A Recent Case On Csr Law Company Business Partnership Essay

Published Date: 02 Nov 2017

Introduction:

Corporate Social Responsibility (CSR) recently has become an important element of businesses and corporation worldwide. CSR is driving its influence from the power of media and the pressure groups that are formulated for a particular reason (E.g. Greenpeace). With time, Social Corporate Responsibility is gaining a legal presence under the Common Law. CSR does not have a universally accepted definition, many businesses or legal authorities define it differently. The main concern of CSR is the Stakeholders which are any person or a group of people who affect a corporation or get affected by it.

According to The World Business Council for Sustainable Development "Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large" [1] . This definition looks at CSR as way for the business to contribute to the betterment of society and the workers of the company in an ethical way while making some improvements into the quality of life for those stakeholders of the corporation. On the other hand, European Commission defines Corporate Social Responsibility as "A concept whereby companies decide voluntarily to contribute to a better society and a cleaner environment. A concept whereby companies integrate social and environmental concerns in their in their business operations and in their interaction with their stakeholders on voluntary basis" [2] . This definition extends and widens the CSR view to include the business operations and its affect on the environment, also how it interacts with the stakeholders. Later in 2011 the European Commission changed their definition to "the responsibility of enterprises for their impacts on society" [3] 

History:

H.R Bowen was the first to talk about Corporate Social Responsibility, wrote in Social Responsibilities of the Businessman (1953) "Pursue those polices, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society" [4] . He stated that company's decision should be aligned with society's norms. His work inspired academics to carry on research on this topic. Walton (1967) said "The concept of social responsibility recognizes the intimacy of the relationships between the corporation and society and realizes that such relationships must be kept in mind by top managers and the corporation and the related groups pursue their respective goals" [5] . Walton took a step forward and suggested that there is a relationship between the corporation and society and it should be kept in mind when pursing corporation's goals. Furthermore, Frederick (1994) mentioned "Corporate social responsiveness refers to the capacity of a corporation to respond to social pressures" [6] . Frederick looks at the responsive CSR which a corporation would only occur when a crisis occurs. In 1992 Cadbury Report was published, it was concerned with the main principles of Corporate Governance, which stated responsibilities of two agents. The first are the board of directors have the responsibility of making sure that the company is in complacence with Cadbury Code. The Second is the role of the auditors who have to make sure that the directors' statements are verifiable. [7] Next, the Greenbury Report came into existence in 1995 which suggested that non-executives should be in the remuneration committee and have the responsibility to set executive remuneration packages and the importance of disclosure of such information. [8] 

Types of CSR:

There are four types of Corporate Social Responsibility which are Economic Responsibility, Legal Responsibility, Ethical Responsibility and Philanthropic Responsibility. [9] By looking at the economic responsibility we are covering the profitableness of a company. A company has to be profitable first to be able to conduct business. Otherwise it will not last and would be liquidated to cover its debt obligations and the remaining would be distributed among shareholders who invested funds into the business. Therefore, first has to focus on being profitable. Next is the Legal Responsibilities, which focuses on making a company legitimate. This falls under the Legitimacy Theory, were the company takes the necessary steps to make its business legal under law and comply with community expectations on how the business should operate. They include environmental laws and labor law. For example, the government sets a maximum pollution emission for a factory, by complying with that the company becomes legitimate. Following the Economic and Legal Responsibilities (meeting basic business requirements) there is the Ethical Responsibilities. This responsibility of CSR is concerned with the decision making process and the company doing what the owners think is right. This is part of the stakeholder theory where a business thinks about the stakeholders and their well being. For example, the company starts paying fair wages for the amount of work and responsibilities. Finally Philanthropic Responsibilities is when the company takes an extra step after meeting all of its other responsibilities. Which means the company would include other stakeholders' welfare and benefit in the decisions it takes.

A Recent Case on CSR [10] :

In April 2010 BP faced a disaster in the Gulf of Mexico. This disaster was caused by Deepwater Horizon oil well explosion. Which in return caused an oil spill in the Gulf of Mexico and killed many and left others injured. What the company did was disclosed information that there is no serious danger on the public and the environment. They used the power of media to convey this message to the public. Latter on it came to the public attention the seriousness of the problem and its effect on the environment and wildlife. It had a severe effect on BP's share price and the company's reputation was at stake. Because their disclosure was not in the public interest and it was illegal because once a company discloses something it is legally binding, and the information disclosed was not sincere. Such action forced the US government headed by Obama to intervene, where he asked BP not to pay out any dividends and set up a fund to overcome this disaster. Even though, BP is a British company and the US cannot exercise legal power over it, the company did not pay dividends that year and announced that it is working on solving the problem. Compensation claims were settled in the United States courts, which are known for giving higher damages' awards than others.

