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]