November 27, 2023 Meeting stakeholder expectations
What do stakeholders need in order to form a fair and accurate picture not only of a company’s current state of health but also of its prospects? It’s a question which comes up time and time again not only in investor forums but also as wider constituencies interact with organisations. And it’s also a question which can challenge boardrooms as they look to compile a fair and true annual report which provides genuine insights without overloading readers with meaningless trivia.
The need to deliver a balanced report sits at the heart of corporate governance. Our latest article looked at the revised QCA corporate governance code which has mainly been designed for small and mid-cap companies. The Financial Reporting Council (FRC) which oversees larger organisations is in the process of revising its code. Pending the outcome of consultations, the FRC has released its latest annual review of corporate governance reporting in a bid to share best practices and highlight potential pitfalls.
The good news is that over the past year improvements have been seen in stakeholder engagement and workforce engagement. The benefit of a flexible code which enables companies to ‘comply or explain’ has also shown its worth with more transparency being seen in areas where organisations have departed from the code.
On the minus side, the FRC is still seeing numerous cases of boilerplate reporting. This adds nothing to the discussion as it provides little or no level of true insight. Reporting on risk assessments and the quality of internal controls also come in for criticism with the FRC seeing little improvement in the past year.
We would urge all companies to read the FRC report in full and compare its findings against current internal practices. For now, we would like to highlight just one aspect of the report, stakeholder expectations.
The FRC report makes it clear that stakeholder engagement isn’t simply a matter of issuing a statement once of twice a year. Rather, stakeholder engagement is a two-way street with companies actively seeking to receive the views of stakeholders and acting on any issues raised as appropriate. For example, the FRC note a growing trend in the use of perception studies in order to take investor feedback into consideration when looking at topics of note. Other organisations are looking towards stakeholder engagement forums, regular performance reviews, or partnering with stakeholders in product development.
Maintaining robust engagement pathways is one thing, reporting on them is quite another. It is not enough to simply comment that this or that activity took place. Meeting stakeholder expectations within the annual report then requires a clear explanation of what actions were or were not taken as a result of that activity. As the FRC’s Executive Director of Regulatory Standards, Mark Babington, commented: “more work is needed across the board to meet stakeholder expectations through clear reporting that provides genuine insights into governance outcomes and actions” adding “Good corporate governance disclosures builds trust and understanding, and is not just a compliance exercise.”