The Notion Of Corporate Social Responsibility Law Company Business Partnership Essay

Published Date: 02 Nov 2017

Introduction

Modern companies have significant powers that can wield over the lives of ordinary people. This has raised a question as to whether there are sufficient controls on these powers. The two major issues in company law theory that bear on this question are the corporate governance and corporate social responsibility. Whereas corporate governance is concerned with sufficient control on boards of directors to ensure that their powers are exercised for the benefits of the shareholders, corporate social responsibility concerns with the broader goals of corporate life and its benefits to a wider range of people than merely the shareholders and creditors (Lowry and Reisberg, 2009:60). This essay critically discusses the notion of corporate social responsibility by giving particular attention to minimum legal expectations. The discussion starts with a consideration of the notion of corporate social responsibility followed by a critical discussion of the notion. Finally, the essay considers the minimum legal expectation for the concept.

Corporate social responsibility

The term corporate social responsibility has been used since the 1970s many people still do not understand its meaning and importance. This has partly been contributed by some misconceptions and misunderstandings that still exist about the actual meaning of the concept. Many companies also find it difficult to integrate corporate social responsibility with their long-term development strategies and principal policies in order to support their overall goals. Bowen (1953), one of the first scholars who started the discussion on corporate social responsibility, argued that companies have the responsibility to pursue policies and to make decisions or act desirably in terms of the objectives and values of the society. Today, the practice of corporate social responsibility is viewed as a legitimate and critical endeavour for companies. The practice of CSR has become accepted as a legitimate and important function of many big companies. Thus, companies across the world invest considerable effort and resources in selecting and implementing practices of corporate social responsibility.

Also labelled as "stakeholder management" or "corporate citizenship", corporate social responsibility may refer to voluntary profit sacrifices made by companies by incurring additional costs or by transferring some profits to others stakeholders (Brudney, 1982:605). The doctrine means that companies should be responsible for the effects of their business activities on the world beyond the traditionally issues recognised by company law. However, some companies still benefits from their business activities without taking seriously their social responsibilities to the environment and to the community at large. For example, some oil and mining companies have been accused of drilling oil and extracting minerals in other countries without being socially responsible to the local community and the surrounding environment (Alexander, 2010). On one hand, the principle of limited liability allows shareholders to freely make profits, but on the other hand it also allows other stakeholders to suffer harms. Similarly, the principle of corporate personality denies the transfer of liability by locking company law into arid, technical and unnecessary debates. For example, in Adam v Cape Industries [1990] Ch 433, company law denied any liability for the harm caused to the subsidiary company’s employees in South Africa when the Court of Appeal overlooked the immorality of repatriating the profits to a holding company in the United Kingdom.

Critical discussion of the notion of corporate social responsibility

There are two conflicting argument on the debate of corporate social responsibility. The first argument maintains that company directors should only be responsible to the shareholders. This argument is based on the classical notion that directors owe legal duties to the shareholders as their representatives (Dodd, 1932:1155). The second argument suggests that company directors should have a wider responsibility that extends as far as to the community at large. This argument was originally based on, among other things, that modern companies have power and dominate the economic life (Berle, 1932:155).

However, recent discussions on the notion of corporate social responsibility have been centred on free market and egalitarian arguments. Those in favour of the free market argue for a maximisation of profit without the interference of the government. This means that companies should only allocate their resources to their business activities and should not be morally responsible beyond this. From a company law point of view, the directors’ objective is solely to maximise profits for the shareholders (Dudson, 2012:259). Thus, the free market focuses more profit maximisation and deregulation. However, one of the causes of the banking crisis in 2008 was the deregulation of the banking industry in the 1990s and 2000s (Dudson, 2012:260). This may lead one to ague that although free market may increase market efficiencies, the banking crisis suggests otherwise (Dudson, 2012:260).

Contrary to the free market argument, the egalitarian argument stresses on the need for greater equality to remove social injustices caused multinational companies in less developed countries (Dudson, 2012:261). The argument is that multinational companies have used their images and marketing techniques to position themselves as responsible members of the society and, therefore, they should actually be responsible. However, directors may end up providing gratuitous donations only where this is for the interests of the company. In addition, the directors may allocate some of the resources of the company for the environment only where this would increase the company’s reputation or to attract environmental friendly customers (Hicks and Goo, 2008:315). On the other hand, the company may loose its reputation if its business activities have negative impacts on the environment, or if it uses cheap labour to maximise its profits, or if the company applies anti-competitive practices detrimental to small businesses (Hicks and Goo, 2008:315).

