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Corporate governance: United in their dismay

Bizarre political decision-making can end up creating distinctly odd
bedfellows. Who would have thought that we would have Friends of the Earth and
the Institute of Chartered Accountants in England & Wales on the one side of
a divide and the Chancellor on the other ­ particularly when the argument is
about the disclosure of corporate information.

This, as you might have guessed, is the sorry saga of the Operating and
Financial Review, the narrative reporting section of annual reports which has
been round for more than a decade and was about to become even more useful than
ever. Until the Chancellor, with his strange and selective understanding of what
people in the business world are all about, pulled the rug from underneath it.

Consider the history. The OFR has been around for years, gently and steadily
growing in influence and usefulness. The government itself finally recognises
this and, as governments do, decides to get in on the act and try and make a
voluntary system rather more official. There is extensive consultation through
the lengthy company law reform process. Then there is a proposal to make it

Regulators hold extensive consultations. These work well. The Financial
Reporting Council receives around 150 responses to proposals. Everyone takes
notice of what the responses say. Modifications are made. The proposal is taken
through Parliament. There is a comment period on the draft standard produced by
the Accounting Standards Board.

Broadly, investors, auditors and companies are in favour. A few of the old
guard still make some spluttering sounds ­ but people pay little attention. What
matters is the broad agreement across investors, auditors and companies.

All is going well. Companies of any size and standing are gearing up to
produce the first mandatory versions of the OFRs they have been doing for years.
Users and preparers of accounts, particularly in the financial services and
retail businesses, are extremely excited at the idea of using key performance
indicators on a large scale for the first time. It will give the companies which
master the art, and are also performing well, a huge advantage in the

Then on a grey Monday in late November, while the audience is slumbering
through the speech from the Chancellor at the CBI’s annual conference, he
decides to wake them up. Chucking the years of due process into the waste bin,
he shows true contempt for everyone involved, except for his audience, which he
fondly believes is going to cheer him to the echo. He scraps the idea of the OFR
being mandatory. In contrast to the world of business, he decides that not a
whit of due process or consultation should be involved in his decision. He
reaches for what he perceives to be a Persian carpet, possibly with gold-plated
edges, and tugs it vigorously out from underneath business.

Hence the odd bedfellows of the Friends of the Earth, who thought that key
performance indicators in environmental reporting would be very useful, and the
accounting profession. The Chartered Institute of Management Accountants, for
example, described the Chancellor’s peculiar decision as “the wrong step and a
fundamentally bad one”.

Behind the scenes, the analysts and the regulators went spare. ‘Fuming’ was a
mild description of what was going on behind the scenes at the FRC. Meanwhile,
the Chancellor was trying to justify the decision by saying that all he was
doing was removing the ‘gold-plating’ with which the legislation had become
encrusted as a result of having to also implement the EU’s modernisation

‘Gold-plating?’ said one senior person involved in the process of straddling
the divide between the Treasury and the regulators. ‘Bollocks!’ They also made
the point that the gold-plating, such as it had been, was entirely home-grown
and was there because it was official Labour Party policy.

In response, the Treasury let it be known that the OFR had somehow got out of
hand and had become a much more expensive cost to companies than had been
originally envisaged. People in business quickly pointed out that it had become
expensive, largely because of government additions to the measure. The lack of a
‘safe harbour’ provision, which would have protected directors from legal action
over some projections, as occurs in the US business world so beloved of the
Chancellor, was the main cause. Without those provisions, City lawyers had
managed to muscle in and had started their fee meters running in a very
expensive way.

It has been one of those strange episodes which show two things. First, it
dramatises quite how far from the business world people in government, and
particularly the Chancellor, are. And second, as the existing use of the OFR
will proceed serenely on anyway, how little effect such daft decisions from the
Treasury really have.

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