Redmond, Paul --- "Corporate Social Responsibility: an Overview" [2005] ALRCRefJl 20; (2005) 87 Australian Law Reform Commission Reform Journal 7

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Reform Issue 87 Summer 2005/06

This article appeared on pages 7 – 11 of the original journal.

Corporate social responsibility: An overview

By Paul Redmond *

Corporate social responsibility seems to be on the tip of every tongue at the moment.

Interest is sharpened by the events associated with the James Hardie group of companies and the Jackson Special Commission of Inquiry into its restructuring. These developments have generated two inquiries into corporate social responsibility, by the Parliamentary Joint Committee on Corporations and Financial Services (PJCCFS) and the Corporations and Markets Advisory Committee (CAMAC). This article offers an overview of the broad topic of corporate social responsibility and identifies some of the principal issues that are bound up in it.

Multiple meanings of ‘corporate social responsibility’

Corporate social responsibility (CSR) is a concept of surprising indeterminacy. It conveys different meanings to different people, differences that are partly due to the distinct perspectives on the topic taken by the disciplines of management, accounting, organisational studies and law. Thus, the Terms of Reference of the PJCCFS inquiry refer to ‘corporate responsibility’ and ‘triple bottom line reporting’; while those of the CAMAC inquiry refer only to ‘corporate social responsibility’. There are also related concepts such as sustainability (where economic, social and environmental value are simultaneously maximised) and sustainable development (where the focus is specifically upon whether present development compromises similar opportunities for future generations). For some practitioners, CSR describes the practical application of these broader principles.¹ However, this usage itself conceals a variety of meanings of the CSR concept.

One meaning of corporate social responsibility refers simply to the corporation’s compliance with legal obligations; this conception is perhaps more accurately described as ‘corporate responsibility’. This usage applies at the domestic level in relation to a range of social, industrial and environmental regulation of business as well as obligations of a more general character. This usage has particular application to international business where host state capacity to impose and enforce regulatory and human rights standards against transnational corporations is often weakened by fierce competition for foreign investment and consequent disparities in economic power between host and investor. There is, of course, no legally binding international regulatory system for corporations although a range of voluntary codes and guidelines has been developed.²

A second meaning of CSR is in terms of corporate philanthropy. In the United States this is the principal meaning of CSR. This conception of CSR has been strengthened by a number of recent initiatives of the Australian Government to support a culture of corporate giving to complement government programs.³ This conception of CSR is, however, but one aspect of Australian CSR practice which includes but takes wider forms than philanthropy.

More commonly in Australia and Europe, CSR is taken to refer to a range of voluntary measures undertaken by companies to integrate social, environmental and business concerns in their operations and their interaction with stakeholders.⁴ Stakeholders are variously defined as those with an interest in or a dependence relationship with the company or, alternatively, as those upon whom it depends for its survival. They include—in addition to shareholders—employees, creditors, customers, suppliers, local communities or the wider community from which the corporation draws support. This model of CSR involves responding to wider stakeholder claims and the social and environmental impacts of corporate operations. In its most common variant it seeks to adjust these competing stakeholder claims not by reference to any assumed parity of interest and entitlement between stakeholders but rather with a view to maximising the long-term value of the shareholders’ investment. Corporate profit maximisation in aid of shareholder value maximisation remains the defining principle of corporate purpose, its lodestar and measure of performance. In this conception, CSR represents a form of enlightened management practice, voluntarily adopted and beyond any legal obligation, because it is seen as being in the long-term interest of the corporation and its shareholders. A leading practitioner describes CSR as ‘rational, enlightened and self-interested business behaviour’.⁵ In its strongest form it is not an optional add-on but is fully integrated into and shapes all aspects of corporate operations.

This dominant form of CSR has the advantage of enabling companies to manage the considerable non-financial risks of their operations; it also enables them to meet wider community expectations with respect to their conduct and protect the ‘social licence to operate’. Many of the leading exponents of CSR have been banks and mining companies which have suffered or are vulnerable to negative community sentiment or adverse government action. CSR initiatives protect firm goodwill or brand name, intangible assets that generally comprise a major part of the balance sheet of any corporation dealing in public product, services or investment markets. CSR also offers the prospect of a strategic social or ethical differentiation from competitors and, generally, broad legitimacy in markets and society.

