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Strategic and Governance reporting workshop, 9 September

This workshop covered the latest developments in Strategic and Governance Reporting and looked at our latest review into reporting practices across the FTSE 350.

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The 2019/20 reporting cycle has concluded against a global backdrop unlike any other encountered by UK businesses. The world has changed and for businesses operating within it, the last few months have forced them to re-evaluate business continuity plans, risk assessments and working practices. In these unprecedented times no company has failed to be impacted in some way.

Against this background transparency and accountability have never been more important. We are therefore pleased to announce a series of reporting workshops that aim to help companies navigate these latest reporting challenges.

At this our launch event we:

  • Provided insights into the current and emerging trends in FTSE 350 strategic and governance reporting identified in the last reporting cycle
  • Showcased examples of good reporting practice
  • Outlined the four key reporting themes that companies should be aware of as they plan for their next annual report

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Mark O’Sullivan

Many thanks for joining me this morning, good morning, and thanks for joining us on the first of our new series of virtual workshops. My name is Mark O’Sullivan, and I am head of Corporate Reporting at PwC. It’s fair to say, these are certainly unusual times, not least in the fact that I am wearing a shirt and physically in the office for the first time since March. And I’m having to do this workshop with two of my team members socially distanced in another room in the office, but despite these unusual times, we are keen to keep you informed and engaged both in this workshop and over the coming months with some key speakers, relevant updates, and practical insights to help with the new reporting season. In this workshop, we will run through our latest insights into current and emerging reporting practices, shine a spotlight on better practice, and outline our plans for the year ahead.

But before we start in earnest, just a couple of pieces, given the number of people in the workshop, you may have noticed already, that you are automatically muted and we will be recording the session, a copy of the recording will be sent to you after the event.

As you would have seen on the opening holding slide, as well as the invitation to the event, we will be using Slido to ask a couple of questions and to take questions throughout the event to create some degree of interactivity.

This year was set to be the year of the stakeholder reporting. New requirements of section 172 and stakeholder engagement reporting were introduced, and the revised UK corporate governance code was set to encourage more clarity on the culture of businesses and their role in society. The environment and climate change are also high on the agenda. Against this backdrop, we once again carried out our review of reporting practices in the FTSE 350. Looking at all the companies in the index with year ends from 1st of April 2019 to 31st of March 2020, and focusing in on the strategic and governance reports, although I should stress that we don't look at investment trusts or haven’t traditionally so our population this year was 278 companies. Although, given how the quality of their reporting is improving, we may change this approach in the future.

It's fair to say that with the emergence of the pandemic, we did ask ourselves whether our review, now unbelievably in its 15th year, much of it done before the pandemic really took hold, was still relevant. In my view, the pandemic and the measures taken to address it have only emphasised the importance of the stakeholder agenda. COVID-19 has also meant a new focus on the short and medium-term survival of companies and begun to raise serious questions about how they assess their longer-term prospects. This year's findings show how the companies have begun to respond to these challenges, both before and after the impact of COVID-19 began to be felt in earnest.

So what will the workshop cover? Hopefully, if I am honest, most of the things that you asked for, so thanks to a number of you who have responded to our request for topics to address in this workshop. It will kick off with a look at what we found, from our review of reporting practices in the FTSE 350. Firstly, we’ll explore how companies responded to the regulatory changes mentioned just now. Secondly, ongoing areas of reporting, any workshop we do, will include areas that we believe will improve the overall standard of disclosure, things like strategic linkage, risk disclosures, and forward-looking insights. The team, however, haven't been resting on their laurels, and have been busy tracking COVID-19 reporting since its emergence. So we will then take a look at a high level of what we have seen in both annual and half year reports since March. We are conscious in this format that we can’t be as interactive as otherwise be, so please feel free to use Slido to submit your questions throughout the session, and we’ve set aside some time later to respond to as many as we can. Then finally, we will set out our plans for the year ahead.

So, who we will hear from today. Putting aside my ugly mug, I am joined today by two colleagues, who, to be honest, have done a lot of the hard work and a better place to walk through our findings than me. So Elaine, led our review of the FTSE 350, and Ollie while involved in the FTSE 350, also led on our review of COVID reporting practices, and you will hear from them shortly. In my experience, a crisis often drives innovation in reporting and this year is no different. And of course, good reporting is good practise, whether it's about COVID or reporting on the delivery of strategy in more normal times. So all in all, I am confident that you will find some interesting and useful insights from our work this year as you plan for the year ahead. So now, I will handover to Elaine and Ollie.

