OFR and sustainability roundtable by Chartered Institute of Management Accountants

OFR and Sustainability Roundtable Examining the impact of the OFR on sustainable development and corporate reporting Technical Report

supported by

Writers: Danka Starovic Dr Arlo Brady

CIMA Mott MacDonald Group and Judge Institute of Management

Contact: Danka.Starovic@cimaglobal.com Copyright ÂŠ CIMA 2005 First published in 2005 by: The Chartered Institute of Management Accountants 26 Chapter Street London SW1P 4NP The publishers of this document consider that it is a worthwhile contribution to discussion, without necessarily sharing the views expressed. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the authors or the publishers. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means method or device, electronic (whether now or hereafter known or developed), mechanical, photocopying, recorded or otherwise, without the prior permission of the publishers. Translation requests should be submitted to CIMA.

Contents

Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ● The OFR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ● The Roundtable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ● Aims of the report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2 5 5 6 6

List of participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 OFR content and key performance indicators . . . . . . . . . . . . . . . . . . . 8 ● Quantitative and qualitative information . . . . . . . . . . . . . . . . . . . . . . . 8 Investors and investor pressure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ● Investor engagement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ● Do equity analysts care about the OFR? . . . . . . . . . . . . . . . . . . . . . . . . 10 ● Evolving measures of performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ● Are all investors the same? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 CSR reports and the OFR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ● OFR, CSR or both? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ● What belongs where? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ● Shareholders vs stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ● Stakeholder engagement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Suggested reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Executive summary

Introduction On 9 May 2005, a group of experts from a wide variety of backgrounds assembled to discuss the impact of the new mandatory Operating and Financial Review (OFR) on companies’ sustainability practices and reporting. The specific issue of sustainability was chosen because many companies will find collecting and reporting information about sustainability–related issues a challenge. In addition, although the OFR is addressed to the members of the company, the information will also be of relevance to other stakeholders. It is therefore an area where there could be conflict between the directors’ judgement of what is material and stakeholders’ demands for transparency. There is also the problem of how the OFR will relate to existing sustainability or Corporate Social Responsibility (CSR) reports which are produced by a number of companies, particularly in the FTSE100. The debate highlighted the following issues: Quantitative and qualitative information The OFR should contain both types of information but it would be futile to prescribe the balance between the two. In some cases, it may prove particularly difficult to develop quantitative indicators. There is a danger that greater weight is given to quantitative information on the basis that it is perceived to convey a greater degree of accuracy than a narrative report.We should get used to the idea that qualitative information, though potentially imprecise, can be very useful when assessing strategic performance. Investors and investor pressure One of the main drivers for the evolution of the OFR will be investor involvement.The extent to which information in existing CSR reports will appear in the OFR will depend on the level of interest shown by investors. There was concern that equity analysts would ignore the OFR because of timing issues. By the time the annual report appears, the information it contains is largely old news for analysts who have had the benefit of face-to-face meetings with companies at an earlier stage.This may need to be addressed in future, perhaps by including the OFR with the preliminary statements. Nevertheless, even if the OFR is not widely read by analysts, the process of preparation will help to generate a better flow of information between companies and investors.

Executive summary

In addition, it should be remembered that different types of investors have different kinds of mandates and there is a growing number of specialist governance and socially responsible investment (SRI) analysts. Companies will have to give considerable thought as to the specific audience for the report. In terms of selection of key performance indicators (KPIs), a balance has to be struck between consistency and comparability on the one hand and the need to develop new KPIs to reflect the dynamic nature of business.This is where the narrative sections of the OFR can be useful in explaining KPI choices and any changes from previous years. CSR reports and the OFR Companies that already produce a CSR report are likely to continue to do so.Although some overlap is inevitable, the reports are aimed at different audiences and therefore require different approaches for preparation and assurance.The main issue is the interrelation of the two reports, both in terms of content and the process of preparation. For the OFR, boards should select the two or three sustainability issues that are truly relevant for overall strategy and report on those. In some cases, it might be appropriate to select long-term issues that could have a serious impact on the companyâ&#x20AC;&#x2122;s future strategy. A key difference between the CSR report and the OFR is that the former is an unregulated communications format which permits exploration of various issues.These might be inappropriate for the OFR which requires consistency and comparability. Shareholders vs stakeholders To a degree, the shareholder/stakeholder dichotomy is misleading in that companies produce CSR reports for a reason â&#x20AC;&#x201C; they believe that they will ultimately create shareholder value. Although not aimed directly at investors, the CSR report may be a useful source of information for them.An issue that may at first sight appear irrelevant to shareholders and of concern only to a narrow stakeholder group, may in fact turn out to be an early indicator of something that will impact long-term shareholder value. Companies might need to conduct stakeholder engagement work to determine what kinds of KPIs should be included in OFRs.The costs and benefits of this need to be considered carefully. Ultimately, the OFR is aimed at members of the company and should focus on information that is strategically relevant.

