Category Archives: Corporate responsibility

Beyond the OFR: The ‘Open Business’ Responsibility Deal

Corporate responsibility, CSR
In August I posted my initial thoughts on the Department for Business, Innovation and Skills (BIS) consultation that had just been launched on the Operating and Financial Review (OFR). The deadline for getting your response in is the 19 October 2010. In my draft submission to BIS (below) I suggest there is now a need for Government to look beyond simply improving reporting in the UK’s largest companies and to also embrace SMEs in a Gov’t backed voluntary CR reporting process.
 
SITUATION: THE OFR DOES NOT COVER SMEs – THE MAJORITY OF UK WORKING POPULATION
In these tough times it is more important than ever for companies to engage with their responsibilities and help the UK meet carbon targets, ensure a healthier workforce, invest in skills and their local communities, as well as improve their competitiveness. Responsible business practices also make good business sense as they often reduce costs. Yet, assuming that post-consultation the Coalition Government implements the Operating and Financial Review (OFR), this will only institute more challenging reporting requirements (than those of the current Business Review) for companies that have a turnover higher than £6.5m or have a balance sheet of more than £3.26m.
Furthermore the OFR may not deliver its desired outcome with this target group of companies. Government
will have to keep a close eye on the concern raised by some that strengthening the reporting requirements risks driving a compliance approach, rather than either a business strategic or Big Society-inspired approach, to the role an enterprise plays in its social and environmental context.
What is clear however is that the current OFR proposals will still leave the vast majority of the 1.25m UK private and public companies without a government-recognised voluntary or mandatory Corporate Responsibility
(CR) reporting framework.[i] Large enterprises, those with 250 or more employees, account for only 0.4% of UK companies.[ii] The majority – about 60% – of the UK working population are employed by SMEs. SMEs deliver about 50% of the economy’s turnover.[iii] This is why if the Government wants actual social and environmental impact from its responsible business policies it is essential that it reaches SMEs. The OFR may also still leave reduced CR reporting expectations for large unquoted, versus quoted, companies. All this falls short of rising to the responsibility and sustainability challenges of our time.
TARGET: SMEs VOLUNTARILY SUBMIT SELF-CERTIFIED ANNUAL CORPORATE RESPONSIBILITY REPORT USING SIMPLE GOVERNMENT-ENDORSED FRAMEWORK
The Big Society and a new era of responsibility should mean that all businesses have the opportunity to voluntarily use a simple system of self-certified online reporting to share openly their responsible business practices (process and performance), at the same time as their annual financial return to Companies House.
The most community minded SMEs/ micro-enterprises already report briefly, often through a page on their websites or more sophisticated mechanisms. However a short CR report (equivalent to 1-2 sides of A4) – using a Government-endorsed reporting framework – submitted online each year to Companies House might inspire the SMEs/micro-enterprises that have been slow to respond to the responsible business agenda and start to level the playing field for businesses that already proactively invest in people and planet.
Responsible business practices have the potential to increase the performance and competitiveness of UK business[iv], as well as trust[v] – and a stronger emphasis on CR transparency by Government, as promised in the Coalition Agreement, has the potential to remind some small companies of the need to balance how they exercise their rights and responsibilities. Most importantly, with small businesses most under pressure at the moment, an ‘Open Business’ Responsibility Deal could help SMEs regenerate ideas, skills and competitiveness to better build for the future – thus boosting the resilience of the British economy.
PROPOSAL: LAUNCH ‘OPEN BUSINESS’ LABEL AND ONLINE TOOL PROMOTED BY COMPANIES HOUSE
1. Companies House send out Annual Return reminder to all companies that includes link/ promotion for a voluntary web-based corporate responsibility report.
2. Companies complete a light touch, online ‘Open Business’ report with optional boxes for additional narrative. This would be along the lines of the ‘London Better Together’ model assessment[vi] (figure 1), with online advice if required from the Small Business Journey[vii] (figure 2) – or professional advisors. Establishing this web-based tool is the one unavoidable cost of the proposal but it is estimated the website could be developed for £50-100k.
Figure 1: London Better Together

Figure 2: Small Business Journey resource

3. An ‘Open Business’ label could incentivise companies to complete the voluntary report by enabling them to put the label on stationery/ websites celebrating their completion of the CR report and/or financial incentives could be considered (for example waiving annual return submission fee to Companies House or making the time required to complete the form a tax deductible expense). Recognition of the label and companies that have completed the submission by public sector procurers would also act as an incentive.
Figure 3: Illustration of what the label might look like

