Any of our business? Human Rights and the UK private sector - Human Rights Joint Committee Contents

Memorandum submitted by ClientEarth


  Relevance to the Joint Committee on Human Rights' inquiry on Business and Human Rights


  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 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]).


  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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Prepared 16 December 2009