Litigation annual review 2002: Corporate social responsibility

United Kingdom

A serious business issue

Businesses of all sizes increasingly need to demonstrate their ethical behaviour to stakeholder groups. The risks to business from failure to meet society's expectations are growing, just as the pressure from stakeholder groups to be open about business ethics is being ratcheted up. However, there is also a growing body of evidence suggesting that business makes worthwhile gains from effective management of social responsibility issues.

The most significant issues in corporate social responsibility (" CSR") are human rights, labour conditions and environmental impact. The risks range from direct financial penalties such as fines for illegal acts, through lost sales or increased costs, to staff recruitment and retention problems and consumer boycotts. Companies which have a poor record will also find themselves paying a higher price for their capital, losing shareholder value, and ultimately perhaps being taken over or becoming insolvent.

Pressure for change for openness on CSR comes from the usual suspects such as the OECD, Governments and NGO's, but growing numbers of mainstream institutional investors now also want assurances that investees are fully aware of CSR risks and have effective management systems to deal with them. Businesses are also increasingly at risk from "whistle blowing" by employees and investigation by aggressive NGO's and news media.

The issues

CSR is now played for high stakes. Some examples from 2001 show this: Exxon faced a boycott campaign because of its stance on global warming; major pharmaceutical companies (in particular GlaxoSmithkline) became embroiled in a dam-aging controversy (and litigation) with South Africa over their patents on AIDs drugs; Nike and GAP had problems following a television exposé of working conditions at their Cambodian suppliers.

Back home, Balfour Beatty and Railtrack suffered greatly over rail safety and MacDonald's received much adverse publicity when one of its franchisees in Surrey was convicted of illegally employing school age workers. Farming suffered badly from practices exposed during the recent out-break of Foot and Mouth disease.

The pressure

Pressure is building on business from a range of guidelines which have recently come into being. In October 2001 the OECD Guidelines for Multinational Enterprises was issued and in July 2001 the Commission of the European Communities issued its own green paper "Promoting a European Framework for Corporate Social Responsibility" and a communication on "Promoting Core Labour Standards and Improving Social Governance in the Context of Globalisation".

Professional and private investors are increasingly concerned about CSR. There is increasing public awareness of CSR issues and a willingness to take action in pursuit of these ends, as witness anti-globalisation protests, consumer boycotts and the growth of ethical investment funds. Investment is increasingly driven by these concerns. This has been partly fuelled by new requirements for investment policy disclosure by pension funds in the UK, France, Germany and Sweden. In the UK, this has been even further reinforced by the requirement for pension fund trustees to consider and establish a policy on ethical investing. The ABI, the trade body representing the British Insurance Industry, introduced their own disclosure guidelines on social responsibility in late 2001.

More and more investment managers are offering socially responsible investment products and, in London, there is now the "FTSE4 Good" indices to facilitate this as well as other indices such as the Dow Jones Sustainability indices. Investors increasingly seem willing to pay a premium for "ethical" stocks so exclusion from an index could well be costly.

The risks

Shareholder value is increasingly at risk and, ultimately, so is the fate of the business itself. Monsanto, the GM food pioneer, lost its independence, arguably as a result of mishandling the wider social and environ-mental concerns about its GM products in Europe which led to its stock market rating falling. Businesses which cannot demonstrate good CSR credentials are also increasingly at risk of being frozen out of lucrative business opportunities. Aspects of CSR are increasingly featuring in tender conditions issued by the public and private sector alike. In the UK, for example, non-discriminatory employment practices is now a common condition.

Access to capital is also increasingly coming under threat for businesses which do not embrace CSR principles.

Our domestic courts are now more willing to allow foreign-based employees of British multinationals to sue here, and the availability of conditional fees means there are lawyers prepared to act for them so, for example, African employees have access to British Justice, with all that implies.

The benefits

The broad business case is that businesses can improve profits by addressing CSR effectively and should not rely on risk management on the assumption that most risks will not materialise. The opportunities to create value from CSR include:

  • harmonising business practices with stakeholder expectations to produce net benefits for all parties
  • less fire fighting by taking a strategic approach
  • lower costs from cutting waste
  • higher sales from more satisfied customers
  • higher productivity and quality
  • lower risk in acquisition and divestment through better due diligence and better management of the sale or purchase process
  • reduced share price volatility.

Conclusion

CSR is no longer an optional extra for business. Although multinational enterprises and other businesses which have a high impact on the environment, human rights and labour conditions are particularly vulnerable, in fact all business are susceptible and need to have policies and risk management systems in place and operating effectively now.

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For further information on this article please contact the author Simon Jeffreys by telephone on +44(0)20 7367 3421 or by e-mail at simon.jeffreys@cms-cmck.com

For further information on this review in general, please contact Tim Hardy on +44 (0) 20 7367 2533 or by e-mail at tim.hardy@cms-cmck.com