Episode 13 - Verification: how to avoid making misleading statements

In this podcast Patrick Skinner, General Manager for UK and Europe at Atticus, discusses the importance of the verification process in ensuring that statements included in regulated documents such as annual reports aren’t misleading.


Our document review and verification software is used by the world’s largest listed entities and law firms, empowering them to seamlessly fact-check documents before public disclosure. Current manual verification processes are inefficient and put Boards & Directors at avoidable levels of risk. Customers like National Grid, Rio Tinto and Coca Cola use our software to improve the integrity, accuracy and efficiency of verification for disclosure documentation: www.atticus.tech

In this podcast Patrick Skinner, General Manager for UK and Europe at Atticus, discusses the importance of the verification process in ensuring that statements included in regulated documents such as annual reports aren’t misleading. Patrick highlights relevant regulatory considerations and discusses the risk of shareholder activism and reputational damage associated with making misleading statements. He also considers verification in the context of greenwashing risk and TCFD disclosure. He argues that automating verification can help combat the risk of human error in what can sometimes be a repetitive and tedious process.


RJ: In today's podcast, I'm talking to Patrick Skinner, General Manager for UK and Europe at Atticus, which offers verification services for regulated documents. Patrick, perhaps you could start by giving us a sense of what verification is and how it relates to our audience.

PS: Thank you very much. It's great to be speaking with you today. Verification in this context is the process of checking or corroborating that any material published in market statements, including annual reports, half years, press announcements, are accurate and a fair representation of the truth. And that they do not, by omission or any other means, create a misleading impression.

RJ: Are there any regulatory requirements around that?

PS: There are a number of different regulatory requirements, probably too many to cover in one podcast. But one key piece I'd like to focus on is the concept of misleading statements and misrepresentations. That's a central theme set out in both the Financial Services and Markets Act (FSMA), as well as the FCA handbook. Corporate governance professionals, including those in this audience, should be aware that the inclusion of misleading statements and misrepresentations in market statements like annual reports or financial results can result in liability for the disclosing company.

One example of this is in Schedule 10a of FSMA, which is of particular concern to listed companies and companies seeking to list, which imposes liability on an issuer of securities for misleading statements or omissions. I think this particular statute applies if a person discharging managerial responsibilities at the company knew that and – this is really important – was reckless as to whether the statement was untrue or misleading.

If we see one of the key functions of corporate governance [professionals as being] to properly review documents and prepare senior management and boards, verification plays a really key role in this [process] to avoid potentially unpleasant outcomes for companies.

RJ: Why else is it important for companies to conduct verification? Are there any actions that shareholders might take?

PS: Absolutely, and that’s a key concern. Even vaguely misleading claims can be used as a basis for shareholder activism, particularly hedge fund-led activism. Reports suggest that these kinds of investors whose modus operandi is to buy shares in publicly listed companies and occasionally privately held ones as well, in a bid to effect significant change, they’ve become increasingly prevalent in the UK and they hold positions in as many as 15 companies in the FTSE100. This kind of relatively new breed of shareholder has been known to jump on misleading or even ill-thought-through statements as a means to effect change, for instance, by trying to sack the board. That's something that I think corporate governance professionals should be aware of so they can properly prepare the board for this kind of action.

RJ: And those kinds of events also bring with them potential for reputational damage. Is that something that you think makes verification important for companies?

PS: Yeah, absolutely and it's not insignificant either. I think a failure to properly disclose statements to the market and investors can have huge reputational issues. There are some well documented examples in the UK. For instance, a FTSE100 company was put in a pretty difficult position when they failed to disclose a cybersecurity breach, which led to reputational damage, a fine from the regulator and a fall in their share price.

I was listening in on BBC Radio 4 where an example of poor public disclosure popped up where a recycled toilet roll company claimed that 15 per cent of global deforestation came from the production of toilet paper. Now, this turned out to be completely untrue and they've mis-cited an environmental study, which led to an exposé on the BBC, which is the last thing that that company needed.

RJ: Absolutely and greenwashing, as that might be considered to be, is particularly high on the agenda at the moment, I would say, in terms of reputational damage. Have you got any stories about your own experiences of carrying out verification?

PS: I’ve conducted quite a bit of verification in practice. Most notably advising a company that were seeking to list on the London Stock Exchange. To be entirely candid, it was my least favourite task. Partly because we were doing it in a super manual way and so I'd have to stay on top of dozens of emails coming from different business units. I had a screen with a horrendous set of notes on my Microsoft Word and Excel [windows] and also had to stay on top of a tonne of different red lines. It all added up as a bit of a dilemma really, where you're seeking to fully cover the company you work for or advise with often quite limited time and resources.

