Sir Jon Thompson, the new Chief Executive of the Financial Reporting Council talks to Nigel Sleigh-Johnson and Sally Baker about coming change and transformation.

Sir Jon Thompson, the new Chief Executive at the Financial Reporting Council, talks to Nigel Sleigh-Johnson and Sally Baker about coming change and transformation

Spider-Man. The day Sir Jon Thompson was interviewed for By All Accounts he had been given strict instructions to wear his superhero T-shirt by his three-year-old grandson. The chief executive of the Financial Reporting Council (FRC) duly obliged. The Spider-Man T-shirt is not his usual workday attire, but this interview took place via videoconference during the lockdown and the dress code was informal. It’s a good fit for Jon, who is reassuringly down to earth despite having held some of the most senior roles in the Civil Service, and having been knighted in 2019.

After qualifying, Jon worked in local government and in practice before joining the Civil Service in 2004 as the first finance director of Ofsted. Since then he has blazed a trail through the Department for Education and Skills, Ministry of Defence (MOD) and HMRC, working his way to the top of the government finance profession and onto the Civil Service Board – and that was before he took the helm of the FRC. “My mantra is to keep learning and work hard, and I think that’s served me well over the years,” he says, with characteristic understatement.

Jon, who says he built a career on change and transformation, has steered various government departments through some massive financial and organisational challenges. He went to the MOD because it had deep financial problems. The former Chancellor of the Exchequer asked him to take over at HMRC because it needed to go through a significant transformation. There will be more of the same at the FRC. Jon arrived there in October 2019, in time to lead the regulator through its transition into the Audit, Reporting and Governance Authority (ARGA); with all that this will entail.

Powering change

Many recommendations for change in Sir John Kingman’s independent review of the FRC’s role and powers are already under way. “We are trying to be more proactive,” Jon says. “We have increased engagement with stakeholders, creating a new communications and stakeholder management function, listening very carefully to stakeholders and flowing that back into the rest of the organisation.” 

Proactive engagement has been evident in the FRC’s response to COVID-19 where, working alongside other regulators, there has been timely and helpful guidance for preparers, auditors and investors on matters such as disclosure of material uncertainties and going concern issues.

Of Kingman’s 83 recommendations to make the FRC a more effective regulator, 20 have been fully implemented (largely affecting internal running of the organisation). Another 35 are at various stages of implementation and others will follow, leaving around 25 that cannot proceed without government action.

Should the UK have its own Sarbanes-Oxley system? Should the FRC have new and improved enforcement powers? The government must decide on such matters and then, if necessary, legislate. Jon is keen to press on though with changes that are possible at the FRC using its existing powers, and feels that plenty can be achieved within these boundaries.

“The organisation needs to change but the ecosystem around it also needs to change,” says Jon. “There’s a giant ecosystem out there, regulating, listening, negotiating, and it intrigued me enormously. That’s why I took the job. At the FRC we are trying to raise standards across the board so that in the end, standards of corporate governance, corporate reporting and audit all improve. That is the purpose of our organisation.” 

Far and wide

Given the size and scope of Jon’s portfolio and how much there is going on at the moment affecting the FRC and the surrounding ecosystem, what are the organisation’s key areas of focus in terms of corporate reporting?

“There are three really,” says Jon. The main areas where the regulator will be “pushing forward during 2020” are: the FRC’s Future of Corporate Reporting project; the new requirement for boards to make a statement with regard to their duty under Section 172 of the Companies Act 2006 to promote the success of the company (a s172(1) statement); and non-financial reporting.

The FRC has been pondering the purpose of the annual report. “The concept for the future of corporate reporting is that you will have a core annual report that’s mandatory for all companies, with a series of modules that you can flex,” he explains. Manufacturing, retail and transport, for example, are very different. “Do you really need to have a standard set of reporting for all of them,” wonders Jon, or can the annual report better reflect the nature of each business, so that reporting is “more agile” and “more relevant” to businesses and their stakeholders?

