The Lab sought views from 25 companies, ranging in size from FTSE 100 to AIM, and 27 members of the investment community, as well as carrying out a survey of approximately 200 private investors.

The main challenge that companies identified is how to report succinct information on principal risks that is of most use to the reader. The basis for the principal risk disclosure is usually the risk register, which often includes risks at a disaggregated level.

Aggregating a substantial number of risks, often across a business which has several different segments, and still ensuring that the disclosure is sufficiently insightful, can present a challenge.

Companies are also concerned that not having a ‘complete’ set of principal risks could result in challenge from investors, even when those risks are general risks faced by any company operating in that sector or geographical location. The Lab found companies can be cautious about the approach taken and many will compare competitors’ annual reports in order to ensure that their own disclosures are consistent.

Companies are also wary that the reporting of principal risks in too much detail may give away a competitive advantage.

The research suggested some investors like to see a short list of five to ten principal risks, while others welcome a more comprehensive approach, but it recommended that all companies should be considering the impacts of cyber-crime, climate change and Brexit in their current reporting.

The Lab said companies have found the process of developing their viability statement to be helpful in better analysing their risk appetite, particularly by incorporating stress and sensitivity analyses into their risk management processes. 

However, it recommends companies are bolder in their viability report disclosures to ensure that they provide investors with better information on the company’s longevity and relevance in the market.  The report encourages companies to develop their viability statements in two stages – firstly to assess prospects, and secondly to make their statement of viability.

The research concluded that few companies currently use the viability statement as a means of communicating positive messages about the long-term prospects of the company, treating it rather as an extended going concern confirmation. Just three of the companies interviewed said they had ever been asked questions about their viability disclosures.

The Lab’s report makes recommendations on changes that could be made and provides guidance and practical examples on how companies can find a balance between reporting that is specific, whilst not revealing commercially sensitive information. 

Phil Fitz-Gerald, director of the Lab, said: ‘It is clear that investors want comprehensive information on companies’ principal risk and viability reporting. They have said that risk disclosures have been more informative since the financial crisis but that more can be done to provide them with confidence that companies are managing their risk and considering their long-term prospects.

‘Many companies have significantly enhanced their risk management processes to ensure that boards are able to make a statement about their viability.  Investors encourage companies to be more transparent on how they have assessed the prospects of the company, how they have considered their principal risks, and what stress and scenario testing they have carried out to enable them to make their viability statement.’

Lab project report: Risk and viability reporting is here.

Report by Pat Sweet