Directors’ duties

on summary conviction to up to twelve months’ imprisonment and/or a fine up to the statutory maximum (£5000).

This requirement imposes high degrees of collective responsibility on a board and every director must:

take ‘all the steps he ought to’;

make enquiries of every other director and the auditors;

take such other steps as required by them duly to exercise due care, skill and diligence.

Reporting

Collective responsibility for financial and narrative reporting

The EU ‘Accounts Amendment’ Directive (2006/46) already has a requirement for board members to be collectively responsible, at least towards the company, for drawing up and publishing annual and consolidated accounts and reports and, as and when required and if produced separately, the company’s corporate governance statement. These requirements are already contained in the Companies Act 2006.

In the UK, the collective responsibility for preparing these accounts is covered by provisions requiring the directors to sign and approve accounts, to prepare directors’ reports and to file accounts. Failure to comply can result in criminal penalties or civil enforcement action.

The link between directors’ duties and narrative reporting

When the directors’ duties and additional obligations described above are considered in conjunction with changes to financial reporting and also to nonfinancial (narrative) reporting, the scale of the increased responsibilities of the board collectively becomes very apparent. From the Government’s point of view there is intended to be a link between the directors’ stewardship of a company and the obligation to make available reports to shareholders and other stakeholders, as to how that stewardship has been exercised. Some would regard this as a logical outcome of an enlightened shareholder value approach. Others would regard it as a form of creeping pluralism.

Business reviews

The purpose of the business review is to inform members of the company and help them assess how the directors have performed their duty under section 172 (duty to promote the success of the company).

Section 417(2)

The requirement for a business review in the directors’ report was introduced in 2005 and reflects the EU Accounts Modernisation Directive. This Directive

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requires companies to provide ‘a balanced and comprehensive analysis of the development and performance of the company’s business . . . [which] shall include both financial and, where appropriate, non-financial key performance indicators . . . including information relating to environmental and employee matters’.23 (It is important to appreciate that, even before the Accounts Modernisation Directive, directors’ reports involved a forward-looking requirement to include ‘an indication of likely future developments in the business’.) The overall effect is to extend significantly the scope of reporting required of the directors.

The business review must be a balanced and comprehensive analysis of:

the development and performance of the business of the company and its subsidiary undertakings during the financial year, and

the position of the company and its subsidiary undertakings at the end of that year, consistent with the size and complexity of the business.

The business review must also describe the principal risks and uncertainties facing the company and its subsidiary undertakings.

The business review must, to the extent necessary for an understanding of the development, performance or position of the business of the company and its subsidiary undertakings, also include:

analysis using financial key performance indicators (KPIs), and

where appropriate, analysis using other KPIs, including information relating to environmental and employee matters.

A medium-sized company does not need to include analysis of non-financial information, unless it is an ineligible company or a parent company required to prepare group accounts. However, the Government has stated (in its guidance on directors’ reports) that these companies are strongly encouraged to report, where appropriate, on these issues voluntarily in recognition of the benefits these disclosures make.

For these purposes, KPIs mean factors by reference to which the development, performance or position of the business of a company and its subsidiary undertakings can be measured effectively. The business review must also, where appropriate, include references to, and additional explanations of, amounts included in the company’s annual accounts.

A holding company which prepares group accounts must produce a group directors’ report which includes those subsidiary undertakings which are consolidated in its group accounts. A group directors’ report can, where appropriate, give greater emphasis to the matters that are significant to the company and those subsidiary undertakings included in the consolidation, taken as a whole.

23 Directive 2003/51/EC OJ L 178, p. 18 of 17.7.2003.

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Thus, the overall effect is to require the board to report on its stewardship to a high standard (a fair review) and in very broad terms (for example, through the use of KPIs).

Enhanced business reviews by quoted companies

For quoted companies even more will be required of their boards. The Companies Act 2006 requires the business review of quoted companies to include, to the extent necessary for an understanding of the development, performance or position of the company’s business:

forward-looking information: the main trends and factors likely to affect the future development, performance and position of the company’s business, and

social information: narrative reporting with information about (or a requirement to explain the omission of information about) environmental matters, employees, and social and community issues (including information about any policies in relation to these matters and their effectiveness).

The concept of narrative reporting needs to be seen in the light of a series of related developments, including disclosure of an operating and financial report in a prospectus, proposals to introduce further management commentary as part of International Accounting Standards and the implementation of the Transparency Directive, among others.

Where a directors’ report does not comply with the statutory requirements as to its preparation and contents, every director of the company who

knew that it did not comply or was reckless as to whether it did, and

failed to take all reasonable steps to secure compliance with the provision in question

is guilty of an offence and potentially liable to an unlimited fine.

Transparency Rules

To consider now the impact of a quoted company’s board’s collective responsibility for reporting more frequently and more extensively to investors under the Disclosure and Transparency Rules, which implement in the UK the EU Transparency Directive. There is a sort of logic to the Transparency Directive. For the EU to operate as a single, effective capital market, it is logical that Main Market companies, and other companies whose securities are admitted to trading on a regulated market in the EU, should produce information which assists investors in the relevant market(s) to receive more information: more information on a timely basis, more information on a comparable basis and more information that is publicly available. So the Directive follows this logic, requiring these regulated companies to produce annual and half-yearly financial reports, and (unless they report quarterly) two other interim management statements each

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year. These reports and statements all have to be made public and the annual and half-yearly reports have to be accompanied by responsibility statements by the company and its directors.

The overall effect is rather like a goldfish bowl in which the activities of regulated companies seem visible from all angles. Regulated companies are required to publish financial reports or statements four times a year, together with any trading statements they regularly make, plus any other announcements under their continuing obligations relating to inside information.

In the UK, the new rules (described below) apply to all issuers whose shares are admitted to trading on a regulated market and whose home state is the UK. Issuers admitted to the Official List will therefore be caught, but AIMonly companies are not. Issuers with securities admitted to trading in an EU Member State other than the UK, but who have chosen the UK as their home Member State, are also caught. Issuers with shares admitted to the Official List also have to comply with their obligations under the Listing Rules.

Although the Transparency Directive had to be implemented by 20 January 2007, the FSA has applied it such that the rules only take effect for financial reporting periods starting on or after 20 January 2007. For example, if a company has 31 March as its year end, it had to produce its first interim management statement (see below) in 2007. But, if a company has 31 December as its year end, it will only have to produce its first interim management statement in 2008.

The responsibility statement is a new requirement and has to be given by the issuer and its directors. They must confirm that, to the best of their knowledge;

the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer and the undertakings included in the consolidation, taken as a whole, and

the management report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

As currently, UK listed companies will be obliged to publish an annual financial report (the annual report and accounts) in accordance with the requirements of the Companies Act 1985 and the Listing Rules. As such, the annual financial report must include a directors’ report which has to include the enhanced business review. The content of the management report replicates the content requirements in the Companies Act 1985 for the business review (which are derived from the Accounts Modernisation and other Directives). GBincorporated companies will already be subject to these requirements under the Companies Act 1985.

The half-yearly report must include a condensed set of financial statements, an interim management report and a responsibility statement.

The interim management report must include at least:

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