Editorial - October 2009

<< GO BACK | September 2010 | ISSUE NO 199

Return to OFR

The Department for Business Innovation and Skills (BIS) in the UK has launched a consultation seeking views on issues relating to corporate narrative reporting.

This consultation considers how the narrative reporting framework is working in practice and how well companies are complying with the existing requirements. Are they focusing on providing the right quality of relevant information on strategy and their principal risks and uncertainties to enable their shareholders to hold directors to account? Does the information provided reflect the issues discussed by the directors in board meetings? Do narrative reports generally reflect the intentions and spirit underlying the statutory framework? Are there ways to improve the narrative reporting framework as a whole?

The consultation focuses in particular on the provisions of the Business Review, in line with the Government’s commitment to reinstate an Operating and Financial Review (OFR). The Companies Act 2006 originally introduced a statutory requirement for listed companies to produce an OFR but in a surprise announcement in his Budget in November 2006 the then Chancellor of the Exchequer, Gordon Brown abolished that requirement and the Act was amended accordingly.

The original legislation said that the OFR must provide a balanced and comprehensive analysis consistent with the size and complexity of the business of:

The business’s development and performance during the financial year;
The company’s (or group’s) position at the end of the year;
The main trends and factors underlying the development, performance and position of the company (or group) and which are likely to affect it in the future.

The regulations also:

Expanded the then requirement for companies to include a fair view of their business in their directors’ report;
Established a requirement for auditors to express an opinion on the consistency of the OFR and directors’ report with the accounts; and
Established a criminal and administrative enforcement regime for both the OFR and the directors’ report.

The current consultation is addressing certain specific issues for users of company reports. Should there be an advisory vote on the Business Review to allow shareholders to express their view on the directors’ performance and the company’s future prospects on the basis of the directors’ description of the company’s performance, forward looking strategy and principal risks? Would report users welcome a way of limiting the narrative report to a summary of the strategic issues with the more detailed supporting information presented separately for those who wanted that extra level of information?

The consultation also addresses information about directors’ remuneration. In particular it looks at whether the current disclosure requirements provide clear and usable information about:

the total remuneration paid to directors, and how this is made up;
the performance criteria for payments to directors, and how these relate to the company’s strategic objectives;
company performance against these criteria, so that there is a demonstrable link between pay and performance;
the process by which directors’ remuneration is decided.

The consultation also asks whether there are non-regulatory solutions to increasing quality through better guidance or publicising excellence in business reports? It suggests that an annual ranking could harness companies’ competitive spirit to drive up reporting standards. Awards are already used to recognise best practice on corporate governance including reporting?

‘I want corporate narrative reporting to tell the company’s story in a balanced and coherent way. It should give shareholders the information they need, so they can hold directors to account and be effective stewards for the business,’ said Business Minister Edward Davey at the launch of the consultation.

The consultation will close on 19 October 2010. Following analysis of the responses, the Minister will discuss the findings with stakeholder groups. The outcome of the consultation including the Government’s proposals will be published on the BIS website by the end of the year.

Full details on how to respond and the consultation paper are available on the BIS website at www.bis.gov.uk

<< GO BACK | TOP