§ The Secretary of State for Trade and Industry (Ms Patricia Hewitt)I am launching today a consultation on draft regulations for a statutory operating and financial review (OFR), following a recommendation of the company law review and proposals set out in the Government's White Paper "Modernising Company Law" of July 2002. Copies have been placed in the Libraries of both Houses and the Vote Office.
The OFR regulations will require quoted companies to provide a narrative report setting out the company's business objectives, its strategy for achieving them and the risks and uncertainties that might affect their achievement. It will require companies to report on other matters where these are necessary for an understanding of the business. These matters include employees, the envirc nment and social and community issues. It is proposed that where directors believe that they have nothing to report on those matters, they will have to state that fact. The OFR will represent a move from reporting on past performance to an assessment of the future prospects of the company in both the short and the long term. It will enable shareholders to judge whether the directors' view of the business meets their own long-term investment needs and their own expectations of the way good companies should perform—companies that understand the importance of human capital, open dealings with customers and suppliers, and their impact on the environment and on the wider community.
77WSThe OFR will apply to all quoted companies. These are companies registered in Great Britain that are either listed in the UK or in any other European economic area (EEA) state or whose shares ate traded on the New York stock exchange or NASDAQ. The regulations also implement related changes to the directors' report of other companies required by the Accounts Modernisation Directive.
A number of quoted companies already prepare OFRs or adopt the broad approach set out in a guidance statement originally introduced by the Accounting Standards Board in 1993 and revised in 2003. The directors of those companies recognise that such reporting can contribute to the profile of the company and offer the market confidence about its management and prospects. The OFR regulations will provide directors with the opportunity to provide key information to shareholders within a statutory regime that will give reassurance on the quality of the information provided. It will enable the best companies to maintain and promote their high standards while allowing other companies to raise their standards. It will contribute to market stability, shareholder engagement, investment, company performance and corporate social responsibility. It will facilitate informed dialogue between directors and shareholders, encouraging responsible institutional investors to adopt an understanding of the particular businesses their investments rely upon.
The Accounting Standards Board will be preparing a new reporting standard for the OFR. In addition, alongside the consultation, a working group chaired by Rosemary Radcliffe and representing a range of business, investor and wider interests, is publishing practical guidance for directors on the preparation of the OFR. I am extremely grateful to the working group for the hard work it has undertaken on this essential element of the OFR.
The consultation period will end on 6 August. After taking into account responses to the consultation, I intend to lay the regulations before the end of the year, so that they can apply to accounting periods beginning on or after 1 January 2005. I hope that all those interested in this issue will respond to our consultation and help us ensure that the OFR is an effective tool.