Mr Brown’s disturbing policy U-turn

There is a disturbing air – akin to that of decision-making at the court of some whimsical ancien régime French Emperor, keen to curry favour among the masses – about Gordon Brown’s scrapping of plans for companies to produce a statutory Operating and Financial Review.

Mr Brown, trying to shore up his deteriorating relations with British business, threw out the news at the CBI annual conference on Monday, like a loaf of bread flung from the passing imperial carriage. “Let them not eat the OFR,” says the Mi’lord of the Treasury – summarily strangling a policy conceived and developed by the Department of Trade and Industry, which is left looking pretty silly and ineffectual.

The move will doubtless please many companies, which will be saved compliance costs, but Mr Brown’s U-turn is a piece of badly flawed policy-making.

First, the reasons he gave for it are thoroughly misleading. He characterised the OFR as an example of the UK “gold-plating” EU legislation when its origins are entirely different: the idea of a mandatory report arose during the Labour government sponsored review of how to bring Britain’s Victorian-era UK company law into the 21st century and it was developed over five years of debate.

Furthermore, the OFR already exists, on a voluntary basis, and has proved a useful piece of company information. Many of Britain’s leading groups include it in their annual report, under guidelines drawn up a decade ago by the Accounting Standards Board. The idea is to provide a narrative on a business’s performance and prospects, giving greater insights into its strengths, the risks to it and where it is heading.

The move to a mandatory basis would have involved some fuller disclosures and certainly carried risks. In the form originally proposed by the DTI it was far too onerous and could have created such a forbidding framework that companies only produced legal boilerplate. Consultation produced a much improved, though far from perfect framework. In particular, the government rejected sensible calls from the CBI for a “safe harbour” provision protecting directors from liability claims over forward looking statements.

If industry was still unhappy, Mr Brown might have done better to readdress that issue rather than scrapping the measure entirely – and in language that suggests the OFR is nothing more than avoidable red-tape.

That is grossly to misrepresent its purpose, which is the worthwhile one of improving communications between companies and their shareholders. The manner of Mr Brown’s announcement – without any consultation and at the 11th hour – is also a very poor way to reward years of work by many minds in the City and beyond.

If this is how the government treats you, why bother to brainstorm on its behalf?

The chancellor’s dismissive approach could also undermine corporate adherence to the voluntary OFR.

Boards, however, should listen to their shareholders. They will want to keep the existing framework and should be encouraging companies to adopt what was worthwhile in the proposed new system – whatever Mr Brown might say.

HSBC knows best

Is it time for a sharp intake of breath and shaking of heads among the guardians of good corporate governance? You might think so: HSBC has gone counter to recommended best practice and appointed its current chief executive as chairman.

A few governance purists seem likely to moan about Stephen Green stepping up to replace Sir John Bond when he retires next May. But the City should be grown up about this appointment and take it in its stride.

The combined code, in its post-Higgs report formulation, frowns on chief executives becoming chairmen because they may find it hard to give up their old duties and power base, thus impeding their successor. They may also be so familiar with the company that they fail to keep non-executives as informed as a fresh, outside chairman might do.

HSBC, however, should be able to overcome these potential problems – as it has in the past. It has never brought in an outsider to lead it and Sir John Bond was chief executive before becoming chairman, without any perceptible ill effect.

It is a particularly complicated global business that an outsider would take a long time to understand and has a collegiate tradition and a strong, well-diversified board that should be able to provide checks.

Furthermore, as a letter to shareholders points out, the board has agreed clear job specifications for the chairman and chief executive, setting out their respective responsibilities – and it has sensibly consulted shareholders in advance. The case is an example of the value of the UK’s flexible code, under which companies are meant to comply or explain.

HSBC’s explanation is pretty convincing. End of debate.

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