Included in this issue: Investment Association publishes guidelines on viability statements; FRC tiers signatories to the Stewardship Code and Investment Association publishes views on quarterly reporting and quarterly earnings advice.
Investment Association publishes guidelines on viability statements
The Investment Association (IA) has published guidance setting out the expectations of institutional investors in relation to the making of viability statements. Viability statements disclose the view of directors about the risks facing their company, its long-term health and strategy in accordance with provision C.2.2 of the UK Corporate Governance Code (Code). The obligation was introduced in the 2014 iteration of the Code which applied to companies with accounting periods beginning on or after 1 October 2014.
The IA's guidelines broadly cover:
- the period of the viability statement;
- the consideration of a company's prospects and the risks it faces when assessing viability;
- the disclosure of the nature of stress testing undertaken when assessing whether a strategy is viable and the description of mitigating or remedial actions which may be necessary; and
- the need for clear differentiation between qualifications and assumptions relevant to the viability statement.
Recommendations of particular note in the guidelines include that:
- there should be greater differentiation between companies in terms of the period of viability statements and longer timeframes (than three to five years) should be contemplated with more detail provided on why a particular timeframe has been chosen;
- directors should not limit consideration of viability to medium or long-term risks but also consider the "current state of affairs";
- statements should address the sustainability of dividends and distinguish between risks that impact on performance and those that threaten operations, focussing on the latter when making a viability statement;
- why a risk is important, and how it is managed and controlled, should be clearly stated;
- risks as a whole should be ranked (e.g. as being low, medium or high) and a statement made as to whether each risk has increased or decreased in likelihood since it was last disclosed;
- companies outside of the financial services sector (for whom it is compulsory), should undertake "reverse" stress testing and disclose the scenarios considered; and
- qualifications and assumptions should be specific to the company and should not include matters which are highly unlikely to either arise or have a significant impact on the company.
By way of reminder, the provisions of the Code apply on a "comply or explain" basis to companies whose securities are admitted to the Premium segment of the Official List of the UK Listing Authority. For companies not subject to the regime, the IA states that the guidelines should be considered to be best practice. The IA's corporate governance research service, IVIS, will continue to monitor companies' viability statements having regard to the guidelines when doing so.
FRC tiers signatories to the Stewardship Code
The Financial Reporting Council (FRC) has categorised signatories to the Stewardship Code into tiers based on the quality of their Stewardship Code statements. The assessment demonstrates much improved reporting and greater transparency in the UK market since the FRC launched the initiative in December 2015 intending that it should improve the quality of reporting against, and maintain the credibility of the Stewardship Code.
Of the near 300 signatories to the Stewardship Code, more than 120 are in Tier 1, an increase from approximately 40 since the beginning of the exercise. This represents nearly 90 per cent of assets under management of members of the IA. Over 200 signatories approached the FRC to discuss improving their reporting against the Stewardship Code.
Asset managers who have not achieved at least Tier 2 status after six months will be removed from the list of signatories as their reporting does not demonstrate commitment to the objectives of the Stewardship Code.
Signatories to the Stewardship Code have been tiered according to the quality of the reporting in their statements based on the seven principles of the Stewardship Code and the supporting guidance. Asset managers have been categorised in three tiers and other signatories in two tiers as follows:
- Tier 1 - Signatories provide a good quality and transparent description of their approach to stewardship and explanations of an alternative approach where necessary.
- Tier 2 - Signatories meet many of the reporting expectations but report less transparently on their approach to stewardship or do not provide explanations where they depart from provisions of the Stewardship Code.
- Tier 3 - Significant reporting improvements need to be made to ensure the approach is more transparent.
Investment Association publishes views on quarterly reporting and quarterly earnings advice
The IA has published a public position statement calling on companies to cease reporting quarterly and refocus reporting on a broader range of strategic issues. IA members believe that quarterly reporting is a distraction which shifts company resources away from long-term strategic considerations and potentially promotes "myopic behaviour" by senior management, channelling their focus on short-term fluctuations in performance and resulting in the risk of executives managing the market, rather than managing the business.
The IA also questions the value of such reports to investors and calls on companies to review how their current reporting cycle is adding value. Should a company continue to report quarterly, the IA expects it to publicly explain this position, and how it is relevant to the achievement of long-term strategy.
Since the removal of the obligation to produce an Interim Management Statement in December 2014, 30 FTSE 100 companies and 139 FTSE 250 companies have stopped publishing quarterly reports. IVIS has been charged with monitoring market practice.