Investment Association publishes guidelines on viability statements

The Investment Association has published guidelines setting out the expectations of institutional investors in relation to viability statements prepared by companies under Provision C2.2 of the UK Corporate Governance Code.

The guidelines cover the period of the assessment, the prospects and risks to be considered by directors when assessing viability, and recommended disclosures about stress testing and qualifications and assumptions, In particular:

  • the Investment Association's members consider that viability statements should address a longer time frame than the three or five years currently favoured by companies to reflect the long-term nature of equity capital and directors' fiduciary duties;
  • directors should state clearly why they have suggested a particular time frame. This should reflect their company's business and sector and not only its business cycle but its investment cycle as well; 
  • where companies have different plans to cover short, medium and long-term horizons, disclosures around prospects should address long-term strategic plans and look longer than the period over which the viability statement is assessed;
  • directors should not limit their consideration of viability to medium or long-term risks but also consider the current state of affairs;
  • the viability assessment should address the sustainability of dividends;
  • directors should distinguish risks that impact performance from those that threaten operations and the company's existence. The viability assessment should focus on the latter;
  • the directors' assessment of prospects is separate from their assessment of viability. The assessment of prospects may be particularly relevant for industries with long-term contracts or assets, such as pension providers and extractive industries;
  • the viability statement should state clearly why disclosed risks are important and how they are managed and controlled. It was helpful to rank risks low, medium or high and whether the risk had increased or decreased in likelihood from the prior year; 
  • in relation to stress testing, investors would welcome (i) more transparency as to the specific scenarios considered and the likely outcomes and (ii) a description of specific actions taken or which may be necessary;
  • investors would also welcome companies outside the financial sector undertaking reverse stress tests (assessing scenarios that would mean the business model is no longer viable and their plausibility) and a disclosure of the scenarios considered;
  • qualifications should be distinguished from assumptions and should be specific to the company. They should not include matters that are highly unlikely to arise or have a significant impact on the company.

The Investment Association's Institutional Voting Information Service, IVIS, will use the guidelines to monitor companies' viability statements.

The guidelines can be found here.