As businesses begin to digest the 462 pages of the UK company law review’s latest consultation document, most are beginning to realise that important changes could be on the way
Although the review’s two main proposals on corporate social responsibility (CSR) fall short of setting out any mandatory duties on companies to audit and report on their social and environmental performance, they do send out clear signals that future company law should no longer focus merely on a company’s duties to its shareholders.
Of the two proposals, the more significant is a suggestion in the review’s chapter on corporate governance that companies should be required to produce a statement of directors’ duties that has regard to the company’s need to ‘foster its business relationships’ with employees, suppliers and customers – and to take account of ‘the impact of its operations’ on local communities and the environment.
The review sets out a draft statutory statement of directors’ duties to this effect, and asks those taking part in consultation to say whether they agree with its wording.
Its other proposal, which is less significant as it currently stands, is that all listed companies (plus those with a turnover of more than £500million) should, by law, have to produce an ‘operating and financial review’ (OFR) in their annual report that covers, among other things, the ‘indirect effects of wider relationships and issues’ on business performance.
The review suggests these OFRs should include ‘an account of the company’s key relationships with employees, customers, suppliers and others on which its success depends’, plus ‘environmental policies and performance’ and ‘policies and performance on social, ethical and reputational issues’.
It recommends, however, that these need not be included in the OFR on a mandatory basis, but only if directors so wish.
That caveat in particular has disappointed a number of CSR campaigners, including some inside the review team, but among the business community at large it has caused less dismay. Proponents of a strong line on CSR from the review are often from pressure groups, while those who would prefer a less prescriptive ‘middle way’ are generally inside business.
John Probert, for instance, says he would not baulk at the new requirements as they stand. As company secretary of the property business Slough Estates he is not in favour of a legal requirement for environmental and social issues to be addressed in the OFR because he feels, paradoxically, that it could stifle CSR innovation.
‘It would be better if it wasn’t mandatory because it means companies can then put in the detail they feel is relevant and change things as the years go by,’ he told EP. ‘If it’s mandatory, then somebody will come in with a boiler plate solution that everyone will just stick to instead of looking at more innovative ways of doing things.’
Probert is also worried that a legal duty to produce yet another report will just add to the volume of paper and put off members of the public. ‘The danger is that the report and accounts become such a huge document that most people are not going to read it,’ he says. ‘Having said that, most of the things the review talks about are already mentioned in our annual report.’
Other business people clearly feel the same, and are concerned that while it is sensible for the law to state general principles on CSR, it would be counter-productive to tell companies exactly how they should report.
‘I think best practice evolves and is not imposed on companies,’ said the company director of one FTSE 350 business.
‘Those of us who do the right thing will continue to do so, regardless of whether there is a law. There is a business advantage to doing so. If anything, I would think it should be a matter for Stock Exchange regulation rather than for company law.’
Such views will be feeding into the review during the consultation period up to 28 July, with another round of consultation followed by final recommendations to ministers next year. A White Paper is not expected to be put to parliament before the end of 2001 at the earliest.
Whatever shape the final document takes, however, most observers believe the current draft inevitably points the way to a new business agenda that places greater importance on CSR issues.