As part of his commitment to reduce the burden of regulation, the UK Chancellor of the Exchequer, Gordon Brown, announced on 28 November 2005, that the Operating and Financial Review (OFR) introduced barely six months earlier and planned for full implementation from 1 April 2006 would be no longer required. That announcement was meant to herald a key measure to reduce red tape, that eternal bete noire of business. But, to HM Treasury’s surprise, the move didn’t meet with universal acclaim, even from business. The CBI initially told the press that the change was flawed and the Financial Times, a key barometer of business thinking, wondered whether the Chancellor’s announcement would have the impact intended. In January 2006, Friends of the Earth launched judicial review proceedings against the Chancellor of the Exchequer Secretary of State for Trade and Industry and the Treasury subsequently started a new consultation on the future of company environmental reporting, covering issues previously in the OFR.
So, why had business already invested considerable effort in the OFR, rather than investing effort in fighting it? Perhaps because corporations and investors alike saw the value of the innovation that the OFR brought – ensuring a level playing field for public disclosure of a company’s impact on society and the environment and bringing CSR fully into the competitive arena.
What is the OFR?
The OFR was a mandatory reporting requirement for Directors of UK-quoted companies to set out their analysis of the business, with a forward looking orientation to assist members of the company in assessing the strategies adopted by the company and the potential for those strategies to succeed.
The OFR was built around a number of principles, including:
- The OFR is the responsibility of the full Board of Directors;
- There should be a formal process for preparing the OFR;
- The OFR should be relevant and meet the recommendations of existing pronouncements on content;
- The OFR should be an integral part of the corporate reporting process;
- The process should involve explicit consideration of whether the OFR content is reliable, balanced and understandable;
- There should be continual evaluation and improvement of the company’s performance as described by the OFR.
When Gordon Brown abandoned the OFR, business was left wondering what could happen next and what might this mean for narrative reporting?
Currently, rather than completing OFRs, stock exchange listed companies will have to comply with less prescriptive European Union requirements for a Business Review, one part of the EU Accounts Modernisation Directive which will come into force for financial years ending on or after 31 March 2006. However, for many companies these requirements are not yet well understood. Additionally, the six months when companies were working out how to prepare the ill-fated OFR has raised expectations in some investors and NGOs that firms will still issue an ‘OFR style’ document in the absence of a legal requirement as ‘voluntary best practice’.
The Business Review
The differences between the Business Review and the OFR can be summarised as:
- Where the OFR was applicable to all UK quoted companies, the Business Review applies to all UK and EU companies except “small” companies;
- While both reports required a balanced and comprehensive review, the Business Review covers only performance and development through the year rather than an analysis of the wider trends affecting the business which was part of the OFR;
- The only essential element of the Business Review is a summary of principal risks and uncertainties, without the commentary on business objectives, capital structure and resources that the OFR required;
- In terms of measures, the Business Review does ask companies to “include to the extent necessary” financial and non-financial KPIs (including where appropriate environmental and employee matters) but not social and community issues, receipts and returns to shareholders and persons with whom the company has key relationships;
- Unlike the OFR, there is no exemption in the Business Review for commercially sensitive information.
The Business Review should certainly be viewed in terms of its potential, as the OFR was a vehicle for good quality narrative reporting, enabling companies to provide CSR reports which allow investors, consumers, suppliers and other stakeholders to understand the company’s decision making processes and compare it with competitors and alternatives.
Also in this feature:
© Article 13 – April 2006