Corporate Social Responsibility

– in Westminster Hall at 12:58 pm on 11th October 2005.

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Photo of Sarah McCarthy-Fry Sarah McCarthy-Fry Labour, Portsmouth North 12:58 pm, 11th October 2005

I am grateful for the opportunity to bring to the attention of hon. Members and the Minister the very important issue of corporate social responsibility. In the short time available to me, I shall set out the old narrow view of the responsibilities of company directors, how things have moved on in the 21st century, and why it makes good business sense for organisations not only to accept corporate social responsibility, but to embrace it and make it central to all their strategic decision making. I shall also set out where Government can help to bring all that about.

Historically, the legal responsibility of the directors of a company has been to maximise shareholder value, either by a return in the form of a dividend or by capital growth, or by a combination of the two. However, it can be argued that that is a very narrow view and that there is a moral and legal responsibility to consider the interests of employees, the local social and environmental impact of doing business, and the impact of company operations on the economy of the whole country and, indeed, globally. The Government are committed to promoting responsible business behaviour as a key part of their sustainable development strategy, which involves both the public and private sectors.

Corporate responsibility can encompass many things. At the moment, it typically encompasses community involvement in the form of charitable gifts, community investment, commercial initiatives in the community or even just allowing employees to take time off to take part in community volunteering projects. However, it also involves looking at the benefits to the wider community and the environment of a company's day-to-day business operations, job creation, investment in a region, the taxes that are paid, the goods and services that are provided and general wealth creation in our economy. Increasingly, corporate responsibility is about responsibilities to the whole value chain. Where, for example, are raw materials being sourced? To whom are goods and services being sold?

Organisations are moving on from being solely responsible to their shareholders to being responsible to a wider group of stakeholders. Who are a business's stakeholders? It could be those who can influence or who are affected by an organisation's activities, such as investors or the wider community. It could be those who have an explicit or implied contract with the organisation, such as employees, customers or suppliers. It could be those who possess the information, resources or expertise that an organisation needs to formulate and implement its strategy, such as City analysts and even politicians such as ourselves. We can therefore define company responsibility as a business's positive impact on society and the environment as a result of its operations, its products or services and its interaction with key stakeholders, such as employees, customers, investors, communities and suppliers.

We might ask why businesses should sign up to such an approach. What is in it for them? Increasingly, corporate value is measured against non-tangible as well as tangible assets. What is a company's brand or reputation worth? How quickly can its reputation be lost if the company is seen to be adversely affecting its local environment or ruthlessly exploiting child labour overseas? Let us take the example of diversity. Consider the spending power of people from ethnic minorities, people with disabilities or people from single-parent households. Consider also how a company will attract and retain the best talent. Some 12 per cent. of all new graduates are from ethnic minorities. Surely, that is a reason for organisations to consider their policies on diversity.

The same is true of the environment. Of course, there are legal obligations with which to comply, but in today's competitive world, with diminishing natural resources and the cost of waste disposal rising, it surely makes sound business sense to consider using recycled packaging and pursuing greater energy efficiency.

Consumers and investors are also becoming much more discriminating. The Government are trying to encourage savings and investment, and more people than ever will be looking at self-invested pension plans and personal pension plans, while all new babies will now have a child trust fund. Parents will be looking for a suitable investment for that fund and for many of them, financial return will not be the only criterion. People have choices and they are exercising them by looking at the ethical background of investment opportunities. That is true not only of investors but employees. According to a survey by Environics, three in five people want to work for a company whose values are consistent with their own.

Fairtrade certification mainly covers coffee, chocolate and bananas. Brand recognition of Fairtrade is growing, and more than one third of the population now recognises the Fairtrade mark. I know that from my own observations because, for the past few years, I have been going out during Fairtrade fortnight offering free samples of Fairtrade chocolate. In the beginning, people were very suspicious and thought that it would taste different. However, in the last year I went out, many people said, "Oh yes, we already buy Fairtrade" or "Yes, we recognise it." That is borne out by the Fairtrade sales figures. Since 2001, overall sales of Fairtrade certified products have grown by 83 per cent., and the estimated UK retail value of those sales is more than £140 million. More and more products are gaining Fairtrade certification, and we can now buy Fairtrade wine and even Fairtrade flowers.

A new generation of citizens is learning about sustainable development and the environmental impact of business as part of the national curriculum at key stage 2. That will colour their decisions in the future as adult consumers, investors and citizens. The recent scandals in corporate governance and a raised awareness of environmental and social issues may have led to some loss of trust between business and the general public, and businesses need to work hard to regain that trust. People need a way to measure and compare the environmental and social performance of companies.

