Corporate Social Responsibility: the case for a self regulatory model
The limited liability corporation is one of the greatest inventions of all time. The corporation is an integral part of our society yet it would seem that society is raising some pretty challenging questions about the role of the corporation in our society. Is there is a need to find a way to enable corporate managers to abandon rules designed in the 1800’s in favour of a more modern concept that recognises the wider role of corporations in our community?
Recently, the Parliamentary Secretary to the Commonwealth Treasurer, the Hon Chris Pearce MP, referred the question of corporate social responsibility to the Corporations and Markets Advisory Committee for consideration and advice. Reflecting these concerns, the Australian Financial Review has editorialised that: “Modern capitalism has many strengths but one big weakness. Some executives are so driven to achieve legitimate corporate goals bigger profits, more shareholder value, a critical restructuring that they are able to justify any technically legal means of pursuing them. The risk is that management and board lose sight of a fundamental question: is this just? In the vast majority of cases their duty to the company and the law is not in conflict with any wider duty, and society as a whole benefits from the wealth created. In rare cases, what is legal and what is just are at such odds that strict legal justifications crumble before community outrage and the threat of legislative action.
In part this is a response the report the Special Commission of Inquiry into the circumstance surrounding James Hardie’s corporate reconstruction. Interestingly, in March 2005, James Hardie’s chair, Meredith Hellicar, called for: “a safe harbour for directors to be able to integrate corporate social responsibility into their decision making without fear that they are going to be sued both personally, and as a company, by their shareholders. “.
To what extent is this concern real? Does Australian corporate regulation need to reflect ‘modern business needs and wider expectations of responsible business behaviour’, that ‘the basic goal for directors should be the success of the company for the benefit of its members as a whole’ and that to reach this goal, directors should be able to ‘take a properly balanced view of the implications of decisions over time and foster effective relationships with employees, customers and suppliers, and in the community more widely’?
There is advantage in providing a reasonable level of protection for those that want to take the ‘long view’. However, many commentators believe that the existing duties of managers, especially the overriding duty to act in the best interests of the company, already accommodate consideration of wider interests by directors and officers if the decision is justifiable as being in the company’s best interests.
Yet, it seems that managers have concerns about how to take a properly balanced view of the implications of their decisions as well as foster effective relationships with employees, customers and suppliers, and the community more widely, whilst at the same time not leave themselves open to complaint from shareholders.
The increased community calls for some form of corporate social responsibility cannot simply be ignored; these are the ‘cultural norms’ that shape the way corporations are allowed to operate. In Canada a significant number of Canadians, and a significant percentage of Canadian shareholders, have been found to want business executives of corporations "to take into account the impact their decisions have on employees, local communities and the country as well as making profit," but can they do so if it at the expense of making profit?
To simply introduce provisions such as those suggested in the UK could lead to greater uncertainty and more capacity for people with only a tangential interest in the company to sue mangers for failing to sufficiently consider their interest or more likely the interests they purport to represent.
The question of whether such a provision is strictly necessary can be avoided by simply including a replaceable rule that will give managers some comfort if they prefer the long view over the short.
The use of a default provision of the constitution giving the managers the freedom to include matters such as employees, customers and suppliers, and the community as being in the interest of the company should provide managers with some comfort.
TIME FOR THE CORPORATIONS ACT TO INCLUDE A NEW REPLACEABLE RULE?
Self regulation is appropriate for complex and difficult issues like corporate social responsibility that do not necessarily require an industry wide solution. A self regulatory model allows a solution tailored to each entity’s circumstances. If there was genuine community agreement about the value of corporate ethics then such provisions affirming their place in the life of the company would quickly gain acceptance as best practice.
Is it necessary for corporate social responsibility to be enforceable? Probably not, as calls for corporate social responsibility have largely been along the lines of the need for a permissive model so, to this extent then there would seem to be no basis for criticising a self-regulation model on the basis of enforcement difficulties.
A self regulatory model will also ensure that only those companies with a genuine interest/need take the issue forward and this is less likely to result in an approach to corporate social responsibility that is a process focussed “tick the box” approach.
A replaceable rule also provides flexibility providing scope for efficiency improvements and innovation. Additionally, such a rule would recognise that many small and micro businesses use the corporate form and do not have the resources to comply with a prescriptive set of rules.
