Environmental and social transparency under the ... - ClientEarth

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38 | Environmental and social transparency under the Companies Act 2006Chapter 1: Governance of company accounting and reporting | 39reporting process by the Financial Reporting Review Panel (the appropriateregulatory body) and company AGMs.1.2.2 Regulatory implementation and compliance: The FinancialReporting Review PanelThe Financial Reporting Review Panel (FRRP) is an independent regulatorybody, which has responsibility and authority for monitoring thecompliance of companies with relevant accounting and reporting requirementsin the UK. When appropriate, it is authorised to intervene toensure compliance. Its legal authority and powers are derived from theSecretary of State, and provided for by statute. 106 It is an operating bodyof the Financial Reporting Council (FRC), which is ‘the UK’s independentregulator responsible for promoting confidence in corporate reportingand governance’. 107The FRRP is primarily populated by former or current city lawyers,accountants, auditors or finance / commerce-related civil servants. At thetime of writing it was constituted by 1 Chairman, 2 Deputy Chairmen, 24members and 1 Secretary. FRRP members are recruited by public advertisement,and other than the Chairman and Deputy Chairman, they areunpaid.The FRRP enquires into cases where it appears that UK accounting andreporting rules have not been followed. It has broad investigative powers;it may require companies, officers, employees or auditors of the companyto provide any information recorded in any form or any explanationswhich it may reasonably require for the purposes of deciding whether tomake an application to court in respect of defective reports. 108 It also hasa right to apply to a court to secure any such information or explanationas necessary. 109 If it decides there is a likelihood of non-compliance andthe company will not voluntarily revise the accounts or reports, the FRRPis authorised to make an application to court for a declaration of noncomplianceand an order requiring the directors of the company to revisethe accounts or reports. 110 The FRRP also maintains a legal costs fund of£2million for the purposes of pursuing any of these court orders and/ordeclarations. 111 To date it has resolved all cases brought to its attentionwithout having to apply for a court order. 112The FRRP normally only exercises its authority in connection with theaccounts of public limited companies and companies within a groupheaded by a PLC. 113 This was agreed with BERR (now BIS), to which theremaining cases fall. 114 In 2007/08 the FRRP reviewed a total of 300 sets ofaccounts and wrote letters to 138 companies requesting information. 115 Itreported that comments on business reviews now feature regularly in theircorrespondence with companies, 116 and reported that the issues it raisedmost frequently relating to business reviews were regarding the principalrisks and uncertainties facing the company, and identifying key performanceindicators. There is no indication that any issues have been raised bythe FRRP which relate to environmental or social reporting. 117In its 2008 ‘Review and Recommendations’ document, the FRRP notedthat:“Boards of quoted companies should give particular attention to thebusiness review in their reports in the light of the enhanced disclosurerequirements, effective for reports prepared for periods beginningon or after 1 October 2007. The review extends to a discussionof the main trends and factors likely to affect the future development,performance and position of the company.”The FRRP is mandated by statute to regulate and ensure compliancewith the full range of company accounting and reporting requirements,including those relating to environmental and social issues. However,as explained above in Proposal 2, as currently constituted the FRRP isnot well suited to ensuring the appropriate incorporation of environmentaland social issues into company reporting. Its capacity needs to beincreased and diversified to allow it to fulfil its statutory mandate, whichplays a vital role in ensuring compliance with legal reporting standards.The FRRP’s practice and communication thus far has indicated that environmentaland social issues in reporting are not amongst its priorities andthat it is not planning to pay specific attention to the issues in the comingyear (as the first reports subject to the new business review requirementsare published). This is an unacceptable situation, and is not consistentwith the FRRP’s statutory remit and regulatory role.1.2.3 Internal corporate scrutiny of accounting and reporting:Annual General MeetingsCompanies are required to ‘lay’ their annual accounts and reports beforethe company in general meeting, 118 which in practice will be the AGM.This is where company shareholders are usually given the opportunity to
40 | Environmental and social transparency under the Companies Act 2006Chapter 1: Governance of company accounting and reporting | 41ask questions relating to the reports, get clarification on certain pointsor scrutinise the treatment of any issues as accounted or reported by thedirectors.The company AGM is a key forum for the scrutiny of the annual accountsand reports. In theory, shareholders have been said to be the primaryregulators of corporate behaviour. 119 They are certainly regarded as theprimary users of the annual accounts and reports, and so the opportunityfor them to engage with directors regarding the content of the accountsand reports and the treatment of any issue within them is central to thereporting process. 120In practice, there is usually the opportunity for discussion of the reportsat the AGM, when they are laid before it. However, this is not explicitlyrequired by law. Neither is there any legal requirement that the annualreports have the shareholders’ approval or acceptance; shareholders haveno ability to reject them. 121In practice, there may be discussion at company AGMs relating to environmentalor social matters associated with the company’s business, andmanagement’s approach to them (especially at AGMs of those companieswith particularly significant environmental and social impacts). Indeedin practice, individuals and organisations often routinely attend companyAGMs to make representations to the company regarding these issues.This practice is discussed in much greater detail in Annex 7.This process plays a key role in safeguarding the discretion of directorswhen they reporting on company activities, in ensuring that shareholderswho are present, and before whom the accounts and reports are laid, aremade aware of significant issues relating to company activities, which mayhave bearing on the business of the company, but which may not havebeen treated with sufficient detail in the annual accounts or reports.As explained above in Proposal 3, ClientEarth considers that this essentialscrutinising role in the reporting process must be formalised and codified,along with a number of specific changes to enhance transparency aroundAGMs.1.3 Non-binding guidance documents and initiatives foraccounting and reporting of environmental and socialimpactsThere is a range of voluntary, non-binding guidance relating to companyenvironmental and social reporting, and initiatives that encouragesuch reporting, at both national and international level. These guidancedocuments and initiatives, particularly at international level, have enjoyedconsiderable success in increasing the volume and consistency of environmentaland social information provided by the largest multinationalcompanies, and enhancing their engagement with the issues. They arealso useful in presenting an aspirational upper ceiling in reporting standards,encouraging incrementally higher quality in reporting. However,they can only be a part of the solution, as they need to be supplementalto robust and appropriate minimum standards, against which adequatecompany performance can be monitored and ensured by mechanismssuch as those identified in Chapter 1.2 above.1.3.1 UK guidance on environmental and social reportingThere are currently two key non-binding guidance documents on environmentaland social reporting in the UK, issued by bodies exercisinggovernmental powers: the Accounting Standards Board’s ‘ReportingStatement: Operating and Financial Review’, 122 and the Department forEnvironment Food and Rural Affairs’ ‘Environmental Key PerformanceIndicators: Reporting Guidelines for UK Business’. 123 These documentsprovide ‘best-practice’ guidance for company reporting of environmentaland (in the case of the ASB’s statement) social issues. However, as wellas lacking legal force, this guidance has, as a whole, been described asambiguous. 1241.3.2 Major international reporting standards and initiativesThere are also a number of voluntary standards and initiatives at internationallevel which aim to achieve higher standards of corporate reportingrelating to environmental or social issues.The Global Reporting Initiative (GRI) is a worldwide multi-stakeholdernetwork of thousands of experts, which strives to provide companies withguidance and support in adopting higher standards of ‘sustainability’
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