Richard Taylor and Bill Carr look at the increased emphasis on corporate social responsibility
Lawyers have not always been celebrated as exemplars of morality and the call to action from Henry VI Part 2 - "the first thing we do, let's kill all the lawyers" - is often quoted as a positive model for starting a new regime. However, it is nonetheless true that lawyers are often asked to operate as the consciences of the businesses which they serve. Indeed, their involvement in the increasingly pervasive debate about corporate social responsibility is, for the reasons explored below, also increasing. This article will briefly attempt to explain what areas are covered by the umbrella term of 'corporate social responsibility', give some examples of how corporate social responsibility policies have been adopted in the insurance industry, stress some particularly legal aspects, and outline the consequential role of the lawyer in them.
It is fair to describe corporate social responsibility (CSR) as a movement rather than a precisely codified matrix of regulations, the observance of which constitutes good corporate citizenship. There are, in fact, numerous differing definitions, agendas, codes, compacts and models which have been promulgated at different times and by different bodies including international organisations, non-governmental organisations, pressure groups of various kinds, industry sector groups and individual enterprises.
An acceptable definition, if one is needed, might be 'responsibly grounded business decision-making that considers the broad impact of corporate actions on people, communities and the environment'. The themes and topics which may be covered by different formulations of corporate social responsibility are often broken down, for convenience, into three categories (the triple bottom line). These are:
- people (social responsibility) - policies in this area would cover non-use of slave, forced or child labour, freedom of association, non-discrimination, health and safety, freedom of expression of thought, conscience and religion, right to a family life, to privacy, (free) involvement in political life;
- planet (environmental responsibility) - relevant policies would include the precautionary principle (if in doubt about negative environmental impact of a given action - abstain observance of the International Convention on Biodiversity, use and handling of genetically modified organisms, control of emissions and impact on global warning, impact on the ozone layer, prohibition of use of certain materials and substances, avoidance of soiled ground water and surface water contamination, 'eco-efficiency', export of waste and reuse of material, subsidising of environmental projects; and
- profit (economic responsibility) - this would include good corporate governance, measures to avoid bribery or money laundering, observance of taxation and competition law requirements, compliance with stock exchange requirements including avoiding insider trading, taking account of impact of economic and societal development of exercise of intellectual property rights, economic impact of business processes, e.g. outsourcing, the direct and indirect economic impact on communities of spending and investment, requiring supply chain partners to follow CSR principles.
Principles of CSR
As stated before, there is a plethora of instruments promulgated by various organisations setting out in various contexts CSR requirements. The UN has published a Global Compact setting out nine principles and these have been adopted by a number of multinational companies. The 30 OECD countries have drawn up the OECD guidelines which multinationals are meant to follow.
The rules are promoted by member countries through their national contact point (the Department of Trade and Industry DTI in the UK) which will investigate complaints or breaches by companies in relation to activities in its country. The EU is running a number of initiatives in relation to CSR, which it sees as the integration of social and environmental concerns and business operations and interactions with stakeholders on a voluntary basis. Its initiatives include seeking to increase knowledge about CSR and develop CSR good practices/management skills. The EU has launched a CSR multi-stakeholder forum which is looking at good practice, establishing a common EU approach to CSR and identifying areas where additions might be needed. The EU is also seeking to integrate CSR into its policies, including allowing CSR considerations to be incorporated into public procurement procedures.
A number of initiatives have also been taken to oblige or recommend disclosure on the part of businesses about the extent to which they take social, environmental and ethical issues into account. Thus, the UK Pensions Act 2000 requires pension funds to declare the extent to which they take these factors into account when selecting companies in which to invest. In February 2003, the Association of British Insurers (ABI) published further guidelines for all listed companies to comply with by way of disclosure in their annual report, including:
- boards should take regular account of the significance of social, environmental and ethical matters to the business of the company;
- boards should identify and assess significant risks to the company's short and long term value arising from social, environmental and ethical matters, and the opportunities to enhance value that may arise from appropriate responses;
- the company's policies and procedures for managing risks to short and long term value arising from social, environmental and ethical matters should be disclosed; and
- procedures for verification of social, environmental and ethical disclosures should be described and should be such as to achieve a reasonable level of creditability.
