Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Wednesday, May 10, 2006

DTI proposals “good news” for directors, issuers – and institutional investors?

So the 7 year saga is coming to an end. The UK's Department of Trade and Industry has published the new corporate reporting requirements and proposals for directors’ ‘safe harbour’ provisions, which replace the hard-won Operating and Financial Review (OFR). Hard-won because of the long consultation process, and the work that many issuers had done to prepare themselves to produce a mandatory OFR.

This long, familiar story had as background the EU’s Accounts Modernisation Directive which required companies to produce an annual business review, albeit a less prescriptive one than an OFR proposed by the DTI. The problem was that for a Business Review to be meaningful, it required some form of protection for Directors, from inaccuracies, failure to identify risk etc. Without a safe harbour protection, companies would resort to Business Reviews written by lawyers, and shorn of any value to investors.

So the (probable) acceptance of a safe harbour protection – probable because of the week long consultation on the issue – is good news. Whilst not as supportive as the US PSRLA, the new rules should help companies produce forward looking commentary on their prospects. They will be liable only if they have acted recklessly or in bad faith.

So everyone is now happy – yes? Not quite. At least 2 letters from institutional investor groups are circulating among the Chairmen of quoted companies, asking them to “commit to a voluntary OFR”. Companies will therefore have a choice to make. The value of a good quality business review should not be underestimated. It encourages precisely the kind of long-termist outlook that US issuers favour, in the aftermath of their decisions NOT to provide earnings guidance.

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