University of New South Wales Faculty of Law Research Series
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CORPORATE ACCOUNTABILITY AND TRIPLE BOTTOM LINE REPORTING: DETERMINING THE MATERIAL ISSUES FOR DISCLOSURE
Justine Nolan
This paper was included in the "Enhancing Corporate Accountability: Prospect and Challenges" Conference Proceedings (2006).
Abstract
The growth and interest in corporate accountability issues has in part stemmed from recurring examples of corporate irresponsibility. Voluntary efforts, have to date, been the overwhelming modus operandi chosen to ensure that companies assume appropriate responsibility and transparency for various human rights and environmental obligations. But such voluntary efforts can serve as precursors to binding formal rules and the emerging public reporting requirements of companies in select jurisdictions – mandating variations of triple bottom line reporting - indicate a willingness of some regulatory agencies to adopt a more expansive modern view of what issues are considered material to a corporation’s short and long term performance. However the principal issues of to whom and ‘social’ issues should be reported on are still far from resolved. The implementation and enforcement of these reporting requirements in the coming years will be a key indicator of the mainstreaming of the corporate responsibility agenda.
The growth and interest in corporate accountability issues has in part stemmed from recurring examples of corporate irresponsibility which, while not new, are perhaps better publicized in the modern era. Recent financial scandals, along with well publicised allegations regarding, for example, the activities of Unocal and its use of slave labour in Burma, Shell’s purported complicity with the repressive regime in Nigeria and James Hardie’s recent intractability regarding compensation of asbestos victims are some of the better known examples of corporate irresponsibility.
Corporate responsibility, corporate social responsibility, corporate accountability or corporate citizenship, however termed, is not a new concept but lacks a commonly agreed definition. The World Business Council for Sustainable Development defines it rather abstractly as “the commitment of business to contribute to sustainable economic development, working with their employees, their families, the local community and society at large to improve their quality of life”.[1] Business for Social Responsibility, a U.S. based organization interprets corporate social responsibility as a means of addressing the legal, ethical, commercial and other expectations society has for business, and making decisions that fairly balance the claims of all key stakeholders.[2] The key features of many definitions tend to be a focus on the long term impact of corporate practices and the principle that organisations owe an obligation to a broader set of stakeholders, beyond simply shareholders. The lack of clarity around the definition of corporate responsibility is indicative of the confusion and lack of consensus within the corporate responsibility movement itself.
For the purpose of this paper, corporate responsibility is assumed to refer
to the process whereby a company considers and manages
the long-term impact of
its decisions on its stakeholders. The term stakeholder is also open to a
multitude of definitions but the
most comprehensive is that used in the recently
formulated United Nations Norms on the Responsibilities of Transnational
Corporations and Other Business Enterprises with Regard to Human Rights
("the Norms").[3] The
Norms define “stakeholder” to include stockholders, other owners,
workers and their representatives, as well as
any other individual or group that
is affected by the activities of transnational corporations or other business
enterprises. In
addition to parties directly affected by the activities of
business enterprises, stakeholders can include parties which are indirectly
affected by the activities of transnational corporations and other business
enterprises such as consumer groups, customers, governments,
neighbouring
communities, indigenous peoples and communities, non-governmental organizations,
public and private lending institutions,
suppliers, trade associations and
others.[4]
Corporate
responsibility has become very closely associated with public reporting. The
recent push for greater corporate accountability incorporates a demand
for increased corporate transparency and is being responded to by some
corporations by publishing
reports that take into account the environmental and
social impact of their activities. This trend has been highlighted by two recent
government initiated inquiries on the topic of corporate responsibility in
Australia including whether there is a need for stronger
reporting requirements
of social and environmental
issues.[5] Disclosure is
a theme of the modern corporate regulatory system and involves the provision of
information by companies to the public
in a variety of
ways.[6] The question is
whether current laws provide sufficient incentive or requirement for companies
to report on the social and environmental
impacts of their activities.
The starting point is to ask why companies should report at all with respect to social and environmental issues (often typecast as ‘non financial’ matters)? What is or should drive business to report on these matters? In some cases, regulatory developments mandating reporting are driving companies to integrate reporting on social and environmental issues into financial reports.[7] The aim is to foster transparency and establish a baseline for future information sharing with stakeholders. The increasing prevalence of ethical investing is another factor influencing the increase in corporate responsibility reports. Interest in socially responsible investing (SRI) has intensified in recent years evidenced by both the estimated increase in the size of SRI funds and the increase in shareholder resolutions concerning social and environmental issues.[8] Other factors driving increased reporting on social and environmental issues include attempts to preserve corporate reputation, risk management strategies, fostering competitive advantage in recruitment and the increasing use of targeted action by vigilante consumer and non governmental organizations (NGOs). These factors are all separate but connected drivers which are increasing the pressure to make corporate practices more transparent and answerable to a broader class of stakeholders beyond simply the company’s shareholders. The uptake of corporate responsibility reporting is perhaps indicative of a growing realisation that in asking the question ‘Is it good for shareholders?’ cannot be answered in isolation from considering the relevance of a particular issue to the company’s broader class of stakeholders.[9]
This means, in many cases, replacing ‘single bottom line’ (i.e. profit based) thinking and practices with ‘triple bottom line’ (i.e. social, environmental, economic) thinking.[10] Triple bottom line reporting aims to highlight the view that a company’s consideration of only financial matters as an indicator of its success is inadequate.[11] Company reporting should also reflect the social (for example, human rights and labour issues) and environmental impacts of its activities. Triple bottom line reports reflect this broader process by finding meaningful ways of weighing short term tangible economic factors with these more elusive factors, such as human rights and environmental sustainability concepts. In order to integrate these social concepts with the financial, a link needs to be established in the corporate decision making process that illustrates the significance or materiality of social and environmental issues.
