Disclosing The Facts

It sometimes seems as if there no end in sight; that the number of laws, frameworks, guidelines and codes of conduct on non-financial reporting and corporate responsibility will keep on multiplying.

The OECD has catalogued nearly 250 codes of conduct, ranging from single-company codes to its own Guidelines for Multinational Enterprises, to the Global Compact between the UN and some leading multinationals. They cover everything from battery hens to baby milk.

Virtually all of these efforts emphasise their voluntary nature, stressing that they serve as a guide to best practice, with the implied hope that a company's concern for its reputation, combined with investor and consumer curiosity about corporate responsibility will provide the carrot and stick.

The UK Government's plans for an overview of UK Company Law are a case in point.

Its Operating and Financial Review (OFR) aims to provide stakeholders with more comprehensive and forward looking-information about a company's health. It will apply to the annual reports of publicly quoted UK companies - more than 1,000 companies will be affected. The first consultation period ended last year, and the Government has now released revised guidelines.

Organisations have until 6 August to consider and comment on these. The requirements are expected to come into force in 2006.

Materiality and Reputation

The OFR is in keeping with the desires of analysts and fund managers.

A recent CSR Europe membership survey found that over 55% of them were dissatisfied with the quality of existing company reports. It is also another step towards a more integrated legislative environment, where businesses are seen to have social and environmental and responsibilities, not just money making ones. The UK government's 2001 decision to require an environmental and social statement by large pension funds is a case in point. To comply with this legislation, pension fund trustees require much more information from companies.

Some of the OFR will be compulsory. It will have to include a statement of the company's business, a review of its performance and a look ahead to issues and events which might affect its operations. Further sections stipulate that directors must consider the issue of materiality (what is or is not material to the future performance of their companies), and report it.

Rarely does a new initiative avoid controversy and it is here, with the concept of materiality, that most of the concern about the OFR centres.

There is a certain amount of confusion among directors as to what should and should not be included when considering strategic issues facing a business, while stakeholders are concerned that the ultimate decision as to what is material lies with directors. There are no issues that they are legally required to consider and include. In other words, the new legislation's teeth are missing; the bits that give it real bite are voluntary.

The 2002 White Paper which introduced the OFR does say that directors must consider whether to include information on anything which might affect the company's reputation, as well as policies and performance on employment, environment, social and community issues. To critics, the devil lies in the detail of the phrase 'consider whether to include information....' They would prefer that this read 'must include information'. And they would prefer that there were potential liabilities for companies which did not comply.

Without this, say critics, the OFR offers nothing new. It just reiterates existing accounting standards, while offering suggestions on how to pursue responsible corporate practices. "Re-inventing corporate reporting is no more than a step in the right direction," says Duncan McLaren, a corporate responsibility campaigner at environmental campaigning organisation, Friends of the Earth. "The next step is independent verification. After that must come true accountability measures, based on mandatory reporting, stakeholder accountability mechanisms which provide the opportunity to legally challenge directors' decisions, and criminal liability."

The UK's Environment Agency, tasked with regulating both solvent and insolvent companies causing environmental problems, naturally wants to see compulsory environmental reporting. But it also thinks that the OFR should expand into additional areas. "We fully support the Government's desire to simplify and modernise Company Law," says an Agency spokesperson.

"But we also note that the draft bill will only regulate the way companies are set up and run. It will not look at how companies are listed on the stock exchange, the taxes they pay, insolvency law, or whether company directors can be disqualified from running another company.

"For example, at the moment company directors can legitimately walk away from any environmental liabilities they have caused, simply by forming a new company and leaving the financial liability with the old, insolvent, one. This means that public funds are often used to clean up the pollution and protect public health. We think this needs to be reconsidered."

Standards

On a positive note, stakeholders agree that the OFR will raise the quality and quantity of non-financial disclosure. The lack of binding guidelines means there will undoubtedly be companies which do the minimum and produce largely symbolic reports. But those which lag behind, or fail to act in good faith, may well jeopardise their relationships with investors and with the public, damaging their reputations and share price. Furthermore, the NGOs have no intention of letting the issue lie. Compulsory reporting and compliance have always been, and remain, the mainstay of those campaigning for better corporate responsibility. They are not going to rest until adequate compulsory reporting is in place.

A Working Group, set up to provide suggestions on how to decide what is material, published guidelines last year. It cited several emerging standards as examples of what is generally considered to be material.

These include the Global Reporting Initiative, the OCED Guidelines, the AA1000 Assurance Standard and the guidelines issued by the Department for Environment and Rural Affairs on environmental reporting.

Companies, regardless of industry sector, would do well to study these standards and carefully consider social and environmental issues. They should also seek outside help when evaluating and reporting on them. If they do not, they may one day find themselves subject to outside attention of a less than helpful nature from fund managers, NGOs and other stakeholders.

ENVIRONMENTAL REPORT GUIDELINES

The UK Department for Environment and Rural Affairs suggest the following should appear in companies' environmental reports:

- A statement by the CEO, to include: endorsement of the environmental policy; highlights of the report including successes and failures; major environmental issues for the organisation and a vision of how the organisation plans to address them

- The company's environmental policy: recognition that the organisation has environmental impacts, commitment to measure and report environmental performance; a statement of your plans to improve performance; plans to consult and involve interested parties

- A profile of your organisation: major sites, functions, geographic scope, details of which operations the report covers.

- A description of management systems: The name and role of the responsible board member or equivalent who heads the environmental management system; how policies are monitored and reviewed; details of any recognised standard of environmental management used in the organisation.

- Key environmental impacts: These are likely to include greenhouse gas emissions, waste emissions and water use. You may also want to recognise that there are impacts associated with the use and disposal of your products, or with the use of your services.

- Environmental performance indicators: These provide the core of your environmental report. It is helpful to be consistent in the way you measure and present information, so that readers can make comparisons with previous reports, or with other organisations in the same sector.

- Targets for improvement/progress against targets: the targets you set should be specified and quantified; to a set timescale and challenging but achievable.

- Legal compliance: If your organisation is certified to ISO 14001 or registered to EMAS, you should report on how you are complying to these standards. Stakeholders will expect you to mention if you have been prosecuted for any environmental offence during the reporting period and explain the action taken to make it less likely to happen again.

The full version of the guidelines is available at: www.defra.gov.uk/environment/envrp/general/04.htm