Social responsibility is
often thought of as something companies can choose to practise if they
wish. Even voluntary actions, however, have a legal context. In the UK
companies can make donations, but not political ones, and in the US
laws on misrepresentation and false advertising frame voluntary company
reporting.
Contrary to some perceptions, a
sizeable body of regulation relates directly to corporate social
responsibility. In a recent client note, the international law firm
Lovells lists 32 ‘CSR initiatives in force’ applicable to UK companies
alone, and a further 24 in the pipeline. A number of these, such as the
Organisation for Economic Co-operation and Development Guidelines for
Multinational Enterprises, are not formal regulations, but as the note
says, the list could have been longer because the boundaries of
corporate responsibility are uncertain.
CSR, according to Lovells, embraces a commitment ‘which is increasingly regulated but goes beyond legal compliance’.
In the UK, the CSR-related legislation currently focusing legal minds
is the requirement for companies to produce operating and financial
reviews, which next month is expected to be allocated parliamentary
time.
Hilary Plattern, director of public policy at
Clifford Chance, the largest fully integrated law firm in the world,
says: ‘The legislation the government is bringing forward on OFRs will
arouse the interest of lawyers because the question of materiality will
inevitably lead to questions being asked about whether the directors
have left something [material] out.’ The debate over the ideal length
of an OFR suggests she is right.
OFRs, however, are not
exactly revolutionary. Many, but not all, companies regularly already
consider a range of risk in their reports. Stephanie Bates, corporate
partner at Mayer, Brown, Rowe and Maw, points out that companies
regulated by the US Securities and Exchange Commission, which includes
many large UK businesses, have to write a Management’s Discussion and
Analysis to accompany the numbers in their financial report, and the
OFR is equivalent to this narrative. The proposed legislation fits the
pattern of demand for greater transparency. ‘We tend to come across CSR
issues when reviewing company reports’, says Bates.
CSR,
however, is about much more than transparency in reporting. Lawyers say
that well-thought out CSR policies, if implemented, can help a company
to manage not only reputational, but also a wide range of regulatory
risks.
Jonathan Pickworth, regulatory partner with the
international law firm DLA, says a company should ask two related
questions: what makes it a good corporate citizen, and how a regulator
– which can range from a utility watchdog to the Inland Revenue – might
intervene in the business. Well managed CSR policies and procedures, he
says, make it less likely things will go badly wrong, and if they do,
should mitigate legal and reputational risks.
‘Established compliance programmes in areas such as health and safety,
environmental protection and financial services provision make it less
likely problems will arise, but if the wheels do come off, you want to
demonstrate that this has happened despite your best efforts rather
than because of your failings. Having in place risk management
procedures counts as significant mitigation. Community and charitable
work alone won’t get you off the hook. You need to look at what makes
you a good corporate citizen overall.’
Pickworth stresses
the value of external verification. ‘Third party verification is
important. If you have the right systems and procedures audited by
outside advisers, you are in a much stronger position,’ he says. ‘An
outsider can raise issues you’ve never thought of, like data
protection.’
The trend for governments to make directors
personally responsible for corporate failings will concentrate
managerial minds on responsible working practices. ‘A code of conduct
can mitigate risk,’ says Pickworth, ‘but if the code is a manual no one
ever reads, and the CEO ends up in the dock, and the code says the
opposite of what has been done, it will not look good. You need to have
a policy, and to implement it properly. The big issue is the corporate
culture.’
Corporate culture, he says, ‘is undoubtedly key
to any effective company risk management policy’. A survey conducted
for DLA last year by the London School of Economics found that
corporate culture was the second biggest barrier to effective risk
management, after lack of leadership from the board.
As
Halina Ward, a director of the International Institute for Environment
and Development, and author of a recent paper on legal issues in CSR,
says: ‘One message is clear: any company that aspires to integrate
corporate citizenship across the full range of functions needs to
involve its legal advisers in the development of management systems for
CSR.’