This paper considers two major questions relevant to determining the content of the triple bottom line reports and also briefly surveys recent legislative advances in Australia and other jurisdictions in regulating these broader reporting requirements. The two primary issues considered are:
Traditionally, the principles governing corporate disclosure have been cached in terms of ‘what the reasonable investor would want to know’. For example, Cooke J in Coleman v Myers[12] refers to the seminal United States decision of TSC Industries v Northway Inc[13] in seeking guidance in defining materiality. While highly context specific (dealing with proxy solicitation) it nevertheless gives a general normative approach as to how materiality has traditionally been considered in corporate law. TSC Industries noted that:
An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote...[If there is] a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available. (p.449)
The emphasis in this instance in defining materiality is on the reasonable investor whose concerns are generally interpreted narrowly as being focused primarily on the financial aspects of corporate performance. However it is logical to assume that the ‘reasonable investor’ may also have an interest in the social performance of the company and thus the requisite materiality of facts should be interpreted more expansively.[14]
This broader notion of what type of information might be considered material and to whom has been under discussion as part of the United Kingdom’s company law review process and has signalled an adoption of a more expansive interpretation as to whom disclosure is directed.[15] In its most recent White Paper examining company law reform the government calls for clarification of reporting requirements and the responsibilities of directors in this regard.[16] In particular, it emphasises that while directors must “promote the success of the company for the benefit of its members, this can only be achieved by taking due account of longer term performance and wider interests, such as the interests of employees and the impact of the company’s operations on the community and the environment.”[17]
Further to this continuing review process and efforts to increase the transparency of British companies, the United Kingdom introduced a new requirement for directors of all quoted companies to prepare an operating and financial review (OFR) for financial years which begin on or after 1 April 2005.[18] The OFR is designed to provide a balanced and comprehensive assessment of the business’s performance and the main trends and developments affecting the performance and position of the company now and in the future. The guidance notes to the OFR state that directors are primarily addressing the OFR to shareholders but explicitly states that information in the OFR will also be of interest to “other stakeholders including: employees, suppliers, customers, regulators and other users of reports and accounts such as those particularly interested in the environment and broader community.”[19] The requirement to prepare an OFR is an opportunity for directors to present a clear and balanced analysis of the strategic position and direction of their business that incorporates a far broader focus than concentrating purely on financial issues of primary relevance to the shareholders. By mandating this new form of reporting, the British government recognises that in a modern economy, those who run successful companies need to develop relationships and provide greater transparency of information to key stakeholders such as employees, customers, suppliers and others in the broader community.[20]
Thus the company law review process underway in the United Kingdom explicitly recognizes that issues that are of significant interest to customers, to employees, to suppliers and to society more widely are, or very likely will become matters of concern for shareholders too. When considering to whom relevant corporate disclosures should be directed, it is logical in the modern economy to now move beyond the stereotype of only focusing on the concerns of the ‘reasonable investor’.
Guidance in terms of what should be disclosed can be gained from both current and emerging social and environmental regulatory disclosure requirements as well as the development and influence of ‘soft law’ in this area gleaned from international guidelines, declarations and codes of conducts among other sources.
A number of jurisdictions have begun to make inroads into regulating reporting on social and environmental issues and this section provides a brief overview of recent and emerging initiatives in Australia, the United Kingdom, France and South Africa regulating various forms of triple bottom line reporting.
The ‘disclosure’ mantra is a major theme of modern company law and although primarily focused on issues that are traditionally viewed as having a direct financial impact on the value of a company,[21] has been expanded in Australian corporate law in two specific instances to include limited consideration of environmental and social issues.[22]
Section 299(1)(f) Corporations Act 2001 (Cth)
With the
introduction in July 1998 of section
299(1)(f)[23]
Australian public companies and certain proprietary companies (that exceed
certain thresholds) are required to include within their
annual report, a
directors’ report that states:
If the entity’s operations are subject to any particular and significant environmental regulation under a law of the Commonwealth or of a State or Territory – give details of the entity’s performance in relation to environmental regulation.
The open ended text of s.299(1)(f) has been criticised as being vague and unclear.[24] The provision does not require disclosure of the financial impact of an environmental issue and as such does not specifically allow for the application of traditional accounting concepts of materiality. Under the current framework, directors are able to use high levels of subjectivity in determining what they should and should not disclose. Despite this lack of clarity, studies indicate that the introduction of s.299(1)(f) significantly improved overall reporting by Australian companies on their environmental performance.[25]
Section 1013D(1) Corporations Act 2001 (Cth)
Section
1013D(1) of the Corporations Act requires limited disclosure of
environmental, social and ethical factors. Although applying only to financial
products it may be
influential over time in mainstreaming corporate
responsibility issues into the broader corporate arena. In March 2004, a
requirement
that institutions offering financial products with an investment
component disclose (in their product disclosure statements) “the
extent to
which labour standards or environmental, social or ethical considerations are
taken into account in the selection, retention
or realization of the
investment” became
mandatory.[26] The
investment products covered by the Australian provision include superannuation
products, managed investment products and investment
life insurance products.
During preparation of the legislation, parliamentarians acknowledged that the
new provision was inspired
by the 1999 amendments to the UK Pensions Act 1995
discussed below.
This disclosure requirement includes an obligation to disclose if such matters are not taken into account at all.[27] However, if a financial product issuer does claim to incorporate social and environmental considerations in their investment decisions, two disclosure obligations ensue: (1) outlining those issues that it considers constitute labour or environmental, social or ethical considerations, and (2) explaining the extent to which those matters are taken into account in the selection, retention or realization of the investment.
The ASIC s1013DA Guidelines[28] do not provide specific guidance on the relevant issues to be considered but suggest that the disclosure statement must include such information ‘as a person would reasonably require for the purpose of making a decision, as a retail client, whether to acquire the financial product’.[29] It would be beneficial for companies to receive further guidance than is provided in this rather vague document. However the Guidelines do suggest that the disclosure statement should mention measurement criteria upon which the financial institution relied in assessing the relevance of such issues. For example, if the product issuer claims to only invest in companies with good labour relations, they must demonstrate how they measure compliance with this goal (e.g. number of strike days, above award conditions etc). The Guidelines provide no detailed guidance on exactly what standards should be used but (in its background commentary) suggests the Global Reporting Initiative, standards devised by Standards International and International Labour Organization and United Nations Declarations are relevant in assisting with triple bottom line reporting requirements.[30]
This legislation, while still relatively open ended, at least cements the legitimacy of incorporating social and environmental considerations in investment decision-making. The question as to what are the relevant standards and considerations on how to incorporate them appears to be being left largely to be determined by the market, which now in a broad sense extends beyond the ethical investment and mainstream investment markets, to incorporate community expectations with respect to the relevance and legitimacy of labour or environmental, social or ethical considerations.