Company law has always imposed fiduciary duties on directors to ensure that the company is run for the interests of shareholders (Hicks and Goo, 2008:314). Therefore, it would be difficult to guarantee for a genuine corporate social responsibility because the directors do not owe legal duties to other stakeholders that may be impacted by the company’s business activities. Nonetheless, modern companies have enormous powers and their business activities have significant impact to the community. Reducing the directors’ duties to shareholders may not be sufficiently enough to serve the interests of other stakeholders and the community at large. By the same token, one could argue that shareholders do not have a moral right to claim primacy simply by basing on their proprietary rights. Of course, their proprietary interests are justified on other basis, but it is also possible for other stakeholders’ moral claim to overweigh or equal the shareholders’ claim of primacy. But efficiency-based arguments may overshadow moral claims. Satisfied employees can be more productive. The company can also lower its prices to benefit trusted customers as well as economy and the community at large (Dignam, Lowry and Padfield, 2010:397).

Parkinson (2001) has distinguished between relational responsibility and social activism as possible models for corporate social responsibility. The relational responsibility focuses more on the need to promote the interests of other stakeholders affected by company’s business activities (Parkinson, 2001:267-71). The social activism refers to the company’s activities that benefit certain stakeholders or the community at large, but does not fall within the company’s ordinary business activities (Parkinson, 2001:267-71). Parkinson (2001) does not agree with the view that shareholders have a moral right to primacy in company law. Accordingly, he puts forwards proposals for reforms in order to enhance corporate social responsibility. Examples include improvements on the inward flow of information, extension of fiduciary duties to address other stakeholders’ interests, creation of mandatory requirements for disclosures of corporate social activities, mandatory consultation with other stakeholders, changing the board’s composition to include independent directors and to establish mechanisms that ensure the implementation of decisions and policies. The question is how these proposals can be implemented in practice.

Traditionally, English law regarded profit maximisation as a major corporate goal. In Hutton v West Cork Railway Company (1883) 23 Ch D 654, the company was subject to liquidation. A general meeting approved the directors’ proposal to pay the officers of the company a gratuity for losing their employment. However, the court held that such payments would be ultra vires the company. This decision enshrined direct profit driven mechanisms for the interests of shareholders (Lowry and Reisberg, 2009:65). As a result, future development of corporate social responsibility focused on circumventing the doctrine in order to make it lawful for companies to make gratuitous distributions for philanthropic reasons. Hutton was overturned following the erosion of the doctrine of ultra vires by statute and common law.

However, during the 1990s, the UK witnessed the debate of corporate social responsibility broadened into philosophical and political arguments about creating a stakeholder society (Lowry and Reisberg, 2009:65). The Company Law Review recognised the great importance of the stakeholder issue and identified the enlightened shareholder value and pluralist as the two broad approaches. The enlightened shareholder value means that the ultimate objective of companies is to generate maximum value for shareholders, but subject to a wider range of subordinate interests (Lowry and Reisberg, 2009:65). The pluralist approach is that company law should be modified to include other objectives in order to serve a wide range of other interests in their own right (Lowry and Reisberg, 2009:65). The eventual outcome of the Company Law Review was the codification of directors’ that were framed to include an obligation to promote the success of the company for the benefits of the shareholders having paying to regard to other relevant considerations such as the company’s business reputation, and the impact of its business activities on the environment and the community at large.

Minimum legal expectations

Section 172(1) of the CA 2006 provides than, when considering how to act in a way that would be most likely to promote the success of the company for the benefit of the members of as a whole, a director must have regard to the impact of the company’s operations on the community and the environment, and the disability of the company maintaining reputation for high standard of business conduct. These are known as social, environmental and ethical considerations and they may be relevant to pension funds that invest in public companies (French, Mayson, and Ryan, 20123:490). Thus, section 172 addresses the conduct of directors by setting out what directors should aim for in promoting the success of the company and what matters they should take into account. The importance of section 172 is that it introduces a new approach to the issue of corporate social responsibility, that is, for whose benefit are directors to manage companies? Does the enlightened shareholder model establish a legal as opposed to simply a commercial basis for justification of corporate social responsibility?

Ho (2010:207) argues that section 172 simply reflects existing law and modern business practices, and provides the guidance for corporate social responsibility. It would appear that section 172 does not entitle the other stakeholders to bring an action against the directors for failing to taken into account their interests (Hicks and Goo, 2008:315). It seems as if section 172 merely imposed soft obligations on directors that may not even been enforced by shareholders. The inclusive approach adopted by section 172 does not seem to go far enough because in cases of conflicts of interest between shareholders and non-shareholder groups, preference will still given to the interests of shareholders. However, it could be argued that the primary objective of section 172 is to set out minimum legal expectations of corporate social responsibility (Hicks and Goo, 2008:315). The fact that section 172 has expressly set out these minimum standards is in itself significant as it may be used by pressure groups to ensure that companies pay a due regard to corporate social responsibility (Hicks and Goo, 2008:315). For instance, a company may be named and shamed through the media for failing to comply with section 172.

