Company directors will face pressure to be much more candid about the success or failure of critical IT projects, under proposed corporate governance regulations.
Under proposals due to become law next year, companies will be required to publish Operating Financial Reviews to show shareholders that they have been good stewards of company funds.
The new requirements will put additional pressure on directors of companies, particularly those that heavily dependent on technology to ensure that IT investments add value, rather than become a cash drain, said Martyn Emery, specialist in corporate governance.
“In the past businesses have swept failed IT projects under the carpet and got on with another round of investment. OFR will mean greater accountability at project level. Companies will be forced to be much more accountable about projects delivering value,” he said.
Under the proposals, technology dependent businesses will need to assess the risks of major IT projects, and to monitor, not just whether they are delivered on time, but whether they genuinely add value to the company.
“Many businesses are highly dependent on technology. If you are doing a $1 billion roll out of SAP, that will be an operation part of the business. And provision for technological failure should be covered in the OFR,” he said.
David Phillips, partner at Pricewaterhousecoopers, said that companies, particularly those in financial services that are dependent on IT will need to review their reporting systems. If companies are highly dependent on IT projects that go wrong, they will have to be disclosed.
“OFR is not going to change everyone’s behaviour, but companies will need to stop and think – what information do we need to report and what systems do we have,” he said.
The regulations could force companies to consider IT security more carefully, given the risks that a hacker accessing a banking site, for example could have the bank’s reputation.
They could also spur companies to invest in IT systems to help them given them better control over their businesses and better information on aspects of the business that could impact performance.
Because OFR will also encourage companies to disclose investments that positively affect companies, they are also likely to make companies more open about their IT successes, said Phillips.
“If they report on a technological issue that gives them competitive advantage, it will put pressure on other companies in the same sector. Their investors will be asking why they aren’t doing the same.”
Patrick Bossert, analyst at KPMG, said that shareholders were increasingly holding companies to account over their IT investments at annual general meetings.
“The whole issue of IT projects and accountability has really come to the fore in the last 3 years as companies have looked how they are spending the money, and shareholders have forced them to be more open,” he said.
The Operating and Financial Review
Requires directors of quoted companies to report on factors which affect the current and past performance of their companies
Expected to become law next year following a consultation period which ends in August.
Directors could face unlimited fines and criminal records if they fail to comply.