EY ARA 2018 Report

Annual reporting
in 2017/18:
demonstrating purpose,
creating value
September 2018 | Fifth edition
Contents Introduction
Highlights from
our analysis
Our ‘acid test’:

a practical aid
8
1. Purpose and 4. Audit committee
long-term value reporting
10 34
2. Stakeholder engagement 5. Looking ahead

and social impact reporting
14 40
3. Chair tenure, diversity, Appendices

culture and remuneration
28 44
Introduction
Welcome to the
fifth edition of our
FTSE 350 annual
reporting review.
Last year, we touched on the
looming changes to reporting
resulting from initiatives by the
Government and the Financial
Reporting Council (FRC). We were
already seeing some impact in
anticipation of these, reflecting a
general desire to encourage trust
in business. The companies in
this year’s sample — at the time
of preparing their annual reports
and accounts (ARAs) — had still
not seen the final text of the 2018
UK Corporate Governance Code,
nor the secondary legislation
in detail. However, they have
anticipated some of the changes
mooted in the draft Code and
made adjustments.
Annual reporting in 2017/18 2

Last year, we also discussed There are many challenges Aviva, which has made significant
the increased level of reporting along the way — there are no clear changes to its reporting this year,
relating to wider stakeholder cut answers and no one right and to the Financial Reporting
concerns and impacts. We approach — but also opportunities Lab, which has undertaken some
observed that many reporters for increased investor and insightful projects. You will find
were adding disclosures with stakeholder engagement. comments from these participants
stakeholders in mind, but we throughout our report. I thank
called for more specificity and a For those exploring how they them for their input and time.
clear focus on materiality. The can best report on areas such as As in previous editions, we have
new non-financial information company purpose, long-term value also included case studies of
statement disclosures have added and impacts on stakeholders, we leading practice examples and
to this materiality challenge. hope you will find this report to be our updated ‘acid test’. These
a valuable resource. We also cover resources provide a practical
The stakeholder theme again other important areas of reporting toolkit for you to use when looking
features strongly in our report this on which investors and regulators at your next annual report.
year. Our key findings, following have recently focused, including
a review of 100 ARAs across reporting on people, culture and We look forward to hearing
the FTSE 350, indicate that diversity, and audit committee your feedback and views.
many reporters have improved activities. Finally, we look ahead at
their disclosures on stakeholder some of the developments shaping
engagement and impacts, with annual reports. We hope you will
Ken Williamson
some added specificity. However, read our report in full, but you can
Head of Corporate Governance
most are still only at the beginning also dive straight into the section
EY UK & Ireland
of a journey towards reporting that that’s most relevant for you.
articulates these engagements
and impacts in line with a clear As part of our research we
long-term value creation narrative. interviewed a number of investors
It’s a journey we see many to gather their views on what they
reporters ambitious to undertake. look for in ARAs. We also spoke to

Highlights from
our analysis
Average length of ARAs
163 167 181 186 190

pages pages pages pages pages
2013/14 2014/15 2015/16 2016/17 2017/18
Purpose and long-term value (see page 10 for more)
41%
There has been a slight This year we also saw a
increase in the number of significant increase in the
reports articulating the number of companies
of companies
company’s purpose, in demonstrating the
clearly link their
particular a broad societal outputs, outcomes or
‘purpose’ to
purpose that goes beyond value created for a range
their strategy.
shareholder value, up of stakeholders, with some
to 47% this year. The including quantification.
proportion of these that
also link their purpose to
strategy has also improved.

Stakeholder engagement (see page 14 for more)
83%
There has been an increase in reports
mentioning directors’ s172 duty, rising to
11% from just 1% last year.
of companies disclose some
Most companies identify some stakeholder form of employee engagement
groups beyond their shareholders (86%, up mechanism.
from 81% last year).
69%
of companies specifically
65%
of companies describe methods used
identify their stakeholders to engage with other stakeholders
in one single disclosure such as customers, suppliers,
within the annual report. communities and governments.
Social impact reporting (see page 14 for more)
74%
of companies have a standalone ˚C
20%
of companies state that they
section on Corporate have responded to the Task Force
Responsibility / Sustainability on Climate-related Financial
rather than using a more Disclosures (TCFD), or have stated
integrated approach. the intention to do so in the future.
8%
of companies include a
18%
explain how they have determined
statement referencing the non- materiality in relation to non-
financial reporting regulations, financial reporting disclosures.
and disclosing at a high level
where the disclosures have
been incorporated.

Chair tenure, diversity, culture and remuneration (see page 28 for more)
Total board tenure of chairs since first appointed to board:
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 years
31% 25% 21% 9% 8% 6%

0-3 years 4-6 years 7-9 years 10-12 years 13-15 years >15 years
23% of companies in our sample have chairs who have served on the board for more than 9 years.
47%
of reports articulate
37%
of reports articulate
15%
of reports
25%
of companies
the culture the how culture is provide detail disclose their
company has or embedded. on the impact gender pay gap
the culture it of the initiatives figures in their
seeks to create. taken to improve ARAs, up from
diversity. 4% last year.
39% 23% 7%
30%
of companies of companies
explain how discuss diversity voluntarily
culture supports beyond gender in report the
the business explain how culture a meaningful way. CEO pay ratio
model or strategy is measured figures.
(up from 10% in (up from 9% in
2015/16). 2015/16).

Audit committee (AC) reporting (see page 34 for more)
26%
disclose plans to
12%
disclose that the FRC’s
tender their audit. Corporate Reporting
Review Team (CRRT)
reviewed their ARA.
14%
report on an
audit tender
during the year.
23%
disclose that a review of
the company’s external
auditor was carried out by
8%
the FRC’s Audit Quality
Review Team (AQRT),
with 15% including
provide an detail around the AC’s
explanation of the involvement in the
tender process and AQRT review process.
selection criteria set.
Viability statement (see page 38 for more)
69%
The time period chosen for assessing
viability has remained in line with last
year, with 76% opting for 3 years, 5%
disclose some detail
for 4 years and 19% for 5 years.
on scenarios tested,
Last year, 76% simply stated that the but far fewer quantify
time period was in line with strategic those scenarios.
planning, rather than including any
more company specific rationale.
However, this has improved, falling to Disclosure and quantification of assumptions
35% this year. has remained the same as last year, included
in 38% and 6% of reports respectively.
There has also been continued gradual
improvement on disclosure of scenarios,
up from 49% last year:

Our ‘acid
Purpose and strategy:
• What is the company’s purpose?
Does it explain ‘why’ the
test’: a
company exists?
• Does the company’s purpose
clearly inform its strategy?
practical aid
• What are the company’s
strategic objectives? Are they
clear and measurable?
Business model:
• How does the company
make money?
• What are the company’s
As a practical tool for preparers key inputs, processes and
and boards looking to ensure their outputs (for shareholders and
stakeholders)?
annual report covers key qualitative • How are the company’s
aspects of leading practice, we key tangible and intangible
assets (including its physical
include our ‘acid test’. These are the assets, IP, people, culture,
technology, etc.) engaged in
key questions we believe a reader the process of value creation?
should be able to answer after • How does the board make
decisions regarding how
having read the narrative report. capital is allocated across
We update these each year in line short and long-term priorities?
For example, R&D activities,
with changing expectations (the shareholder payments, tax,
yellow underline indicates the pensions, employee salaries
and bonuses.
updates we made in light of this • What is the company’s
year’s review and 2018 Code): competitive advantage and how
is it sustained over time?
• How does the business model
help deliver the strategy?
• Which aspects of the company’s
culture are critical to the
business model and/or strategy
and how does the board
measure and monitor the
extent to which the culture
is embedded?

Key performance Risk management and Governance:
indicators (KPIs): internal control disclosures:
• What did the board and its
• What are the key metrics the • How are the principal and committees actually do in the
board uses to measure progress emerging risks mitigated and year to govern the company
against its strategic objectives? controlled by the company’s — what specific governance
Are these focused on outcomes systems of internal controls issues arose and how were
in order to truly measure and risk management and they addressed?
performance against strategy how does the board monitor • What, if any, changes
over the long term? these controls? were made to governance
• How has the company • What did the board’s review arrangements during the year
performed against these of the effectiveness of and why?
metrics over time and how these systems and controls • What areas for improvement
has this influenced the encompass and what were were identified from the board
remuneration of key executives? the findings? and committee evaluations
• Are alternative performance • Has the board identified and what progress was made
measures (APMs) clearly significant failings or against actions from the
signposted and reconciled to weaknesses and is it clear what previous evaluations?
statutory measures? Is their actions have been or will be • How is board and committee
use balanced with statutory taken to address these failings composition and succession
measures? or weaknesses? planning being managed,
giving due regard to the
Risk appetite and Viability statement: evolving strategy of the
principal risks: group, skills, experience,
• Over what timeframe has the diversity and tenure?
• What levels of risk is the board board considered the viability • Are the key stakeholders of the
willing to take in pursuit of of the company and why? How company clearly identified?
its strategy and how is this has the period been rationalised
• How did the board seek to
monitored by the board? in sectors where the company
understand the views of both
• What are the key risks to the is making investment decisions
shareholders and stakeholders
successful delivery of the over longer periods?
during the year? Does this
strategy and operation of • What process did the board include reference to the
the business model? use to assess viability? feedback received and actions
• What are the risks that pose • Does the board understand taken? How has the board had
the greatest threat to the which, if any, severe but regard to these groups in their
viability of the company i.e., plausible risks (or combination principal decision making?
solvency and liquidity risks? of risks) would threaten the
• How, specifically, might these viability of the company and
risks manifest themselves in has appropriate disclosure
the company? been provided?
• What assurance did the board
obtain over relevant elements
(e.g., stress testing)?
• What assumptions did the board
use in reaching its conclusion?
• Did the board give a point of
view on the wider prospects of
the company beyond the period
of the viability statement?

1
Articulating purpose
This year we found an increase
in the percentage of reports
articulating the company’s
purpose, in particular a broad
societal purpose that goes beyond
shareholder value — up to 47%
from 41% last year. This aligns with
encouragement from the FRC and
investors for boards to agree on
and articulate their purpose.
Purpose and
This year’s letter to company
CEOs from Larry Fink, Chairman
and CEO of BlackRock, focused
long-term
on fostering a sense of purpose.
In his call to action to his investee
companies, he said: “Society is
demanding that companies, both
value
public and private, serve a social
purpose. To prosper over time,
every company must not only
deliver financial performance,
but also show how it makes a
positive contribution to society.
Companies must benefit all of
their stakeholders, including
shareholders, employees,
customers, and the communities
in which they operate. Without a
sense of purpose, no company,
either public or private, can
achieve its full potential. It will
ultimately lose the license to
operate from key stakeholders.”
◊ — Denotes a reference
to changes arising from
the 2018 UK Corporate
Governance Code or the
Companies (Miscellaneous
Reporting) Regulations
2018. These are explained
in more detail in Appendix
A ‘The 2018 Code, new
regulations and guidance’
on page 45.

