UK moves to overhaul corporate reporting framework

Gary Gray, a corporate governance expert at Pinsent Masons, was commenting as the government opened a consultation on significant proposals to modernise and improve UK corporate reporting.

The government said it wanted to simplify outdated reporting rules that are proving overly costly and creating unnecessary administrative burdens for UK companies.

The consultation, published on 7 September, forms part of a “wholesale review” of the UK’s existing corporate reporting framework to address identified weaknesses and cumbersome processes inherent within businesses’ annual reporting practices amid a fragmented company law and regulatory landscape that “was designed for a paper-based world”.

The paper puts forward proposals to lighten the existing regulatory load on small-and-medium enterprises (SMEs) and exempt more businesses from time-consuming audits. The government says it also intends to make it clearer which companies are required to report different types of information and proposes to review and rationalise the current list of exemptions and exclusions listed under the Companies Act 2006.

The consultation also sets out plans to streamline financial reporting and remuneration reporting to ensure requirements are flexible and proportionate to a company’s size, ownership structure and relevant economic impact.

Commenting on the proposals, Gray said: “If the government's proposals succeed in removing unnecessary overlap and simplifying reporting requirements, that should reduce administrative burden and allow management teams to focus their time and resources on running the business rather than producing reports that provide limited additional value.”

He said the proposals were unlikely to fundamentally change the existing approach adopted by most UK companies to governance or reporting, but that simplifying the rules would benefit smaller businesses. “Many larger businesses will continue to disclose information that investors, lenders and other stakeholders expect to see, whether or not a particular disclosure remains mandatory,” he said. “However, a more streamlined framework should make compliance easier and more proportionate.”

The government says financial reporting law should also be clearer and more coherent. It is seeking views on whether the existing capital maintenance and distributable profits regime should ultimately be replaced by a solvency-based approach to determining the legality of distributions. There is also a proposal to test the merits of non-financial reporting requirements for private companies.

Corporate reporting requirements have become increasingly complex for many businesses, particularly private companies, resulting in a degree of duplication across various reporting and disclosure obligations.

The government is also consulting on measures to simplify remuneration and corporate governance reporting. Proposals include potentially removing the requirement for an annual advisory vote on the directors’ remuneration report and reviewing whether other requirements, including CEO-employee pay ratio reporting, remain effective and avoid duplication.

The consultation also explores a proposal to move certain corporate governance reporting from company level to group level. The government considers that this could provide more useful information for investors and creditors, while reducing duplication across groups.

The government is also seeking stakeholder views on how to modernise corporate reporting for the digital age. The proposals include testing which disclosures could be moved to digital platforms and websites, supporting greater electronic tagging within annual reports and accounts, and making electronic communications with shareholders the default while retaining an appropriate route for shareholders who require hard-copy communications.

There is also a proposed move to clarify the law on fully virtual AGMs. Legally, under the Companies Act 2006, a notice of AGM must reference the location of the meeting as well as its date and time. Since the Covid-19 pandemic, many UK companies have amended their own articles of association to allow hybrid or fully virtual AGMs to take place.

Gray said businesses would welcome the government honouring its previous commitment to provide clarity on this issue. “Companies have operated against a degree of uncertainty as to whether a wholly virtual meeting satisfies the statutory requirement to state the place of the meeting,” he said. “Clarifying that a virtual location can constitute a place, where shareholders have agreed to that approach, would give companies useful flexibility.”

However, the format of the AGM should not become “an obstacle to meaningful shareholder participation”, he warned. “Any safeguards should focus on ensuring that shareholders can attend, ask questions, vote and engage with the board effectively, rather than imposing a rigid model for every company,” he added.

The consultation also looks at the growing use of artificial intelligence in preparing and analysing corporate reports. Gray said: “AI should help companies produce, review and interrogate reporting information more efficiently, but it does not alter where responsibility ultimately lies. Directors will still need to be satisfied that the information approved by the board is accurate, balanced and supported by appropriate evidence. The focus should therefore be on proportionate governance, human oversight and clear accountability, rather than introducing prescriptive rules that may quickly be overtaken by technological developments.”

Although companies do not need to change their reporting processes at this stage, they should use the consultation as an opportunity to identify disclosures that are duplicative, disproportionately burdensome or of limited value to their principal stakeholders. That evidence will help the government distinguish genuine simplification from merely relocating existing requirements.

The consultation closes for responses on 30 November. “The direction of travel is positive,” added Gray. “Simplification should not mean reducing transparency, but it should mean removing duplication and ensuring that companies spend time producing information that is genuinely useful. The challenge will be to create a framework that remains proportionate as companies grow, while preserving the information that shareholders, investors and creditors actually rely on.”