Company Law Reform Bill
The
proposed Company Law Reform Bill aims to clarify the general duties which
directors owe to the company in the context of more accurately reflecting modern
business
needs and wider expectations of responsible business
behaviour.[31] In
considering the general duty of directors to promote the success of the company
for the benefit of members, the Bill requires
directors (where relevant and so
far as reasonably practical) to take account of the long and short term impact
of such decisions
having regard to the interests of its employees and its
ability to foster its business relationships with its suppliers and customers,
and to consider the impact of its operations on the community and the
environment.[32] This
explicit integration of social and environmental concerns into the decision
making purview of the company directors recognises
the material nature of these
issues to business operations.
Operating and Financial Review
As discussed above, the new
requirement for certain British companies to produce an Operating and Financial
Review (OFR), represents
a step forward in improving corporate reporting and
transparency and in promoting broader dialogue with a company’s
stakeholders.
It is instructive to reflect on the deliberations of the OFR
Working Group on Materiality when considering what type of information
companies
should disclose. The Group noted that:
Information will be material to the OFR if failure to disclose it clearly, fairly and unambiguously might reasonably be expected to influence member’s assessment of the company and hence the decisions they may take, either directly or indirectly as a result of the significance that the information has for other stakeholders and thus the company. Information that is material to the OFR may be quantitative or qualitative; and may relate to facts or probabilities, and to past, present or future events and decisions. [Emphasis added][33]
The OFR Working Group definition acknowledges the difficulty of reporting on some of the more amorphous social and environmental concerns but makes it clear that the difficulty of quantifying and reporting them does not disqualify the need for such disclosure.
In terms of what issues should be disclosed the OFR refers to information about environmental matters, company employees and social and community issues.[34] Ultimately it is up to the directors to provide a sufficient amount of information on such issues “to the extent necessary” to comply with the objectives of the OFR; that is to provide a balanced and comprehensive analysis of business strategies including a description of the principal risks and uncertainties facing the company.[35] Directors will need to make judgments about what data and analysis to include and the level of appropriate detail but what the OFR does make clear is that such social and environmental issues are intrinsically linked to business operations so as to likely constitute a material item for disclosure.
Pensions Regulations: SRI
The extent to which stock markets
are major factors in promoting corporate responsibility is still open to
question[36] however
legislation such as that introduced in the United Kingdom in 1999 - Occupational
Pension Schemes (Investment, and Assignment,
Forfeiture, Bankruptcy etc.)
Amendment Regulations
(1999)[37] – is
likely to be influential in advancing the prominence of corporate responsibility
issues. This Regulation requires trustees
of occupational pension funds (as of 3
July 2000) to disclose on the Statement of Investment Principles (a) the extent
(if at all)
to which social, environmental or ethical considerations are taken
into account in their investment strategies and (b) their policy
(if any) in
relation to the exercise of rights (including voting rights) attached to
investments. Legislation such as this and the
Australian legislation discussed
above, forces fund managers who may not previously have considered these issues
to now, at least
stop and acknowledge that such concerns have not been taken
into account in their decision making process.
The New Economics Regulations (NRE) was adopted in May 2001 by the French Parliament and came into force on January 2002.[38] The NRE is an attempt to modernize France’s company law framework and predominantly deals with financial issues (such as the transparency of takeover bids, improving corporate governance and strengthening antitrust regulation) but also legislates for the reporting of a company’s triple bottom line performance. Article 116 mandates disclosure of social and environmental issues in annual reports and accounts. It requires all companies listed on the “premier marche” (those with the largest market capitalizations) to report against a template of social and environmental issues, including those related to human resources, community issues, and engagement and labour standards, and health, safety and environmental standards. The new law aims to provide baseline sustainability reporting standards that French corporations can voluntarily build upon and institutionalizes the concept of triple bottom line reporting.
Notably the law is silent as to perimeters (geographical or otherwise) of the reporting requirement and does not specify if the regulation affects the subsidiaries, business partners, joint venturers etc of the company. While identifying the principal subject areas for disclosure, the law does not set out the specific indicators by which a corporation must report on the relevant issues and thus handicaps its aim to promote harmonization and standardization of non-financial reporting.[39] Significantly, the law also fails to provide any sanctions for non-compliance with the disclosure requirements. However, Article 116 represents a milestone in triple bottom line reporting by attempting to enumerate the relevant social and environmental issues that affect business. The NRE is significant in institutionalising corporate responsibility issues beyond their relevance purely to the ethical investment community and recognises the indivisibility of business activities and social and environmental concerns including the relevancy of information relating to their interaction to investors and other stakeholders.[40]
As of September 1, 2003 all companies listed on the Johannesburg Stock Exchange (JSE) are requested to comply with codes created in 2002 by second King Report on Corporate Governance for South Africa, the so called King II Report.[41] These codes not only address core corporate governance issues, such as director independence but also require the use of Global Reporting Initiative (GRI) guidelines for disclosing social and environmental performance. King II’s Code of Corporate Practices incorporates a provision on Integrated Sustainability Reporting, which states that:
Disclosure of non-financial information should be governed by the principles of reliability, relevance, clarity, comparability, timeliness and verifiability with reference to the Global Reporting Initiative Sustainability Reporting Guidelines...[42]
Companies are requested to report annually on the nature and extent of its social, transformation, ethical, safety, health, and environmental management policies and practices. It is expected that the use of GRI guidelines in reporting such issues will lead to greater standardization in disclosure practices. The Code specifically notes that it is the board of directors’ duty to present a balanced assessment of the company’s position and that the reporting should address material matters of significant interest and concern to all stakeholders. The requirements of King II thus embody the broader concepts of materiality, stakeholders and directors’ duties that are envisaged in the reform of the U.K. company law. King II arguably paves the way for more responsive corporate disclosure framework by noting that ‘reports and communications must be made in the context that society now demands greater transparency and accountability from companies regarding their non-financial matters’.[43]
In addition to regulatory changes, materiality is also being redefined on the ground – by the continuing development of soft law initiatives linking business with social and environmental concerns, through pressure on business from wider civil society and through precedents established by company practice and reporting processes. Through these developments the definition of materiality is being practically extended to encompass information beyond simply traditional financial information.[44] Issues that are often categorized as non financial aspects are implicitly being taken to be material.[45] The challenge lies in folding in the emerging consensus on social (generally understood here to primarily encompass human rights and labour rights) and environmental concerns to a broader understanding of issues that are material to a company and thus require public disclosure.[46] Guidance on what are the key issues for corporate disclosure can be gained by a brief review of the relevant international law and guidelines as well as corporate practices in developing codes of conduct to guide responsible behaviour.