There is a widely held view, says Jon, that the annual report is trying to serve too many purposes and stakeholder groups, and risks not serving any of them well. With some corporate annual reports running to six or seven hundred pages, reform is needed. Whether reform can de-bloat the annual report remains to be seen, in light of stakeholder demands and regulatory requirements for more non-financial information. “We’ve been looking at the future of corporate reporting and, in particular, the increased importance of non-financial reporting and what else is in the annual report.”

All companies qualifying as large under the Companies Act 2006 are within scope of the s172(1) reporting requirement to provide visibility of directors’ considerations in the performance of their duty and will be writing the first annual reports including these s172(1) statements during 2020. The Financial Reporting Lab of the FRC will be reviewing those first reports. “It will be interesting to see what people disclose on matters such as the consequences for a company in the long term and the impact on employees, customers, the community and the environment,” says Jon.

Investors and other stakeholders are becoming more engaged with non-financial risks. “Non-financial reporting is increasingly important and the FRC needs to be in this space,” says Jon, noting recommendations in the Brydon Report for the FRC’s new incarnation, ARGA, to become the standard-setter for non-financial reporting. Also, for more of the non-financial information in annual reports to be assured, with some sort of certification.

“On that project, expect some sort of public manifestation of our thinking in the autumn,” he says.

Jon thinks that more needs to be done to improve non-financial reporting, but he also thinks that it will require some significant work over quite a period of time. “There is already a standard for providing assurance over non-financial information in the annual report. The question is, how would that apply on a cyber-audit or a mineral reserves audit or a climate change impact audit?”

More thought is needed about what is to be assured, what level of assurance is required, and who is going to provide that assurance. “Clarity is needed,” adds Jon.

There are many types of non-financial information that could potentially be reported on and many voluntary (sometimes overlapping, sometimes competing) non-financial reporting frameworks. “I’m told that 11 exist across the globe and we think that in the end there needs to be a winner,” says Jon. “We should provide some rigour around non-financial reporting and demonstrate the impact of a company on various different aspects of society,” he adds, such as how the climate is affected by tech giants, or the environmental impacts of those extracting mineral reserves.

Brave new world

Building a more sustainable global economy, where businesses combine long-term profitability with social justice and environmental protections, may require a single framework to support the disclosure of comparable, reliable and transparent non-financial information. “I think stakeholders, including the general public, are keen to get to a place where they can understand this on a consistent basis,” says Jon. “We need something that is almost an IFRS for non-financial reporting, if such a thing were possible. Whether that’s a runner or not, I don’t know.”

Even if it were, how long would it take to develop? At the cusp of 2019/2020, the European Commission said it would be inviting the European Financial Reporting Advisory Group to begin preparatory work, as quickly as possible, on the development of European non-financial reporting standards. Does Jon expect the UK to support this? “I can’t pre-empt what ministers will do if the EU has a non-financial reporting directive either in the transition period or immediately after we leave, but at the FRC we would take a good deal of interest in what it says”.

It can take years for international standards to come to fruition at the best of times. Meanwhile, says Jon, the FRC can help by being clear what it is in favour of. It has been evaluating possibilities, including Global Reporting Initiative (GRI) standards, reporting recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) and the standards of the Sustainability Accounting Standards Board (SASB), as well as talking to major investors about what they want to see. “People are interested in metrics, they want to see some actual numbers,” says Jon.

The board of the FRC has not yet decided its official position, but the FRC chief executive shared his personal perspectives. “I think SASB is very flexible. You pick what kind of industry you are in and then it tailors a set of metrics that are very investor-focussed,” says Jon, who leans towards a combination of SASB and GRI that would provide numbers on various dimensions, through which stakeholders could see the impact of a company. “If the FRC can say something in the autumn about what we are in favour of, then you might see companies pick that up and run with it.”

Creating clarity despite increasing numbers of non-financial reporting frameworks and standards is just one of the challenges Jon may need to overcome while steering the regulator through its transition to ARGA and beyond. Doing so would not be his first big achievement. 

“As an accountant, my proudest moment to date was when Philip Hammond announced in 2012 that the government finally had a grip of MOD finances,” says Jon, who had helped to dig the department out of a £38bn budget black hole.

In the world of public sector finance, Jon could be considered a superhero.