CSR and beyond: OFR with its head

Annie Hayes

Sift

Editor

CSR and beyond: OFR with its head

By Annie Hayes

Should the 1,300 or so listed companies that were preparing an OFR heave a sigh of relief that the Red Queen has chopped off its head? And what are the implications for HR departments?

In his speech to the CBI on 28 November, Gordon Brown announced that the government would abolish the operating and financial review (OFR) because of “concerns about the extra administrative costs of the gold plated regulatory requirement.” The DTI provides further justification for replacing the OFR with a simpler annual ‘business review’ because that could lead to overall savings for business of £154 million over the next five years .

Most companies were well into the process of producing an OFR. That requires them to come up with a forward-looking narrative taking into account any social or environmental risks that could affect the business.

By contrast, the business review that will replace the OFR does not demand a prospective view. The criteria for the business review comes out of the EU company law modernisation directive which states that the analysis in an annual report of the company’s “development performance and position” should “to the extent necessary … include both financial and, where appropriate, non-financial key performance indicators relevant to the particular business, including information relating to environmental and employee matters.”

However, the directive allows member states to waive the obligation of small and medium sized listed companies to report on non-financial matters. Since the DTI assigned a threshold of £22.8 million turnover and up to 250 employees for a medium sized firm, the vast majority of the companies that were subject to the OFR will still be obliged to provide a business review.

The difference is that directors do not have to provide a prospective view of the business that they would subsequently have to defend (possibly in a court of law) should things have turned out differently. The business review demands a look back at the past year and present position.

Therefore finance directors are likely to rejoice at the government’s turn-around on the OFR. The business review envisioned by the EU directive still recommends some information about non-financial factors such as employee and environmental developments but it does not demand anything like the disclosure that the OFR entailed.

It will be entirely possible to revert to the ‘boiler plate’ statement typical of annual reports in the scandal ridden 90s that kicked off the movement to have a meaningful OFR in the first place.

Getting rid of the OFR does not, however, get rid of the demand from investors and other stakeholders for meaningful non-financial information about a company’s risks and prospects. Companies that already provide that sort of information through CSR or sustainability reports will continue to do so.

And HR departments that are already engaged in implementing and reporting on responsible employee practices will still want to get the message out in an annual review.

For very large UK companies and their HR departments there is an even larger reporting obligation on the horizon and that is the implementation of the US Sarbanes Oxley legislation which aims to tighten up financial controls and prevent future accounting scandals.

All foreign companies that are listed on a US stock exchange have to start complying fully with the most demanding aspect of the legislation (Section 404 on internal financial controls) from the middle of 2006.

The burden on HR departments in some of the UK’s largest companies (about 60 of the FTSE-100 will have to comply) cannot be underestimated in terms of recruitment and training not just on ethics, but IT, corporate governance and accountancy within different parts of the business.

Whereas the OFR might have cost a company on average about £40,000 a year to produce, compliance with SOX runs easily into seven figures especially in the first years of implementation. Home grown and EU regulations will look like a drop in the bucket compared to the cost of red tape imported from the US.

Leo Martin is director and founder of GoodCorporation, the corporate responsibility standard and is the principal character in the BBC’s series, Good Company, Bad Company.

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