Elaine Forrest

Good morning everyone. We are starting in a phase which is not necessarily somewhere that we would choose to start, but it's something that tends to grab headlines and that is around this length and size of reports. Reports have continued to grow, and I don't think anybody would be surprised by that. The annual report is up about 13% bigger than it was a couple of years ago. A lot of that is down to those regulatory changes that Mark talked about or introduced a minute ago - the new section 172 regulations, and obviously the increase in the corporate governance report. Likewise, remuneration is something that has seen a number of pages added to the report in the last couple of years. What is interesting is that we looked within the data and the March year end reports were about five pages bigger than the companies that have preceded them, and we think that is probably the COVID effect. We think that companies have introduced new disclosures, explaining the COVID impact or at least beginning to explain and look forward as to how that will impact the following year's results, because of course for most or all of these companies, we are looking at a sample from 1st April 2019 to the 31st March 2020. The impact of COVID itself is actually relatively limited on the financial numbers, it's more about a forward looking perspective of what might be to come in the next year's results.

First, to begin, I’d actually like to talk about in earnest is something that was raised by most of you as a question in advance of this session, which was around stakeholder engagement and section 172 - as I said, the new areas of regulation for this year. The first thing to say is that we were genuinely pleasantly surprised with what we saw this year with the new regulations in this area. Often when new regulations can get introduced they creep in and it's hard to notice that they’ve arrived, but actually with the stakeholder engagement and the section 172 information, it's noticeable that all companies have made an effort, they’ve put something in, they’ve labelled it well and it's clear that disclosure has been added, so congratulations on that.

Of course, we are not going to say that it was perfect. There is still lots that can be done and hopefully we can point out some good practice examples and to give you some ideas about how those companies that have perhaps done more to respond to those regulations have done, and give you some ideas for improving your own reporting.

So stakeholder engagement, I think it’s fair to say that companies have done this in the past, particularly around employee engagement. We have seen a lot of companies talk about their employee people as part, perhaps, of the people section in the past, which has been great, but this year we have seen more companies formalise that disclosure and include other stakeholders. So we’re seeing a lot of tables, for example, or a lot of sections titled stakeholders. As you can see 96%, that's pretty much everyone doing that type of disclosure. What is great about that is that we are seeing the ‘how’ companies have engaged with their stakeholders. We are seeing these methods we’ve used to communicate, but that in itself isn't necessarily quite enough disclosure, and I think this is what the other sets on that page show. We would actually like to see more, and we would expect to see more, it's not just about the ‘how’, it's also about the ‘what’. What have you learned by engaging with those stakeholders, and only 41% companies actually did identify those key issues that stakeholder cared about. Then 38% explaining their response to that stakeholder. Which in itself, as you can see, is obviously clearly less than half, but actually that’s the bit we were really interested to know about. Why have you engaged with those stakeholders, what has it meant to you, and what was the point, and what did you learn, and how have you changed as a company?

Ollie is going to talk about it more later, but that linkage piece, actually how have you linked your response to what you’ve done in response to your stakeholders? How have you linked that back to your strategic response? So, have you changed anything you are doing, or did it all automatically already tie into your strategic priorities that were previously set.

We’ve got an example here of Fresnillo, who are a really strong reporter in this area. As I say, lots of companies are doing tables and, as you see when we look at the next slide as well, it’s a double page spread. They set up nicely with who the stakeholder group are, why they matter, what their key issues are, and talked about the engagement piece, but then on the next slide what they have done is give that more in detailed disclosure. So, what issues matter, how has that affected what the board and the board committee have talked about, and then they’ve got the nice piece around decisions and actions. Actually, what was the impact of the conversation, how did it really influence the disclosure. There is something else in that slide that we will refer to a bit more later, but they’ve used the example of their workforce engagement mechanisms, so the NEDs. They’ve got their NED representing the Board and talking to employees, and how that has impacted the employee engagement. As I say, it doesn't have to be a table, just it is for companies introducing new disclosure, it does tend to help formulate or tick the boxes of what it is we would perhaps or, investors would like to see, in the report. But there are other ways of doing it and some companies have produced really nice reports of stakeholder sections with lots of different disclosure and bringing it to life with the voice of those stakeholders perhaps.

So the other side of that argument is the Section 172 disclosure. As we said, the stakeholder engagement piece has been done really well and a lot of companies have just taken that stakeholder engagement and turned that disclosure or expanded that disclosure to be their Section 172 statements. So, 61% of companies focused it entirely on their stakeholders, which is a good starting point. I think, where perhaps we didn't see that develop far enough, is around principal decisions. So we’ve heard how they engage with stakeholders but actually the principal decisions that have been made by company’s stakeholders have impacted upon those decisions. Some companies have used case studies for that which is a really nice way of putting it out in detail, but it doesn't have to be a case study, it can be just an analysis of a principal decision. So we would perhaps expect companies to consider next year how they might expand their Section 172 disclosure to include those other elements, to include the things like long-term decision making. And I think that’s the point picked up by the second step around 28% of companies took the other approach, which is they got the regulation out, and they said, ‘right, what are the things we need to talk about,’ and then responded in turn to each of those elements.

