CSR and Legislation

Principles and standards abound to such an extent that companies are puzzling where to stand. Impetus will be given to a set of ëvoluntaryí principles when the GRI formally launches its report at the Johannesburg summit in August (see http://www.globalreporting.org/). The list of principles and indicators being proposed by the GRI is very weighty to the extent that companies may start to ask themselves ëwhy botherí? Financial regulation is tough enough but at least it can help companies to know their main costs and benefits. Social, economic and environmental principles leading to three additional balance sheets seem to be an additional burden, particularly if the benefits are poorly understood as they are now and the costs increasing. Consequently, as much as I admire the sentiment behind ëtriple-bottom lineí reporting and see its value as a short hand formula for introducing the subject of CSR ñ I much prefer the clearer stakeholder model of reporting as argued in an earlier Monthly Feature (see http://www.mhcinternational.com/measurement%20of%20CSR.htm ).

Even as companies struggle with voluntary principles and standards, which critics argue raise the cost of compliance, there is a gradual movement toward regulation. One part of this is coming from the EU but various drafts of its papers indicate the struggle within its walls between legislate or not! Its green paper in July 2001 argued:

Corporate social responsibility should nevertheless not be seen as a substitute to regulation or legislation concerning social rights or environmental standards, including the development of new appropriate legislation. In countries where such regulations do not exist, efforts should focus on putting the proper regulatory or legislative framework in place in order to define a level playing field on the basis of which socially responsible practices can be developed. [EU Green Paper, 18.7.2001]

Whereas, after consultation, that paragraph was dropped in the EUís white paper published in July 2002. The EU even defined CSR to be voluntary when it said:

ìCSR is a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basisî [my emphasis]

In a correspondence with one of the authors I noted that the EU included process in their CSR definition with the addition of 'on a voluntary basis'. I suggested that the word ëvoluntaryí should be eliminated since you cannot then consider 'any' regulation however minor. An EU official replied that he thought that the definition is obviously a crucial point. ìOur compromise was to use again the definition given in the Green paper, which puts stress on that CSR means going beyond obligations and thus is by nature voluntary. This focus reflects the approach adopted by the Commission, which is not to regulate CSR but to facilitate the dialogue between the stakeholders on CSR issues and to promote existing market developments. In 2004 we will have more evidence to judge what can be achieved through this approach.î

I much prefer a definition that emphasizes more explicitly the stakeholder nature of the concept while not pre-judging the ëvoluntary or notí debate:

CSR is concerned with treating the stakeholders of the firm ethically or in a responsible manner. ëEthically or responsibleí means treating stakeholders in a manner deemed acceptable in civilised societies. Social includes economic responsibility. Stakeholders exist both within a firm and outside. The wider aim of social responsibility is to create higher and higher standards of living, while preserving the profitability of the corporation, for peoples both within and outside the corporation[1].

A pro-regulatory view comes, surprisingly, from companies themselves ñ at least some of them such as BP, The UKís Co-operative Bank etc. They believe that their existing behaviour exceeds most existing standards and, of course, they wish to bring other companies, especially their competitors, up to the same level. In fact this process is one I encapsulated in my book The Planetary Bargain[2] where I suggested that companies would invoke, voluntarily, a number of basic principles. They would then 'shame and name' rogue companies thereby encouraging limited legislation. However, the danger of my 'minimalist' position, which was essentially to stop a race to the bottom whereby companies would jump to favourable countries, has been admirably highlighted by Adrian Henriques who noted:

The most common reason given for why new legislation would set CSR back is the lowest common denominator argument. This suggests that if there were legislation on CSR, then companies would deliver what the law requires, but never more. At the moment, voluntary CSR is experiencing a hundred flowers in bloom" Ethical Performance, March 2002.

What, therefore, are the pluses and minuses for CSR regulation?

Pluses from legislation

• It would help to avoid the excessive exploitation of labour, bribery, and corruption.
• Companies would know what is expected of them thereby promoting a level playing field
• Many aspects of CSR behaviour are good for business (reputation, human resources, branding, easier to locate in new communities etc.) and legislation could help to improve profitability, growth and sustainability
• Some areas, such as downsizing, could help to re-address the balance between companies and their employees
• Rogue companies would find it more difficult to compete through lower standards
• The wider community would benefit as companies reach out to the key issue of under-development around the world

Minuses

• Additional bureaucracy, with rising costs of observance
• Costs of operation could rise above those required for continued profitability and sustainability
• Critics already argue that the CSR of companies is simply to make a profit, and legislation would increase the vocalization of these concerns
• Reporting criteria vary so much by company, sector, country and they are in constant evolution.

Conclusion

I have moved from my 1998 position, stated in my book, when I argued for a voluntary ëPlanetary Bargainí for CSR i.e. companies would come to realize that CSR was in their best interest and would ëoutí rogue companies. More and more companies are already focusing voluntarily on CSR issues but it is clear in the light of the poor corporate governance that resulted in both the Enron and World Com debacles that some further form of legislation is necessary. I now believe that no regulation is out of the question as is full regulationÖthere is ground somewhere between the two[3].

But, the key question remains, who will be the regulator?

Government? In the USA the Security and Exchange Commission is to play an enhanced role ñ at least as far as something called ëcorporate responsibilityí is concerned. In Europe the EU has already stated its position as being on the side of ëvoluntaryí which will relieve many anti-EU lobbyists. Only a few nations will in all probability embed CSR principles into national legislation.

The UN? In developing countries we would normally look toward the UN but we know that the UN is not a ëregulatoryí body and can only suggest changes to national legislation.

The Corporate Sector? Like it or not ëvoluntaryí will be the status quo for the foreseeable future with only a few companies interested in legislation to create a level playing field. Which means that CSR advocates/consultancies, such as our own (MHCi) will more and more become the ëunacknowledged legislators of mankindí (with apologies to Coleridge who was referring to poets) in helping companies and governments find their way. And, as The Economist noted[4]:

" If the market comes to admire honesty, transparency and good corporate governance, executives will rush to acquire those characteristics. Even in morality, the market rules - in the end."

[contributed by Michael Hopkins with comments gratefully received from Ivor Hopkins and George Starcher]