EY claims corporate reporting in FTSE 350 is improving

EY claims corporate reporting in FTSE 350 is improving

January 2019 will see the new Corporate Governance Code coming into effect, and businesses are already preparing for it – but EY believes more can be done

With the new Corporate Governance Code officially coming into full force in January next year, EY has discovered that this is already having a positive impact on corporate reporting among FTSE 350 companies.

However, the firm believes that there is still plenty of room for improvement when ensuring that “disclosures are fully compliant and provide meaningful insights on these new areas.”

EY analysed over 100 annual reports from the FTSE 350, and each one showed an improvement in the reporting of stakeholder purpose, culture, and engagement. The firm’s analysis also revealed that companies are making the necessary adjustments ahead of the new Code coming into effect.

Ken Williamson, EY’s UK Head of Corporate Governance, said: “We’ve seen significant progress in the quality of reporting since we began our reviews five years ago. The political and regulatory focus on how companies engage with their stakeholders has had a noticeable impact on annual reports this year, and we’re also seeing companies providing better disclosures around their purpose, social impact and corporate culture.”

Out of these annual reports, 83% showed that companies have chosen to engage with their employees, whereas 65% go a step further by describing their methods when engaging with other stakeholders, such as suppliers.

EY said: “There has also been a small increase in reports mentioning the section 172 duty (of the 2006 Companies Act), rising to 11% from just 1% last year.”

In accordance with section 172, directors have a regulatory obligation to report the long-term impacts of any business decision they make, with a focus on the involved interests of the company’s community: the suppliers, employees, and stakeholders.

Williamson continued: “In order to comply with new Corporate Governance Code and section 172 requirements, companies will need to place great emphasis on how the board listens and responds to the views of employees and other stakeholders. They will also need to explain how these interactions have impacted their decision-making as a result.”

Out of the the reports analysed, 47% had an increased focus on the “broad societal purpose that goes beyond shareholder value”, as opposed to the 41% from last year, EY has found. This follows on from the issues from the issues raised by the Financial Reporting Council.

When coupled with the fact that 41% of companies connected their strategic objectives with their purpose – compared to just 20% in the previous year – the rate of improvement is certainly noteworthy.

The annual reports of 39% of companies explained how culture supported their business strategies, 30% focused on how culture measured up in their companies, and a large number highlighted the importance of both identity and culture as a board priority going forward.

Williamson emphasised that with “technologies such as data analytics, AI and automation have the potential to provide new insights into areas like culture that were previously thought impossible to measure.”

Hywel Ball, EY’s UK & Ireland Managing Partner for Assurance and UK Head of Audit, said: “With the growth of the knowledge economy, more and more of a company’s value lies in its intangible assets, such as its corporate culture. It’s therefore positive to see that some companies are grasping the opportunity to provide better disclosures around these issues, albeit still having some way to go. These trends are consistent with a growing momentum for companies to report on how they are generating long term value for their stakeholders and increase trust in business for society.”

Despite these undeniable improvements, EY believes that “culture reporting is often generic and limited, with few disclosures that identify the challenges faced in relation to culture or embedding it.” According to the firm’s analysis, only 37% of the annual reports clearly outlined how culture was embedded throughout the company, rather than just “setting the tone from the top”.

Ball stated: “We have been looking at these issues as part of our work with the Embankment Project for Inclusive Capitalism. Under the auspices of the Coalition for Inclusive Capitalism, the project brings together business leaders, investment managers and shareholders. Ultimately, it’s focused on helping companies to deliver trusted information to their key stakeholders.”

One particular area EY has revealed needs to be a focus for further improvement is how long committee chairs are allowed to serve on a company board.

Provision 19 in the new Code is introducing a nine-year tenure limit from a chair’s first appointment to the board, in order to encourage company boards to continually remain diverse, engaged, and ambitious. However, 23% of the annual reports looked over by EY stated that chairs had served on the board for more than the nine-year limit. 6% served for over 15 years.

When considering the results EY has gathered as a whole, Ken Williamson concluded: “With trust in business in decline, it’s also vital that companies follow the spirit of the new rules, rather than seeing them as purely a compliance exercise. Bland, boilerplate disclosures will miss the opportunity to provide real, meaningful insights to a company’s stakeholders.”

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