Although we observed more should establish the company’s
disclosures outlining purpose purpose, values and strategy, and
Purpose satisfy itself that these and its
overall, companies use different
Why? Why does the company terminology and what it means culture are aligned.’ It also states
exist and for whom? is often unclear. The terms that reporting on application of
‘purpose’, ‘vision’, ‘mission’, the Principles should be done
Vision/mission ‘aims’ and ‘objectives’ are used ‘in the context of the particular
Where? Where is the company interchangeably by some. circumstances of the company
heading? and how the board has set the
We interpret purpose as the company’s purpose and strategy,
Strategy ‘why?’ Why does your company met objectives and achieved
exist? What value is created and outcomes through the decisions
How? How will the company
for whom? it has taken’.
achieve this?
Vision can mean either what Therefore, although the 2018
the company will look like if it is Code does not explicitly require
fulfilling that purpose, or where companies to disclose the purpose
the company is going. Sometimes of the business, we expect many
a company’s ‘purpose’ in annual more will choose to do so. We
reports actually reads more like a also anticipate that company
Case studies vision e.g., to be the leader in
a given sector.
reporting will evolve even before
the 2018 Code comes into effect
(accounting periods beginning on
GlaxoSmithKline plc The company strategy should
or after 1 January 2019).
2017 ARA outline the plan for achieving the
(pages 2 and 5) vision in line with the company’s
Clear description of broad
purpose, with associated measures Long-term value narratives
to demonstrate progress. We saw
purpose, goal, strategy Many investors have a long-term
improvements this year in the
and values horizon for their investments
connection between purpose
and strategy: 41% of companies and are keen to know how value
The Unite Group plc now make a link. In these ARAs it is is being created and preserved
clear how the strategic objectives over the long term. Reporters are
2017 ARA
align with the company’s purpose. therefore increasingly looking for
(inside cover)
This indicates that the purpose is ways to demonstrate both their
Clear description of purpose tangible and intangible assets
embedded and ‘lived’ in practice
and what it means for the and value creation story.
by the business. It is important
company in practice
that the company’s purpose We found that most companies
doesn’t become a buzzword that are reasonably successful
Greggs plc 2017 ARA companies disclose but employees at articulating the critical
(pages 4 and 10) would not recognise; it can be a attributes and activities that
valuable tool for embedding and underpin the creation of value
Clearly articulated broad
explaining culture and ensuring for their shareholders and other
purpose with links to vision
everyone is pulling in the same stakeholders. More companies
and strategy
direction. now take this approach than
The key to articulating purpose is when we began our analysis five
Kingfisher plc 2018 ARA years ago. In most instances the
to focus on the value being created
(page 1) sources of value are disclosed
and for whom. We anticipate
Detailed disclosure on the that many more companies will as part of the business model —
company’s re-assessment disclose a purpose next year. The as part of the resources / inputs or
of its purpose, including 2018 UK Corporate Governance competitive advantages / ‘how we
a process of engagement Code (the 2018 Code)◊ includes create value’ elements. The case
with stakeholders a new Principle (Principle B) studies we have selected (overleaf)
which specifies that ‘the board provide some good examples.

disclosures of the Integrated
“ Investors want to Reporting Framework — but rather
than using the six capitals set out Case studies
understand companies’
in the framework, most companies
long term strategy. Unilever plc 2017 ARA
tailor these to articulate their own
They are interested sources of value. Many also explain (page 9)
in companies that how their competitive advantages
are looking to do the • Resources underpinning
supplement their (internal and the business model
right thing by their external) sources of value when clearly explained,
stakeholders as well as describing their business model. including the explicit
making a return. Non-financial measures such as identification of tangible
people and brand feature heavily, and intangible assets
While traditional
which is a positive shift and
financial metrics remain reflects companies’ intangible
important, investors are assets that contribute to business Intu Properties plc
increasingly interested value. The most common sources 2017 ARA
in a wider set of metrics of value were: (page 30)
which articulate sources • Identification of the
of value more broadly.” • Financial resources and capital company’s value
discipline sources and quantified
• Skilled employees and outputs for a variety
management of stakeholders
• Supplier and customer
relationships Royal Bank of Scotland
Group plc 2017 ARA
• Brand strength and quality
(page 24-25)
Phil Fitz-Gerald • Innovation
Director, • Identification of inputs
Financial Reporting Lab and processes as well as
a qualitative description
of the outputs
Last year, we referenced

This year we saw a significant Aggreko plc 2017 ARA
‘The Embankment Project
increase in the number of (page 12)
for Inclusive Capitalism’. This
companies demonstrating is a project supporting the • Inputs and outputs
the outputs, outcomes or development, testing and quantified, including
value created for a range validation of EY’s long-term relevant details, e.g., on
of stakeholders, with some value framework. See page 43 in wages expended rather
including quantification. the ‘Looking ahead’ section for than just number
We also noted that some more detail. of employees
companies identify particular
metrics (e.g., Net Promoter Score)
as inputs which others identify as
outputs. We are at the beginning Capital allocation frameworks
of a journey in this aspect of framework in their ARA, although,
This year we looked again at how
reporting, with companies looking a few companies do provide a good
companies articulate their
for new ways to articulate their overview of their approach. We
overall capital allocation across
own unique value story. understand that some companies
different priorities.
currently disclose this information
We continue to observe the
The majority of companies do in analyst presentations; however,
influence on business model
not articulate a capital allocation we believe capital allocation

frameworks should be disclosed Dividend policy disclosures • Identify the explicit links
in the ARA because of their between dividend, principal
Many companies still describe their
importance to shareholders. risks and viability
dividend policy as ‘progressive’,
Leading practice capital allocation • Enhance understanding
without explaining what this
disclosures include: on constraints
means in practice. Surprisingly,
• An explanation of the options some companies that did not pay a • Explain more fully what
available to the board (which dividend or reduced their dividend the dividend policy means
will vary according to sector payment give no explanation of in practice
and business model) their reasons, although we would • Enhance understanding of
recommend doing so. Some do list structure and process, e.g.,
• An indication of the relative
the factors considered within the where profit is generated and
priorities, e.g., would the
dividend policy, but then do not how profits might flow.
board focus on debt reduction
explain how they arrived at the
or returning money to
final dividend payment decision.
shareholders?
Very few link their dividend policies
• Information about the to the risks facing the company.
parameters set, e.g., what “ Value creation should
gearing level does the board However, several companies flow throughout the ARA
consider to be appropriate and do quantify their distributable and not just be discussed
what impact will this have on reserves under the dividend in a separate section
returns to shareholders? policy disclosure. Some explain i.e., Corporate Social
the linkages between capital Responsibility.”
Some reports also include structure and dividend policy or
information about the way in even reference the link between
which the company’s capital dividend policy and long-term
allocation framework helps the value explicitly under the
company to shape and achieve business model.
its strategic priorities over a
measurable period of time. Examples of good practice include
Taylor Wimpey plc’s 2017 ARA
(page 8), which explains that Freddie Woolfe
the company’s ‘dividend policy Head of Responsible Investment
and Stewardship, Old Mutual
Case studies was subject to prudent and
comprehensive stress testing
Global Investors
against various downside

Meggitt plc 2017 ARA scenarios, which also included a
(pages 6 and 13) reduction of 20% in average selling
prices and a 30% reduction in
• Priorities for capital volumes’. Another useful example
allocation are articulated of a leading practice dividend
• Areas of investment and policy disclosure is found in
clear description of the the 2017 annual report of
cash flow model included Hunting plc (page 16).
Overall, dividend policy

GlaxoSmithKline plc disclosures would benefit from
2017 ARA further consideration of the
(pages 54-55) recommendations from the
• Key priorities for capital Financial Reporting Lab1 for
and alignment with disclosures to:
strategy articulated
Financial Reporting Lab, Lab implementation study: Disclosure of dividends — policy and practice, October 2017, pg10.
1

2
Stakeholder engagement
There has been a tangible
shift in sentiment over the last
few years away from a purely
shareholder-centric approach,
towards a view that relationships
with stakeholders are key to a
company’s success. This principle
of enlightened shareholder value
is enshrined in the Companies
Act 2006 (see Figure 1).
Stakeholder
The strategic report is intended
to help shareholders assess how
the directors have performed their
engagement
duty to promote the success of
the company under s172 of the
Companies Act 2006, this is not
new. However, engagement with
and social
stakeholders (particularly the
workforce) and consideration of
their concerns has been felt — by
some — to be insufficient. In the
impact
wake of corporate failures, the UK
Government pledged corporate
governance reforms to help build
a society that works for everyone.
reporting
This focus culminated in the FRC
publishing the 2018 Code and
Parliament approving secondary
legislation, The Companies
(Miscellaneous Reporting)
Regulations 2018◊, which added
further obligations such as a
requirement to report on how
directors have had regard to
(a)-(f) of s172.
on page 45.

Identification of stakeholders
(1) A director of a company
In order to operate effectively, “ We focus on responsible
must act in the way he
companies must understand those investment not just
considers, in good faith,
resources and relationships that because it is the ‘right
would be most likely to
matter most to their success.
promote the success of the thing to do’ but because
These will vary from company
company for the benefit we see a direct link to
to company and, as the FRC
of its members as a whole, long-term value creation.
underlines in its Guidance on the
and in doing so have regard Companies focused on
Strategic Report, ‘it is important
(amongst other matters) to— stakeholders over the
that boards identify its [the
(a) the likely consequences company’s] key stakeholders long term will drive more
of any decision in the and the importance of those value for shareholders.”
long term, stakeholders to the long-term
(b) the interests of the success of the company.’2
company’s employees,
In line with last year, most
(c) the need to foster the
companies identify some
company’s business
stakeholder groups beyond
relationships with
their shareholders (86% this
suppliers, customers
year, up from 81%). The most
and others, Freddie Woolfe
common stakeholders identified
Head of Responsible Investment
(d) the impact of the are shown in Figure 2. Almost and Stewardship, Old Mutual
company’s operations all stakeholders groups or Global Investors
on the community and considerations are mentioned
the environment, more widely compared to last year.
(e) the desirability of the
company maintaining
a reputation for high
standards of business
conduct, and Common stakeholders identified
(f) the need to act fairly as People / colleagues / employees
between members of 82%
the company. 77%
Customers / consumers / clients
Figure 1. Companies Act 2006 s172(1) ‘Duty
to promote the success of the company’
77%
62%
Community / society
This year we found a marked 63%
increase in reports mentioning 59%
the s172 duty, rising to 11%
Suppliers
from just 1% last year, with more
52%
companies directly or indirectly
33%
acknowledging directors’
responsibilities. Regulators / Governments
34%
More broadly, although the 22%
2018 Code and the secondary Partners
legislation were finalised after 25% 2017-18 ARA
the reports we analysed were 11% 2016-17 ARA
published, consideration of the
issues raised had already begun Figure 2. Breakdown of most common stakeholders mentioned
to impact reporting.
Financial Reporting Council, Guidance on the Strategic Report, July 2018, pg59.
2

Figure 3. Unite Group plc 2017 ARA (pages 6 and 7)
or the business model. This year including employees (as set out in
we have also seen them more Figure 1). However, it also requires
“ Long-term investors
frequently included in distinct disclosures in the directors’ report
are more likely to invest
stakeholder engagement sections. of how the directors have engaged
in companies which
with employees.
seek to engage in a Good practice isn’t just about
meaningful way with identifying stakeholders, however. Similarly, Provision 5 of the
customers, employees, In our view, companies should 2018 Code◊ recommends the
environment, the explain why it is that groups use of one or more of three
community and other are considered to be the key methods to engage with the
stakeholders.” stakeholders. Unite Group plc workforce: a director appointed
(Figure 3) do this by setting out from the workforce; a formal
why it is important that it engage advisory panel; or a designated
with each stakeholder group, and non-executive director. Note that
how each is relevant to its business although the secondary legislation
model and strategy, as well as refers to employees, the 2018
how each set of interests has Code uses the term workforce to
been considered. encourage companies to think
more broadly and beyond those
Phil Fitz-Gerald
Engagement with the workforce with formal employment contracts.
Director,
Financial Reporting Lab
Some of the recent governance This year, 8% of the reports we
reforms focus specifically on analysed already indicate that the
engagement with the workforce. company intends to adopt, or has
69% of companies specifically The new secondary legislation◊ will already adopted, at least one of
identify their stakeholders in one require in the strategic report the the three mechanisms set out in
single disclosure within the annual inclusion of a s172 (1) statement the 2018 Code. This percentage
report. These disclosures typically on how directors have had regard will rise significantly over the
occur in the chair’s statement for a number of stakeholders, coming years.