Executive summary

Conclusions

● The OFR needs to be a part of mainstream corporate reporting. Both companies and investors need to ensure that it fulfils its mandatory remit and potential to improve the transparency of corporate reporting.

● In time, we should hopefully see convergence of good practice which will allow comparability and consistency.

● Business needs to pay attention to stakeholder opinion for reputational reasons as well as to meet the needs of its customers. However, the OFR is aimed at members of the company and should not be cluttered with information that is not strategically relevant. ‘Taking account of’ is not the same as ‘being held accountable to’.

● The publication of the OFR may be an opportune time for companies to stand back and review the entirety of their corporate communications package in order to ensure overall coherence. As the length of various reports increases, it becomes even more important to have ‘read across’ between different sections. Once the first round of OFRs is published, companies may also find it useful to seek feedback from users in order to make sure the report is meeting their needs.

Introduction

The OFR There is no shortage of opinions about the Operating and Financial Review (OFR). Acres of newspaper print and a glut of seminars, conferences and presentations have been devoted to it in recent years.The Conservative Party even made it a part of their election manifesto in 2005, vowing to scrap the mandatory requirement as part of its deregulation package for business. One Labour victory later, the mandatory OFR is still in place and all listed companies now have to comply for financial years that began on or after 1 April 2005. At the heart of the OFR is a desire to improve transparency in corporate reporting. It is meant to provide information to ‘assist members of the company to assess the strategies adopted by the entity and the potential for those strategies to succeed’.This includes the nature, development and performance of the business, as well as the resources, principal risks and uncertainties that may affect it. (ASB, 2005). Although the OFR is not new – many large companies have been producing theirs for a while – it seems that the UK business leaders remain split over its benefits. Research conducted by MORI in May this year shows that some 43 per cent support it and 48 per cent oppose it. Part of the reason the OFR is proving to be so contentious is undoubtedly the requirement to report – ‘to the extent necessary’ – on environmental, employee, community and social issues. Up until now, if a company felt the need to report on its environmental or social performance, it did so on a voluntary basis, mainly through so-called CSR/sustainability reports.There has been little legislative pressure (in the UK) and, as a result, there are still relatively few British companies who do report. In the main, sustainability reporting is restricted to the ‘usual suspects’, and the quality, coverage and size of their reports is highly variable. One can therefore assume that the majority of some 1400 listed UK companies may not have mechanisms in place for collecting and reporting relevant information and may therefore struggle with OFR preparation.

Introduction

The Roundtable Some 24 hours before the Accounting Standards Board (ASB) issued the final OFR Standard, a group of experts from a wide variety of backgrounds – financial controllers, investment managers, risk experts and CSR specialists – assembled to discuss the impact of the OFR on companies’ sustainability practices and reporting.The event was chaired by Dr Arlo Brady, a research associate at the Judge Institute of Management. Why did we choose sustainability in particular? In many ways, sustainability or corporate social responsibility has been the most visible part of companies’ attempts at non-financial reporting.There might not be many CSR reports, especially not outside the FTSE100, but the fact that they exist at all is a testament to the growing importance of the subject matter. Some companies have been forced to publish their reports as a result of public scrutiny and pressure from NGOs or single-issue campaigners. Others, such as Co-operative Financial Services (CFS), have used CSR strategically, thereby creating unique competitive advantage. But for the majority, collecting and reporting information about sustainability-related issues will undoubtedly be a challenge.They will have to start from scratch and consider the processes they need to put into place to make it happen – from how to collect the relevant information to who within the company is responsible for its accuracy. In addition, although the OFR is addressed to the members of the company, the ASB standard states that the information disclosed in it will be of relevance to other stakeholders. It also states that the OFR ‘should not, however, be seen as a replacement for other forms of reporting addressed to a wider stakeholder group.’ No one knows how those stakeholders will react to the first round of OFRs but it is an area where we could potentially see conflict between directors’ judgement of what is material and stakeholders’ demands for transparency. More clarity about expectations may be needed on both sides. Aims of the report The aim of this brief report is to provide some basic background on the OFR requirements – detailed information is available elsewhere and we list some of the main sources on page 17 – and to summarise the discussions that took place on 9 May. We hope the reported dialogue highlights some of the issues that companies, investors and CSR specialists may face after OFRs are published. In particular, we hope it alerts all the participants to particular areas of importance or those that may be ripe for misunderstandings or conflict.

