According to the Companies Act 2006, the directors of a company (except a small company: s 414A (2) CA 2006) must prepare a strategic report for each financial year of the company (s 414A (1) CA 2006). Strategic reporting introduced enhanced disclosure requirements with regard to non-financial information in the UK. Although the emphasis on s 172 CA 2006 (duty to promote the success of the company) in the relevant statutory provisions is a welcome development, the strategic report requirement raises questions about the effectiveness of non-financial reporting and the market’s ability to evaluate the performance of the disclosing company.
We evaluate and analyse the impact of the strategic report of a quoted company on shareholders and especially other stakeholders (eg employees, customers, suppliers, environmental agencies, social, community and human rights bodies) in the context of s 172 CA 2006. We scrutinise the strategic reports of the FTSE 100 companies. The following issues, and the extent to which they are addressed in the strategic reports of selected companies, are considered whilst analysing the reports:
- the role and objective of the strategic report and how this is explained;
- the description of the company’s strategy and business model;
- review of the company’s business and the principal risks and uncertainties facing the company;
- whether the information in the strategic report has a forward looking orientation;
- whose interests are taken into consideration during decision-making, in particular, whether the report considers: (i) environmental matters, (ii) the interests of the company’s employees and (iii) social, community and human rights issues;
- when the report does not contain information specified above, whether the company explains and highlights this;
- gender diversity on the board; and
- quality and transparency of reporting.
This study is especially significant as the practical implications and relevance of the production of a strategic report, in the context of non-financial issues, by company directors, have not been discussed in depth in prior literature. (However, a few important empirical studies in this area must be mentioned, such as Eurosif and ACCA, ‘What do investors expect from non-financial reporting’ (2013) and ‘The KPMG Survey of Corporate Responsibility Reporting 2015’ (2015). We provide empirical evidence on compliance with the statutory requirements for a strategic report, especially the extent to which environmental, social and governance (ESG) issues are considered by the companies. This first systematic review of strategic reporting in the UK carries international implications due to the high international shareholder base in FTSE 100 companies. Secondly, the type and quality of information transferred from the company to stakeholders through the strategic report are evaluated. The second stage of our research will gather evidence, by way of interviews with selected stakeholders, on whether compliance with the strategic report requirements results in a better informed stakeholder base and the extent to which it facilitates engagement with corporate decision-making.
The main conclusion of this empirical research is that compliance with the provisions of the strategic report is very high, amounting even to super or over-compliance. Such a high standard of disclosure is surprising, especially taking into consideration the mainly ‘comply or explain’ nature of non-financial reporting. We surmise that super-compliance may well be a mechanism to pre-empt any moves towards direct stakeholder representation in corporate decision-making by ensuring that disclosure operates as an effective regulatory strategy. Only three variables produced low or very low compliance rates. The worst results were achieved against variable 1 – the role and objective of the strategic report. Even though there is no legal duty to refer to s 172 CA 2006 in the strategic report, these surprisingly low results could indicate a weak connection between strategic reporting and the duty to promote the success of the company. The second worst result was produced against the forward looking orientation variable. Thirdly, in comparison to the other extra financial variables, the disclosure rates for variable 10 on human rights issues were relatively low.
The full paper with all our results and conclusions can be found here.
Professor Iain MacNeil is Alexander Stone Chair of Commercial Law, University of Glasgow, Dr Irene-Marie Esser is Senior Lecturer in Commercial Law, University of Glasgow and Dr Katarzyna Chalaczkiewicz-Ladna is Research Associate & Graduate Teaching Assistant, University of Glasgow.