The unsustainable depletion of naturalresources, perpetuation of poor healthand imposition of dangerous working

conditions are just some of the worryingexternal costs imposed by international com-mercial operations. These costs are borneespecially by developing countries that donot receive adequate com-pensation from companiesresponsible for social andenvironmental damage.

However, at a nationallevel there are significantbarriers to regulating com-panies to ensure that theymanage their social andenvironmental impactsproperly. Prescriptive legis-lation often leads to tokenis-tic responses and regulationcan quickly become an inac-curate reflection of society’s concerns, lag-ging behind public opinion. At aninternational level, with inadequate globalgovernance and discrepancies betweennational social and environmental laws,improvements in corporate practices oftenhave to rely on voluntary action. There isan abundance of recognised internationalstandards, for example those set by the

ILO, OECD and UN, for protecting work-ers, human rights and the environment.However, where these are not incorporat-ed into national legislation, or are notapplicable to overseas operations, theireffectiveness is much diminished.

Companies take voluntary action whenmarket forces reward themfor doing so. The commercialimperative for a company toimprove its perormance canbe driven by the reaction ofinstitutional investors andshareholders, employees,suppliers, customers, com-munity representatives andNGOs. Corporate practicesadvocated in codes of con-duct may not have the sameforce as law, but pressure fromthese stakeholders can in the-

ory be a formidable force for improvementsin behaviour.

Clearly this market imperative needssupport. For it to work effectively, infor-mation about business activity has to bemade accessible so interested groups canmake informed decisions about their rela-tionships with companies. But accessibleinformation alone is not enough for market-

96 NEW ECONOMY

Promotingcorporate social

responsibilityIs market-based regulation

sufficient?

ELLA JOSEPH

Institute for Public PolicyResearch

1070-3535/02/02096 + 05 © 2002 IPPR

“Corporate practicesadvocated in codes of

conduct may nothave the same forceas law, but pressurefrom stakeholderscan in theory be a

formidable force forimprovements in

behaviour”

PROMOTING CORPORATE SOCIAL RESPONSIBILITY 97

based regulation to take place. A criticalquestion for policy-makers is how far dis-closure of social and environmental impactscan be an effective means to improve cor-porate behaviour. To make it effective, anumber of other criteria for reporting mustalso be met (Adams 2002):● the issues that can be reported on must

match the interests of stakeholders ● there must be a measure or a metric that

accurately captures performance and can beapplied across organisations (ideally acrosssectors and geographic boundaries)

● that measure or metric should be audited● that measure or metric should be commu-

nicated to the appropriatestakeholder(s); and

● the relevant stakeholder(s)should respond

A mandatory approach?At present, these criteria area long way from being ful-fil led, so that market-enforced regulation based oninformed choice is still poor-ly developed. In response theUK and the EU are currently grappling witharguments over the relative merits ofmandatory as opposed to voluntary socialand environmental reporting. The urgencyof this debate has increased with the publi-cation of proposals by the UK Departmentof Trade and Industry’s (DTI) influentialCompany Law Review and the EuropeanCommission’s Employment and SocialAffairs Directorate. The former advocatesreporting on non-financial performance asa means to an ‘enlightened shareholder’approach to corporate governance. The lat-ter has broader aspirations to improve EUcompanies’ social and environmental per-formance.

Both reports confront similar questionsabout the most effective way to get suffi-cient, accurate information from companies.

Some key issues to consider are: ● on which issues should reporting be

mandatory and how detailed should leg-islation be about the content and format ofreports?

● is there a trade-off between imposing stan-dardisation and the quality of informationthat is provided?

● should there be a distinction between therequirements made on companies of dif-ferent sizes and in different sectors?

● should external verification be required?● should interested parties have a formal

method of redress if they believe the pub-lished information to be a misrepresentation?

Current levels ofvoluntary disclosure

Analysis by KPMG of the 100largest companies in 11 of theworld’s industrialised coun-tries showed that only 13 percent produced environmentalreports in 1993, 17 per centdid so in 1996, rising to 24 percent in 1999. However, inOctober 2000, the Prime Min-

ister challenged the UK FTSE350 to publishannual environmental reports by the end of2001 and that summer the European Com-mission recommended that companies shouldrecognise, measure and disclose environ-mental issues in their annual reports andaccounts.

Recent surveys differ as to how far report-ing has taken off in the UK. In 2000, analysisby Pensions Insurance Research Consultants(PIRC) claimed that 81 per cent of the FTSE350were disclosing their environmental impactscompared to 52 per cent in 1998. However,more conservative estimates are that almosthalf of the UK’s top 200 quoted companies donot adequately disclose on social and envi-ronmental issues, and that the Prime Minis-ter ’s challenge to the FTSE350 wentunheeded.

