Advisors to draft corporate disclosure rules

The chairman of the group drawing up guidance on the issues which directors will have to disclose under proposed changes to the Companies Act has defended the environmental credentials of its members. She told ENDS that the group will take a "very broad view" of the scope of issues that may affect the value of a business.

Rosemary Radcliffe, former chief economic advisor with PricewaterhouseCoopers, was responding to an article in the Financial Times which said that environmental groups and trade unions had been denied a place on what it described as the "business-friendly" group. Its membership was announced by the Government in December.

Ms Radcliffe said the article was "misleading". She pointed to Deborah Doane of the New Economics Foundation and Mark Goyder of the Centre for Tomorrow's Company as examples of members with environmental expertise. She also insisted that no proposed candidates had been rejected on such grounds.

The group is said to have been selected to represent a balance of individuals who have experience in preparing and assessing operating and financial reviews (OFRs) plus a knowledge of employment and environmental issues.

Another member of the group, Rob Lake, head of SRI engagement and corporate governance at Henderson Global Investors, indicated that there would be pressure for greater environmental disclosure. "It's clear to me that companies at the moment do not report everything about their environmental impact which I think it would be helpful for investors to know," he said.

Ms Radcliffe was on the steering group for the review of company law which led to the publication last summer of the Department of Trade and Industry's draft company law Bill. Under the Bill, for which find parliamentary time has yet to be found, directors of the 1,000 or so largest listed firms will be required to publish an OFR (ENDS Report 330, pp 40-41 ).

The DTI's White Paper said that directors must decide for themselves which issues are of material relevance to their businesses. It stressed that they should consider environmental, social and ethical issues that may affect a company's performance or reputation, as well as direct financial and market factors.

Ms Radcliffe said there were two clear aims for the OFR working group: to provide greater clarity about directors' duties, and to forge a more constructive approach to disclosure. From an economist's viewpoint, she felt that directors ought to consider as relevant "any factor that can influence the value of a business," including environmental, social, employment and community issues.

However, she believes that an approach based on principles rather than rules will be more effective. Experience in the USA showed that prescriptive rules can lead to companies employing "tick-box" or "find the loophole" tactics. By setting down principles, as is traditional in UK financial regulation, she argued that companies would feel compelled to act within the spirit of the law.

The group's guidance will form the basis of standards to be laid down by a new accounting standards body to be created under the Bill.

Ms Radcliffe added: "I think we will have to go beyond broad principles to practical guidance....This is likely to include some suggestions about the processes which directors use to arrive at their judgements."

The group is likely to consider the guidelines on corporate disclosure issued by the Association of British Insurers in 2001. These require directors of firms in which ABI members invest to report on social, environmental and ethical risks and opportunities in their annual reports. But they are also asked to describe the processes, including regular reviews, by which they made decisions to include or exclude issues in their annual reports. Unlike the Government's proposals, the ABI's disclosure requirements apply to SMEs as well.

The OFR working group is due to conclude its work by October. It plans a consultation exercise to air its initial thoughts in the spring.

The group's guidance is likely to have an impact far beyond its immediate target audience. It will add to a growing swell of pressure on all companies to consider and disclose environmental issues under the general heading of corporate governance, and follows in the wake of failed Government initiatives to "name and shame" companies into reporting.

Emma Howard-Boyd of leading SRI firm Jupiter Asset Management pointed to a range of pressures which signal that the audience for such information is growing both in size and sophistication: the rapid growth of SRI funds; the requirement for pension firms to disclose whether they have worked ethical and environmental considerations into their investment policies; the ABI guidelines; and the "carbon disclosure" project.

Matt Haddon, partner in charge of corporate reporting and assurance at consultants Environmental Resources Management, pointed out that one of the most significant cultural changes in the business community in the last two years has been a move away from treating environmental and social issues as compliance matters to an appreciation of the marketing and strategic potential and risks.

The new legislation is likely to broaden the range of firms recognising the seriousness of the challenge, he said. Ideally, he thought, the guidance should comprise a mixture of headline indicators - considered applicable to all - coupled with flexibility for companies to judge their most significant impacts based on stakeholder consultation.

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