why large private firms should be subject to the OFR regimeJune 2004
The key question surrounding the operating and financial review is a simple one. Will the UK government’s proposals to force large businesses to report more fully on social and environmental issues lead to improved company behaviour?
It is worth remembering that this is first and foremost a disclosure regulation. Whatever their final form, OFRs can alter company behaviour only by motivating managers to pay more attention to these issues and by arming investors and others with more audited information than the present disclosure regime requires. The track record of such regulations is not that promising. Since 2000, UK pension funds have had to disclose their social and environmental policies. Four years on, the latest Uksif survey has found that most pension fund trustees believe ‘additional regulation or legislation’ is needed to make pension funds report on how they actually implement their statements of investment principles.
But it is easy to overdo such comparisons. Pension funds are not companies, and there is a difference between asking trustees to declare whether or not they have a policy on such matters and requiring directors to declare, in the annual report, the social and environmental risks they believe are germane to the business, with the remote but nevertheless real possibility of criminal prosecution if those risks are mistated. Disclosure regulations are often described as ‘soft-touch’; this is not the case with the OFR, which goes well beyond the minimum required by European Union law.
But disclosure to whom? The government says that while it is for shareholders to hold the company to account, they will not be the only readers of an OFR. Other stakeholders – employees, suppliers, customers and ‘those with an interest in the environment’ – will also need the information.
It therefore seems odd that the government is proposing to exempt large private companies from the OFR requirement. Their responsibilities to society are as great as large public companies’. The government should make large private companies produce OFRs too.
Please see also Briefing
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