The Financial Reporting Council's (FRC) recent open letter to investors lists areas where it believes annual reports could be more ‘user-friendly’ – a list that spans business models through alternative performance measures to Brexit. Want to know how to follow best practice on dividend disclosure? There’s a reminder about responsibilities in the letter. Concerned about the impact of lower interest rates and how to include this in your report? Well, that’s in there, too.
Why share this list with investors? The FRC appears to have one overriding objective – to drive shareholders both to help management improve their annual reports and, where necessary, to hold management’s feet to the fire: ‘We encourage investors to engage with companies to provide a steer on what information they believe is relevant and to challenge where reporting falls short of expectations.’
At the very least, this letter represents a shopping list of reporting topics where management might expect challenge from shareholders. But we would argue that its significance goes far beyond the 2017 annual report.
Ever since the introduction of the Financial Reporting Lab in 2011, the FRC has signalled its desire to foster an environment where management and shareholders can work together to shape the future of reporting. Their vision is a reporting model that is both pragmatic and driven by market needs. This letter represents yet another attempt to encourage a constructive exchange of views – and to remind shareholders of their responsibilities in this regard.
However, this progressive approach to reporting will only work if both management and investors play their part. So reflect on the suggestions made in this letter to as you plan your 2017 annual report. Not doing so risks provoking the FRC to take the only alternative left – yet more regulation.
A copy of the letter may be found here.