Voluntary to toughen state regulations. Revision of Corporate Law

Voluntary schemes offer a positive aspect in directing business activates, more so in a rapidly evolving environment where regulation and legislation can become quickly outdated. Where governments lack control, business has an essential part in promoting corporate social responsibility, and as such, there is space for a voluntary approach to encourage responsible corporate activities. However, it cannot be disregarded that regulation is more effective with its enforcement and accountability. While businesses do include CSR in their business activities, there is no accountability for not doing so. This could be viewed as a restriction of the voluntary approach to self-regulation, which strengthens the argument for the need for more regulation. Friends of the Earth1 states that:

“while CSR may be valuable regarding promoting better corporate behaviour it can never be seen as an alternative to good public policy and legislation”.

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Thus, it appears that the best approach could be a combination of both mandatory and voluntary approaches, where the regulation would fill in the gaps. The argument presented is that suitable systems of control on business activities remain with the mandatory approach, where the voluntary approach is ineffective, leading to a preference for governments to toughen state regulations.

Revision of Corporate Law in Australia

In Australia presently, s 181(1)(a) of the Corporations Act 2001 (Cth)2 mandates that directors must use their power and act in good faith in the best interest of the corporation. It is assumed that in doing, they may also assume that the best interests of the corporation are equal to that of their shareholders best interests, which is to maximise profits.3 The public interest in issues of CSR on human rights and environmental protection has led to additional efforts to enforce further fiduciary duties concerning stakeholder interests of directors.

Following the public outcry in 2005 and 2006 in respect to the James Hardie case, where the directors had failed to consider the organisation’s duty to stakeholders,4 the Australian Government initiated two separate inquiries concerning CSR.5 Neither report concluded that any revision to Australian corporate law concerning directors duties. However, one the reports, the PJCFS report, recognised directors duties to raise their shareholder’s value and commented that this further obligation would help steer directors to consider stakeholders interests.6 The report concluded that present legislation allows directors to consider the interests of other stakeholders instead of only shareholders and that a perspective with a long-term benefit focus would assist directors to consider greater CSR.7

As a consequence, though the attempts to revise directors duties have been unsuccessful, the subject remains contentious. An argument for the expansion of directors duties is that though present legislation allows directors to consider the interests of stakeholders, it also allows them not to. It could be argued that the corporate legislation does not include the interests of stakeholders and as a consequence does not ensure that directors consider CSR in their decision making. This could be taken even further with an extreme perspective that the absence of regulatory direction could lead to CSR being ignored entirely.8 Although the concerns that the concept of “enlightened maximum maximisation”9 might be utilised to guide directors to consider the interests of stakeholders in their decision making, there remains doubt that directors may ignore certain interests if they are viewed as having no benefit to the organisation. This has resulted in a continued desire to expand the fiduciary duties of directors to ensure the interests of other stakeholders are protected. It could be viewed that the enforcement of this duty under the Corporations Act (2001) should be viewed as eliminating the fear of reaction by shareholders as opposed to raising the burden on directors.10 This would enable directors to consider the interests of all stakeholders in their decision making by referring to regulatory constraints as they would feel safer within the protection of the law.11

Other developed nations, such as the UK and USA, have incorporated this development in directors duties into their law. In the UK, the Companies Act 2006 under s172(1) mandates that directors are explicitly required to take into consideration the interests of wider stakeholders.12 In the USA, the majority of states have implemented constituency statues that either require or permit directors to consider the interest of stakeholders in their decision making other than shareholders.13 However, there has been criticism in both nations due to their apparent inability to give any real benefit to stakeholders, as they give broad discretion to directors when considering stakeholders interests.14 It has been noted in particular that:

‘the US constituency statutes and UK’s Section 172 do little more than provide directors with “a get out of gaol free card”, for it permits them to defend a case for breach by asserting that they did what they did because they were considering the interests of non-shareholding stakeholders.’15

 

Under s172(1) of the Companies Act (UK), the question remains over how directors deal with conflicting interests between various stakeholders.16 There has also been criticism for the lack of legal enforcement, due in part to, which only organisations themselves can take action against directors who have breached their duty.17 The constituency statues in the US have also been considered as a ‘red herring’ and have had minimal impact on the improvement of stakeholder interests.18 The statues do not impose any responsibility for directors duties concerning considering social or environmental impacts.19 This could leave stakeholder interest being overshadowed due to the lack of enforcement.20 On the other hand, despite their criticisms, the developments in the UK and US regulations have provided some guidance for corporations to ensure they promote sustainable development by considering the interests of a wide range of stakeholders. Other countries may adopt similar regulatory developments and use the developments in the UK and US as a basis for their regulatory regimes. Although the move to more regulations has been unsuccessful in Australia thus far, the transition by other nations has shone a light on the issue of corporate law reform.

