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People need a way to measure and compare the environmental and social performance of companies. Many leading businesses have recognised that and now produce an array of corporate responsibility reports. However, with no standard for reporting, how do the public differentiate between a business that reacts to problems or crises as they arise and one that puts corporate social responsibility at its core and involves that in all its business decisions? What about organisations that do not rely on a well-known brand? How do we ensure that they take on board wider interests?
The sheer number of people who signed up to the Make Poverty History campaign last year demonstrates that there is a willingness to address exploitation in the developing world. However, do ordinary people in the street know which companies are continuing to exploit workers in the developing world with poverty wages and unsanitary and unsafe working conditions? Are we happy to let subsidiaries of UK companies continue to do that safe in the knowledge they have no legal responsibility to tell their shareholders they are doing so? Like other hon. Members, I think that the matter is too important for a voluntary code—regulation is needed. Health and safety is considered too important to be left to a voluntary code, and corporate responsibility is also too important to be left to such a code.
I do not want to diminish the huge step forward that the Bill makes. For the first time, it defines in legislation that a company director should have regard to other stakeholders, not just shareholders, when considering the likely consequences of any decision in the long term, the impact of the company’s operations on the community and the environment and the desirability of the company maintaining a reputation for high standards of business conduct. However, I am not sure how enforceable the measure will be, given the use of the phrase “have regard to” and the fact that the Bill represents a step back from a pluralist model that would require directors to have a positive duty to take reasonable steps to minimise significant negative impacts on wider stakeholders.
We need to examine carefully how to prevent UK companies from taking advantage of weaker regulatory regimes overseas, especially in developing countries. I appreciate the arguments against that approach and that companies may choose to incorporate in other countries. Of course, we cannot act isolation in the UK and thus we need to bring other countries with us. However, there is scope for further strengthening the definition of directors’ duties, so I hope that that matter will be addressed in Committee. It is often said that we are powerless in the face of globalisation and the power of capital. However, if we do not do something about sustainable development, the power of capital will be worthless in the face of environmental and economic collapse.
We need to consider the reporting regime, about which many hon. Members have spoken. Reporting should be a management tool for a business and the building blocks of an action plan, rather than just another bit of paper for shareholders. I, like many others, was disappointed when the operating and financial review was abandoned last year. However, I am pleased that many of the provisions have been incorporated into the business review, especially
through clause 399, although, like other hon. Members, I would like the measure to go further. There are still no statutory reporting standards, and that to me is key. One would not expect a company to make up its own financial reporting standards, so why should there not be standards for social and environmental reporting? There are many examples of good practice in corporate social responsibility reporting. Let us use the companies that have been the trailblazers and show the rest of the business world how such reporting can and should be done.
There should be standardised performance indicators that set out benchmarks and requirements for stakeholder dialogue and public reporting. Let us give consumers and investors the power to make informed choices by ensuring that companies present their reports in a standardised way so that people can make meaningful comparisons. I accept that the UK Government cannot act alone. There has to be a balance of incentive and regulation and, in our globalised economy, we have to take other countries with us, but we also have a duty to show leadership. We should start by agreeing the basic premise that a company does not exist in isolation and capital is only one of the building blocks that add value. From there, it is but a short step to acknowledging that directors should act in the interests of stakeholders as well as shareholders and with corporate social responsibility.
I warmly welcome the Bill as a massive first step along the road of sustainable development and balancing economic growth and business success with responsibility to stakeholders and the wider environment. However, as I have said, there are aspects of the Bill that do not go far enough, so I look forward to further debate as the Bill progresses.
8.16 pm
Susan Kramer (Richmond Park) (LD): I will try to be brief because it is getting late and several other hon. Members wish to speak. I declare an interest as a director of a very small private company, Infrastructure Capital Partners, and a very small public company, Specialty Scanners plc. I do not think that that greatly influences what I will say.
Liberal Democrats are concerned that businesses should be held to account by their shareholders for not only their financial performance, but their impact on the community and the environment. There is also a broader—although perhaps lesser—public interest in transparency. We have thus welcomed any moves towards new forms of corporate reporting that would achieve those goals, so we were excited by, and supportive of, the whole concept of the operating and financial review that the Department of Trade and Industry promulgated in detail in 2004. We were as stunned as everyone else when the consultation was withdrawn by the Chancellor in November 2005. It is important that we use every opportunity during the passage of the Bill to press the Government to look again at the measures on business reviews in clause 399 and consider whether there would be only gain and no loss by strengthening the provisions, in effect to pick up the various abandoned parts of the OFR.