List of participants

Name

Organisation

Role

David Bent

Forum for the Future

Senior Sustainability Advisor

Ian Blythe

Boots plc

Group Environment Manager

Dr Arlo Brady

Mott MacDonald Group and Judge Institute of Management

Head of CSS and Research Associate

Mandy Cormack

Unilever plc

Vice-President Corporate Responsibility and Head of Corporate Relations

Nigel Cribb

ICI plc

Group Financial Controller

Rachel Crossley

Insight Investment

Director, Investor Responsibility

Nadia Ford

Mott MacDonald Group

CSS Advisor

Guy Jubb

Standard Life Investments

Director and Head of Corporate Governance

Rob Lake

Henderson Global Investors

Head of Corporate Engagement

David Loweth

Accounting Standards Board

Board Secretary

Dr Craig Mackenzie

Insight Investment

Head of Investor Responsibility

Richard Mallett

CIMA

Director,Technical Development

Howard Orme

Allied Domecq

Group Financial Controller

Howard Pearce*

Environment Agency

Head of Environmental Finance and Pension Fund Management

Jeremy Roche

CODA plc

CEO

Sarah Sodeau

GUS plc

Head of Risk Assurance

Danka Starovic

CIMA

Technical Specialist

Charles Tilley

CIMA

Chief Executive

Andrew Watchman

DTI

Accountancy Advisor

*Comments submitted by post

OFR content and KPIs

Because the participants came from such a wide variety of backgrounds, the debate about the OFR content focused on fairly general themes rather than the specifics of individual companies’ performance. Quantitative and qualitative information One of the first issues to be discussed was whether the OFR should contain predominantly quantitative or qualitative information. Unsurprisingly, the answer was both – whichever is chosen depends on the issue in question. In some cases, according to Rob Lake from Henderson Global Investors, when reporting environmental performance in an area such as greenhouse gas emissions, most of the data will be quantitative and historical by definition. But the discussion about the main environmental trends or factors likely to affect the company’s future development and the board’s view about the future significance of emissions may well be purely qualitative. For example, a company may choose to outline the steps it intends to take to reduce its gas emissions; that is likely to be a narrative report rather than another set of numbers. Similarly, methodologies for capturing and reporting data may already be relatively well established for some issues, such as reporting on waste emissions.They may simply need a bit of tweaking to make them suitable for inclusion in the OFR. But with others, such as the ‘softer’ issues around human capital, it could be difficult, or even impossible, to develop quantitative indicators, at least not for the first cycle of the OFR. It is therefore futile trying to predict in advance what the OFR may look like or prescribe that a certain percentage of it should be quantitative or qualitative. There was a warning, however, not to give greater weight to quantitative reports on the basis that they convey a greater degree of accuracy than a narrative.According to David Bent from Forum for the Future, this could lead companies to downgrade all future information and rely purely on historical, quantitative data.And that is exactly what the OFR is trying to avoid.

‘I think we should not trip ourselves up right at the start by saying that quantitative is much better than qualitative.’ David Bent, Forum for the Future

OFR content and KPIs

Instead, we should get used to the idea that qualitative information, though potentially imprecise, can be useful when assessing strategic performance. Dr Craig Mackenzie from Insight Investment added that he understood the OFR to be about telling a convincing story to shareholders. If that is the case, then the story needs to be illustrated with evidence which will undoubtedly include numbers. Put simply, it is one thing to claim to have high levels of customer satisfaction but quite another to have data to prove it. In reality, very few issues are likely to be separable into clearly quantitative or clearly qualitative information.While producing a report that is predominantly one or the other is not in any way illegal, eventually shareholders will voice their opinion about the nature of the information provided.