The Universal Declaration of Human Rights 1948 (UDHR) is the most widely accepted codification of universal human rights and as such acts as a road map indicative of the definitive human rights issues of the modern era. It encompasses a broad range of rights including the right to freedom of thought, conscience and religion, freedom of peaceful assembly and association, the right to just and favourable conditions of work and the right to an adequate standard of living. The preamble to the UDHR notes that it is:
a common standard of achievement for all peoples and all nations, to the end
that every individual and every organ of society...
It
is arguable that the UDHR directly applies to companies as an ‘organ of
society’ and that as such they are called upon
to promote, respect and
secure the recognition of these rights, particularly those directly applicable
to business. [47]
However, while responsibility may be accepted by some
companies[48]
unanimity on the exact nature of those duties and the applicable rights, has not
yet been achieved.
While the UDHR itself, as a declaration, is not legally binding, other documents produced by the United Nations which essentially codify the UDHR, do produce legally binding obligations on states (not directly on companies) that are party to them. The two key human rights covenants are the International Covenant on Economic, Social & Cultural Rights (ICESCR, 1966) and the International Covenant on Civil & Political Rights (ICCPR, 1966). Rights includes specific rights relevant to business such as the right to work, the right to a minimum wage, the right to form trade unions and the right to health.
There are also a number of non binding international declarations concerning environmental rights and sustainable development- the Declaration of the United Nations Conference on the Human Environment (Stockholm, 1972)[49] and the Rio Declaration on Environment and Development (1992)[50] - but in contrast to international human rights documents, a distinct lack of any binding universal standard. Guidance can also be found in a number of regional and multilateral plans which can be said to represent a global consensus of states,[51] such as Agenda 21[52], the Monterrey Consensus (on financing for development, 2002)[53] and the UN Millennium Goals for Development (2000). While not legally binding, and thus more aspirational than obligatory, these documents explicitly acknowledge the role that companies, along with governments, have in promoting environmental and human rights.[54] These treaties and documents, along with voluntary guidelines formed both at an international level and within individual companies as codes of conduct provide indicia for divining consensus on which social and environmental issues are relevant to business.
Since the 1970’s a number of inter-governmental organizations have formed voluntary guidelines, declarations and codes of conduct to regulate the activities of corporations and all are of assistance in determining those social and environmental issues considered most relevant to business. The most notable of these voluntary agreements are:
The OECD Guidelines and the ILO Tripartite Declarations were revolutionary in the sense that they explicitly focus on outlining the obligations of companies with respect to protecting human and environmental rights but they are subject to severe limitations. Apart from the fact that they are non binding, their implementation mechanisms are extremely weak, the duties outlined are broad and lack details.
More recently the United Nations established the Global Compact (2000), whereby UN Secretary General Kofi Annan called on world business leaders to voluntarily “embrace and enact” a set of ten principles relating to human rights, labour rights, the protection of the environment and corruption, in their individual corporate practices.[57] The labour and human rights standards reflect those accepted norms as laid out in the ILO’s Tripartite Declaration on Fundamental Principles and Rights at Work and the UDHR, but the Compact does little to advance the debate toward clarifying what the key environmental issues are for business.[58] The principles cited in the Global Compact do not constitute a sufficient basis for designing enforceable standards, even though they may provide overall guidance and are beneficial more from the point of view of acting as yet another indicator of the relevance of international human rights and environmental norms to business.[59]
The most promising initiative to emerge recently is the United Nations Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights (2003) (the Norms).[60] In August 2003, the UN Sub-commission on the Promotion and Protection of Human Rights adopted this comprehensive set of international norms specifically applying to transnational corporations and other businesses (thus applying to any business entity regardless of its international or domestic nature). [61] The Norms are based not only on international instruments and non binding declarations and guidelines adopted by multilateral organizations, but also on industry initiatives, framework agreements between corporations and workers’ organizations, corporate codes of conduct and non-governmental organisations (NGOs) and union guidelines. The Norms and the accompanying interpretative Commentary, while not ‘black-letter law’, constitute the most authoritative interpretation to date of the duties and responsibilities owed by business with respect to human and environmental rights.
The Norms provide a new benchmark against which companies will be increasingly be assessed. They cover a broad range of issues and include the most fundamental and basic rights that have been agreed as accepted standards for nation states and individuals for decades. The Norms should be used as a base from which to determine those issues most relevant for social and environmental disclosure.