The problem with that is that it can sometimes tend to lead to a checklist approach of reporting, and like all good reporting, what we actually expect companies to do is report on what is relevant for them as a business. And the Section 172 requirement does give you to do that, so actually what were the key points in your year? What is driving your business strategy? What are the things you are looking to achieve and how has Section 172 played into those strategic decisions you’ve made, and linking back to those things.

The final thing I would say on Section 172 reporting is around the placement of it. Obviously, Section 172 is a strategic report requirement and 79% of these Section 172 statements were in there. However, we know and we agree that the sense of frustration is there is a lot of overlap between the Section 172 requirements and the Corporate Governance code new requirements. And so for some companies, they decided actually they were much better placed in the governance report. Frankly, it doesn't matter where you put it, as long as you have made the required disclosure in the strategic report to say that your Section 172 statement is in the governance report, then that is fine.

We are very keen on limited repetition and making the disclosures work for you as a company. So wherever is the right place to position it, and we will strongly encourage you to do that - cross referencing, referring. I think it was noticeable in our review that actually a lot of companies did their Section 172 statement in the strategic report, and then didn't necessarily mentioned Section 172 in the governance report, and that was something we were expected to see given it is part of the COVID plans too, so that is definitely something that we could see an improvement in.

The National Express example, this is an example which uses that idea of connecting or linkage to strategy, and linkage to stakeholders and talking about the decisions made in the year, the principal decisions, and how the stakeholders have been considered in that process. It is something that we have seen in a few places and something that helps with the use of icons as well. It just helps to bring to life the linkage piece that can be useful to explain the story that a company is trying to tell, and that linkage can then be frontend, backend, consistency of approach.

Now we are onto the excitement of our first Slido question. So, as was explained earlier, you either use your camera to get the QR code, or visit Slido #CorporateReporting. The question is, ‘How do you expect your approach to Section 172 and stakeholder engagement disclosures will differ in year 2 of the new reporting?” I shall give you a minute to read those answers and to respond.

Perfect, thank you to those who responded. Interesting to see that the thing that has come out top, Ollie, is the identification of principal decisions and explanations of that more clearly.

Ollie Law

Exactly, it is interesting also to see less discussion around the more case studies examples that companies have got, let us bring them to light a little bit more through those principal decisions and start to define them more clearly.


Yeah, it is interesting as well, because we were expecting with COVID that companies would want to use COVID as an example to talk about as a case study and bring that to life through the Section 172 decision making process.


Yeah, no exactly. COVID although presenting a number of issues is giving companies an opportunity to showcase their stakeholder engagements, Section 172 requirements throughout the year. Specifically, when we are looking, for example, around decisions such as whether or not to pay dividends. So actually, engaging with the various stakeholders, including shareholders, and showing that trade-off between those two and then linking back to why have they made that decision as well as bringing that into play between the different stakeholders, so interesting to see that’s the response so far.


And guys, given that it is a duty of the Board, to me looking at the answers that they came in I was surprised that there was a small focus on explaining more about the role of the Board. Do you think that the disclosures we’ve seen in the year is enough to talk about the Board and how active it has been?


I think to reflect back on what I said around, we are not seeing enough Section 172 necessarily mentioned enough in the governance report. I think that's indicative of the fact that people aren’t talking about the Board enough and their role. I think it’s something we are going to jump onto in a second around the new governance code, being more around Board actions and bringing governance to life, rather than necessarily just talking about the principles or procedures that people have in place for governance act.


Yeah exactly agree, again, I will talk about COVID I don’t think we can go through without talking about COVID, but clearly the Board will have been involved in a number of decisions throughout the past six or seven months, that COVID’s has been around and will continue to be involved in those decisions. It does present an opportunity to bring to life more of the Board involvement and how they have been involved throughout the year, and not just on key specific decisions but actually showing that effectiveness, not just in meetings but throughout the year.


Just before I move off too far from stakeholders, there is one other reminder that I wanted to give and that’s around this director’s report requirements. The other thing we noticed from our research is that whilst companies are very good about talking about the stakeholders in the front half of the report, many have forgotten that actually there is a specific director's report requirement around stakeholder engagement. Again, it just needs to be a sentence to cross reference to the frontend where that disclosure is, you don't need to make the disclosure in the director report, but for stakeholder engagement and employee engagement there are now specific director’s requirements. So if you are unclear about those or that’s come as a surprise to you then do reach out for more information, but a good reminder.


