New requirement to disclose non-financial and board diversity information

New regulations came into force on 26 December 2016 which require certain large companies to include in their strategic report a non-financial information statement. These regulations apply to financial years beginning on or after 01 January 2017.

Companies which have to comply are UK companies which are a traded company (ie one whose transferable securities are admitted to trading on a regulated market), a banking company, an authorised insurance company or a company carrying on insurance market activity (each as defined in the Companies Act 2016) and which have more than 500 employees in the relevant financial year or, if it is a parent company, the aggregate number of employees for the group was more than 500. It does not apply to companies which are subject to the small companies regime or qualify as medium sized in a financial year.

The board diversity requirements have been implemented through changes to the FCA’s Disclosure Guidance and Transparency Rules.

Our view

These Regulations need to be seen in the context of continuing reactions to the "credit crunch" and pressure for better financial and non-financial information. And, they form part of an overall and increasing focus on socially acceptable, responsible corporate conduct.

While some of the non-financial information statement is already covered by the required contents of a strategic report, it is noteworthy that: 

• the new statement must include a description of anti-corruption and anti-bribery policies and their "outcome" (that is, their "effectiveness"), and
• separately companies are required to disclose their diversity policy (but only in relation to their directors), how it has been implemented and the results of doing so.

Background

A directive which amended the Accounting Directive to require the disclosure of non-financial and board diversity information (the Amending Directive) came into force on 05 December 2014 and Member States had to implement the directive into national law by 06 December 2016.

On 09 November 2016, the UK Government published its response to its consultation which sought views on the best way to implement the Amending Directive. The government also laid draft regulations (the draft Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016 before Parliament on 07 November 2016 and published an explanatory memorandum. The final regulations were published on 21 December 2016.

The board diversity requirements have been implemented through changes to the FCA’s Disclosure Guidance and Transparency Rules.

Non-financial information

The Government decided that the non-financial information should be in the strategic report and has not provided the option (in the Amending Directive) for it to be in a separate report.

Content of non-financial information statement

Large companies have to include, in their strategic report, a non-financial information statement with information to the extent necessary for an understanding of the company’s development, performance and position and the impact of its activity relating to (as a minimum):

• environmental matters (including the impact of the company’s business on the environment)
• the company’s employees
• social matters
• respect for human rights, and
• anti-corruption and anti-bribery matters.

The information must include:

• a brief description of the company’s business model
• a description of the policies pursued by the company in relation to these matters (and any due diligence processes implemented) and a description of the outcome of those policies
• a description of the principal risks relating to those matters and, where relevant and proportionate (i) a description of its business relationships, products and services which are likely to cause adverse impacts in those areas of risk; and (ii) how the company manages those risks
• non-financial key performance indicators relevant to the particular business, and
• where appropriate, references to, and additional explanations of, amounts included in the annual financial statements.

If a company does not pursue a policy in relation to any of these matters, the statement must provide a clear and reasoned explanation why this is the case.

Confidential information

Companies do not have to disclose information about impending developments or matters in the course of negotiation if, in the directors’ opinion, the disclosure of such information would be seriously prejudicial to the company’s commercial interests, provided that the non-disclosure does not prevent a fair and balanced understanding of the company’s development, performance or position or the impact of its activity.

Companies that have to comply

These requirements apply to reports prepared by a UK company which is a traded company (ie one whose transferable securities are admitted to trading on a regulated market), a banking company, an authorised insurance company or a company carrying on insurance market activity (each as defined in the Companies Act 2016) and which has more than 500 employees in the relevant financial year or, if it is a parent company, the aggregate number of employees for the group was more than 500. It does not apply to any company which is subject to the small companies regime or qualifies as medium sized in a financial year.

The Government has decided not to extend the obligations to companies outside the scope of the Amending Directive but other companies can disclose on a voluntary basis.

Group accounts

The disclosure requirements only have to be fulfilled once at group level, rather than by each subsidiary separately within a group of companies, provided that the group strategic report includes that subsidiary undertaking; the financial year ends are the same and the group parent company’s non-financial information statement includes the subsidiary undertaking or the parent company report is drawn up in accordance with the relevant Articles in the Directive.

Overlap with other strategic report requirements

The new requirements have been deliberately kept separate and added on top of existing requirements in the Companies Act 2006 as the Amending Directive requires this information to be included in a non-financial information statement. As a result of the overlap with some of the existing rules on the strategic report, compliance with these new requirements will also be treated as complying with certain existing provisions in section 414C Companies Act 2016.

Reliance on other frameworks

The Regulations maintain a flexible approach and allow a company to report voluntarily under the EU framework when providing the information to allow companies to avoid the costs and complexities of moving between reporting obligations as their size increases and decreases. If that is the case, the company has to disclose which framework it has relied on.

Auditor review

The Government decided not to mandate independent verification of the non-financial information but companies can voluntarily seek independent verification if they want.

Other proposed reforms

The response to the consultation notes that:

• Electronic reporting - the Government will clarify legislation concerning the sending of annual reports electronically and will continue to work with the FRC to encourage innovative digital reporting
• Gender reporting - the Government will continue to explore options to improve the definition of "senior manager" for the purposes of gender diversity reporting. It had received feedback that compliance with the requirements had proved a challenge for companies.
• Other regulatory reforms - the consultation sought views on reporting regulations that could be repealed. The responses received will be considered and proposals for amendments will be explored in future consultations where appropriate.

Board diversity policy

The Amending Directive also requires certain large listed companies to include, in their corporate governance statement, a description of the diversity policy applied to their board of directors, covering aspects such as age, gender or educational and professional backgrounds. This aspect has been implemented through changes to the FCA’s Disclosure Guidance and Transparency Rules which apply to financial years beginning on or after 01 January 2017.

DTR 7.2.8R provides that a listed company’s corporate governance statement must include a description of:

• the diversity policy for the board, including age, gender, educational and professional backgrounds
• the objectives of the policy
• how the policy has been implemented, and
• the results in the relevant reporting period.

If a company does not have a diversity policy, then it must explain why that is the case.

The rule does not apply to a listed company which qualifies as a small or medium company under the Companies Act 2006 in relation to a particular financial year.