The UK government has settled details of its forthcoming requirement on
listed companies to publish a forward-looking annual ‘Business Review’
that takes account of social and environmental issues affecting the
business.
The new measure, parachuted into the Company Law
Reform Bill last month, says company directors must use the Business
Review to cover ‘the main trends and factors likely to affect the
future development, performance and position of the company’s
business’. It would also require company directors to include
information about ‘the impact of the company’s business on the
environment’, its employees, and ‘social and community issues’.
However,
company directors can choose not to include such information –
providing they state this in the review – and also anything ‘seriously
prejudicial to the company’s interests’.
There will be no
statutory reporting standards related to the reviews, and directors
cannot be subject to legal challenge over information they provide
unless it has been produced ‘recklessly’ or in ‘bad faith’. The
government believes this will encourage more open reporting.
The
new Business Reviews, which will be introduced to fulfil the
requirements of the European Union’s accounts modernization directive,
will stand in place of the Operating and Financial Review regime, which
would have imposed more specific duties on large listed companies to
report their social and environmental performance. The proposed
statutory requirement to produce an OFR was scrapped without warning in
November 2005. A period of consultation followed, but the government
has now pronounced the OFR regulation dead.
Sarah
McCarthy-Fry, Labour MP for Portsmouth North, said that the demise of
the statutory OFR, which had proposed detailed reporting standards,
‘will severely undermine the comparability of [non-financial] reports’.
The
precise shape of the Business Reviews regime may alter as the Company
Law Reform Bill passes through the House of Commons. The Bill finished
its passage through the House of Lords on 23 May and is expected to
receive royal assent in the autumn. This means that companies will not
have to produce Business Reviews before April 2007 at the earliest. The
government has said it will consult with business on the start date.
Another
measure, Clause 156, which requires directors to have regard for the
interests not just of shareholders but also customers, suppliers, the
community and the environment, survived opposition from Conservative
peers in the House of Lords.
The government stresses that the
clause will only clarify the existing legal position established
through case law, creating a statutory obligation for the first time.
However, the Opposition is expected to table further amendments in the
Commons.
Clause 866, which gives ministers the power to force
institutional investors to declare their voting records at company
annual general meetings, also remains largely intact.
