Many in the business community have realised that in a globalised world decisions and actions can have unforeseen consequences in many different locations. These are undesirable not only on ethical grounds, but also because of the damage they can do to a company’s reputation, as experienced by clothing manufacturers like Nike and Gap, and the increasing risk of litigation and therefore of being found guilty by investors of poor risk management.

The result of this new understanding of real business risks, corporations have begun to try and ensure that, at a minimum, their business activities do not have an adverse impact on the various “stakeholders” they affect – including workers, consumers, local communities and the environment. One result of this has seen the setting up of new standards for business conduct, such as the ‘FTSE4Good’ index on company performance. Many firms have examined where their activities pose a risk to the well-being of people and the environment and established their own codes of conduct for good corporate ‘citizenship’.

Change, however, has been very slow, and in many cases only superficial steps have been taken. A mismatched patchwork of voluntary best-practice standards and codes of conduct has emerged, obscuring the main priorities and encouraging companies to undertake a “pick-and-mix” approach to corporate social responsibility. Many of the FTSE 350 companies still do not produce regular social and environmental reports, and no consistent standard exists amongst those that do. This can make it difficult to distinguish substance from gloss, and means that companies taking corporate responsibility seriously must compete with the ‘free-riders’ in their industry who do not. The reality is that individual consumers and institutional investors are currently not able to properly compare companies’ social and environmental performance.

One MP’s solution
Andy King MP (Rugby & Kenilworth, Labour Party) was drawn in the annual Private Members Ballot in December 2003, and has recently presented a new Bill to Parliament which aims to clean up companies’ social and environmental performance. The Bill will be discussed in Parliament again in late March.

Mr King’s Bill seeks to inject suions and church groups including Amnesty International UK, Christian Aid and Friends of the Earth.

If it became law the Bill would require businesses to produce annual reports on their social and environmental impacts, and would require Directors to consider the impact of their investment decisions on all of their stakeholders. Mr King has said of his Bill: “The aim is to end the current ‘pick-and-mix’ voluntary approach to corporate social responsibility. More than 300 MPs have signed an Early Day Motion expressing their support for more comprehensive laws in this area, and the weight of opinion in the UK means the government must act.”

The Bill includes two key elements:
* Mandatory reporting: companies will be required to publish annual reports explaining the significant social, environmental and economic impacts of their activities;
* Directors’ duties: expands the present duties of company directors from just considering the financial success of a company to requiring them to consider also the environmental, social and economic impacts of their activities, as well as the interests of all their stakeholders (not just shareholders).

The Bill would oblige companies to be open about their ‘triple bottom line’ – their social, environmental and economic performance – allowing consumers and investors to compare companies’ performance and make their investment decisions on the basis of a fuller picture.

Amnesty International UK Director for Economic Affairs, Peter Frankental, is eager to see the Bill get wide Parliamentary support: “There have been too many cases of business complicity in serious human rights abuses in countries all over the world. We need mandatory social reporting to make companies accountable for their business activities, and to create a 21st century framework for business that ensures it is accountable to all its stakeholders.”

Support from not just the ‘usual suspects’
What is interesting about these proposals for new law on corporate conduct is the growing support from where you might least expect it. Of course the usual suspects among the campaigning organisations and the policy community are on board, but there is also increasing support from companies themselves. Where you might expect resistance to any proposal that could perceived as further regulation or ‘red tape’, there are actually business leaders who recognise that investors and consumers are demanding to be properly informed about social and environmental performance, and that they need a ‘level playing-field’ to ensure they and their competitors and held accountable to the same standards.

Fund manager Henderson Global Investors recently made an explicit threat to refuse to endorse a company’s annual report and accounts if there is no disclosure of social and environmental risks in the report. Nick Robins, the head of socially responsible investment at Henderson said: “Companies with inadequate disclosure on social, ethical and environmental factors are denying their investors the right to make informed investment decisions.” (Financial Times, 26 February 2004) Such a move by a major stock market player could have enormous consequences for the way business is done.

The Association of British Insurers (ABI), whose members own a fifth of the London stock market, has recently published a report, ‘Risks, Returns and Responsibility’, which details how effective management of corporate responsibility could lead to improved business performance. Peter Montagnon, head of investment affairs at the ABI, said: “Corporate responsibility is not about creating a feel-good factor. We’re talking about fundamental risk management. We want companies to have high quality, sustainable earnings.”

What next?
The next move then must come from the government, whose approach so far has been to allow companies to set their own standards, or to sign up to one of the multiple voluntary CSR codes of conduct now in place. The hope was that business would respond to encouragement rather than coercion, giving companies the flexibility to ‘innovate’ within their CSR programmes.

The results of this hands-off approach have, however, been disappointing and business leaders themselves are now expressing a need for a common standard for ethical performance and disclosure. Professor Alyson Warhurst of the corporate citizenship unit at Warwick Business School said: “A systematic and thorough approach to social responsibility [is becoming] an imperative rather than a nice-to-have. It’s going to be necessary for companies to do this as systematically as any other risk process.”

Consumers in the UK want to know that the goods they buy are not the product of someone else’s suffering or environmental degradation elsewhere, and there is a sound business case for creating a common and enforceable set of standards for social and environmental performance. The government can support Andy King’s Bill or introduce its own company law reform to end finally the notion of companies operating as islands in society, accountable only for their profitability.