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How will the new UK Coalition respond to the CSR challenge?

The Coalition is still in its early days, but we are already beginning to see the ways in which the new UK government's approach to CSR might differ from that of its predecessor. Not too much should be read into the decision to ditch the role of CSR Minister. The role was never particularly well defined, and its removal may be another sign of the greater “embedded-ness” of CSR ideas in business-related policies. Companies are repeatedly told that token appointments and nice-sounding initiatives are no substitute for real commitment and resources. This must surely apply to government too.

Corporate reporting: back to the future?

More significant is the dual commitment in the Coalition's “Programme for Government” (on pg. 10) to “[a] reinstate an Operating and Financial Review to ensure that directors' social and environmental duties have to be covered in company reporting, and [b] investigate further ways of improving corporate accountability and transparency”.

A bit of history might be useful here. Campaigners and investor groups have been arguing for more meaningful (and mandatory) corporate reporting on social and environmental impacts for years. After much discussion between government, business and civil society, it was decided to include a requirement for an annual “Operating and Financial Review” (or “OFR”) as part of a package of company law reforms being finalized during 2005. The idea was that companies would be required to produce, not just financial reports, but a forward-looking overview of the prospects and performance of the company over the reporting period. This would include, where material to a company's financial performance, information about social, environmental, employee and community matters. The OFR was made a legal requirement for publicly listed companies under regulations passed in 2005, but later that same year the then Chancellor Gordon Brown abruptly announced that the regulations would be withdrawn. The main reason given for this was that the OFR requirements amounted to, in Brown's view, unnecessary “gold-plating” of EU requirements.

The sudden U-turn provoked a furious response from various quarters, especially social and environmental campaigners, but also from investors and some companies which had, by then, put considerable resources into getting ready for the new regime. The U-turn also provoked a legal challenge by Friends of the Earth. Eventually, the OFR was replaced by the Business Review, a scaled-back proposal designed to implement EU minimum standards, but which also incorporates some of the ideas behind the OFR regime.

Business review vs OFR

The Business Review is not a million miles away from the OFR, although there are some important differences. First, the Business Review applies to all UK companies, not just publicly listed companies (although small companies may receive exemptions, and there are additional requirements for publicly listed companies, see below). Second, the Business Review regime is less prescriptive. For example, it does not expressly require details of “objectives and strategies” and wider trends and factors affecting company performance during the reporting period, which were specific requirements under the OFR regulations. Thirdly, in a subtle shift of emphasis, the stated purpose of the Business Review is to enable shareholders to assess how well directors have performed their duty “to promote the success of the company”. The OFR provisions, on the other hand, did not specifically relate back to directors' duties, but instead contained a general requirement that the information be sufficient to enable shareholders to “assess the strategies adopted by the company and the potential of those strategies to succeed”. Fourthly, directors and auditors were required to make more detailed disclosures under the OFR provisions. Under the OFR regulations, for instance, directors were required to set out the extent to which their OFR complied with reporting standards and to explain the reasons for any departures from such standards. The Business Review provisions, on the other hand, contain no such requirement. Also, the OFR regulations required auditors to state whether any information had come to their attention that was inconsistent with the OFR. This requirement was dropped for the Business Review, although auditors are still required to give a view as to whether the information in the Business Review is consistent with the accounts.

But campaigners and investor groups did succeed in getting many of the key features of the OFR regime reinstated under an “enhanced” regime applicable to “quoted” (or publicly listed) companies. These companies are still required to report on future trends and issues, environmental and social matters, employee issues, community issues, relevant company policies and supply chain problems. And reference to Key Performance Indicators (including non-financial indicators) is still a requirement where this is able to aid understanding of the company's position.

A new approach to social and environmental reporting?

So the commitment in the Coalition's manifesto to revive the OFR is intriguing, but what it actually amounts to is quite unclear at present. For instance, which discarded aspects of the old OFR regime is the Coalition planning to reinstate? Will OFR reporting standards once again have legal status? Will auditors be placed under more onerous requirements?

More fundamentally, does the singling out of social and environmental duties in the Coalition's manifesto signify a shift in ideology about what corporate reporting is actually for? Social and environmental duties are already enshrined in UK companies legislation, although these duties still play second fiddle to the directors' primary duty to promote the success of the company. This, in turn, informs the corporate reporting regime, which recognises that social and environmental information can be relevant to assessing how well a company and its directors have performed (financially) over a given period. One possible interpretation of the Coalition's manifesto commitment regarding the reinstatement of an OFR is that the UK government would like to see more social and environmental reporting for its own sake, not just as an aid to financial analysis. This, if made mandatory, would be an entirely new development.

The additional commitment to “investigate further ways of improving corporate accountability and transparency” is vague. But, as discussed below, it carries possibilities that cut across numerous policy areas – tax, employee law, competition law, consumer law, as well as company law.

Other CSR-related proposals

Aside from this general commitment there are numerous other specific proposals sprinkled through the Coalition's manifesto that relate, in one way or other, to CSR. Of course, reforms to banking regulation are high up on the agenda (“Item No. 1” in the Coalition's programme, see. p. 9). The Chancellor, George Osborne has already outlined a number of proposals, which include a transfer of powers from the Financial Services Authority to the Bank of England, a new “Consumer Protection and Markets Authority”, and an investigation into whether the UK's biggest banks should be split up. The Coalition also proposes a crack-down on white collar crime, and a merging of some of the functions of the FSA, SFO and the OFT into a single criminal enforcement agency. In addition, the Coalition also signals its intention to do more about tax avoidance (see pp. 10 and 30). Clearly, if the government is serious about sorting out the UK 's public finances in a manner that is fair across society, then this obviously must be a priority.

