Legal Framework for CSR in United Kingdom

Legal Framework for CSR in United Kingdom

Legal Framework for CSR in United Kingdom

CSR are still voluntary in the UK. This being so, it means that there is no standard format. Companies are free to include whatever they deem fit. Late in the 20th century the governments in some West European countries (most of which are now members of the European Union) had legislation in place forcing companies to involve employees in the decision making process; hence the establishment of Work Councils in the work place.

The UK governments in the 1970s passed many Acts of Parliament such as the Equal Pay Act 1970, Health & Safety at Work Act 1974, Sex Discrimination Act 1975, Race Relations Act 1976 just to mention a few. These Acts were intended to place some responsibility on corporate entities towards their employees.

The effect of government legislation in the UK has understandably brought about a change in attitude. Industrial Psychologists did not have much difficulty in persuading senior managers that happy workers are better workers! The late 1970s saw the birth of the Annual Employee Reports. Like its successor–the CSR report, it was an unregulated voluntary report with no standard format or specified layout.[1]

The UK government despite not having a particular legal framework that regulate CSR, sees itself focusing attention in four key areas namely: promoting good practice, supporting work to demonstrate the business case, promoting international action on CSR and joining up action across government.[2]

The EC’s 1993 Environmental Management and Audit Scheme (EMAS) encourages companies to provide information on matters such as their objectives and management of issues relating to environmental performance, initiate a pattern of eco-auditing, make available to the public an environmental statement and show commitment to externally validated progress in meeting their environmental objectives.

The ICAEW’s guidelines of 1993 which encourages companies to provide information on their environmental objectives in a form that allows their performance in the area to be easily measurable; provides the required evidence that professional accountancy bodies in the UK are not left out of the debate. The Welfare and Pension Act 1999 has made it obligatory for pension funds to disclose whether they took social, ethical and environmental matters into consideration in the selection and management of funds.

In the UK, the Government appointed the world’s first Minister for CSR in March 2000. The Minister’s early work focused on developing the business case, encouraging good practice, promoting CSR internationally and joining up action across Government. Three related All-Party Parliamentary Groups were established-on Corporate Governance, Corporate Social Responsibility and Socially Responsible Investment- with the Group on CSR being established to promote debate, improve understanding and encourage business interaction with wider society.

In 2001 the Government published its first CSR report,[3] stressing its responsibility for promoting the business case and in providing leadership by helping to achieve consensus on vision and priorities for action. These developments reflect a policy perspective that clearly endorses the voluntary approach articulated at ED level.

In May 2004 the Government released a CSR update in which the Minister said he remained convinced that the focus should be a voluntary one although the “policy framework must use the right mix of tools- including fiscal and regulatory measures where appropriate -to boost socially and environmentally responsible performance”.[4]

Compliance with legal requirements was, therefore, seen as the base that businesses should go beyond “in the interests of business and the rest of society”. The Government stresses the importance of working in partnership with the private sector, community bodies, unions, consumers and other stakeholders so that innovative approaches to the development and application of best practice (which are equated to the maintenance of minimum levels of performance in health and safety, equal opportunities and the environment) can be encouraged.

It continues in a similar vein, emphasising the need for open and constructive dialogue and the creation of a policy framework that encourages and enables responsible behaviour by businesses.

In 2002, a Corporate Responsibility Bill was introduced into the English Parliament which sought to create a government agency which will be directly and primarily responsible for coordination, regulations and enforcement of CSR activities within the UK business community and thereby institutionalise the CSR concept by way of hard law and mandatory regulation in the UK.[5]

Although the UK bill may be said to be similar to the Nigerian bill in the sense that both sought to legislate directly on CSR by means of a hard law approach, the UK attempt can be distinguished. The UK bill never tried to reduce CSR or corporate accountability or transparency to a corporate tax, levy or contribution.

It sought inter alia to: make provision for certain companies to produce and publish reports on environmental, social, economic and financial matters; require those companies to consult on certain proposed operations; specify certain duties and liabilities for directors; establish and provide for the functions of a corporate responsibility board; and provide remedies for aggrieved persons.

