7. How To Answer Tricky Questions

Aren’t the new laws in the Companies Act adequate?

As the ‘Campaign Successes’ section of this booklet explains we have made some important steps forward through successful campaigning about the Companies Act. We especially welcome the steps taken in the Act to make it clearer to company directors that they must give proper consideration to the impact of their company's operations on the community and the environment.

However there is still a long way to go as under the Government's approach, the primary duty of directors is still to shareholders. Though directors must now 'have regard to' other factors including social and environmental impacts in fulfilling their duty to shareholders this is still unlikely to significantly improve the performance of the least responsible companies as it assumes that business success will go hand in hand with responsible business behaviour, which is not always the case. There are many examples of UK companies making record profits whilst causing significant damage to communities and the environment around the world (for example see the stories of injustice from around the world in this booklet).

We need to keep up the pressure for further changes to company law to ensure that directors have a clear duty to minimise negative impacts on their employees, the community and the environment (see the Big Dress Campaign Goal on being Accountable). We also must urge the Government to keep the promises it has made related to the Act, especially that it will review the new system of reporting standards within 2 years and bring forward stricter legal standards if the system is not working (see the Big Dress Campaign Goal on being Transparent). The Act gave very little consideration to the question of companies being liable in the UK for abuses committed overseas which is clearly a vital area that must be addressed (see the Big Dress Campaign Goal on being Careful). Finally all these areas need addressing not just at a UK level but also in Europe and globally where there is a great deal of work to be done as so much dialogue focuses on voluntary measure not legal accountability (see all three Big Dress Campaign Goals).

Are SPEAK anti-business?

No. We believe that if properly managed, the investments brought by multinational companies to communities in both rich and poor countries can help reduce poverty, promote people’s rights, protect the environment and generate growth. Many MNCs already have positive impacts and some are genuinely trying to be accountable and to develop good social and environmental practice.

Won’t more legal regulations make companies less competitive, and mean more ‘red tape’?

All serious companies recognise that some legal standards are essential. Regulation can be useful in developing and maintaining a fair, level playing field for businesses to operate within. Furthermore, some companies already take consideration of their social and environmental impacts. Raising the bar so that all UK companies have to report on and minimise any negative impacts on employees, communities and the environment would mean that responsible companies would not lose a competitive advantage to less scrupulous companies.

We do not believe regulations mean more red tape either. Instead there is evidence that new laws would act as a 'road sign' providing companies with clear signposts. Effective regulation of companies has lead to some of the greatest advances in social conditions in modern times, including vast improvements in air quality and reductions in industrial emissions. Also several countries have introduced tougher regulation on companies and have not lost their competitive edge. For example, Sweden and Finland have high levels of business regulation and and were in the top five most competitive economies according to the World Economic Forum’s Global Competitiveness Report (2005-06). UK business should be leading by example – doing business in a sustainable and profitable way.In terms of ‘red-tape’ we don’t want to explicitly tell company directors how they should go about monitoring and minimising any negative environmental and social impacts but to provide plenty of flexibility for directors to choose a system that would work most effectively for their company.

What about small businesses? Won’t they be over-burdened by increased regulation?

Most of the companies we are concerned about are large companies with an international reach. These companies, rather than small UK businesses, will be affected by the legal changes we are seeking. Also, smaller companies tend to have more immediate relationships with their employees and suppliers and so are more likely to be aware of and could more easily demonstrate that they have considered any problems in their operations. Larger, multinational companies have more complex supply chains, so laws need to ensure they put in place adequate monitoring systems.

Will this mean lots of legal cases will be brought against companies?

The legal changes we are seeking are only likely to result in the worst-case abuses being brought before a UK court through shareholder actions. In the same way, only the most blatant cases of financial mismanagement currently land directors in court. Legal processes are extremely time-consuming and expensive, so there is unlikely to be a big increase in cases being brought for more minor issues. Stronger obligations on companies to report on and take steps to minimise their negative impact will bring benefits to both companies and communities by raising the benchmark against which companies are expected to perform. This will mean that directors of UK companies will have to take a precautionary approach and be aware of their impact on communities and the environment in their planning and decision-making.

Won’t the costs of regulation be passed on to suppliers, producers and consumers?

Most costs are likely to come in the changes companies may have to make to their reporting and auditing systems. These costs are likely to involve short-term costs whilst monitoring and screening systems are put in place. But since all UK companies will be expected to make such adjustments, no one company will lose its competitive advantage and companies should be able to take on board new costs without passing them on to consumers or producers.