Investors and investor pressure

Investor engagement The ASB Reporting Standard for the OFR spells out a principle that the ‘OFR shall focus on matters that are relevant to the interests of the members’. It also states that ‘Members’ needs are paramount when directors consider what information shall be contained in the OFR’. (ASB, 2005). According to Andrew Watchman from the DTI, one of the main drivers for the evolution of the OFR should be investor involvement. Indeed, the extent to which the information that now sits in CSR reports will find its way into the mainstream OFR will in large measure depend on the amount of interest shown by investors. Notwithstanding the different perspectives of different types of investor – a subject the debate touched upon later – companies will need to put themselves in the shoes of a reasonable and diligent investor and try to figure out what the notional person actually wants.And if it is thought that they really want the added comprehensiveness of a CSR report, then companies will have to respond accordingly. Do equity analysts care about the OFR?

‘Hopefully, one of the main drivers for a positive evolution in the qualitative factors will be engagement with investors.The extent to which information – the vast part of which is in CSR reports already – will find its way into the mainstream OFR will in large measure come down to how much interest investors really show in this type of information.’ Andrew Watchman, DTI

There was some concern, however, that equity analysts will ignore the OFR altogether. This runs the risk of making the document itself superfluous and the cost of producing it a regulatory burden. The importance of analysts lies in their role as the first link in the corporate reporting supply chain. In a sense, they are almost proxy investors as they publish recommendations and valuations of companies’ shares that may affect their trade and therefore price. Their recommendations are based on various sources of information, including the companies’ preliminary results as well as broker reports which in effect ‘pre-digest’ anything likely to be new and/or interesting in the annual report. In addition, during their face-to-face meetings with companies, analysts receive much more than just the update on financial results.They obtain information about the company’s future strategy and an opportunity to form their own perceptions about the quality of management thinking and the competence of executives.They are also likely to see some of the KPIs that may later appear in the OFR. Research (Holland, 2002) has confirmed that for analysts, these private meetings are an opportunity to ‘look into the whites of managers’ eyes’ and challenge them on different issues, sometimes quite robustly. However, this also means that by time the annual report comes out, it is largely old news. Most of the information it contains has already been circulated and reflected in the company’s share price. Both Rob Lake and Craig Mackenzie insisted that the OFR publication is therefore unlikely to greatly – if at all – improve the quality of analysts’ access to information or their resulting perception of the business.

‘Frankly, the vast majority of analysts who do the number crunching will completely ignore the OFR.’ Dr Craig Mackenzie, Insight Investment

Investors and investor pressure

Charles Tilley, an advocate of the OFR’s potential to improve the quality and transparency of corporate reporting, thought that this was a ‘terrifying’ prospect. He added that, considering the annual report and the OFR come at the end of a process by which the relevant information gets disseminated to key users, then perhaps the issue of timing needs to be addressed in the future.The OFR might need to be attached to preliminary statements so that analysts receive all the relevant information together with the financial update. Dr Mackenzie pointed out that, even if the report itself is not widely read by analysts, the process of preparation will help to generate a better flow of information between companies and investors. First and foremost, the OFR will help with what he calls ‘story-making’ because it will create a more structured context for corporate communication.

‘Not many sell-side or indeed buy-side financial analysts will get up in the morning and say – I must go and read the OFR. But that does not mean that there is not going to be a very interested audience in the investment community.’ Rob Lake, Henderson Global Investors

