Sunday, April 20, 2014

Directive Requiring Disclosure of Non-Financial and Diversity Information Approved by E.U. Parliament

The European Parliament enacted legislation amending the Accounting Directives to require the reporting of non-financial information, such as board diversity, in large company accounts. Companies concerned will need to disclose information on policies, risks, and results regarding environmental matters, social and employee-related aspects, respect for human rights, anti-corruption, and diversity on boards of directors. The new rules will only apply to large companies, defined as those with more than 500 employees, noted E.U. Commissioner for the Internal Market Michel Barnier, because the costs for requiring small- and medium-size enterprises to apply the rules could outweigh the benefits.

Broadly, the European Commission believes that non-financial reporting is vital for managing change towards a sustainable global economy by combining long-term profitability with social justice and environmental protection. It also helps in monitoring a company’s performance and its impact on society.

The Directive provides for further work by the Commission to develop guidelines in order to facilitate the disclosure of non-financial information by companies, taking into account current best practice, international developments and related EU initiatives.

Comply-or-explain. The new measures will require big companies in the E.U. to issue a statement annually relating to environmental, social, and employee-related matters, respect for human rights, anti-corruption, and bribery matters.

The statement will have to include a description of the policies, outcomes, and the risks related to those matters. A company that does not pursue policies in relation to these matters would have to explain why this is the case.

Importantly, as part of the corporate governance statement the company would have to describe its diversity policy for the management and supervisory boards with regard to aspects such as age, gender, and educational and professional background.

Companies are left with significant flexibility under the legislation because of the comply-or-explain modalities. For instance, companies will not be required to have a boardroom diversity policy, but when they do not have such a policy, companies will have to explain. This requirement is in keeping with the comply-or-explain rubric used in E.U. member states’ corporate governance codes. Under the comply-or-explain rubric, the explanation about why a company does not have a boardroom diversity policy cannot be boilerplate, but rather must be a meaningful, substantive, and differentiated explanation.
Companies will not be required to disclose information that is not relevant or not necessary for an understanding of a company’s development, performance, or position. This is no box-checking exercise, emphasized the Commission, rather this is about disclosing material, useful, and valuable information for proper management and understanding of a company.

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