“Consumers are demanding more than ‘product’ from their favorite brands. Employees are choosing to work for companies with strong values. Shareholders are more inclined to invest in businesses with outstanding corporate reputations. Quite simply, being socially responsible is not only the right thing to do; it can distinguish a company from its industry peers.”
Starbucks 2001 Corporate Social Responsibility Annual Report (p. 3)
India has become the first country in the world to make Corporate Social responsibility mandatory. This year the Indian government implemented a new law on CSR which requires companies to spend 2% of their net profit contributing to social development projects.
Whilst any active contribution to fostering a culture of good corporate citizenship is welcome, there has been much controversy surrounding the form. NGOs, business professionals and academics have speculated as to whether compulsory CSR will actually work or whether it will mean forced philanthropy, ‘tick box’ behaviour, tokenism – and even corruption.
Furthermore, making CSR compulsory fundamentally goes against what academics have stated CSR is truly about – going above and beyond what is required by law to allow stakeholders in society to be rewarded for their contribution to the prosperity of the business.
If all companies are forced to comply with strict CSR, there may be an argument to the end that there is no real ‘business’ case for taking part in such initiatives.
Compulsory CSR will mean there is not such a great incentive for companies to contribute to society enthusiastically, strategically and for the long-term.
This post considers the alternative under Scots Law – creating a company law framework that encourages voluntary CSR.
UK Company Law and the Business Incentive
The Companies Act 2006 attempts to reconcile the objectives of company law with the wider community in which a company operates through the “enlightened shareholder value” approach.
The theory behind this approach is that while the duty for directors is primarily to maximise profits for shareholders, this is best achieved through an ‘enlightened approach’.
The enlightened approach is for companies to take not only shareholder but also stakeholder considerations into account when making business decisions in order to create lasting and valuable relationships with the society in which the company operates.
By doing this, the company’s potential for profit and long term sustainability can be fully realised. s.172 of the Companies Act dictates that directors must consider the long term consequences of decisions, including employee matters, business relationships, the impact of the company on its operating environment, reputation and fairness.
This is not an exhaustive list but merely provides areas of particular importance that should be borne in mind by directors.
Scottish Case Re West Coast Capital & Culture of Good Corporate Citizenship
This approach makes directors really consider the long-term effects of their business decisions. However, in the Scottish case of Re West Coast Capital, it was stated that s.172 did not confer a more substantial obligation on directors and merely codified pre-existing duties under pre-2006 common law, a step backwards in Scotland for creating a culture of good corporate citizenship.
However, the enlightened shareholder value approach is also coupled with disclosure requirements under s. 417 of the Companies Act 2006. This provision means that companies must make statements on environmental matters, employee matters, social and community issues including the company’s formal policy on those issues, and how effective that policy is.
“70% of consumers surveyed have decided against buying products from a company they believed to have questionable ethics”
Having companies consider these stakeholders and make public their policies in these areas can have a great impact on the prosperity of their business and thus socially responsible behaviour becomes a crucial part of the business agenda. Consumers are very sensitive to a company’s reputation and this has a demonstrable effect on buying habits. For example, a 2006 study of ethics in the market showed that 70% of consumers surveyed have decided against buying products from a company they believed to have questionable ethics. The reverse trend is also significant, in 2006 when Marks & Spencer changed all 38 of their tea and coffee products to Fair-trade products they noticed a 27% rise in sales in only 3 months.
Furthermore, companies are very aware of this pattern- a survey of CSR reporting by KPMG found that 74% of company CSR reports identified “economic considerations” as a driver for corporate responsibility.
Concluding Remarks: The Real Incentives of CSR for Scottish & UK Companies
Whilst the fact that the Indian government are taking CSR to the next level by requiring companies to take part in CSR initiatives, it remains to be seen whether this will be a more effective approach than the voluntary position UK companies are in at present.
However, what has been demonstrated is that the real incentive for companies to take part in CSR initiative is not compliance with the law but winning the approval of consumers and generating profit.
Where there is strict law and universal CSR participation there may be little incentive for companies to innovate and strategise their CSR policies and initiative which may lead to ‘tick box’ philanthropy, avoidance and even corruption if not coupled with adequate disclosure requirements to put their most valuable asset at risk – their reputation.