“A critical questionfor policy-makers ishow far reporting on

social andenvironmental

impacts can be aneffective means to

improved corporatebehaviour”

98 NEW ECONOMY

Reporting on social performance is evenfurther behind. Although, between 2000 and2001 the number of FTSE100 companies issu-ing information on their social performancedoubled to 79, very few produce more than‘corporate gloss’, with only 16 using quanti-tative performance data to back up theirclaims. A regularly cited problem with socialreporting is that the indicators are less welldeveloped than indicators established forenvironmental performance. However, evi-dence shows that even with issues on whichcompanies have explicit policy statements,and where easily identifiable and quantifiabledata exists, the UK’s largest companies stillfail to provide information on their perfor-mance. For example, only ten of the FTSE100report data on the ethnic diversity of theirworkforce and none provide quantitativedata on child labour in their supply chain oron workdays lost through stress (ERM 2001).

Analysis of published reports also showthat practices differ widely between sectors.Those most forthcoming with information ontheir environmental policies and/or perfor-mance tend to be those that have a high envi-ronmental impact, such as the chemicals andtransport industries, or those which are par-ticularly sensitive to political or regulatory fac-tors, for example, utilities. Non-industrialsectors, such as insurance, communications,retail and banking traditionally report at belowaverage rates as environmental issues areseen to be less relevant. Among the top fourbanks in the UK, three provide limited envi-ronmental data, and only one has reference tosocial issues beyond basic philanthropic con-tributions (Doane 2002). Company size is alsoan indicator of reporting behaviour. Unsur-prisingly, due to different levels of demand aswell as resource constraints, there is a disparitybetween the reporting practices of large andsmall companies. In 2000, only one in tenSmallCap companies satisfied PIRC’s corereporting criteria, compared to half of theFTSE100.

The general upward trend in the quantityof reports does not, however, equate to theprovision of improved quality of information.Of the reports analysed by KPMG in 1999,only half mentioned their progress on prioryears’ targets and the proportion of reportsthat contained quantitative data on environ-mental performance and described futuretargets remained constant between 1996 and1999. Few reports – KPMG estimates one insix – are checked by third parties for accura-cy and where they are it tends to be the datacollection processes rather than the end resultsthat are audited.

There is a range of verification methodsthat can be employed from truly independentaudit of both internal management and datathrough to informal peer review. The lion’sshare of third party auditing is conducted bythe ‘big five’ accountancy firms. However,their ability to provide these services on socialand environmental information has beenbrought into doubt following the Enron deba-cle, provoking questions on their ability toprovide accurate and accountable financialaudits. And organisations charged with audit-ing or verifying reports rarely comment onissues that the report has failed to include.

Direction of future policyThe UK regulatory framework for the report-ing of social and environmental issues is dueto shift significantly. The DTI’s CompanyLaw Review published its recommendationsin July 2001 after three years’ deliberation anda new Companies Bill is expected after con-sultation.

The new Act will require large public andprivate companies to produce an enhancedOperating and Financial Review (OFR) aspart of their annual report. This is likely tomean that it will be mandatory for directorsto report on non-financial issues that arematerial to understanding the firm. Theseissues are likely to include factors that maysubstantially affect future performance; an

PROMOTING CORPORATE SOCIAL RESPONSIBILITY 99

account of the company’s key relationshipswith employees (such as disability and non-discrimination policies); and policies andperformance on environmental, community,social, ethical and reputational issues includ-ing compliance with relevant laws and reg-ulations. This requirement is expected toapply to public companies that satisfy atleast two of the following three criteria: theyhave a turnover in excess of £50 million, a bal-ance sheet total of at least £25 million andover 500 employees.

The European Commission’s Green Paperon the development of a European frame-work for encouraging corporate socialresponsibility advocatesreaching an internationalconsensus on reporting. Ithighlights the use of theGlobal Reporting Initiative(GRI), probably the mostwidely recognised voluntaryreporting guidelines to covereconomic, social and envi-ronmental issues. A draftreport from the European Parliament’s Com-mittee on Employment and Social Affairs hascalled on the Commission to bring forwarda proposal for a Directive, requiring enter-prises with more than 250 employees or aturnover of J4 million to undertake annualsocial and environmental reports, by theend of 2003, with an implementation periodof three years. The content of these annualsocial and environmental reports should beset according to the evolving internationalrange of economic, environmental and socialstandards identified by the GRI whichlaunched its latest guidelines in March 2002.

These aspirations, due to be voted on by theCommittee and Parliament, far outstrip thoseof the DTI’s Company Law Review. At early2002 exchange rates, such a directive wouldrequire all UK companies with a turnover ofapproximately £2.5 million to report. Fur-thermore proposals from the Committee are

for reports to be independently verified andinclude all levels of the company and its sup-ply chain as well as for the Commission to sup-port and assist corporate watch groups andother civil society initiatives aimed at moni-toring corporate behaviour. Of course, suchreforms would be a significant boost to mar-ket-based regulation.

