Are the business reviews that companies will be required to produce under the Company Law Reform Bill, currently being debated in Parliament, operating and financial reviews by any other name? Briefing investigates…
The government confirmed on May 3 proposals to require companies to produce business reviews, replacing previous legislation calling for operating and financial reviews (OFR).
Chancellor of the Exchequer Gordon Brown had made a shock announcement at the November CBI conference that the OFR 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 regulations until March 24.
Laying the Company Law Reform Bill before Parliament, the government said the requirements for narrative reporting have 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”.
Crucially, reviews must include information about environmental matters, the company’s employees, and social and community issues, prompting some commentators to speculate that companies would in effect continue to prepare business reviews along the same lines as OFRs.
John Davies, head of business law at the Association of Chartered Certified Accountants, says a number of FTSE 100 companies are preparing their business reviews as though they are OFRs and using the reporting standards issued by the Accountancy Standard Board as a guide. The ASB issued in May 2005 Reporting Standard (RS 1), applying to all quoted companies in Britain that prepare OFRs, setting out the framework of the main elements that should be disclosed in an OFR.
With the government saying it has no plans to provide any further technical guidance for companies preparing business reviews, companies are reverting to the reporting standard by default, Davies says. ACCA is providing guidance on the issue on its website.
Meanwhile, company directors are to be given US-style ‘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.
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.”
The campaign group welcomed the new reporting requirements stating companies must provide information on environmental and social matters. But the absence of statutory reporting standards for business reviews mean companies will be free to decide what information is included in their report, Bennett says.
At best, the OFR affair has brought the importance of social and environmental reporting to the public’s attention. At worst, the confusion surrounding the government’s apparent indecisiveness has been a distraction for companies wanting to produce accurate and in-depth accounts on their non-financial impacts.
After the chancellor canned the OFR in November (or “recalibrated” reporting requirements, in government speak), the government was forced to backtrack on its hasty decision by Friends of the Earth, and subsequently extended consultation on the matter until March 24. Importantly, the government allowed stakeholders to make comments on social, community, employee and environmental matters, which are now included in the new regulations, making a strong case for seeing the requirement to produce a business review as every bit as good as the pre-existing OFR regulations.
The difference here is the government is not providing any technical guidance for companies compiling business reviews, meaning that they are in effect using the ASB’s OFR standard issued in May last year. Crucially, the government is also saying it 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.
As we have argued before, step back from the brouhaha and the real issue at stake is again whether it is indeed desirable for the state to regulate these issues. Is government regulation requiring mandatory disclosure better than investor and wider stakeholder demand driving voluntary action? There is a strong case to argue that politicians and civil society should concentrate rather more on substantive issues like climate change, world trade and poverty, and interfere rather less on generic issues like governance.
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