4. To maintain credibility of the scheme an assurance mechanism might be required. This could be a year two development and an optional extra. It would undoubtedly require an extra fee and network of independent auditors around the country qualified and approved to review companies’ reports, as well as a distinction between the label that companies with unaudited versus audited submissions can use. However it is worth noting that given companies would be signing off their submissions as a statement of fact, they might fall foul of the Trade Descriptions Act 1968 if any of the information submitted before using the label was later found to be false by a consumer. This could be highlighted at the point of submission and provide an incentive for companies to ensure their reports are true and accurate.
For further information – or suggestions to improve this proposal – please email me hi@andrewdakers.com or post a comment on this blog entry.
ENDNOTES
[i] The exception is Community Interest Companies (CICs) that already complete a light touch Corporate Responsibility report through their CIC34 annual return:
[ii] Inter Departmental Business Register (IDBR), Office for National Statistics,http://www.statistics.gov.uk/cci/nugget.asp?id=1238
[iii] Small and medium-sized enterprise (SME) statistics, Whitehall Pages,http://www.whitehallpages.net/news/archive/4282
[iv] Ipsos MORI/ BITC research on performance against FTSE350 peers of companies participating in
BITC’s Corporate Responsibility Index (CRI) each year between 2002 and 2009,http://www.bitc.org.uk/media_centre/bitc_news_press_releases/lg_res…
[v] Edelman Trust Barometer 2010, http://www.edelman.com/trust/2010/
[vii] Small Business Journey, http://www.smallbusinessjourney.com

BIS consultation on ‘The future of narrative reporting’ and reinstatement of the Operating and Financial Review (OFR)

Corporate responsibility, CSR, Sustainability
At the Lib Dems Autumn conference in 2009 I called for correction of a party policy paper (‘Are we being served?’) that incorrectly stated the Operating and Financial Review (OFR) was still in place. The statutory OFR had been repealed in December 2005. It is little surprise the party policy-makers had got confused as to where things stood in UK corporate governance legislation given the history is now so convoluted (but well explained in a paper by Radley Yeldar). BIS sets out the background in their new consultation document:
 
“The business review is an essential element in company narrative reporting. The EU Accounts Modernisation Directive required all companies other than small* to prepare a business review. These requirements were implemented by the Companies Act 1985 (Operating and Financial Review and Directors’ Report etc) Regulations 2005, which introduced a mandatory Operating & Financial Review (OFR) for quoted companies with effect from financial years beginning on or after 1 April 2005. The Regulations recognised a reporting standard for OFRs prepared by the Accounting Standards Board. They also provided an enhanced audit requirement whereby the auditor needed to state whether any matters coming to their attention in the course of the audit were inconsistent with the information in the OFR.
 
“The statutory OFR was repealed in December 2005 and, following further consultation, the Business Review provisions were enhanced for quoted companies and restated in the Companies Act 2006; these provisions came into effect for reporting years beginning on or after 1 October 2007. The Business Review requires companies to provide broadly the same information on non-financial matters as the earlier OFR. Briefly, all companies, other than small, are required to prepare a business review as part of the directors’ annual report. The purpose is to help shareholders assess how the directors have performed their duty to promote the success of the company. Quoted companies must also, to the extent necessary for an understanding of the company’s business, include information on environmental, employee, social and community matters, as well as on contractual and other arrangements essential to the business. The Business Review does not include the enhanced audit requirement for the OFR or statutory recognition of a reporting standard.”
[* Turnover not more than £6.5m/ balance sheet total not more than £3.26m]
How quickly times change! By the time the Liberal Democrats’ election manifesto was published there was an explicit commitment to: “reintroduce the Operating and Financial Review, dropped in November 2005, to ensure that directors’ social and environmental duties will have to be covered in company reporting.” (pg 26)
This then carried through into the Coalition Agreement with a commitment to: “reinstate an Operating and Financial Review to ensure that directors’ social and environmental duties have to be covered in company reporting, and investigate further ways of improving corporate accountability and transparency.” (pg 10)
Effectiveness of the ‘Business Review’
When the OFR was repealed Phil Hodkinson (then Group Finance Director, HBOS) said in BITC Members’ Viewpoint, November 2005: “It came as a huge surprise to hear that Gordon Brown had sacrificed the OFR on the altar of red tape reduction. It is thought by some to be a setback, as some worry that it sends the message that corporate governance and corporate responsibility don’t matter.
 