Many leading businesses have recognised that and now produce an array of corporate responsibility reports. However, many companies, known as the laggards, just pay lip service to the idea, and that makes it difficult for the general public to distinguish between a company that reacts to issues or crises as they arise and a company that puts corporate social responsibility at its core, involving it in all business decisions. We must also consider the organisations that do not rely on a well known brand. How do we ensure that they take on the wider interests of stakeholders, not just shareholders?

It will take time for consumer power to create a significant impact. Currently, ethical consumers represent only about 5 per cent. of the population on an active basis, although that proportion is growing. What are we to do until critical mass is reached in that respect? My view is that the issue is too important to be made voluntary. Some regulation is needed. Health and safety is considered too important to be left to a voluntary code. It is a statutory responsibility. Corporate responsibility is too important to be left to a voluntary code.

There are wide implications to the term stakeholders. We are all, after all, stakeholders in the planet. Climate change threatens us all. Whether or not the recent increased hurricane activity can be directly linked to global warming, it had a devastating effect on the people of New Orleans, and climate change will affect us all in that way if we do not take action soon. As we exhaust our natural resources, it makes sense to conserve what we have for the long term, and not to exploit it for short-term gain.

We all recognise the importance of sustainable development, but do we all recognise the actions that we need to take to achieve it? Most of us have signed up to the Make Poverty History campaign, but do we know which companies continue to exploit workers in the developing world, on poverty wages, in unsanitary and unsafe working conditions? Are we happy to let subsidiaries of UK firms do that, safe in the knowledge that they have no legal responsibility to tell their shareholders that they are doing so?

I am aware that the Government have tried to address those issues through the White Paper "Company Law Reform", but I do not believe that they have gone far enough. I do not think that enshrining in statute the principle of enlightened shareholder value is sufficient. Success is too narrowly defined by financial outcomes. A possible interpretation is that where a conflict occurs between public good such as environmental or employee protection, and the success of the company, members' financial interests must take precedence.

The language in the proposed measure appears a bit woolly, such as in the provision that a director must act in a way that he considers,

"in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole".

The term "consider" is highly subjective and will be judged differently by different people. Also, directors need only consider members' interests.

The freedom of companies to operate must be balanced with clear responsibilities to society and the environment. I should like the company law reform Bill to include a statutory duty to affected stakeholders as well as to shareholders. Specifically, there should be a duty for directors to identify, consider, minimise and report on any negative social and environmental impacts caused by a company's activities in the UK or overseas.

Multinational corporations present distinct challenges to corporate governance, since, effectively, they co-ordinate their activities as an integrated economic network that is beyond the boundaries of an individual nation state. We need to look carefully at how to prevent UK companies from taking advantage of weaker regulatory regimes overseas, particularly in developing countries.

Finally, we must look at the reporting regime. Although the operating and financial review that is required by UK listed companies is a welcome step in the right direction, it does not go far enough, as it requires company directors to report only in the interest of the company's shareholders, and not that of affected stakeholders. If the operating and financial review were linked with a duty for company directors to report significant negative social and environmental impacts, and a legal duty to take reasonable steps to minimise those impacts, the reporting would become a management tool for the business. It becomes the building blocks of an action plan rather than just another report for the shareholders.

The first reports under the operating and financial review are due to be published next year. I should like a working party to be set up with business, the Government and other stakeholders to examine those reports, look at the commonalities and the differences and come up with a standardised benchmark for reporting. I want companies to report on their social impact and ethical behaviour in relation both to their own aims and the aims of their stakeholders. There are many examples of good practice in corporate social responsibility reporting. Let us use those companies that have been the trailblazers; let us show the rest of the business world how it can be done and how it should be done.

The Government could develop standardised performance indicators, setting out benchmarks and requirements for stakeholder dialogue and public reporting. That could be overseen and monitored by a standards board which could be established as a subsidiary of a company law and reporting commission, building on the role of the Financial Reporting Council. Let us give consumers and investors the power to make informed choices by ensuring that companies present their reports in a standardised way so that people can make meaningful comparisons.

But regulation and reform of company law are just one way in which the Government can have an impact. Government procurement presents a huge opportunity to act as a lever to encourage business along this road. The UK Government, regional development agencies, local authorities and health service trusts spend more than £17 billion a year in the form of direct contracts, grants and support to start-up businesses.

Yes, there are legal requirements that have to be met in awarding public contracts but there are still real opportunities to use sustainable procurement to drive change. We need to highlight these opportunities and actively encourage innovative practice. If these public bodies took the lead in setting minimum standards of corporate social responsibility among their suppliers it would send a clear message to the business community. It would help to create a level playing field between the social enterprises who already operate in the interests of the wider stakeholders and those companies that just pay lip service to it. Because of the impact and profile that these public bodies have with members of the public it will also help to raise awareness among ordinary consumers.