If this third conception of CSR is instrumentally based in that it recognises non-shareholder stakeholder interests only as a device to maximise shareholder value, a fourth conception is grounded in the worth of those interests in their own right. This conception permits or requires management to balance competing stakeholder claims freed from the overarching claim of shareholder value maximisation. It would permit forms of social welfare through profit-sacrificing expenditures and the promotion of socially desirable goals as ends in themselves. The conception treats the corporation as community and addresses the threat of harm to non-shareholders from an exclusive management focus upon shareholder interests. However, apparent instances of this form of CSR, tested with sceptical acid, usually prove to be closer to the third, enlightened self-interest, conception. This conception’s natural habitat is academic theory rather than business practice.

A further conception, which needs to be distinguished from CSR, applies in professional service firms. For law firms especially, pro bono services, which provide free legal services to those in need, are distinguished from the philanthropic or CSR initiatives undertaken by those firms.

The rise of the dominant culture of shareholder value

Before addressing specific issues posed by CSR, it is useful to take stock of the present character of business and investment culture. The commonly accepted purpose of corporate activity and measure of corporate performance is the maximisation of shareholder value as expressed in the price of the corporation’s shares. Shareholder value maximisation currently exercises strong influence over corporate decision makers and the dominant group of shareholders in large corporations—institutional investors.

This sharp shareholder focus is relatively recent. Until the 1970s or even later, a managerialist ethic dominated in the US, United Kingdom and Australia. It had two aspects. First, managerialism assumes that corporate directors and managers enjoy some independence from shareholder control; second, it stresses that corporate management owes duties to wider constituents, to ‘the four parties to industry’—labour, capital, management and society.⁶ Thirty years ago, the Confederation of British Industry proposed ‘a general legislative encouragement [for companies] to recognise duties and obligations ... arising from the company’s relationships with creditors, suppliers, customers, employees and society at large; and in so doing to strike a balance between the interests of the aforementioned groups and between the interests of those groups and the interests of the proprietors of the company’.⁷

There are many factors contributing to this change in ethos and the current shareholder orientation. Undoubtedly, one lies in the growing concentration of voting power of institutional investors (insurance companies, superannuation funds, investment fund managers). They are better able than dispersed individual shareholders to exercise shareholders’ control rights since relatively small coalitions of institutional shareholders can command a majority of the voting power in a shareholders meeting. Institutional investors are all but exclusively focused upon the share price of portfolio companies; the only measure of funds management success is the return upon funds under investment as measured by share price movements and other financial returns. Share price movement is thus deeply ingrained in share-ownership structure as the institutional investors’ performance measure.

A second factor contributing to the current shareholder value culture is the relatively recent emergence of the hostile takeover which exercises a continuing disciplinary pressure upon directors and managers and sharpens focus upon shareholder value. Thus, if the company’s market capitalisation—its aggregate share price—falls below its potential value under the control of another group of managers, incumbent management is vulnerable to ouster through takeover offers made to shareholders. Takeover regulation in the UK and Australia has a shareholder focus and protects the exclusive right of shareholders to transfer control of the company through sale of their shares.

The shareholder value focus is powerfully reinforced in other ways, for example, the rapid growth of the equity component of executive remuneration, particularly through share options, under the influence of the ‘pay for performance’ movement from the early 1990s. Similarly, the pervasive use of shareholder value metrics (such as earnings per share, return on investment etc), in the absence of clear competing metrics for non-financial performance, contributes to the assessment of corporate performance by reference to share price measured over a short time frame.

A consequence of the shareholder value focus is that the company is seen as a set of income claims and property rights rather than as an autonomous enterprise with its own institutional identity and entity status. This is sometimes referred to as the shareholder-centred or Anglo-Saxon corporation to distinguish it from a European conception of the corporation in which wider social and employee claims are more clearly represented and recognised along with those of the enterprise itself.

