Financial Times: Reporting is a global matter: By Mark Moody-Stuart: Anew era of corporate reporting moved a step closer last week when the Department of Trade and Industry issued guidelines on how companies should prepare an operating and financial review.”: “The government has rightly listened to business concerns over an unnecessarily legalistic approach and removed the requirement that directors make "due and careful inquiry" in preparing an OFR. That could have led directors… to open themselves to the risk of legal action.” (ShellNews.net) 1 Dec 04
By Mark Moody-Stuart
Published: December 1 2004
Anew era of corporate reporting moved a step closer last week when the Department of Trade and Industry issued guidelines on how companies should prepare an operating and financial review. From April 2006, OFRs, setting out the factors affecting past and future performance, will be mandatory for larger listed companies.
During the consultation period, the OFR met a mixed response. Many pressure groups hailed it as compelling companies to put in the formal part of their annual report statements that could be legally challenged if proved incorrect. They hoped it would be the answer to what they often claim to be incomplete information or "good news only" in a company's environmental and social report. Some companies, on the other hand, advocated a minimalist approach, with just enough in the report to keep the box-tickers happy.
Neither view appears to have prevailed. The government has rightly listened to business concerns over an unnecessarily legalistic approach and removed the requirement that directors make "due and careful inquiry" in preparing an OFR. That could have led directors either to exercise excessive caution or to open themselves to the risk of legal action. But under the DTI guidelines, they must still exercise "due care, skill and diligence", as required under common law.
As it stands, a mandatory OFR will merely reinforce the moves towards greater corporate transparency and disclosure that leading companies are already making. Any company worth investing in should already be trying to make plain to its shareholders in a brief report what the trends are that underlie its business, what its strategy is and where the main risks lie. This will undoubtedly include social and environmental impacts where relevant. The OFR will encourage a more systematic approach to this reporting and make it easier to draw comparisons between companies in the same industry.
But while Patricia Hewitt, the trade and industry secretary, listed the latest changes as "simplifying the audit requirements, addressing duplication, avoiding unnecessary publication costs and giving companies more time to manage the transition" there appears to be little discussion of how the OFR will relate to reporting practice and requirements as they are developing around the world. This is a critical issue for global companies.
The DTI's announcement does make reference to avoiding overlap with the European Union's modernisation directive, which is positive. But there are other initiatives to consider too. As the DTI consultation document noted, an estimated 60 per cent of UK listed companies already prepare OFR-style reports. Worldwide, more than 600 companies now voluntarily use the internationally recognised Global Reporting Initiative framework for sustainability reporting, and more than 60 of these are UK-based, including Anglo American, Co-operative Bank, BAA, BT, Vodafone, Diageo and Shell.
When the OFR finally comes into force, the government should recognise the sustainability reporting efforts that are currently being made. It should encourage use of existing global frameworks, such as the GRI and its sector- specific supplement. (An example of such a supplement is the one for the mining industry, developed by the GRI with the International Council of Mining and Metals.) The DTI needs to take account of this growing practice to ensure convergence in global reporting, and to make the best use of information that is already being gathered.
Properly implemented and integrated with schemes such as the GRI, the OFR could also reduce the "questionnaire fatigue" brought on by the demand by rating bodies and others for ever more information. This reflects the growing stakeholder interest in corporate performance. There is no doubt that the OFR will also increase dialogue with stakeholders and - it is to be hoped - public understanding of companies' contribution to society and their impact on the environment, as well as the limits to businesses' responsibility. This reinforces the need for integration with other international initiatives, such as the United Nations Global Compact and the Organisation for Economic Co-operation and Development's guidelines for multinational enterprises. These offer sound guidance on what constitutes good corporate behaviour, and are themselves converging with international reporting frameworks.
In implementing its OFR guidelines, the government needs to take account of the rapid changes in sustainability reporting that are taking place around the world. If it does not, we shall again find ourselves having to negotiate convergence of reporting in different jurisdictions post facto, with all the problems this brings. It is vital for the competitiveness of British business that the UK align its reporting regime with increasingly recognised and used global standards.
Sir Mark Moody-Stuart is chairman of Anglo American and a board member of the Global Reporting Initiative