Companies will be forced to organise their thinking about strategy in a way that makes sense to shareholders by considering what they choose to communicate and when, and how they can improve their story to make it more convincing.With the OFR as a backdrop, there is an opportunity to make all investor communication consistent. Evolving measures of performance As Andrew Watchman from the DTI pointed out, there is currently nothing to stop a company reporting one set of KPIs in a presentation to, say, analysts, but a completely different set to a different audience at a different time.With the OFR as the framework for investor scrutiny, it is going to become much harder to get away with selective and inconsistent reporting. However, there was some concern amongst the rountable companies that reporting a static set of KPIs implies the business never changes – which is clearly not the case in today’s dynamic competitive environment. Mandy Cormack said that, for example, Unilever’s health and safety performance indicators keep evolving.Although this makes comparisons difficult, Unilever’s rationale for doing it is that it is committed to safety of its employees and contractors. If it can implement a better way of monitoring it, it will not hesitate to do so even if it runs the risk of inconsistency. Clearly, this is one area where quantitative information such as historical indicators has to be put in a wider context.A narrative can be used to explain and justify KPI choices and any changes from previous years. Howard Orme reminded the panel that the market will not let you ‘chop and change’ KPIs willy-nilly and that doing so would constitute ‘investor relations suicide’. In other words, there is a certain amount of market rather than legislative pressure against inconsistency. Howard Pearce from the Environment Agency suggested that companies select KPIs from the forthcoming DEFRA publication on environmental KPIs which is out for consultation over summer 2005.The data should be collected from the companies’ existing control, procurement, financial accounting and CSR reporting systems as companies should already be managing the risks involved.

‘The OFR will put discipline and structure into communication processes.’ Andrew Watchman, DTI

Investors and investor pressure

Both companies and investors should work together to ensure that the OFR becomes a significant part of mainstream reporting rather than a ‘specialist subject’, according to Guy Jubb from Standard Life Investments. Investors agreed on the need for engagement and follow up. Equally, companies ought to be responsive to investor concerns and make sure the OFR meets their needs. If the issues mentioned in the OFR are deemed to be strategically important, there ought to be a ‘read across’ with other segments of the companies’ reporting ‘package’ such as, for example, the remuneration report. Are all investors the same? Investors are often portrayed as being a uniform entity but in reality, they are a very diverse group.The fact that City analysts may not read the actual document does not in itself spell the death of the OFR. Rob Lake pointed out that this is already the case with other sections of the annual report which, though unread by analysts, are nevertheless seen as vitally important for transparency and good governance. It is therefore more a question of who within the financial community will make use of the OFR information. There are investors with a different kind of mandate, such as the growing number of specialist governance and socially responsible investment (SRI) analysts.Their approach tends to be long-term stewardship so, in Mintzberg’s words, they are owners rather than punters.While they may not manage money directly, they do vote at AGMs and their views are influential, not least because they often get reported in the press. Although specialised, they are increasingly interacting with the traditional ‘number crunching’ analysts.This ensures cross-fertilisation and a better ‘fit’ between financial and non-financial information. Finally, there was a warning that when deciding what information to report, companies and boards will also have to consider who their shareholders actually are.As Rob Lake said, the investment world is already very diverse and is becoming increasingly so. Hedge funds or proprietary desks, both of which have been under heavy criticism recently, are also shareholders.Their time horizons and therefore their priorities may be entirely different from those of traditional investors.As a result, their approach to sustainability – for example, their views on environment-related investments with longer payoffs, are likely to be different. For companies, this should mean a general awareness that it is not only the single issue pressure groups or NGOs that may try to influence the reporting agenda. Some shareholders may try to do the same, especially if there is a vacuum where legitimate investor engagement should be.

‘The OFR is clearly going to evolve.The DTI allows a year’s grace so that companies could perhaps still be experimenting a little bit in the first year before the regulatory regime kicks in fully.’ Andrew Watchman, DTI

‘There is a relatively small group of people in investment houses who take an interest in the OFR and they tend to be the same people who are busy running around voting and doing lots of other things. So there is a bit of a problem, I think, in terms of using the consumer of the report to drive best practice.’ Rob Lake, Henderson Global Investors

‘Sustainability is very important for certain shareholders and investors – but for others, it does not come into their particular equation or remit. I think when boards set out on this journey they will have to give some considered thought at the outset as to just who this report is in fact designed for.’ Guy Jubb, Standard Life Investments

