The Non-Financial Reporting Directive

While the debate over the EU and its bureaucracy is so topical, it’s worth taking a look at the latest public consultation on an EU Directive that needs to be implemented into UK law. This goes under the snappy title of “The Non-Financial Reporting Directive”. It’s primarily about how companies report information to their investors and to the wider public on their strategy and operations – typically in their Annual Reports at present.

There is already a requirement in UK company law to report such matters for large listed public companies. But the EU Directive somewhat differs in content so our regulations have to be made consistent with it, and it also extends it to large “Public Interest Entities” (PIEs) that may be unlisted organisations. There may even be some smaller quoted companies in the UK who are currently covered by the UK strategic reporting requirement to which the EU Directive may not apply (the requirement could be either retained or dropped but complexity could result from having two different sets of regulations that apply to companies which might change as they changed). The Directive has to be implemented into UK law by December 2016.

The EU Directive allows companies to produce a separate report on non-financial disclosures, and possibly at a different time. In effect taking that material out of current Annual Reports and placing it in a separate document. In addition the possibility of putting that material only on-line is being considered in the consultation (there is no requirement to support a printed version in the EU Directive).

Does it make sense to permit non-financial reports to be published separately and on a different time scale (even if it puts pressure on companies to do so within the financial reporting deadlines)? Surely not because the non-financial matter can be prepared earlier anyway and if done on a separate timescale it could mean for example that it might not be available in time for the company’s AGM.

The consultation is also extending to the issue of whether companies need to provide the Annual Report in printed form which has come up repeatedly in the past, but is opposed by many investors. Some investors find it easier to browse or skim through documents off-line rather than on-line (not necessarily in their baths but there are lots of locations where it’s easier to read a paper version, and they object to companies passing the cost of printing on to them). In the UK the default is already for on-line communications, i.e. companies have the option to say you don’t get a paper version unless you specifically ask for it. Does that system not provide the best compromise and surely minimises the waste of paper and postage costs that used to apply?

Note that even institutional investors have opposed the fragmentation of Annual Reports and making them on-line only in the past because they are concerned about companies retrospectively updating them.

There are also some proposals to drop some of the current UK reporting requirements that are seen as unnecessary and they are collecting information on the costs of reporting incurred by companies.

The consultation is clearly aimed primarily at issuers (listed companies) and seems to bear in mind their complaints about the recent increases in the volume and complexity of reporting. But obviously these proposals affect those who read and rely on company reports so private investors do have a strong interest in this matter. Please let ShareSoc know if you have any views on the matter as we will be submitting a response to this public consultation. However you can of course also submit your views directly. More information on the consultation and an electronic response form can be found here:

https://www.gov.uk/government/consultations/non-financial-reporting-directive-uk-implementation

Roger Lawson

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