Time for action in the wake of OFR

Six months after the Operating and Financial Review came into effect, many companies still haven’t realised the implications – or the opportunities

Six months into a fresh reporting era for listed companies, there is still no clear consensus among corporate affairs or finance directors as to what should be in, and what left out, of the Operating and Financial Review (OFR).

But this is the very point of the OFR from the Department for Trade and Industry's perspective. It is for directors to collectively decide what is sufficiently important (material) in terms of performance, risk and prospects, for inclusion. And that will vary according to the nature of the business and its sector. This is where the challenge lies for advisers on, and managers of, corporate reputation.

Companies not quoted in the UK need not turn away with a sigh of relief. The likelihood is that the spirit of the regulation will have a profound impact on the way all sizeable companies seek to position themselves in their markets – at least it should. Because stakeholders, from environmentalists to consumers to human rights activists, will be encouraged to demand similar levels of information on all organisations.

Transparency law
For those firms that have produced something called an OFR in the past, and those that think a few extra pages in the annual report will do the trick, the reality of the regulations could come as quite a shock. For a start, the review should be self-standing, not part of the directors' report. As a result, the first compliant OFRs have been highly variable in quality and quantity.

The new requirements are not about more communication per se – they are about increasing transparency in the way companies behave and operate. In particular, they are about providing a forward-looking view, and a sense of the value of 'intangible' assets.

This means reporting on policies and practices – and being compared with competitors – in such areas as accounting for people, social responsibility and reputational risk management.

These are areas in which many companies have, until now, been able to pay lip service in practice while presenting a glossy picture in print. But unless they take hard action soon they will be found out.

From next year, the DTI will impose tough penalties – ultimately, unlimited fines – for directors personally who fail to comply.

Even more startling to many will be the requirement to set out strategic plans and prospects in a realistic manner. How can this be done without aiding the competition? Business can only measure and report on what is actually done – not on what it might wish to be. So descriptions of strategy and prospects in the context of market trends and risks will need to be well grounded to satisfy investors and analysts. Policies and processes to ensure effective and fair treatment of people will need to be in place and measurable.

Socially responsible behaviour – from ethical principles to supply chain management and community engagement – will be on many agendas. But if accountability and reporting procedures are not in place, there will be little on which to report.

Reputational risk assessment may be an even tougher nut and there is no sign yet that anyone outside the oil industry has cracked it. Like any other form of risk assessment it requires measurability, in this case across all areas of corporate activity. It is a long list, from levels of compliance to the extent of pressure group interest, to stakeholder opinion audits to understanding the reputational impact of the core business.

Note too that auditors will be expected to express a view on the adequacy of the processes adopted to generate the OFR.

Sourcing detailed information in all these areas in order to produce a competitively advantaged OFR will be tough for many, particularly so if year-on-year progress is to be proven by hard data. Wise (or well-advised) companies will move fast and accurately to benchmark their current position in the required areas.

Where necessary, companies will change. This may mean developing new policies, regularising operational behaviour or simply capturing more information on a wider range of 'soft' issues (and if it is material, 'hard' ones too, such as supply chain). Then they can implement the reporting process needed to demonstrate achievements.

Bold claims
Getting all this right will enhance reputation. For many, it is bound to increase perceptions of value, and reduction in the cost of capital should be one result.

Are these bold claims? Yes, but market intelligence suggests most businesses are unprepared to grasp the potential advantage – particularly in terms of allocating the resources necessary to make real changes to policy and behaviour.

Of course there is a cost. Extra pages have to be written, designed and produced (another 50, in one FTSE example). These in turn increase postage in the printed form. But the true cost is understanding and resourcing the right information to start with, and that begins with a serious process of board engagement with some of the more difficult issues.

For those who still believe the annual report can be a triumph of spin and design over fact, note the words of then secretary of state for trade and industry Patricia Hewitt when launching the draft regulations in May last year: 'Transparency has long been recognised as a crucial element in corporate governance.'

Therein lies the driver of this regulation. Whether it is a threat or an opportunity is up to individual firms  and the time they take to comply. Of course, accessing new levels of information and putting it in the public domain will not be easy.

But think of the rewards if it positions a business or brand as being among the most ethical and transparent in its sector. Effectively communicating that is the opportunity for PROs.

Alastair Eperon is managing director of reputation management consultancy Eperon Consulting and senior partner of OFRsolutions. He was group corporate affairs director at Boots throughout the 1990s.

How to handle OFRs
Don't panic –an OFR may seem complex but can be exciting
* Get into the conversation now – other companies are already
planning their OFRs
* Search for buried treasure – the OFR process should identify important stories for your company
* Make it work for you – an OFR should be a dynamic and engaging document, not dry
* Remember the web – OFRs will be published online, so think about building a great user experience

Source: CIPR

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