Also, a useful reminder for me, now many of you have had a go on the old Slido tool. You all have seen the functionality to ask any questions. So far, we have clearly been as clear as you like, and we have received no questions at the moment, but do please submit them if you have any.


Thanks Mark. So, to move on to the UK Corporate Governance code, as I said, there is obviously a lot of overlap between this and stakeholder and Section 172 requirements. It is a big part of the new code, but it's not all about that. A key part of the new code is this idea of applied governance reporting, so using the governance report to explain how the Board have actually contributed to this delivery strategy, how the board have gone about the other parts of their business. And we would say that 44% of the companies have provided some sort of indication of the delivery of strategy. Again, I talked about symbols earlier, but symbols are something that some companies have used in their governance report to show a link back to the strategy in the front half or, even better, companies that have just talked more naturally about that actually the Board have thought about the strategy or contributed to the strategic decision making in this specific way. There is definitely more that companies can do in that area. We think that the new rules of governance, companies have done a great job of ticking the boxes of the procedure, but actually bringing the requirements to life and being more inventive perhaps or engaging with their reporting. There is still some way to go in those areas.

I talked about the fact that I don't think enough companies are referring to Section 172 in the governance report, and you can see here that about 50% did do that. Again, though sometimes that references literally, we have applied Section 172 or the Board are aware of the Section 172 principles. And that really isn't enough. We really do want to understand from the Board what it is, how they have applied those principles, and why they’ve considered them to be important to the decisions which they were making, and how they have an impact around some of the decisions they are making.

The other area, as I said, reflected back to the frontend, the stakeholder agenda that again is a Board requirement. How is the board engaging with stakeholders? 82% of companies did refer to that, again some of that is in the strategic report and some of that is in the governance report. That's a really good indication, but again more perhaps that can be done to bring that to life rather than just saying ‘yes’ and the Board playing a part of that. One of the things, in particular, that we don't necessarily see enough of - it tends to be generalistic - the Board has engaged or the Chair of the Board has engaged. What we would like to see a bit more of perhaps is the Committee Chairs talking to stakeholders and understanding particularly perhaps giving opportunity for investors to speak to them.

This example from Pearson, is taken from the Chair’s statement, and this really does demonstrate or indicate how the Board are applying governance. The Chair talked about in the statement about how they’ve contributed to the strategic priorities in the year and what specific actions need to be taken. And I think this is a brilliant example, because it does indicate or make use of something that I think is much underused in annual reports, and that's the Chair’s introduction to the governance statement. Sometimes, these can be very generic and high level and it can also be really difficult actually to understand what business we are talking about, it really could be taken from any annual report. To really personalise this statement and to run through and talk about the things that the Board have actually done in the year, to highlight the key issues that the Board has acted on and discussed. It really is a great opportunity to bring those things to life and to keep, and also for the Chair to own and discuss the key issues in his own voice. I know it can be difficult sometimes, because you’ve got a Chair’s statement at the front and a Chair’s statement at the front of the governance report, but actually there is a clear distinction that can be made between those two statements and using the principles and practices of governance is a great way to talk about this in this particular area.

One of the new regulatory requirements of the governance codes that we have seen a lot of discussion around is the methods of workforce engagement. As I indicated earlier, the designated NED is definitely the most popular choice and it also always seems to pop-up in those combinations of methods. Some companies have deviated from the code and come up with their own method, which is also perfectly acceptable, as long as that's clearly explained. But we get the sense that a lot of this is still in development for most companies, that they have introduced these principles or are introducing these methods of engagement and started the process, but actually what we are not necessarily seeing in the report particularly well is the explanation of, okay, we send the NED out to talk to the workforce - what have they learned and how has that impacted and influenced the decisions we are making? What did we learn from the process - what is the point in doing it basically, because there is no point in doing these things unless we’ve learned from them and are using it in the way we change the way we do the business. So, we would expect to see a better disclosure perhaps than what we are seeing at the moment and maybe, as I said, some of that is just that the mechanisms weren't necessarily in place before, so companies have talked about how this year, how will they therefore be able to move on to the results of that engagement in more detail next year.