Very importantly, the current state of the UK bill must be appreciated against the backdrop of the UK’s membership of the EU. The UK system is perhaps better understood as implementing[6] the EU 2003 Fourth Directive on annual accounts (popularly called the Accounts Modernisation Directive)[7] that imposes obligations on companies to consider and report on nonfinancial (social and environmental) matters in their annual reports.

Read also: Legal Framework for CSR in India

The Accounts Modernisation Directive states that companies in member states shall report annually on “non-financial key performance indicators relevant to the particular business, including information relating to environment and employee matters” in relation to the worldwide operations of that company.

Further, in 2014, the EU expanded and improved its disclosure requirements by requesting disclosure of information on sustainability, such as social and environmental factors, with a view to identifying sustainability risks and increasing investor and consumer trust through Directive 2014/95/EU of the European Parliament and Council of 22 October 2014 amending Directive 2013/34/EU regarding the disclosure of non-financial and diversity information by certain large undertakings and groups.[8] Legal transposition among member states in the EU is not expected until 2017 and the directive is clear in its adoption of the “comply or explain” compliance mechanism.

Furthermore, it is interesting to note that the UK 2006 Companies Act does provide sufficient conducive corporate law ideological model for effective CSR. The UK corporate governance system is styled as Enlightened Shareholder Value[9] – where extraneous competing interests of certain stakeholders are supposedly balanced but for the long term benefits of the shareholders – has its ideological foundation deeply rooted in the shareholder primacy model.

To start with, corporate managers are statutorily required to ‘…promote the success of the company for the benefit of its members as a whole…’[10] By way of other examples, shareholders still retain the ultimate control of the corporate managers,[11] the business owners have several participatory rights in corporate governance, the investors are specifically promised returns and benefits from the company’s profits,[12] the stockholders who may find themselves in minority are also assured of some protection, the legislative and regulatory framework for mergers and takeovers of companies still largely prioritizes shareholders’ interests as opposed to other stakeholders such employees.

Therefore, in the UK, CSR issues and disclosures on non-financial social and environmental matters are a matter both of requirements in UK principal company legislation (sections 172, 417 and 423(5) of the English Companies Act in compliance with the EU directives) and demands of best financial reporting practices (further to the 2005 Accounting Standards Board’s reporting standard on operating and financial review). Following the so-called BREXIT, will the UK government maintain the status quo or will they regulate and institutionalize CSR?

 

[1] S. O. Idowu & B. A. Towler, ‘A comparative study of the contents of Corporate Social Responsibility (CSR) Reports of UK companies’ Management of Environmental Quality An International Journal,·August 2004. DOI:10.1108/14777830410540153,  https://www.researchgate.net/publication/249362976

[2] Department of Trade & Industry 2001, “Business and Society” Developing Corporate Social Responsibility in the UK

[3] Department of Trade and Industry (2001)

[4] Department of Trade and Industry (2004), 4

[5] See section 9 of the Proposed English Corporate Responsibility Act 2002

[6] See for instance, English Companies Act, sections 417 and 423(5).

[7] Council Directive 2003/51/EC, 18 June 2003 amending Directives 78/660/EEC, 83/635/EEC and 91/674/EEC on the annual and consolidated accounts of certain types of companies, banks and other financial institutions and insurance undertakings, OJ L178/16, 2003.

[8] EU Directive 2014/95/EU on Disclosure of Non-Financial and Diversity Information by Certain Large Undertakings and Groups, available at: http://eur-lex.europa.eu/legalcontent/EN/TXT/?uri=CELEX:32014L0095  (last accessed 18 April, 2021).

[9] ESV is similar to the Austrialian ‘Business Approach to Corporate Responsibility’ model which also enjoins corporate managers to consider Stakeholder interests so long it is in the best interest of shareholders as a whole

[10] The English Companies Act, 2006, section 172

[11] The shareholders may remove directors with unsatisfactory performance. English Companies Act, 2006, Section 168

[12] English Companies Act, 2006, section 581

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