Many investors are calling for companies to be more transparent in disclosing their capital allocation and dividend policies and practice. They see decisions around these matters as vital to the long-term success of the companies in which they invest and are seeking improved disclosure. Some investors are additionally demanding that companies disclose an audited figure for their level of distributable reserves. Most recently the Investment Association has called on all listed companies to disclose their distribution policies.
Political pressure
The topic has moved into the political arena. The government, acknowledging that change is required, has stated that it will look at ways to strengthen the UK’s capital maintenance framework. It has made it clear that it will legislate to require companies to disclose and explain their capital allocation decisions in their annual report and accounts if what it sees as ‘sufficient progress’ is not made through companies making voluntary disclosure.
S172 reporting
The new statutory requirement for all large companies to report how the directors have discharged their Companies Act 2006 s172 duties to promote the success of the company for the benefit of its members comes into force for periods beginning on or after 1 January 2019. The statement, required for all large companies, is to be included within a separately-identifiable section of the company’s strategic report. To provide the statement, directors will need to have had regard to matters such as the need to consider the interest of the company’s employees and the need to consider the likely consequences of any decisions made in the long-term. Both of which are vital when making capital allocation and dividend policy decisions.
Compliance with this new legal requirement is expected to drive fuller disclosure around capital allocation and dividend policies.Indeed, the Financial Reporting Council’s (FRC’s) revised Guidance on the Strategic Report goes as far as to say that it expects that, for most companies, disclosure of capital allocation and dividend policy will form part of their s172 reporting. Whilst some companies are leading the way and are currently making disclosures voluntarily, compliance with s172 reporting will take disclosure a step further. Also, fundamentally, it will enable companies to demonstrate that they are addressing calls from investors.
There are diverse views as to the nature and necessary details that the s172 statement should contain. The Financial Reporting Lab’s research reports into dividend policy and practice provide practical guidance to assist company directors in determining what to include. Its recent report on sources and uses of cash provides further insight into what investors expect. To avoid repetition, companies may find it useful to provide disclosures elsewhere in the annual report with a cross reference to the s172 statement in the strategic report. So, whilst legally the s172 statement is required in the strategic report, disclosures regarding capital allocation and dividend policy may be made elsewhere.
Governance and quality
Some companies might consider that capital allocation and dividend policy are not principal decisions and may choose to make no disclosure in their s172 statement. However in the light of investor pressure, calls from the Investment Association and the FRC’s expectations regarding the new s172 reporting requirement, it is becoming increasingly difficult for companies to avoid making disclosures of dividend policy and capital allocation within their annual report and accounts.
A few commentators are pushing for more radical changes to the UK’s capital maintenance framework such as a move to a solvency-based regime. These more fundamental changes will require careful consideration and will take time. But for now the change that investors are seeking, and which companies should embrace, is in the governance over capital maintenance decisions and in the quality of the disclosures supporting them.
About the author
Chris Skinner is a senior manager in the national technical department at Deloitte.
