2005: the year in CSR

Annie Hayes

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2005: the year in CSR

By Annie Hayes

The year may have seen significant advances in promoting the fair treatment of employees but it marks a setback in terms of corporate social responsibility as the government abruptly changed its mind about its own role in effecting greater transparency and better reporting on the part of companies.

A raft of employee legislation, mostly translations of EU directives, have come into force: the Disability Discrimination Act took effect in April, the Sex Discrimination Act and the remaining provisions of the Employee Relations Act of 2004 (covering collective bargaining and other Trade Union practices) in October.

Companies also started to contemplate the impact of the Age discrimination rules which will be implemented from October next year and absorb the findings of the Turner Pensions Review (published end of November) which could raise the age for receiving a (more generous) state pension to 68 after 2020.

Corporate responsibility reporting by companies continued to grow more than other kinds of non-financial reporting. According to corporateregister.com companies have produced 119 non-financial publications of various types so far this year. Of these 57 – close to half – are CSR reports focusing on HSE, social and environmental factors.

In 2002, by comparison, only 16 of 138 reports were to do with CSR. Furthermore all but one of the FTSE-100 companies now produce some kind of corporate responsibility information. Worldwide KPMG has found that since 2002 52 percent of the Global 250 companies report on corporate responsibility (or sustainability, its preferred term) compared to 45 percent in 2002. KPMG also notes a considerable shift by companies away from purely environmental reporting towards publishing information about social economic and environmental impacts.

For every publicly listed company in the UK that reports on CSR there have been 12 that do not. Silence on CSR does not mean absence of CSR; good companies don’t always bang their own drum. However, in the wake of business scandals from Enron to Parmalat, major companies and most European governments have recognised that reporting on social and environmental factors is a key element in restoring public confidence in business.

Since it came to office, Tony Blair’s government has viewed CSR as an important strategy for companies to adopt in building trust and reputation. Ministers have framed CSR policies as facilitation not regulation. Running parallel to these initiatives, however, the government launched in 1998 “a long-term fundamental review of core company law” out of which emerged in 2002 (along with other recommendations) a white paper supporting the introduction of a mandatory operating and financial review (OFR), “as a way of improving the disclosure of information by companies”.

The government developed its OFR policy before the EU drew up its own Accounts Modernisation directive and passed the necessary regulations to implement it from 22 March of this year.

CSR proponents including institutional investors welcomed the OFR as a rare bit of stick after so much waffle because it would require all listed companies (not just the usual suspects that already report on CSR) to say something meaningful about non-financial aspects of the business.

Companies whose financial year begins on or after the 1st April would have to produce a forward looking narrative about their strategy that refers to relevant social, economic and environmental risks as well as including appropriate KPIs on these CSR-related factors where necessary. The Accounting Standards Board developed a framework that provided some guidelines if not strict criteria about what a reasonable OFR should look like.

Companies themselves also seemed to be fairly positive about the OFR judging by the position of their official representative, the CBI which had “sought to achieve that the statutory requirements are as workable and practical as possible and do not lead to sterile boilerplate reporting dictated by legal caveats.” The CBI was also pleased that “the Regulations make clear that the OFR is prepared with shareholders’ interests paramount, and clearly all stakeholders will benefit from the information provided.“

With so much lead-time before the rules took effect, many companies had already prepared at least one OFR taking into consideration such non-financial risk factors as employee relations, environmental impacts and supply chain management as and where necessary.

It was not until 28th November, that the Chancellor of the Exchequer Gordon Brown in his speech to the CBI revealed that the OFR had been an April Fool’s joke all along. While companies were working away to ensure that their OFRs weren’t boilerplate, the chancellor did a complete U-turn; the OFR was in fact an example of unnecessary gold plating of European legislation. “Best practice,” he told the audience “ is of course for companies to report on social and environmental strategies relevant to their business.

But I understand the concerns about the extra administrative cost of the gold plated regulatory requirement that from April next year all quoted companies must publish an operating and financial review. So we will abolish this requirement and reduce the burdens placed upon you.” With breath-taking amnesia, Brown completely overlooked the fact that the OFR had been an entirely home- grown policy rooted in his government’s own company law review.

Somehow, between the start and end of 2005, there appears to have been a fundamental shift in the government’s view – or Treasury’s view – about the role mandatory reporting should play in boosting accountability. It has reverted to its default position that anything related to CSR should remain voluntary. The business review contained in the EU modernisation directive which will replace the OFR imposes minimal demands on companies to describe non-financial risks and removes the forward-looking narrative from the requirements.

Gordon Brown’s decision has drawn fire from most quarters including companies who had already put in months of time and money into preparing the OFR. Ironically while Brown was doing away with the reporting requirement, the Company Law Bill, currently under review in the House of Lords, still holds a stick over company directors to promote the success of the organisation ‘for the benefit of its members’ taking into consideration as much as possible the interests of its employees, the community and the environment.

As the year draws to a close, Friends of the Earth is seeking a judicial review of the Chancellor’s decision to dump the OFR without consultation and if FOE succeeds, the OFR could be reintegrated into the Company Law Reform Bill. But the debacle on this key piece of regulation has left most observers feeling that 2005 was the year when the UK government’s reputation as a serious proponent of corporate responsibility was laid to rest.

Leo Martin is director and founder of GoodCorporation, the corporate responsibility standard and is the principal character in the BBC’s series, Good Company, Bad Company. Lisa Buchan is a business development manager at the GoodCorporation.

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