The other area that’s in the code is around culture. And again I think culture is something that companies have culture on purpose, in particular, things that companies have started talking in more detail about over the last year or so, which is great. But I think the problem we are seeing with the culture disclosures as part of the governance report at the moment, is that they tend to be very high level. They tend to talk about culture in the strategy report and then the governance report will just have a sentence that says, ‘oh yes, we’ve got a great culture, you can read more about that in the strategic report.’ And that is not actually what the governance code is asking, what the governance code is asking about is, how does the Board monitor that culture, how do you ensure that what you set as a culture is correct, and is actually being maintained. Obviously the governance code was introduced in a response to a lot of corporate failures, and a lack of understanding of ‘were the Board actually taking control of that company and leading it in the way, and monitoring success, and the way that it was’. We’ve set a purpose, we’ve set a culture, are you actually following that in the way you do business? So we feel that there is much more that can be done in this area.

There have been some good disclosures. For example, the National Grid. Obviously it's quite small on this slide, but we’ve broken it down on the next slide to sort of keep it, but they’ve talked about the process and monitoring culture in the year. And on this slide you can see, they have been quite specific about how they have evaluated, the sort of scorecard that they’ve got, and how they’ve listened and talked about culture in the year. And that is an ongoing process, rather than just something that they have done this year because it's new in the code and next year might not see anymore so actually it's an ongoing consideration. Again, what I have just said, we are not saying actually you can’t talk about culture in the strategic report, we are very pleased to see that disclosure there, but we do need to see that Board involvement piece. So if you talk about culture in the frontend, you want to talk about board involvement there, that's great, but cross reference back to the governance report where you can.

So, back to our Slido questions and the question here is, ‘“What aspects of the 2018 code would you like to report on better or do you find most challenging to report on?” Now it is interesting as those final results come in, but actually it is quite consistent across the different categories that I see that, there is no one standout where I could see obvious strategies at the top and slightly longer, but there is not really any standout area.


No, that's been a reflection of what we’ve seen in the first year of reporting. So it is not an easy code, although that 2018 code is shorter, it is more challenging to companies to be able to share. For example, how governance contributes to the delivery of strategy or how they monitor and assess culture. Hopefully as we move into year 2 and we see potentially COVID being used as a case study and the development, the NED or the workforce engagement may see these answers, if we were to ask the same question this time next year, change going through there. But it is interesting to see there is no real standout miles ahead as we saw in the previous slido I think.


Yeah, I think the other thing that I would pick up is, we haven't necessarily talked about it, but the sustainability of the business model is something that's been a new requirement for this year. We see that sometimes in viability reports, where companies start to talk about actually how the business model will be sustainable, what is it that ensures the viability period will be met? But actually being more explicit that they are talking about business models is something that perhaps we are not seeing enough of.


Yeah, no exactly, and obviously within the viability statement, it’s the two step approach so assessing that kind of prospects of the business. Fundamentally say, is our business model sustainable, and actually again in the environment that we are in, COVID has accelerated many trends that we were seeing go through. So for example, in retail moving towards more online. So there’s going to be an onus going into the 2020 reporting season for companies to really dive down and say in our current format, and within the current environment, is our business actually sustainable as part of an overall viability, but also as part of linking to the strategy as well, which I will touch on a little bit later.


Yes, that's an excellent way forward to your point unless Mark, did you have any other questions?


Yes, there is. It is timely there is one on Slido to do with culture. Well, it’s more of a statement, but suggesting that in reality a lot of Boards don’t monitor culture. I suppose my reflection on that is slightly different. I think it’s difficult to draw a clear, I suppose, conclusion on that. And certainly a number of Boards that I have spoken to over the last two or three years are recognising the growing importance to better understand, or determine what that company's purpose is, or at least work with the executive to determine what it is. And consequently, to better understand what the sort of culture of the business, but more from the perspective of risk and decision making, to ensure at that point in time the right decisions are made, needs to be driven by the culture of the organisation. So I think this is an area of recognition of its growing importance, and certainly from my experience a growing number of Boards are beginning to focus on it, even if they hadn’t in the past.


Yeah it goes back to what we were saying around, actually a lot of companies have recognised the importance of doing these things, but putting a mechanism in place in this year hasn't necessarily given the opportunity to report a lot about the outcomes and effectiveness of that mechanism. So perhaps, hopefully, we will see more reporting on these things next year.


I had a few conversations with Company Secretaries, where they are using the change in the code actually to drive a different debate at the Board level, whether it's around purpose or culture, and actually bringing that to the Board's agenda arguably for the first time.


Fantastic, thank you both.

So, I’m going to spend a little bit of time now just discussing how reporting standards can be improved. Regulators and investors alike believe that strategy should be at the heart of the strategic report. Obviously it’s within the name, but it should be at the heart, but it should be clear as well - clear, consistent and at the heart of the report, and also linking to different areas, because, clearly talking about the strategy and the strategic priorities is one aspect of the strategic report. As you can see from the chart we’ve got, there are five other main sections to this and the chart shows a slight improvement year on year between the linkage between the overall strategy and priorities to say risk reporting, KPIs, etc. So Elaine has mentioned a couple times only when we were discussing linkage. Yes, we mean icons, etc, but is also that piece, say for example, how does a specific risk if it was to crystallise - how would that impact the delivery of a specific strategic priority?