Should CSR be encouraged?

Should Australian companies be encouraged to adopt socially and environmentally responsible business practices and, if so, how? The first question seems obvious. CSR is a ubiquitous phenomenon in business apologetics: who could oppose something so wholesome? The UK Government has had a Minister for Corporate Social Responsibility since 2000. But the question invites another: what is CSR’s character and consequence? Is it essentially an exercise in the management of risk and good corporate relations or does it mark out a sphere of legitimate corporate self-regulation? It is often put forward as offering the assurance that corporations can be trusted to fill regulatory gaps and address the problems that their operations create. However, at the international level at least, there is a body of evidence that CSR through voluntary company and industry codes is an inadequate substitute for legal regulation: its actions fall well short of its words.⁸ The question persists therefore as to the conditions under, and the extent to which, CSR is an effective substitute for corporate accountability through regulation.

The revision of directors’ duties?

The central issue posed in the Terms of Reference of each of the current Australian inquiries concerns the recognition that directors and managers should accord the interests of stakeholders other than shareholders, and those of the broader community. The PJCCFS is asked whether the current legal framework governing directors’ duties encourages or discourages this recognition; CAMAC is asked whether the Corporations Act should require directors to take into account the interests of specific classes of stakeholders or the broader community when making corporate decisions. Two questions are implicit here:

• should directors be required by law to regard the interests of non-shareholder stakeholders and the broader community and

• if not, should they be permitted to do so?

Both inquiries appear to have been prompted by the James Hardie restructuring and the findings of the Special Commission of Inquiry. There was evidence before the Special Commission that the law on directors’ duties was perceived by the directors of the parent company of the James Hardie group as constraining their capacity to assume responsibility for, or to contribute to, the amelioration of harm caused by its former wholly owned subsidiaries when those subsidiaries were unable to meet current and projected claims.⁹ The company had the benefit of first-tier legal advice. There is no reason to think that different advice would be given in other Australian boardrooms in like contexts.

There are costs to the legal model that defines the interests of the company solely in terms of the collective interests of shareholders and which permits recognition of non-shareholder interests only where they advance shareholder value. Threading other stakeholder interests through the eye of the needle of shareholder value is highly instrumental. The legal structure of the corporation itself encourages the externalisation of the costs of corporate behaviour, a form of moral hazard. The combined effect of separate personality, limited liability and shareholder primacy doctrines is to encourage shifting the risk or costs of enterprise operations away from shareholders and onto stakeholders or wider society. While some of these interests will be protected by specific statutory or common law provision, it is fanciful to think that corporations will be required by law to bear all the costs of their operations; there will inevitably be a time lag in legislation and gaps in its reach. In addition, the inevitable barriers to and costs of enforcement create opportunities to disregard legal obligations. If a firm voluntarily assumes costs that it might legally externalise, it risks its long-term survival against competitors who do otherwise. This is particularly so in relation to transnational enterprise in host countries with relatively weak governments and poor institutions for legal enforcement; these difficulties are accentuated by the mobility of and competitive auction for foreign investment capital.¹⁰

Imposing a duty to consider stakeholder interests confronts the shareholder primacy norm more directly than does a mere licence to do so. However, both the licence and duty models pose problems of indeterminacy of the criteria for director conduct and their accountability for decision-making. Of course, as noted, it is not changes in legal rights and rules that have created the current thrall of shareholder value maximisation; it is easy to overestimate the effect of legal rule change upon conduct in this sphere. One challenge, however, is to provide assurance that directors and managers who internalise the costs of corporate operations where they are not legally required to do so will not fall foul of their directors’ duties.

Voluntary or mandatory CSR reporting?

The Terms of Reference of both inquiries include the appropriateness of CSR reporting requirements. CAMAC is specifically asked whether the Corporations Act should require certain types of companies to report on the social and environmental impact of their activities.

