New disclosure requirements for large companies aimed at ensuring “Transparency Max”

Directors of large UK businesses employing more than 250 people will have to demonstrate they are acting in the best interests of the company due to new laws coming into force.

The aim of the fresh legislation is to contribute to the transparency of large companies, ensuring investors, employees and suppliers, have visibility on areas including decision-making, employee engagement and pay reporting.

The implications of not complying with the new rules could be severe, beginning with civil penalties for late filing of accounts, disqualification of directors and the cost of reputational damage - potentially the most serious issue facing businesses today.

Companies will be required to publish a report on how the directors have had regard to matters in section 172 of the Companies Act 2006 – which provides a requirement that directors “must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole”.

For accounting periods beginning from 1 January 2019, large companies (those with more than 250 employees, or turnover in excess of £22.8m if the number of employees is less than 250) will need to include information in their strategic reports covering how the directors have engaged with employees; how they have had regard to employee interest; and the effect of that regard, including on the principal decisions taken by the company during the financial year.

Quoted companies who have more than 250 employees will also be required to prepare a table within the annual directors’ remuneration report showing the ratio of their CEO’s latest Single Total Figure of Remuneration (STFR) - along with supporting information and an explanation of the data provided, including the methodology chosen for calculating the ratios, the reason for any change in the ratios from the previous financial year, and if the ratio is consistent with the company’s wider policies on employee pay, reward and progression.

To aid transparency the information is required to be provided as a separately identifiable statement within the strategic report, and companies will be required to publish the statement on a website maintained by or on behalf of the company.

Commenting on what the new regulations would mean for businesses, Gary Gray, head of company secretarial services at Burness Paull LLP, said: “We are currently in the age of ‘Transparency Max’ with new disclosure requirements being brought into force at regular periods in one shape or form over the past seven or eight years. This is despite the previous coalition government’s attempt to reduce the amount of bureaucracy through their ‘Red Tape Challenge’.

“In my view, the more transparent business in the UK can be, the more secure their investors and suppliers can be in their dealings with companies, so despite the attempt to reduce bureaucracy, and the preparation and submission of corporate information simply for the sake of it, there is merit in organisations being required to report on issues and matters which can have a real impact on the way they are viewed by the public in general.”

Mr Gray said the real test of the value in implementing such disclosures will be in the depth of information provided by large companies, which will only be determined once the additional information is included in the strategic reports.

“In some cases companies will do the bare minimum, whereas those who provide reports that go beyond will, hopefully, provide more intrinsic value to investors and recipients of their strategic report by including a greater level of detail. Given the potential interest in these disclosures there will be pressure on companies to provide data in their reports that will be robust, and demonstrate their commitment to meeting their obligations.”

Mr Gray added: “Directors also face the potential for prosecution, both for failure to meet the disclosure requirements, but also for failing to submit statutory accounts within the appropriate timescales. In the worst case, this can result in substantial fines, or imprisonment, as well as disqualification from holding office as a director.”