The path to regulatory reform will continue to persevere, although, the scope of this protracted duty may be too comprehensive and could create challenges to appease the interest of all stakeholders. There will always be room for debate and development in legal reform as conflicts will always arise between different stakeholders. However, the benefits for the public should remain a priority and negate any objections to any legal development. It could be argued that the proposed change is not too farfetched, as most of companies currently consider the interest of stakeholders, and implementing this further duty should not be difficult for directors. Furthermore, the development of the Australian regulatory system would ensure that Australia does not fall behind other nations that are advancing at a quicker pace in this respect. Regardless of the reason, developing regulation would at a minimum enhance the promotion of CSR by Australian businesses.

The importance of transparency

The trend within corporate disclosures has shifted from traditional financial performance to include environmental and social impacts, in part due to the growing concerns over the influence businesses have on society.21 Businesses are being encouraged to supply more information to a broader range of stakeholders to comply with the expectations of society. The information is beneficial to investors so that they can make informed decisions, but also is beneficial to the corporations as it affects socially responsible practices by changing business management practices.22 However, as previously stated, the reporting standards in Australia are much lower than other developed nations, and Australia has initiated even fewer steps to improve these standards.23

In Australia, currently, there are several environmental reporting requirements. These include:

·         The Corporations Act s299(1)(f) mandates that corporations provide directors reports on their performance in respect to environmental regulations;

·         The Corporations Act s1013D(1)(l) mandates the disclosure of financial products with an investment element to “the extent to which labour standards or environmental, social or ethical issues are considered in the selection, retention or realisation of the investment” 30; and

·         ASIC’s s1013DA Disclosure Guidelines provides guidelines to product issuers for disclosure on labour standards or environmental, social and ethical considerations regarding the Product Disclosure Statements (PDS) under the Corporations Act s1013D(1)(l) (ASIC, 2011).

This means that environmental issues that could affect a company’s future financial performance must be reported on by directors. However, despite multiple disclosure requirements, it has been argued that these requirements remain insufficient to allow for greater accountability and transparency. The weakness of these reporting requirements are:

·         A sufficiently severe attitude has not always been adopted by government departments in prosecuting any violations of the required reporting duties;24

·         The requirement to disclose environmental impacts in financial reports is confined to instances where the liability can be easily measured;

·         Corporate reporting is more directed towards shareholders as opposed to stakeholders and as such, directors may negate considering environmental risks or other social risks in their reports in favour of financial risks; and

·         The majority of companies cannot report on environmental and other issues because the majority of reporting options are not mandatory and open to interpretation.

Despite the numerous attempts to change the current disclosure obligations, the PJCFS report recommended that sustainability reporting remain voluntary.25 Though the attempts to toughen disclosure requirements have been unsuccessful, there remains a clear case for mandatory reporting with an emphasis on CSR elements. A main issue with the current voluntary model, apart from the lack of enforcement, is that there is no cleat structure nor uniformity. The information is mostly insufficient to be able to evaluate a corporation’s activities effectively. The lack of a uniformed system makes it difficult to be able to decide on a corporation ethical practices. Corporations are unlikely to highlight their failures in their reports. However, they can highlight the positive results to the extent that these reports almost become a form of advertising. Businesses can decide to exclude any information without any risk being held accountable, which in turn leaves voluntary reporting in no way measurable or comparable so that it becomes difficult to decipher which corporations are socially responsible.

Mandatory disclosures in corporate reporting would provide the below:26

·         A reporting framework that is defined would disallow corporations from deciding what information is excluded and how it is presented;

·         Corporate performance would be measurable and would enable accurate comparisons between corporations;

·         All stakeholders would have access to the practices of companies about their impact on society and the environment; and

·         The public, including investors, would have access to relevant information in relation to corporate activities should they have a concern regarding CSR.

There would be costs of compliance involved with this reporting system. However, it would be offset by the reduced cost of producing glossy public relation reports.27 A mandatory reporting system would reduce the confusion and complexity in voluntary reporting programs. Additionally, directors would be enabled to guide resources to uniform mandatory reporting program as opposed to having to waste resources on selecting a suitable reporting system. There would also be greater efficiency in the market due to corporations being more transparent.28 While it could be argued that Australian corporations are failing to be compliant under the voluntary framework, there is a clear need for greater transparency on their CSR disclosures to ensure they are accountable to society.

It can be argued that although voluntary frameworks provide for positive elements in CSR, it can also be argued that greater regulation will ensure that corporations remain socially responsible. Both aspects of self-regulation and law enforcement have positive and negative arguments, however, perhaps the best solution is a hybrid model where the regulations fill the gaps of a voluntary framework. A voluntary approach could be used where there is no regulation and a mandatory approach introduced where a voluntary approach has failed. It might be argued that voluntary self-regulation requires more time to grow, there remains a need for governments to implement a regulation that controls business practices, avoiding potential violations of human rights and environmental standards.