Key issues referenced in the UN Norms as relevant to business:
• Right to equal opportunity and non discriminatory treatment
Complementary to the international development of broad based multilateral guidelines guiding corporate responsibility has been the growth, particularly in the last fifteen years, of codes of conduct developed by companies, trade organizations, NGOs and multi-stakeholder bodies largely aimed at delineating business’s responsibilities with respect to human rights and environmental issues. Levi Strauss & Co. led the way in the early 1990’s followed soon after by a raft of companies such as Gap Inc., Nike, Shell and BP Amoco, notably principally representative of the apparel/footwear sector and extractive industries. These codes, while often content and sector specific do indicate some consensus on the relevant social and environmental issues of concern to business. Many were drafted in a reactive manner as a response to public criticism of specific business practices but nevertheless reflect issues which companies, consumers, workers and others were motivated to address in a very public manner.[62]
The growth and influence of the socially responsible investment market also provides a forum for divining emerging consensus on the social and environmental issues most relevant to business.[63] The Dow Jones Sustainability Index (launched in 1999)[64] and the FTSE4Good (launched in 2001 by the Financial Times Stock Exchange)[65] aim to establish a baseline of “challenging but achievable” standards for corporate responsibility. Both emphasize environmental sustainability, labour rights and human rights with the Dow Jones Index taking a noticeably more detailed approach to defining environmental sustainability by particularly valuing corporate performance with respect to issues such as energy consumption, greenhouse gas emissions, water usage, waste generation and climate strategies. Other popular code issues such as corruption and bribery and security practices are also emphasized.
This growing sense of convergence of issues, most recently evidenced by the development of the Norms, suggests that at some level, it is both possible and necessary to begin to define those issues most relevant for corporate disclosure. By tracking the development of these soft law and corporate initiatives along with the emerging regulatory reporting requirements it is now possible to develop a basic checklist of the principal social and environmental issues of concern to business. As to the appropriate level of detail such issues are reported on depends on their relevance to the specific company. As such it is important when encouraging or mandating increased levels of social disclosure for regulatory agencies to not only provide guidance on those particular social and environmental issues most relevant to business but also direction as to when such disclosure is necessary.
Voluntary efforts, have to date, been the overwhelming modus operandi chosen to ensure that companies assume appropriate responsibility and transparency for various human rights and environmental obligations. However, voluntary efforts can serve as precursors to binding formal rules. A key question arising from these current and proposed regulatory initiatives which broaden the definition of materiality to include non financial - human rights and environmental issues - relevant to stakeholders, rather than simply shareholders, is the extent to which such definitions are adopted in other jurisdictions either in a formal regulatory sense or informally through voluntary corporate reporting. Clearly the evolution of the corporate accountability movement in the United States will be important. While the recent passage of the Sarbanes-Oxley Act[66] did not create any specific new environmental or social disclosure obligations, the increased care and attention now given to SEC reporting may increase the quality of reporting generally, and thus indirectly promote better environmental and social disclosure.
Given the recent passage of these overseas corporate reporting initiatives, many questions still remain as to the value and effectiveness of mandatory corporate reporting of non financial issues as a means of promoting greater corporate accountability including determining the most effective means of implementing and enforcing non financial reporting measures (for example, by redefining the expanse of a director’s fiduciary duty or through company fines for non- compliant reporting etc)?[67] However, the emerging public reporting requirements of companies in select jurisdictions indicate a willingness of regulatory agencies to adopt a more expansive modern view of what and to whom issues should be considered material to a corporation’s short and long term performance. Triple bottom line reporting runs the risk of tokenism unless and until regulatory agencies are willing to mandate its requirement for a significant number of companies and provide specific guidance as to what and to whom particular social matters should be disclosed. The implementation and enforcement of these reporting requirements in the coming years will be a key indicator of the mainstreaming of the corporate responsibility agenda.
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*This paper is based on a submission by the author to the Parliamentary
Joint Committee on Corporations and Financial
ServicesR[1] inquiry into corporate
responsibility, dated September 14, 2005.
1 World
Business Council for Sustainable Development, as stated in the KPMG
International Survey of Corporate Responsibility,
2005.
[2] Business
for Social Responsibility:
www.bsr.org
[3] Norms
on the Responsibilities of Transnational Corporations and Other Business
Enterprises with Regard to Human Rights, U.N. Doc E/CN.4/Sub.2/2003/12/Rev.2
(2003); Para. I.22 (hereinafter ‘the
Norms’).
[4]
Also see the definition of stakeholder adopted by the World Business Council for
Sustainable Development which includes shareholders,
employees, business
partners, suppliers, pressure groups, local communities and the enviroment;
World Business Council for Sustainable
Development, Corporate Social
Responsibility, The WBCSD’s Journey (2002), 2. This definition of
stakeholder is used by the Australian government in the Department of
Environment and Heritage’s
report, Triple Bottom Line Reporting in
Australia: A Guide to Reporting Against Environmental Indicators (2003) and
the Department of Family and Community Services’ draft report, Triple
Bottom Line Reporting in Australia – A Guide to Reporting Against Social
Indicators (2004). Also see, Bryan Horrigan, ‘Fault Lines in the
Intersection between Corporate Governance and Social Responsibility’,
UNSWLJ Vol. 25(2) 2002, 515 at 520 for his definition of ‘inner
circle’ stakeholders like employees, customers and creditors
and
‘outer circle’ stakeholders like regulators, interest groups and the
wider community.
[5]
On 23 March 2005 the Parliamentary Secretary to the Treasurer, the Hon Chris
Pearce MP requested the Corporations and Market Advisory
Committee (CAMAC)
consider and report on several issues relating to corporate responsibility,
including whether the Corporations Act should require certain types of companies
to report on the social and environmental impact of their activities. On 23 June
2005 it
was announced that the Parliamentary Joint Committee on Corporations and
Financial Services of the Australian Parliament will conduct
an inquiry into
corporate responsibility including the appropriateness of reporting requirement
associated with these issues and
whether regulatory, legislative or other policy
approaches in other countries could be adopted or adapted in
Australia.
[6] For
example, Australian Stock Exchange (ASX) Listing Rule 3.1 (given legislative
force by s.674 of the Corporations Act) is the foundation of the
‘continuous disclosure’ regime for public companies. It requires
that once an entity ‘becomes
aware of any information concerning it that a
reasonable person would expect it to have a material effect on the price or
value of
the entity’s securities, the entity must immediately tell the ASX
that information’ (subject to certain
exceptions).
[7] See
discussion below in section (b) ‘Current and Emerging Regulatory
Initiatives’.
[8]
Social Investment Forum, 2003 Report on Socially Responsible Investing Trends
in the United States (2003) available at http://www.socialinvest.org/areas/research/trends/sri_trends_report_2003.pdf.