“But what has not been scrapped is the implementation of the EU Directive on Directors Reports which, while not requiring forward-looking statements, will require companies to report on most of the key performance indicators that would have been required by the OFR.
 
“There were huge and perhaps unreasonable expectations around the OFR. It was a long time coming, being the joining together of the Company Law Review recommendations and the European Accounts Modernisation legislation. There was, therefore, plenty of noise around it from the lobby for mandatory social and environmental reporting, all of which led to a lack of clarity about its role in requiring social and environmental disclosure.
 
“What resulted was an accounting standard. But the new ingredient was the requirement for directors to be forward looking in their views – an ingredient that has now been lost. It was not, however, primarily a tool for social and environmental disclosure.”
There has not been a vast amount of research undertaken on the effectiveness of the ‘Business Review’ requirement, but then its application remains fairly new. Studies that stand out are those by PWC, KPMG, the ASB, ICAS and CORE – and show Hodkinson’s observations in 2005 to have been rather prescient.
PWC concluded in ‘The Business Review and AIM‘ (2007) that:
“…while Main Market companies are increasingly recognising the benefits generated by greater transparency of reporting, AIM companies do not appear to be maximising this opportunity to the same extent. In what is a highly competitive and volatile market, the report shows that there is real scope for AIM companies to present investors with a clearer picture of the performance and future direction of the company. According to the research, only 54% of AIM companies gave investors a view of the business and market in which the company operates, compared with 100% of their Main Market counterparts.”
The KPMG Audit Committee Institute undertook some of the earliest broad-based research I am aware of on the take up of the Business Review. In ‘Narrative reporting – season 2’ (Audit Committee Quarterly – Issue 22, 2008) Nicola Collins observes that “whilst there is little regulatory guidance on what should be in the detail of a Business Review the Accounting Standard Board’s best practice statement on producing OFRs (RS 1) provides useful guidance for companies compiling their Business Reviews. Many companies appear to have adopted elements of this best practice guidance although only two out of the 74 surveyed stated that they had prepared their statements in line with RS 1.
 
“There does appear to be a slight shift this year with more companies incorporating their CSR issues into the main body of their Business Review. There has been an increase of seven percent in companies disclosing KPIs on employees (35 percent compared to 28 percent last year) with employee motivation/satisfaction being the most common.
 
“There is a two percent decrease in companies disclosing measures relating to health and safety issues (23 percent of companies compared to 25 percent last year) with mining and gas, water and multi-utility companies focusing on this issue more than other sectors. Interestingly the number of companies disclosing KPIs relating to customers has nearly doubled rising from 17 percent to 30 percent. Banks, fixed line telecommunication, and travel and leisure companies are the most prolific in this area. Disclosure of environmental KPIs is also on the increase with 28 percent of companies disclosing in this area compared to 21 percent last year. Reporting on social and community issues has remained steady at nine percent.”
 
In ‘Rising to the challenge: A review of narrative reporting’ (2009) the ASB raise a number of issues:

“we think that describing the business should go beyond just products, services and geography to include business processes, distribution methods and structure of the business – in other words the disclosure of the business model.”
“We concluded that the CSR sections of annual reports contain significant immaterial clutter that is not necessarily essential for making resource allocation decisions. For example, it is a good thing that many companies are now using refillable glass bottles in meetings, but this is not a decision changing piece of information. One potential reason for this deluge of information is the regulations, which require discussion of all three of employees, environment and social and community or disclosure of the type of information that has been excluded. Social pressures make it difficult for a company to flag up non-disclosure in any of these areas, with the result that companies disclose all three, regardless of the importance of each to

the business.”
“…further work also needs to be undertaken to consider whether the focus should be on integrating all reporting into one place or having separate stand-alone sustainability reports.”
A report for ICAS focused on the media sector (‘The Influence of the Business Review on Reporting UK Media Sector KPIs,’ ICAS, Nov 2009) suggested the need for more research:
“Some companies are not complying with the disclosure requirements at all, suggesting that policy makers may have to take further action. To inform policy making in this area, further research is necessary:
• to ascertain why companies have not yet responded to the Companies’ Act requirements for reporting KPIs; and
• to determine whether users of accounts find KPIs useful for their decision-making processes.”
Writing for the CORE Coalition in ‘The reporting of non-financial information in FTSE100 Annual Reports‘ (