In February 2004, the ABI published research (entitled 'Risk Returns and Responsibility') into the development of CSR initiatives by UK companies.
The research indicated that corporate responsibility has advanced rapidly since the mid-1990s, particularly since the ABI first published guidelines on corporate disclosure in 2001. However, generally speaking, financial markets have been slow to integrate the concepts into their assessments of risk and returns. Larger companies have taken significant steps to respond to the published guidelines; for example, Aviva, one of the front-runners, has committed itself to eight policies dealing with the environment, the workforce, health and safety, customers, community, human rights, suppliers and general standards of business conduct. The research indicates, however, that smaller companies have been slower to respond and more focus is required on what is material to each company, rather than general issues.
It also appears that reputational risk has become more significant for companies. Research conducted by Aon in 2001 among leading UK organisations found that loss of reputation was seen as the greatest risk, a shift from earlier research.
There is, at present, a Private Members, Bill before Parliament which would make it compulsory for major companies to prepare an annual operating and financial review containing three core elements: a statement of the company's business; a fair review of its performance; and a fair projection of the prospect of its business. The directors must consider if the inclusion of information about the impact of the company's operations on employees, the environment or social community issues are necessary in order to achieve the overall objective of the review. In addition, directors' duties would be codified and one such duty would be "... to take all reasonable steps to minimise the impact of the company on the communities that it affects and the environment." The DTI is sponsoring the establishment of a CSR academy and has now appointed a steering group to take forward recommendations for developing CSR skills.
As far as the insurance industry is concerned, there may be an issue about the extent to which insurers might become a driving force behind the CSR initiatives of their clients. For example, over the past ten years, substantial economic losses have been suffered as a result of environmental disasters, with insurers often picking up the tab. The grounding of the Exxon Valdez in 1989 - possibly the world's worst environmental disaster - generated substantial losses in the London insurance market, which continued to be litigated almost 15 years later. In theory at least, CSR may be a mechanism by which insurers could seek to minimise their exposure to large-scale losses.
Recent reports in the US press suggest that, in response to the threat of actions being pursued against alleged emitters of CO2 gas, some insurers are already sending their clients questionnaires regarding compliance with, for example, environmental regulations. It is not currently suggested that this might affect the availability - or price - of insurance cover but it does not require a great deal of imagination to anticipate ways in which the information gathered might eventually be used. A discounted premium may well provide a good incentive to an insured to take CSR issues more seriously. A number of reasons have been given why companies have chosen to formally adopt CSR policies and to publicise their commitment to these.
There is, for example, a growing amount of litigation in relation to the behaviour of subsidiaries of multinational companies in developing countries. These range from cases of human rights' violations in overseas jurisdictions and allegations on the working conditions violating employees' human rights to claims in the UK for health and safety breaches in overseas jurisdictions based upon parent companies owing a duty of care to staff affected by their overseas operations. In addition, corporates can be the subject of proceedings, especially in the US, on the grounds that they have made false claims relating to the quality of their production facilities. Acquiring in this way a reputation as a bad corporate citizen can affect relationships with customers, and the ability to recruit and maintain staff. British American Tobacco (BAT) announced towards the end of last year that it is withdrawing from Myanmar because of the country's human rights record in that country. Further, ethical, environmental and social criteria are increasingly being used in selecting investment opportunities and, as stated above, there is more reporting of companies' CSR policies.
The question whether observance of CSR principles improves or detracts from a company's financial performance is controversial. Some 30 years ago, Milton Friedman expressed the following view: "... few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stakeholders as possible. This is a fundamental corporate doctrine." Increasingly, however, studies have been published to the effect that companies that focus on economic, ethical and environmental issues outperform other companies. For example, a Deloitte & Touche survey has found that 65% of the largest fund managers in the UK believe that companies with good performance in these areas outperform their peers on other indicators. The reason why all senior business sectors now believe in the financial value of CSR may be the increasing vulnerability of a company's bottom line to damage to its reputation and in particular to the value represented by its brands.
