Guest Speaker - Annual General Meeting, 29 Nov 2001
David Jackson, General Counsel & Company Secretary, Powergen plc

CORPORATE SOCIAL RESPONSIBILITY – HERE TO STAY?

Good afternoon ladies and gentlemen. It is a great privilege and a pleasure to be asked to say a few words to you on the occasion of your Annual General Meeting.

I have been asked to reflect on whether corporate responsibility is here to stay.

The explosion of thinking on issues relating to corporate social responsibility seems to have occurred over the last two or three years.

Or at the very least, that is when it has, for a variety of reasons, appeared on the agenda of many bodies and organisations, but only slowly with the media and the financial community.

There are those who would suggest that in the light of what is perceived to be:-

• a gathering world recession
• a change in attitudes following the terrible events of 11 September; and
• generally, a lack of precision over what corporate social responsibility is

that this whole topic is, in effect, a “one day wonder”.

Let me nail my colours to the mast right at the outset. I do not believe this is the case.

There is, I believe, an issue of whether corporate responsibility or corporate social responsibility is a clearly articulated concept. I agree that, given the present state of its development in the UK, some companies could see it as somewhat of a moving target.

Because of this, companies may be deterred from trying to hit it with the accuracy that is required.

There is, in my view, enough definition, momentum and focus for me to be confident that CSR is really here to stay.

Having said that, I need to be clear on what exactly is here to stay; that is a need for companies to own their actions and interactions with all the communities in which they operate and a willingness by those companies to be transparent and open about this. A willingness to report on their strengths and their weaknesses and a desire to learn from and endeavour to set best practice.

In my view what will emerge is an agenda dictated by the companies, rather than the media, pressure groups, ethical funds etc., with their own agendas. These groups have played their part in pricking the companies consciences. It is the companies who will now take this agenda forward and, indeed, as the research mentioned at the beginning shows, it is the CEO who must be the champion.

As I said earlier, there are those who believe that there is insufficient definition. We, therefore, need to ask “What is corporate responsibility or corporate social responsibility?”.

Well, that’s a very good question.

As I am sure you all know, you can go and look at the published documentation of many different bodies and organisations and you will find the issue defined in different ways. The differences may only be slight. It is a very broad concept and can include and exclude issues almost at a whim.

And that’s not surprising. The various organisations who have been working in this area all come at it from different aspects; inevitably, therefore, they will bring their own slant to it.

It’s an issue that I have had to wrestle with recently. I am working with a group from Business in the Environment, part of Business in the Community, to try and develop a CSR Index. As you may know, BIE launched some 6 years ago their index of environmental engagement. This has been extremely successful and has, I believe, set the benchmark within the UK. The Index has been used by the NAPF for the past two or three years in its voting issue service to determine a company’s engagement and performance in environmental matters.

Following Bill Coburn’s report on “Winning with Integrity” which was published about a year ago, BITC have been working on putting together a CSR Index which will work much in the same way as the environmental index. My group, charged with developing this index, has actually spent some time trying to be quite clear what we mean by CSR.

It’s often the word “social” put between the words “corporate” and “responsibility” that gives the problem. It would seem to raise thoughts in people’s minds of “socialist” connotations.

I believe it’s actually quite straightforward. When one talks about social responsibility, I believe we are trying to define a company’s corporate responsibility to society generally.

This is an important concept because it differentiates where many western companies have been for many years, namely solely thinking in terms of their responsibilities to their shareholders and rather than to a wider society as a whole.

I agree there is no agreed definition of CSR. However, for the purpose of today, I adopt the view I have just given. So why does it seem so high on the agenda now? Let’s be quite clear. We are seeing what is essentially a “bandwagon” effect. What, therefore, are these different influences that are bringing this about?

Well, in no particular order:-

• We have the recent pensions legislation which is, for the first time, requiring funds to set out their own criteria for socially responsible investment.
• We have the growth of the desire for ethical investment. By this, I mean firstly shareholders wishing to invest in funds made up of shares which are perceived to be ethically based and, secondly, somewhat in response to this, a growth of indices which, again, try and measure companies performance and engagement in these areas. Currently, the mostly authoritative is probably the Dow Jones Sustainability Index. We have our own imitation of that in FTSE4Good, which was launched during the Summer of this year. Both attempt to measure where companies are. I believe Dow Jones does it better.
• There is the general ground swell of public opinion which has placed pressure on companies to consider reputational issues and the damage that can be done to their brands by inappropriate actions. To some extent, the oil and mineral companies have been in the forefront of criticism and have responded very positively. Indeed, their reaction has added impetus to the debate because of the very lead that companies like BP have taken in establishing policies and procedure to demonstrate their good citizenship.
• This has been coupled with the increasing use of the concept of a company’s licence to operate. The idea that the shareholders in a company give the directors and managers freedom to operate on their behalf. If, however, that trust is betrayed in any way, that licence can be removed. The trust can be betrayed if the companies reputation is damaged.
• In the UK, we have had over the last 10 years, a growing corporate governance agenda. Reports of city worthies which were often knee-jerk reactions to specific problems that the legislation could not deal with quickly enough, have advanced the corporate governance agenda. The Turnbull Report proposals on internal control have now been moved into broad issues of corporate risk management and, in turn, the Association of British Insurers have further developed that risk management by requiring companies to report specifically on how they deal with social and environmental risks. This is a significant development.
• Separate from the informal approach, we have the development of legislative initiatives. In its first term in office, the Labour government initiated a comprehensive review of English company law. Company law, which has developed piecemeal, has not changed fundamentally since the days when the first companies were set up to develop railways travelling across the country in Victorian days. At a very early juncture, the Commission looking at this matter had to take a decision as to whether they intended to adopt what was seen as a “pluralist” approach or that of the “enlightened stakeholder”.
  