Encouragingly, we saw a significant stakeholder groups. Both the
development in the reporting on
employee engagement in this
2018 Code and the new secondary
legislation◊ require the board’s
Case studies
year’s review: 83% of companies involvement in engagement with
in our sample disclose some employees and other stakeholders, Drax Group plc 2017 ARA
form of employee engagement so this is an area of practice (pages 44 and 45)
mechanism. Engagement surveys and reporting that we expect to • Detail of key engagement
are most popular, followed develop in coming years. activities and topics
by representative councils or raised segmented by
Many disclosures make boilerplate
consultative committees. stakeholder group
references to the process or
mechanism in place, rather • Stakeholder and
than focusing on the outcomes. shareholder engagement
Some do go further, such as by disclosed alongside each
“ If you don’t look after
disclosing metrics relating to other
your customers, you
have no business. If employee engagement. As an
example, Inmarsat plc ’s 2017 Taylor Wimpey plc
you don’t have staff,
ARA (page 17) includes employee 2017 ARA
there is no one to look
engagement as a KPI, linking it (page 51)
after your customers. to the company’s strategy, risks
To make the most of • Overview of both
and remuneration outcomes
the opportunity boards for executive directors. Fewer shareholder and
should not explain how companies disclose details such as stakeholder engagement
they have had regard for issues raised (see more below). activities
matters set out in s172 • Cross-references to
in a siloed statement, sections of the report
Engagement with other
but it should cross-refer where greater detail can
stakeholders
be found
to other disclosures in
In terms of engagement,
the annual report to join employees and shareholders are
all the dots.” the most common stakeholder
these KPIs over time, especially
groups referred to in disclosures.
as investors (and other groups)
However, 65% of companies
increasingly focus on wider
describe methods used to engage
performance metrics.3
with other stakeholders such as
customers, suppliers, communities One current trend is for companies
and governments. to report on their engagement
activities with shareholders
Freddie Woolfe For these other stakeholder
alongside their engagement
Head of Responsible Investment groups, customer engagement
activities with other stakeholders:
and Stewardship, Old Mutual mechanisms are most often
Global Investors 32% of companies in our sample
described, with 17% of companies
have done so this year. We expect
explaining their use of customer
this percentage to increase in
satisfaction surveys or the Net
future. Many governance reports
Promoter Score. For example,
However, not all disclosures clearly still follow the structure set out in
St. James’s Place plc discloses
explain how the mechanisms the 2016 Corporate Governance
in its 2017 ARA (page 20) three
work in practice, and whether the Code, but Section E ‘Relations
related KPIs: client numbers, client
board engages with employees with shareholders’ has now been
retention and client advocacy (the
or if it is management only who integrated throughout the 2018
number who would recommend
conducts this engagement. This Code◊. Therefore, companies will
the service to someone else).
lack of clarity about the board’s have the opportunity to innovate
It will be interesting to see the
role also applies to the reporting and change the way they present
development of trends with
on engagement with other this information.
Financial Reporting Lab, Reporting of performance metrics, June 2018.

3

Shareholder engagement Companies will have to evolve their workforce), ARAs also fail to make
disclosures, as the new secondary clear whether the directors are
Last year we found that only
legislation◊ requires reporting on involved in engagement processes
a minority of ARAs disclosed
how they have had regard for their or whether reports on the results
the specific feedback or topics
employees, suppliers, customers of engagement are fed up to the
discussed with shareholders
and others, including the effect of board. In the light of both the
during the year. Encouragingly,
that regard on principal decisions secondary legislation and the
the majority now do this. Figure
taken by the company. 2018 Code◊, we look forward
4 shows the most commonly
to seeing more information
discussed issues. We found that some companies about how directors gain the
are already moving in this necessary exposure to stakeholder
We also compared the disclosures direction. A significant minority of
made by companies in our interests, and the outcomes of
the reports we analysed disclose these interactions.
sample with those in two investor the feedback or topics discussed
stewardship reports (Standard Life with stakeholders (including
Investments4 and Legal & General shareholders), and some already Social impact reporting
Investment Management5) that go the step further to explain
reference specific engagements how that feedback has impacted In addition to greater focus on
undertaken. These reports the company’s decision-making engaging with stakeholders,
highlight board composition (see Figure 5). there have been a few
and succession planning, developments requiring companies
executive pay, climate change, From our direct discussions with to disclose more on their social
and transparency as the top five companies, we believe that, in impacts. In this year’s report we
themes discussed in meetings practice, more companies do take look at two areas:
in 2017. Consistent with our this engagement into account in
findings last year, just over their decision-making. We expect • The ‘non-financial information
half of the companies referenced disclosures to become clearer on statement’
in the stewardship reports these effects in future. • The Task Force on Climate-
reflect in their own annual related Financial Disclosures
reports the topics that investors As indicated earlier (when (TCFD)
raised with them. However, these considering engagement with the
companies do not fully cross-refer
to all the topics outlined in the
stewardship reports. Topics discussed with % of those who
shareholders report topics
Effect of stakeholder engagement Remuneration 82%

on board decision-making
Strategy 32%
Disclosures of stakeholder
engagement are more useful if Financial performance 25%
they explain what matters were Capital allocation/investments/disposals 15%
discussed, the feedback received,
and detail the actions, if any, Shareholder returns (dividends and buybacks) 6%
taken as a result. However, the Board effectiveness, composition and succession 14%
majority of ARAs we reviewed
simply describe the company’s Other governance 22%
engagement mechanisms. Sustainability 9%
This may be partly because the
Other 18%
engagement methods are new to
many companies, so reporting in
Figure 4. Most commonly discussed topics with shareholders
this area will take time to develop.
4
Standard Life Investments, ESG Annual Review 2017, May 2018. Following the merger with Aberdeen Asset Management Plc to create
Standard Life Aberdeen plc, this is the last ESG Annual Review from Standard Life Investments.
5
Legal & General Investment Management, 2017 Corporate Governance Report, May 2018.

Figure 5. Pearson plc 2017 ARA (page 27)
Non-financial information of the FRC’s July 2018 Guidance

statement on the Strategic Report, which “ There’s a link between
is a useful tool for interpreting
value creation
Last year, we highlighted that the regulations, and so we
the EU Non-Financial Reporting
and stakeholder
expect reporting to mature in
Directive (NFRD) would be future years.
engagement. Investors
implemented through The are interested in
It is worth noting that some information about
Companies, Partnerships
FTSE 350 companies are not employees and
and Groups (Accounts and
caught by these rules, either customers as they affect
Non-Financial Reporting)
because they are incorporated
Regulations 2016. These amended a company’s value.”
in another EU member state
strategic reporting requirements
that has implemented the
in the Companies Act 2006
directive differently, or because
through the insertion of sections
they are incorporated outside
414CA and 414CB, as well as
the EU, such as in Jersey. An
diversity policy disclosures through
example of an EU member state
amendments to the Disclosure
that implemented the NFRD
and Transparency Rules.
differently to the UK is Ireland,
which allows the non-financial Hannah Armitage
The requirements apply to
Project Manager,
financial years beginning on information statement to be Financial Reporting Lab
or after 1 January 2017, and included in a separate report
the ARAs we analysed were the (such as a sustainability report);
first needing to comply. These the UK does not.
disclosures were made in advance

Separately, there are clear 8% of our sample include a
materiality tests (discussed statement referencing the
on page 23) and the level of regulations and disclosing at a
disclosure by companies in each high level where the disclosures
area of non-financial reporting have been incorporated, as shown
may vary, subject to what in Figure 6. This approach is the
companies deem to be material. one that the FRC recommended
in its guidance issued in July
Presentation 2018.7 One company, Lloyds
Banking Group plc (Figure 7), Figure 6. Capita plc 2017 ARA (page 48)
The regulations require the provides a destination table
inclusion of a ‘non-financial cross-referencing how all the
information statement’ in the requirements of the regulations regulations. Companies tend to
strategic report of qualifying are met. This is the only such concentrate the majority of their
companies, although this can be example we have seen and we disclosures in one place, such as
incorporated across the strategic consider it an effective approach. a corporate social responsibility
report. We found that only a section, but with non-financial
handful of companies make their The vast majority of companies KPIs and relevant principal risks
disclosures in a single statement incorporate the disclosures disclosed within the sections
or section, such as International throughout their ARAs without relating to their other KPIs
Consolidated Airlines Group SA making an explicit reference and risks.
(2017 ARA pages 47 to 56).6 to the non-financial reporting
Figure 7. Lloyds Banking Group plc 2017 ARA (page 27)
Note: this example is incorporated in Spain.

6
7

Figure 9.
(1) The non-financial Most common new principal risk categories
information statement
must contain information, Principal risk Number of companies
to the extent necessary for
an understanding of the Cyber security / Data protection 15
company’s development,
performance and position Environment / HSE 8
and the impact of its
activity, relating to, as a People / Employee 7
minimum—
Competitor as a new risk 6
(a) environmental matters
(including the impact of Bribery / Corruption 4
the company’s business
on the environment),
(b) the company’s
employees,
(c) social matters,
(d) respect for human
rights, and Even though a description of required to describe not only the
non-financial KPIs relevant to the principal risks relating to the NFR
(e) anti-corruption and
non-financial reporting matters matters, but also the business
anti-bribery matters.
(NFR matters) (see Figure 8) was relationships, products and
required in this year’s ARAs, we services likely to cause adverse
Figure 8. Companies Act 2006 s414CB saw no significant increase in the impacts in those areas of risk.
‘Contents of non-financial information number of KPIs disclosed from As seen in Figure 10, we found
statement’
last year (finding an average of that although 88% of companies
six non-financial KPIs). disclose at least one principal risk
relating to the NFR matters, only
74% of the companies The number of principal risks 30% outline in the risk description
we looked at have a single also remains unchanged (at 12), those relationships, products
standalone section on corporate however, there was some or services. Most commonly
responsibility or sustainability change to the categories used this relates to the risk posed
within their strategic report. by companies. It is interesting to by suppliers and other third
note that where companies added parties, but not exclusively. ITV plc
new principal risks, three of the (Figure 11), for example, provides
KPIs and principal risks
top five most common additions a description of the potential
The non-financial reporting relate to NFR matters (they relate impact of the expansion of ITV
regulations overlap significantly to the environment, employees Studios on the risk of a health and
with pre-existing requirements and anti-corruption and anti- safety incident that could result
under s414C to report on bribery matters). Please see Figure in the loss of human life. We also
environmental matters, employees, 9. Broadly speaking, the same saw some examples of companies
social, community and human applies to non-financial KPIs, with highlighting business relationships,
rights issues to the extent the exception being that the most products and services as separate
necessary for an understanding common additional KPI relate to principal risks, although this is not
of the development, performance employee engagement, followed required by the regulations.
and position of the company. by a customer-related metric, in
The non-financial information line with the broader stakeholder Policies, due diligence and
statement extends this list of engagement agenda. outcomes
matters to include anti-corruption
and anti-bribery. A key change introduced by the Pre-existing law required
regulations is that companies are companies to disclose policies —

