On 14 May 2002 the Government published its second annual report on
corporate social responsibility ("CSR"). It sets out the
Government's strategy to help promote and enable socially
responsible behaviour at every level of business practice by
companies of all sizes. As part of this strategy, the Government is
looking to help mainstream, and establish best practice on, CSR
reporting, to:
- address the increasing public interest in corporate performance
on social, ethical and environmental ("SEE") issues and
- stimulate organisations to identify their SEE impact.
Speaking at the launch of the report the Minister for Corporate
Social Responsibility said that CSR "should not be for show, and
should not only be skin deep". CSR is clearly here to stay and, to
the extent they have not done so already, companies will begin to
face ever increasing pressure to pay attention to social
responsibility issues.
One of the approaches welcomed by the Government
was the introduction by the Association of British Insurers (the
"ABI") last October of disclosure guidelines on social
responsibility (the "Guidelines") which apply to all listed
companies.
What is Corporate Social Responsibility?
CSR is not a term of art. Generally it focuses on
how profits are made and particularly how a company, while
remaining primarily accountable to its shareholders, relates to its
"stakeholders"- its employees, suppliers, customers, the
communities and environments in which the company operates and
other special interest groups. CSR is not simply about
philanthropy. Nor is it about caving in to the demands of special
interest groups or saving the world. CSR in the context of the
Guidelines is about understanding the responsibilities to,
interests of, and risks concerned with different stakeholder
groups.
The Guidelines
The Guidelines set out the nature of the
disclosures on SEE issues institutional investors expect to see in
the annual reports of listed companies. They apply to all listed
companies. The focus is on Board responsibilities, policies,
procedures and verification and the company should, amongst other
things, cover:
- the significant SEE risks and opportunities and their possible
impact on the company's short and long-term value and its
business
- the policies and procedures for managing SEE risks, which
should incorporate, where relevant, performance management systems
and appropriate remuneration incentives, and the extent of
compliance with these policies and procedures
- the procedures for verification of the SEE disclosures, which
should be such as to achieve a "reasonable level of
credibility".
The Business Case for CSR
The ABI does not intend the Guidelines to restrict
companies unnecessarily from generating returns by imposing
needless prescription and costly burdens. Institutional investors
remain primarily focused on financial returns and CSR reporting is
considered a way of protecting and enhancing these returns. The
Guidelines are intended to help companies develop appropriate
policies on corporate social responsibility and, particularly, on
the management of SEE risks. They are not simply intended to
encourage a superficial public relations exercise with no basis in
reality. The business case being put forward by the ABI is that CSR
policies that appropriately address SEE risks should protect and
may even enhance shareholder value.
Risk Management
The first aspect of the business case is that CSR
is a risk management tool that protects shareholder value. From
this perspective it overlaps with, and builds on, the Combined Code
requirement, supported by the Turnbull Report, for listed companies
to maintain a sound system of internal controls to safeguard
shareholders' investment and the company's assets. Although some
SEE risks are directly financial, such as fines for a pollution
incident or the direct costs of a product recall, and reasonably
identifiable and quantifiable, many SEE risks, such as an
unpredictable change in public opinion or policy, are not easy to
identify let alone quantify. Nonetheless, they may have a
substantial negative effect on shareholder value. Monsanto and its
experience with genetically modified soya is often cited as a
drastic example of a company that failed to identify and manage SEE
risks and the implications such failures have on shareholder value-
and in the Monsanto case, the independence of the company itself.
The Guidelines are intended to help companies develop policies and
procedures to mitigate these risks.
Increased Opportunities
CSR may also have an upside in the form of
increased opportunities. This aspect of the business case is even
more difficult to establish: is social responsibility a driver for
business success or simply a consequence of it? Nonetheless, a
report commissioned by the ABI (entitled Investing in Social
Responsibility) contains anecdotal evidence of how
opportunities and value have been created from CSR, including:
- Increased stakeholder loyalty through engagement and
dialogue
- Higher sales and more satisfied customers
- Attracting and retaining talented employees
- Competitive advantage from responding swiftly to new
standards
- Reduced share price volatility
- Reduced regulatory intervention
- Access to and cost of capital
Although there may be increased costs from the
additional monitoring, auditing and reporting required to comply
with the Guidelines, the ABI does not expect companies to incur
costs disproportionate to the significance of the SEE risks they
face. Given these parameters, the ABI expects any additional costs
to be outweighed by better risk management and possibly additional
revenues and increased shareholder value.
The Future
Although today CSR reporting is not strictly a
legal requirement, this has been recommended by the Company Law
Review Steering Group. Its Final Report on British company law,
issued in July 2001, recommends that all companies of a
"significant economic size" be required, as part of their annual
report, to publish an operating and financial review containing,
among other things, information on social, environmental and
ethical policies. The Company Law Review Steering Group has also
recommended a statutory statement of directors' duties which would
include, as one of the material factors to be taken into account by
directors (to the extent it is practicable to identify them), the
company's need to have regard to the impact of its operations on
the communities affected by those operations, and on the
environment.
The Government's annual report, Business and
society corporate social responsibility report 2002, is
available at
www.societyandbusiness.gov.uk
The report commissioned by the ABI, Investing
in Social Responsibility, which includes the Guidelines is
available at www.ivis.computasoft.com
For further information please contact:
Nick Callister Radcliffe
Corporate Partner
Phone: +44 (0)20 7367 2394
Email: [email protected]
or
Jennifer Watt
Senior Corporate Solicitor
Phone: +44 (0)20 7367 2760
Email: [email protected]