The future of corporate reporting (not that it’s currently pleasant to contemplate the future…)

In my last entry, I said that if Trump wins, it will only be because of an abject mass surrender to blindly ugly short-termism, a rejection of science and governance and of rationality itself, aided by a malfunctioning democracy and widespread mendacity. Well, at the time of this post, the outcome is still unclear, but it’s apparent that a shocking number of Americans surrendered in exactly that way. The implications of this are, I believe, terrible. But for now I’ll press on, while acknowledging that the following post (which I’d written earlier) seems trivial against such a background.

The UK’s Financial Reporting Council has issued a discussion paper A Matter of Principles: The Future of Corporate Reporting

Here’s some of the executive summary

  • Today the annual report is widely seen as the set piece of corporate reporting. In recent years it has been pushed and pulled to meet increasing demands from traditional and new users. The result is a document that is confused about its intended audience and purpose.
  • It is also important to recognize that the annual report is just one part of the suite of corporate reports that companies produce, which has resulted in fragmented and sometimes incoherent content. The premise of this paper is that further tweaks are unlikely to address valid concerns. Accordingly, we present for discussion a more radical overhaul. The new model seeks to:
    • unbundle the existing purpose, content and intended audiences of the annual report by moving to a network structure;
    • facilitate a more holistic approach to corporate reporting, governed by an overarching set of principles, that recognizes different reports and the needs of different stakeholders;
    • move towards an objective-driven reporting framework around principles of effective communication;
    • establish a reporting framework that is consistent with the recommendations made in the independent reviews by Sir John Kingman and Sir Donald Brydon;
    • think beyond a paper format and embrace the opportunities available through technology and
    • enable corporate reporting to be more flexible and responsive to changing demands and circumstances

The discussion paper is, as you’d expect, handsomely designed and full of good ideas, some of which (and this of course is the most immediate value of such exercises) can be used to enhance current reporting. For example, their proposed model contains a “business report” with the objective of “(providing) information that enables users to understand how the company creates long-term value in accordance with its stated purpose,” with minimum content including, among other things, disclosure of the business model and how it creates value, addressing the following:

  • Resources and relationships
  • Indicators of the quality of relationships with key stakeholders
  • Explanations of how value is allocated to shareholders and directors including:
    • dividends and dividend policies;
    • summary information on directors’ remuneration (further details in a remuneration network report) and how those distributions relate to value creation
  • Explanation of how value is distributed to other stakeholders to sustain value creation, such as employees, local communities, and the natural environment, and how this contributes to sustaining value creation

To the extent that an entity isn’t already addressing these items in its management commentary or suchlike, there’s plainly no reason – at this advanced point in our history – that it can’t do so, regardless of whether it’s required; likewise the FRC’s point about disclosing the “impact of a company’s activities on stakeholders and the environment.” On the latter point (and of course there’s a linkage here also to the IFRS Foundation’s recent initiative), the paper goes further in envisaging a “public interest report” which in summary would “provide information which enables a user to understand how the company views its obligations in respect of the public interest; how it has measured its performance against those obligations; and to provide information on future prospects in this area.” This would include “identification of stakeholders, their relationship with the company and how the company interacts with them” and “for each area of stakeholder relationship: metrics relating to external outcomes for each stakeholder relationship; policies; and risks posed by the company’s operations to that area and mitigation.”

The FRC requests comments on the paper by February 5, 2021. It certainly seems capable of sparking some eloquent and multi-faceted reaction, but I don’t know, by now the whole process of putting out such reports and collecting and sifting through comments on them seems more like some kind of performance art than anything else. I’ve covered many such think pieces and initiatives over the life of this blog (if I remembered all of them), and it would be appealing to think that each built on what came before, inching ever closer toward some financial reporting promised land. But each new initiative has the feeling of starting all over again, standing in splendid, doomed isolation (the stuff about thinking beyond a paper format is so tired and old-hat now that one almost expects the debate soon to come full circle, hailing paper formats as an exciting new breakthough). To take the most obvious example, I’m not sure why the FRC report doesn’t (unless I missed it) even mention integrated reporting, or try to build on the work already done in that area, given the obvious degree of commonality and overlap. So, really, I doubt that it’s worth anyone’s time issuing a comment letter consisting of much more than broad applause, and a plea to get on with making something happen. Because while the virtuous among us are writing discussion papers, others are malignantly poisoning the world in which those efforts could possibly have made a difference…

The opinions expressed are solely those of the author

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