CSR reports and the OFR

OFR, CSR or both? Most of the companies represented at the roundtable already produce a standalone CSR report and all of them said they would continue to do so.There was no question about the OFR superseding it in any way.Although some overlap was inevitable, it was stressed that the reports are aimed at different audiences and will therefore require different strategies for preparation and assurance. The issue for companies was more around how the two reports are likely to relate to each other, both in terms of content and the process of preparation. Although the OFR is written for the benefit of members of the company, there was some debate about whether it is feasible to produce a document that would satisfy both shareholders and stakeholders. Guy Jubb reminded the participants that though this is possible, it is worth bearing in mind that the directors’ ultimate accountability is to shareholders alone. David Bent pointed out that a CSR report should set the scene for the OFR. Companies that already take time to prepare a good CSR report may find it a lot easier when it comes to preparing the OFR as they will already have considered what is strategically important. What belongs where? Nigel Cribb from ICI said that this type of relationship between reports may sound logical in theory, as the OFR could be seen as a high-level summary of the more comprehensive CSR report. But in practice, it may be difficult to narrow the focus of reporting even further. For companies that have already been through the process of selecting the strategically relevant issues and KPIs, cutting their number down further will be a challenge. Craig Mackenzie contested this by saying that however important many CSR issues may be in themselves, many of them are simply not material to shareholders. In other words, the process of preparing an OFR should not be about trying to cherry-pick, say, five most important KPIs out of the whole CSR report. Instead, it should be about the board selecting two or three issues – perhaps a few more in companies with obvious social or environmental impacts – that are truly relevant for its strategy. The KPIs selected do not necessarily have to have an immediate impact. It may be appropriate to select more long-term issues. For a company like Unilever, Dr Mackenzie said, it could be something like obesity or access to unsustainable fisheries or indeed unsustainable sourcing in general – all of which are likely to have a serious and long-term impact on its ability to keep producing its goods and supplying its customers. He added that it is, on the other hand, entirely appropriate for a CSR report to cover all the issues that a company thinks are relevant from a social or environmental point of view. Considering such a report is aimed at a wide group of stakeholders, it will by default be far-reaching in its approach.

‘All of your communication from the packaging, the advertising, the marketing messages, investor relations, your analyst briefings, your CSR report, your OFR – this is telling the world about what your company is like, what its values are, what is underlying it – so they have to be a coherent piece. But they are also all addressed to different people for different purposes.’ David Bent, Forum for the Future

CSR reports and the OFR

Mandy Cormack agreed, citing the example of advertising and the social debate that has built up around it as something that the Unilever CSR report would discuss in terms of, for example, the company’s approach to self-regulation.Although that is not immediately relevant in terms of explaining the company’s performance to the City, it is nevertheless an important area for Unilever to be involved. Mandy Cormack felt that the CSR report offered a unique and legitimate place for reporting issues such as these.This was precisely because it is an unregulated communication format which allows the exploration of issues that have a ‘wave pattern’ and come in and out of focus of attention.They may be inappropriate for the OFR – which she referred to as a ‘hard’ statement, meaning it requires consistency and comparability. Shareholders vs stakeholders Rob Lake took the debate one step further by saying that the shareholder/stakeholder dichotomy is to a certain extent false anyway.When companies produce CSR reports covering a whole range of issues from greenhouse gas emissions to ‘how many babies the CEO has kissed in the previous year’, they do it for a reason. They perceive that there is some benefit in doing so which will eventually – and perhaps in a roundabout way – translate into shareholder value.There would be little point in doing it at all otherwise. Investors – including his own company – do not assume that boards of directors are so naive as to invest a lot of time and money into good CSR reporting if the result has no value whatsoever to shareholders. He added that although not aimed at them, the CSR report may in fact be a useful source of information for investors. For example, it would reveal the importance a company attaches to its reputation and standing in the local community and how much it is prepared to invest in developing them. In addition, an issue that may at first sight appear irrelevant to shareholders and of concern only to a narrow stakeholder group, may in fact turn out to be an early indicator of something that will impact long-term shareholder value.This does not mean that it is suitable for the OFR – at least not on its own. It might find its way in as a part of an aggregated issue. Guy Jubb added that companies should use this as an opportunity to stand back and examine their corporate reporting practices. Rather than simply publishing the reports and forgetting about them, they should go the extra mile and seek feedback from users as to whether or not they are meeting their need.And if they are not, then they need to take action to address it.

