Directors' know how' is a monthly article which highlights key rule changes, proposed changes and market updates so that you know what is coming down the track.
FRC publishes a project report on disclosure of dividends
The FRC's Financial Reporting Lab has published a project report on disclosure of dividends. The Lab’s report explores how companies can make dividend disclosures more relevant for investors and explains why investors want information about dividends and what they want to know.
The Lab points out that dividend disclosures need to be clear and provide adequate information so that investors can evaluate the board’s stewardship of the company and assess prospective dividends. Investors want to know:
- Why has the company selected the dividend policy?
- What will the policy mean in practice?
- What are the risks and constraints associated with the policy?
- What was done in practice to deliver under the policy?
According to the Lab’s findings, investors also want disclosure of the circumstances in which companies expect to pay special dividends or buy back shares, and whether they are in the best interests of shareholders. All investors participating in this project considered that the disclosure of dividend resources, i.e. cash and the amount of the company’s reserves legally available for distribution under company law (distributable profits), is helpful in circumstances where the ability of the company to pay dividends is, or might be, insufficient relative to the level of dividends indicated by the policy. Some investors believe that distributable profits are always required to be disclosed. The FRC understands that the Companies Act 2006 does not require companies to identify separately distributable profits on their balance sheet.
The report highlights that investors find that the dispersal of disclosures across annual reports and other communications results in repetition, and makes it hard for them to find the information they need. Investors advise that it would be helpful to group together similar or related disclosures on dividends, or to draw links between the disclosure elements.
A new proposal for prospectus rules
Following the recent publication of the Capital Markets Union Action Plan and after public consultation during the course of this year, the European Commission has published its proposals for a new Prospectus Regulation, to replace the currently applicable rules of the Prospectus Directive.
The Commission’s legislative proposal for the Prospectus Regulation and its proposed annexes are the result of the review of Prospectus Directive 2003/71/EC and is meant to replace this Directive.
The proposal includes new rules that allow for reduced disclosure requirements for secondary offers and SMEs, as well as allowing greater use of the incorporation of information into a prospectus by reference.
We have welcomed these proposed rules in our press release as these are a step in the right direction in ensuring that companies throughout Europe are able to raise finance on public equity markets more efficiently by reducing the administrative burdens on companies and make raising funds more cost-effective, whilst still allowing for high quality information to be available to investors. Nevertheless, we have stressed that this will be a missed opportunity if the European Commission does not create a bespoke prospectus regime for companies on SME Growth Markets.
This proposal now goes to the European Parliament and the Council of the EU (Member States) for discussion and adoption. The proposal includes changes that aim to:
- Exempting the smallest capital raisings;
- Creating a lighter prospectus for smaller companies;
- Shortening prospectuses and providing better investor information;
- Simplifying secondary issuance for listed firms; and
- Creating a fast track and simplified frequent issuer regime.
FRC explains positive developments in corporate reports through clear and concise strategic reporting
The FRC has published its report “Clear & Concise: Developments in Narrative Reporting”, which identifies that the introduction of the Strategic Report and the FRC's Guidance on the Strategic Report has had a positive effect on the quality of corporate reporting.
This report provides an overview of developments in narrative reporting, includes a study reviewing the influence of the FRC’s Guidance on the Strategic Report since its publication in 2014, and also includes practical tools to help companies achieve clear and concise reporting, which relate to:
- Starting early;
- Reducing page count;
- Having an innovative approach;
- Applying materiality;
- Considering the audience;
- Collaborating between internal teams;
- Engaging at board-level; and
- Promoting company culture.
The FRC notes that business model and strategy reporting provides useful insight into how a company is managed and that best practice in this area is evolving. The report also highlights focus areas for the next reporting period such as:
- the application of materiality and improving reporting of key performance indicators;
- principal risks; and
- forward-looking information.
The FRC highlights that the overriding objective of the strategic report is to provide information for shareholders that will enable them to assess how the directors have performed their duty to promote the success of the company. It should reflect the directors’ view of the company and provide context for the related financial statements. In meeting the needs of shareholders, the information in the annual report may also be of interest to other stakeholders. The annual report should not, however, be seen as a replacement for other forms of reporting addressed to other stakeholders.
New PLSA corporate governance policy and voting guidelines
The Pensions and Lifetime Savings Association (formerly the NAPF) published a revised version of its Corporate Governance Policy and Voting Guidelines 2015/16.
The aim of this document is to assist their members in promoting the long-term success of the companies in which they invest and ensuring that the board and management of these companies are held accountable to shareholders.
Since its previous publication last year, the guidelines now include specific changes in policy and guidelines regarding:
- Reporting on strategic risk – The composition of the workforce and the sustainability of the employment model warrant further transparency in corporate reporting to allow shareholders to gain a comprehensive view of the risks and opportunities present within the company. This reporting should evolve to reflect emerging risks (such as cyber-security and climate change) and should show how these risks are managed and what changes have occurred in relation to them in the past year. Where a risk materialised in the past year the report should communicate clearly how the company is responding.
- Ensuring directors have sufficient time to fulfil their role properly – Shareholders should be mindful of concurrent directorships and their respective call upon an individuals’ time. For complex companies it may be appropriate to vote against the (re)-election of a non-executive director who holds more than four directorships. Where a director chairs a number of key committees a stricter view may be adopted, especially where an individual is a director of two or more companies in heavily regulated industries.
- The issuance of new shares under the Pre-Emption Principles – Companies should clearly signal at the earliest opportunity their intention to undertake a non-pre-emptive issue and to engage in a meaningful dialogue with their shareholders about this. Companies should keep shareholders informed of issues related to an application to disapply their pre-emption rights. In return, shareholders should review each case made by a company on its own merits and decide on each case individually, using their investment criteria.
