Ministers in U-turn over review aspect of corporate reporting rules

The unexpected U-turn by the Government over plans to abolish a key part of the corporate reporting rules has highlighted its fraught attempt to shake-up the way UK plc is run.

Late on Wednesday night, the Treasury agreed to consult on the requirement by companies to produce an operating and financial review (OFR) as part of their annual report.

Its move came just nine weeks after Gordon Brown used his keynote address to the CBI employers' group to hail its abolition as an attack on red tape.

The OFR was, in effect, an annual report on companies' views of their future risks and opportunities including their environmental concerns.

But it led to an unholy alliance between investment bodies, who wanted to better gauge companies' financial outlook, and green groups who wanted directors to face up to their environmental responsibilities. Friends of the Earth launched a legal challenge to the decision and the Government has agreed to pay its costs in an out-of-court settlement. The Government will consult on reporting rules up to 24 March.

The OFR would have been part of the Company Law Reform Bill - at 866 clauses the largest for two decades - which is sponsored by the Department of Trade and Industry and is going through the House of Lords. The Conservatives said the latest move on the OFR showed ministers were guilty of "bad government" on a vital piece of business legislation.

Jonathan Djanogly, the shadow Minister for Corporate Governance, said: "There's clearly been a bust-up between the Treasury and the DTI. If scrapping the OFR is to save business £33m a year, why did the Government support it in the first place and what will the regulatory cost of the 'Business Review' now be to companies?"

The Liberal Democrats said it highlighted the lack of business experience among cabinet ministers. Chris Huhne, the party's Treasury spokesman, said the Cabinet included seven lawyers, 11 researchers or lecturers, three trade union officials, a teacher, an economist and a management consultant. "It shows time after time the Treasury gets decisions wrong because it just doesn't understand how markets work," said Mr Huhne, a former senior economist at the City ratings agency Fitch.

Gerald Russell, a senior partner at Ernst & Young, said: "This has all the elements of a Brian Rix farce - now you see it, now you don't. There was extensive consultation before the OFR was adopted - what is the point of going through it all again?"

The DTI said the Bill had been broadly welcomed by all major interest groups, although a spokeswoman conceded different interest groups had individual concerns.

What's in the Bill

* Extension of directors' duties to take account of wider interests, such as those of the local community, has created fears it will open the door to legal challenges which could result in a judge ruling a director had not made the correct corporate decision.

* Shareholders may bring actions for negligence, default, and breaches of duty and trust. There are fears about the potential for abuse and the timing of court involvement.

* It would be an offence to "knowingly or recklessly" give an incorrect audit opinion. Businesses are concerned this will increase the cost of audits as the volume of box-ticking multiplies.

* An operating and financial review would oblige companies to reveal issues such as environmental concern. The Government pledged to drop it from the Bill but is now consulting on putting it back in.

* Shareholders and institutional investors would have to disclose how they voted on matters such as executive pay.