At the beginning of the debate, the Secretary of State most graciously let me intervene. I picked up on the issue of prospective investors and their interest in access to information on the environment, the community and social impacts that the operation and finance review offered. I think that the hon. Member for Eddisbury (Mr. O'Brien) quoted from a DTI press release issued back in 2004 by the hon. Member for Leicester, East (Keith Vaz). It talked about the OFR improving the quality of reporting and “completing the corporate jigsaw”—that was the phrase that he repeated—to give investors a clearer picture. A paragraph continues—I shall not bore the House with it—that essentially repeats that sentiment, constantly stressing the importance of the OFR to investors in understanding the picture of the companies in which they might choose to invest and support, and the importance of the dialogue that ensures between investors and business with these disclosures.
I was able to quote back to the Secretary of State the words of Lord Sainsbury of Turville, who was speaking for the Government in the other place. He essentially dismissed those principles of providing information to potential investors on a much wider range of issues.
We constantly hear the Government call for people to invest more and to save more. It is a call that is directed especially to younger people. When I spend time with younger people and with people of my generation—I am thinking of my own grown children—they are deterred from investing because they do not understand the efficacy of the corporations in which they might invest, in their daily practices and operations. If we want to bring the younger generation in, we must respond to what they are asking us to do, which is to ensure that there is full and reasonable disclosure. That is not too high a standard to set before the Government.
At the beginning of the debate, the Secretary of State seemed to give the impression that the business review was almost everything that the OFR was, bar a few technicalities and costs—a little extra on the reporting requirement and a little more auditing—and so not really very different. I read in the Bill something that is fundamentally different. There is no basic accounting standard. How can anyone compare one company with another without a common language and a common standard around which to work? I do not think that it is reasonable to ask someone to do that. There is the light touch of audit on statements. Under the business review, any requirement has now been removed for auditors to check for inconsistencies between the business review and the reality. To me, that matters. The best companies will continue to provide full and accurate information, but if anyone wishes to be slack or inconsistent, there seems to be a door through which they can charge. I am sad to say that the business review will have attached to it the words “caveat emptor”. That is exactly what we do not seek. Instead, we want certainty, clarity and absence of ambiguity.
There are a few other issues that I want to raise on the business review. There is no reference to the supply chain. Two years ago, I was in New Zealand at a conference on sustainable development. One of the main speakers was from B&Q, I think from strategic planning. He talked of an experience that the company had had. It had been challenged by NGOs on the ground that—I do not want to swear by this—the
company had been supplying furniture that had been made from wood from endangered forests. I think that it was teak from inappropriate sources.
That caused the company to look at its supply chain. It was horrified with what it found. The company committed itself to examine every aspect of the supply chain, including its contractors. It found that it did not know who its contractors were when it started the examination. It examined where it was sourcing from and how workers were treated. It examined what standards were used in the workshops. At first, it thought that there would be a huge cost on the company, to be offset by a gain in reputation. We were told at the conference that the benefit was found in better suppliers and better sources. The company had workers employed by their various contractors. They were being properly employed and properly treated in much healthier conditions. The company’s financial bottom line improved because of that chain in practice.
What struck me more than anything else was that the company did not know what its situation was until it was forced by an outside event to go and explore. I am worried by the absence of the supply chain within the business review. Without that forcing element, companies will not go back, do the homework, discover what the situation is, confront it and finally deal with it. The opportunity is provided by the Bill to achieve that.
Mr. Davey: Is there not a danger that some companies might operate from abroad, reporting that they are meeting the highest standards of corporate social responsibility while subcontracting to suppliers and other businesses in their supply chain that have poor standards so that we have the worst of all possible worlds?
Susan Kramer: My hon. Friend is right.
The hon. Members for Gower (Mr. Caton) and for Portsmouth, North (Sarah McCarthy-Fry) both cited companies whose public declarations in the UK showed that they sincerely believed—this is not an issue of malfeasance—that they met high standards of corporate responsibility. However, non-governmental organisations and other bodies that looked at what happened in developing countries, particularly the role of contractors, found unacceptable standards and major environmental, social and community impacts. In 2005, Friends of the Earth conducted a case study on palm oil in which it asked 96 UK companies to trace the sources of their palm oil and provide an assurance that it came from sustainable non-destructive sources. Only 18 companies replied, but, according to Friends of the Earth, none of them could
“trace their palm oil to non-destructive plantation sources, and the majority did not even know where their palm oil came from.”
That is a small example, but that lack of knowledge and focus by companies lies at the heart of the problem. If we can strengthen the business review so that it is much closer to the OFR, we can tackle that challenge.
