Back to podcast

Mala Shah-Coulon

Hello, everyone, and welcome to this short podcast from EY's corporate governance team recorded in June 2020. I'm Mala Shah-Coulon, an associate partner at EY, and I lead our corporate governance team.

My team provides practical guidance and thought leadership on narrative reporting and governance matters for management and boards and contributes to wider discussions on good governance based on our research and engagements with boards, regulators and investors.

We all find ourselves in very unprecedented times, and management and boards are having to make very difficult decisions at the moment, and I want to discuss how companies report and communicate during this pandemic. To do this I'm joined by Phil Fitz-Gerald and Tom Toomse-Smith from the Financial Reporting Lab (the Lab), which is part of the Financial Reporting Council here in the UK.

Phil, Tom, welcome and thank you for joining me. Do you want to do a quick introduction, Phil? 

Phil Fitz-Gerald

Thanks very much, Mala, and thanks for the opportunity to speak to you today. My name's Phil Fitz-Gerald. I'm director of the Financial Reporting Lab at the Financial Reporting Council. The Lab seeks to provide practical guidance to companies on reporting topics based on discussions that we have with investors and companies. 

Tom Toomse-Smith

Yes. I'm Thomas Toomse-Smith. I am project director at the Financial Reporting Lab. I have worked on a number of areas including recently sources and uses of cash, business model disclosure and most recently COVID-19 reporting in times of uncertainty. 

Mala

Great. I really look forward to our discussion. So without further ado, Tom, as I mentioned in my introduction, companies haven't really faced this sort of crisis we are in now. What should companies be communicating during this time and why? 

Tom

Sure. We had been thinking about how companies report on their time horizons for a while, and actually we… Pre-this-crisis we'd been running a project thinking about reporting over the long-term, and what we observed as the crisis began to unfold was that the time horizons for investors, and therefore for companies as well, had shortened down dramatically. So as a response to that we felt that it was useful to go and speak to investors about the sorts of information and disclosure they needed right now. 

For many companies this kind of crisis really developed at a time when it was outside of the reporting cycle. Many had completed their annual report, for example. So it was really trying to understand what sorts of information and communication, no matter whether it was in the annual report or whether it was an investor presentation or other kind of communication, would be useful to the useful to the market.

When we spoke to investors we did some interviews. We did some roundtables, and we did a survey. We quickly heard that there were three key themes and five key questions that investors were considering at the moment.

The first of those was around resources - trying to understand what cash and short-term resources the company could get hold of, what do they have right now. Then it was moving on to actions. So what kinds of actions were management taking to reduce or modify costs and modify operations and also to extend the viability of the company. Then thirdly it was really around the future, so beginning to think about how they might need to make changes to their strategy and business model going forward. 

Mala

Thank you. Very much in line with that, my team recently supplemented our usual acid test. This test or two we've developed and used for over six years to qualitatively assess narrative reporting, to cover matters that are very pertinent at this time, many of which you just covered. It's actually very much aligned to the fifth question in your infographic. 

From having reviewed quite a few, whether it was earnings announcements or reports, in the immediate aftermath of the pandemic, from mid-March roughly, many announcements that companies were making, either to withdraw their earnings guidance or revise it downwards, also detailed some of the points on what you went through, resources and immediate actions. Then they moved on to talking about what they're doing to safeguard their viability.

But then, having reviewed more recent reporting from mid-April through to May, we're moving to a phase where the question is now becoming how do we emerge from this crisis stronger than before or better than before.

Our acid test has some key considerations for boards and management to address because I think more than ever before transparent and balanced reporting at this time is critical to enhance long-term trust in business, not just with investors, but with a wider stakeholder group as well.

For example, our acid test has questions like, how are some of the difficult decisions that boards are having to make now, or will have to make, aligned to the company's purpose? Are there any decisions that actually challenge the company's purpose in the long-term? Because maybe the pandemic has indicated the board may need to reconsider the purpose or refresh it. Also, how have the current circumstances impacted the company's future strategic direction? So really very much all in line with the fifth question of the Lab's infographic. 

Our acid test is over two pages, so we encourage boards and management to use it. It's quite accessible for everybody to look at the quality of their reporting.

As I said, boards are having to make some very tough decisions at the moment, and clearly as well as having an impact and bearing on their viability and long-term success, they are very likely to have implications for the company's stakeholders.