I’m just going to take a look at an example from AstraZeneca and their 2019 annual report. Again, we’ve got a split over two slides. This first slide shows very clearly three of their strategic priorities, and what exactly that means, and helpfully they’ve got a little symbol next to that. Then on the next slide, we’ve taken four sectors, apologies that it's not essentially as clear, but just to highlight the various different areas. We have got key performance indicators in the top left, and we have got risks in the bottom left, business review and market review. And actually, they are linked through icons, as you will be able to see on there, but it is also within the detail, it’s that ‘how’. To say, for example, how that specific KPI is helping to deliver on that strategic priority. It is also around consistency and use of terminology, so say for example, within the employee section. It discusses enterprise as a team and that is actually reflected within the business review, within the risk section and also within the KPI section. It is not only setting up a strategic priority, but also understanding that that should be consistent terminology used throughout.

So we’re going to take a look at a couple of stats, more specifically around strategy and also looking over the time period. So, 51% of the companies we reviewed, just over half set out their strategic plans at a high level, and with 44% of those having specific actions against them. Again, investors and regulators want to see a clear linked strategy at the heart of the strategic report, but it also wants to see overall what time period as well. On that right hand side, we can see around 64% of the companies that we reviewed did not give a specific timeline. That, if we go back to last year, that was 52% so seen an increase of 12% year on year.

So, we've got a Slido question coming up about it in a bit. Interestingly, the first if it is not mentioned within a strategic section, the first mention of any sort of strategic time frame is usually in the viability report. And the main reason for that, or the main justification that’s given, is around that’s what they see as the strategic plan. Interesting to see that kind of shift year on year now, could be reflecting some of the uncertainty in the market, but we are going to ask you that question. So, for the third and final time, the final question is “why, in your view, do many companies not specify the time period covered in their strategy disclosures?” So jump on to Slido, and I am so intrigued to see what comes out of this one.

As you can see from the results, we have a clear frontrunner, so avoiding making public commitments that might not be achieved. It's an interesting one Elaine, given obviously the viability period is disclosed usually around 80% between three years, and with the state, we are going to be viable for three years, but not wanting to make that public commitment earlier on in there.


Obviously, it is a double-edged sword, because in times of uncertainty like we currently have, actually investors are looking for commitment from companies. They are looking for a bit of certainty and a bit of steerage around actually, this is what they want to achieve, and we are so committed to that. There is an argument that said forward looking disclosure doesn't necessarily have to have a time period, to use forward looking language and to be specific about your plans, and the way your direction of travel is, is just as important as putting a number on it. Some companies, for example, instead of talking about two or three years, might talk about a medium-term period which is a bit more flexible but still gives an idea of actually what needs to be achieved or they want to achieve in a period of time. I think also allows investors to have a bit more confidence in that disclosure, and as you said yourself, with so many viability periods you’ve got a three year strategic plan there then why are you not talking about in the same terms in the front end, the same three year period, it is not.


Clearly, we are in times of uncertainty, it is difficult, but disclosure can be a company's friend in this. So, for example, within the viability period I discussed it very briefly around the prospects of the business and the business model, actually setting out why you think for the next three years your business model is able to function and achieve your strategic priorities, is helpful. And then also when we dive down into some of the more detailed disclosure, actually showing that scenario analysis and stress test and say, ‘hey, this could happen and this could be the impact of that.’ But we’ve spoken to investors and companies, so, and regulators as well, that this is all a very topical subject.


It definitely continues to be one of the areas of focus, the controversy that investors would like more of, and companies are always reluctant to give.

Mark, I don't know if you have anything to add?


Well, it is an interesting one. If the shoe was on the other foot I would probably answer the same. I suppose, what we are not saying here is, when we look at strategy that we would expect to see clear targets that companies can be held accountable to necessarily. There are clearly some that do that and it has been interesting not to steal all his thunder, that with the pandemic and everything that we are going through, how much more transparent companies are being in terms of some of the scenarios that they are looking at and the plans that they are putting in place. What we are looking for when we talk about strategy is that, is this the viability, is talking about a three or a five-year strategic planning cycle, then what are the key areas of focus. Now, that's not operationalising them and trying to get into the minutiae, it is being clear about the direction of travel - where will be the areas of focus? What will be the main areas? That's an important distinction that I would hope would bring that percentage down a bit in terms of what we are really looking for, and what the leading companies are providing.