Also companies have often over-estimated the impact of new laws, for example the introduction of the minimum wage in the UK was predicted to result in over 1 million job losses, but in reality unemployment fell by 200,000. Ultimately, the changes we want to see will benefit shareholders by ensuring they have better information about their companies’ operations and that the company has a long-term, sustainable future.

What do companies think about changes to laws that regulate them?

The TJM and CORE coalitions have been in discussions with some large UK companies about corporate accountability. Although the Confederation of British Industry or CBI (the main UK business lobby group) publicly states its opposition to new rules on companies, many enlightened businesses have privately stated that they see a benefit in ensuring there is a level playing field that requires all companies to meet minimum social and environmental standards.

What about companies who aren’t based or listed in the UK?

Ultimately, we need international solutions to ensure good corporate behaviour. But 25% of the world’s largest companies are listed on the London Stock Exchange. So changes to UK Company Law would be a first step towards ensuring our own companies and those listed in the UK act responsibly. This would also set a precedent internationally.
One way forward would be to have international rules on human rights to be applied to business through the United Nations. We are also pushing for World Trade Organisation agreements to conform to International Labour Organisation (ILO) conventions that enshrine basic rights for all workers.

Will the changes in the Bill mean that UK law will be applied overseas?

Multinational companies should respect the laws of the countries within which they are operating. The changes to the Bill do not challenge national laws in other countries. The UK Government must make it clear to directors that they cannot hide behind their subsidiaries and suppliers overseas but must do all they can to ensure their companies behave in a responsible manner.

My MP says UK law is based on ‘Enlightened Shareholder Value’ (ESV). What does that mean?

Enlightened Shareholder Value (ESV) asserts that the primary duty of a company director is to manage the company in the collective best interests of its shareholders, but with consideration of wider interests, such as communities, employees and environmental concerns. We believe that this approach, which the Government have favoured, is unlikely to stop cases of irresponsible behaviour, since it fails to explain what a company should do when its profits conflict with wider social or environmental issues. For the law to help ensure that UK companies do not harm the rights of communities, workers and the environment, there must be clear and stronger obligations on directors to not only consider but also to take steps to minimise any negative impacts. We don’t just want directors to think about these issues – we want them to act on them!

My MP says I am misunderstanding company law

The Government has responded to our concerns saying that we are confusing legislation about a vehicle (the company) with legislation about the journey (where you want the company to go). They are arguing that we are trying to put too many specific requirements on companies and that other forms of regulation, such as environmental laws or labour laws should deal with our concerns. We disagree with this. We are calling for general requirements on directors of companies to consider and minimise any negative impact on communities, employees and the environment. This will help to ensure that directors of companies cannot shift their responsibilities to communities and the environment to other parties or play off weaker labour, human rights or environmental laws in one country against another when considering their investment and operations overseas.

Haven’t the Government done a lot already?

The government has said that they cannot regulate for good behaviour. We would agree – ‘good’ corporate behaviour will need to come from voluntary initiatives by companies. But the government should and must put in place minimum standards and regulate to prevent damaging corporate behaviour in the UK and overseas.

An example of why we need to keep the pressure on the Government despite the new Bill being made law is not just that it does not go far enough but also to ensure no steps back happen. An example of the latter occurred in November 2005 when the Operating and Financial Review (OFR) was ditched by Chancellor Gordon Brown in an attempt to placate the CBI. The OFR, only introduced in March 2005, was new regulation requiring the largest companies listed on the UK stock market to produce a report detailing their social and environmental impacts, alongside their annual financial reports. In this U-turn Gordon Brown baffled many companies, investors and civil society groups as many companies were midway through producing their reports. We had to fight hard for reporting requirements in the Bill to then cover this important area. The possibility of our work being undermined is unfortunately ever present.

What Have The Government Done Before The Bill?

At the World Summit on Sustainable Development in Johannesburg, 2002, the UK Government committed itself to ‘…actively promote corporate responsibility and accountability…’ and has publicly stated its commitment to ‘Corporate Social Responsibility’ (CSR), claiming to be a leader internationally on the issue and even appointing a Minster for CSR within the Department of Trade and Industry. Until the changes to UK law through the Companies Act the government was relying on a variety of international initiatives to fulfil this commitment, such as the UN’s Global Compact and the OECD’s Guidelines for Multinational Enterprises, which are entirely voluntary in nature and not legally binding on companies. This is still central to its discussion of these issues at an international level and SPEAK believes that this is a mistake because it has meant they have encouraged companies but not legally required them to take environmental and social considerations into account. While efforts to encourage the positive impact of companies should continue, and some companies are making real progress, we need legal accountability not voluntary responsibility. We need to challenge the government to do more!