In conclusion, if we are serious about sustainable development, corporate social and environmental responsibility needs to be at the heart of business organisation in the UK, and at the heart of UK companies' activities overseas. The impacts are far wider than just here at home. Today, I have outlined two ways in which I feel the Government can act: by reforming company law and by using the enormous purchasing power of public bodies.

It is often said that we are powerless in the face of globalisation and the power of capital. But if we do not do something about sustainable development, the power of capital will be worthless in the face of environmental and economic collapse. The Government cannot act alone; it has to be a partnership, a balance of incentive and regulation. I believe we should start by agreeing the basic premise that a company does not exist in isolation and that capital is only one of the building blocks that adds value. From there it is but a short step to acknowledging that directors should act in the interests of their affected stakeholders as well as shareholders, which in a nutshell is what corporate social responsibility is all about.

Photo of Malcolm Wicks Malcolm Wicks Minister for energy, Department of Trade and Industry 1:13 pm, 11th October 2005

I congratulate my hon. Friend Sarah McCarthy-Fry on securing the debate on this important subject. She mentioned that her constituents were suspicious when she offered them Fairtrade chocolate. I would not be suspicious. Indeed, as I look forward to two one-and-a-half-hour debates tomorrow on energy policy in this Chamber and the Adjournment debate at 7 pm, at about 4 pm I shall be looking for my hon. Friend.

With so much debate surrounding corporate social responsibility it is important to have a clear understanding of what it is, what the Government are doing and where the future might lie. It is clear from my hon. Friend's introduction to the discussion that it is an important and complex debate, and today will certainly not be the end of it. CSR might seem difficult to define precisely but one would know if one saw it. In essence, it is about how we recognise a good company. A good company in the 21st century takes sustainable development seriously and takes responsibility for its environmental, social and economic impact. We have already referred to the sourcing of materials—timber comes to mind—and the impact on other parts of the world. The horror of child labour is another example presented to us by my hon. Friend.

CSR is, in part, about sustainable development. Given the environmental concerns that have been highlighted, that will grow in importance. It interfaces with good employment or human resource practice. The good company with a social conscience may have been ahead of the Government in terms of what we now call the work-life balance. The good company recognises that employees, including fathers, have children, and puts paternity as well as maternity leave on the agenda. It is a company such as B&Q, which has always practised non-ageist policies in recruitment and does not reject people because they are in their late fifties or sixties while saying "In no way can you get a job." It takes occupational pensions seriously; it recognises that many in the work force with grown-up children now have caring responsibilities for others. A good company, for social and also commercial reasons, will want to treat those employees seriously.

CSR covers a range of things, including some of the more traditional social projects supported by many companies, whether in the local community in a one-factory town, or nationally or internationally. The impact of Rowntree, the chocolate company, on one city over more than 100 years since the pioneering report into poverty at the turn of the 19th and 20th centuries is a case study, which also partly reminds us that such social programmes are nothing new.

We would recognise a good company with a social conscience and social responsibility when we saw it. Nevertheless it is worth rehearsing the reasons why business should practise corporate social responsibility. CSR is not only about businesses being more responsible because of the moral and ethical considerations, valuable though such things are. It also enables companies to become more efficient, more profitable and fundamentally more sustainable in the longer term. Improving UK competitiveness and raising productivity are central to our aims as a Government and at the Department of Trade and Industry.

Corporate responsibility can contribute to raising competitiveness. Many businesses have found that CSR can lead to a better reputation with customers, which will increase in the decades to come, and improve staff motivation. Most companies say that their biggest asset is their people, and it is common sense that people want to work for organisations of which they can feel proud. That is backed by strong survey evidence as well as the experience of individual companies. For example, one survey showed that 82 per cent. of employees involved in a company's social responsibility activities would recommend that company as an employer—a great testimonial. In another survey by the Chartered Institute of Personnel and Development, two out of three graduates said that a company's ethical reputation would influence their decision to apply for a job. Again, there will be a momentum behind such research findings.

Government's role is to create the right framework to encourage high standards of corporate behaviour. CSR must start with compliance with the law, and in the UK we have a strong record of regulation on a range of issues related to corporate activity including health and safety, employment terms and conditions, and environmental protection. We recognise that the regulatory framework will evolve over time to reflect changing circumstances. That represents the baseline for company behaviour. The crunch question is what companies do voluntarily to raise the performance beyond the minimum legal standards.

I appreciate that there is considerable support for more mandatory measures to ensure company accountability and, although we fully support high standards of business behaviour, we do not accept that a one-size-fits-all approach would necessarily benefit the business community, the environment or wider society. We believe that a more targeted and carefully designed range of policy instruments should be deployed.