Figure 10.
Do companies disclose principal risks Case studies

relating to NFR matters?
G4S plc 2017 ARA
12% (page 13)
30%
!
No • Full list of relevant
policies provided
Yes, in addition • Links to different pages
to information of website where policies
about business and case studies can be
relationships, viewed
products and
services likely to
Aggreko plc 2017 ARA
cause adverse
(page 73)
impacts in those
areas of risk • Overview of compliance
58% programme with some
Yes information of due
diligence processes
implemented in
pursuance of policies
and their effectiveness — in pursuance of the policies of a high-level confirmation (e.g.,

in relation to environmental disclosed. In addition, rather ‘we have an anti-bribery and anti-
matters, employees, and than reporting on effectiveness, corruption policy’). Few describe
social, community and human companies must report the those policies. Moreover, it is
rights issues. The non-financial outcome of the policies. questionable whether the policies
information statement goes disclosed cover all the issues raised
further, with an additional area The vast majority of reports we
by the NFR matters; for example,
(anti-bribery and corruption), and analysed state that they had
whether charitable donations
requiring an explanation of the due policies in place relating to the NFR
policies truly cover social matters,
diligence processes implemented matters, but this consists mostly
or if health and safety policies fully
cover employee matters.
Fewer companies disclose the due

diligence processes implemented
in pursuance of their policies.
However, many companies may
have more due diligence processes
in place than they report. Where
ARAs do include disclosures on
due diligence processes, these
are generally boilerplate. This
is despite FRC guidance, which
states: ‘Any disclosures relating
to due diligence processes
Figure 11. ITV plc 2017 ARA (page 55) should be entity-specific

already had to report on the
matters to the extent necessary
for an understanding of the
company’s development,
performance and position, but
now they must additionally do
so to the extent necessary for
an understanding of the impact
of the company’s activity.
Many companies explain the

positive impacts of their business,
such as contributions to charity,
volunteer days and employee
opportunities. In Figure 12, WPP
plc’s disclosure is an example of
a company that illustrates these
positive impacts, as well as some
Figure 12. WPP plc 2017 ARA (page 40)
indirect and negative impacts.
As with the outcome of policies,

fewer companies disclose
and informative. Boilerplate putting due diligence processes in the negative impacts of their
disclosures are of limited use.’8 place, although it is not clear that activities. To gain a balanced
The disclosures we saw typically this is truly what the EU or UK understanding of the impact
include mentions of mandatory Government intended. of a company’s activity from
training, whistleblowing, supplier an external perspective, it is
screening or audits, or monitoring We found some positive
examples, which include the critical that negative as well as
of health and safety metrics. positive impacts are considered
It is not necessarily obvious to disclosure of quantitative metrics
demonstrating reductions in and disclosed.
which policies the due diligence
processes relate (e.g., when environmental degradation, Some companies do address
discussing whistleblowing emissions and waste, and fewer this aspect of the regulations
metrics, it was not clear if these reportable health and safety well, and some of the relevant
relate to corruption, theft, incidents. However, we noted disclosures are highlighted as
misconduct, etc.). that companies tend to articulate case studies, overleaf.
improvements in outcomes;
Reporting in this area could well few openly discuss worsening
evolve, particularly given the outcomes and any need for Materiality
increased scrutiny of employee corrective action in future periods. Given that the ‘impact of
and stakeholder engagement, This brings into question how activities’ should be viewed as
and the board’s increasing role these disclosures meet the fair, a ‘materiality’ filter, itemised
in assessing and monitoring balanced and understandable test, disclosures of impact for all the
culture. For example, we see scope since it appears they may not be NFR matters are not, strictly
for cross-referencing between balanced in nature. speaking, required. Rather, if the
sections, which would help to company’s activity has a material
reduce the boilerplate nature of Impact of activity impact on, for example, a local
current disclosures. community (judged externally,
NFRD introduced into UK law an
and not in terms of materiality to
Even fewer companies disclose additional filter for determining
the company’s revenue), then that
the outcomes of their policies. what to disclose in relation to
information needs to be disclosed.
Some report outcomes included non-financial matters. Companies
8

to these matters. This ranges
“ It is important to ensure from high-level disclosures on
the process undertaken to assess
Case studies
that non-financial
reporting does not materiality to ones which give
more detail, including some which Evraz plc 2017 ARA
revert to boilerplate or
publish materiality matrices (see (pages 104 and 105)
marketing hype. I am
concerned that narrative Figure 13). • Narrative analysis of the
sections often contain company’s compliance
The Global Reporting Initiative
information which is regarding anti-bribery
has published guidance on
scattered, repeated and and corruption
defining materiality in relation to
sometimes exaggerated
stakeholder issues. This includes
for marketing purposes Polymetal International
industry-specific guidance,
— making the front half plc 2017 ARA
such as for the mining, metals
of ARAs very long and (pages 52, 53 and 56)
and electric utilities sectors
difficult to pick through to
(see Appendix A for more details). • Disclosure of the impact
get at key information.” Although the guidance does not
of the company’s
exactly align with the regulations,
activity in relation to its
it does overlap, and a few
employees
companies in our sample have
been using it to help with their
materiality assessment. Glencore plc 2017 ARA
(pages 34 and 35)
It will be interesting to see whether
• Disclosure of the impact
Peter Parry companies, alongside adopting the
of the company’s activity
Policy Director, Guidance on the Strategic Report,
UK Shareholders’ Association leverage increased stakeholder in relation to social
engagement and wider changes matters
to corporate governance to
improve reporting in relation to Unilever plc 2017 ARA
Moreover, in its guidance, the the non-financial information (pages 7 and 14)
FRC states that the descriptions statement. However, overlaps
• Disclosure of the impact
of policies, due diligence between the non-financial
of the company’s activity
and outcomes are only to be reporting regulations and wider
in relation to human
disclosed when necessary for an UK corporate governance
rights
understanding of the company’s reforms◊ could impede progress
development, performance and — companies may focus on the
position, and the impact of its newest changes, influenced by
activity.9 If the company decides the increased Government and
to report additional information, companies, however, may still
press interest in the governance
this should be located outside view climate change as a distant
reform agenda.
the strategic report, e.g., in a issue, even though its implications
sustainability report located online. form a risk to the long-term
Task Force on Climate- viability of businesses across
We found that the majority of related Financial many sectors and geographies.
companies make their non- For example, the rise in extreme
Disclosures
financial disclosures without weather events, carbon policy
reference to how they have Awareness of the potential impacts mechanisms (e.g., carbon cap-and-
determined that the information is of climate change has been trade mechanisms and low-carbon
deemed to be material. Only 18% increasing for some time. Some levies) and disruptive shifts to
mention materiality in relation green technologies.
Financial Reporting Council, Guidance on the Strategic Report, July 2018, pgs49-50.
9

Until recently, the degree to 3. Metrics and targets they have
which companies report on how set themselves to monitor their “ On value creation,
they manage these risks has performance investors are most
varied considerably and, in many interested in the answer
cases, disclosures are limited. The climate change debate to the question ‘If
However, the recent wave in is heating up scenario X happens,
shareholder resolutions on this
A year after the release of the what does it do to your
topic demonstrates that investors
are increasingly dissatisfied with TCFD recommendations, 20% business model?’ That’s
the lack of quality disclosure on of the companies we reviewed why TCFD has gained
climate-related risk. In response, already claim to have responded, a lot of momentum.
the Financial Stability Board or state their intention to do so. TCFD is not asking
(FSB) created the Task Force But even more companies discuss for impact on the
on Climate-related Financial the implications of climate environment for the
Disclosures (TCFD) to establish change on their business without sake of it, but asking
a set of recommendations for specifically referencing TCFD:
for impact on the
consistent ‘disclosures that will 37% describe the long-term
business model.”
help financial market participants risks and/or opportunities of
understand their climate risks’. climate change on their business.
The recommendations, issued 23% include information on
in June 2017, suggest that the board’s oversight and
companies start to disclose management’s role in assessing
the following: risks and/or opportunities
arising from climate change,
1. The risks and opportunities and 17% of companies include
Hannah Armitage
born out of climate change information on how climate risks
Project Manager,
2. The strategy and governance and opportunities could impact Financial Reporting Lab
structure they intend to strategic and financial planning.
establish to address them
Figure 13. Pearson plc 2017 ARA (page 26)

Climate change affects all sectors Shareholder pressure to move future planning. One of the most
— but some more than others beyond disclosure comprehensive recommendations
of the TCFD addresses this, by
The TCFD recommendations apply Although climate change receives
suggesting companies undertake
to all sectors, but there is also much attention, only 10% of
analysis of company resilience
specific guidance for a number companies reference climate
under different climate scenarios.
of high impact sectors. Over change in their principal risks and
In our sample, only BP plc (see
half of insurance companies only four consider climate change
Figure 14) and Unilever plc
described their response to as a separate principal risk. This
(2017 ARA page 32) discuss
climate change in detail, indicating leads readers to question how
the outcomes of their climate
relatively high awareness of seriously companies consider
scenario analysis in their annual
the long-term implications the severity of climate change
report, which may indicate the
climate change may have for compared to other factors.
complexity of this exercise.
their services, investments and But as shareholder awareness
But as the practice of climate
ultimately their beneficiaries of climate risk is increasing,
scenario analysis matures and
(e.g., policy-holders, future companies are facing pressure
tools become more widespread,
pensioners, etc.). Conversely, to go beyond disclosure alone
more companies should find
industries that typically operate and embed climate change in
it feasible to conduct scenario
under shorter time horizons core risk processes.
analyses that will help them
appear less prepared for climate
During some annual general respond to shareholder concerns.
change. For example, a very small
proportion of companies in the meetings (AGMs) this year, a
industrial goods and services growing number of shareholders Turning a risk into an opportunity
sector discussed the topic. have shown their unease about
the limited level of disclosure TCFD primarily puts forward
regarding the quantifiable financial recommendations in the context
implications of climate change on of risk, but climate change
Figure 14. BP plc 2017 ARA (page 11)

also provides opportunities to
companies that respond to it
successfully. 22% of companies
in our review deem that climate
change will result in both risks
and opportunities for their
business, with 9% seeing climate
change solely as an opportunity.
Companies acknowledge that
climate change cannot be solved
by one entity in isolation and that
collaboration is required between
different stakeholders, including
businesses, their supply chains,
regulators and governments.
Implementing the TCFD

recommendations requires
changes to typical governance
and risk assessment processes.
It will likely take several years for
an organisation to be in a position
to generate valuable information
for investors to help them make
informed decisions. The earlier
organisations embark on this
journey, the better — the TCFD
initiative provides a platform
to help educate directors and
management about climate risks,
and enables them to engage with
investors on the impacts and
opportunities for their company.

3
Chair tenure
The 2018 Code◊ (Provision 19)
now states that the chair should
not remain in post beyond nine
years from the date of their first
appointment to the board. This
nine year period can be extended
for a limited time, particularly in
cases where the chair was a board
member previously. However, in
these cases, a clear explanation
Chair tenure,
should be provided. This change
is designed to encourage board
refreshment and diversity.
The flexibility of extending the
diversity,
appointment was added to address
concerns that introducing a time
limit would discourage internal
appointments (for e.g., from senior
culture and
independent director to chair),
with the result that companies
would lose talent.
remuneration
Our review found that 23% of
companies in our sample have
chairs who have served on the
board more than nine years
(see Figure 15). Going forward,
these companies will be scrutinised
more heavily as a result of the
change in the 2018 Code.
Once the 2018 Code◊ comes

into effect, we recommend
that companies whose chair is
approaching the nine year limit
consider disclosing: how much
longer the chair is expected
to remain in post; how wider
succession planning, diversity
and company objectives have
been considered; and details
of engagement with major
shareholders on the topic.
0 – 3 years 31%
4 – 6 years 25%
7 – 9 years 21%
10 – 12 years 9%
13 – 15 years 8%
>15 years 6%
Figure 15. Total board tenure of chairs
since first appointed to board
Diversity hiring managers, and requesting
Companies often disclose

