Narrative reporting

If Gordon Brown looks at the final version of the Business Review as envisaged by the Companies Act he may think that his decision to abandon the mandatory Operating and Financial Review went unnoticed.
The final version of the Business Review does bear an amazing resemblance to what was envisaged with the original OFR reporting standard.  Indeed, the various rounds of legal challenges, lobbying and last minute concessions by the Government as the Companies Act was passed mean that – in some cases – what we’re faced with is a slightly more confusing situation that was even the case under the mandatory OFR.  Certainly, the Business Review suffers from not being supported by the kind on in-depth guidance that backed up the OFR reporting standard.
The Act introduces a range of new provisions and defining elements over and above the existing Business Review legislation.  For starters, there’s a whole new ‘statutory purpose’ to contend with.  Companies will have to use their reviews to ‘inform members’ (that is, shareholders), which is all well and good, and fits quite nearly with previous corporate reporting requirements.  But the Act goes one step further and requires that they also pay regard to a list of other factors, such as the environmental, community and other stakeholder interests.  All of this ties in with the wider ‘enlightened stakeholder value’ aspects of the Act.
The Act also brings back in the notion of forward-looking information in more force, requiring companies to discuss the main trends and factors likely to affect the future development, performance and position of the business.  The additional provisions require companies to talk about social and community issues – adding to the requirement to cover environmental and employee-related matters in the original legislation.  This, and several of the other amendments, such as the ‘statutory purpose’ provision, was announced by the Government back in May in response to Friends of the Earth’s legal challenge to the decision to abandon the mandatory OFR.
Perhaps the most contentious change came at the very last minute, however.  Just a week or so before the Bill gained Royal Assent, the Government announced that it wanted to introduce a requirement for companies to talk about contractual or other arrangements essential to the business.  In essence this means companies talking about their supply chain.  This caused a storm in the press, but is in fact not vastly different from one to the original OFR requirements, which hardly seemed to cause a murmur at the time.
In order to force these supply chain requirements through, the Government has to throw a bone to two to the business community.  The fast-tracking of the e-comms provisions was the most widely-publicised of these (see p.10), but less well known was the idea that companies do not have to reveal information about contractual arrangements if, in the opinion of directors, it is deemed to be seriously prejudicial to that person or the company’s interests.
One of the other areas related to the Business Review where significant changes have been made is with regard to the liability for directors’ reports.  The legal challenge by Friends of the Earth presented to Government with an opportunity to revisit this issue – particularly as it was intent on maintaining the forward-looking nature of narrative reports.
The end result is not a clear-cut as many would have liked, but it does introduce some new protections for directors and is undoubtedly a step forward.  The Act brings in a new ‘safe harbour’ that restricts directors’ liability for the content of directors’ reports and remuneration reports (as well as summaries of those reports).  Effectively, it means that a director is only liable to the company for losses resulting from knowingly or recklessly providing untrue or misleading information – rather than potentially being liable to a wider group.
It’s worth noting that this safe harbour doe not include any potential criminal liability or any civil penalties.  Nor does it cover statements made outside of these reports.  So we have, in theory, the strange situation where a director can say one thing in the directors’ report and be protected, but say something in an accompanying statement and not be protected.  That said, the Department of Trade and Industry (DTI) has previously made it clear that the narrative reporting information clearly cross-referenced from the directors’ report would be acceptable.  We are expecting some further clarification from the DTI on these issues in the weeks and months ahead.
Finally, the Act also introduces a reduced liability regime to protect companies from the possibility of extended liability under the Transparency Directive.  Various parties had raised concerns that the Directive might extend liability across EU Member States and to all potential investors.  The new regime helps protect companies by restricting liability to investors who have suffered a loss as a result of statements made within periodic reports.  Once again, the liability is restricted to the company (although it can, in turn, pursue a case against directors) and, once again, directors must have knowingly or recklessly provided untrue or misleading information.
It all means lots to take in over the next few months.  The greatest problem might be working out when it all comes into effect – certainly, apart from a few key provisions required by, say, the Transparency Directive – the DTI has not yet got to grips with the implementation schedule.  It has, though, made it clear that any Business Review requirements will not apply to financial years which have already begun by the time the various provisions come into effect.  That might be scant consolation, though, for companies caught out by last minute announcements.  Watch this space.

Richard Carpenter, Development Director at corporate reporting consultancy and design agency Radley Yeldar

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