FRC Lab encourages clear disclosures in times of uncertainty

The reports provide practical advice on the disclosures investors expect to see from companies, and specific guidance on going concern, risk and viability disclosures. The FRC said the provision of transparent and timely information would help investor decision-making and capital allocation.

Corporate governance expert Tom Proverbs-Garbett of Pinsent Masons, the law firm behind Out-Law, said the main report (57 page / 5.4MB PDF) would be helpful for companies considering disclosures, although it was unlikely to tell them anything new.

“Specificity remains key. The report acknowledges that in a period of uncertainty, where focus may be elsewhere, companies may shy away from detailed disclosure. In the Lab's view, this simply increases the potential for rumour. When deciding what to report, companies are encouraged to consider the likely level of market understanding of their current position and the actions they are taking,” Proverbs-Garbett said.

The report said there are five key questions about which investors seek information: how much cash the company has; the cash and liquidity it could obtain in the short term; how a company can manage expenditure in the short term; what other actions it could take to ensure viability; and how the company is protecting key assets and value drivers.

The lab identifies practical challenges to reporting, and suggests a practical model for reporting in times of uncertainty which could well be outside annual or half-year reporting.

A survey of investors’ current concerns showed that disclosure on liquidity issues was the most important area, with nearly 45% saying they were most focused on liquidity in the next three months. Employee well-being was cited as the next most important topic.

“Although firmly in line with national developments in governance, it is still interesting to see support for employees and information about how the company is managing its customer commitments also highlighted by investors,” Proverbs-Garbett said.

In the longer term investors said they were interested in a company’s approach to employees, including its approach to furloughing, as well as the payment of dividends, remuneration changes, and the use of the proceeds of capital raisings.

“The report explicitly links such considerations to Section 172 of the Companies Act 2006 – the duty of directors to act in the best interests of the company for the benefit of its members as a whole – and the key stakeholder factors directors should have regard to in making such decisions. With these obligations in mind, recording why decisions have been made, especially in times of difficulty, is as important as ever. Reporting is on investors' radar,” Proverbs-Garbett said.

The second report (31 page / 4.8MB PDF) provides examples for companies to follow when making going concern assessments, risk reporting, and producing viability statements.

“One of the ‘take away’ points of the report is the identification of risks for upcoming half-year disclosures,” Proverbs-Garbett said.

“As the lab points out (and understandably), only a small number of companies identified pandemic as a principal risk before Covid-19. Working out whether Covid-19 represents a significant issue in its own right, because of impact on, for example, the supply chain, cyber security, financing or health and safety, or not at all may not be easy in these still relatively early days of the crisis. The many examples of what the lab considers to be best practice disclosures will no doubt be a welcome resource for those preparing such half-year documents and, longer-term, annual reports,” Proverbs-Garbett said.

The latest reports build on previous guidance given to companies on disclosures which may need to be made in relation to coronavirus, and a joint regulatory statement by the UK’s financial regulators aimed at ensuring a continued information flow to investors during the pandemic.