Director's Report
Encyclopedia
The Director's Report is a document produced by the board of directors
under the requirements of UK company law, which details the state of the company and its compliance with a set of financial, accounting and corporate social responsibility
standards.
The Director's Report must be disclosed to the public, and so also serves as an important source of public information, as a form of social accounting
. Following its introduction, the Report's (under various names) had a bumpy history. As previously named, the Operating and Financial Review was said by Gordon Brown
to be unnecessary ‘goldplating’ of EU regulations. Brown initially proposed scrapping it, stating it was important to place ‘trust in the responsible company’. He was widely criticised by charities, social foundations and environmental groups, leading the Government to backtrack on its plan for scrappage. The present requirements are found in the Companies Act 2006
.
section 415. Under section 416, the contents must include the directors' names and the company's principal activities. The critical requirement is found in section 417(1). A business review must be carried out, though this is only for large companies. Small companies, with fewer employees and less turnover, are excepted by statutory instrument. Under section 417(2), directors must explain how their leadership has lived up to the directors' duty in CA 2006 section 172 to "promote the success of the company" with regard to all a company's stakeholders, including the long-term interests of shareholders, employees, the environment, the community, maintaining a high business reputation, and so forth. Section 417(3) requires that a fair review of risks and uncertainties facing the company must be outlined, a requirement from the Accounts Modernisation Directive. Section 417(4) requires a "backward looking" analysis of the business' development in the last year (again required by the Directive).
Under section 417(5), public companies come under a further duty, reflecting the old Operating and Financial Review. Companies must either comply with this provision or explain why they will not. If they do comply, public companies must state the main trends in the business, give information about the company's effect on the environment, employees, including contractual arrangements through supply chain
s that are essential to the company. All analysis, under section 417(6) and mandated by the Directive, must use key performance indicators, unless the company is a small or medium company. Where appropriate, section 417(8) requires that accounts are explained.
Civil liability follows, also in the case for a Director's Remuneration Report and summary financial statements, under section 463(1) for false or misleading statements in the Director's Report. Any loss caused to the company by wrong statements must be compensated for, but this is a sanction that only the company (i.e., no groups except the board of directors or company members with the power to bring derivative claims) can sue for, and liability only arises for an intentional or reckless act, or a dishonest omission.
According to section 496, the company auditor must give its own report on the Director’s Report (a requirement that should be brief, and only operates as a badge of good health) stating whether the report is inconsistent with anything in the accounts. This is a watered-down version of the previous requirement under the Operating and Financial Review, which needed the auditor to say whether all the information emerging in the audit was consistent. Furthermore, the Operating and Financial Review required reports set out information consistently over time so that reports could be compared. It is likely this requirement exists implicitly in the basic duty to explain the contents of the report clearly, but it is not so rigid as to require the same font each year.
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
under the requirements of UK company law, which details the state of the company and its compliance with a set of financial, accounting and corporate social responsibility
Corporate social responsibility
Corporate social responsibility is a form of corporate self-regulation integrated into a business model...
standards.
Purpose
The Director's Report arose out of a general move for greater transparency in corporate governance. It is useful for shareholders to find out issues such as whether the company has good finances, whether the market has potential, and whether the business has the structural capacity to expand into new opportunities. In order for shareholders to make informed decisions when casting their votes at annual or other meetings, the Director's Report provides part of that essential minimum standard of information. It is complemented by the Director's Remuneration Report and the Company Accounts. Much of the Director's Report requirements are basic harmonised standards in all European Company's, through the Accounts Modernisation Directive, but the UK chose to go further in the interests of greater transparency and accountability.The Director's Report must be disclosed to the public, and so also serves as an important source of public information, as a form of social accounting
Social accounting
Social accounting is the process of communicating the social and environmental effects of organizations' economic actions to particular interest groups within society and to society at...
. Following its introduction, the Report's (under various names) had a bumpy history. As previously named, the Operating and Financial Review was said by Gordon Brown
Gordon Brown
James Gordon Brown is a British Labour Party politician who was the Prime Minister of the United Kingdom and Leader of the Labour Party from 2007 until 2010. He previously served as Chancellor of the Exchequer in the Labour Government from 1997 to 2007...
to be unnecessary ‘goldplating’ of EU regulations. Brown initially proposed scrapping it, stating it was important to place ‘trust in the responsible company’. He was widely criticised by charities, social foundations and environmental groups, leading the Government to backtrack on its plan for scrappage. The present requirements are found in the Companies Act 2006
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
.
Law
The duty of directors to produce a Director’s Report once a year is found in the Companies Act 2006Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
section 415. Under section 416, the contents must include the directors' names and the company's principal activities. The critical requirement is found in section 417(1). A business review must be carried out, though this is only for large companies. Small companies, with fewer employees and less turnover, are excepted by statutory instrument. Under section 417(2), directors must explain how their leadership has lived up to the directors' duty in CA 2006 section 172 to "promote the success of the company" with regard to all a company's stakeholders, including the long-term interests of shareholders, employees, the environment, the community, maintaining a high business reputation, and so forth. Section 417(3) requires that a fair review of risks and uncertainties facing the company must be outlined, a requirement from the Accounts Modernisation Directive. Section 417(4) requires a "backward looking" analysis of the business' development in the last year (again required by the Directive).
Under section 417(5), public companies come under a further duty, reflecting the old Operating and Financial Review. Companies must either comply with this provision or explain why they will not. If they do comply, public companies must state the main trends in the business, give information about the company's effect on the environment, employees, including contractual arrangements through supply chain
Supply chain
A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer. Supply chain activities transform natural resources, raw materials and components into a finished product that is delivered to...
s that are essential to the company. All analysis, under section 417(6) and mandated by the Directive, must use key performance indicators, unless the company is a small or medium company. Where appropriate, section 417(8) requires that accounts are explained.
Civil liability follows, also in the case for a Director's Remuneration Report and summary financial statements, under section 463(1) for false or misleading statements in the Director's Report. Any loss caused to the company by wrong statements must be compensated for, but this is a sanction that only the company (i.e., no groups except the board of directors or company members with the power to bring derivative claims) can sue for, and liability only arises for an intentional or reckless act, or a dishonest omission.
According to section 496, the company auditor must give its own report on the Director’s Report (a requirement that should be brief, and only operates as a badge of good health) stating whether the report is inconsistent with anything in the accounts. This is a watered-down version of the previous requirement under the Operating and Financial Review, which needed the auditor to say whether all the information emerging in the audit was consistent. Furthermore, the Operating and Financial Review required reports set out information consistently over time so that reports could be compared. It is likely this requirement exists implicitly in the basic duty to explain the contents of the report clearly, but it is not so rigid as to require the same font each year.
See also
- UK company law
- Accounts Modernisation Directive 2003/51/EC, art 1.14
- Form 10-KForm 10-KA Form 10-K is an annual report required by the U.S. Securities and Exchange Commission , that gives a comprehensive summary of a public company's performance...
, an equivalent in US corporate law