The 2003 report notes that a total of $2.16 trillion in assets was identified
in professionally managed U.S. portfolios using one
or more of the three core
socially responsible investing strategies – screening, shareholder
advocacy, and community investing.
It estimates that more than one out of every
nine dollars under professional management in the United States today is
involved in
socially responsible investing (p. 4). The report also notes that
between 2001 and 2003, shareholder advocacy activity increased
by 15 percent,
growing from 269 resolutions filed in 2001 to 310 in 2003. The report notes that
this is indicative of international
trends. In Australia, it is estimated that
SRI in 2003 amounted to at least $21.3 billion representing a significant
increase in
recent years. See, Ethical Investment Australia, Socially
Responsible Investment in Australia 2003 (October 2003),
4.
[9] Many debates
attempt to define a corporate responsibility model by referencing the
distinction between the shareholder and stakeholder
primacy views as
determinative of the purpose of a corporation. The arguments in this paper adopt
the middle ground that recognises
that the primary role of directors is to
promote the success of the company for its members but that this can not be done
without
specific consideration of the interests of its stakeholders and that
taking into account material social and environmental issues
is a necessary part
of such deliberations. The debate over the role of the corporation will not be
further discussed in this paper
but see generally Bryan Horrigan note 4 above
and for an alternate view see, Samuel Gregg, ‘Stakeholder Theory: What it
means
for Corporate Governance’, Policy Winter (Jun-Aug) 2001 where
it is argued that stakeholder theory is an incoherent and implausible guide to
how corporations should
act.
[10] The
‘triple bottom line’ concept was first widely disseminated by John
Elkington, chairman of the London based consultancy,
Sustainability
Ltd.
[11] Sarre,
Rick, “Responding to Corporate Collapses: Is there a role for corporate
social responsibility?” (2002) Deakin Law Review 1 at 6.
[12] 1977 2 [NZLR]
225 at 336
[13]
[1976] USSC 119; 1976 426 US
438
[14] Cynthia
Williams, ‘The Securities and Exchange Commission and Corporate Social
Transparency’ (1999) 112 Harvard Law Review, 1197 at 1277 where she
argues that it is unlikely that people are either pure economic investors or
pure social investors as a company’s
financial position can be affected by
its social and environmental
performance.
[15]
In July 2002 the U.K. Government published its White Paper “Modernising
Company Law”. This represented the first part
of the Government’s
response to the final report of the Company Law Review (CLR) published in 2001.
The Government gave its
support to many of the CLR proposals including one to
require British quoted companies to prepare an Operating and Financial Review
(OFR) that would cover a number of issues, including a company’s impact on
the community and environment. See discussion at
note 26 below. It’s most
recent White Paper, “Company Law Reform” March 2005 includes
details on the proposed Company Law Reform Bill:
www.dti.gov.uk/cld/review.htm
[16]
Department of Trade and Industry, Company Law Reform March 2005;
www.dti.gov.uk/cld/review.htm
[17]
Ibid at 16.
[18]
The U.K. Companies Act 1985 (Operating and Financial Review and Directors
Report etc) Regulations 2005 [S.1. 2005/1011] came into force on March 22,
2005. A quoted company is a British company whose equity share capital: is
included
in the official list (Part 6 of the Financial Services and Markets Act
2000); or is officially listed in a EEA state; or is admitted
to either the NY
Stock Exchange or
Nasdaq.
[19]
Department of Trade and Industry Guidance on the OFR and changes to
director’s reports (April
2005)
[20]
Company Law Reform note 16 above at
10.
[21] Australian
Stock Exchange (ASX) Listing Rule 3.1 (given legislative force by s.674 of the
Corporations Act) is the foundation of the ‘continuous
disclosure’ regime for public companies. It requires that once an entity
‘becomes
aware of any information concerning it that a reasonable person
would expect it to have a material effect on the price or value of
the
entity’s securities, the entity must immediately tell the ASX that
information’ (subject to certain exceptions).
However there are
suggestions that materially significant environmental risk is currently under
reported by ASX companies (see Ernst
& Young; The Materiality of
Environmental Risk to Australia’s Finance Sector (2003) and submission
of Monash Sustainability Enterprise (March 24, 2003) to Treasury on the Exposure
Draft-Corporations Amendment
Bill 2002. This would be consistent with similar
findings in the United States where a 1998 study by the Office of Planning and
Policy
Analysis, within the EPA's Office of Enforcement and Compliance
Assurance, found that 74% of companies did not adequately disclosure
environmental issues per SEC rules. Further see, an October 2002 survey by
Friends of the Earth indicating that companies were providing
inadequate
disclosure (in SEC filings) to investors with respect to climate risk (www.foe.org/new/releases/902secsurvey.html)
and a 2004 report by the UK Environment Agency detailing the environmental
disclosures of companies on the FTSE All Share Index
which argued that the vast
majority of reports lacked depth, rigour or quantification and that guidance on
key performance indicators
would help companies decide which environmental
disclosures are necessary; www.ethicalcorp.com/content_print.asp?ContentID=2453.
Also see The Allen Consulting Group, Triple Bottom Line Measurement and
Reporting in Australia,
(2002).
[22]
Also relevant with respect to disclosure of material items are: s.412 (When
companies enter into schemes of arrangement to reconstruct
their businesses the
explanatory statement sent to members or creditors must set out
‘information that is material to the making
of a decision by a creditor or
member whether or not to agree to the compromise or arrangement, being
information that is within
the knowledge of director’s); s.636 (A
bidder’s statement for a takeover must include details of ‘the
future employment
of the present employees of the target’ and ‘any
other information that: (i) is material to the making of a decision
by a holder
; and (ii) is known to the bidder’s); and s.710 (If a company is raising
funds from the public the prospectus content
rules require disclosure of
‘all the information that investors and their professional advisers would
reasonably require to
make an informed assessment of... the assets and
liabilities, financial position and performance, profits and losses and
prospects
of the
body’).
