Government ministers lay the Company Law Reform Bill before Parliament, including proposals not to force companies to produce operating and financial reviews, ‘streamlined’ narrative reporting requirements and an outline of directors’ duties.
The government confirmed on Wednesday proposals not to legally require companies to produce operating and financial reviews detailing their social and environmental impacts.
Chancellor of the Exchequer Gordon Brown had announced in November that OFRs would be scrapped as part of the government’s drive to reduce the burden of red tape faced by business. Friends of the Earth subsequently mounted a successful legal challenge to the U-turn, forcing Brown to reverse his decision and consult on the matter until March 24.
Streamlined reporting
Laying the Company Law Reform Bill before Parliament on Wednesday, the government said the requirements for narrative reporting had been “streamlined” so that the requirements for quoted companies are now more closely aligned to those for unquoted companies. The proposed new narrative reporting arrangements include the requirement that all companies, other than small companies, will need to produce a business review, as required by the EU Accounts Modernisation Directive, to inform shareholders and help them assess how the directors have performed their duty “to promote the success of the company”.
Guidelines
Quoted companies will need to ensure that business reviews include:
the main trends and factors likely to affect the future development, performance and position of the company’s business
information about
– environmental matters (including the impact of the company’s business on the environment)
– the company’s employees
– social and community issues, including information about any policies of the company in relation to those matters and the effectiveness of those policies.
Directors duties
The bill crucially included amendments to directors’ duties so that in their drunning of the company they must must have regard to:
the likely consequences of any decision in the long term
the interests of the company’s employees
the need to foster the company’s business relationships with suppliers, customers and others,
the impact of the company’s operations on the community and the environment
the desirability of the company maintaining a reputation for high standards of business conduct
the need to act fairly as between members of the company
Directors will be given ‘safe harbour’ protection, shielding them from lawsuits over untrue or misleading statements in the business reviews. The government also acted to subdue fears the bill would trigger mass litigation against companies from minority shareholders by giving judges the power to dismiss “non-meritorious” claims early on without a company having to mount an expensive and often lengthy defence.
Putting profits first?
Friends of the Earth’s senior corporate accountability campaigner Craig Bennett dismissed the measures as inadequate.
“The government is saying that when profits come into conflict with responsible behaviour, companies must put profit first.There is nothing here that will provide justice for the victims of corporate irresponsibility or guarantee high environmental standards for UK companies,” he said in a statement.
The campaign group welcomed the new reporting requirements which state companies must provide information on environmental matters including their environmental impacts and social and community issues and their policies on this. But the absence of statutory reporting standards mean companies will be free to decide what information is included in their report.
Briefing comment
At best, the OFR affair has brought the importance of social and environmental reporting to the public’s attention. At worst, the commotion surrounding the government’s apparent inability to make up its mind has been a distraction to CSR reporters wanting to produce an accurate and in-depth account on their non-financial impacts.
We have argued before that the OFR was hardly 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 balanced review; employees and the environment must be explicitly addressed and non-financial key performance indicators used.
But crucially the government has introduced ‘safe harbour’ protection for directors, shielding them from lawsuits over untrue or misleading statements in the business reviews. This is important because without ‘safe harbour’ companies were not going to disclose anything contentious anyway. Meanwhile, directors’ legal duties have been clarified in the bill, explicitly to include social and community issues.
Step back from the brouhaha and the real issue at stake is the desirability of state regulation. Is government regulation requiring mandatory disclosure better than investor and wider stakeholder demand driving voluntary action?
There’s no easy answer of course, but there’s no disguising the government’s zest to cut red tape – this was seemingly the chancellor’s justification for pulling the plug on what amounted to seven years of hard work creating the OFR proposals in the first place.
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.
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