Five questions with the UK’s Financial Reporting Council

What is the Financial Reporting Council’s (FRC) main message to issuers?

DS: The message we’re giving to issuers from the corporate governance side of the house is that we want them to take on board the changes we made last year, specifically with regards to risk reporting and viability reporting. That’s quite difficult to do. The information we’ve got is provoking a quality conversation about how you go about assessing risk and mitigating it, and then how you determine your viability. We’ve only seen a few reports under the code so far. We’ve also said we’re letting that embed and we won’t be looking to change the UK Corporate Governance Code until 2019. What we want to see is a period of stability, but we also want to see development in terms of the ways issuers respond to the challenge.

How are investors reacting to the initiatives the FRC has taken on quarterly reporting and audit committee reporting?

JW: The majority of UK-based investors believe quarterly reporting was a barrier to long-term thinking. But when you talk to US-based investors you get a completely different perspective, as they’re still very much in favor of quarterly reporting. And most of the investment coming into the UK is from overseas so we need to be aware of what international investors are thinking.

If you look at the changes we’ve made to audit committee reporting, those have gone down almost universally well. Investors really like the fact that we’re going to have extended auditor reporting. The black box that was audit has been opened up and they can have much more meaningful conversations with companies about the audit process.

How do international investors view reporting from UK companies?

JW: Most of the time when you talk to global investors about their views of the UK market, many of them say they don’t need to bother too much about engaging with the UK market regulator because they’re quite happy with how UK companies report. This is great in one sense, though it also means that when we want to make changes, we need to try a bit harder to engage people. But one of the motivations I think people have to engage with us is that if you look around the world, a lot of what other regulators do is based on initiatives that started off with the FRC, so I think we’re quite internationally respected and watched.

We’ve seen, for example, stewardship codes popping up around the world based on the UK one ‒so investors do have motivations to engage with us because it influences policy around the world but it’s sometimes difficult to get them to engage on specific UK issues because, in a broader context, they see that the reporting problems are in emerging markets and not so much in the UK.

In some areas we’ve reached the opposite extreme where there’s too much information, so it’s more about key initiatives such as ‘clear and concise’, which is making sure the report doesn’t include information that shouldn’t be there. Our corporate reporting review team found there is still a lot of uncertainty around how you arrive at the decision about what’s material and what’s not, which causes reports to become quite cluttered.

Sometimes, companies are too much on the side of caution and include everything, which makes for a report that is not clear. That applies to non-financial reporting as well. A lot of information that is targeted not at investors but rather at pressure groups should be placed on the website, not inside the report.

DS: We have colleagues who specifically deal with narrative reporting. ‘Clear and concise’ aims toward shorter reports, which is good in practice but, if anything, reports on the whole are staying the same or getting very slightly longer. Our colleagues shy away from the number of pages as an indicator of the quality of the report.

What is the FRC’s position on integrated reporting?

JW: It’s not as simple as being ‘for or against’. As an organization we’re in favor of integrated thinking, but we don’t have a position on integrated reporting. That’s reflected in the UK market: when I’m talking to investors, I don’t get a particular sense that people are absolutely for integrated reporting or not. In some countries, like the Netherlands, investors will almost invariably say integrated reporting is the way forward. I don’t see that among UK investors and definitely not in the US.

DS: A lot of the principles of integrated reporting are contained within our strategic report guidance so there isn’t necessarily a clash between them at all. If you’re producing an integrated report that is also giving a lot of material information and is also clear and concise, that’s good. There are quite a few models of reporting out there. If you integrate your report in the right way and you make those links clear, it’s easier to understand.   

What will be your main area of focus this year?

DS: Every year we do a developments and monitoring report for corporate governance stewardship. This year was relatively quiet with no big issues; there were no major remuneration votes and all the transparency issues are largely out of the FRC’s hands and under the law. We have embarked on a major project about corporate culture. We have a long history of corporate governance in the UK, with our listed rules and our code.

Broadly speaking, we look back and think it’s been a success. But we do realize there’s much that goes on within a company in its relationships with its stakeholders that is beyond the code. So we’re trying to look at the way a company deals with its employees, which issues are coming up in the workplace – training, recruitment – relationships with investors, customers and suppliers, and how you measure all of that. There’s a whole debate about the possibility of measuring it, how you can measure it, what you infer from the information you’ve got, and then how to embed a good culture within your organization. Corporate culture will be the main topic at our upcoming annual conference in June.