Relative to several other countries, there is almost no requirement for disclosure of corporate social and environmental performance in Australia.¹¹ Perhaps in consequence, there is relatively modest voluntary reporting of such information: only 23% of Australia’s top 100 companies published stand-alone reports on non-financial performance in a 2005 survey compared with 71% of the top 100 companies in the UK and 80% in Japan.¹² In Australia reporting of social and economic performance is at an early stage of development and lacks the rigour and comparability of financial reporting standards. There are tensions between the aims of securing sector wide comparability and respecting the specific circumstances and measures adopted by individual companies. The principle of comparability is more difficult to apply in relation to social and environmental reporting than for financial performance.

One issue, therefore, is whether reporting on social and environmental performance should remain voluntary or whether government should specify a disclosure framework and impose penalties for non-compliance. If disclosure is voluntary and its format unregulated, there is no inducement for accuracy and perhaps some incentive otherwise. Voluntary reporting easily becomes ‘good news’ reporting and suits corporations seeking only to manage their reputation with respect to a particular constituency. A second issue is whether non-financial reporting should be subject to external independent verification or assurance in a manner corresponding to the audit of corporate financial reporting.

* Paul Redmond is a Professor and former Dean of the Faculty of Law, University of New South Wales. From July 2006 he will be the inaugural Brennan Research Professor in the University of Technology, Sydney Faculty of Law.

Endnotes

1. See, eg, Westpac, Submission to the Parliamentary Joint Committee on Corporations and Financial Services Inquiry into Corporate Responsibility (September 2005), 6.

2. See P Redmond, ‘Transnational enterprise and human rights: Options for standard-setting and compliance’ (2003) 37 International Lawyer 69.

3. An example is The Prime Minister’s Community Business Partnership <www.partnerships.gov.au>.

4. See, eg, Commission of the European Communities, Communication from the Commission Concerning Corporate Social Responsibility: A Business Contribution to Sustainable Development (2002), sect 3.

5. Westpac, Submission to the Parliamentary Joint Committee on Corporations and Financial Services Inquiry into Corporate Responsibility (September 2005), 15.

6. The title of an address by the Canadian Prime Minister W L Mackenzie King in 1919.

7. Confederation of British Industry, The Responsibilities of the British Public Company (1973), 9. The UK Companies Act was amended in 1979 to require directors ‘to have regard in the performance of their functions [to] the interests of the company’s employees in general as well as to the interests of its members’. The provision became s 309 of the Companies Act 1985; it was recently repealed.

8. See, eg, Christian Aid, Behind the Mask: The Real Face of Social Responsibility (see <www.christianaid.org.uk>); P Redmond, ‘Transnational enterprise and human rights: Options for standard-setting and compliance’ (2003) 37 International Lawyer 69, 87-95.

9. See Report of the Special Commission of Inquiry into the Medical Research and Compensation Foundation, September 2004, paras 14.45 (d), 30.22.

10. Globalisation and economic liberalisation offer wider opportunities for cost externalisation since globalisation simultaneously integrates on the economic dimension while fracturing on the political: W Reinicke & J Witte, ‘Interdependence, Globalization and Sovereignty: The Role of Non-Binding International Legal Accords’ in D Shelton (ed) Commitment and Compliance: The Role of Non-Binding Norms in the International Legal System (2000), 77-78.

11. The principal requirements are Corporations Act 2001, ss 299(1)(f) (details of the company’s performance in relation to environmental regulation but only if its operations are subject to ‘any particular or significant environmental regulation’) and 1013D(1)(l) (disclosure, in solicitation of funds for investment management, of the extent to which labour standards or environmental, social or ethical considerations are taken into account in investment decisions). Listed companies are also subject to a ‘disclose or explain’ obligation with respect to the ASX Principles of Good Corporate Governance which include ‘Recognise the legitimate interests of stakeholders’ (Principle 10) and ‘Recognise and manage risk’ (Principle 7).

12. KPMG International Survey of Corporate Responsibility Reporting 2005, 10 (Fig 3).