In these circumstances there may be a temptation for directors not to be ‘selective’ in their reporting to shareholders – perhaps ‘cherry-picking’ good news or putting a positive spin on data to present more favourable reports of business position. However, such action can leave directors exposed on a number of levels.

From a statutory perspective, directors must prepare an annual report to shareholders consisting of the annual accounts, and the directors’ report.

The annual accounts must be signed off by the board confirming that they are satisfied that they give a 'true and fair view' of the company’s financial performance – with the directors signing to confirm that they honestly represent the directors’ belief of the financial position of the company.

The directors’ report provides shareholders with a good deal of information which cannot be ascertained from the financial information contained in the accounts. It can be tempting for directors to ‘lose’ information within them, to obscure the overall picture or to distract shareholder attention from any problems that the business might be facing.

Statutory reporting requirements are constantly evolving and nowadays annual reports go significantly beyond the basic statutory reports – and can include obligations to report on such wide things as the directors compliance with their statutory duties, workforce make-up and structure, gender pay comparisons, environmental issues, engagement with suppliers and customers, as well as on wider corporate governance. For businesses in regulated sectors, reporting obligations will be heightened further.  Under s.463 CA 2006, any director is liable to compensate the company, for loss it suffers, as a result of any untrue or misleading statement in, or omission from, the directors’ report.  Certain reporting standards are also subject to criminal sanction.

The onus is on the directors, as the controlling mind of the business, to collect and review the data that they need to report on, rather than passively consuming the information that they are fed.

However, the implications of improper reporting go well beyond the annual reports.  Board packs prepared for board or shareholder meetings, investment packs, minutes of meetings shared with shareholders, interim updates and forecasts and a whole host of other less formal communications offer directors the opportunity to misrepresent, exaggerate, over-optimistically or even recklessly report performance. Because the report is not provided by way of a formal or statutory requirement – does not free the directors from liability if the report is inaccurate and such behaviour has the potential to leave the director (or board) exposed to complaint or civil action at the hands of the shareholders and susceptible to the ultimate sanction of removal by the shareholders as a body.  

A loss of confidence in the board, or in the information emanating from it, can be terminal for the board/shareholder relationship. It’s crucial that Directors take their reporting obligations seriously and recognise that whether formal or informal, reporting in their office as Director is burden that has the potential to cause rifts with the shareholder group where reporting is inaccurate or misleading.  Where error are made it is important for Directors to ‘come clean’ quickly addressing the concerns of shareholders to regain confidence and t preserve relationships.