Voluntarism in the spotlight:

January 01, 2006

By scrapping statutory operating and financial reviews, the government is hoping measures already in place will ensure responsible corporate governance.

OFR CANNED

The Chancellor of the Exchequer Gordon Brown announced in late November that the government would abandon the statutory Operating and Financial Review requirements for UK-listed companies in order to reduce the regulatory burden on business. But Brown maintained that companies should continue to report on the social and environmental impacts relevant to their businesses as best practice. The Chancellor’s bombshell came just weeks after the Department of Trade and Industry published the company law reform bill containing the clauses necessary to create the legal framework for the statutory OFR, prompting talk that the Treasury had not consulted the DTI about the decision. But a DTI spokesperson told Briefing that Alan Johnson, the Secretary of State for Trade & Industry, had worked closely with the Chancellor on the decision to abandon the OFR. “We keep all of our policies under constant review. The government remains committed to improving the quality of narrative reporting,” she said, noting quoted companies will still have to provide information on social and environmental issues under European legislation to be introduced next year. Later the DTI said the about-turn was a “recalibration of existing policy rather than a fundamental change,” adding that it was not considered necessary to carry out public consultation. The DTI also announced January 12 as the date for the repeal of the OFR legislation. The sudden u-turn frustrated investor groups and regulators. The Association of British Insurers, which represents about a sixth of the UK equity market, and the Financial Reporting Council, the independent regulator that oversees accounting bodies and corporate governance, said they would look at how OFRs could be incorporated into best practice. “Regardless of whether or not the OFR is a statutory requirement, the FRC’s view of best practice remains unchanged,” the body said. Despite the abolition of the OFR, from next April listed companies will still have to comply with the European Union’s Accounts Modernisation Directive, which obliges them to produce an “enhanced directors’ report”, applying to all medium and large businesses. But many believe the AMD does not go far enough. Sarah-Jayne Clifton, campaigner at the Friends of the Earth, said: “Regulation is essential to tackle market failure and to protect people and the environment from the negative impacts of corporate activity”. Friends of the Earth later wrote to Brown giving notice it intended to seek a judicial review of the contentious decision to scrap the OFR. Contact HM Treasury 020 7270 4558 http://www.hm-treasury.gov.uk; DTI 020 7215 5000 http://www.dti.gov.uk

ROOM FOR IMPROVEMENT

Boards need to improve their approach to dealing with non-financial issues according to a new report, Board View: Dealing with material non-financial issues by Leon Olsen and Erwin Scholtz from Ashridge Business School. While non-financial issues such as customer retention, value of brands and CSR are viewed as important by board members, most company boards are not sufficiently systematic in their approach to them, the report finds. Based on interviews with senior board members from a range of major UK listed companies, the research identifies some key corporate governance processes in relation to boards dealing effectively with material non-financial issues. The full board including the non-executive directors should deal with them, as non-executive directors add value due to a broader perspective than the often more operationally oriented executive directors, the report says. The chairman and chief executive play a critical role to make it happen, as they set the agenda for boardroom deliberations. “Non-financial issues are more and more integral to the long term creation of business value and corporate boards therefore need robust systems to identify and deal with material non-financial issues,” says Olsen. Contact Eileen Mullins, Ashridge 01442 843 491 http://www.ashridge.org.uk

COSTLY COMBINED CODE

Nearly two-thirds of the chairmen of more than 60 large listed companies have reported little or no improvement in performance from the 2003 revised combined code on corporate governance that incorporated the recommendations of the ‘Higgs review’, according to a survey by Russell Reynolds Associates, the executive search firm. Meanwhile, less than 15% said that governance changes had had a “significant” or “great” impact on company performance. Many of the chairmen, who included about 40 from FTSE 100 companies, complained of the cost of complying with governance rules and warned of the danger that boards could be distracted from creating shareholder value. Separately, a survey conducted for the Financial Reporting Council, the independent regulator overseeing companies’ implementation of the Combined Code, found that few small companies like the code. Jon Edis-Bates, author of the report said: “Larger companies were always going to feel more comfortable with the evaluation process than their smaller counterparts. What is remarkable is the degree of discomfort felt by the smaller companies, some of whom have called for guidance in this area”. Contact Luke Meynell, Russell Reynolds 020 7839 7788; John Edis-Bates, Edis-Bates Associates 01923 335 335 http://www.edisbates.co.uk

SHAREHOLDER POWER

Shareholders of companies in the FTSE 100 have increased the percentage of shares they vote on to 61% from 50% in 2004, according to the latest data released by Paul Myners, chairman of Marks & Spencer and former chief executive of fund manager Gartmore. The data was released as an update following Myners’ landmark 2004 report on shareholder voting. According to the data, which looks at the 12 months to August 2005, 42% of the FTSE 100’s share capital was voted electronically, against 22% the year earlier. Among the 2004 report’s recommendations was that electronic voting should be encouraged. Contact Paul Myners, Shareholder Voting Working Group http://www.investmentuk.org

Editorial Comment

When is a U-turn not a U-turn? When it’s a recalibration! Welcome to the wacky world of top level government decision-making, when careful deliberation since March 1998 by company law reform experts is torn up in a Friday afternoon brainstorm by speech writers and spin doctors, eager to grab a Monday morning headline and to throw a bone to pesky business leaders just before the pre-Budget report will increase ‘stealth’ taxes again. This whole affair is rich in irony and double standards from which few escape with much credit, including the CBI not representing the stated views of its members and NGOs going to court to defend a measure they had previously criticised as wholly inadequate. At Briefing, we argued before that the OFR was not a revolution in corporate accountability, saying it would never live up to claims that it amounted to mandatory social reporting. So its demise is not the end of the world either. The EU directive still requires a broader (and, crucially, balanced) review; employees and the environment must be explicitly addressed and non-financial KPIs used. Without ‘safe harbour’ provisions in the OFR, companies were not going to disclose any really difficult stuff. The accounting and reporting profession will still go on arguing for OFR-style reporting, recommended as best practice since 1993. Meanwhile (and little reported on), directors’ legal duties continue to be ‘clarified’ in the latest company law reform bill, explicitly to include social and community issues. Step back from this brouhaha, and there is a real issue at stake: what is most effective – state regulation to require mandatory disclosure or investor (and wider stakeholder) demands that drive voluntary action? As we go to press, news comes that America’s SEC is planning to relax reporting requirements on foreign companies and tone down Sarbanes-Oxley rules. There’s a case at least to argue that politicians should concentrate rather more on substantive issues like employee working conditions, climate change and indeed tariff barriers to world trade, and interfere rather less on generic issues like governance.

Corporate Citizenship Briefing, issue no: 85 – January, 2006

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