1 Friends of the Earth (2001), Submission on the European Commission’s Green Paper on CSR, Friends of the Earth, Amsterdam, December, p. 2.

2 Corporations Act 2001 (Cth).

3 Greenberg, D. (2007), “Making corporate social responsibility an everyday part of the business of business: offering realistic options for regulatory reform”, Bond Law Review, Vol. 19 No. 2, pp. 41-57.

4 Jackson, D.F. (2004), Report of the Special Commission of Inquiry into the Medical Research and Compensation Foundation, NSW Government, Sydney, available at: http://nla.gov.au/nla.arc-45031.

5CAMAC (2006), The Social Responsibility of Corporations Report, Corporations and Markets Advisory Committee, available at: www.camac.gov.au/camac/camac.nsf/byHeadline/PDFFinalþReportsþ2006/$file/CSR_Report.pdf.

6  PJCFS (2006), Corporate Responsibility: Managing Risk and Creating Value, Parliamentary Joint Committee on Corporations and Financial Services, available at: www.aph.gov.au/binaries/senate/committee/corporations_ctte/completed_inquiries/2004-07/corporate_ responsibility/report/report.pdf.

7 Nolan, J. (2007b), “Corporate responsibility in Australia: rhetoric or reality?”, Australian Journal of Human Rights, Vol. 12 No. 2, pp. 63-88.

8 Hinkley, R. (2002), “How corporate law inhibits social responsibility”, Business Ethics: Corporate Social Responsibility Report, January/February, available at: www.commondreams.org/views02/0119-04.htm.

9 Jensen, M.C. (2001), “Value maximisation, stakeholder theory, and the corporate objective function”, Journal of Applied Corporate Finance, Vol. 14 No. 3, pp. 8-21.

10 Baxt, B. (2000), “Avoiding the rising floods of criticism: do directors of certain companies owe a duty to the community?”, Company Director, Vol. 16 No. 11, p. 42.

11 Buffini, F. (2005), “Calls to protect corporate conscience”, Australian Financial Review, 23 November.

12 Companies Act 2006 (UK).

13 Keay, A. (2010), “Moving towards stakeholderism? Constituency statutes, enlightened shareholder value, and all that: much Ado about little?”, available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id¼1530990

14 Ibid.

15 Ibid.

16 Ibid.

17 Ibid.

18 Kerr, M. and Segger, M.-C.C. (2004), “Legal strategies to promote corporate social responsibility and accountability: a pre-requisite for sustainable development”, A CISDL Legal Brief, p. 9, available at: www.cisdl.org/pdf/Legal_Strategies_Resp.pdf

19 Ibid.

20 Ibid.

21 The Code of Conduct Bill in the USA is called the McKinney Bill, and in the UK called the Corporate Responsibility Bill (CORE).

22 Turner, R.J. (2006), Corporate Social Responsibility: Should Disclosure of Social Considerations be Mandatory? Submission to the Parliament Joint Committee on Corporations and Financial Services Inquiry, available at: www.aph.gov.au/senate/committee/corporations_ctte/completed_inquiries/200407/corporate_responsibility/submissions/sub05.pdf

23 Ibid.

24 Overland, J. (2007), “Corporate social responsibility in context: the case for compulsory sustainability disclosure for listed public companies in Australia?”, Macquarie Journal of International and Comparative Environmental Law, Vol. 4 No. 2, pp. 1-22.

25 CAMAC (2006, p. 147) considered that voluntary initiatives “have benefits of flexibility and responsiveness to change that cannot be achieved as readily through legislative prescription and may provide a useful model and possible commercial benefits for companies that choose to follow them. There is something to be said for allowing the current activity in this area to continue rather than cutting across it by legislative prescription, particularly where recommended practice is still at a formative stage”. PJCFS (2006, pp. 88-89) noted that “mandating sustainability reporting in the current Australian context would promote form over substance. As a result of these issues the committee believes that it is vitally important for companies to be encouraged strongly to engage voluntarily in sustainability reporting rather than being forced to do so”.

26 Overland, J. (2007), “Corporate social responsibility in context: the case for compulsory sustainability disclosure for listed public companies in Australia?”, Macquarie Journal of International and Comparative Environmental Law, Vol. 4 No. 2, pp. 1-22.

27 Doane, D. (2002), “Market failure: the case for mandatory social and environmental reporting”, paper presented to IPPR seminar – the transparent company”, 20 March, available at: www.hapinternational.org/pool/files/doanepaper1.pdf

28 Ibid.

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