more diversity from our search
partners and ourselves, we have
Case studies
information on their diversity increased the number of female
initiatives, but fewer disclose their hires from 20% (in May 2017) to Reckitt Benckiser Group
effectiveness and impact. This 33% (in September 2017).’ Barclays plc 2017 ARA
remains an area for improvement. plc also provides specific data (pages 2, 10 and 14)
Examples of reported initiatives to demonstrate the impact of its • ‘Our people and culture’
include the creation of transgender diversity initiatives (see Figure 16). identified as a strategic
policies, programmes for women, input under business
diversity and inclusion awards, and The 2018 Code◊ (Principle J) model (page 2)
flexible working arrangements for expands companies’ consideration
• ‘Organisation and
staff. Leading practice disclosures of diversity to include social and
culture’ identified as a
include the quantification of trends ethnic backgrounds, and cognitive
strategic objective with
or historic data to demonstrate and personal strengths. We are
targets, KPIs set out,
impact. Paddy Power Betfair seeing an increase in disclosures
progress and future
plc’s 2017 ARA (page 31) is an on diversity beyond gender,
actions set out
encouraging example: ‘Since although other factors are not
updating our job specs to be more often discussed in a meaningful
way. When they are, the most Metro Bank plc 2017 ARA
inclusive, rolling out training to
discussed aspects beyond gender (pages 6 and 8)
include ethnicity, age, nationality, • ’Unique culture’ is
culture, disability, sexual identified as key to
“ As diversity ought to orientation, type of contracts and business model and is a
result in a company having experience of working in specific strategic objective, with
access to the best talent, regions. Some companies, such detail on progress and
it just makes common as John Wood Group plc in its outlook, linkages with
sense, and unsurprisingly 2017 ARA (page 30), also discuss KPIs and risks
studies have shown diversity of thought and cognitive
that board diversity strength. One of the key drivers of Aggreko plc 2017 ARA
can boost a company’s the diversity debate in corporate (pages 14, 42 and 64)
performance. Investors are governance remains the need to
also interested in seeing avoid ‘group-think’ and increase • Culture is referenced
board effectiveness. under strategy and as a
how boards are building
competitive advantage
diversity below board level
for the same reason.” • Culture is listed as an
15%
area of focus for board
meetings, with detail on
of reports provide detail on discussion and actions
the impact of the initiatives
taken to improve diversity. Rentokil Initial plc
2017 ARA
Freddie Woolfe
23%
of companies discuss
(pages 6, 19, 35 and 49)
• Disclosed external
metrics (Glassdoor and
and Stewardship, Old Mutual diversity beyond gender in
Global Investors
Trustpilot) to explain how
a meaningful way.
culture is monitored in
relation to workforce
and customers
◊ — Denotes a reference to changes arising from the 2018 UK • Clear articulation
Corporate Governance Code or the Companies (Miscellaneous of the culture and
Reporting) Regulations 2018. These are explained in more measurements used
detail in Appendix A ‘The 2018 Code, new regulations and
guidance’ on page 45.

Culture
“ Investors today have “ Culture disclosures often
Culture has been a hot topic for
access to a wide range of read like marketing,
a number of years and is of great
information. A company generic statements — it
interest to the FRC, investors and is hard to get a sense of
should consider whether
other stakeholders. The 2018 the true culture through
the story in the ARA is
Code◊ (Principle B) encourages reading ARAs. Companies
comparable to third party
the alignment of culture with should articulate: What
information. If they don’t,
the company’s purpose, values culture they need to
investors will, and it is and strategy. It also emphasises build the business model
likely to affect their views (Provision 2) the importance of and strategy and what
on the credibility of the board oversight of the assessment measures (financial and
information. Companies and monitoring of culture. This is non-accounting) are
should seek to take control a significant update and raises the used. A company should
of their narrative. importance of this area further. disclose its success in
relation to culture but also
Some metrics presented
be transparent about the
by companies may not be areas for improvement.
sufficiently reliable for an
investor and as such they
may be more likely to use
47%
of reports articulate the
In the long-term, culture
will impact a company’s
ability to create value
third party information.” culture the company has or profitability. Investors do
the culture it seeks to create. not only judge a company
by their numbers but also
39%
look at their narrative for
credibility.
explain how culture supports Value creation and
the business model or human capital reporting
strategy (up from 10% in are not well reported.
2015/16). Metrics (e.g., employee
Phil Fitz-Gerald satisfaction surveys) can
Director,
be used to hide a lot of
Some companies have started to things. Companies should
include more detailed descriptions disclose external evidence
of the culture they seek to create
corroborating their
disclosures in their ARAs,
The majority of reports disclose and the values they aim to embed.
where possible.”
information on board-level In certain sectors, specific values
diversity only, with just a few are given prominence, for example,
companies meaningfully disclosing health and safety in energy and
details about diversity below board mining companies, and innovation
level. Lloyds Banking Group plc’s in healthcare companies. Culture is
2017 ARA (page 21) provides a often mentioned in more than one
good overview of various diversity place within reports, but is more
aspects beyond gender across the frequently discussed in the chair’s
statement, the CEO’s review, Freddie Woolfe
workforce (including below board Head of Responsible Investment
level). Disclosures could be even sections on corporate social and Stewardship, Old Mutual
further improved by including responsibility, people and diversity, Global Investors
a description of management’s risk disclosures, and the corporate
analysis of the current diversity governance report.
levels and any targets to improve. More companies are explaining explaining how having the
how instilling the right culture is right culture delivers positive
important for their business model outcomes and contributes to
or strategy. Leading practice competitive advantage.
reporting in this area includes

37%
of reports articulate how
culture is embedded.
30%
explain how culture is
measured (up from 9% in
2015/16).
Many discuss the importance of

culture or identify culture as a
board priority. However, only a
minority (37%) explain clearly
how culture is embedded (beyond
‘setting the tone from the top’). Figure 16. Barclays plc ARA (page 46)
The examples we found include
the use of culture champions,
new codes of ethics and the
introduction of teams set up dashboard’ and ‘culture audit’
to address cultural change. without providing details on the “ Companies often say ‘our
We recommend that companies methodology or outcomes. The people are our biggest
provide more context as to the best examples disclose third party asset’ without setting
purpose of their culture initiatives, metrics in their culture reporting out what particular
and their reach where possible. (see the Rentokil case study on aspects of the workforce
For example, Meggitt plc’s 2017 page 29 of this report). are considered to be
ARA (page 9) explains how it
Overall, however, reporting on important — high skills and
launched a culture development
culture is often generic and productivity? Low staff
programme, how it has been
limited. We have seen very few turnover? Companies
deployed, that its aims are to
disclosures that identify any should articulate how
foster more effective collaboration
challenges faced in relation to the culture drives value,
and increase employee
culture or embedding it. One performance and strategy.
engagement, and its link to
financial targets. exception is Man Group plc’s Investors are particularly
2017 ARA (page 44), which interested in employees
We observed improvements in discloses the board’s challenge because they are the
the explanations of how culture to management over the extent ones that are driving the
is measured beyond the use of to which its business principles success of the company.”
employee surveys. Other methods are embedded in employees’
include recording regional site day-to-day behaviours (including
visits, increases in training any variation of penetration
available, workforce turnover, across different teams), despite
informal engagement across the difficulties reporting and
the business, and the number of monitoring such qualitative issues.
senior appointments made from
within the business. However, In addition, we found that while a
Phil Fitz-Gerald
the majority of companies do few companies disclose employee Director,
not explain clearly how culture turnover, the workers’ reasons Financial Reporting Lab
is monitored. For example, a few for leaving (an area of interest to
referenced the use of a ‘culture investors) is not discussed.

Remuneration The secondary legislation will
require companies to disclose a “ Gender pay gap
More companies have disclosed ‘pay ratios table’ of CEO pay to disclosures can be
their gender pay gap figures in the first quartile, median and third instructive. They can
their ARAs this year (25%, up quartile of employee pay. It gives indicate if something is
from 4%), despite it only being a companies three options for how wrong or out of kilter. For
mandatory website disclosure. to calculate these figures. Going example, if women are
Many more companies referred forward, historical data will have not properly represented
readers to their websites for to be disclosed for each preceding at higher levels of
this information. Among the year in which the requirement management and are
companies choosing to disclose applied, up to a maximum of nine not amongst the highest
gender pay gap details in their years. In the next couple of years, earners, it calls into
annual report, the better examples however, and especially where question the company’s
provide some benchmarking (e.g., companies have reported pay commitment to
to Office for National Statistics ratios ahead of the regulations, promoting a meritocracy
national averages), explanations, data will not be comparable until in the workplace.”
assumptions and limitations of more than one year’s worth of
the findings, and future actions. calculations have been performed
Examples of this can be found in using the same methodology.
Barclays plc’s 2017 ARA (pages
90 and 91) and Spire Healthcare The 2018 Code◊ explicitly links
Group plc’s 2017 ARA (pages culture, practices and behaviour to
46 and 47). incentives and rewards throughout
the whole company (Principle
Peter Parry
The Companies (Miscellaneous Q, and Provision 2 and 33). The Policy Director,
Reporting) Regulations 2018 remuneration committee should UK Shareholders’ Association
(see Appendix A)◊ include a also review workforce and related
requirement for companies to policies, and the alignment of
report CEO to employee pay ratios. incentives and rewards. The
Although the regulations are not committee’s role now also includes part of their strategy — as a
yet effective and the detail was setting senior management (i.e., consideration in the remuneration
unknown when our sample of first layer below board level) pay. section: ITV plc (2017 ARA page
companies published their ARAs, 89) and Elementis plc (2017 ARA
7% voluntarily reported pay ratios. With a view to this, we found
page 71).
that 40% of companies discussed
When companies published their senior management remuneration. In the next reporting cycle we
ARAs the secondary legislation◊ Their discussions focused on expect to see remuneration
had not yet been made public, topics such as the broad senior committee reporting to discuss
therefore some companies management remuneration these issues much more widely,
devised their own methodology policy or structure, the general in advance of adopting the wider
for calculating the ratios. For incentives or reward strategy (e.g., responsibilities set out in the
example, John Wood Group shares and bonuses), how senior 2018 Code ◊.
plc’s 2017 ARA (page 64) uses management reward schemes
two different methodologies to are aligned to those of executive
calculate the ratio, and Metro Bank directors, the gender pay gap, and
plc’s 2017 ARA (page 75) states high earners. We also identified
that its current year methodology two companies that explicitly
changed from last year. referenced culture — which forms

4
Current trends in audit
committee (AC) reporting
This year’s review included the
first December and January
year-end companies required to
apply the 2016 UK Corporate
Governance Code. This added
the requirement for the audit
committee as a whole to have
competence relevant to the sector
in which the company operates,
Audit
and for advance notice of any
audit retendering plans to be given
in the annual report. Additional
disclosure recommendations were
committee
also added to the 2016 Guidance
on Audit Committees. These were
as follows:
reporting
• How the AC composition
requirements have been
addressed, and the names and
qualifications of all members of
the AC during the period, if not
provided elsewhere
• How the AC’s performance
evaluation has been conducted
• The name of the current
external audit partner, and how
long they have held the role
• If the external auditor
provides non-audit services,
the AC’s policy for approval of
non-audit services
• Audit fees for the statutory
audit of the financial statements
• Fees paid to the auditor and its
network firms for audit-related
services and other non-audit
services, including the ratio of
audit to non-audit work
• For each significant
engagement, or category of
engagements, an explanation of
what the services are and why
the AC concluded that it was in
the interests of the company
to purchase them from the
external auditor