The Gulf of Mexico disaster raised an issue "the distribution of oil fields around the world is such that the next accident, if lessons are not learned, could quite possibly take place in a jurisdiction with a legal system less accessible to the general community" [11] . Which means if the same incident took place in a country with a less powerful legal system and not accessible to the general public, would lead to an environmental disaster that would affect the world. Corporate Social Responsibility to be effective in those situations needs a universally accepted and legally enforceable power.

The Directors of BP could be accused under the English law of breaching section 172 of the Companies Act 2006. Since the disclosure and press releases they have made were not in good faith and did not lead to the success of the company. Also they did not show that BP has the desire of maintaining a reputation of high standards of business conduct. It could be a breach in Corporate Governance policy, and the directors could be liable to BP's shareholders. Given that they expect the directors to act in the best interest of the company and shareholders' wealth maximization.

Directors Duty and Section 172 of Company's Act 2006:

In 1997 Tony Blair was calling for financial regulatory and corporate governance reform. In one year time Blair's government was able to setup the Company Law Review Steering Group (CLRSG). Their main task was to "Facilitate enterprise and promote transparency and fair dealing" [12] . In 1999 CLRSG published their consultation document it stated that under the current UK system company law is focused on the benefit of shareholders. However, Blair was very interested in the concept of "Enlightened Shareholder Value", which means "value of shareholders can only be maximized if the interests of other stakeholders are also catered for." [13] This means that in order to obtain a greater shareholder value that is captured via higher share price or increase in capital, the firm as to look after the interests of its stakeholders which the business was created for. This could be achieved if there is a co-operative environment between various stakeholders. Since stakeholders include customers, suppliers and employees, by having a good relationship with them the company would have better returns and operations would be smoother. This would lead directors to disclose more information voluntarily because he wants to keep a good relationship with the company's stakeholders. This means that companies should be more socially responsible towards society and maintaining a good relationship with them, while keeping in mind that this would lead to creating a better shareholder value. At the same time another approach was developed which is called "Pluralist Approach". "This approach argues that preference should not automatically be given to shareholders, but management should seek to balance potential conflicting interests between different stakeholders." [14] This approach is more socially responsible than the Enlightened Shareholder Value, since it tries to balance between shareholders and other stakeholders. Giving shareholder the main focus is not always beneficial to the company's long term goals, because shareholders focus on returns on their investments and share price which sometimes could be considered as a short term goal. 'A good example of this would be Tesco in 1990s when the UK was in recession and Tesco found itself in a hard position. The CEO Sir Leahy led to a great change in Tesco, he asked for a team to be formed and look at what consumers want and need. Over 250,000 customers were consulted, and the result was introducing Tesco Loyalty card, 24 hours shopping and many more.' [15] This was a reason for Tesco's success and becoming a market leader. They have implemented CSR in a way that had lead to their success; they have integrated the concept into their goals and objectives. If CSR is used as a separate activity not an integrated one, it will have a cost on the business with no or small positive impact on the business's reputation. The pluralist approach tries to find a balance between different stakeholders which includes shareholders when they are taking business related decisions.

CLRSG rejected the Pluralist approach and decided to go with the Enlightened Shareholder Value approach because the former approach is highly subjective and the director's job would be very hard by looking after many groups' needs and requirements. If for any reason he was not aware of a particular group, they could easily take him to court for illegal and irresponsible decision.

A director is "An appointed or elected member of the board of directors of a company who, with other directors, has the responsibility for determining and implementing the company’s policy." [16] Since the director is appointed by the shareholders, they are considered as agents of the shareholders. They are bind by law to present a duty of care and diligence and also have a fiduciary relationship with the shareholders. In other words they have to behave in the best interest of the principle and keep information that is not supposed to be known by the public or competitors between them and the principle. Finally, in 2006 CLRSG was able to propose a document which was accepted by the Government and the result of this was the Companies Act 2006. In sections 170-175 of this act the duties of directors was explained. These duties include Fiduciary Duty, Duty to Act Within Powers, Duty to Promote Company Success, Duty to Exercise Independent Judgment, Duty to Avoid Conflict of Interest. They are mainly concerned with Corporate Governance; however CSR could be better understood under section 172 "Duty to Promote the Success of the Company".

