Since 2008, the Private Equity Reporting Group (PERG) – a semi-independent body established by the BVCA, the UK’s private equity association – has monitored corporate reporting by the largest UK-based private equity-backed companies. Each year, PERG assesses a sample of the annual reports issued by qualifying portfolio companies, looking for conformity with the Walker Guidelines. In general, the objective is that large portfolio companies match the disclosure standards set by UK-listed companies of equivalent size. This year’s report (PERG’s 12th) confirmed that, although all the annual reports sampled were compliant with the Walker Guidelines, there is more work that can be done to improve disclosures further. (The accompanying Good Practice Guidance will help companies in that regard.)
Last December, in its 2018 report, PERG reported that 73% of companies achieved an overall standard of reporting that was at least “good”. Somewhat disappointingly, the 2019 report puts that proportion at just over 50% (although one company was able to achieve an “excellent” rating).
Of course, the comparison is not entirely fair, because the benchmark is constantly moving: improved reporting in the listed sector on, for example, environmental and social issues, means that continuous improvement is required and companies need to upgrade their reports in order to stand still. In addition, PERG’s report highlights that an unusually high number of the companies sampled this year had not been assessed before and were new to the population: perhaps they were not quite ready for the more exacting standards required by the Guidelines.
Employee disclosures were also found to be somewhat lacking. Companies are required to give information about employees in their annual report, including any relevant policies and their effectiveness. Nearly half of the companies reviewed were said to have provided only “basic” disclosure, which “tended to make blander statements on employee areas without giving details of how the policies were practically put into action.”
A full explanation of the company’s approach to environmental and social issues, and the way it considers the interests of its workforce, is increasingly important to all stakeholders, and PERG urges some portfolio companies to re-double their efforts.
But the news was not all bad. Gender diversity and board composition disclosures, for example, were much better than in previous years, providing more detail on forward-looking policies rather than the standard backward-looking data. This may provide a leading indicator of progress in an area that has been under the spotlight in the private equity sector, as well as elsewhere in the business community.
PERG is also actively considering what changes need to be made to the Guidelines to keep them current. It notes the many changes to narrative reporting already on the horizon in UK and EU law: the new reporting requirement on directors’ duties and engagement with stakeholders, as well as the corporate governance disclosures for very large companies and the related Wates Principles. It is also monitoring implementation of the EU Non-Financial Reporting Directive. PERG concludes that dramatic changes should not be made immediately, and these general developments should first be allowed to run their course.
Large UK-incorporated private companies will certainly have to address narrative disclosure more fully in 2020 than ever before, and all large portfolio companies should make sure that is on their Q1 agenda.
We wish all our clients and friends a happy and healthy holiday season. European Funds Comment will return in January.