Our approach is therefore to provide the right policy environment that sets decent minimum standards while stimulating companies to raise their game and their performance beyond those levels. Getting the balance right is crucial: imposing new burdens on business could hurt competitiveness and stifle innovation, which many businesses are bringing to this subject.

How do we do that? One basic way in which we can help to create the right balance is by setting out clearly the standards we expect of company directors. The company law reform Bill that will be introduced later during this Session will include a statutory statement of directors' general duties. The Bill will set out for the first time how directors are expected to behave in an authoritative but accessible way.

In line with the recommendation of the independent company law review, the statutory statement will adopt an approach that the review called "enlightened shareholder value". Under this approach the basic goal for directors should be the success of the company for the benefit of its shareholders. However, we believe, as the review did, that business prosperity and responsible business behaviour are two sides of the same coin. The duty will therefore go on to say that, in seeking to promote the success of the company, directors must have regard to factors such as the interests of the company's employees and the impact of the company's operations on the community and the environment. My hon. Friend discussed some of the implications of that and I am sure that the debate will continue.

That alternative approach, which my hon. Friend supports, would enable or require company boards to override the interests of shareholders where they considered that this would satisfy broader ethical or social considerations. That is the point that the debate has reached. I believe that there are two important reasons why it would not be the best way forward. An extremely pluralist approach—as some call it—would muddy the waters unhelpfully: directors would lack clarity about what they were meant to be doing, and it would in practice be more difficult for anyone to hold directors to account. For example, what should directors do if environmental and employee interests point in different directions? Directors could be put in a difficult, even an impossible position, and all of the company's stakeholders, including shareholders, would be impotent to challenge their decisions.

We believe that the most effective way to promote responsible business behaviour is to show how such behaviour leads to business and commercial success. If we are not able to do this, there is little prospect of achieving high standards of business behaviour. That is precisely the area where both engaged shareholders and well-informed customers can and do make a difference.

As my hon. Friend knows we work closely with Business in the Community on a number of initiatives, including sponsorship of its awards for excellence and corporate responsibility. It will have to find a snappier name for that, I suspect. Both programmes illustrate the growth of CSR with more companies participating and the standards of performance increasing year on year.

Programmes such as Envirowise, funded by the Government, offer advice to business to help improve their resource efficiency. Savings are estimated at over £1 billion to date. As part of the world summit on sustainable development commitment on sustainable production and consumption, the Government have pledged to ensure that the £13 billion of goods and services bought every year for central civil Government are sustainable. That was the second theme of my hon. Friend's speech.

In October 2003, the Government signed up to the recommendations of the cross-government sustainable procurement group. Action so far includes ensuring that from 1 November 2003, all new Department contracts apply minimum environmental standards—such as on energy efficiency, recycled content and biodegradability—as well as value for money when purchasing certain types of product. I know that my hon. Friend is aware of that development and will welcome it. Our new goal is to be recognised as among the leaders in sustainable procurement across EU member states by 2009. Greater transparency is vital to building up trust and a reputation. The number of companies that have reported on their performance has already increased significantly over the past few years. UK companies are now among the leaders for quality and quantity in that kind of reporting. They were responsible for seven out of 10 of the top global reports in a recent survey, for example.

As part of our reform of company law, we have introduced a statutory operating and financial review—as was mentioned—which will play a key role in putting financial statements in the context of a broader discussion and analysis of the business. Following that review, companies need to report on matters such as employees, the environment, and social and community issues, where those are necessary for an understanding of their business. We hope that the review will help to improve transparency through a step change in the quality of company reporting as well as by recognising the potential for intangible and non-financial issues to have an impact on company performance.

One way to ensure that CSR is part and parcel of the way in which we do business is to ensure that the skills and competencies for responsible business practice are embedded right across companies. To help with that, the Government launched a CSR academy to help to develop individual skills and to integrate CSR, in an understanding way, into recruitment, appraisal and the professional development of employees. That is important. CSR needs to be embedded and integrated, rather than being regarded as something that one does during the last half hour of a course. Looking to the autumn, we plan to license promotion of the academy competency framework overseas and we will publish a resource on how to use the framework.

Much of the CSR debate centres on the impacts of our companies' operations and relationships overseas. I think that it is fair to say that, internationally, the UK is seen as among the leaders in CSR, both in policy and in practice. Given globalisation, the multinational nature of many of our companies, sourcing from abroad and all the things that my hon. Friend mentioned, the globalisation of CSR is vital.

I should add that as part of our presidency of the European Union, we are holding a CSR conference in December. I hope that my hon. Friend can come; I will ensure that she is invited. The conference will focus on how financial institutions can help to drive CSR by promoting and mainstreaming responsible investment.

I welcome the debate on how business can contribute to tackling the challenges that we face. We believe that business prosperity and responsible business behaviour are two sides of the same coin.