New rules, new expectations
January 30 2007
by Simon McRae
Although the new UK Companies Act broadens directors’ duties beyond the traditional short-term profit motive, there is some way to go before companies are held fully accountable for their social and environmental impacts, argues Simon McRae of War on Want.
Late last year after more than eight years of consultation and lobbying the new UK Companies Act (2006) finally became law. The Act contains provisions that will – for the first time anywhere in the world – oblige companies to “have regard for” their social and environmental impacts.
Companies can no longer ignore local communities, the environment or their own employees. Companies will also be required to produce an annual Business Review, requiring directors to report on their impact on the environment, employees and communities.
Significantly, the Business Review will be linked to the new directors’ duties provisions covering social and environmental issues. And in what has been seen as a major concession, the government agreed that businesses must now report on their relations with their suppliers – whether in the UK or overseas. Since the Companies Act has been passed, the main focus among companies in terms of social and environmental issues has been on reporting through the new Business Review. However, for NGOs it is the broadening scope of directors’ duties beyond the traditional short-term profit motive, which is potentially the most significant in the long term.
Under the new statutory statement of directors’ duties, company directors are now required to consider the interests of their employees, the impact of the companies operations on the community and the environment and the desirability of the company to maintain a reputation for high standards of business conduct. But there is still some way to go before companies are fully accountable for their social and environmental impacts. For instance, although companies will be required to provide details of their relationships with suppliers in the Business Review, the Act doesn’t allow communities or workers overseas who are adversely affected by UK companies to be able to seek redress in the UK.
While the corporate lobby may feel they have been successful at watering down the provisions in the Act that deal with social and environmental issues, the reality is that they are now embedded in company law and the expectations from society is that they will be respected. Indeed 90% of the UK public believe that companies should be regulated to ensure they are socially responsible, so there is clearly strong public desire for the government to use the law to change company behaviour.
We are not expecting companies to change overnight and there are many other aspects of business behaviour that remain socially unacceptable. They include the shameful private lobbying of government by companies that contradicts their public position on key social and environmental issues, or the widespread use of tax havens and low-tax regimes by companies to avoid paying substantial tax revenues to governments worldwide.
The view that the so called ‘enlightened shareholders’ will hold companies to account for their real world impacts is simply naïve and not supported by the evidence. The ‘shareholder model’ of companies has had its day and in terms of tackling the big issues of the 21st century, such as reducing global poverty and tackling climate change, it has largely failed. While the new Companies Act is still focussed on shareholders, the acknowledgement of stakeholders within it is critical. It is only by changing the rules of company law to embrace important stakeholders, such as local communities, workers and the environment, that business can begin to face up to the huge challenges facing us in the 21st century.