OFR - Never MindOFR - Never Mind

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Summary
For a while, it seemed that public companies in the United Kingdom would have to assess the adequacy of their internal reporting systems because of a requirement to beef up the breadth and depth of information provided to investors in their Operating and Financial Review (OFR, which is akin to the management discussion and analysis section in U.S. public company reports). OFR reform is now a dead letter, but Ventana Research recommends companies still examine carefully whether their finance and reporting IT systems adequately support their business requirements.

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Early in December, Gordon Brown, the U.K.’s chancellor of the exchequer, announced companies would not be required to adhere to pending regulations for the Operating and Financial Review (OFR). The Review was a regulation of the Department of Trade & Industry that came into force in March and required a much broader range of annual disclosure. For many companies, preparing such a detailed and consistent discussion of their corporate strategy and operations would have taxed their existing systems and staffs. While these issues might have been addressed over time, Ventana Research found several factors that helped abort the OFR (beyond Mr. Brown’s political motivations).

One of the issues U.K. companies faced was legal liability for what in the U.S. are called “forward-looking statements.” Until the U.S. Congress passed the Private Securities Litigation Reform Act of 1995, a law that shields companies from lawsuits over good-faith guidance about their prospects, executives were reluctant to publish anything about the future. The U.K. has not had as many securities lawsuits and therefore has seen no need for this kind of rule. Yet even before class-action lawsuits by investors became fashionable in the 1970s, U.S. public corporations would not include opinions about the future or even broad future trends for fear of being sued. Unless and until U.K. companies get legal protection for such statements, investors are unlikely to get much guidance.

Another factor, in our judgment, is the cultural difference between the United States and the rest of the world with respect to the rights of shareholders to information. For the U.S., these rights were enshrined in the 1933 Securities Act and 1934 Securities Exchange Act. The thriving institutional investment business that developed in the 1960s pushed successfully for “full disclosure,” and the increase in individual investing that accompanied mass adoption of the Internet led to “fair disclosure.” In our view, while the U.K. is far ahead of continental European countries in this respect, it lags far behind the U.S. in the sense of entitlement.

It also did not help that there were requirements for companies reporting on social and environmental strategies relevant to their business, since from a corporate standpoint these requirements were (to quote Mr. Brown) “gold plated.” Some companies already tout their contributions to the community and the environment. Some, however, would prefer not to have to make hard assertions on such soft subjects, while others do not see this as a legitimate part of their charter.

Assessment
We continue to advise companies against making IT investments simply to comply with regulatory requirements. Management, particularly in the finance department, must (and, we believe, easily can) find ways to achieve real business benefits from these sorts of investments. For example, U.K. companies that take more than a week to complete their monthly close or are unable to provide executives and managers with useful information about performance should recognize that IT investments aimed at remedying these issues would be worthwhile.

Related Research Note:
OFR, Reporting and Business Intelligence 
Don’t invest in IT just to satisfy regulations.  

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