New OFR rules were set in motion last month, and UK-listed companies will publish their first OFR assessments on 1 April 2006.
Those companies that do the minimum required by the new rules will do themselves no favours. Such efforts will produce little return on the necessary investment and may even exacerbate the problems of poor management that the OFR sets out to resolve.
The OFR has arisen because the investment community demands better, more transparent reporting. Information on intangible assets – and forward-looking issues that could affect future profitability – will become critical to investment.
After all, companies that demonstrate good governance are the ones proven to deliver greater shareholder returns. Research from management consultancy firm McKinsey reveals that the majority of investors are willing to pay a premium – in some cases more than 30% – for the shares of well-governed companies.
Firms that ignore the link between transparent reporting and shareholder value will derive little benefit from their compliance efforts. Regulation should be viewed as a golden opportunity, not only to increase financial transparency, but also to improve management control – changes that can bring substantial improvements in business performance.
But company directors must first be assured of the integrity and reliability of their data before they can instil greater confidence in investors and stakeholders. With fines for those who recklessly approve OFRs due to come into force in 2008, the need for accurate, reliable information will be critical.
My hope is that unlisted, privately owned firms will elect to adopt the principles of the OFR – not because they are mandated to do so, but because it is the right thing to do. That would be the ultimate proof that transparent reporting is a business benefit and not a burden.
Norman Green is vice-president of finance at Oracle UK, Ireland and South Africa
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