"Stakeholder engagement is not just an item to be reported on, but a goal of reporting."
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Last week the FRC published a new discussion paper entitled ‘A Matter of Principles: The Future of Corporate Reporting’ and the message is clear – responsible capitalism is the way forward, and the world of corporate communications must recalibrate to accommodate a broader, more modern audience.
The proposal set out in the paper is sweeping in scope, and the FRC confronts the familiar challenge of producing effective corporate communications head on, proposing a ‘fit for future’ model that would involve unbundling the annual report into a ‘reporting network’ comprised of both mandatory and voluntary reports that are guided by a common set of principles.
Critically, each report would be designed to take an objective-driven approach that emphasises communication, as opposed to the current framework which is seen as more compliance-driven and oriented towards meeting the perceived needs of a primary readership of shareholders.
The new model is a work in progress that intends to launch discussion, and the FRC invites stakeholder feedback which can be given via this online form. Many of the discussion points that emerge will require further collaboration and critique before they can be enacted, but there are also clear trends that are achievable within the current reporting framework. Below, we’ve outlined five key takeaways that corporate communication practitioners should already be thinking about to align themselves with the FRC’s vision.
- Corporate purpose will increasingly drive reporting.
The FRC envisions the ‘Business Report’ as the centrepiece of its proposed reporting network, which would function as a more concise version of the existing Strategic Report. The overarching objective of the Business Report would be to ‘enable users to understand how the company creates long-term value in accordance with its stated purpose’. Whether or not the strategic report is replaced by a Business Report, it’s clear that there will be growing pressure for companies to share a statement of purpose. This will give greater prominence to reporting on corporate culture and values, with further links expected to the business model and strategy.
- Sustainability reporting is likely to become mandatory...
The FRC believes corporate reporting must evolve to provide a more holistic account of a company’s impact on society that goes beyond its financial contributions to a model that emphasises sustainable value creation. The proposal puts forward the notion of a ‘Public Interest Report’ as part of the reporting network, which would represent an evolution from the Sustainability Report. The Public Interest Report would be oriented around identifying stakeholders as the key elements of the ecosystem in which a company operates, and reporting on how the business interacts with those stakeholders – with considerably more rigour than what is currently mandated by section 172.
- ...and standardised non-financial reporting is on the horizon.
In the context of the growing pressure to report on sustainability, significant discussion is dedicated to how non-financial reporting requirements must be on par with financial disclosure in order to provide meaningful and comparable measurements of sustainability performance and impact. The FRC acknowledges that there is an urgent need for a globally standardised framework and that the current fragmentation in voluntary frameworks presents a challenge to companies in determining non-financial measures that are relevant, comparable and reliable. Nonetheless, the FRC also implied that current measurement techniques are sufficient to be mandated in reference to employees, suppliers, customers, the community, the environment and human rights.
- Disclosure around materiality assessments is likely to evolve.
To make reporting more relevant and useful for readers, materiality remains a central concept in the FRC’s proposed framework. However, in order to improve transparency, the FRC further recommends that, given the variety in methodologies for determining materiality, companies should also consider disclosing the basis for their materiality judgments, as well as including both quantitative and qualitative benchmarks.
- Digital is likely to become the default format.
Whilst print still has its value in portraying a company and reaching a varied audience, technology is clearly providing a plethora of opportunities for the future readership of the annual report. Accordingly, the FRC is thinking ahead to how reports will be produced, disseminated and consumed, and immediacy, flexibility and personalisation are the key trends driving the expectations of modern media consumers. Company websites would evolve to house reports via a centralised portal, and access will likely be further facilitated through an external tool or data provider. Tagging requirements will expand to cover a broader range of content to enable readers to tailor their experience, and the FRC also predicts that mediums including HTML, video and PowerPoint will flourish.
Conclusion and challenges:
The FRC’s proposals place evolving information needs at the heart of the discussion on the future of corporate reporting – a clear embrace of the spirit of section 172. Its proposed reporting framework is geared towards a more communication-led approach that will enable flexibility in anticipation of more rigorous global standards and a changing technology environment. Non-financial disclosure is given significantly greater prominence, and stakeholder engagement is not just an item to be reported on, but a goal of reporting. Certainly, to implement the FRC’s vision for a reporting network effectively, there are practical challenges to consider: would we be throwing the baby out with the bathwater by doing away with the annual report as a consolidated source of truth? How will introducing a network of reports reduce fragmentation and encourage cohesion across reporting collateral? Is this model truly scalable for the small and mid-cap sectors? As corporate communications professionals debate these questions and more, there is still a discernible path to follow that is leading towards a brighter, more sustainable future.
We highly recommend that corporates and third parties alike, engage with the FRC on this vision and respond to their survey, which can be found here.