Phil, given now that certain companies are having to include a separately identifiable Section 172 statement, within their accounts, do you expect companies with year-ends on or after, say, March 2020, to use this new disclosure under Section 172 to explain what choices were made by directors at this time?

Phil

I think the 172 statement actually becomes even more important at this time. As Tom was saying, although companies are initially focussing on short-term survival, liquidity, access to cash and the various facilities that allows them to do that, investors are starting to focus more on how the decisions made now are likely to affect the longer-term sustainability of the company.

The sort of things they're looking for is, how is the company making sure that they retain customer loyalty? How are they making sure that they're securing their supply chain? How are they ensuring that they're employees are appropriately regarded? What kind of decisions are they making in terms of furloughing employees or making sure that they're…? For those who are able to run their business on manufacturing sites, for example, how those health and safety implications are properly managed. 

All of these things feel to me like they're part of the Section 172 statement, or should be part of the Section 172 statement. And therefore I think the statement itself is really an opportunity for companies to set out clearly and position themselves for the future because what investors are starting to do is differentiate between those companies who are thinking about the future and making sure that the decisions that they're taking now will ensure the future sustainability of the company and those that aren't.

I think I also wanted to go back to your comments, Mala, on purpose because I think a clear purpose is also very important for the future. We're hearing that… For many companies it's good to have a look at the purpose and have a look at whether the decisions being made at the moment are consistent with that purpose and consistent with the values that the company has. Or indeed whether that purpose needs to be revisited as we perhaps enter into a new normality in the future as we come out of this situation.

In conclusion, I think the Section 172 statement is really a good opportunity for companies to set this out clearly, set out how they're having regard to their stakeholders and promoting the success of their company as they go forward.

Mala, I know that you've also looked at Section 172 reports from December year end, so I'd be really interested to hear a little bit more about what you've found from looking through those reports and perhaps any lessons that can be learnt in the current crisis. 

Mala

Yes, my team has looked at emerging observations based on reviewing 60 reports from December year ends of FTSE 350 companies. Most of these, of course, were finalised before the world went into lockdown. But what we have seen is that more than two-thirds of companies discussed the impact of decisions made on their stakeholders. But only a few actually cover the long-term consequences of the decisions, and that's quite an important point in Section 172.

So as well as the stakeholder aspects, I would want more companies to articulate the longer-term consequences of the decisions their boards are making.

Then also we didn't identify many companies discussing decisions with negative or adverse consequences for impacted stakeholder groups and clearly, given the situation we are now in, I think this will have to change because companies are making very difficult decisions with pretty adverse consequences for their stakeholders, such as large-scale redundancies or restrictions. So I expect that to be coming through in future reports.

The other thing I would say is when discussing principle decisions taken in response to COVID-19, it will be very important to explain the board's consideration of the impact on the company's reputation and culture as well because, again, those are two important factors in Section 172 as well. So that's how I would summarise our key observations. 

Phil

Absolutely. I completely agree with that, Mala. You might be interested to note that the Financial Reporting Lab will be starting its own project on Section 172 reporting very shortly. So we'll certainly be very interested to see emerging Section 172 reporting and what users are interested in from that reporting. 

Mala

Thanks. Yes, I look forward to seeing how the things I talked about flow through to reporters which have year ends on or after March 2020.

Another interesting area I wanted to explore is how companies are communicating and engaging in the current time, given the restrictions in place for physical meetings. Tom, the Lab recently published a blog where you discussed the value of videos at this time particularly. Can you provide your perspectives on the use of video? 

Tom

Yes, sure. Thank you, Mala. We did a piece of research. We looked at 50 company websites to try and understand how people were using video. We started this just before the lockdown began, and we carried on a little bit post-lockdown as well. Broadly, what we had seen was a significant movement in terms of numbers of people using video for communication, but really there's a significant missed opportunity for company and company reporting. 

When you look at how companies are using the video media, it's very compartmentalised. So people think about making a video for investors. Perhaps that's a Q&A, or it might be an interview with the chief executive, for example, and then they have a separate video for employees, and they might have a different one for customers. Really, what it neglects is the fact that investors and other stakeholders are mixing their ability to get that information, so they all have access to that information. 

Really, when you look at the statistics, it's very clear that the videos that meet multiple stakeholder needs are really the best and the most useful and the most used. So I would really implore companies in this time to think about using not just video, but other media as well to communicate their message.

It can work quite well. Video could be quite cost effective. It's quite easy to do on an individual basis, and it really has that human empathetic touch that is quite key in communications at this point in time.

