Chapter 3: Narrative reporting and enlightened shareholder value under the Companies Act 2006
‘Enlightened shareholder value’ (ESV) underpins the business review requirements of the Companies Act 2006 (the Act) with the aims of enhancing shareholder engagement and creating a long-term business culture.1 Despite the perceived importance of the business review I argue in this chapter that the legislative reporting requirements in the Act fall short of their aim of assisting the goals of ESV. Not only are the legislative requirements too vague, but also the enforcement mechanisms are inadequate. The result is that although the Act ‘requires high quality and detailed narrative reporting to shareholders’,2 instead ‘few [companies] provide the depth of understanding or a clear and coherent picture of performance … necessary in the current economic environment … a compliance mindset is often suppressing effective communication’.3 These faults let down not only the shareholders but other stakeholders too, as well as the company in the long term. Ultimately, such defects undermine the directors’ duty to promote the company’s success, and reduce the ability to challenge the directors, with the risk that trust in the UK’s corporate governance system will fall. In the second section, the chapter outlines the connection between the narrative reporting requirements and the directors’ duty to promote the company’s success, highlighting the ESV objective. The third section identifies the limitations of the legislative provisions and the narrative reporting framework for the purposes of ESV. The fourth section presents evaluations of company business reviews from a number of published surveys and reports as well as a small scale research project carried out by the author.
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