Other proposals that will be of interest to the CSR community will be a new Ombudsman to help enforce the Grocery Code of Practice, and greater “honesty in food labelling (p. 13), and making import or possession of illegal timber a criminal offence (p. 17). The chapter on “Equalities” (p. 18) reiterates commitments on equal pay and the ending of workplace discrimination, and also promises to expand rights to request flexible working.

De-regulation or re-regulation?

There is obviously a tension between some of the specific proposals in the Coalition's manifesto, and the government's broader “deregulatory” ambitions. One example would be the commitment to reinstate the OFR (see above), which is followed almost immediately by a commitment to “end the so-called ‘gold-plating' of EU rules” (see p. 10).

This tension may perhaps be overcome to some extent via the commitment to “smarter” regulation, “shunning the bureaucratic levers of the past and finding intelligent ways to encourage, support and enable people to make better choices for themselves” (p. 8). The chapter on Consumer Protection (at p. 12) signals the intention to “promote more responsible corporate and consumer behaviour” but not necessarily by more rules and regulations. Instead, it is suggested that “greater transparency” might provide some of the answers, as well as “the insights of behavioural economics and social psychology”.

Addressing the problem of “horizontal incoherence”

But these tensions and possible inconsistencies do highlight the need for coordination between the many different policy areas with a bearing on CSR. In the absence of a designated minister with responsibility for CSR, who will be ensuring “horizontal coherence” across the different areas of government policy? Who will be ensuring that the various possible approaches to CSR (and regulation in general) support, rather than undermine, each other? Of course, money is tight. But this only makes the need for regulatory consistency and efficiency that much greater. What use, for instance, is a regulatory direction to do one thing, if there is a tax incentive to do the opposite? Different ministries, law-makers and regulators must not neglect the importance of learning from, informing and supporting, each other.

The problem of “horizontal incoherence” at national level has been highlighted by Professor John Ruggie in the business and human rights field. In his 2009 report to the UN Human Rights Council he notes that, while there is “vertical incoherence”, where governments sign on to human rights obligations and fail to implement them:-

“[e]ven more widespread is “horizontal” incoherence, where economic or business-focused departments and agencies that directly shape business practices - including trade, investment, export credit and insurance, corporate law, and securities regulation - conduct their work in isolation from and largely uninformed by their Government's human rights agencies and obligations.”

Business and human rights: the Joint Select Committee Report

This problem of “horizontal incoherence” was explored by the UK Parliament's Joint Select Committee on Human Rights in their December 2009 report Any of Our Business?: Human Rights and the Private Sector . Giving evidence to the Joint Committee, Professor Ruggie had commented that frequently, at national level:-

“Government departments…that directly shape business practices, whether it is securities regulations or whether it is trade, commerce or investment, are off doing their thing, the human rights people are off somewhere else and the twain rarely meet” (quoted in the Joint Committee's report at para. 164).

In its report, the Joint Committee expressed concern that:

“ a number of the weaknesses highlighted by Professor Ruggie in his reports are apparent in the Government's current strategy for business and human rights. No clear message appears from the Government's evidence on these issues, other than encouragement to businesses to take a responsible approach to their human rights impacts” (see para. 192).

It goes on to recommend that “the Government reviews its approach to business and human rights to develop a more consistent strategy with a clearer message.”

Putting it all together

The Coalition manifesto contains some good ideas on CSR. And it also gives an idea of the broad social aims of the new government, and the role of regulation in achieving it. In many cases, detailed policy is still to be worked out. But while work is parcelled out to the various different departments and committees, the government should, as a priority, set out its overall mission and strategy as regards CSR. For starters – and consistent with the Coalition's own commitment to “smarter regulation” – a new strategy needs to do away with the old and unhelpful distinctions between “voluntary” CSR and “compulsory” regulation. This outdated understanding of CSR held back UK government policy under Labour, confining the government to the role of cheerleader, rather than player. A modern, progressive CSR strategy needs to recognise, instead, that government has a diverse range of tools to encourage CSR – some of these may involve “voluntary” measures, and some may be enforceable by law, and some may fall somewhere between the two.

The Coalition's statement illustrates very well how CSR ideas cross-cut traditional regulatory areas - company law, financial regulation, consumer law, competition law, environmental law and so on. But, as we know from past experience, pursuing these different projects in isolation can produce inefficiencies, mixed messages and unintended consequences. More than this, it means that regulatory insights and opportunities may be lost. Experience gained in relation to banking regulation, for instance, may be relevant in other contexts. So the Coalition needs a strategy for ensuring, not only that different initiatives support and enhance each other, but that there is cross-fertilisation of ideas and experience.

© Jennifer Zerk

Resources:

The Coalition: Our Programme for Government. Copy available at http://www.cabinetoffice.gov.uk/media/409088/pfg_coalition.pdf

UK Joint Committee on Human Rights Any of our Business: Human Rights and the Private Sector 16 December 2009, copy available at http://www.publications.parliament.uk/pa/jt200910/jtselect/jtrights/5/5i.pdf

Business and human rights: Towards operationalizing the “protect, respect and remedy” framework ; Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, A/HRC/11/13, 22 April 2009, copy available at
http://www2.ohchr.org/english/bodies/hrcouncil/docs/11session/A.HRC.11.13.pdf

Postscript:

On 2 August 2010, the Department of Business, Innovation and Skills opened up a fresh consultation on “The Future of Narrative Reporting”. Referring to the Coalition's commitment to reinstate an “Operating and Financial Review”, the consultation called for comments from interested parties about the effectiveness of the Business Review, and whether “the requirements are clear, guidance is sufficient and all importantly, whether reports are high quality and relevant”. The Consultation closed on 19 October 2010.

See further /www.bis.gov.uk/assets/biscore/business-law/docs/n/10-1057-future-narrative-reporting-consultation.pdf

 

 

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