Exactly, thank you, Mark. So, we’re now going to look at risk reporting - so, again it is another key focus of the regulator. They want to see companies, not just rolling forward the prior year principal risks, but actually investing in that time and going through the process to ensure that they have identified the key principal risks. Again, COVID, I am going to keep mentioning it, it has been a catalyst for that. So, Mark mentioned that we have been doing some looking into, kind of, interims and what you are seeing is definitely a significant change from the early December reports to the interims and that changed within principle risk. Again, the 2018 code introduced this concept of emerging risk and talking about the process that companies go through.

Again, we’ve got a stat there, so 74% did confirm the process for identifying emerging risks. Although they’re not required 40% did identify those emerging risks. And on the right hand side, you can see a word cloud, probably only a couple of words visible there, but that's quite deliberate. So, all that shows is the number of times a specific risk was mentioned. Clearly you can see COVID-19, pandemic, climate change, and also not to forget it, Brexit and cyber attacks as well. Again, 32% of companies who did state that emerging risk had COVID-19 as part of that and it’s interesting to see how quickly that situation has evolved and I don’t think any of us really expected that. I wouldn't expect many companies going forward to have it as an emerging risk, clearly that’s emerged. We had 11 average number of principal risks this year and last year as well.

Before we jump onto the next slide, the principal risk reporting around COVID is taking two specific approaches. The first being, including it as its own standalone specific risk either calling it out as a pandemic risk or as a COVID-19. Or showing how it has impacted the principal risk, so actually what is the impact on the outstanding principal risk. Virgin Money, when we look at that brief emerging risk example, does a really good job of assessing how COVID-19 has impacted that principal risk.

So this is the Virgin Money example. Very briefly, they talk about a process on the left-hand side. They clearly identify what they believe the potential time frame of impact is using the heatmap on the bottom left hand side. Clearly, on the right hand side, they give a description of emerging risk but then they also take it one step further, actually, and talk about the mitigating actions they're taking already to try and ensure that risk doesn't crystallise, which is probably a step further then what most companies have done and essentially report on it as a central principal risk rather than as an emerging risk.

Moving on, finally to climate change, and TCFD. This again is looking back to that Word Cloud, climate change was up there and we have 53% of companies, who stated emerging risk including climate changes as one of those. It was set to be alongside stakeholders, the reporting topic of the year, clearly COVID came along and started to take that mantle.

But Mark has been quoted as saying, ‘you can't social distance from climate change,’ and he is absolutely right. This is not an issue that's going to go away and actually COVID has highlighted the ESG agenda even more than we were, say 12 months ago. So a couple of brief stats on it - so we’ve seen 26% in the TCFD reporting and 19% include that as part of their future plans. We are expecting to see more reporting around this going forward. So, obviously, we’ve got the regulatory focus of the FCA consultation around reporting and premium listed companies reporting on this December 2021 year end as well as, but it is not mentioned, the FCCR regulations as well. So we are expecting more disclosure and more integration within that strategic frame.

I’m going to touch on an example from the London Stock Exchange. Clearly, there are four areas of recommended disclosures, so just taking that extract around the governance piece. So it explains the two sections there on the recommended disclosures, it talks about the LSEG approach to their specific approach, and also including the Board level approach, the enhancements they’ve made within 2019, and then also appropriate and clear cross references to other sections of the annual report.

And finally, I know we’ve touched on it a lot. Personally, I’ve spent a lot of time looking at COVID reporting, and it is certainly something that is not going to go away. So there has been a new level of focus, ongoing concern, clearly due to the liquidity and insolvency issues that many organisations have faced, and what the stats show and what we are starting to see even more is that importance of explaining how you get to the decision around growing concern and viability. The FRC very explicitly came out and said, ‘we expect to see more material uncertainties’, so it is the job of management to be able to disclose that judgement, whether there is or there isn't a material uncertainty within the report.

So, just a couple of quick stats there. So we are seeing a 179% increase in the length of the average going concern disclosure compared to 2019, and 73% included stress or scenario analysis compared to only 14% in 2019. Clearly, we are seeing a marked increase, and that was based on a recent sample, and as we go through 2020 reporting season we will see more of that. Then, we just got a couple brief areas that we have touched on - stakeholders have already touched on and the impacts of that. Governance and risks and clearly again both principal and the emerging risk, but actually more importantly is that quality of information. Clearly, we have all had to make a change in the way that we work. So it’s how has the internal risk management system held up to that and is the Board still receiving the same quality of information as they worked previously. And finally, by no means least, that reporting impact. Again, the regulators are very clear that APMs should be used consistently year on year and not create new APMs out of this crisis.

