Article contents
Promoting more socially responsible corporations through a corporate law regulatory framework
Published online by Cambridge University Press: 02 January 2018
Abstract
This paper aims to lay the foundations for a more critical approach to the relationship between corporate social responsibility (CSR) and corporate law. Limitations on legislative approaches including directors’ duties, disclosure of information, sustainable decisions, direct promotion and corporate internal management structure are critically analysed, trying to find well thought-out and effectively implemented adjudication that provides meaningful instruction for regulating CSR. The paper explores the manner in which corporate law may contribute to accommodating CSR principles within corporate strategies, in order to establish a transformative legal regulatory framework within corporate law by using the authoritative legal mode to promote corporate regulatory mechanisms. The paper critically studies a few legislative measures supported by the relevant legislative experiences from various jurisdictions as examples of currently enforced CSR laws at national level, in order to offer comprehensive and potentially effective legislative suggestions for accommodating CSR elements. However, a ‘one size fits all’ approach is clearly not desirable, and these suggestions should be interpreted and implemented in a locally relevant manner, according to path dependence theory.
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- Research Article
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- Copyright © Society of Legal Scholars 2017
Footnotes
I am immensely grateful to the anonymous referees for their constructive and insightful comments. I am greatly indebted to Professor Andrew Keay for providing me with valuable comments on the draft of this paper. I also want to thank Professor Blanaid Clarke for her encouragement and support.
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113. Ibid.
114. A provision that is similar to Esvp, also introduced in the new Companies Act, states that ‘a director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment’ (s 166 (2) of Indian Companies Act 2013).
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117. Apart from jurisdictions discussed in section 2, the regulatory initiatives were made in Canada (Continuous Disclosure Obligation NI51-102), Norway (Accounting Act (Regnskapsloven) 1999), Denmark (Aarhus Convention on Access to Information, Public Participation in Decision-Making and Access to Justice in Environmental Matters 1998), South Africa (Code of Corporate Practice and Conduct/The King's Code 2002) and the USA (see Notice of SEC Registrants’ Duty to Disclose Legal Proceedings 2001); according a 2015 report by the Initiative for Responsible Investment at the Hauser Institute for Civil Society at the Kennedy School, 23 countries have enacted legislation requiring public companies to issue reports on social and environmental issues including, apart from the countries that have been mentioned here, Argentina, China, the EU, Ecuador, Finland, Germany, Greece, Hungary, Ireland, Italy, Japan, Malaysia, the Netherlands, Spain and Taiwan; see Initiative for Responsible Investment Corporate Social Responsibility Disclosure Efforts by National Government and Stock Exchanges (12 March 2015).
118. For example, KMPG believes, from a practical point of view, that corporate responsibility reporting has established its position as the de facto law for business, delivering a compelling insight into the expectations that companies face; see KPMG, above n 35, p 2.
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122. Section 414C(7)(b) Companies Act 2006.
123. Section 414C(7)(b) Companies Act 2006 (Strategic Report and Directors’ Report) Regulation 2013.
124. The Business Review was the previous legal requirement before the enforcement of the Companies Act 2006 (Strategic Report and Directors’ Report) Regulation 2013. Legislatively, under s 417 of the Companies Act 2006, directors are obliged to include in the Business Review ‘a fair review of the company's business and a description of the principal risks and uncertainties facing the company’. The purpose of the Business Review was ‘to inform members of the company and help them assess how the directors have performed their duty under Section 172’. The obligations imposed on quoted companies are more onerous in comparison. Their Business Review must ‘to the extent necessary for an understanding of the development, performance or position of the company's business’, include ‘the main trends and factors likely to affect the future development, performance and position of the company's business and information about environmental matter, the company's employees, social and community issues’.
125. Section 414C (1) Companies Act 2006.
126. Ibid, at 442.
127. See Art 5 of Chinese Company Law 2006 (Ccl 2006); ss 134–135 of the Indian Companies Act 2013.
128. This implies that the controlling bodies of companies, when pursuing the interests of their shareholders, have to be socially responsible, and responsible to internal and external stakeholders.
129. The abstract provision could act as a guidance principle for future provisions, such as: detailed corporate responsibilities at different levels; enforcement measures for these responsibilities; directors' duties towards stakeholders in realising these responsibilities; and corporate liability and directors' liability in breach of these responsibilities.
130. Typical primary stakeholders are employees or creditors who input human capital and loan capital to companies, while shareholders inject equity capital.
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141. On the basis of empirical research, human rights issues have been largely ignored by corporations in their corporate reports: see Li, Z and Cui, XN Corporate Social Responsibility in China (Beijing: China Economic Publishing House, 2011)Google Scholar. This may be a useful opportunity for the UN to introduce human rights law and jurisprudence developed by the UN treaty bodies to the Chinese legal and constitutional system. See Subedi, SP ‘China's approach to human rights and the Un human rights agenda’ (2015) 14 Chinese J Int'l L 437 CrossRefGoogle Scholar.
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143. See eg O Lui ‘Mining companies explain their operations abroad – and so do their problems’ CSR Asia, 7 October 2008. However, it is argued that the settlement of human rights related issues still has a long way to go in China: see H Zhang and C Qian ‘Merging business and human rights in China: still a long way to go’ (2014) 76 Focus, available at http://www.hurights.or.jp/archives/focus/section3/2014/06/merging-business-and-human-rights-in-china-still-a-long-way-to-go.html (accessed 22 February 2016); see also Hanlon, RJ Corporate Social Responsibility and Human Rights in Asia (Abingdon: Routledge, 2014) pp 91–116 Google Scholar.