• An explanation of how the are some good examples to be In line with this, the 2016 Code
committee has assessed found in the 2017 annual reports added a Provision for disclosing
the effectiveness of internal of Fidessa Group plc (page 45) and advance notice of any retendering
audit and satisfied itself that Astrazeneca plc (page 102). plans. We found that 26% of
the quality, experience and companies disclose such plans.
expertise of the function is Reporting on external audit and Another 26% either had an
appropriate for the business tendering audit tender in the year or were
• The nature and extent of retendering when they reported.
It has long been established that A significant proportion of
interaction (if any) with the
the AC should recommend the the others may not have been
FRC’s Corporate Reporting
appointment and removal of the planning for their next tender,
Review Team (CRRT)
auditors to the board. Updates in which case this disclosure
• Where a company’s audit has to regulations following the EU requirement would not be relevant.
been reviewed by the FRC’s audit reforms also made the Overall, however, more companies
Audit Quality Review Team AC responsible for the process made disclosures about their
(AQRT), disclosures about any of selection and required it retendering plans this year.
significant findings and the to provide a minimum of two
actions the AC and the auditors recommendations of prospective The 2016 Guidance for Audit
plan to take (but should not audit firms to the board. Committees also suggests that ACs
include disclosure of the audit give an explanation of how they
quality category) have assessed the effectiveness
of the external audit process
Last year we found that some
“ An important feature of and of the approach taken to the
companies were already starting
disclosure on tendering appointment or reappointment
to make some of these disclosures
is an explanation of how of the external auditor. Of the
early. It has been interesting
the AC is or was involved 14 companies that reported on
to observe how reporting has
an audit tender during the year,
progressed this year. in the tender process
eight provided an explanation of
and in recommending
the tender process and selection
Disclosure on meeting the auditor. Companies criteria. Common criteria
composition requirements should explain how the included audit quality findings,
The percentage of companies
AC satisfied itself that independence, understanding of
providing an explanation of how the auditor appointed the business, geographic coverage,
the composition requirements has the right skills and resources, use of data analytics
of the AC have been addressed resources for the audit. and technology, ability to offer
(a recommendation in the This would increase robust challenge, cultural fit and
Guidance on Audit Committees), the reader’s confidence value for money. We found that
particularly in relation to the in the integrity of the leading practice disclosures on
sector competence, has remained financial statements, process included some or all of
static at 61%. However, the which is an integral the following:
quality of the information given component of the ARA.” • Clarity on AC leadership in
has broadly improved. Although
conducting the tender
the board director biographies
would usually provide sufficient • Evaluation criteria in the
information to be able to request for proposal
determine who has financial • Considerations in determining
and sector-relevant experience, a shortlist and number of
readers can benefit from the AC participating firms
report bringing this information • Who from the company was
Charles Henderson
together to explain exactly what involved in the process and
Business Manager,
type of experiences qualify Invesco Perpetual, and member who was involved in meetings
the AC members and meet the of FRC AQR Committee
• Information on any site visits
composition requirements. There

• Topics discussed in meetings Committees. This is an area for review of the company’s external
and presentations potential improvement. audit was carried out by the FRC’s
• Reasons why the auditor AQRT, with 15% including detail
Going forward, the scrutiny on the around the AC’s involvement in the
was appointed
AC’s role in tender process is set review process, an improvement
Reckitt Benckiser plc’s 2017 ARA to increase even further. Where from last year. Value-adding
(page 74) provides a leading language previously centred on insights include:
practice disclosure on the AC role responsibility for the process and
in running the tender and what making recommendations, the • The focus of the review
the process entailed, including the 2018 Code◊ (Provision 25) is • How the AC was informed of
number of participating firms and now much more specific on the AQRT findings
criteria for selection. Some reports committee’s role being to conduct
• The interaction between the
also discuss the plan for audit the tender.
AQRT, the AC and the audit firm
transition, such as BAE Systems
• Any impact on the quality of the
plc’s 2017 ARA (page 83). Interactions with the CRRT audit for the company
and AQRT
We saw less disclosure from • Agreed actions taken by the
companies that are not currently We looked to see how many audit firm for the company’s
tendering their audit on the length reports followed the 2016 audit and for the audit firm
of tenure of the current audit firm, Guidance on Audit Committees more broadly
when a tender was last conducted, recommendations for
who the current audit partner is disclosure on: It should be noted that many
and how long they have held the companies will not have been
• The nature and extent of subject to a CRRT or AQRT review
role — all suggested disclosures
interaction (if any) with the in the year. Others that were
in the 2016 Guidance for Audit
FRC’s CRRT subject to one may not have
• Where a company’s audit has disclosed this.
been reviewed by the FRC’s
“ AQRT disclosures AQRT, disclosures of any Assessment of the AC’s own
should form part of the significant findings and the performance and effectiveness
explanation of how the actions the AC and the auditors
AC gained assurance plan to take According to the 2016 Code,
over the financial board evaluations (both
12% of companies disclosed that internal and external) should
reporting. Context
the CRRT had reviewed their include reviews of each of the
should be provided,
ARA. Leading practice disclosures committees. The FRC Guidance
which shouldn’t be provide details on: recommends that ACs provide an
difficult to do.” explanation specifically on how
• The objective of the review their performance evaluation was
• Dates when the review occurred conducted. This year, 71% of AC
• What was reviewed by the CRRT reports mention how the AC’s
• Conclusions and own effectiveness was evaluated
recommendations reached during the year. However, the
by the CRRT explanations vary considerably in
terms of depth, with many reports
Charles Henderson • Any subsequent responses or
making only a brief mention that
Business Manager, changes made by the company
the AC was assessed as part of the
Invesco Perpetual, and member
Similar to last year, 23% of reports overall board evaluation. Leading
of FRC AQR Committee
in our sample disclose that a practice disclosures feature
◊ — Denotes a reference to changes arising from the 2018 UK Corporate Governance Code or the
Companies (Miscellaneous Reporting) Regulations 2018. These are explained in more detail in Appendix
A ‘The 2018 Code, new regulations and guidance’ on page 45.

additional details on findings
and actions specific to the AC.
Man Group plc’s 2017 ARA “ The main criticism of annual reporting in general
(page 61) offers an example is that often the ARA looks like a compliance
of in-depth AC reporting on document instead of a communication document.
how the committee assessed
AC reports often do not sound like they are written
its own performance, including
information on actions and by the chair as it is usually written by someone else.
progress from the previous year.
The disclosures which investors pay the most
The 2018 Code◊ further attention to in the AC report are the:
emphasises the importance of
board evaluations (Principle L, • Reliability of the financial statement
and Provisions 21, 22 and 23). (e.g., external audit process)
In particular, the 2018 Code
emphasises the importance of the • Reliability of controls (internal audit,
evaluator having direct contact general controls etc.)
with the board and individual
directors. We believe this may • Judgment and estimates
result in more quality engagement
between evaluators, the board and • Reliability of the information relied on by
its committees. shareholders which are usually price sensitive
(e.g., How did the company become comfortable
Internal audit performance
with non-GAAP measures? How can investors
and effectiveness
become comfortable with TCFD disclosures?
The FRC’s updated 2016 Guidance
What are the relevant AC measures/due
on Audit Committee recommends
that AC reports include an diligence?)
explanation of how the committee
has assessed the effectiveness
I would like AC reports to become more succinct
of internal audit and satisfied and relevant to institutional investors.”
itself that the quality, experience
and expertise of the function is
appropriate for the business.
Our review found that 78% of
ACs at least confirm that they have
assessed the effectiveness of the
internal audit function, an increase
from 53% last year — perhaps due
in part to the additional time the Charles Henderson
Business Manager, Invesco Perpetual,
recommendations have had to bed
and member of FRC AQR Committee
in. Of those, 27 companies provide
detail on how the AC’s assessment
of the internal audit function’s
effectiveness was undertaken —
up from 14 last year. This is likely asks companies to explain not only also how internal assurance is
to be an area of increasing levels why they don’t have an internal achieved in these cases and how
of insight: the 2018 Code◊ now audit function (if they don’t), but this affects the work of external
audit (Provision 26).

Figure 17.
Time period chosen for viability statements “ Companies need

to move away from
19% boilerplate viability
five years statements. They should
aim to present what the
board believes to be
the long-term viability
76%
5% period of the business.
four years This involves doing more
to reflect the wide range
three years of timeframes they work
across. E.g., climate
change disclosures can
go out to 2030/2050 for
a company with a three
year viability period.
Viability statement fewer companies quantified Viability statement

reporting these scenarios. In addition, disclosures could also be
38% of companied disclose their improved by companies
Our findings in relation to the assumptions and 6% quantify disclosing what the
time period chosen for assessing them (the same result as last AC’s involvement was in
viability are similar to last year’s year). However, more could be making the statement
results, with 76% of companies done in AC reports to highlight and what they did to get
opting for three years, 5% for four the challenges made by the AC in
comfortable with it.”
years and 19% for five years (see making the statement.
Figure 17). Although investors
often question why certain Some best practice examples
companies are not prepared refer to the company’s longer-
to make the statement over term prospects, drawing on
a longer period, explanations other timescales used by the
for why particular time periods business to indicate the planning
were chosen have significantly and investment cycles used.
improved. Last year, 76% of Such timescales relate to credit Charles Henderson
companies simply stated that periods, bank loans, conversion Business Manager,
Invesco Perpetual, and member
the period was in line with projects, new land investments,
of FRC AQR Committee
strategic planning, compared to other forecasts, pensions deficit
only 35% this year. We noticed a repayment plans, the remaining
lot of added specificity relating operational life of projects, foreign
to factors such as contract currency hedging, development Code’s Provision on viability is
lengths, customer and supplier cycles, the cash impact of tax for it to be applied ‘in two stages,
contracts, lease terms, product charges, funding plans to firstly for directors to assess the
development cycles, incoming clear a pension deficit, the prospects of the company and
regulatory change, financing and average length of business secondly to make a statement
credit facilities, order books, R&D relationship with clients, and of its viability.’10 We believe
pipelines and Brexit. shareholding requirements for this two-fold approach would
executive remuneration. improve viability disclosures and
We also found better disclosure make them of greater interest
of scenarios tested, with 69% now In its report on risk and viability
to investors.
providing some detail. However, reporting, the Financial Reporting
as we also found last year, far Lab says that the intention of the
Financial Reporting Lab, Risk and viability reporting, November 2017, pg7.
10

5
We have already highlighted
how the 2018 Code◊ and the
secondary legislation will affect
company reporting in a few years’
time. We provide further details of
these developments in Appendix
A. However, a number of other
developments will also impact
reporting in the future.
We have seen significant progress

in the quality of reporting since
Looking
we began our reviews five years
ago. It is important for regulators,
companies and investors to keep
innovating — using new ways
ahead
of working and technological
advances to ensure the relevance
of company reporting. Some
companies report that website
traffic to ARAs is relatively low,
causing them to question the
relevance of annual reporting.
This is why this year (as in some
previous years) we talked to
investors about what they find
useful and included their views
throughout our report. We are
also playing a part in exploring
the future of corporate reporting
through EY’s involvement in the
Embankment Project for Inclusive
Capitalism (see more on page 43).
Digital reporting
The use of technology in corporate
reporting is an area of focus
for both the FRC and the EU.
on page 45.

