The UK’s Accounting Standards Board recently published a review of the state of narrative reporting by UK listed companies. For those of us concerned to improve the visibility and quality of human capital (HC) reporting, it is a wake up call.
The harsh truth is that human capital reporting in the UK won’t even get off the blocks until narrative reporting improves.
Under the November 2006 Companies Act, all UK quoted companies are obliged to produce a narrative report on including information on employees, risks, intangible assets, etc. (For my take on this, see previous posting.) The aim of the narrative report is to balance the retrospective, fiscal focus of financial reporting with a view the company’s future prospects, and likely influences on it.
The narrative report will be obligatory from this year. The ASB’s review looked at a number of those that already had produced one voluntarily, covering ‘a significant number of the FTSE 350 leading quoted companies’.
What the ASB found was not, perhaps, surprising.
Companies do well describing the things they already have to describe: their businesses and markets, strategies, objectives, and their current state of development.
They are less good in unchartered territory, particularly when reporting on:
- forward-looking information
- resources, particularly intangible assets
- describing and ranking principle risks
- key performance indicators, both financial and non-financial
Strike a chord? Yes, if you want information on human capital, you’d find it under these four categories. And remember – these are the companies voluntarily producing a narrative. In other words, over the next year we can expect the general quality of reporting to fall as all firms are obliged to report, including the laggards and sceptics.
The message is clear: until companies are more comfortable with narrative reporting in general, we are not going to see any sort of high-quality human capital reporting in the UK.
And if you’re tempted to say that at least we do things better in the UK than the corrupt American corporate world, which gave us Enron, read what the ICAEW said in April 2006 after a comprehensive study of UK and US narrative reporting:
the quality of US disclosure is markedly superior to that in the UK for a number of key sub-topics, while UK disclosure does not appear superior for any examined sub-topic.
It looks like we have a long way to go before we really begin to appreciate the value of people to business.