The Viability Statement Insightful or legal boilerplate?
The first tranche of the new Viability Statements have been published in companies’ recent annual reports. There is a divergence of views on whether companies have gone too far or not far enough – so we thought it would be interesting to take a look and see what the recent FTSE100 reporters are up to.
The overriding driver of this new statement is to provide shareholders with a clearer understanding of the way Boards are managing the principal risks to their invested capital. The FRC has been quite clear in their expectations as to how companies should be reporting:
As with all parts of the annual report and accounts, the board should provide clear and concise information that is tailored to the specific circumstances material to the company, and should avoid using standardised language which may be long on detail but short on insight.
The viability statement should be more than just a legal disclosure – it’s about forecasting the longer-term future of the business by assessing the soundness and robustness of the company’s business model, strategy, future performance, solvency and liquidity and highlighting any potential risks or events that could impact these along the way.
Or to put it another way, the Code is asking companies to look at the things that may keep the Board awake at night and how they would mitigate these in a ‘perfect storm’.
Having gone through a number of current FTSE100 reports, it has been disappointing to find that over two thirds of those reporters have gone down the generic boilerplate road with very little qualitative insight. Companies are not sticking their heads above the parapet, but to be fair, the reality of that maybe down to this being the first year of reporting under the new Code.
Boilerplate narrative is unlikely to convince investors and the wider stakeholder community that the future is being properly managed. Most of the statements we reviewed read like they have been poured through the legal filter – careful in construction and modelled on the safest option.
To date, only a minority of companies have been slightly more innovative and overt in their communication approach, embracing the spirit of the statement, by revealing the deeper insights into how potential risks could impact the long-term viability of their business. These reporters are including risk scenarios – the ‘what ifs’ – and linking these risks to other parts of the report. Granularity of information is key in providing a clearer understanding and broader insight into longer term planning around risks. One excellent example features a risk radar for each of their business units in the performance review which links to the viability statement and demonstrates management’s approach to risk appetite and enhanced business resilience.
Key opportunities to help evolve the Viability Statement content include:
- Don’t be generic
- Recognise that reporting of the statement will evolve over time
- Check that your objectives and conclusions align with your Going Concern statement
- Identify those priority risks and provide ‘what if’ scenarios that support the Board’s approach to managing and mitigating these
- Cross reference other sections of the annual report to help reinforce the statement
- Ensure consistency of information throughout the report
- Keep stress-testing the risks and update accordingly
- Be insightful in your communication
We will be monitoring the later year-end reporters…..so watch this space!