"A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:

(a) The likely consequences of any decision in the long term,

(b) The interests of the company's employees,

(C) The need to foster the company's business relationships with suppliers, customers and others,

(D) The impact of the company's operations on the community and the environment,

(E) The desirability of the company maintaining a reputation for high standards of business conduct, and

(F) The need to act fairly as between members of the company." [17] 

This section of the companies act shows that the director has to look after the success of the company and find ways to promote it. He also has to look after the benefits of its members; which means he has to keep a close attention after employees, suppliers, customers and the community. He has to do so in a bona fide manner, by doing what he thinks is right. Hutton v West Cork Railway Co (1883) was one of the cases that lead to giving attention to the stakeholder rather than just focusing on shareholders. The word "must" make the duty under this section an obligation not a recommendation. It makes this section enforceable, since it looks after some of the stakeholders which are specifically mentioned in the act. This requires the director to take of how they are treated and he has to look after their welfare. In other words, this section gives Corporate Social Responsibility a legal foundation that makes it more legitimate. It makes companies consider the welfare of the stakeholders not just the shareholders. This section also covers the enlightened shareholder value approach in how it specifies the director's duty. It suggests that the director to be able to promote the successes of the company which is maximizing shareholders' value, he has to look after the stockholders of the company and their benefits. The word "short-term" was abandoned from this version of the act and more emphasis is given to the long term. Since focusing on the short term outcome of a decision would mean neglecting the impact on the long term and also the stakeholders. A short term clause would have made implementing CSR harder; because CSR doesn’t give instant benefits, it takes long time. This is one of the reasons why some companies don’t do CSR activities because they are more focused on the short term. However, the phrase "in a way he considers in good faith" gives this section subjectivity. In other words different directors have different prospective, which means that each director would practice this duty in his own way. Furthermore, it would be hard to make it legally enforceable, because it depends on the directors prospective. This aspect would weaken CSR's position as being legally enforceable. Item Software (UK) Ltd v Fassihi showed an objective measure that the court has used to assess whether the decision was taken was bona fide. Even though, it cannot be completely objectified unless the decision is obviously not in good faith.

Moreover, the director has the duty of disclosure towards the shareholders. If the company is a publicly listed company he has the duty to disclose to the public. Any information that the company discloses is considered legally binding. This means if the company disclosed wrong or misleading information it could lead to legal consequences. This gives Corporate Social Responsibility disclosures more legal power since they are legally binding and would make the company think of what it would disclose and making sure it is sound and true.

Company consciousness and legal enforceability:

A. Berle [18] (1995) talked about a company with a conscience. He mentioned this type of a company would assume a wider social responsibility and profit maximization. Companies that are conditioned by shared value and cooperative behavior would lead to giving people a greater sense of worth and well being. According to J. Plender [19] the economy would become more efficient and faster growing, because of lower transaction costs. The reason for the lower transaction cost is there will be less need for monitors (I.e. auditors) and because of high level of trust and shared value entering into contracts is much cheaper. In this state of utopia, companies would be more socially responsible towards stakeholders.

Many countries are making reforms in their view of how stakeholders should be treated. For example, Kingdom of Bahrain has made a legal requirement for companies to disclose their emission amount and the minority diversification of company's employees. European countries are having worker representation on the company board.

A new approach is being developed "Meta-Regulation" approach. Which is mainly concerned with corporation self regulation and it incorporates CSR as its core notion, this makes it easier for regulators and the most suitable approach to raise social responsibility of companies. [20] 

Conclusion:

Corporate social responsibility is becoming an important factor in how companies deal with each other and society in general, because of the increasing power of individuals over corporation. Since the world is coming to realize that making profit while damaging the environment which in the end of the day effects everyone even who gain profit from it. Also, the customer is gaining more power with all of the new regulation in his protection. This enables stakeholders to gain some power which would force companies to consider them when making decisions. Even though there is no legally enforceable doctrine on Corporate Social Responsibility, this could be considered a setback for CSR. Many companies are trying to stand in the way of making CSR legally enforceable because they consider it as a cost that the company has to pay that will not have a major benefit for the company. On the other side, companies who implement CSR say that there is a positive correlation between CSR and long term profits. Bowen was the first to state a definition for CSR and many scholars have followed his path and now it is becoming a global phenomenon. In my opinion, in the upcoming years there will be a legally enforceable framework that covers Corporate Social Responsibility.