Corporate responsibility with Tom Rotherham

Is there a difference between private and public?

Last week I hosted a feedback session on the UK Conservative Party’s draft White Paper on “Responsible Business”. 

Unavoidably, one of the topics that came up was private equity.  A few people suggested that while public companies may have a responsibility to report on environmental or social issues, a privately held company does not.

I think that the central question is: why distinguish between types of ownership? 

“Companies” are man-made institutions that exists because we have decided that it is in society’s interests for them to exist.  Governments therefore created an enabling environment of laws and institutions. 

Companies would not be able to exist in their present form were it not for, among other things, public acceptance of legal institutions like limited liability and property rights. 

It follows that if a certain category of company – be it chemical companies, privately held companies, overly geared ones, ones with no non-executives on the Board – is found to be consistently acting against society’s interests … guess what?  Society will want to see that problem fixed.

In the old days, governments would fix the problem on behalf of their electorate by creating new regulation.  We now recognize that voluntary approaches enable us to more flexibly and more rapidly address problems before they get too serious. 

Back to private equity.

Yes: the efficient allocation of capital and the generation of wealth are in society’s interests.  But is the concentration of massive wealth in the hands of a small elite equally in society’s interests?  And is it in society’s interests to have a tax system that encourages companies to get out of the public eye?

Increasingly, many people would say “no”. 

And that is why the private equity industry feels compelled to develop its own code of conduct on disclosure.  Just like the chemicals industry felt compelled to develop the Responsible Care code of conduct after the Bhopal disaster.  23 years later, the Responsible Care programme has not hurt the chemicals sector – if anything, it has helped them.

Why should companies care about this debate?

In October 2006, at the 11^th hour of discussions on the UK Companies Act, some members of the Commons’ suggested that the enhanced Business Review should apply to all companies above a certain size and not just to publicly listed ones. 

The amendment came too late to be seriously considered – but my prediction is that it will eventually have its day.  And the private equity code of conduct will speed that day along. 

Society has a claim on information about all companies’ environmental and social impacts because all companies have an impact on society, be they public or private. 

Some of our clients are private companies who have concluded that reporting on their financial and non-financial issues is in their interests.  More and more will reach the same conclusion – prompted, bullied or on their own.

Mixed messages from Brussels on CSR

On 13 March 2007, the European Parliament voted 25-15 in support of a non-binding resolution on Corporate Social Responsibility (CSR). The resolution, drafted by UK Labour MEP Richard Howitt, calls for a new approach to CSR and outlines a number of policy decisions – many of which go far beyond what the Commission proposed last year.

At a general level, the most significant difference between the EU Parliament and the Commission is that the Parliament has called for an end to an exclusively voluntary approach to CSR.

For a taste of what’s inside, consider clause 5, which states that the EU Parliament:

“ (…) believes that the Commission should also consider establishing a list of criteria for enterprises to respect if they claim to be responsible;”

Or this from clause 61:

“Believes that the international dimension of CSR should be a stimulus for guidelines to be drawn up promoting the development of such policies throughout the world;”

The Report also recommends that the Commission:

    * Includes mandatory social and environmental reporting to what must be included alongside financial reporting requirements;
    * Extends the responsibility of directors of companies with more than 1 000 employees to encompass the duty for the directors themselves to minimise any harmful social and environmental impact of companies' activities;

The resolution seems much more aligned with NGO positions, such as the CORE Coalition and the European Coalition for Corporate Justice (ECCJ). Part of this might have to do with the fact that business lobbyists recognize that the Parliament has no power – and so were not engaged in the drafting of the resolution.

But it is hard to see how the unelected Commission can avoid re-thinking their approach now that the elected Parliament has weighed in so heavily. And even if there is no action at the Commission, this will also provide ammunition for national agenda-setting, and could raise the volume on the CSR debate in Europe.

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Anything you can do, I can do greener.

Weeks of green posturing between David Cameron and Gordon Brown over carbon taxes for air passengers have hopefully been cut off by the government’s publication of the draft climate change bill on 13 March 2007.

Offering binding emissions cuts across a range of sectors, the bill has the potential to put the emphasis firmly back where it belongs: reducing overall emissions levels quickly, without prejudice to where savings come from, and so without unnecessary economic disruption.

Rather than squabbling over the price of airline taxes, government leaders should focus on the price of carbon and ensure a robust and reliable emissions trading scheme, both in the UK and in the EU, to ensure a predictable policy framework for companies to follow. Low predictability from government means less long-term planning by companies.

But the draft Bill looks likely to vindicate the (at the time) bold steps taken years ago by leading companies who had the foresight to recognize a transformational issue when they saw it.

In truth, the writing was always on the wall. The real puzzle is: how did some Directors conclude that business-as-usual could ever be the right decision on climate change?

Perhaps the newly codified Directors Duties might prompt Boards to consider environmental issues a bit more carefully in the future. Companies, shareholders and the environment would thank them for it.

Winners:

· Enlightened self-interest

· Companies selling energy efficiency (from the Prius to home insulation)

· Companies that have already upgraded to clean technology

· Low-carbon energy producers

· Carbon traders

Losers:

· Business-as-usual

· Anyone who didn’t chose clean technology in the last procurement cycle

· Companies who haven’t integrated energy efficiency into product development

· Potentially … exporters in developing countries

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Non-financial value creation: can we do better than CR reports?

The rise of investor interest in CR issues is part of a broader trend towards a recognition of the importance of non -financial metrics (including brand equity; intellectual property; customer satisfaction; employee morale; …). 

The Big 4 accounting firms have stated that we do not yet have the tools to adequately communicate how companies manage non-financial risk and generate non-financial value.  At the moment, CR Reports are about the best that we have.

There are two good reasons for this.

First, stakeholders of all stripes recognize that, in a free-market economy, CR can be nothing else than enlightened self-interest.  Understanding how companies prioritize CR issues is a window into how enlightened companies are about their self-interest.  No one wants to hear about altruism: it is a flash in the pan.

Second, companies are recognizing that it is a mistake to think about stakeholder expectations as “additional requirements”: knowing stakeholders’ expectations actually helps companies to understand how to create additional value – non-financial, intangible, soft and fluffy, sure; but value all the same.

As soon as the accountancy profession develops tools to help companies measure non-financial risk and value-creation, maybe we will not need CR Reports.  Or, maybe CR Reports are that tool – and we just need to get better at using them.

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