Memorandum submitted by ClientEarth
CLIENTEARTH'S REVIEW OF ENVIRONMENTAL AND
SOCIAL TRANSPARENCY UNDER THE COMPANIES ACT 2006
Relevance to the Joint Committee on Human Rights'
inquiry on Business and Human Rights
INTRODUCTION
ClientEarth has been requested to submit its
review of environmental and social transparency under UK law for
consideration by the Joint Committee, having been mentioned by
a submission in the official call for evidence in May 2009. This
note seeks to give an overview of ClientEarth's review and place
it in the context of the Joint Committee's inquiry.
CLIENTEARTH'S
REVIEW OF
THE COMPANIES
ACT 2006
ClientEarth's review examines the UK legal framework
that governs company annual reporting on environmental and social
issues. It examines the legal provisions that set out content
requirements for the reports, and also the mechanisms established
by law to scrutinise the reports (audit requirements, regulatory
oversight, Annual General Meetings). It identifies specific reform
proposals that we consider necessary to make the current legal
framework effective, and achieve the objectives of the Companies
Act 2006.
The reporting requirements
Under the Companies Act 2006, UK-based companies
are required to account and report annually to their shareholders.
In the case of public quoted companies, the accounts and reports
must also be published on the internet.
As well as the numerical accounts and accompanying
notes, these annual reports must contain a "narrative"
review of the business. The Companies Act 2006 brought in
enhanced requirements for this narrative "business review",
including explicit requirements (for "quoted" companies[525])
to report on environmental, social and community issues, "to
the extent necessary for an understanding of the development,
performance or position of the company's business".[526]
ClientEarth examines what we consider these provisions to mean,
in light of the policy objectives of the Companies Act 2006, as
developed in the Company Law Review[527]
and laid out in the UK government's white paper "Company
Law Reform", which led to the Companies Act 2006.
Fundamentally these requirements are about increasing
and protecting company value. The key innovation of the Companies
Act 2006 was to develop and implement the concept of "enlightened
shareholder value", which re-interprets shareholder value
(and therefore the ultimate objective of the public company) through
a long-term perspective.[528]
It thereby acknowledged that shareholder value could not be equated
solely with short-term financial bottom-line, and that in order
to succeed or even survive in the long-term, companies need to
have regard to and effectively manage its relationships with a
range of stakeholders, and a range of social and environmental
issues. This policy consideration shaped the new statutory duties
of directors,[529]
and combined with the policy objective of "enhancing shareholder
engagement and dialogue",[530]
underpins the requirements for companies to report on environmental,
social or community issues, and the rest of the enhanced business
review.[531]
We have produced a framework through which these
requirements can be understood and interpreted in comprehensive
detail. We have broken down the ways in which environmental and
social issues can be understood to affect a company's business,
into a number of categories of "intangible assets and risks":
reputation, social licence to operate, regulatory freedom, access
to capital and litigation risk.
For instance, we would argue that complaints
or allegations made against a company regarding complicity with
human rights abuses overseas should be understood as an issue
which is important in understanding the position of the company's
business, in that it affects company reputation and potentially
social licence to operate, both of which have real if intangible
implications for the company's long-term value. As such, we would
argue that such a controversy, and the way that company management
is approaching and managing it, should be reported in accordance
with the Companies Act 2006.
Scrutiny of company reporting
ClientEarth's review also examines the mechanisms
established by law to scrutinise company annual reports and ensure
their compliance with legal requirements. First, companies are
required by statute to commission an independent audit of their
annual accounts and reports. Second, the Financial Reporting Review
Panel (FRRP)[532]
holds statutory powers and responsibilities to monitor and ensure
company compliance with legal requirements in practice. Third,
the statutorily required Annual General Meeting (for public companies)
provides an opportunity for shareholders to ask questions and
raise any concerns about the accuracy, usefulness or compliance
of the annual accounts and reports. ClientEarth's review identifies
critical problems with these mechanisms as currently constituted
or operating, which in our view seriously undermines the capacity
for the law to achieve its policy objectives.
ClientEarth's proposals
ClientEarth's review identifies and proposes
straightforward steps that the UK government and regulator should
take, that in our view would enhance the current legal framework,
providing much needed clarity to the existing reporting obligations
established by the Companies Act 2006. Details of these specific
proposals can be found in the attached document.
Our proposals are aimed at improving the efficacy
of the current framework, in order to better achieve the objectives
of the Companies Act 2006. We are not proposing a change to the
fundamental parameters of the law, or the policy that underlies
the law.
As such, our proposals relate to improving a
reporting process that is fundamentally about business interests,
not the broader public interest (other than to the extent that
the generation of financial value serves the public interest)
or the protection of human rights.[533]
Our emphasis in this work is on implementation.
Provisions are set in legislation, and a regulatory framework
is in place, but without supplementary measures and appropriate
regulatory scrutiny, we do not consider that the law can achieve
what it was intended to (ie ensure that companies report in a
thoughtful and thorough way about the way that the business of
their company engages with environmental, social and community
issues[534]).