It may therefore be the case that corporates find the adoption of CSR increasingly helpful in avoiding, or at least minimising, the risk of certain adverse events occurring, even where the consequence is not immediate financial loss but damage over a longer term. The various principles, codes and practices behind CSR policies are thus a useful tool for protecting what is often a company's most valuable asset, its reputation, particularly when they are adapted for use in the particular circumstances of an individual enterprise and the sector in which it operates. The ethical issues facing a pharmaceutical company may well be very different from those which confront a company in the extractive business or a producer of energy.
The lawyer's role in CSR is a developing one. At the most basic level, a lawyer's skills are obviously well suited to interpreting the various codes and other instruments which already exist, and in drafting specific policies and practice codes for particular companies. Often, however, the lawyer is involved in a number of other ways since the standards required by CSR policies are often based upon or complementary to legal requirements.
While CSR requirements are generally regarded as such precisely because they go beyond strict legal obligations, the real situation is usually more nuanced. In the first place, legal requirements in many areas, including, in particular, employment protection laws and environmental protection laws, differ significantly from jurisdiction to jurisdiction and it may well not be considered ethical to comply only with the legal baseline standard in each jurisdiction. At the very least, many multinationals will choose to comply with the requirements in their home jurisdiction and to apply these standards wherever they operate.
Secondly, there are some types of law which if infringed may have particularly serious consequences on a company's reputation and undermine its whole standing as an ethical enterprise. Examples of such statutory requirements may be found in respect of money laundering and the use of corporate funds improperly to influence officials or individuals who can, for example, direct a company's choice of suppliers. A company's reputation may also be disproportionately affected by what may seem to be minor lapses in complying with the labelling or content requirements of popular consumer products, which may require a costly and embarrassing product recall.
A further task which will often involve the skills of a lawyer is reconciling the broad requirements of ethical behaviour with the specific requirements of certain legislation. There may be instances where differing requirements are imposed under different national legislation or under codes dealing with different aspects of corporate life, and a lawyer's training in balancing apparently conflicting requirements can be helpful. Inside counsel will often also play a key role in ensuring that where a company has non-executive directors on its board, its governance works in such a way as to allow them the necessary information and access to be able to challenge the executive management and to formulate their own proposals for the company's business strategy.
Principles embodied in 'voluntary' codes may develop into customary law, breach of which may be actionable in other jurisdictions. Additionally, 'voluntary' codes may become enshrined in legislation as a number of non-governmental organisations (such as Amnesty International) press for obligations of particular interest to them to be made legally enforceable. Thus, while law shapes CSR, it is also the case that CSR shapes law. Another way in which a voluntary code may become enforceable is by being made contractually enforceable, such as when imposed by a business on its suppliers. As noted previously, it is also possible to imagine a situation of particular relevance to the insurance industry where CSR requirements, dealing perhaps with environmental practices, might influence the availability - and cost - of insurance cover.
Lastly, in an effort to reduce the impact of different types of risks occurring, companies increasingly turn to external consultants with the requisite skills to create this parameter for or even carry out the audit.
There are many areas of CSR compliance which lend themselves to the use of checklists which may be used to identify any risk of contraventions and which lawyers may be best equipped to produce.
Doubts are sometimes expressed over whether the CSR movement will prove an ephemeral phenomenon rather than a lasting influence on business. While the term 'corporate social responsibility' may well prove short-lived, it seems very unlikely that business will, even if it wished to, withdraw from a commitment to responsible business practices going beyond the prevailing minimum legal standards. The underlying trends of globalisation of business, demands for increasing transparency and the ease of communication of information all reinforce the need for businesses to be mindful of their reputations and thus to ensure that they are aware of, and can comply with, the standards which they (and the wider community) consider are appropriate and necessary.
- Richard Taylor is a Consultant with and Bill Carr is a Partner with London-headquartered law firm CMS Cameron McKenna.