What is a directors report?

Usually included within an annual report, the directors’ report addresses aspects such as financial performance, executive compensation, strategic initiatives, corporate social responsibility and risk management.

Directors’ report requirements vary according to the company and industry and are not mandatory in many countries. However, they are a legal requirement in jurisdictions such as Australia, India, New Zealand, the UK and the European Union.

What is the purpose of a directors’ report?

The purpose of a directors’ report is simple: to provide analysts, investors and other stakeholders with the information they need to make informed business decisions.

In most cases, such decisions revolve around whether to continue investing in a company or to evaluate its performance against the competition.

This can be clarified in a few different ways.

Communication of company performance

Directors’ reports need to disclose financial and non-financial performance over the reporting period in question.

Revenue, profits and cash flow must be disclosed in addition to the company’s broader objectives and how it is working toward them.

Demonstration of good corporate governance

Companies with good corporate governance embody fair business practices.

This is facilitated by workplace diversity, independent auditing, progressive compensation models, transparency, accountability, ethical conduct and a strong risk management framework.

Disclosure of significant events and risks

Significant events and risks are those that could substantially impact the company’s financial performance, operations and future. Proper reporting in this area increases transparency and enables shareholders to understand the company’s risk profile in detail.

Key elements of a directors’ report in Australia

Here are some of the key elements of a directors’ report for Australian companies:

• Director names – the names of any directors in office over the financial year stated.
• Review of operations and financial results – this includes financial performance and analysis as well as whether the company made a profit or loss.
• Strategic review – a section where the company’s objectives are discussed. There may also be information on its market, competitors and other key factors.
• Significant changes in the state of affairs – such as discontinued operations, the purchase or sale of core assets or a major restructuring.
• Principle activities – which also encompasses the principle activities of any subsidiary.
• After balance data events – for matters or circumstances since the end of the financial year that significantly affected (or could significantly affect) the company’s operations, operational results or its state of affairs in subsequent financial years.
• Other disclosures – some disclosures are a legal requirement, such as those related to environmental or social impact.
• Dividends – this element details whether dividends were paid, recommended or declared.
• Directors’ interests – here, the relevant interests of each current director are listed. This includes shares, debentures, rights, options and interests in registered schemes.

Directors’ report examples

To conclude, let’s take a brief look at a couple of director’s report examples from real-world companies.

Suncorp-Metway Limited

Suncorp-Metway Limited’s directors’ report for the financial year ending 30 June 2019 is the first example. The report first tables all directors’ meetings over 2018-19 with a list of attendees and how many times each were present as members of the Board or Committee.

In the principle activities section, Suncorp describes itself as an Authorised Deposit-taking Institution (ADI) that offers banking and related services to commercial, retail, SMEs and agribusinesses in Australia.

Later, in section 11 on likely developments, the company explains that it is committed to growing the SME and agribusiness portfolios in particular. In the case of the latter, this would be achieved by increasing access to credit for drought-affected customers.

Able Australia Services

Able Australia Services is a provider of disability services and community support. As a healthcare provider, the company’s directors’ report for 2021-22 listed the COVID-19 pandemic as a major negative impact on its revenue growth target.

Principle activities included services to adults with physical and sensory disabilities (and their families) such as respite care, day services, support coordination, community services, transport and emergency care.

Under the section titled “Significant changes in the state of affairs”, Able Australia was required to mention that the JobKeeper short-term subsidy ceased during the 2021 financial year.

In summary:

• A directors’ report is a formal document that provides a comprehensive overview of a company’s performance, operations and financial condition over the fiscal year. It is typically prepared by the board of directors and is included in the annual financial report from the company.
• The primary purpose of a directors’ report is to communicate company performance, demonstrate good corporate governance and disclose significant events and risks. Reports should always be compiled with clarity, objectivity and compliance.
• Some of the key elements of a directors’ report include the names of the directors, company performance, after balance date events, dividends (whether recommended, paid or declared) and principal activities.