The corporation is create of statute designed for investors to collect together for a common business pursuit through a legal entity that provided the benefits of limited liability, continuity of existence and simplicity in contractual dealings. As part of the bargain, investors should be able to regulate the general nature of their bargain with the other investors and management through the constitution.
The Corporations Act provisions dealing with the constitution could have a default setting that provided that in the absence of an alternative provision in the constitution of a company the board as the agent of the investors were entitled have regard to their a social responsibility the board would be entitled to do more than adhere to the rules and doing “whatever you can get away with”.
The provision would thus form part of the contract between the members and management and it would be theirs to consider, modify if necessary and reject if they wished. It would not be open to regulators, “stakeholders” or anyone who was not a member or officer to enforce against mangers.
A replaceable rule would also lessen the risk of litigation against the corporation by tangential ‘stakeholders’. A statutory proscription to consider social issues, could mean that section 1324 of the Corporations Act could be used to enable the “stakeholders” to seek remedies against managers for not having, say, proper regard to “the community and the environment”. Whilst little use has been made of this provision in developing the view that officers might owe duties to others in addition to their company that is not to say it could not be. The future battle ground for lawyers looking for ways of representing people like the landholders surrounding the BHP mine in Papua New Guinea, Ok Tedi, might be based around the injunction and corporate social responsibility provisions.
In practice, a constitutional provision of this type would not fundamentally alter the circumstances where a board had somehow failed to properly consider, corporate social responsibility type matters in circumstances where it would have been in the best interests of the company to do so. Those directors would still be liable for failing to satisfy their duty of care and diligence. However, if the directors had taken a decision favouring the long term sustainability of the company which resulted in financial detriment to the current shareholders the directors could argue the existence of the replaceable rule was a relevant factor in determining the ‘corporation’s circumstance’ or the office held and the ‘responsibilities within the in the corporation’.
A replaceable rule would also be consistent with the Principle 10 of the ASX recommendations. Compliance with this recommendation was originally contemplated by a code of conduct but a replaceable rule would be entirely consistent with the recommendation. A replaceable rule would also give managers more certainty than a code of conduct, in terms of their duties to the company and the availability of business judgement defences.
An interesting related development might include combining accreditation and self-regulation. A voluntary accreditation scheme might also be adopted to try to ensure consistencies in corporate social responsibility standards across different sectors. Self-regulation of the type discussed could mean that companies are defining their own corporate social responsibility standards and therefore some entities will be taking on far greater corporate social responsibility obligations than other entities.
As with other corporate governance reforms, a self regulatory approach to corporate social responsibility is the surest way to get meaningful approach to this issue. There is a case for reforming directors and officers’ duties; the changes needed should not be revolutionary. A self regulatory model together with a scheme for accreditation provides a better model for influencing behaviour by institutionalising a change that is permissive and reflective of each company’s own circumstances.
If the social norm has shifted, and there is ample evidence it has, then that pressure can be accommodated in the proposed model. The self regulatory model suggested will allow company’s to create wealth on a sustainable basis, but subject to the requirements of responsible business conduct.
Sources: Letter of referral by The Hon Chris Pearce MP to CAMAC, available at http://www.camac.gov.au/CAMAC/camac.nsf/byHeadline/Whats+NewDirectors%27+duties+and+corporate+social+responsibility?openDocument; Parliamentary inquiry into Corporate Responsibility, see online at http://www.aph.gov.au/Senate/committee/corporations_ctte/corporate_responsibility/index.htm; AFR article 22 September 2004, pg 62; UK White Paper on Modernising Company Law available on the UK Department of Trade and Industry's website at http://www.dti.gov.uk/cld/WhitePaper.htm; James McConvill “Directors’ duties to stakeholders: A reform proposal based on three false assumptions” (2005) 18 Australian Journal of Corporate Law 88, see also - Ian Ramsay, ‘Pushing the Limit for Directors’, The Australian Financial Review, 5 April 2005, 63; R. Baxt, “Directors’ Duty of Care and the New Business Judgment Rule in the 21st Century Environment”, Seminar Paper, Seminar on Key Developments in Corporate Law & Equity, Melbourne, March 2001 cited in Saul Fridman “Corporations Law in the courts and the academy: a dangerous malaise?” Butterworths Corporation Law Bulletin No 23 December 1996; ASX Principles of Good Corporate Governance and Best Practice Recommendations.