[23]
Corporations Act 2001 (Cth). See Frost G. and English L., Mandatory
Corporate Environmental Reporting in Australia: Contested Introduction Belies
Effectiveness of its Application (Nov. 2002), (http://www.econ.usyd.edu.au/drawingboard/digest/0211/frost.html
) for a summary of the passage of s.299(1)(f) which notes that it was an
unintended outcome of the Federal Government’s Corporate Law Economic
Reform Program and was a political
compromise.
[24] Parliamentary
Joint Statutory Committee on Corporations and Securities, Report on Matters
Arising from the Company Law Review Act 1998 (tabled on 18 December, 2000).
[25] Frost G. and
English L., note 23 above at
5.
[26]
Corporations Act 2001 (Cth), s. 1013D(1) (inserted by the Financial
Services Reform Act 2001
(Cth).
[27]
Corporations Regulations 2001, Clause
7.9.14C
[28]
Australian Securities & Investment Commission, Section 1013DA disclosure
guidelines; ASIC guidelines to product issuers for disclosure about
labour standards or environmental, social and ethical considerations in Product
Disclosure Statements (PDS), December 2003;
http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/s1013DA_finalguidelines.pdf/$file/s1013DA_finalguidelines.pdf
[29]
Ibid at 11.
[30]
Ibid at 16.
[31]
See text at note 15 above and Ch. 3.3 of the White Paper on this
Bill.
[32]
Company Law Reform Bill 2005 note 15 above, Part B, Ch. 1
B.3.
[33] OFR
Working Group on Materiality, A Consultation Document, para. 20.
http://www.dti.gov.uk/cld/ofrwgcon.pdf
[34]
The Companies Act 1985 (Operating and Financial Review and Directors
Reports etc) Regulations 2005. Schedule 7ZA
(4).
[35] Ibid at
(1-3).
[36] The
ethical investment market is gaining mainstream acceptance in Australia with
institutions like Westpac and Rothschild now offering
‘ethical’
products. While in 2002 ethical funds represented just over 1% of funds managed
in Australia (($1.3 billion)
this figure is forecast to rise to $40 billion by
2020. Fitzgerald S, Corporate Accountability for Human Rights Violations in
Australian Domestic Law (2002) unpublished, copy on file with author.
[37] Regulation
11A of the Occupational Pension Schemes (Investment) Regulations (1996) UK
(inserted by Occupational Pension Schemes (Investment,
and Assignment,
Forfeiture, Bankruptcy etc.) Amendment Regulations (1999) requires trustees of
occupational pension schemes in preparing
their statement of investment
principles under section 35 of the Pensions Act 1995 (UK) to take into account
the factors noted
above.
[38] Law
No.2001-420 Nouvelles Regulations Economiques (New Economics Regulation)
Article 116
[39]
Hoffman E., Environmental Reporting and Sustainability Reporting in Europe,
(2003) (http://www.iges.or.jp/en/be/report7.html).
[40]
Dhooge, Lucien J. ‘Beyond Voluntarism: Social Disclosure and France's
Nouvelles Regulations Economiques’ 21 Ariz. J. Int'l & Comp. Law
441 at at 442. Also see ORSE ‘Assignment Report submitted to the
government; Critical review of how companies are applying French
legislation on
social and environmental reporting’, April 2004.
[41] King
Committee on Corporate Governance, March 2002, ‘Code of Good
Governance’ can be accessed at
www.iodsa.co.za
[42]
Ibid at 35.
[43]
Ibid at 39.
[44]
Westpac’s annual report is an example of an expanded and reshaped annual
report that reflects the needs of customers and the
community to understand the
wider impact of the company on society.
[45] “What a
reasonable investor would need to know about a company to make financial and
voting decisions won’t change...but
what reasonable investors and the
public at large find important over time does change, so issues like global
warming...human rights
can be included in the purview of what’s
‘material’”, quote by Michele Chan Fisher, Friends of the
Earth,
July 11, 2003 www.ishareowner.com/news/article.cgi?sfArticleId=1170
[46]
For example see the US based Corporate Sunshine Working Group’s list of 20
proposed expanded corporate disclosure items, which
have been selected for their
financial value-relevance, as well as their ability to enhance corporate
governance and responsibility.
http://www.corporatesunshine.org/proposedisclosure.pdf
. Also see: Williams C ‘The Securities and Exchange Commission and
Corporate Social Transparency’, Securities Law Review Annual 2000
v32 3-117, appendix I for models of expanded
disclosure.
[47]
International Council on Human Rights Policy, Beyond Voluntarism; Human
Rights and the developing international legal obligations of companies
(2002): 58-64, Sullivan R: Business And Human Rights Dilemmas And Solutions;
2003 at 15, Henkin, L., The Global Market as Friend
or Foe of Human Rights: The
Universal Declaration at 50 and the Challenge of the Global Markets, (1999) 25
Brooklyn Journal of International Law 17 at
25.
[48] For
example, the Body Shop’s charter explicitly aims to “balance the
financial and human needs of its stakeholders: employees,
customers,
franchisees, suppliers and shareholders” and assumes an indirect role in
protecting human rights (i.e. through collaboration
with Amnesty
International).
[49]UN
doc A/CONF.48/14/Rev. 1
(1972)
[50] UN
Doc/A/CONF.151/5/Rev.1
(1992)
[51]
International Council on Human Rights Policy, Beyond Voluntarism; Human
Rights and the developing international legal obligations of companies
(2002)at 65.
[52]
Agenda 21, the Rio
Declaration on Environment and Development, and the Statement
of principles for the Sustainable Management of Forests were adopted by
more than 178 Governments at the United Nations Conference on Environment and
Development (UNCED) held in Rio de
Janeiro, Brazil, 3 to 14 June 1992. Agenda 21
is a plan of action to be taken globally, nationally and locally by
organizations of
the United Nations System, governments, and major groups in
every area in which human impacts on the environment.
[53] See
http://www.un.org/esa/sustdev/documents/Monterrey_Consensus.htm
[54]
See Agenda 21, Chapter on Business and Industry, and see also, The Beijing
Declaration and Platform for Action, adopted by the Fourth
World Conference on
Women, Beijing 4-15 September, 1995, which puts specific responsibilities on the
private sector with respect
to preventing violence against women, (paras. 125
and 126), strengthening women’s’ economic capacity (para. 177) and
promoting work and family compatibility (para.
