Seeing the wood for the trees – Are we at peak reporting?

What do One Hundred Years of Solitude, A Tale of Two Cities, Wuthering Heights and Harry Potter and the Philosopher's Stone all have in common?  They are all shorter than the average FTSE 100 annual report and accounts (ARA) for 2021/22.  Having increased by over 40,000 words since 2016/17, in 2021/22 the average FTSE 100 ARA was three times longer than The Great Gatsby. Novellas these are not.

A 2023 study by the Quoted Company Alliance¹ compared ARAs published by 298 companies in 2021/22 as against those they published in 2016/17.  On average, the ARAs reviewed increased by 5,800 words every year over this five-year period.  Those published by AIM companies remained on average shorter than those of FTSE 100 or other Main Market companies.  However, the percentage increase in the number of pages in the ARAs over the period was the greatest for AIM ARAs, demonstrating that the growth has been experienced even amongst companies subject to a lighter regulatory regime.

Of course, it is possible that some of the extra words reflect a more narrative style of reporting, with companies using the ARA to illustrate and publicise achievements and milestones from the previous year to investors (and potential investors).  Nonetheless, given the costs involved in producing ARAs and the potential liability attaching to their contents, the growth cannot be attributed solely to increased voluntary disclosures.     

An unstoppable juggernaut?

Looking back over just the last five years, companies in the UK, and in particular listed companies, have had to incorporate a raft of new disclosures in their ARA, as the government and regulators have sought to increase transparency in relation to a wide range of issues.  Amongst the areas covered by these additional reporting obligations are:

• board gender and ethnicity diversity;
• CEO versus employee pay comparisons;
• employee engagement activities;
• corporate governance arrangements; and
• climate impacts and energy use.

Over the past ten years there has also been the development of new periodic reporting obligations falling outside of the ARA, with in-scope companies being required to provide information on matters as diverse as steps taken to prevent modern slavery within their organisation, their payment practices and their employee gender pay gap.

The expansion in corporate reporting requirements has at times looked like an unstoppable juggernaut with new proposals coming thick and fast, particularly on sustainability matters (for further details, see the UK sustainability reporting and EU sustainability reporting developments call-out boxes). And this has not been an experience unique to the UK; for discussion on the situation in the US, see the US reporting requirements call-out box.  Companies would have been within their rights to question for whose benefits all these extra disclosures were being made.  Were investors keen to digest more and more information? Or was the government introducing new requirements to satisfy wider societal expectations or in a belief that, applying the "sunlight is the best disinfectant" adage, these additional disclosures would help prevent future corporate failures?

A change in tack

Given the trend over recent years, it was therefore rather unexpected when, in October 2023, the government withdrew its draft regulations to introduce new reporting requirements as part of its reform of audit, corporate governance and reporting (Draft Reporting Regulations). The Draft Reporting Regulations, which had been introduced to Parliament in July 2023, would have extended disclosure obligations for in-scope companies in relation to their risk management and resilience strategies, their audit and distribution policies and fraud detection and prevention procedures (for more on this reform program, All change please? Governance reform proposals round-up).

Announcing this apparent U-turn, the government noted that companies had raised concerns about additional reporting requirements being imposed, when responding to a separate call for evidence on non-financial narrative reporting launched in May 2023.  The government stated that the proposals contained in the Draft Reporting Regulations "would have incurred additional costs for companies by requiring them to include additional layers of corporate information in their annual reports" and observed that the May 2023 call for evidence had "identified a strong appetite from businesses and investors for reform, including to simplify and streamline existing reporting".  It is surprising that this observation only became apparent to the government through the call for evidence on non-financial reporting, given the numerous consultations it has conducted in recent years in relation to corporate reporting. Undoubtedly responses to these consultations would have included commentary on the increased costs and resources needed for companies to comply with additional disclosure obligations.  When confirming the proposals for the new disclosures (which were ultimately set out in the Draft Reporting Regulations) in its May 2022 audit and governance consultation response, the government's concerns seemed to side with consumers of the information.  The withdrawal of the Draft Reporting Regulations, and the call for evidence on narrative reporting, suggest a shift to focus more on the burden being placed on reporting companies. 

There will have been some frustration at the wasted costs already incurred in preparing for the proposed disclosures set out in the Draft Reporting Regulations and the government's failure to recognise the long lead-time involved in preparing to make new disclosures of this nature.  In the long run however, the signs of an apparent shift in emphasis will no doubt be welcomed by companies. 

Further evidence of this shift can be seen in the government's proposals to streamline the non-financial reporting obligations of companies, announced in response to the May 2023 call for evidence.  The proposals include exempting medium-sized companies from the requirement to produce a strategic report as part of the ARA, as well as removing certain disclosures required in the directors' report and the directors' remuneration report. When setting out its response to the call for evidence in March 2024, the government confirmed that it was proposing changes to "make the non-financial reporting framework smarter, simpler and better for business” (for more details on these proposals, see All change please? Governance reform proposals round-up).

With the General Election to be held on 4 July, companies will be hoping that the next parliament, whatever its composition may be, will continue with this trend and that this is the start of a period of reflection. All interested stakeholders should be engaged in a thoughtful conversation about the burden on companies of current reporting obligations and about the expectations placed on institutional investors in terms of the quality of their engagement and stewardship of investee companies. Ultimately, it will be in everyone's interests if corporate reporting is succinct, focussed and relevant. Let's leave the 150,000 word tomes to writers of fiction.