2005 – Operating and Financial Reviews
The uproar in some sectors created
by Gordon Brown’s decision to scrap mandatory
operating and financial reviews is understandable.
So many noses were pushed out of joint in this
single dismissive blow that the sound of cracking
bone was almost audible across the auditing and
But maybe Mr Brown has done everyone
a service. The withdrawal of the legal requirement
does not negate the business case for the OFR.
Investors will still be seeking evidence of a
well run company, particularly among the kind
of businesses that rely on their intellectual
capital rather than fixed assets for their future
Fixed capital is a kind of insurance
policy against failure. If the business isn’t
up to much you can strip away and sell off various
assets and parcel up any remaining profitable
bits for development or sale. The late Lords Hanson
and White created a successful business doing
But a growing number of companies
these days are trading far ahead of their book
values. This was why the OFR was proposed in the
first place. It was envisaged as a new kind of
valuation narrative that would tell the story
that you could not find in historic cost accounting.
The need for this story is as
strong today as it was when the OFR was first
proposed by the Accounting Standards Board in
1993. At that time the idea seemed so sensible
that it was quickly endorsed by the stock exchange.
It wasn’t seen as red tape but as sound
The problem then was that neither
companies nor auditors could agree on a cohesive
and common approach with meaningful measures and
comparisons. It took years of investigations and
task forces to produce the regulations that Mr
Brown removed at a stroke.
For those involved it must have
been a crushing decision. No-one wants to see
their hard work flushed away. On the other hand
there were flaws in the final OFR guidelines,
particularly when it came to the suggested approaches
to employment reporting.
This was leading to a money-spinning
free-for-all among consultants hawking their various
approaches and proprietary measures. Companies
could be forgiven if they felt as confused as
ever. Most big public companies are already producing
OFRs, but they still lack strong guidance on mean
Last week speaking with members
of the HR Society in London, there seemed to be
general dismay at the chancellor’s decision
but a determination, also, that companies should
continue to develop their use and application
of employee metrics.
A similar reaction emerged form
Investors In People, where a meeting has been
planned later this month to establish The Human
Capital Management Standards Group, an industry-wide
body devoted to creating a common set of employment
measures that can be used for investor comparison
across all sectors.
This particular initiative emerged
from a conviction within the HR community that
the OFR guidelines were inadequate in their approach
to employee information. According to the reporting
standard, even with the mandatory approach, companies
would only have needed to supply information “to
the extent necessary”, a legal framework
that lacked the clarity embodied in the concept
Most of those who have a stake
in the success of a company don’t give two
hoots for such legal niceties. They want useful
information that ideally can be set against the
information produced by a competitor company for
the sake of comparison.
I’m not a horse-racing
enthusiast but if did seek to place a bet at the
races I would want to consult a form guide about
the horses, jockeys and trainers. What had they
done in the past? How well could the horse perform
over a particular distance in particular conditions?
Nothing will guarantee a winner but we all need
the best information we can get when making our
One of the biggest problems with
the stock market today is that too often investors
are behaving like track-side punters, interested
in short-term gains that tend to be secured on
reactions to short-term information such as quarterly
reports and potentially volatile statements such
as profits warnings or take-over bids.
The value of the OFR, particularly
if it can get its approach to employment reporting
right, is that it can provide strong long-term
indicators of growth potential and sustainability.
This is the business case for stability behind
the OFR that all companies should heed if they
are thinking of scrapping their reports after
the chancellor’s intervention.
The business case is far more
important than the case for compliance. But businesses
need guidance. This is why the HCM Standards Group
is seeking to pool the knowledge of the UK’s
most authoritative organisations and people in
If they can’t, through
informed debate, put together a basic template
of employment metrics to underpin the detailed
work in which most big companies are already engaged,
then it will not be for the want of trying.
In these deliberations the question
of whether or not the OFR is mandatory is immaterial.
The OFR had been concentrating minds and, in that
sense, it was proving a useful peg. The challenge
now is to build on the spirit of co-operation
founded in the conviction that people make a difference
in companies and that there are ways to represent
this difference in a narrative, in figures and
in qualitative reviews.
If the HR community cannot find
a compelling business case for external human
capital reporting, then the various bodies must
go their separate ways and continue with the piecemeal
approach that exists at present.
Those who favour complex matrices,
elaborate calculations and trademarked metrics
will probably prefer such division, since it will
preserve their professional and consulting cabals,
not to mention their distance from a bamboozled
executive, wary of snake oil sellers.
But it doesn’t need to
be like this. Enough chunks of work have been
produced in the past few years that make the link
between good people management and corporate performance.
That work needs to be synthesised and simplified
to give all companies the building blocks they
need to construct individual strategies. At the
same time these companies could utilise a few
standard measures to provide a representative
picture for outside investors and for their own
The vital signs of a healthy company are
the attitudes, skills, knowledge and approaches of its employees.
So why not give investors a few vital statistics to support
their overall impression of corporate potential? It’s
not bureaucracy. It’s not red tape. It’s information.