In addition, section 417 of the CA 2006 obliges public companies to give information in directors’ reports about certain matters to the extent necessary for an understanding of development, performance or position of the company’s business. These are environmental matters, including the impact of the company’s business on the environment; the company’s employees; and social community. The information must include information relating to the company’s policies on those matters and the effectiveness of the policies (French, Mayson, and Ryan, 20123:33). Section 417 reflects the intention restated in section 172 about a cultural change in how companies consider their responsibilities (Hannigan, 2010:198). The disclosure requirements are intended to force public companies to acknowledge and respond to the interests of stakeholders affected by their business activities. However, section 172 may have been overtaken by event bearing in mind that corporate social responsibility is now an important matter of its own right, particularly to large public companies (Hannigan, 2010:198). Thus, the disclosure of information relating to corporate social responsibility has become common to reduce the significance of the changes brought by section 172. It appears as if the law is playing a catch-up with a developing business culture which has a much wider agenda and broader constituents that merely a company’s own shareholders (Hannigan, 2010:198).

Despite these minimum standards there is still uncertainty and academic debate about the impact of section 172. At the moment, it is still early to assess the legal impact of section 172. Some have suggested for a development of a binding regulatory framework (Pedamon, 2010). In deed, Waagstein (2011) suggests that compulsory regulatory approaches may be gaining ground and momentum and refer Indonesia as an example of increased regulation. Recently, Indonesia adopted the Indonesian Law No. 40 (2007) that has created a significant debate over whether corporate social responsibility should be voluntary or mandatory. Waagstein (2011) argues that whilst the new law recognises the existence of corporate social responsibility and clarifies on the nature of the doctrine, it has created uncertainty, particularly on its substance and procedures. He recognises the problems associated with the application of the law in practice, but nonetheless he argues that the mandatory nature of corporate social responsibility is legitimate and should be encouraged.

Tighter regulatory control may discourage companies from developing voluntary policies. However, increased intervention by the State into the exercise of the corporate business may lead to abuses by the State’s agencies, leading to corruption. For example, Kuznetsov and Kuznetsova (2012) argue that Russia suffers from widespread corruption, the insecurity of property rights, arbitrary law enforcement and bureaucratic inconsistency. As a result, managers in Russia do not necessarily regard corporate social responsibility as a tool for legitimisation in the way their Western counterparts do. However, recent series of corporate disasters and scandals and the recent global banking crisis have put companies under greater scrutiny (Nakajima, 2011:257). Calls have been made for more control of companies as well as their behaviours and, thus, more regulation of companies in order to bring those responsible to account (Nakajima, 2011:257). Various initiatives have also been adopted at the international level recognising greater power and influence multinational companies at the global lever and the need to control them (Nakajima, 2011:257; UNCTAD, 2002).

Group companies raise particular issues as far as corporate social responsibility is concerned (Quo, 2011). In Bowoto v Chevron No C99-2506 CAL, the US (federal) District Court in San Francisco rejected a claim against an American holding company for human rights abuses by its subsidiary in Nigeria on, among other grounds, that the holding company could not be held responsible for the actions of its subsidiary. However, the court stated that separate personality of a subsidiary company did not prevent holding a company responsible for the actions of its overseas subsidiary. The relevant control may exist where, as in Cape Industries v Adams (1990), the company knew of the risks, but took steps to establish an asset-free undertaking for the risky business (Meeran, 2000:252; Amaeshi, Osuji, and Nnodim, 2008).

In an Australian case of James Hardie (ASIC v Hellicar [2012] HCA 17), a holding company attempted to avoid responsibility in negligence to asbestos victims by shifting assets around the group. It was ultimately forced to respond to its corporate social responsibility. The company was named and shamed by pressure groups, governments, the media and the victims and ultimately agreed to compensate the victims (Quo, 2011). It is directors were also and disqualified from serving on boards for a certain period of time. Thus, if wrongdoings can be exposed then the difference between the enlightened shareholder and pluralist approach may not be that crucial. The same cannot be true where external monitors are not as prevalent.

Conclusion

This essay has critically discussed the notion of corporate social responsibility by giving particular attention to minimum legal expectations. Modern companies have huge powers and influence on the society. Their business activities can have both positive and negative effects on the community. The doctrine of corporate social responsibility has been recognised as a mechanism that can be used to ensure that companies behave not only for the benefits of the shareholders but also for the interests of other stakeholders as well as for wider interests such as the community and the environment. There has been a positive response towards the doctrine through the introduction of certain minimum legal expectations. In particular, section 172 CA 2006 sets out minimum legal expectations for corporate social responsibility. It is still early to assess the how section 172 will bring about a cultural change in how companies regard their corporate social responsibilities and how it will be interpreted and applied by the courts.