On 16 November 2016, the IA published new guidelines setting out the expectations of institutional investors in relation to viability statements prepared by companies under provision C.2.2 of the UK Corporate Governance Code. The guidelines include a number of recommendations concerning the period of the viability assessment, the prospects and risks considered when assessing viability and transparency around stress testing and qualifications and assumptions.

Among other things, the guidelines indicate that:

  • Longer time horizons should be considered when selecting the appropriate period for assessing a company's future viability. Three to five years seems to have become standard practice, but the IA's members expect greater differentiation between companies, and viability statements addressing longer timeframes given the long-term nature of equity capital and directors' fiduciary duties. Viability statements should state clearly why a particular assessment period was chosen. Factors such as the company's business and sector and its investment and business cycles should be considered.
  • Directors should look at the current state of affairs, and not limit their consideration of viability to medium or long-term risks.
  • Investors would welcome the viability assessment addressing the sustainability of dividends.
  • Risks that impact performance should be distinguished from those that threaten operations; the viability assessment should focus on the latter.
  • Viability statements should explain why the disclosed risks are important, and how they are managed and controlled as well as the likelihood of a risk occurring and its possible impact. It is helpful to rank the disclosed risks (for example, low, medium, high) and indicate whether it has increased or decreased in likelihood from the previous year.
  • Investors would welcome greater transparency around stress testing. The guidelines suggest disclosure of the specific scenarios considered and likely outcomes, as well as a description of the specific mitigating actions taken or any remedial actions which may be necessary. Reverse stress testing is also encouraged.
  • Qualifications should be clearly distinguished from assumptions. Both should be specific to the company rather than generic, and they should not include matters that are highly unlikely either to arise or have a significant impact on the company. Companies are encouraged to treat the guidelines, though directed at premium-listed companies, as best practice.

The November version can be accessed here:

https://www.ivis.co.uk/media/12474/Guidance-viability-statements-final.pdf

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