Again, we have a specific project looking at this, so please do keep an eye out for that, that is coming in the next couple of months by focussing, driving down to more detail on this.

Back to you Mark.


Thanks, guys for that excellent run through of what we have seen from through the current reporting cycle both from FTSE 350 and more specifically from COVID. Elaine, Ollie, and the rest of our team have put in a significant amount of work as you might imagine to look at 350 sets of accounts, and it's much appreciated.

There are a couple of questions that I'll pick up and if I don't address any/all of the questions and we will come back to them after the event and then I will wrap up.

The most recent that came in actually when we were talking about emerging risks was, is it credible to describe climate change as an emerging risk? And I suppose that goes to the heart for each company, how do they define emerging risks? I think it was introduced into the code without any guidance or definition per se and therefore some companies have approached it and it's probably appropriate that it has been identified as an emerging risk. I mean, for me an emerging risk is something where it is difficult to or only just possible to start to establish what the potential impact or likelihood of the risk is and indeed, mitigating activities are only really just being put in place. But we have seen different views around the emerging and some people have looked at it as well these are the emerging principal risks of the year, in which case maybe climate change or Brexit would be appropriate, but I would agree going forward those areas may not be appropriate to call them emerging risks for the longer term.

Another question that's been asked is around subsidiaries. We have focused on our findings and our review clearly on the group annual report, but we should remind you that many of these changes particularly around Section 172 and stakeholder engagement reporting are applicable for subsidiary accounts over certain thresholds. And in our experience, this is an area that has arguably been missed and companies are grappling with it at the last minute, I think the better companies are putting more insight into them. But that is undoubtedly, the last minute realisation has led to a certain degree of boilerplate in some organisations, but I think the key for me is determining what is the nature of the subsidiary before you determine whether it is appropriate for boilerplate wording.

I'm conscious that we are running up to 10 o'clock and close. I just wanted to outline, I suppose, our plans going forward. So, based on our observations so far and following on from them, we’ve identified four themes as set out in this slide that we will be looking at in more detail over the coming months in the run up to the next reporting season. So taking them at a high level each in turn.

I think firstly, we’ve pushed for strategy to be the backbone that runs through the report and you’ve heard that a lot today. Yet, I must admit, annual reports remain stubbornly siloed. So we will be attempting to answer certain questions such as how can companies best break down silos, create the strategic backbone and integrate the new focus on stakeholders. Some of it responded to the much greater focus from investor groups on ESG matters into their strategic story and also how can companies make best use of technology and different reporting channels to meet their stakeholder needs. With the imminent release of the FRCs report on the ‘Future of Corporate Reporting, we will be hosting a webinar with Paul Druckman and Deepa Ravel from the FRC to explore their thinking in this and other areas. So watch this space for that.

Next, we’ve talked about today the lack of clarity on time horizons in many reports. So how can reporting build on the new levels of forward-looking information created as a result of COVID-19 and also look further ahead? Because we are concerned that there is a risk that things will revert back to normal when the urgency decreases. So, how will companies report the future direction of their business models? For example, over the last few months, the world of work has changed fundamentally, organisations have had to move at pace to plan and implement new people strategies and reimagine their business models and processes, and already significant skill gaps have widened exponentially and the destruction shows no sign of abating. So in this environment it is critical for organisations to have a clear and agile strategy which enables their people to develop the right digital skills, and the right mindset to implement. So in January 2021, we will be hosting a New World.New skills workshop to explore this agenda and shine a light on what the leading companies are doing and reporting.

Next we talked about going beyond just describing engagement processes to answer the ‘so what’ questions when it comes to stakeholders. We will be looking at how companies and Boards most effectively report on the balance they strike in their decisions between the interests of different stakeholder groups and show how this is consistent with their underlying purpose and values. Two things that I think are critical and only really the leading companies have been able to demonstrate the reporting this year.

And then finally, and following on from the last year, much of the focus on the relationship between companies and their key stakeholders stemmed from a number of corporate failures and scandals and a good part of the 2018 code was dedicated to measures to reduce the risk of them happening again. I believe that there is a danger of the relatively low level of response to much of the code being buried under the impact of COVID. So we will be looking at what more companies can do to show how their governance addresses the important issues that were tackled in the 2018 code.

So I would encourage you to look out for invitations to workshops or webinars on these themes over the coming weeks and months. I hope you found this interesting. I would like to offer a huge thanks to you for attending, but just as importantly my team for all the hard work they have done in pulling this together. So just a reminder to look out for upcoming events and invites in the future.

Thank you.


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