In the other place, there was an extensive discussion of British business operations in the Democratic Republic of the Congo. In 2000, a UN panel of experts met to look at the illegal exploitation of natural
resources and other forms of wealth in the DRC. Among the companies that it cited as being in violation of Organisation for Economic Co-operation and Development guidelines for multinational enterprises were a number of British companies. We should not have to wait for a UN panel of experts to apply pressure and expose the problem. We should be able to look at our own company law structure in the business review to bring that information into the open and provide transparency.
David Taylor (North-West Leicestershire) (Lab/Co-op): The hon. Lady is making a powerful case on both named and unnamed companies. Asda Wal-Mart deploys marketing strategies using the tag line, “A better life for all”. In reality, it makes widespread use of sweatshop labour in south-east Asia and central America and, in the UK, it was recently fined nearly £1 million for anti-trade union activities. Is that not shocking, and is that not the reason why the Bill should proceed and be strengthened in the process?
Susan Kramer: The hon. Gentleman has read the same report by War on Want as me. We have a great deal of evidence of the inconsistency between what companies say and the reality on the ground. If clause 399 strengthened the business review so that it became an OFR it would achieve a climate of transparency.
It is inconsistent to exclude from most of clause 399 unquoted companies. In the Democratic Republic of the Congo, many companies reported by the UN were unquoted, so we cannot work on the assumption that transparency is required only for listed companies. I accept that we cannot include small companies, but it would be appropriate for some medium-sized companies to report on such issues. Recently, The Times reported that companies that follow good practices often believe that they are isolated and unsupported by Government. I shall not try to quote from that lengthy article but, companies frequently express frustration that there is not a level playing field on ethical practice. A company may decide to pursue good environmental, social and community practice, but it is frustrated that its competitors do not do so. Here we are discussing a tool which creates that level playing field. If there is anything that is ultimately good business, it is the creation of a level playing field so that competition exists on fair terms, not on unacceptable terms.
There has been a general assumption that the reason why the OFR was abandoned in favour of the much lighter touch——the much paler business review——is that widespread objections were raised by the corporate UK. I find that contradicted by the experiences and conversations that I have had. I was a member of the Treasury Committee last December when we took evidence from a number of people on the impact of OFRs and their views on the abandonment of OFRs. I shall quote some of those.
F&C, one of Britain’s biggest fund managers, said that it was disappointed that the OFR had been swept away. Anita Skipper, head of governance at Morley, which invests £148 billion on behalf of Norwich Union policyholders, said:
“We were surprised and disappointed. The OFR would have given companies the opportunity to educate, explain and persuade.”
The head of the Chartered Institute of Management Accountants said:
“We think this is fundamentally a bad decision.”
There is quote after quote from relevant bodies.
I had the opportunity to take evidence from Mr. John Whiting of PricewaterhouseCoopers. One might say that, as an accountant, he has an interest in a reporting standard or OFR, but he is a gentleman to whom hon. Members in all parts of the House have turned for good advice over the years. When I asked him what he thought of OFRs, he said:
“I think in general we saw the Operating and Financial Review as a good way forward. It promoted more openness, there were more general statements about what was going on and we supported it. It seemed to be a way forward in terms of just generally encouraging more openness and more transparency.”
“Much benefit from scrapping it?”,
“I do not immediately see it. I think one could think of other things that people would rather see scrapped.”
Was it not simply a case of sod’s law? The Chancellor wanted to do something to improve his credentials as a pro-business, anti-regulation Chancellor, and he snatched the one piece of regulation which, on the whole, business supported and the non-business community supported, for which the costs had already been sunk because of the work done by the accounting community and most major companies to put in place reporting mechanisms and procedures, and for which the additional cost would not be high because it was moving companies in the direction in which they already felt they ought to be going.
In conclusion, there is an old adage in which I strongly believe: what you measure, you manage. The operating and financial review gave an assured, properly audited standard-based mechanism for displaying environmental, social and community impacts in narrative form rather than in financial ratio terms, but accurate, recognisable and measurable in its narrative. It would have led to management of those aspects. By adopting a light touch in the form of business review, we have abandoned it. I hope the Government will take the opportunity of the remaining stages of the Bill to go back to their initial sound concept.
8.33 pm
James Brokenshire (Hornchurch) (Con): I am grateful for the opportunity to take part in the debate. I should say at the outset that I have a particular interest in proceedings in the Chamber today, inasmuch as I am a non-practising solicitor. Before entering the House, I practised in the area of company law for 14 years as a company solicitor, so I retain an interest in the development of corporate law, even though I am no longer practising in that field.
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