The reaction to these ambitious proposalshighlights the tensions caused by mandato-ry reporting. At the end of March 2002, theEuropean Parliament’s Industry Committeerejected demands for all EU firms to be sub-ject to mandatory social and environmentalreporting along the lines of GRI and instead

it endorsed the original vol-untary approach implied inthe Green Paper. The com-mittee agreed that the EUshould focus on better com-pliance with existing codesof practice such as thosedeveloped by the OECD andshould encourage sectorally-driven campaigns by indus-

try bodies themselves. This is in line withbusiness campaigns claiming that Europeanfirms are too diverse to have a single report-ing requirement imposed upon them.

From disclosure to improvedpractices

Unsurprisingly, legislation does affect therate of reporting. For example, in Denmarkthe proportion of the largest companies toreport rose from eight per cent in 1996 to 29per cent in 1999, partly as a result of the‘Green Account’ requirement from 1996 oncompanies with a significant environmentalimpact. However, the number of reportsprompted by legislative changes does notalways equate to the provision of useful orindeed accurate information and some believethat the quality of information suffers if com-panies are simply complying with imposedlegal frameworks.

“even if laws are putin place, disclosure isa necessary but notsufficient conditionfor market forces to

apply pressure tocompanies”

100 NEW ECONOMY

It is likely that tough proposals to introducemandatory reporting into UK and EU law willbe watered down, but even if they were not,for this disclosure to translate into improve-ments there would have to be interest fromstakeholders and a willingness to act on thisinformation. In 2001, MORI showed that thereare widely differing levels of interest: 87 per centof shareholders would expect to see a copy ofa social and environmental report, comparedto 63 per cent of employees and only 25 per centof customers. Furthermore, whilst one in nineBritish consumers say that they are concernedwith social and environmental issues, less thana fifth reflect this in how they spend theirmoney and less than 5% make an active andinformed choice in the majority of their pur-chasing decisions (Cowe and Williams 2000).Indeed, NGOs and advocacy groups may nothave the resources to make comparisons acrosscompanies and mediate this information to helpinform consumers.

The perceived importance of differentsocial issues varies across borders and this cre-ates another set of problems for internation-al companies. However, there areinternationally agreed issues of concern, suchas health and safety at work, and the mostpressing environmental concerns have glob-al implications. This is reflected by pressurefrom the international investment communi-ty for companies to provide information ontheir non-financial performance.

This demand for information has beenboosted by recent amendments to the UK’sPension Act that requires pension fundtrustees to state whether they take social andenvironmental issues into account in theirinvestment decisions. There have been simi-lar legislative changes elsewhere in Europe.This increased demand for reports has beenfurther boosted by similar initiatives from theAssociation of British Insurers and require-ments to be eligible for a place on the ‘ethi-cal’ FTSE4Good index. However, interestfrom investors will fail to promote quality

reporting if analysts continue not to consid-er social and environmental performance tobe important.

Conclusion There is a range of possible approaches thatgovernments can take that fall short of pre-scriptive reporting requirements:● legislation that indirectly encourages report-

ing by stimulating the demand for infor-mation

● indicating good practice by naming andshaming companies that perform poorlyand

● providing practical guidelines as well asleading by example.

To date, UK government intervention hasgone some way to doing all these:● amending the Pensions Act● publishing environmental reporting guide-

lines● supporting awards for some of the best

reports and ● naming and shaming large companies that

fail to comply voluntarily. More could be done, for example requiringgreater disclosure in public procurement, butit may not be enough.

However, the rationale for a mandatoryreporting structure needs to be clear. If theobjective is to make markets work more effec-tively, for example by ensuring that share-holders have adequate information on themanagement of the social and environmen-tal risk that a company faces, then allowingdirectors discretion over the information thatthey provide and tailoring it to the financialcommunity is acceptable. However, if theobjective is to encourage a wider group ofstakeholders to press for improved corporatebehaviour then there is a clear case for expos-ing companies to the risk of market punish-ment by mandating them to report on a widerange of indicators that are clearly compara-ble across similar companies as well as sec-tors and countries.

PROMOTING CORPORATE SOCIAL RESPONSIBILITY 101

There are a range of issues to be resolvedif government intervention is to go beyondexhortation: how can the problems of com-mercial confidentiality be negotiated, shouldthere be a discrepancy between the require-ments made of big and small firms andthose in sectors with differing environmen-tal impacts? A recognised side-effect ofmandatory reporting is low-grade andunadventurous reporting. However, the useof voluntary guidelines such as GRI reducesthe ability of stakeholders to make com-parisons across companies, as there is flex-ibility over what individual companies

report on. One way of getting round theissue of what information should be pro-vided is to have a three-tiered requirementdepending on the relevance to the organi-sation: core (for all companies), sectoral (forthose in certain industries) and companyspecific.

However, even if laws are put in place, dis-closure is a necessary but not sufficient con-dition for market forces to apply pressure tocompanies. There has to be a widespreadwillingness from stakeholders to use this datato inform market decisions. Unfortunately, atpresent this looks unlikely ●