180).
[55] (2000
revision), adopted 27 June 2001. The OECD Guidelines are part of the OECD
Declaration on International Investment and Multinational
Enterprises, OECD
document no. DAFFE/IME/WPG(2000)15/FINAL The Guidelines were first adopted in
1976 and revised in 2000.
[56] The
Declaration can be seen as providing guidance for how corporations should
implement the fundamental ILO conventions. The overarching
obligations with
respect to labour rights are set out in the eight fundamental conventions of the
International Labour Organization:
Forced Labor Convention (No. 29); Freedom of
Association and Protection of the Right to Organize Convention (No. 87); Right
to Organize
and Collective Bargaining Convention (No. 98); Equal Remuneration
Convention (No. 100); Abolition of Forced Labor Convention (No.
105);
Discrimination (Employment and Occupation) Convention (No. 111); Minimum Age
Convention (No. 138) and Worst Forms of Child Labour Convention, 1999
(No. 182). These conventions are legally binding on those states
that have ratified them. Obligations then exist at a national level to ensure
enforcement of these rights by corporations; they do not directly bind
companies.
[57]
Originally launched in 2000 with nine principles, the tenth relating to
corruption was added in June 2004 at the Global Compact Leaders
Summit
available at
www.unglobalcompact.org
[58]
Principles 7,8 and 9 of the UN Global Compact encourage businesses to support a
precautionary approach to environmental challenges;
undertake initiatives to
promote greater environmental responsibility; and encourage the development and
diffusion of environmentally
friendly technologies:
www.unglobalcompact.org
[59]
See criticisms of the Global Compact by the Lawyers Committee for Human Rights
(now Human Rights First), Human Rights Watch, Oxfam
International and Amnesty
International: http://www.humanrightsfirst.org/workers_rights/issues/gc/index.htm
[60] The Norms
note 3 above.
[61]
In April 2005 the United Nations Commission of Human Rights following up on the
development of the Norms, called on the U.N. Secretary
General to appoint a
Special Representative on the issue of business and human rights for an initial
period of two years to investigate
further the legal responsibilities of
business for social and environmental issues;
E/CN.4/2005/L.87 15 April 2005. The vote in support of the resolution
was 49-3. The 3 states who voted against the resolution were
the United States
of America, Australia and South Africa (although South Africa’s vote
signalled dissatisfaction with the weakened
compromised language of the
resolution). The Commission on Human Rights’ resolution provides the
Special Representative with
a mandate to: clarify the standards of corporate
responsibility; elaborate on the role of States in regulating business; define
concepts
such as ‘complicity’ and ‘spheres of
influence’, develop methodologies for human rights impact assessments
of
the activities of business; and compile a compendium of best practices. On 28
July 2005 the UN Secretary General appointed Professor
John Ruggie as the UN
Special Representative. Professor Ruggie previously served as UN Assistant
Secretary-General and senior adviser
for strategic planning from 1997 to
2001. He was one of the main architects of the United Nations Global
Compact. The Special Representative
is due to hold broad-based consultations and
issue two reports, an interim one in 2006 and a final one in
2007.
[62] See
generally, Posner M. and Nolan J. ‘Codes of Conduct and Workers
Rights?’ in Flanagan, R. and Gould IV, W. (2003)
International Labor
Standards: Globalization, Trade and Public Policy, Stanford, Stanford
University Press. Also see, Gordon K. and Miyake, M. "Deciphering Codes of
Corporate Conduct: A Review of their
Contents" Working Papers on International
Investment, Number 1999/2. Organization for Economic Co-operation and
Development. November
1999. This OECD study was the result of an investigation
of 246 voluntary codes collected "from business and non-business contacts
which
OECD Member governments helped identify" ( at 8.). Out of this set of codes,
they found that 118 or 49% of them where issued
by individual companies (mostly
multinationals), while 34% were industry and trade association codes, 2% issued
by an international
organization, and 15 % by partnership of stakeholders
(mainly NGOs and unions) (at 9). Also see Strengthening Implementation of
CSR in Global Supply Chains, World Bank Group, CSR Practice (October 2003)
which noted that “while codes themselves have in many ways converged in
content
and form, inconsistent interpretation and application of the provisions
presents the greatest source of confusion”. The study
was limited to the
agriculture and apparel
sectors.
[63] Note
8 above.
[64]
http://www.sustainability-index.com/
[65]
The FTSE4Good is not itself an SRI fund but is a tool that can be used by fund
managers to assess the social, ethical and environmental
‘worth’ of
a company.
http://www2.ftse.com/ftse4good/FTSE4GoodCriteria.pdf
[66]
H.R.3763 Sarbanes-Oxley Act of 2002
(US)
[67] For
example, consider the enforcement provisions of Proposition 65 in the USA. In
1986, California voters approved an initiative
to address their growing concerns
about exposure to toxic chemicals. That initiative became the Safe Drinking
Water and Toxic Enforcement
Act of 1986, better known by its original name of
Proposition 65. Proposition 65 requires the State to publish a list of
chemicals known to cause cancer or birth defects or other reproductive
harm. This list, which must be updated at least once a year, has grown
to
include approximately 750 chemicals since it was first published in 1987.
Proposition 65 requires businesses to notify Californians
about significant
amounts of chemicals in the products they purchase, in their homes or
workplaces, or that are released into the
environment. In judging the effective
of enforcing the reporting requirements, the penalties are the key, both because
they are potentially
heavy (zero to $2500 per offence, at the jury's or judge's
discretion; each single unit of product sold without a required warning
can
count as a separate offence), and -- probably more important -- because they can
be enforced by citizen suit. Further see, Roe
D., An Incentive-Conscious
Approach to Toxic Chemical Control, Economic Development Quarterly Vol. 3
No. 3 1989 179-187 and
http://www.oehha.ca.gov/prop65/background/p65plain.html
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