Recently, the Parliamentary Secretary to the Commonwealth Treasurer, the Hon Chris Pearce MP, referred the question of corporate social responsibility to the Corporations and Markets Advisory Committee for consideration and advice. Reflecting these concerns, the Australian Financial Review has editorialised that: “Modern capitalism has many strengths but one big weakness. Some executives are so driven to achieve legitimate corporate goals bigger profits, more shareholder value, a critical restructuring that they are able to justify any technically legal means of pursuing them. The risk is that management and board lose sight of a fundamental question: is this just? In the vast majority of cases their duty to the company and the law is not in conflict with any wider duty, and society as a whole benefits from the wealth created. In rare cases, what is legal and what is just are at such odds that strict legal justifications crumble before community outrage and the threat of legislative action.
In part this is a response the report the Special Commission of Inquiry into the circumstance surrounding James Hardie’s corporate reconstruction. Interestingly, in March 2005, James Hardie’s chair, Meredith Hellicar, called for: “a safe harbour for directors to be able to integrate corporate social responsibility into their decision making without fear that they are going to be sued both personally, and as a company, by their shareholders. “.
To what extent is this concern real? Does Australian corporate regulation need to reflect ‘modern business needs and wider expectations of responsible business behaviour’, that ‘the basic goal for directors should be the success of the company for the benefit of its members as a whole’ and that to reach this goal, directors should be able to ‘take a properly balanced view of the implications of decisions over time and foster effective relationships with employees, customers and suppliers, and in the community more widely’?
There is advantage in providing a reasonable level of protection for those that want to take the ‘long view’. However, many commentators believe that the existing duties of managers, especially the overriding duty to act in the best interests of the company, already accommodate consideration of wider interests by directors and officers if the decision is justifiable as being in the company’s best interests.
Yet, it seems that managers have concerns about how to take a properly balanced view of the implications of their decisions as well as foster effective relationships with employees, customers and suppliers, and the community more widely, whilst at the same time not leave themselves open to complaint from shareholders.
The increased community calls for some form of corporate social responsibility cannot simply be ignored; these are the ‘cultural norms’ that shape the way corporations are allowed to operate. In Canada a significant number of Canadians, and a significant percentage of Canadian shareholders, have been found to want business executives of corporations "to take into account the impact their decisions have on employees, local communities and the country as well as making profit," but can they do so if it at the expense of making profit?
To simply introduce provisions such as those suggested in the UK could lead to greater uncertainty and more capacity for people with only a tangential interest in the company to sue mangers for failing to sufficiently consider their interest or more likely the interests they purport to represent.
The question of whether such a provision is strictly necessary can be avoided by simply including a replaceable rule that will give managers some comfort if they prefer the long view over the short.
The use of a default provision of the constitution giving the managers the freedom to include matters such as employees, customers and suppliers, and the community as being in the interest of the company should provide managers with some comfort.
TIME FOR THE CORPORATIONS ACT TO INCLUDE A NEW REPLACEABLE RULE?
Self regulation is appropriate for complex and difficult issues like corporate social responsibility that do not necessarily require an industry wide solution. A self regulatory model allows a solution tailored to each entity’s circumstances. If there was genuine community agreement about the value of corporate ethics then such provisions affirming their place in the life of the company would quickly gain acceptance as best practice.
Is it necessary for corporate social responsibility to be enforceable? Probably not, as calls for corporate social responsibility have largely been along the lines of the need for a permissive model so, to this extent then there would seem to be no basis for criticising a self-regulation model on the basis of enforcement difficulties.
A self regulatory model will also ensure that only those companies with a genuine interest/need take the issue forward and this is less likely to result in an approach to corporate social responsibility that is a process focussed “tick the box” approach.
A replaceable rule also provides flexibility providing scope for efficiency improvements and innovation. Additionally, such a rule would recognise that many small and micro businesses use the corporate form and do not have the resources to comply with a prescriptive set of rules.
The corporation is create of statute designed for investors to collect together for a common business pursuit through a legal entity that provided the benefits of limited liability, continuity of existence and simplicity in contractual dealings. As part of the bargain, investors should be able to regulate the general nature of their bargain with the other investors and management through the constitution.