Middlesex University, 2010)

Professor Adrian Henriques concluded: “Before the introduction of the new Companies Act, some who held the ‘enlightened shareholder view’ believed that companies would automatically report information affecting stakeholders because it would overall be in their interests to do so. This would have meant that the Business Review would contain information pertinent to other stakeholders. This is only proving to be true to a very limited extent. The analysis of the Business Reviews of FTSE companies found insufficient reporting of risks from the shareholder point of view as well as from that of other stakeholders. The Business Review does not appear to be serving the purpose for which it was intended.”

The Minister’s views
Introducing the Government’s Consultation on The Future of Narrative Reporting, Ed Davey MP, Minister for Employment Relations, Consumer and Postal Affairs (the new Corporate Responsibility minister in all but name!) says: “…the recent economic crisis has put a spotlight on all aspects of our regulatory framework including our corporate governance model and forced us to consider where things have gone wrong and why. The broad consensus is that, while the UK model of corporate governance is not essentially flawed, there are areas where we all need to do better – as Government, as companies and as shareholders.”
 
As well as highlighting the need for narrative reporting to be future-focussed and material in disclosure Davey rightly highlights the need for “a clear link between the company’s strategic objectives and the criteria for payments to directors.” He goes on to explain that the reinstatement of “an Operating and Financial Review to ensure that social and environmental duties have to be covered in company reporting and to investigate further ways of improving corporate accountability and transparency is central to achieving these aims.”
Davey has three objectives. To:
  • see what we can do collectively to drive up the quality of narrative reporting to the level of the best, including on social and environmental issues;
  • empower shareholders so they can step up and act as effective owners in the long term interests of the companies in which they invest; and
  • achieve coherence without increasing the regulatory burden on business.
Consultation
The Consultation invites you to contribute your views in four areas: Value of narrative reporting; the Business Review; Directors’ Remuneration Report; and Potential costs. Most significant will be the debate on whether a statutory reporting standard or guidelines based approach should be introduced — and whether shareholders’ advisory notes should be produced.
Value of narrative reporting
1. Are company directors providing useful and relevant information on the company’s:
i) forward-looking strategy and
ii) principal risks and uncertainties?
2. What are the constraints on companies providing information on these issues?
3. Does the information provided reflect the issues discussed by the directors in board meetings?
4. Does the information help shareholders to press directors on key issues relating to strategy and risk, or inform their business decisions?
5. If a company does not provide sufficient or material information to you, do you challenge it? Is there anything which could help you to do so?
6. What other sources of company information do you use and how valuable are they (e.g. information provided on the website, analysts’ briefings, dialogue with the company, corporate social responsibility report)?
7. Is there scope to reduce or simplify the requirements on which companies report?
8. Is there scope to arrange the information in a more useful way?
 
Business Review
9. Looking at an Operating & Financial Review and the existing business review (see Annex D), do you see value in reinstating elements of an OFR and if so what would they be? In particular, would a statutory reporting standard help to improve the quality of reporting?
10. The business review provisions require quoted companies to report, to the extent necessary, on:
  • main trends and factors likely to affect the future development, performance and position of the company’s business
  • information on environmental matters
  • information on employees
  • information on social and community matters
  • persons with whom the company has essential contractual and other relationships
i) Is this information useful to you? How do you use it?
ii) Could disclosure be improved? If so, how?
iii) Are there key issues which are missing? If so, please explain?
11. Would more guidance be helpful? If so, what form should this take? For example: best practice example, sample Key Performance Indicators, etc?
12. Should there be a shareholder’s advisory vote on the Business Review?
13. Are there non-regulatory solutions to increasing quality through better guidance or publicising excellence in business reports? If so, what?
 
Directors’ Remuneration Report
14. Do 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?
If not, please explain including any views on how this might be improved
 
Potential Costs
15. If you can provide any information on costs associated either with the existing narrative reporting requirements eg preparing your business review or your views on potential costs and benefits in relation to any of the ideas in this consultation, please give details.
Your chance to respond to the consultation ends on 19 October 2010.
Implications of the formation of the International Integrated Reporting Committee
Perhaps the most significant issue – not touched upon in the BIS consultation document – is how the conclusions of the Department for BIS consultation will mesh with the work of the newly formed International Integrated Reporting Committee announced on 2 August 2010. Given this new global initiative, it will be interesting to see how Accounting for Sustainability (A4S), the ASB and BITC respond to this latest push on reporting standards that could result in the emergence of a UK statutory reporting standard.
Further reading
The Companies Act 2006: Directors’ Duties Guidance, David Chivers QC (CORE – The Corporate Responsibility Coalition, 2008)
 
Extracts from ‘The Future of Narrative Reporting – A consultation’ (August 2010) are Crown Copyright.

