FRC tries to improve dialogue between boards and shareholders

In the wake of corporate governance changes such as the new UK Corporate Governance Code and the recent introduction of the Stewardship Code for institutional investors, the Financial Reporting Council (FRC) has published recommendations aimed at improving dialogue between company boards and their shareholders.

The Effective Company Stewardship: Enhancing Corporate Reporting and Audit report proposes that all of the annual report and accounts should be “balanced and fair”.

The FRC also proposes that audit committees provide fuller reports to shareholders, particularly in relation to risk. In turn, the auditors’ report should include a new section on the “completeness and reasonableness” of the audit committee report, particularly in relation to the dialogue between them and the committee.

John Davies, head of technical at the Association of Chartered Certified Accountants (ACCA), says that the FRC’s proposals bring together some of the strands that both ACCA and the government have been looking at in the past two years – active share ownership, narrative reporting and independent audit.

“There is growing disenchantment with the ability of corporate reports to meet the information needs of shareholders,” says Davies. “Too often annual reports are too voluminous and detailed or else are marketing vehicles which contain vague or self-congratulatory content. If the FRC’s ideas have the effect of concentrating boards’ minds on what users really need to know, that will be a positive development.”

Company response

Separately, Stephen Haddrill, the FRC’s chief executive, announced last December that the regulator is to bring together company directors, investors and others to explore how companies are responding to the new UK Corporate Governance Code provision on the board’s responsibilities for risk. The FRC will then consider whether the Turnbull guidance on risk and internal control needs to be amended.

The FRC wants to know what the respective roles of the board, board committees and management are, how they interact, where oversight ends and operational management begins. It also wants more information on how boards are determining their appetite for risk and which risks the board needs to “own”.

The FRC’s approach has been broadly welcomed. John Smart, head of fraud investigation and dispute resolution services at Ernst & Young, believes that the FRC’s approach is timely.

“There is a realisation within company boards that they need to look more widely at the nature of risk and not just focus on areas that have always seemed key,” says Smart. “New legislation and regulations mean that boards have to assess how these impact their operations and how these new risks need to be managed.”

Recommendations

1 Directors should take full responsibility for ensuring that the annual report will provide a “fair and balanced” account of their stewardship of the business

2 Directors should better describe the steps they take to ensure management information is reliable, and provide greater transparency about the activities of the business and any associated risks

3 Audit committees should provide fuller reports explaining how they discharged their responsibilities for the integrity of the annual report and other aspects of their remit (such as their oversight of the external audit process)

4 The audit report should include a new section on the “completeness and reasonableness” of the audit committee report, which should identify any matters that the auditors believe are incorrect or inconsistent with other information presented

5 Companies should take advantage of various technological developments to increase the accessibility of the annual report

6 There should be greater investor involvement in the selection process by which auditors are appointed