2020/21 Reporting Season: the impact of COVID-19 on narrative reporting
3 December 2020: Annual reports provide an opportunity for companies to communicate how they have adapted to face the challenges of COVID, writes Mala Shah-Coulon, EY’s Head of Corporate Governance.
In our review of FTSE 350 narrative reporting, issued in September 2020, we observed good emerging practice disclosures but were clear that the focus needs to shift from processes and intentions to actions and outcomes to meet the spirit of the Code and to ensure the impact of COVID-19 is properly communicated. This chimes with the FRC’s findings in their recent review of corporate governance reporting issued on 26 November 2020. In its review, the FRC emphasised that while Code compliance is high, companies need to make more meaningful disclosures.
Despite the full impact of COVID-19 being hard to fully ascertain, disclosures are essential. As Sir Jon Thompson, CEO of the FRC, put it: “Reporting where outcomes are uncertain is difficult, but we expect companies to rise to the challenge to avoid situations where helpful information could have been in the public domain and was not.” In particular, companies should be explaining where they diverge from commitments made before the pandemic.
Putting purpose into practice
The Code put a new impetus on companies to establish a purpose and ensure it is aligned with their culture. Not all companies have fully responded to the Code’s change in emphasis.
Our research found that while 86% of reviewed companies disclosed their purpose, very few articulated how this affected their strategy. Carefully crafted purpose statements are perhaps less important than how the purpose is put into practice and companies need to spell out how their purpose has acted as their ‘Pole Star’ during the pandemic, or whether experience has led them to rethink their purpose.
Viability Statements
The pandemic has been an impetus for the viability statement to provide further detail and scenario testing that had until now been sometimes lacking in disclosures. Going concern explanations have also evolved in the same direction.
As the Financial Reporting Lab outlined in its report, Going concern, risk and viability, COVID-19 and Reporting in times of uncertainty – a look forward, “uncertainty caused by the COVID-19 crisis provides an opportunity for the viability statement to act as a vehicle for companies to communicate a more stable long-term vision post-crisis.” The Lab highlights that better reporters covered key assumptions made, gave company-specific detail and detailed actions and expectations.
The importance of outcomes
The Code and MRR have also brought engagement with a company’s stakeholders to the fore and, when combined with the Section 172(1) statement, companies must explain how they have considered stakeholders when making principal decisions. Our review of annual reporting found that 45% of the companies did not provide examples or case studies to illustrate how stakeholder considerations affected their decisions. The FRC’s review of governance reporting also highlighted the use of examples to demonstrate the impact of actions taken.
Lessons from COVID-19
COVID-19 has acted as a stark reminder of how quickly an emerging risk can manifest and the pervasive impact these risks can have. Emerging risk disclosures often lack detail and can be an indication that companies do not have a robust approach to considering them.
Importantly, the ‘knock-on’ impact of one risk on other principal risks – such as health and safety or the supply chain – is an important area for companies to grasp and for disclosures to highlight. This also applies to Brexit and climate change.
More widely, it’s been interesting to see that COVID-19 has not detracted from developments in the wider environmental, social and governance (ESG) reporting space. Climate change and diversity continue to rank high on the agenda but remain areas where companies need to detail the outcomes of policies.
The pandemic has had a significant impact on companies, and annual reports provide an opportunity for companies to communicate how they have adapted to face the challenge, considered stakeholders’ interests and protected long-term value. It’s not an opportunity to be missed.
Mala Shah-Coulon is Head of Corporate Governance at EY.
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