Enhanced business review

For reports relating to financial years beginning on or after 1 October 2007, the content requirements for a business review in the directors' report for quoted companies are extended significantly, to include information on environmental, employment, social and community issues and the main factors likely to affect the company's future business (the 'enhanced business review').

There are no statutory reporting standards for the business review, and the auditor's review is limited to whether it is consistent with the accounts.

As widely publicised in the press, just before the Act was passed, the Government made an eleventh hour addition (without consultation) to this 'enhanced business review' requiring quoted companies to also include "information about persons with whom the company has contractual or other arrangements which are essential to the business of the company" to the extent necessary for an understanding of the development, performance or position of the company - apparently aimed at suppliers.

The business review is intended to allow shareholders to make an informed assessment of the performance and prospects of the company, and not as a repository for detailed information on corporate social responsibility and other issues that might be of interest to wider stakeholder groups. We think there needs to be a clear and express understanding that the purpose and scope of this new requirement is as envisaged in the Reporting Statement issued by the ASB, and the onus is on the Government to take whatever steps are necessary to satisfactorily rectify this ambiguity.

Exemptions

Even later in the day, the Government added an exemption for "information about a person if the disclosure would, in the opinion of the directors, be seriously prejudicial to that person and contrary to the public interest". This concession to business was intended to ensure that such information cannot be misused by animal rights extremists. However, we query whether it will be worth much in practice, as the test to avoid disclosure is very high and uncertain - it is prejudicial to the person and against the public interest.

This is in addition to the general exemption from including information in a business review for information relating to impending developments or matters under negotiation if disclosure would be seriously prejudicial to the interests of the company.

Background on late amendment

In briefings, we expressed our concern over the Government introducing such a significant amendment at a very late stage in the parliamentary process without proper consultation, which gave rise to adverse reactions from business and concerns from investor representatives in view of the lack of proper debate over the merits and impacts of the proposal and uncertainty over its potential consequences.

This late requirement replicates a former OFR requirement, and is also mirrored and expanded upon in the Reporting Statement (RS), in which the ASB provides voluntary guidance on OFRs. As presented in the ASB's RS, the new requirement entails the directors informing shareholders about relationships with customers, employees, suppliers, regulators and the community at large whose decisions could have an impact on the company's future performance. There was a general acceptance when this clause was debated in the context of the statutory OFR and the Reporting Standard (now the RS) that a succinct narrative description of any major impacts material customers, suppliers and other groups could have on future performance could be viewed as important information for shareholders.

The Institute is a strong supporter of improvements in the quality and transparency of narrative reporting by public companies. However, the outcome of the selective reintroduction of specific provisions that had formed part of a set of balanced proposals relating to the statutory OFR is unlikely to be satisfactory unless there is a clear and express understanding that the purpose and scope of the new clause is as envisaged in the RS.