Behave Responsibly, by Order of the Law! (Special Report: Corporate Social Responsibility)

Article excerpt

Should companies be legally required to consider social and environmental issues as well as the interests of their shareholders?

A little group of accountants and other experts is currently beavering away at a tiny detail of the new Companies Bill. It might seem like a footnote in the painfully lengthy history of this extremely dry legislation, but, in fact, it is central to what this government understands by "corporate social responsibility" (CSR), and its conclusions will have a huge impact for many years to come on how the boards of large companies attempt to meet their responsibilities.

The immediate job of this materiality working group, which will report next month, is to propose how company directors should decide which social and environmental issues to include in their annual reports. Its deliberations, however, are enmeshed in the fundamental CSR question that the government has repeatedly sought to duck: what are the responsibilities of big business beyond making as much money as possible for shareholders?

The fact (as opposed to the law) is that businesses, especially big businesses, are held responsible for what they do to people and the environment. The food industry may escape legal liability, even in the US, but it is discovering that it cannot escape opprobrium for damaging people's health with excessive doses of fat, salt and sugar. Similarly, arms manufacturers get a bad press for selling their products to nasty regimes -- even though governments grant licences -- or for making products such as cluster bombs. Banks are pilloried for shutting branches in isolated areas, shunning disadvantaged communities, and financing destructive dams and other major projects. Supermarkets are accused of antisocial behaviour -- such as not paying farmers enough.

These examples show what CSR is all about: the extent to which public companies' actions are not lust in the interests of their shareholders but of the wider society.

CSR, then, means more than good works around the periphery, such as giving money to charities and letting employees do some volunteering. Company responsibilities have wider implications, especially in the eyes of the NGOs which act as opinion-formers in these things -- and which, in great numbers, supported Linda Perham's private member's bill on corporate responsibility.

The government has struggled with this wider, deeper interpretation. It got off to a good start by appointing the world's first minister for corporate social responsibility in 2001 (except that it was Kim Howells). But it has been hampered by a failure, until recently, to connect CSR with wider work on sustainable development; and by the mantra that CSR is necessarily voluntary.

Voluntarism inevitably leaves CSR on the periphery, unless you swallow the "business case" argument -- that shareholders benefit from corporate responsibility because it makes a company more attractive to employees, customers, suppliers, communities and socially responsible investors.

There is no doubt that there can be business benefits, but the impact that these "stakeholders" can make is limited. Having good employee relations is likely to reduce labour turnover, and to boost productivity and innovation. Avoiding scandals such as child labour protects reputation and brand. Using energy and other resources more efficiently saves money as well as being good environmentally. And so on.

But there are also plenty of examples where shareholders would lose out if companies did the really responsible thing, such as supermarkets paying farmers more, car companies withdrawing gas-guzzling 4x4s, or drug companies giving away products to poor people.

This is where voluntarism ends and some kind of intervention is necessary -- which brings us back to company law.

The simplest solution would be to end the legal pretence that all companies are merely vehicles for shareholder investment; and to give directors of the larger companies broader duties in law, so they would have to weigh their responsibilities to all stakeholders. …