Perhaps another interesting point, we did a survey as well as part of this COVID-related work, and one of the things that we asked about in there was what forms of communication or what mediums were people most interested in receiving or they thought were most important for COVID-related information.

Web was sort of the number one, and I think this crisis has identified the value of technology and the value of media. So if you're not using your website to communicate and have all the most up-to-date information, I think you're really not doing yourself any favour in terms of communication.

Mala

Thanks, Tom. I completely agree. There are some things I think we all are going to retain from this pandemic, and use of videos seems like a definite thing we will retain and maybe make more use of just because of its reach, as you mentioned.

My slight comeback is I feel videos maybe offer one-way communication, so you put a message out, and I would say that it's important not just to communicate but to engage. So companies that use videos perhaps then need some sort of follow-up mechanism, whether it's inviting comments from their stakeholders or having a follow-up session, which is a live video conference or telephone call, to just see if employees and other stakeholders have feedback and reactions to what was in the video.

Tom

Yes, and I think actually… You mentioned Section 172 earlier. This is also going to be a great area for companies to think about video and video case studies, and the best case study related material that we've seen is where they actually involve an interview and discuss with the individuals who are impacted because it gives it a real feel for what happened and the impacts of those decisions. 

Mala

I completely agree. So, Phil, before we close, any final words of advice for companies during these times? Also, if you could just mention what materials companies can look out for from the Financial Reporting Lab.

Phil

Sure. Over the last few years, the FRC has very much encouraged companies to provide forward-looking information in their reporting through their strategic reports and other means, but the problem is now, more than ever, it's very difficult to predict what's going to happen in the future.

But one way I would very much encourage companies to explore is using more scenario analysis and thinking about the potential different scenarios that they're going to face as they come out of this crisis.

The viability statement is therefore a very important thing to consider as part of the company's year-end process because that's looking forward. It's looking at the company's prospects over a longer-term period, but then it's also looking at the impact of the different risk scenarios that might arise. So I think it becomes a really important statement for companies to set out what their future looks like and what the different scenarios might be.

Companies are starting to recognise that return to normality is likely to be a new normality, and the successful companies are those that are really preparing for this and setting out to investors how they are preparing for this. And investors are really starting to differentiate between those companies that are well-placed for the future and those that are not. 

So take this opportunity to have a look at how the company's business model might need to adapt to the future scenario and set that out clearly to investors.

In terms of what's coming up from the Lab, depending on when you're listening to this podcast, the Financial Reporting Lab is releasing a report in June which will be a follow up to the infographic that we released a couple of months ago. That report will provide practical guidance for companies in implementing some of the recommendations in the infographic and contain a number of practical examples. So do look out for it.

And then, as I mentioned earlier on, we'll be starting our project on Section 172 reporting, and we expect to produce a report on that towards the end of the year. So that report and all of the Financial Reporting Lab's reports can be found at the FRC's website at www.frc.org.uk/lab. 

Mala

Thanks, Phil. I couldn’t agree more on your comments on setting out scenarios that companies have considered that may or may not transpire, but I think just the scenario analysis in itself gives reassurance to investors that management have really looked at what could happen… There's no certainty, but what could happen and how the company would fare under the various scenarios.

In fact, compared to two or three years ago, the hesitation that companies had to set out scenarios and their stress testing of the scenarios seems to have disappeared because I think companies realise it's important information for the investors and reassures them, more than anything, that this has been looked at very closely.

Phil

Yes, I completely agree with that. I think we're starting to see companies providing more information at this time and partly because there's a demand for more information, but partly I think companies have perhaps been more willing to express the different scenarios because there's so much uncertainty out there. And I think that's something to be encouraged. 

Mala

Our discussion has just highlighted how interconnected various aspects of narrative reporting are and also then how the company actually communicates and engages around those aspects. So there is something in trying to pull everything together to tell a cohesive story, and that's no easy task, but it's something that I think companies should aspire to.

So, as we draw this to a close, a few things to keep your eyes out for from EY's side, our acid test, as I mentioned, and our Section 172 report on emerging observations from December 2019 reporters. Both of those are on our website, www.ey.com.

Two things we're working very hard on at the moment. The first is a short report based on some roundtables we did with designated non-executive directors on workforce engagement. We did those via video interestingly, and we’ll be providing insights in the short report due out sometime in July, I assume.

Secondly, an analysis, as we do every year, on narrative reporting in the FTSE 350. That will be out in the late summer. Thank you and stay safe. 

Back to podcast