RJ: What can go wrong during a verification process? Are there any key risks that our audience should be aware of?

PS: There's quite a few things that can go wrong and/or be quite unpleasant about the process. I think the key issues that I'd highlight, firstly is tedium: human error, skipping over material statements, humans can get bored, hungry, tired. This can be a long process: if you look at annual reports, they're often in the hundreds of pages. It can be quite a repetitive and time-consuming process.

The other piece I’d probably point to is project management. A lot of the audience probably appreciate that it's very difficult getting different business units and advisers to all sing from the same hymn sheet. Collating information from your peers, particularly colleagues in more senior positions, can be pretty tricky to say the least.

I think one of the other [factors] is staying on top of changing drafts. Lots of different teams, whether they be finance, legal, investor relations, always want to add to the content. It can be really last-minute and so staying on top of those changing drafts and ensuring that your notes still correspond to the updated draft can be really unpleasant and time consuming.

RJ: Do you have any specific examples of where not conducting verification has backfired?

PS: Yes, there's quite a few in the market. A recent example is of a large oil and gas company here in the UK, where they had to issue a market clarification after not providing enough information on their energy transition process, which naturally upset shareholders. That's quite a high-profile example but you will see market clarifications and amendments coming out quite a lot, both with listed companies and privately held companies. I think that's something that company secretaries live in fear of because it's a very public admission of a mistake that's been made.

RJ: Yes. You mentioned the company secretary, what's their role in this verification process?

PS: In our experience, the role of the company secretary depends slightly on the company. Predominantly in the UK and Ireland, they are generally charged with running or quarterbacking the process, sometimes in conjunction with the investor relations team. The secretariat function often leads the process itself and they're responsible for project managing and providing a lot of the notes. They're very much front and centre in our experience throughout this whole process.

RJ: You mentioned regulations earlier. Are there any other legal requirements or regulations that company secretaries when they’re carrying out this work, or governance professionals, should be considering?

PS: We mentioned the FCA handbook and FSMA earlier and you quite rightly pointed to greenwashing and how that's very much in vogue.

Another topic, which I know is very high up the CGI’s agenda at the moment, is around the impact that the (Taskforce on Climate-Related Financial Disclosures) TCFD regulations have on the industry. Particularly the principles of effective disclosure. If you go to principle six, [it] states that all statements need to be reliable, verifiable and objective. If they can't be, the company needs to set out a plan which meets the standard in their next reporting cycle. The word verification is explicitly called out there but pointing also to the reputational things we were discussing earlier, it's really important to be on top of TCFD to make sure that all of your environmental stuff is on point.

RJ: Is that something that you are able to help your clients with?

PS: Yeah, absolutely. We're all about making the verification process a little bit easier. Pulling different business units into the same platform, having a safe space where you can write notes and add supporting evidence. Also, because a lot of these documents are subject to drafting changes, we are able to transfer verification notes across different drafts and different documents so that there's better compliance and less duplication of work.

RJ: That sounds brilliant. Where have you or your clients seen the most success? What are your tricks of the trade?

PS: I think the first one really is [to] try not to panic. It can be a really daunting task given the sheer volume of statements that often need to be verified. With that in mind, I’d try to start the process as early as possible. For instance, by verifying the most mature parts of the draft. The last thing anyone wants is [a situation where] two days before a document is released you're working late nights and it's a very stressful environment. So, if you can avoid that, that's great.

Other little tricks [include], where possible, trying to transfer notes from previously verified documents. I would say this, but, make use of software wherever possible to streamline and track the process. I think if you get all of those things right early on, it will become much easier.

RJ: Well, that all sounds great. What do you think is the best way to get this onto the board's agenda? Or how do you discuss it with somebody who's not very technical?

PS: I would, first and foremost, feel confident about raising any concerns that you might have with senior management, including the general counsel and members of the board. Company secretaries and the secretariat team are experts in their field and they should feel confident that they can express any concerns that they have.

Also, we've spoken a bit about this today, but don't be ashamed to raise the human element behind this. It's important and challenging work and if you can get support, you should. I think the one that might resonate most, particularly with boards, is how this can be a really beneficial process for them. The last thing they want is [to be] going to an AGM or doing a TV circuit, where someone picks apart an annual report or a financial statement. If you can verify documents more fully and more effectively, that will in turn make those people a lot more confident when they attend those kinds of events.

RJ: Yeah, absolutely; that sounds brilliant. Well, thank you, Patrick. That's all been really interesting insight into the verification process and your experiences of it. And like you say, how the human element of it can make it quite challenging. And how perhaps considering other approaches can take some of that pressure off and avoid the panic that you said is never good. Thank you very much for your time today; it's been really interesting.

PS: Thanks so much for having me. It's been a pleasure speaking. 

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