  Historically, UK directors owe their duties to the company and, in essence, that means to the shareholders. A pluralist approach would have broadened that responsibility to include many of the stakeholders who we now see appearing in the CSR debate.

  This was thought to be too radical a departure and, indeed, in legal terms, the responsibility may have been difficult to frame. The Commission, therefore, lighted upon the idea of the enlightened stakeholder. Under this concept, the directors still retain their historical obligations to the shareholders. However, they will be encouraged, through legislation, to demonstrate that they had considered their actions upon a much broader community. In the final version of the report that has been submitted to the government, this concept has taken root and the Commission recommends that companies specifically report on these issues in their annual reports each year. It is believed that this recommendation will be carried forward into legislation over time.

Separately, the European Commission has been working on this whole area and a green paper has now been produced. It is believed that this will be given substantial focus by the current Belgian president.

The fact that these matters are now being looked at in terms of legislation on both sides of the Channel, means that these issues are very much here to stay.

This last point raises an interesting issue. In last week’s “Economist”, it is argued that CSR is not an issue for companies but for governments. This is a view that is supported by German companies who have little or no engagement on CSR. This position may be tenable while they remain within their own jurisdiction. The position will be more interesting in a global market when they acquire other companies in countries where CSR is a higher priority. These companies see this as a matter for government. Interestingly, in the UK, it is clear that the government sees this as an area of social policy which they wish to place on companies!

The issue of legislation is key to this area as quite often national attitudes will depend upon legislation or government responsibility. We have seen the attitudes in Germany. In the US, it is strictly a matter of compliance. The law is far more developed in requiring companies to take particular actions.

It is difficult, when considering all these different influences, to argue that corporate social responsibility will disappear from the corporate agenda. Equally, in considering the breadth of issues, there is a very real challenge for companies to responding a coherent fashion.
There is a clear challenge because it is not evident whether the voluntary regime will run in parallel with a future statutory regime or whether it will be substituted.

I said at the outset that a number of the pressures that I listed would not halt the development of the CSR agenda.

It would be very wrong to say, however, that these influences have no effect at all.

Companies are facing economic, business and financial pressures. These are not going to go away and will have an effect on the way in which companies respond to all these pressures. I believe that there will be two major developments.

Firstly, there will be a sorting out of the market place. Companies will not want to respond to every questionnaire they are sent. There will be a move to work from common data, rather than trying to accommodate each separate group’s particular demands.

Secondly, and perhaps more radically, companies, I believe, will seize the agenda. There is enough pressure on the companies for them to respond in a responsible and comprehensive fashion or companies voluntarily to be involved in setting the standards.

Why do I say this? There are two reasons.

Firstly, when one analyses all the pressures that are on companies to engage with CSR, the focus is on the company. The information comes from the company. The actions come from the company. Companies have it within their hands to determine how they wish to be judged.

Secondly, much of the focus on CSR has come from the governance/compliance/PR wing of companies. As with a number of other initiatives, this has led the whole area to “get off on the wrong foot”. Turnbull compliance started in this way. It was seen as a challenge by many businesses. In many ways though, companies were directly doing 80/90% of the risk management envisaged by Turnbull. They just had to document it. That may seem over simplistic but in many cases this is what occurred.

I believe this to be the case with CSR. It is a far more complex task and the input that will be required will be spread more widely within companies. Work is already going on within BITC to encourage companies to engage in this way.

That being said, over the next year or so, companies will come to believe that it is in their interest to become involved in the CSR debate; that the information that is available within their own businesses will allow them to engage; that they do not require expensive and sophisticated CSR departments. What they need is a will.

It is a challenge – but it can be achieved.

In May this year, I spoke at another conference on financial reporting. There the thrust was to consider how environmental and CSR reporting could be made part of the financial agenda. I identified 4 actions which I, unashamedly, repeat here:

1. Companies do need to do some work on internal practice. Financial and social reporting needs to be integrated.
2. There is a perception gap. There are a large number of stakeholders all looking for different things. These must be brought together so that companies can deliver.
3. There needs to be rationalisation of the indices industry.
   
4. Finally, all this should be done on a least cost basis so that a CSR compliance industry is not created.

To repeat myself, this is achievable.

Related links:
Business in the Environment
Business in the Community

If you have any comments or queries arising from this speech please email Elizabeth Forbes, Committee Member, Corporate+Financial Group.