§ Lord Sainsbury of TurvilleMy right honourable friend the Minister of State for Industry and the Regions and Deputy Minister for Women and Equality (Jacqui Smith) has made the following Statement.
My department published a consultation on 5 May 2004 seeking views on draft regulations to implement a new statutory operating and financial review (OFR) and certain provisions of the accounts modernisation directive, requiring an enhanced review of a company's business in the directors' report.
This Statement explains how the Government intend to proceed in the light of responses to the consultation document. I am grateful to all those who responded to the consultation. A summary of the responses will be placed on the DTI website next month and in the Libraries of both Houses.
Our OFR proposals have been subject to extensive public consultation over the past four years. In making this statement today I am clear that the OFR will improve the quality, usefulness and relevance of information provided by quoted companies—helping investors, shareholders and other interested parties get a better understanding of a company's operations and its future business prospects.
The OFR represents a real opportunity for business to promote long-term value creation. Improved shareholder engagement will help strengthen corporate performance and boost confidence in UK companies. The OFR is a vital part of the DTI's drive for effective corporate governance, which will benefit investors, business and the economy at large by improving the quality of investment decisions and the allocation of capital.
I have considered consultees' comments carefully with a view to ensuring companies are able to provide full and frank disclosures in a cost-effective and efficient way. This will enhance the usefulness of the OFR for both shareholders and other stakeholders. As a result, I am amending some of the earlier proposals to ensure that the regulations achieve the Government's overarching policy objectives.
10WSOn coverage for the OFR, I have considered the arguments for both extending the OFR to large private companies) and for narrowing it (to larger quoted companies only). I have concluded that the draft regulations should stand as drafted. There will be no extension of scope for the OFR and it will apply to quoted companies only.
I have also considered the standard of care required of directors preparing the OFR, as well as the role of auditors. On the first point, I have decided to drop the requirement that auditors give an opinion on whether the directors have used "due and careful enquiry" in preparing the OFR. This should address concerns that we might be requiring a different legal standard for this type of corporate report.
On the second point, I am simplifying the role of the auditors. I am retaining the requirement that auditors should consider whether the OFR is consistent with the company's accounts, and whether it contains any inconsistencies based on any matters that have come to their attention while conducting the company audit.
This reflects concerns that having auditors review the process would prove difficult and costly, and have the unintended consequence of discouraging full and frank reporting by reducing the OFR into an anodyne, "box-ticking" exercise.
I believe directors can be open and candid with information on the basis that a distinction can be made between those statements made based on good faith judgments, and those made based on objectively verifiable data. Guidance notes will make clear to companies that they may wish to advise members of the need to treat with caution good faith judgments, in particular those relating to future events or prospects. As well, the regulations will make clear that directors will not be required to disclose specific information about impending developments or specific matters in the course of negotiation.
Following the consultation, we believe the objectives and content of the OFR are right. No changes of substance will be made therefore and there will be no extension of content.
Having met the review objective and general requirements of the schedule, directors will then need to consider and include information relating to their environmental, employment, and social and community policies to the extent necessary for shareholders to understand how these are impacting the business and wider community.
With regard to enforcement, I believe the OFR warrants the implementation of a sturdy regime but must be allowed a chance to bed-in. I have therefore decided to delay the FRRP's role in administrative enforcement until one year after the duty to prepare OFRs has kicked in. This means the FRRP will start looking at OFRs prepared for financial years starting on or after 1 April 2006.
I have also addressed potential cost burdens arising from our proposal to make mandatory hard-copy circulation of the OFR. Where shareholders have agreed to receive summary financial statements, there will be no requirement for the full OFR to be sent, and 11WS shareholders will be notified of the availability of the OFR on the company website.
In addition, potential duplication of reporting requirements occasioned by the introduction of the EU modernisation directive will be avoided. All companies in a group other than small companies will be required to produce individual directors' reports or, if they are quoted, individual OFRs with the ultimate parent company also producing a group report (but not an individual report). Where the parent is a quoted company, the OFR will be prepared for the group. Small and medium-sized companies will be allowed to take full advantage of reporting exemptions under EU accounting directives, including those that that are part of a group.
Finally, on timing, I intend to lay the regulations within the next two months. Given concerns expressed in consultation about the need for adequate preparation time, the date the regulations come into effect will be delayed until financial years beginning on or after 1 April 2005 (and not 1 January 2005), thus giving business three extra months to absorb the new reporting standard and prepare for implementation.
We know the business environment is changing dramatically and at an accelerating pace. Companies are becoming increasingly complex and information needs are changing. This was reflected during the consultation and in the responses from stakeholders: companies, institutional investors, professional bodies, auditors, trades unions and representative organisations.
It is evident that vibrant capital markets rely on interventions and institutions that promote the governance of companies. Corporate governance structures ensure shareholders receive reliable information about the value of companies, while motivating directors and managers to maximise long-term value creation. I believe that the OFR is a crucial element in the corporate governance agenda, and will contribute to raising the productivity of British companies, helping generate prosperity for all.