The Operating and Financial Review may have been scrapped but many organisations are now recognising that motivating their employees is the only sustainable route to high performance, says Duncan Brown
Guess who said this in 2005: “Human capital is the 21st century equivalent of the 19th century dependence on natural resources. Modern enterprise and wealth creation depend upon the development of people, not their exploitation.”
No, not I, or anyone else at CIPD, though I hope all readers agree with the sentiment. It was in fact the prime minister, just before the general election, in April last year. Therefore, it was somewhat surprising that the Chancellor delivered an early present to the anti-red tape business lobby at the CBI’s annual conference just before Christmas.
He announced he would be scrapping the Operating and Financial Review, a reporting requirement the government had introduced in April for all quoted UK companies. The OFR obliges companies to report on their future strategy and prospects, including their policies for managing their people. Brown described the OFR as an example of the unnecessary ‘gold plating’ of European regulation that the government was now committed to removing.
“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 CIPD. But, fortunately for my prospects, I wasn’t alone.
Peter Montagnon at the Association of British Insurers was similarly “baffled, bewildered and rather disappointed”; while Christine Farnish at the National Association of Pension Funds lamented a significant “missed opportunity” to improve investor decision-making.
Friends of the Earth accused the Chancellor of “short-term political expediency” and even the normally supportive Institute of Directors moaned at his “cavalier and ill-thought-through approach to regulation and its impact”.
So what’s all the fuss about over this somewhat obscure accounting requirement? The OFR’s abolition, like its introduction, will not have a massive immediate effect. But it was a potent symbol of the way in which the economy and business are changing and how investor, accountant and management behaviour needs to change to catch up.
The case for the OFR was first put forward in the early 1990s, when the Institute of Chartered Accountants of England and Wales recommended its voluntary introduction. A joint meeting of senior CIPD and ICAEW members 10 years later 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 very little to do
with Europe and in fact emerged from the process of updating UK company law. Modernising Company Law in July 2002 stated: “The government agrees that companies should provide more forward-looking reporting… it recognises that companies are increasingly reliant on intangible assets such as the skills and knowledge of employees… (such) information is just as vital to the users of financial reports as a historical review of performance.”
The Chancellor’s then 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,” she stated, “understand that smart people management underpins their business performance.”
CBI president John Sunderland similarly emphasises the necessity of analysts and investors understanding the “relationship between the effectiveness of HR policies and performance”.
Compulsory OFRs may have encouraged such understanding, but the good news is that there are plenty of signs that this is emerging anyway.
Look at law firm CMS Cameron McKenna’s annual people report, showing how the large number of partners who were recruited as trainees by the firm underpin its financial success.
Or at the job ads for Pret a Manger: “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 in which the firms’ founders state “our employees are everything to us… we will reward and treat them well”, including a free annual ski trip. And look at its stellar stockmarket performance since then.
American professor Dave Ulrich told me that the investment analysts at Macquarie recently downgraded their recommendation for the National Australia Bank from a ‘buy’ to a ‘hold’ on the basis of a report that placed it well below its competitors in terms of its employees’ attitudes.
The lesson is: treasure your human capital.
Guess who said this in 2005: “Human capital is the 21st century equivalent of the 19th century dependence on natural resources. Modern enterprise and wealth creation depend upon the development of people, not their exploitation.”
No, not I, or anyone else at CIPD, though I hope all readers agree with the sentiment. It was in fact the prime minister, just before the general election, in April last year. Therefore, it was somewhat surprising that the Chancellor delivered an early present to the anti-red tape business lobby at the CBI’s annual conference just before Christmas.
He announced he would be scrapping the Operating and Financial Review, a reporting requirement the government had introduced in April for all quoted UK companies. The OFR obliges companies to report on their future strategy and prospects, including their policies for managing their people. Brown described the OFR as an example of the unnecessary ‘gold plating’ of European regulation that the government was now committed to removing.
“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 CIPD. But, fortunately for my prospects, I wasn’t alone.
Peter Montagnon at the Association of British Insurers was similarly “baffled, bewildered and rather disappointed”; while Christine Farnish at the National Association of Pension Funds lamented a significant “missed opportunity” to improve investor decision-making.
Friends of the Earth accused the Chancellor of “short-term political expediency” and even the normally supportive Institute of Directors moaned at his “cavalier and ill-thought-through approach to regulation and its impact”.
So what’s all the fuss about over this somewhat obscure accounting requirement? The OFR’s abolition, like its introduction, will not have a massive immediate effect. But it was a potent symbol of the way in which the economy and business are changing and how investor, accountant and management behaviour needs to change to catch up.
The case for the OFR was first put forward in the early 1990s, when the Institute of Chartered Accountants of England and Wales recommended its voluntary introduction. A joint meeting of senior CIPD and ICAEW members 10 years later 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 very little to do
with Europe and in fact emerged from the process of updating UK company law. Modernising Company Law in July 2002 stated: “The government agrees that companies should provide more forward-looking reporting… it recognises that companies are increasingly reliant on intangible assets such as the skills and knowledge of employees… (such) information is just as vital to the users of financial reports as a historical review of performance.”
The Chancellor’s then 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,” she stated, “understand that smart people management underpins their business performance.”
CBI president John Sunderland similarly emphasises the necessity of analysts and investors understanding the “relationship between the effectiveness of HR policies and performance”.
Compulsory OFRs may have encouraged such understanding, but the good news is that there are plenty of signs that this is emerging anyway.
Look at law firm CMS Cameron McKenna’s annual people report, showing how the large number of partners who were recruited as trainees by the firm underpin its financial success.
Or at the job ads for Pret a Manger: “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 in which the firms’ founders state “our employees are everything to us… we will reward and treat them well”, including a free annual ski trip. And look at its stellar stockmarket performance since then.
American professor Dave Ulrich told me that the investment analysts at Macquarie recently downgraded their recommendation for the National Australia Bank from a ‘buy’ to a ‘hold’ on the basis of a report that placed it well below its competitors in terms of its employees’ attitudes.
The lesson is: treasure your human capital.
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