THE JOINT
COMMITTEE'S
INQUIRY ON
BUSINESS AND
HUMAN RIGHTS:
WHERE CLIENTEARTH'S
WORK FITS
IN
ClientEarth considers that an enhanced company
reporting regime with appropriate regulatory intervention, as
identified in our review, can play an important role in facilitating
and driving better corporate practice in relation to human rights.
We consider that our work falls under questions
3 and 6 of the Joint Committee's official call for evidence
of March 2009: gaps in the current legal and regulatory framework
for UK business which need to be addressed, and how; and (part
of) how UK businesses should take into account the human rights
impact of their activities, and how a culture of respect for human
rights in business can be encouraged.
In terms of human rights practice, our work
is not strictly seeking mandatory standards and associated regulatory
structures (eg a national legal framework to articulate business'
legal duties to avoid complicity in human rights violations, and
an associated tribunal or ombudsman to enforce that code), nor
adopting an approach that solely "encourages" the adoption
of voluntary standards of practice (eg The Global Compact or other
codes of practice with regard to human rights or other issues).[535]
We are advocating a system that brings certainty
and accountability to companies' responses to what might be thought
of as "voluntary" or "business" drivers for
high standards of human rights practice. It is a mechanism that
could drive "laggard" companies, those which respond
slowly or poorly to the business drivers for better human rights
practices.
To improve business practices, this type of
reporting framework relies on the existence of other business
drivers, whether arising from civil society or media scrutiny,
public interest litigation, community representation and organisation
or many other sources. What such a reporting framework can achieve
is to enhance companies' responsiveness to these drivers, and
facilitate positive investment choices or interventions.
ClientEarth's work is to an extent about advocating
the "business" case for companies to progressively manage
and engage with environmental and social issues (including human
rights issues), and advocating long-term business thought.
We are aiming to stimulate a process of transparent
corporate thought about the way that companies understand these
issues in relation to their businesses. A legal reporting framework
that ensures that companies discuss their relationship with human
rights issues and how those issues relate to the "business"
of the company can drive a progressive culture in which companies
understand the business implications of their human rights practices,
and seek to address associated problems. For many companies, it
makes business sense for them to take human rights issues seriously,
and address them in a progressive and proactive way.
Higher quality company transparency, in the
terms discussed above, also helps to identify where business factors
do not drive higher standards of practice, or the limits
to which business drivers can contribute to human rights protection.
This type of transparency can therefore assist dynamic and effective
policy decision-making in a broader context, as policy-makers
or regulators have easier access to more detailed, accurate and
balanced information about where and to what extent "voluntary"
or business-driven approaches to human rights protection (or other
social or environmental issues) can work, and where they may not
be effective.
Transparency on these questions also allows
society at large a clearer understanding of the way that companies
relate to these issues, aiding a process of demystification in
an area (public perception of companies in relation to environmental
and social issues) where balanced perspective and clarity of motive
and substance are sorely lacking.
There is great potential for a better alignment
between company practice, societal perceptions and expectations,
the long-term interests of companies, and high standards of human
rights protection. An effective legal regime for company transparency
on these matters can facilitate and drive business' adaptation
to these challenges, and changing business and regulatory environments.
Therefore in ClientEarth's view it is an important component of
an overall solution to the governance gap in the area of business
and human rights.
525 Companies officially listed on the London Stock
Exchange, on the list of an EEA State, or on a New York Stock
Exchange. Back
526
Section 417(5) Companies Act 2006. This also explicitly requires
them to include information about any policies of the company
in relation to those matters, and the effectiveness of those policies. Back
527
An independent review of UK company law by a group of experts,
practitioners and business people, set up by the Department for
Trade and Industry to frame the forthcoming company law reform. Back
528
See, for example, Company Law Review Steering Group, "Modern
Law for a Competitive Economy: The Strategic Framework" (February
1999), p. 37, for an overview of the concept and the alternative
approach that the Review rejected (a "pluralist" approach). Back
529
See section 172 Companies Act 2006. Back
530
See Department of Trade and Industry, "Company Law Reform"
(March 2005), p. 16. Back
531
See section 417 Companies Act 2006. Back
532
An operating body of the Financial Reporting Council (FRC). The
FRRP is an independent regulator with statutory powers that seeks
to ensure that the provision of financial information by public
and large private companies complies with relevant accounting
and reporting requirements. Back
533
Notwithstanding this focus, it is not to suggest that ClientEarth
would not consider that a more expansive mandatory reporting framework
for these issues, approaching with the fundamental goal of protecting
human rights, rather than maximising long term company value,
would not be appropriate. This could be complementary to the regime
we are examining, if designed appropriately. It is not, however,
a matter that we are pursuing for the time being. Back
534
The review contains further detail on the nature of the intentions
underlying the law. Back
535
This is not to suggest that ClientEarth does not support either
of these approaches as part of an overall, coordinated solution
to the governance gap in business and human rights. Back
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