The Corporations Act provisions dealing with the constitution could have a default setting that provided that in the absence of an alternative provision in the constitution of a company the board as the agent of the investors were entitled have regard to their a social responsibility the board would be entitled to do more than adhere to the rules and doing “whatever you can get away with”.
The provision would thus form part of the contract between the members and management and it would be theirs to consider, modify if necessary and reject if they wished. It would not be open to regulators, “stakeholders” or anyone who was not a member or officer to enforce against mangers.
A replaceable rule would also lessen the risk of litigation against the corporation by tangential ‘stakeholders’. A statutory proscription to consider social issues, could mean that section 1324 of the Corporations Act could be used to enable the “stakeholders” to seek remedies against managers for not having, say, proper regard to “the community and the environment”. Whilst little use has been made of this provision in developing the view that officers might owe duties to others in addition to their company that is not to say it could not be. The future battle ground for lawyers looking for ways of representing people like the landholders surrounding the BHP mine in Papua New Guinea, Ok Tedi, might be based around the injunction and corporate social responsibility provisions.
In practice, a constitutional provision of this type would not fundamentally alter the circumstances where a board had somehow failed to properly consider, corporate social responsibility type matters in circumstances where it would have been in the best interests of the company to do so. Those directors would still be liable for failing to satisfy their duty of care and diligence. However, if the directors had taken a decision favouring the long term sustainability of the company which resulted in financial detriment to the current shareholders the directors could argue the existence of the replaceable rule was a relevant factor in determining the ‘corporation’s circumstance’ or the office held and the ‘responsibilities within the in the corporation’.
A replaceable rule would also be consistent with the Principle 10 of the ASX recommendations. Compliance with this recommendation was originally contemplated by a code of conduct but a replaceable rule would be entirely consistent with the recommendation. A replaceable rule would also give managers more certainty than a code of conduct, in terms of their duties to the company and the availability of business judgement defences.
An interesting related development might include combining accreditation and self-regulation. A voluntary accreditation scheme might also be adopted to try to ensure consistencies in corporate social responsibility standards across different sectors. Self-regulation of the type discussed could mean that companies are defining their own corporate social responsibility standards and therefore some entities will be taking on far greater corporate social responsibility obligations than other entities.
As with other corporate governance reforms, a self regulatory approach to corporate social responsibility is the surest way to get meaningful approach to this issue. There is a case for reforming directors and officers’ duties; the changes needed should not be revolutionary. A self regulatory model together with a scheme for accreditation provides a better model for influencing behaviour by institutionalising a change that is permissive and reflective of each company’s own circumstances.
If the social norm has shifted, and there is ample evidence it has, then that pressure can be accommodated in the proposed model. The self regulatory model suggested will allow company’s to create wealth on a sustainable basis, but subject to the requirements of responsible business conduct.
Sources: Letter of referral by The Hon Chris Pearce MP to CAMAC, available at http://www.camac.gov.au/CAMAC/camac.nsf/byHeadline/Whats+NewDirectors%27+duties+and+corporate+social+responsibility?openDocument; Parliamentary inquiry into Corporate Responsibility, see online at http://www.aph.gov.au/Senate/committee/corporations_ctte/corporate_responsibility/index.htm; AFR article 22 September 2004, pg 62; UK White Paper on Modernising Company Law available on the UK Department of Trade and Industry's website at http://www.dti.gov.uk/cld/WhitePaper.htm; James McConvill “Directors’ duties to stakeholders: A reform proposal based on three false assumptions” (2005) 18 Australian Journal of Corporate Law 88, see also - Ian Ramsay, ‘Pushing the Limit for Directors’, The Australian Financial Review, 5 April 2005, 63; R. Baxt, “Directors’ Duty of Care and the New Business Judgment Rule in the 21st Century Environment”, Seminar Paper, Seminar on Key Developments in Corporate Law & Equity, Melbourne, March 2001 cited in Saul Fridman “Corporations Law in the courts and the academy: a dangerous malaise?” Butterworths Corporation Law Bulletin No 23 December 1996; ASX Principles of Good Corporate Governance and Best Practice Recommendations.
posted by Andrew Lumsden @ Friday, May 05, 2006
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