The case for a ‘Sustainable and responsible economy minister’

Corporate responsibility, CSR, Sustainability
In the past few days Fabian Pattberg and then Mallen Baker reflected on the absence of a CSR/CR minister within the new Coalition administration. A few weeks ago I considered the extent to which Corporate Responsibility (CR) issues permeated through the Coalition Agreement.
Failure of CR minister to be watchdog, visionary or even advocate
I agree with Mallen’s assessment of the limited impact of the ministerial post as we moved through some 7 ministers in 10 years. As Mallen says Stephen Timms MP was the exception when he held the post and it shouldn’t be forgotten that the CR Academy Timms saw established was eventually taken over by Business in the Community (BITC). In my experience the interest in the CR minister role – and apparent status it provided the CR agenda in the UK – has always seemed greater from those overseas looking at UK CR from the outside, than here in the UK.
Yet politically, given the backdrop of financial crisis and now BP, it seems a particularly unfortunate time to see the complete demise of the role. Having said that it is difficult to construct a credible argument that the recent CR crises would have been prevented by a CR minister, however motivated, with the role as it was most recently conceived.
This failure of the CR minister to be the CR watchdog, visionary or even a recognised advocate provides interesting food for thought. The Conservatives particularly gave considerable time to considering the future of corporate responsibility in opposition. Yet the loss of the role will reduce the prospect of their ideas being implemented and a Corporate Responsibility centre of expertise and advocacy in government developing.
So perhaps Vince Cable’s starting point, as the minister responsible for this change, should be to consider whether post-holders were held back by the limited scope of the CR minister role, and the lack of a more holistic vision for how we shape a more responsible economy?
Delivering CR is not just about voluntary action
Mallen’s line that “CSR is voluntary” is an oxymoron. Certainly some CR/ CSR comes from a voluntary, self-regulatory approach, but a raft of responsible business behaviours are – and should continue to be – backed up by carefully written and considered legislation and regulation. For businesses of all sizes legal compliance remains no small challenge, and its effective delivery is also worthy of celebration and recognition (for example ‘Scores on the doors’ in the restaurant health and safety context).
‘CSR as voluntary action’ has of course long also been the mantra in much of the wider CR/CSR movement too. The lack of a more holistic approach to analysis of responsible business practice perhaps also stems from the flawedGovernment definition of Corporate Responsibility that also followed suit in emphasising the voluntary:“Specifically, we see CR as the voluntary actions that business can take, over and above compliance with minimum legal requirements.”
However if government – and the CR movement – looked more holistically and analytically at how responsible behaviours are brought about, we might better judge when either the regulatory or voluntary, self regulatory route is more appropriate in a specific context. This would make the Better Regulation agenda an explicit part of the CR brief, as well as the respective roles of competition and cooperation in the marketplace. Voluntary action often, although not always, requires some degree of co-operation between businesses.
Business and society might also see less regulation misapplied and the earlier identification of opportunities for proactive self-regulation if there was less thinking in silos.
 
Need for a new role with broader scope
To tackle this the new Government could introduce a post of ‘Responsible and sustainable economy minister’, probably still within the Department for Business, Innovation and Skills (BIS) or perhaps in a more cross cutting function such as the Cabinet Office. Most posts are usually backed up by a Civil Service unit and are one hat amongst many worn by a minister. As Whitehall downsizes this new unit could emerge from the merger of existing units as BIS inevitably restructures. Last time I checked the CR unit was effectively about 1.5 Full Time Equivalents.
A new post – and with it a new definition of CR – should also make explicit the need for more shared learning to driving responsibility and sustainability across the public and private sectors, from the NHS Good Corporate Citizenprogramme to marketplace focused initiatives such as the Roundtable on Sustainable Palm Oil.
From this breaking down of disciplinary silos I am hopeful that much needed leadership across Government about how we really go about shaping a new era in capitalism might emerge.