7 Disclosure of non-financial and
diversity information by companies
| (34852)
8638/13
+ ADDs 1-2
COM(13) 207
| Draft Directive amending Council Directives 78/660/EEC and 83/349/EEC as regards disclosure of non-financial and diversity information by certain large companies and groups
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| Legal base | Article 50(1) TFEU; co-decision; QMV
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| Document originated | 16 April 2013
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| Deposited in Parliament | 22 April 2013
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| Department | Business, Innovation and Skills
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| Basis of consideration | EM of 7 May 2013
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| Previous Committee Report | None; but see footnotes
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| Discussion in Council | No date set
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| Committee's assessment | Politically important
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| Committee's decision | Not cleared; further information requested
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Background
7.1 Although the so-called Accounting Directives (78/660/EC
and 83/349/EC) on the preparation of annual financial statements
provide for non-financial information relating to environmental
and employee matters to be supplied where necessary to understand
a company's position, the need to improve the transparency of
such information was one of the areas identified by the Commission
in its April 2011 Communication[49]
on the Single Market Act, and this was reiterated in a Communication[50]
in October 2011 setting out a renewed EU strategy for Corporate
Social Responsibility. However, the Commission points out that
only a limited number of EU companies regularly disclose non-financial
information, and that the quality of this varies considerably,
making it difficult for stakeholders and investors to understand
and compare company performance. It also notes that differences
in the requirements as between Member States have led to a fragmentation
in the legislative framework within the EU, thereby adding to
the lack of clarity.
The current proposal
7.2 The Commission has therefore put forward this proposal
to amend the two Directives by requiring that, where a company
has more than 500 employees, and either a balance sheet in excess
of €20 million or a net turnover of more than €40 million,
its annual report should include a non-financial statement containing
information relating to at least environmental, social and employee
matters, respect for human rights, anti-corruption and bribery
matters. In addition, it would have to include a description
of its policy in those areas; the results of that policy; and
any associated risks (including how these are dealt with). Where
a company prepares a report for the same financial year, it will
be exempted from the obligation to produce the non-financial statement,
so long as the report covers the required topics and content,
relies on national, EU-based, or international frameworks, and
is annexed to the annual report. A subsidiary company will also
be exempt, provided its policy in this area is covered in a group's
consolidated report in a way which fulfils the requirements laid
down. However, where a company does not pursue a policy in relation
to any of these areas, it must provide an explanation.
7.3 At the same time, the Commission has also
sought to address another issue, which it sees as a cause for
concern — the insufficient diversity of boards, which it
suggests may lead to a similarity of views ("group think")
and resistance to innovative ideas. It therefore suggests that
listed companies should be required to include in their corporate
governance statement information on their diversity policy, including
aspects such as age, gender, geographical diversity, and educational
and professional background; on its objectives and implementation;
and on the results obtained. Again, companies not having such
a policy will have to explain why that is so.
The Government's view
7.4 In her Explanatory Memorandum of 7 May 2013,
the Parliamentary Under-Secretary of State for Employment Relations
and Consumer Affairs (Jo Swinson), says although the Commission's
view is that a minimum level of comparability between Member States
in terms of non-financial disclosure is essential, the Government
remains to be convinced that this is the case, believing that
flexibility is to be preferred in some areas. However, she also
observes that the annual report and accounts which all companies
in the UK are currently required to produce have, over the years,
increased in size but decreased in usefulness, and that there
is a great deal of variability in their quality, which this proposal
is seeking to redress.
7.5 The Minister says that the new requirements
would be very similar to those due to come into force in the UK
in October 2013, except for the disclosures on human rights and
anti-corruption measures, which would be new. However, the UK
requires companies to disclose information "to the extent
necessary for an understanding of the business", and, if
a company has decided not to cover one or more of these issues,
it must state that this is the case, allowing users to see that
the information in question has not been omitted as an oversight.
The Minister notes that the proposal goes further by requiring
companies to explain why they have no policy, and suggests that,
whilst this may have a positive effect on transparency, it could
lead to them creating a policy simply so that they can then report
it. She also observes that, whilst the Commission's proposals
imply a fundamental move away from the shareholder as the main
recipient of company reports, the adequacy of the Commission's
"comply or explain" approach largely depends on the
involvement of shareholders.
7.6 As regards the requirement that all listed
companies should disclose their board diversity policy, the Minister
says that this too goes beyond current UK requirements, but is
in line with the objectives
of the Davies review of gender diversity (which looked at ways
to increase gender diversity in the top levels of UK companies),
with the exemption for small and medium enterprises being particularly
welcome. She also notes that this disclosure would be required
as part of a company's corporate governance statement, which in
the UK is prescribed in the Listing Rules, so that implementing
this proposal would have implications for the UK Listing Authority.
7.7 The Minister has attached to her Explanatory
Memorandum an Impact Assessment checklist, which suggests that
the Commission's proposals will increase the number of those preparing
non-financial reports from around 1,000 listed companies to between
2,400 and 4,800 large private companies, and will create some
burdens for those preparing reports for the first time (which
the Government estimates to be in the region of £30,000 for
the first year). On that basis, and, taking the Commission's
estimates that the annual administrative burden would be €600-€4,300
per company for non-financial disclosures and €600-€1,000
for diversity disclosure, it puts the overall costs of the measures
at between £21 million and £328 million. However, the
Government will continue to revise these figures, with further
work being needed to assess whether the benefits outweigh the
costs. In addition, it is estimated that there will be some additional
costs for the UK regulatory body overseeing non-financial reporting,
the Financial Reporting Council (FRC) due to an increase in companies
required to produce non-financial information, and that this may
be in the region of £200,000 per annum.
7.8 Finally, the Minister notes that her Department
is currently working on reforms of the structure and content for
non-financial reporting to improve corporate transparency, to
re-focus reporting on strategic issues, and to allow companies
to communicate key information in a way which is right for them
and their shareholders. She says that, subject to Parliamentary
approval, these reforms will come into force in October 2013,
and that, should this proposal be adopted, her officials do not
currently foresee difficulties in incorporating the changes, although
this will become clearer in the development of the Commission
proposals and in negotiation.
Conclusion
7.9 Although these proposals appear to be
broadly in line with existing, or intended, UK policy, they do
nevertheless give rise to a number of issues, notably the Government's
reservations over how far a minimum degree of comparability between
Member States in this area is essential, and the cost estimates.
We note the Government's concerns, and would be grateful to know
in due course how many other Member States take a similar view.
7.10 We also note that further work is needed
to assess whether those costs are outweighed by the benefits,
and that this is one of the areas which the Government intends
to cover in a stakeholder group which it proposes to establish.
In view of this, we think it right to draw this document to the
attention of the House, but to hold it under scrutiny, pending
further information on these various points.
49 (32702) 9283/11: see HC 428-xxvii (2010-12), chapter
7 (18 May 2011). Back
50
(33327) 16606/11: see HC 428-xliii (2010-12), chapter 13 (7 December
2011). Back
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