related documents

top stories

Owen, Shaw and Cooper, 2005

Executive summary

This research report traces the development of the mandatory Operating and Financial Review (OFR) reporting requirement, as enshrined in the Draft Statutory Instrument laid before Parliament in January 2005, and investigates its potential role in providing a catalyst for improved corporate disclosure of information regarding the social and environmental impact and related policies of business. The latter issue is explored by means of a questionnaire survey of the FTSE350 companies, followed up by a programme of 11 in-depth interviews designed to investigate more fully corporate views as to the probable impact of the new regulations.

Our analysis of the evolution of the present mandatory OFR reporting regime illustrates that, while the OFR has continued to be regarded by regulators as a suitable vehicle for social and environmental information disclosure, there has been a narrowing of scope in terms of purpose of, and audience for, such disclosure. In particular, the interests and concerns of non-financial stakeholders have been progressively downplayed, whereas the primacy of the shareholder group as the audience for OFR reporting has been ever more firmly established as the Government pursues a policy of increased shareholder engagement.

The questionnaire survey confirms that the shareholder group is the key audience for OFR reporting. A large majority of our respondents did not view shareholders as the only audience, however: a second tier comprising employees, government/regulator and customers was clearly discernible. Feedback from interviewees indicated that interest in the OFR, as far as report preparers is concerned, is in fact likely to be confined to institutional shareholders, although some questions were raised concerning the latter’s real interest in social and environmental disclosure within the OFR. Significantly, a number of interviewees were not clear about where the demand for social and environmental disclosure within the OFR originates.

Despite the doubts expressed concerning the level of demand, questionnaire responses suggest that companies will use the OFR as a vehicle for social and environmental disclosure. Current reporters expect to provide more of such data, particularly of a quantitative nature, within future OFRs, while non-reporters anticipate utilising the OFR for, at least, the disclosure of environmental and employment issues. It is for this latter group that the OFR may be regarded as offering something in the way of a catalyst for improved social and environmental reporting.

Other issues concerning the reporting process to emerge from our study include:

• lack of specific reporting guidance from either the government or the ASB poses a problem
  
• policies for determining ‘necessity to report’ decisions, where they exist, tend to be informal in nature, rather than fully documented
  
• whereas skill shortages or ‘information gaps’ do not appear to pose a significant problem in meeting the OFR requirements in general, some difficulties are anticipated in capturing and collating social and environmental data and integrating them within mainstream information functions
  
• stakeholder consultation and use of reporting guidelines will feature in the OFR preparation process, but questions arise as to the degree of rigour with which these tools will be employed
  
• senior executives and the company board will play a more prominent role in deciding upon matters of OFR content than currently appears to be the case with stand-alone reporting practice
  
• particularly influential factors driving OFR disclosure practice are expected to be short-term financial impact, whether shareholder decisions may be influenced, the likelihood of regulation, and issues of risk management.

Our study is also concerned with identifying the implications of the mandatory OFR requirements for the future of stand-alone social and environmental reporting. Significantly here, questionnaire respondents whose organisations already produce a stand-alone report viewed the audience for this document as being different from that envisaged for the OFR. Nevertheless, when asked to rank the importance of specific groups, shareholders came first, although a number of others, notably employees, pressure groups and local communities, were ranked closely behind and were perceived to be much more important audiences for the stand-alone report than was the case with the OFR. The overwhelming majority of respondents indicated an intention to continue producing stand-alone reports, while interviewees stressed the very different purposes of the latter documents, deriving from their specific role in the stakeholder engagement process.

For active social and environmental reporters it seems that the OFR will be largely irrelevant as a disclosure mechanism for social and environmental issues. It appears likely that the OFR will contain headline data from the stand-alone report (to which the reader will be referred) rather than any new information. There is some concern, however, that the mandatory OFR regime may diminish the importance of the stand-alone report, making it more difficult to justify its continued production, or at least affecting its frequency or medium of reporting.

Our overall conclusion is that the mandatory OFR requirement possesses limited potential as a catalyst for improved social and environmental disclosure. Admittedly, it seems that current non-disclosers will include at least some information in future OFRs, while the more prominent role played by senior executives and board members in content decisions may mean that social and environmental issues will become more mainstream in strategic terms. However, there are grounds for suspecting that disclosures will be highly constrained and driven largely by concerns with financial risk. Their usefulness for shareholders is questionable given the lack of clear reporting guidance that would allow reports to be used for comparison purposes. For already-active social and environmental disclosers, the OFR requirements appear mostly, at best, an irrelevance or expensive nuisance, and, at worst, an impediment to further developments in voluntary stand-alone reporting initiatives.

Despite Gordon Brown's recent announcement that the publication of an OFR will not now be mandatory for quoted companies, it would nevertheless seem that the majority of the FTSE 100, along with a significant number of other quoted companies, will continue with their long established voluntarily publication policy. ACCA has convened a working party to monitor progress and develop a work programme to further investigate the future role of the OFR as a central feature of corporate communications strategy. The recently published reports, The operating and financial review: a catalyst for improved corporate social and environmental disclosure? and OFR, strategy and reputation - opinion paper are offered as initial inputs into this ongoing debate.

Back to top