“ I prefer to look at
information in one place
Case study
— within the ARA — rather
We found that Aviva plc had issues that the audit committee
than across several
made significant changes in its looked at during the year.
webpages as I know I
reporting this year. The Aviva The litmus test will be that
have read the totality plc 2017 ARA is 110 pages investors will be able to find the
of what a company wants shorter than last year’s report, information they want.
to communicate on with fewer graphs and less use
Outside of the Annual Report
certain topics.” of imagery.
we have sought to focus on
“The change was driven partly other forms of engagement
by wanting simplicity due to with investors such as the use
our values ‘kill complexity’ of video presentations and
and ‘digital first’. In removing material on our website. We are
the imagery in our report we always conscious of the volume
focussed on saying it better of disclosures required, some
with words, conscious that that sit within the ARA and
Freddie Woolfe
prose had to flow better, and some outside e.g., gender pay
words needed to have greater gap, tax policy and Solvency
Global Investors clarity. It is a journey and this II. These wider disclosures will
is our first effort, but we really also begin to change the shape
felt the benefit of focusing on of Annual Reporting itself.”
The European Securities and content and not on design. We
Market Authority (ESMA) is also felt that this simplified
awaiting European Commission reporting would position us
endorsement for new legislation, well with the direction of travel
the European Single Electronic towards tagging of reports.
Format (ESEF), which will apply The annual report is still a
to all annual financial reports of valuable tool, a good record
issuers with securities listed on of events, and will cover Roy Tooley
regulated markets in the EU from disclosure that won’t appear Head of Secretariat — Corporate &
1 January 2020. Under ESEF, elsewhere e.g., significant Board Governance, Aviva plc
all annual financial reports will
need to be prepared in XHTML
(a hybrid of XML and HTML, which
allows the creation and structure required for the primary financial We recommend that companies
of design elements, and encodes statements for the first two years develop their understanding of
rules for making documents (after this, the notes will need ESEF ahead of its implementation.
human and machine-readable). to be tagged as a block), but the The Financial Reporting Lab has
Where the annual financial whole annual financial report issued a helpful report explaining
report contains consolidated will required to be in XHTML how XBRL could be used in the
financial statements that apply from the start in order to do this. production, distribution and
International Financial Reporting XBRL enables information to be consumption of annual reports.11
Standards (IFRS), these XHTML machine-readable so that users, ESMA has also published
documents should be tagged with such as analysts, are better able to guidance on the preparation
the eXtensible Business Reporting extract and compare data across of Inline XBRL instance annual
Language (XBRL). The resulting companies more efficiently. It reports.12 Although there is still
report is an ‘In Line XBRL format’ remains unclear how Brexit will much to learn on this topic, some
(i.e., iXBRL, combining XBRL and impact ESEF, or how ESEF will companies are preparing for the
XHTML). XBRL tagging is only impact auditors. new regulatory requirements
Financial Reporting Lab, XBRL: Deep-dive — Digital future of corporate reporting, December 2017.
11
ESMA, ESEF reporting manual, December 2017.

12

for the iXBRL files, we encourage
“ In the future, the Lab will companies to adopt designed “ The current system
develop more examples iXBRL files: well-designed ARAs of nominee accounts
of how companies can help convey information in a means that many private
can apply ESEF while clear and concise manner to aid investors do not receive
understanding. For example, data paper copies; they
maintaining ARAs that
visualisation using infographics have to download and
are engaging.
can be help to highlight read ARAs online. It is
We will also investigate information, trends, anomalies important, therefore,
the use of other and movements in some sections that they are designed to
technologies, such as of the ARA, e.g., those covering be read on-screen. They
artificial intelligence, KPIs and principal risks. should be interactive
augmented and virtual and should be easy to
reality, in the corporate navigate and use on-
reporting process.”
50%
of companies in our sample
screen. The approach
of simply providing an
electronic copy of a paper
still produce their ARAs document is inadequate
in simple PDF format only and unhelpful. It is also a
(down from 69% last year). missed opportunity.”
This year we saw an increase in the

Phil Fitz-Gerald
number of companies providing
Director,
interactive reports in the format
of a flipbook or interactive PDF.
The interactive functions include
the option to view the ARA on a Peter Parry
and have already made changes mobile phone using a downloaded Policy Director,
to their reporting. Based on our app (e.g., Equiniti Group plc’s 2017 UK Shareholders’ Association
discussions with such companies, ARA, page 3). A few companies

we believe that changes to have also uploaded short videos
reporting in terms of tagging alongside their ARAs, such as CLS important. In the future, the
could undermine the UK’s Holdings plc. In a three-minute Lab will be looking into the use
narrative reporting framework video, its CEO communicated of artificial intelligence in
and result in more US-style key details of its business model, corporate reporting.
reporting. We believe this would strategy and dividend policy.
be a retrograde step.
The Lab has also been looking Reporting of performance
As pointed out by the Lab, the at another element of digital
metrics
two types of iXBRL output are reporting — blockchain. It
plain iXBRL files (akin to plain found that blockchain has the The Lab has also been exploring
Word documents) and designed potential to lead to greater trust the use of performance metrics in
iXBRL files (akin to glossy annual and resilience in the corporate response to the increasing focus
reports with graphic elements). reporting process.14 However, its by ESMA and the FRC on this
Between the two types, the latter influence is likely to be gradual and area. Its report on the first stage
is currently the less common restricted to certain cases (e.g., to of the project sets out the five key
output.13 Although both the UK improve accounting records) and qualities looked for by investors in
and ESMA mandates are silent the need for clear communication performance metrics disclosures
on the required level of design and human judgment will remain i.e., that they should be aligned to
Financial Reporting Lab, XBRL: Deep-dive — Digital future of corporate reporting, December 2017, pg11.
13
Financial Reporting Lab, Blockchain and the future of corporate reporting: How does it measure up?, June 2018.
14

strategy, transparent, in context, responding, as well as its purpose,
“ One of the disclosures reliable and consistent.15 The strategy and the governance that
report also includes questions underpins it. These factors help
investors are most
for companies to consider when determine which stakeholders are
interested in relates to
deciding how to report their core to the organisation’s value
customer engagement performance. As part of the next creation model and the outcomes
in helping a company to phase of this project, the Lab will it is aiming to deliver for them.
develop a sustainable explore examples to demonstrate This in turn defines the metrics
brand and competitive how the principles have been for each significant value area,
advantage. One company applied (with a report expected which can complement or even
published its Net later in 2018). In the meantime, replace existing short-term
Promoter Score (NPS). we encourage companies to performance indicators.
However the reality was consider how their performance
metrics reporting could be With input from an advisory
that it struggled to obtain
improved to meet investors’ council comprised of leading
answers from customers; business influencers and
it only surveys 10% needs more effectively.
academics, participant-led groups
of its customers for are identifying metrics that already
feedback, out of which The Embankment Project exist but could be applied more
only 6% or so reply, so for Inclusive Capitalism and broadly, or where those do not
in total they knew the long-term value reporting exist, developing and piloting new
views of less than 1% of metrics and methodologies.
their customer base. But The ongoing Embankment Project
for Inclusive Capitalism represents For the information to be trusted,
this limitation was not companies need to be transparent,
disclosed in the report, an important opportunity to
transform the way businesses balanced and consistent. These
so it is unsurprising metrics will allow asset managers
measure and report on the value
that investors may be to measure how well a company
they create for stakeholders.
sceptical about the is executing on its strategy
Bringing together over 30 major
reliability of some metrics global organisations across and identify those assets that
disclosed. Companies the entire investment value are better positioned to grow
should explain how chain, representing almost and protect future cash flows.
the board satisfies US$30 trillion in assets, the Asset managers will have better
itself of the integrity of participants first identified the information to make investment
strategically important areas they considered to be decisions and a greater ability to
the most important relating to engage with asset owners.
non-accounting data.”
long-term value creation: trust, When it comes to its conclusion,
culture and purpose, innovation, the Embankment Project for
Sustainable Development Goals, Inclusive Capitalism will deliver
human capital, health outcomes a tested long-term value
and corporate governance. The methodology, and a number of
aim is to develop a measurable, metrics, categorised by value
comparable and meaningful way area, available for anyone to use.
Freddie Woolfe to report on these topics. Find out more and keep up to date
Over the course of the project, here: https://www.inc-cap.com
Global Investors participants are testing and further
developing a proof-of-concept
framework created by EY. The
framework builds upon the context
to which the organisation is
Financial Reporting Lab, Performance metrics — an investor perspective, June 2018.

15

Appendices

Appendix A:
The 2018 Code, new
regulations and guidance
The 2018 UK Corporate Governance Code

Source: Financial Reporting Council
Timing: Financial years beginning on or after

1 January 2019
Detail: For an analysis of the Code, highlights of key

issues and resulting considerations, read our paper
2018 UK Corporate Governance Code and new
legislation: latest governance developments impacting
UK premium listed companies. A full detailed analysis
of the key changes between the 2016 and 2018
Codes can be found in the Appendix.
The Companies (Miscellaneous Reporting) Regulations 2018

Source: UK Government
Timing: Financial years beginning on or after 1 January 2019
Requirement Scope
1. Section 172(1) statement

A statement in the strategic report to set out All companies that prepare a strategic report
how directors have had regard to the matters set unless they qualify as medium-sized.
out in Section 172 (1) (a)-(f) when performing
their duty under section 172. This is now called At a high level, this means all public companies
a ‘section 172(1) statement’. and any company which meet any two of the
below fall in scope:
For companies that are unquoted, the section • Turnover £36m or more
172(1) statement must also be made available • Balance sheet £18m or more
on the website and updated each year. • 250 employees or more

Requirement Scope
2. Employee engagement and stakeholder interests

The directors’ report must detail how directors All companies with 250 UK employees or more.
have engaged with employees, and the effect of
their regard for employee interests, including on If the company is a parent, this refers to the number
the principal decisions taken by the company. of UK employees within the group.
The directors’ report must summarise how directors Any two of the below:
have had regard to the need to foster business • Turnover £36m or more
relationships with suppliers, customers and others,
• Balance sheet £18m or more
and the effect of that regard, including on the
principal decisions taken by the company. • 250 employees or more
3. Statement of corporate governance arrangements

A statement of corporate governance arrangements All UK companies with either:
must be made in the directors’ report detailing which • More than 2,000 employees globally; or
corporate governance code the company applies (and
• Turnover above £200m AND a balance
how the code is applied, including explanations for any
sheet of over £2bn.
departure from application), and if no code is applied,
why and what governance arrangements are in place. Subsidiaries will be in scope.
For companies that are unquoted, this statement Exemptions apply for those who already provide a
must be made available on the website and ‘corporate governance statement’ (DTR 7.2) and
updated each year. CICs and charitable companies.
In relation to the above, the regulations set two definitions:

Corporate governance, in relation to a company, means:
(a) the nature, constitution or functions of the organs of the company,
(b) the manner in which organs of the company conduct themselves,
(c) the requirements imposed on organs of the company,
(d) the relationship between different organs of the company, and
(e) the relationship between the organs of the company and the members of the company
Corporate governance code means a code of practice on corporate governance.
4. CEO pay ratio

A ‘pay ratios table’ of CEO pay to the first quartile, Quoted companies with more than
median and third quartile of employee pay. Where 250 UK employees.
a company is a parent, the ratio information must
relate to the group. There are three options for how
to calculate the pay and benefits.
Going forward, historical data will have to be disclosed

for each preceding year in which the requirement
applied, up to a maximum of nine years.
Narrative on changes to ratio and context, including

changes of employment model.
There are a number of other amendments to Quoted companies.

Directors’ Remuneration Report requirements,
including enhanced reporting on the impact of a
share price change on executive pay awards.

European Single Electronic Format (ESEF)
Source: EU Commission, European Securities out ESEF. All annual reports shall be prepared in
and Markets Authority (ESMA) XHMTL. IFRS consolidated financial statements
shall be labelled with XBRL tags, making the
Timing: Financial years beginning on or labelled disclosures structured and machine-readable.
after 1 January 2020 ESMA has also prepared an ESEF reporting manual
Detail: In December 2017, ESMA published the final to provide guidance on common issues encountered
draft Regulatory Technical Standards (RTS) setting when generating Inline XBRL instance documents.
Guidance
Several diverse sources of guidance are useful to
preparers of the annual report. Below is a non-
exhaustive list of guidance you may wish to consult.
Source Title Published Summary
ESMA ESEF reporting manual December Provides guidance on common issues

2017 encountered when generating Inline XBRL
instance documents.
ICSA: The The Stakeholder Voice in September Guidance to assist boards in thinking about
Governance Board Decision Making 2017 how to ensure they understand and weigh up
Institute, and the interests of their key stakeholders when
The Investment taking strategic decisions. It identifies ten
Association principles to guide the way boards approach
these issues.
Financial Guidance on the July The guidance has been updated to reflect the
Reporting Strategic Report 2018 2018 Code, and regulatory updates resulting
Council from The Companies, Partnerships and Groups
(Accounts and Non-Financial Reporting)
Regulations 2016 and The Companies
(Miscellaneous Reporting) Regulations 2018.
Financial Guidance on Board July This guidance was published (and consulted on)
Reporting Effectiveness 2018 at the same time as the 2018 Code. It contains
Council suggestions of good practice to support
directors in applying the Code, and should be
viewed alongside it.
FRC Financial Performance metrics — June This report forms the first phase of the Lab’s
Reporting Lab an investor perspective 2018 project on the reporting of performance
metrics, which involved discussions with
investors. The next phase of the project will
include examples of how companies have put
these principles into practice.

