Guest opinion: Scrapping the Operating and Financial Review (OFR)

Guess who said this: “Human capital is the 21st century equivalent of the 19th century dependence on natural resources. Modern wealth creation depends upon the development of people.” It was, in fact, Tony Blair, just before the general election in April last year. Therefore, the early Christmas present that Chancellor Gordon Brown delivered to the Confederation of British Industry’s anti-red tape lobby at their annual conference last month was somewhat surprising, (or perhaps not given the leadership situation in the Labour Party). Brown announced he would be scrapping the Operating and Financial Review (OFR) that the government introduced in April for all quoted UK companies. The OFR obliges firms to report on their future strategy and prospects, including policies for managing their people. Brown described the OFR as an example of the unnecessary gold plating of European regulation. “An astonishing u-turn that contradicts his own government’s policy and the needs of investors and the business community itself.” OK, I own up, that one was me on behalf of the CIPD. But I wasn’t alone. Peter Montagnon at the Association of British Insurers was “baffled, bewildered and rather disappointed”; while Christine Farnish at the National Association of Pensions Funds lamented a significant “missed opportunity”. Friends of the Earth have accused the Chancellor of “short-term political expediency”, and the normally supportive Institute of Directors felt he “demonstrates a cavalier and ill-thought through approach to regulation”. So what’s all the fuss over this obscure accounting requirement? The OFR’s abolition will not have a massive immediate effect. But it was a potent symbol of how the economy and business is changing, and how investor, accounting and management behaviour needs to respond. Voluntary OFRs were recommended in the early 1990s by the Institute of Chartered Accountants of England and Wales (ICAEW). Some 10 years later a joint meeting of senior CIPD and ICAEW members concluded that “organisations need to stop being shy about their human capital if they are to give a full view of their performance”. The mandatory OFR had little to do with Europe. It emerged while updating UK company law. The Chancellor’s cabinet colleague Patricia Hewitt, introduced the OFR as “embedding in law the concept of enlightened shareholder value [and] the importance of human capital reporting. The best UK companies understand that smart people management underpins their business performance”. And Gordon Brown himself spoke of the importance of Britain and its companies winning “the global skills war”. Compulsory OFR’s would have encouraged such understanding, but it is happening anyway. Look at law firm CMS Cameron McKenna’s annual people report, showing how the large number of partners recruited as trainees by the firm underpins their financial success. Or scope the job advertisements for sandwich chain Pret a Manger which claim “we pay our wonderful staff as much as we can afford, rather than as little as we can get away with”. Look at the IPO document for Google where the firms’ founders state: “Our employees are everything to us. We will reward and treat them well.” This includes offering staff a free annual ski trip. And look at their stellar stock market performance since then. Finally, Dave Ulrich, professor of business at the University of Michigan told me that the investment analysts at financial services firm Macquarie recently downgraded their recommendation for the National Australia Bank from a buy to a hold, on the basis of a report which placed them well below their competitors in respect of their employees’ attitudes. The volte-face over the compulsory OFR is nothing more than a minor skirmish in the long-term campaign to get many more organisations voluntarily recognising that managing and motivating their employees effectively is the only sustainable route to high performance.