The firm’s analysis of 100 annual reports from FTSE 350 companies shows improvements have been made around reporting on stakeholder engagement, purpose and culture, although it says there is still some way to go to ensure that the disclosures are fully compliant and provide meaningful insights on these new areas.

According to EY’s research, 83% of the annual reports disclose how companies are engaging with their employees and 65% describe the methods they are using to engage with other stakeholders such as suppliers.

There has also been a small increase in reports mentioning the section 172 duty of the Companies Act 2006 (CA 2006), rising to 11% from just 1% last year.

Under section 172, directors have a regulatory requirement to consider and report on the long-term impact of their business decisions, and the interests of a wide range of stakeholders including their employees, suppliers and community. When the new secondary legislation comes into force in January, companies will have to make a specific statement on how the directors have addressed the matters set out in section 172 for the first time.

Ken Williamson, EY’s UK head of corporate governance, said: ‘The political and regulatory focus on how companies engage with their stakeholders has had a noticeable impact on annual reports this year, and we’re also seeing companies providing better disclosures around their purpose, social impact and corporate culture. However there’s still much more to do.

‘In order to comply with new corporate governance code and section 172 requirements, companies will need to place greater emphasis on how the board listens and responds to the views of employees and other stakeholders. They will also need to explain how these interactions have impacted their decision making as a result.’

EY’s analysis shows an increase in FTSE 350 annual reports that articulate a company’s purpose, in particular a broad societal purpose that goes beyond shareholder value – up to 47% from 41% last year. This follows a greater focus on these issues from the Financial Reporting Council (FRC). There are also improvements in how companies connect their strategic objectives with their purpose - 41% of companies make the link, up from 20% last year.

Similarly, some companies have started to include more detailed descriptions of the culture they seek to create and the values they aim to embed, in advance of the new code.  Currently, 39% of annual reports explain how culture supports the business model or strategy (up from 10% in 2015/6), and 30% explain how culture is measured (up from 9% in 2015/6).

However, overall, EY says that culture reporting is often generic and limited, with few disclosures that identify the challenges faced in relation to culture or embedding it. Only a minority (37%) explain clearly how culture is embedded, beyond ‘setting the tone from the top’.

A quarter (23%) of the companies were found to have chairs who have served on the board for more than nine years, with 6% having served for over 15 years. This is significant as provision 19 in the new code introduces a nine-year ‘maximum’ tenure for chairs to encourage board refreshment and diversity, leading EY to suggest companies with chairs in excess of, or approaching, nine years of tenure are likely to be scrutinised more heavily in future.

Report by Pat Sweet