News round-up (Jun/Jul)

July 01, 2005

BHP Billiton and BT are among the world’s best-governed companies, while an inquiry has begun into the role of company boards in fulfilling the social and environmental responsibilities of businesses. Also the OFR standards are published.

Good governance

BHP Billiton, Smith & Nephew, Scottish Power, BT and BPB are among the world’s best-governed companies, according to the Corporate Governance Index ratings, published by the FTSE Group and corporate governance specialists Institutional Shareholder Services. The indices assessed 2,200 companies on a range of criteria including boardroom structure, audit, executive compensation and takeover provisions. The top five sectors for good governance included oil and gas, while the bottom five included construction and materials, and healthcare. Contact Nicky Gardner, FTSE 020 7448 1821 ( http://www.ftse4good.com)

Board games

An inquiry has begun into the role of company boards in fulfilling the social and environmental responsibilities of businesses. The Boards and Corporate Responsibility Project, set up by Insight Investment, Business in the Community and the FTSE Group, is intended to deepen the involvement of boards and will recommend steps directors might take to ensure their company is taking adequate account of its social responsibilities. Issues the inquiry will consider include:

– whether all companies should be encouraged to appoint CSR board committees n how best to incorporate non-financial performance indicators into executive remuneration

– where board responsibility ends and executive management’s responsibility begins.

While the aim of the programme is to strengthen boards, the findings are also expected to become part of the process used to assess a company’s eligibility both for the FTSE4Good index and for BITC’s corporate responsibility index. Contact BITC 0870 600 2482 ( http://www.bitc.org.uk)

Publish what you’re paid

Germany’s cabinet has adopted a draft law that will compel publicly listed companies to disclose full details of executive pay and financial benefits as of next year. The law will affect around 1,000 companies and will strengthen shareholders’ controlling rights. Companies will be required to present in annual reports details of each executive board member’s fixed salary, performance related benefits and stock options. The law does however include a clause allowing the company’s shareholders to decide, with a three-quarters majority, that the extra earnings information is not required. Contact ( http://www.bundesregierung.de/en)

OFR PUBLISHED

The Accounting Standards Board has issued Reporting Standard (RS)1 ‘The Operating and Financial Review’ setting out the main elements that should be disclosed in an OFR. These include the “resources, risks and uncertainties and relationships” that may affect a company’s long-term value. Where it is necessary to meet this requirement, the OFR must include information about a range of matters, including employees, environmental and social and community issues, with analysis using key performance indicators. While the standard allows directors to decide how to structure the report and which KPIs to disclose, it calls for indicators to be reported on transparently and consistently. The standard also sets out what disclosures should be made for each KPI included in an OFR, so that investors are able to understand and evaluate each one. Contact Ian Mackintosh FRC 020 7492 2434 ( http://www.frc.org.uk/asb)

And so OFR is finally with us, for reporting periods starting on or after April fools day. Will it have been worth the wait, or has it just been a long drawn-out process of fooling those who hoped New Labour’s company law review in 1997 would herald a new dawn for stakeholder capitalism? Well, revolution it isn’t (but then “revolutions ‘r’ us” was never this government’s approach). Coupled with the proposed new directors’ duties, however, we believe it will achieve a step change in the way all except the most Neanderthal companies engage at the highest levels with these wider social, community and environmental issues that can impact long term shareholder value creation. The crucial thing now is to focus on getting the right KPIs into the OFR and on trying to avoid generalist waffle. The time to start is with next year’s annual report, even though for most the first statutory OFR won’t be until a year later. Already the same companies are planning to adopt a cautious ‘wait and see’ approach. As the standard is based on principles and without much prescription, the danger is that a minimalist approach becomes the norm. So the first round is crucial in establishing expectations – a real opportunity for CSR reporting leaders to set the pace.

Corporate Citizenship Briefing, issue no: 82 – July, 2005

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