My MP says that laws don’t deny justice to people overseas who are affected by irresponsible UK companies

We believe company directors should be considering and taking steps to ensure their companies’ operations, subsidiaries and suppliers not only comply with local labour and environmental laws but also respect the rights of workers, communities and their local environment wherever they work.

At the moment, laws fail to ensure directors do this and offer no clear means for people whose rights have been violated to get justice.

Why should affected communities be able to bring legal action against a company in the UK?

Communities harmed by irresponsible business practices should seek justice in their own local or national legal systems first of all. But sometimes this is not possible. For example, 20,000 people died and tens of thousands were critically injured by a devastating gas leak from a Union Carbide factory (a US company) in Bhopal, India in 1984. More than twenty years on, there are still reports of groundwater contamination. The chief executive of Union Carbide and the company itself have both been charged with manslaughter and ‘culpable homicide’ in India, but the charges have not been carried out as both have refused to appear before the Indian court. To date, few of the victims or their families have received adequate compensation.

Examples like this demonstrate why communities affected by corporate irresponsibility should be able to get justice in the home courts of the company responsible.

Isn’t the business focus on voluntary corporate social responsibility (CSR) enough?

Over the last 10 years many different business codes of conduct relating to companies social and environmental impacts have been drawn up creating the modern area of ‘Corporate Social Responsibility’ (CSR). However a plethora of studies and cases where companies involved in ‘best practice’ voluntary initiatives still cause harm to workers, communities and the environment indicate that voluntary measures are not sufficient and must be made binding or be replaced by others with legal teeth.

CSR often means companies themselves define responsible behaviour and decide where they are falling short and where they have gone far enough - making them in effect police, judge and jury. As CSR is about voluntary commitments there are rarely any form of enforcement measures to ensure compliance with codes that have been agreed to. At worst, some multinationals are using voluntary initiatives as fig leaves behind which they can hide bad practice or in order to argue for fewer laws and less regulation.

Aren’t voluntary measures and consumer pressure making companies act responsibly?

Some companies have put a lot of time and energy into drawing up ‘corporate social responsibility’ procedures and policies. But unfortunately there are some companies that hide bad behaviour behind glossy brochures and fine-sounding promises. That’s why we need laws that will require all companies to be truly accountable.

Pressure from customers has definitely helped change the behaviour of some companies, but only 5% of customers consistently shop ethically, so we need other mechanisms alongside consumer pressure to hold companies to account. Poor behaviour by multinational companies is too serious to leave to voluntary initiatives – instead there should be clear laws that set standards right across the board.

Won’t market pressure force companies into more socially responsible behaviour?

There are a number of problems with this argument:
• When it is optional to consider these issues too many companies will continue to put profits before people. There is a lack of incentive to do otherwise and many firms have only adopted policies when they believe there is a risk to a brand but this is not relevant to many businesses.
• Short-term pressures for profit from shareholders dominate and so too few companies consider issues such as long-term social and environmental impacts.
• Companies that do take their social responsibilities seriously can be financial disadvantaged when competing with other companies who only take short term profits into account.
• There are too many competing standards and codes with varying levels of compliance required meaning companies are only likely to adopt practices which they believe they can achieve.
• Actions companies take can in reality just be another form of PR delivering no real change.
Changes in the law would address these weaknesses and create a level playing field for all.

What about the world trade talks?

We will still be keeping a close eye on world trade talks. Although the UK Government has shifted its rhetoric to agree with the Trade Justice Movement that poor countries should not be forced to open their markets, we now need to see it influencing its European allies and ensure these words are put into action.

How are multinational companies influencing and benefiting from World Trade Organisation talks?

Over recent years many multinational companies have used their influence to push rich and poor country governments to negotiate trade rules that will benefit their business. For example, corporate lobby group the European Services Forum (ESF), which represents EU services companies such as Barclays and British Telecom, has privileged access to high-level EU trade policymakers. The ESF has been pressuring EU officials to force poor countries into opening up their markets for services through WTO talks.

The ESF’s lobbying appears to have paid off. Despite huge opposition from developing countries, the EU succeeded in getting a new agreement on services at the WTO summit in Hong Kong in December 2005. This will mean that developing countries will be under greater pressure to open their markets for services, including water, healthcare and education. This is why we need to stop rich country governments from pushing poor countries to open their markets, alongside rules to stop companies profiting at the expense of people and the planet.

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