Source Title Published Summary
FRC Financial Blockchain and the June This report forms part of the Digital Future
Reporting Lab future of corporate 2018 project and explores the possibilities of
reporting: how does it blockchain in the corporate reporting process.
measure up?
FRC Financial XBRL: Deep-dive December Also part of the Digital Future project, this
Reporting Lab — Digital future of 2017 report provides a summary of the potential
corporate reporting impacts and issues of the use of XBRL in the
context of ESEF.
FRC Financial Risk and viability November This report seeks to understand how
Reporting Lab reporting 2017 companies can better inform investors on the
risks they face and their viability.
FRC Audit Audit Committee December This report looks at the external reporting
& Assurance Reporting 2017 by audit committees in the annual report. It
Lab is the first phase of a project to explore how
investors’ confidence in audit is enhanced.
Global G4 Sustainability August Guidance on Materiality can be found on

Reporting Reporting Guidelines — 2015 pp.11-12, including tests and a visual
Initiative Implementation Manual representation of prioritisation of aspects.
Global Defining Materiality March The aim of these publications is to understand

Reporting (Technology Hardware & 2015 how companies in the selected sectors are
Initiative and Equipment and Banks & defining the (sustainability) issues that are
RobecoSam Diverse Financials) material, and whether this aligns with the
needs of investors.
Defining What Matters May
(Mining, Metals and 2016
Electric Utilities)
Appendix B: Methodology
Except where otherwise indicated, the sample Our research compiled qualitative and quantitative
consisted of 100 ARAs of FTSE 350 companies with findings on a broad range of measures and key
31 December 2017 to 31 January 2018 year-ends. themes, which we present throughout this report
The sample was weighted 45% FTSE 100 and 55% alongside recommendations for leading practice.
FTSE 250 companies. Our sample covered a range of The case studies highlight examples of leading
industries that broadly reflects the composition of the practice from our sample or that we have become
FTSE 350, other than excluding investment trusts and aware of from our wider work.
mutual funds.

Appendix C:
Interviewee biographies
In order of first appearance
Phil Fitz-Gerald Freddie Woolfe Peter Parry

Director, Head of Responsible Policy Director, UK
Financial Reporting Lab Investment and Stewardship, Shareholders’ Association
Old Mutual Global Investors
Phil became Director of the Freddie joined Old Mutual Global Peter started his career in the
Financial Reporting Lab in 2017. Investors in 2017 from Newton manufacturing industry working
He is a Chartered Accountant Investment Management where in South America and Europe.
in the UK with over 20 years of he was a responsible investment On returning to the UK he spent
experience in accounting and analyst primarily covering the a number of years working in
audit, focusing on improving the healthcare, technology, media logistics with the National Freight
quality of company reporting. and telecommunications sectors, Consortium (NFC) shortly after
He has worked for the Financial a role he held for nearly three the business was bought by the
Reporting Council since 2009 and years. Prior to this position, employees from the government.
was previously the Head of Case he worked at Hermes Equity Peter notes that experiencing
Examination and Enquiries. Ownership Services as associate change at first hand — over a very
director, head of UK engagement short time — from a bureaucratic
Phil started his career in the audit from 2008. He started his career culture to one that was
practice of a major firm where in 2006 in HSBC’s fraud, risk entrepreneurial and motivating was
he spent ten years, the latter half and security office and studied fascinating and informs his belief
of which he worked as a senior French and Italian at University in the importance of active and
manager in the firm’s professional College, London. committed ownership.
practice department. After leaving
practice, he spent five years as Over the last twenty years he
a training consultant helping has worked in management
companies with their corporate consultancy, specialising in
reporting requirements before purchasing and supply chain
joining the FRC. management. He spent five
years with a large international
consultancy and for the last twelve
years has run his own business.
Peter has been investing for over
forty-five years and now has a
portfolio of about 100 different
holdings. He makes use of advisory
services, which he finds expensive,
but believes the information and
advice fed to him as an experienced
investor pays for itself over time.

Hannah Armitage Charles Henderson Roy Tooley
Project Manager, Business Manager, Invesco Head of Secretariat —
Financial Reporting Lab Perpetual, and member of Corporate & Board
FRC AQR Committee Governance, Aviva plc
Hannah joined the lab in 2017. Charles joined Invesco Perpetual Roy joined Aviva in February
She moved from the FRC’s in May 1994 and has worked in a 2016 and leads a team of five that
Corporate Governance Team, number of senior roles, including provide governance and company
where she worked on reviews of Head of Fund Administration secretarial support to Aviva plc.
the Stewardship Code and UK and Accounting, Head of Global This includes responsibility for the
Corporate Governance Code. Investment Operations and Head corporate governance elements of
of Invesco Perpetual’s Investment the Annual Report and Accounts,
Hannah is a qualified lawyer and Management Operations. Based in annual Solvency II reports,
prior to joining the FRC, worked Henley-on-Thames, he joined the compliance with the Corporate
in the Australian Department of UK Equities team in April 2012 as Governance Code, the relationship
the Treasury on corporations and their Business Manager to support with the Registrar and Depositary,
corporate law policy. its fund managers with their funds’ compliance with MAR and with the
corporate finance activities on listing rules. He has recently been
primary transactions, compliance engaged with the implementation
requirements and shareholder of Mandatory Direct Credit for
engagement. He is also a non- the payment of cash dividends
executive member of the FRC’s and a share forfeiture programme
Audit Quality Review Committee. that will raise funds for an Aviva
charitable foundation.
Charles’ career began in 1979
at Blease Lloyd & Co where he Prior to Aviva, Roy spent almost
trained as a Chartered Accountant. five years with BT Group as Head
In 1985, he moved to Touche of Corporate Governance, and
Ross & Co (now Deloitte), where before that nine years with BP as
he became a senior audit an assistant secretary.
manager responsible for a
number of financial institutions’
clients including Perpetual
plc and Nationwide Anglia
Building Society.

Appendix D:
Recent publications
and relevant materials
Contact us at corporategovernance@uk.ey.com for hard copies of our reports
or visit our website www.ey.com/corporategovernance to download them:
July 2018 July 2018 June 2018

2018 UK Corporate Governance Governance in large Update on the new QCA
Code and new legislation privately-held businesses Corporate Governance Code
and the Wates Principles
Analyses how the new 2018 Provides an overview of the new
Code and secondary legislation Overviews the scope, timing, and QCA Code and in light of changes
will impact premium listed implications of the ‘statement to AIM Rule 26 what it may mean
companies. of corporate governance for AIM companies.
arrangements’ requirement
and the Wates Principles.
November 2017 September 2017 June 2017

Politics, populism and trust AGM Trends 2017 Future proofing corporate
in business: discussions for governance — reflections and
Produced in partnership with
the boardroom practical questions for board
Equniti and Prism Cosec, this
consideration
Reflects on interviews with senior report looks at trends and
business leaders and provides developments during the 2017 Based on a series of roundtables
key considerations for boards AGM season. It also highlights where we explored how boards
navigating political uncertainty. some considerations to bear in are responding to the accelerated
mind when planning 2018 AGMs. pace of change in the world and
business environment.

Appendix E:
EY contacts
If you want to know more about… EY contacts
Corporate • Perspectives and trends Ken Williamson kwilliamson@uk.ey.com +44 20 7951 4641
governance in governance
and narrative Mala Shah- mshahcoulon@uk.ey.com +44 20 7951 0355
• Board composition and
reporting Coulon
effectiveness +44 20 7951 1316
• Leading practices in Natalie Bell nbell1@uk.ey.com
corporate reporting
• Future developments in
governance and reporting
Performance • Executive remuneration Rupal Patel rpatel15@uk.ey.com +44 20 7951 0658

and reward including policy design,
governance and reporting Isobel Evans ievans@uk.ey.com +44 20 7951 3113
• Incentive design for executive, David Ellis dellis@uk.ey.com +44 20 7980 0163
management and all employee
populations including equity
incentives
• Share plan implementation
in the UK and internationally,
including addressing regulatory
and tax matters
• Remuneration benchmarking
and market surveys
Climate • Sustainability strategy Doug Johnston djohnston2@uk.ey.com +44 20 7951 4630

change and assessment and implementation
sustainability • Environment, health and
safety risk
• Sustainable supply chains
• Sustainable finance solutions
• Integrated reporting and
sustainability report assurance
Long-term • Investor trend reviews Hywel Ball hball@uk.ey.com +44 20 7951 2474
value • Purpose-driven organisation
Barend van bvanbergen@uk.ey.com +44 20 7951 1009
reviews
Bergen
• Alignment of metrics to +44 11 8928 1502
the range of capitals that Karl Havers khavers@uk.ey.com
investors are analysing

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Annual reporting

Our ‘acid test’:

2. Stakeholder engagement 5. Looking ahead

3. Chair tenure, diversity, Appendices

Annual reporting in 2017/18 2

Annual reporting in 2017/18 3

163 167 181 186 190

2013/14 2014/15 2015/16 2016/17 2017/18

Purpose and long-term value (see page 10 for more)

Annual reporting in 2017/18 4

Social impact reporting (see page 14 for more)

Annual reporting in 2017/18 5

31% 25% 21% 9% 8% 6%

Annual reporting in 2017/18 6

Viability statement (see page 38 for more)

Annual reporting in 2017/18 7

Annual reporting in 2017/18 8

Annual reporting in 2017/18 9

Annual reporting in 2017/18 10

Annual reporting in 2017/18 11

Last year, we referenced

Annual reporting in 2017/18 12

against various downside

Overall, dividend policy

Annual reporting in 2017/18 13

Annual reporting in 2017/18 14

Annual reporting in 2017/18 15

Annual reporting in 2017/18 16

Financial Reporting Lab, Reporting of performance metrics, June 2018.

Annual reporting in 2017/18 17

Effect of stakeholder engagement Remuneration 82%

Annual reporting in 2017/18 18

Non-financial information of the FRC’s July 2018 Guidance

Annual reporting in 2017/18 19

Figure 7. Lloyds Banking Group plc 2017 ARA (page 27)

Note: this example is incorporated in Spain.

Annual reporting in 2017/18 20

Annual reporting in 2017/18 21

Do companies disclose principal risks Case studies

and their effectiveness — in pursuance of the policies of a high-level confirmation (e.g.,

Fewer companies disclose the due

Annual reporting in 2017/18 22

Many companies explain the

As with the outcome of policies,

Annual reporting in 2017/18 23

Annual reporting in 2017/18 24

Figure 13. Pearson plc 2017 ARA (page 26)

Annual reporting in 2017/18 25

Figure 14. BP plc 2017 ARA (page 11)

Annual reporting in 2017/18 26

Implementing the TCFD

Annual reporting in 2017/18 27

Once the 2018 Code◊ comes

Companies often disclose

Annual reporting in 2017/18 29

Annual reporting in 2017/18 30

Many discuss the importance of

Annual reporting in 2017/18 31

Annual reporting in 2017/18 32

Annual reporting in 2017/18 34

Annual reporting in 2017/18 35

Annual reporting in 2017/18 36

Annual reporting in 2017/18 37

Time period chosen for viability statements “ Companies need

2. Stakeholder engagement 5. Looking ahead

Financial Reporting Lab, Reporting of performance metrics, June 2018.

Time period chosen for viability statements “ Companies need

Viability statement fewer companies quantified Viability statement