‘We are talking about the really big strategic businessrelevant risks and anything that is not in that big hairy category would have to go on the web or in some other form of communication.’ Mandy Cormack, Unilever

CSR reports and the OFR

Stakeholder engagement The Chairman raised a question about whether companies need to conduct stakeholder engagement work in order to help them decide what kinds of KPIs may need to be included in their OFRs. Both Sarah Sodeau and Mandy Cormack thought that, although companies may find engaging with stakeholders useful, they need to state at the outset that their final choices might not be based on the outcomes of this process.The results might not necessarily be helpful so the costs and benefits of such an exercise need to be weighed up carefully. Howard Pearce said it was not necessary to go through the engagement or consultation process if the company is using a set of standard KPIs derived, for example, from DEFRA or ASB guidelines. However, if using company-specific, non-standard KPIs, then there may be need to consult more widely. David Bent mentioned the two kinds of regulatory regime with which companies need to comply. On the one hand, there is the formal, regulatory regime but on the other, there is the civil regime, consisting of civil society groups (NGOs, pressure groups, etc) that, in his words,‘go around causing bother’. This civil regime, through its public agenda, is trying to mark out the territory within which they feel companies are allowed to operate.The boundaries and the relationship between business and society are therefore constantly shifting. The ‘business of business may be business’ but corporate communication is part of continuous renegotiating of the ‘licence to operate’ between companies and society.A CSR report is therefore not only a way of justifying company’s strategic choices but also a way of marking out the territory in which it feels it can legitimately do business and a signal it is trying to play a legitimate role in society.

‘If it is the board of directors that is accountable for the choice of KPIs, then the board of directors has to make that decision. If they do not agree with their stakeholder requirements, then they have to be prepared to say so.’ Sarah Sodeau, GUS plc

Conclusions

Despite having a potentially controversial mix of participants, the OFR and Sustainability Roundtable turned out to be a constructive dialogue between different interest groups. Hopefully, the publication of the first round of OFRs will not turn out to be too dissimilar. If there was a consensus about anything during the meeting, it was about the need to make the OFR a part of mainstream corporate reporting. It makes the effort put into producing it worthwhile and it gives investors valuable information about the company’s strategy and potential. In other words, both companies and investors need to ensure that the OFR fulfils its legal remit as well as its potential to improve transparency of corporate reporting. In time, there will hopefully be a convergence of best – or at least good – practice which will allow more comparability and consistency. The publication of the OFR may be an opportune time for companies to stand back and review the entirety of their corporate communications package in order to ensure overall coherence.As the length of various reports increases, it becomes even more important to have ‘read across’ between different sections. Once the first round of OFRs is published, companies may also find it useful to seek feedback from users in order to make sure the report is meeting their needs. There is no doubt that business needs to pay attention to stakeholder opinion. It cannot succeed otherwise, not only because it runs a significant risk to its reputation – but also because it fails to meet the needs of its customers.As a recent article in The Economist put it: ‘Companies that treat social issues as either irritating distractions or simply unjustified vehicles for attack on business are turning a blind eye to impending forces that have the potential fundamentally to alter their strategic future.’ (Davis, 2005) But ultimately, the OFR is aimed at members of the company and should not be cluttered with information that isn’t strategically relevant. ‘Taking account of ’ is not the same as ‘being held accountable to’:‘Accountability refers to a much more formal and direct set of rights and obligations’ (The Economist, 22 January 2005) Finally, it is worth adding that there is much about sustainability reporting, whether in the OFR or elsewhere, that is common sense. Some recommendations for companies wishing to engage in best practice include:

● Engaging stakeholders (and sometimes NGOs) in a dialogue ● Establishing principles and procedures for addressing difficult issues such as labour standards for suppliers, environmental reporting and human rights

● Adjusting reward systems to reflect the company’s commitment to CSR ● Having the senior leadership team and members of the board of directors engage in an ongoing process of CSR risk evaluation

● Establishing anonymous reporting and whistle-blowing policies and procedures ● Educating employees and managers about CSR policies and the company’s commitment to CSR

● Having the senior leadership team communicate CSR priorities and set an example through their own behaviour. (Donaldson, 2005)

‘One of the tricks at the outset is going to be for corporates and investors to make sure that the OFR comes into mainstream corporate reporting and does not become a specialist subject in itself.’ Guy Jubb, Standard Life Investments