria could be permitted in some extreme circumstances, but we would encourage BIS not to take this proposal forward, as inaccurate remuneration data will exist in the interim and in this form it will not make it easy to hold management to account.

Question 24

Would disclosure by quoted companies of the ratio between the pay of the company’s Chief Executive and the median earnings of the organisation’s workforce provide useful information to shareholders?

If so, how should the ratio be calculated?

Yes No

Yes

Comments

Question 25

Do you agree that quoted companies should be required to disclose the total spend on directors’ remuneration as a proportion of profit for the relevant financial year?

Yes No

Yes

Comments

Disclosure of this information would aid transparency.

Question 26

Should the amount of fees paid by companies to remuneration consultants be disclosed, and is there any further information which should be disclosed by companies in relation to the procedure for setting directors’ remuneration?

Yes No

Yes

Comments

We are in favour of as much transparency as possible.

Question 27

Do you agree that company law and the Listing Rule disclosure requirements on remuneration should be made fully consistent?

Yes No

Yes

Comments

Question 28

Would reporting under International Financial Reporting Standards provide an appropriate basis for disclosure of remuneration in the preceding financial year if this were required on both an aggregate and individual basis?

Yes No

Comments

Question 29

Do you agree that the current legislative regime for audit and assurance for narrative reporting is adequate for your needs?

If you support assurance beyond the consistency of the Strategic Report and the Annual Directors’ Statement with the accounts, then please explain what you believe assurance should be provided on and the benefits that you believe will ensue.

Yes No

Yes

Comments

We are in favour of meaningful, measurable and verifiable data in the Strategic Report and Annual Directors’ Statement. It is essential that this is properly verified.

We would also encourage auditors to report against the non-financial information included in the Strategic Report and Annual Directors’ Statement. External auditing brings credibility, greater accountability and transparency to the reporting process. If non-financial information is included as a requirement in the Strategic Report and Annual Directors’ Statement, then to be verifiable it should be audited.

We would welcome clarification of auditors’ responsibility and liability for both financial and ESG-risk type statements in reports.

Furthermore, auditors' reports should not be limited to only stating if what has been audited is true, but also making suggestions for improvement in scope, detail and the quality of reporting. This would provide an extra layer of reassurance for report users (as long as the auditor responsibility and independence are credible).

Guidance on the Strategic Report, Annual Directors’ Statement and audit of these, could include an explanation of where to find more detailed information to check the validity of the report (e.g. the CSR /

sustainability report) and encourage that a link to this is included in the Annual Directors’ Statement.

On a related point, we would also support greater standardisation of assurance of CSR / sustainability reports and we encourage other bodies to support common metrics for CSR / sustainability reports. As mentioned in our response, it would help if this report could be referred to and linked to in the Annual Directors’ Statement. This will mean that this data is more useful for investors, who will find it easier to use and analyse.

Question 30

Are there any actions that the Government could take to make the process of obtaining additional assurance on specific information in company narrative reports easier or less costly?

Yes No

Comments

Question 31

Do you agree that the Audit Committee Report should contain, in addition to existing requirements:

• How long the current auditor has been in post; and when a tender was last conducted.

• The length of time since the directors, including members of the audit committee, have held discussions with principal shareholders about the company's relationship with its auditors, including the quality of service provided?

Yes No

Yes

Comments

Disclosure of this information will contribute to the improved standard of overall disclosure.

Question 32

The Government would also welcome views on the impact of these proposals, both on the cost of preparation of the Audit Committee Report, and of the benefits to investors of having access to this information.

Yes No

Comments

Question 33

What guidance should be provided for preparers of the Strategic Report and the Annual Directors Statement? For example, what form should the guidance take (case studies, best practice, minimum compliance requirements), how should it be disseminated and should it be high-level and principles-based or more detailed and specific?

Yes No

Comments

We are in favour of full guidance – more detailed, with best practice and minimum compliance requirements.

We support the commitment given to provide business with new guidance that will help them measure and report upon their corporate environmental impacts. We would suggest that this links to current initiatives for measuring performance, such as the Global Reporting Initiative and the Global Initiative for Sustainability Ratings. Given the focus that will be necessary by many parties to make a success of this, it would make a lot of sense to look at how best to influence and develop that stream of work in this direction, rather than to launch any closely related ventures independently.

We recognise the need for clear, unambiguous guidance to assist companies in reporting. An example of good guidance on this issue was the Accounting Standards Board’s guidance under the original Operating and Financial Review that was proposed in the mid-2000s.

Related to this is the initiative towards integrated reporting. We very much support this, led by the International Integrated Reporting

Committee. However, EIRIS is keen that the amount of sustainability information available and produced by companies is of sufficient detail and quality for investors and other stakeholders. We would therefore encourage that any detailed information to help companies measure and report their corporate environmental impacts could be detailed in their CSR/ sustainability report, with a link from Annual Director’s Statement. This could be explained in guidance given for the Strategic Report and Annual Director’s Statement.

Question 34

Do you agree with the Government’s proposal that the reporting statement and supporting guidance should remain voluntary? If you support a mandatory statement, please explain why that is necessary for your requirements.

Yes No

Yes

Comments

Question 35

Do you agree that understanding of the profile and working practices of the FRRP should be enhanced, but that the remit of the FRRP should remain unchanged?

Yes No

Comments

Department for Business, Innovation and Skills URN 11/945RF