A Rebirth of Wisdom

The TakeAway: Revived British Initiative May Strengthen Board Role in Social and Environmental Oversight

We were pleasantly surprised to learn that the UK’s new Coalition Government has quietly exhumed the Operating and Financial Review (OFR), a policy for expanding corporate disclosure requirements that was controversially repealed in 2005.  It’s buried in the Business section of The Coalition: Our Programme for Government, the five-year policy plan released online on 20 May 2010, inviting public comment.  “We will reinstate an Operating and Financial Review to ensure that directors’ social and environmental duties have to be covered by company reporting, and investigate further ways of improving corporate accountability and transparency,” the document states.  While many initiatives now call for enhanced disclosure of environmental, social, and governance (ESG) issues, few explicitly link this to board duties, a move that takes a great step toward restoring high standards of stewardship for corporate directors.

The revival came in response to pressure from investors to provide a more accurate picture of company activities beyond rote box-ticking, according to Rachel Sanderson of the Financial Times.  The earlier version of OFR developed out of a comprehensive public consultative process in the early 2000s.  That version also called for mandatory reporting on environmental and social issues beginning in fiscal year 2005 for all 1290 quoted companies in the UK, according to Murninghan Post Editor Bill Baue, who covered the issue.  But it was “shot dead”, Baue wrote in December 2005, after then-Chancellor of the Exchequer Gordon Brown “pulled the trigger, citing concern over ‘goldplating’—or blind adoption of European Union regulations.”  Back then, many businesses and accountants claimed the policy was too burdensome and costly.  Now, they seem to have changed their minds, Mario Christoduolou writes in AccountancyAge:  “[W]ith its possible reinstatement came the possibility of reform in another area closer to auditors’ hearts – liability reform”.

Last week, SAP’s James Farrar blogged about the return of OFR, highlighting Microsoft’s embrace of mandatory carbon reporting.  Microsoft is a reluctant discloser, according to Michael Muyot of CRD Analytics, which provides the framework for the NASDAQ Global Sustainability Index, launched last year.  Last October, the Index dropped Microsoft (as well as Oracle and Cisco) due to their failure to meet the Global Reporting Initiative’s G3 Guidelines.

The UK OFR regulation follows the “comply or explain” approach that allows for non-disclosure  but requires companies to offer clear and persuasive arguments for their decision.  This approach mirrors provisions of the UK’s Stewardship Code launched by the Financial Reporting Council last month.  The overarching objective is to engage shareholders and companies in fruitful dialogue across the range of financial and nonfinancial concerns.  In that case, too, trustees will need to step up, which is one reason the European Commission opposes it:  the EC isn’t confident of investor trustees’ ability to do so.

We can learn much from the British experience on both the investor and corporate governance fronts as the US undergoes its own process of reform.  In the midst of SEC deliberations regarding board disclosure of climate risk, board qualifications, and shareholder involvement in director nomination, the UK approach of making ESG disclosure an explicit board responsibility provides a strong example of best practice.  After all, improvement comes not just from better regulations and reports, but from real people exercising informed good judgment about interrelated economic, environmental, social, and governance risks and opportunities.  In the end, that’s what wise 21st century stewardship – and statecraft – is all about.

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