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155. This concept of ‘comply or explain’ originated in the UK with the Cadbury Report in 1992, which provided the first serious code, and states that a company should comply with a set code of practice, but if it does not then it must state this in the annual directors' report and explain why; see Keay, A ‘Comply or explain in corporate governance code: in need of greater regulatory oversight’ (2014) 34 Legal Stud 279 CrossRefGoogle Scholar; MacNeil, I and Li, X ‘“Comply or explain”: market discipline and non-compliance with the combined code’ (2006) 14 Corp Govern: Int'l Rev 486 CrossRefGoogle Scholar; Andres, C and Theissen, E ‘Setting a fox to keep the geese – does the comply-or-explain principle work?’ (2008) 14 J Corp Fin 289 CrossRefGoogle Scholar; Arcota, S, Brunob, V and Faure-Grimaud, A ‘Corporate governance in the Uk: is the comply or explain approach working?’ (2010) 30 Int'l Rev L & Econ 193 CrossRefGoogle Scholar; Seidl, D, Sanderson, P and Roberts, J ‘Applying the “comply-or-explain” principle: discursive legitimacy tactics with regard to code of corporate governance’ (2012) 17 J Mgmt & Govern 791 CrossRefGoogle Scholar.
156. For example, it is suggested by Horrigan that new rules are needed, with governments, companies and the community all playing a part and proposing a framework of international agreement focusing on CSR; see Horrigan, above n 19, pp 269–270.
157. Kerr et al, above n 150, p 100; see also BE Olsen and KE Sorensen ‘Strengthening the enforcement of CSR guidelines: finding a new balance between hard law and soft law’ (2014) 41 Legal Issues Econ Integ 9.
158. For example, corporate codes of governance to which listed companies should adhere could be one of the legal documents that help to promote CSR. They are useful in the context of voluntary principles that acquire recognition by companies, international financial institutions and civil societies as the result of an industry drive towards self-regulation, globally re-enforcing norms that have received multilateral and international acceptance; see B Nwete ‘Corporate social responsibility and transparency in the development of energy and mining projects in emerging markets: is soft law the answer?’ (2007) 8 German L J 311 at 327. As another example, stock exchanges require social and environmental disclosure as part of their listing requirements: Australia's ASX, Brazil's Bovespa, India's Securities and Exchange Board, and the London Stock Exchange; see Initiative for Responsible Investment Corporate Social Responsibility Disclosure Efforts by National Government and Stock Exchange (12 March 2015).
159. Pillay, above n 104, p 136.
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169. RK Sithanen ‘Riding out the global crisis: saving jobs, protecting people, preparing for recovery’ (2009) 4 para 16, cited by Pillay, above n 104, p 227; see also Ragodoo, NJF ‘Csr as a tool to fight against poverty: the case of Mauritius’ (2009) 5 Soc Respons J 19 CrossRefGoogle Scholar.
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171. Section 135 Indian Companies Act 2013; the government shifted responsibility to corporate sectors, and it is estimated that the law will cover about 3,000 companies in India and about US$2 billion per annum of expenditure on CSR activities related to social welfare initiatives. See Ernst and Young ‘Understanding the Company Bill 2012’ (2013), available at http://www.ey.com/publication/vwluassets/ey_understanding_companies_bill_2012/$file/ey-understanding-companies-bill-2012.pdf (accessed 28 July 2016); Ernst and Young ‘Corporate social responsibility in India: potential to contribute towards inclusive social development: Global CSR Summit 2013, an agenda for inclusive growth’ (2013), available at http://www.ey.com/Publication/vwLUAssets/EY-Government-and-Public-Sector-Corporate-Social-Responsibility-in-India/$File/EY-Corporate-Social-Responsibility-in-India.pdf (accessed 20 February 2016).
172. It is argued that since time immemorial, CSR has had its origins in Dural, The Great Book of Tiru Valluvar’s Verses; see C Raja Gopalachari Kural, The Great Book of Tiru Valluvar (Hindu Books Universe, 2003), available at www.hindubooks.org/dynamic/modules.php?name¼Content&pa¼showpage&pid¼44 (accessed January 2016).
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177. For example, the 2% requirement will result in a reluctance to comply for loss-making companies, and it is not clear whether the list of CSR activities provided in Sch VII is an inclusive or exhaustive list.
178. Comments of Venkateshwaran, partner and head of accounting advisory services at KMPG India ‘India now only country with legislated CSR’ Business Standard 3 April 2014); available at http://www.business-standard.com/article/companies/india-now-only-country-with-legislated-csr-114040300862_1.html (accessed 28 July 2016).
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189. This legislative approach may be traced not only to the ESVP in the UK Companies Act 2006, as discussed in the last section, but also to Art 1174 of the Italian Civil Code, which provides that performance can also correspond to non-monetary interests of the creditors, and Art 1141 of the Code, whereby an agreement in favour of a third party may be considered admissible if it is relevant to the interests of the stipulans (the contracting party).
190. 134 S Ct 2751 (2014).
191. Ibid, at 2771.
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200. Such as the Un Global Compact, the Ruggie Principle, the Oecd Guidelines or international standards such as Iso 26000.
201. Buhmann, above n 15, at 192.
202. For example, the strategic report from the Uk Companies Act could be helpful for other jurisdictions (s 414C (7)(b) Companies Act 2006 (Strategic Report and Directors’ Report) Regulation 2013).
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