Corporate transparency In a globalised world of deregulated markets, power is highly concentrated in the hands of the largest companies. Some of these companies have significant negative impacts on the environmental and social rights of communities around the world. The effects of some industries are of particular concern. Mining and extractive companies operate across the globe, often in environmentally or socially sensitive regions, and the damage they cause can be grave and irreparable. Company transparency is an important part of how these powerful social actors can be understood and regulated. High standards of transparency for company operations and management can drive higher standards of company behaviour, promote good governance, and help to align company action with societal or shareholder expectations. Low standards of transparency can allow companies that are failing or likely to fail commercially to continue on that path. The same applies to failures in social and environmental commitments and expectations, which also often have commercial implications. While many companies subscribe to voluntary codes of practice, including highly developed reporting and transparency initiatives, ClientEarth believes that these can only be part of the solution. We consider that only with robust legal obligations and an effective regulatory system in place can effective and appropriate transparency be achieved across the board, and in turn the environmental and social damage caused by these companies be limited. We are therefore working to strengthen and stimulate the existing legal and regulatory framework that governs company reporting in the UK. Minimal legal requirements and voluntary codes of practice A system comprised of minimal legal obligations, aspirational and voluntary codes of practice, and limited regulatory intervention relies on trust. In terms of transparency, it relies on trust that company management will act in the ways that they claim to. They are trusted to be proactively honest, open and transparent about their impacts whether positive or negative, their strengths and weaknesses, their successes and failures. The 'corporate social responsibility' discourse and the landscape of voluntary standards and initiatives have played an important role in shifting the discussion around company impacts and accountability in a positive direction, and achieving positive change in corporate practice. However, in terms of transparency, they also afford companies a large and unregulated space in which they can engage in essentially promotional activities. In many cases, the resulting reports can be misleading, and provide little genuine accountability. Voluntary 'responsibility' or 'sustainability' reporting initiatives still have a role to play in pushing companies towards a new model incorporating a healthier relationship with the public interest. However, ClientEarth believes that these aspirational initiatives and discourses must be underpinned by stronger minimum legal requirements, and perhaps most importantly, proper regulatory scrutiny. Company reporting in the UK Public companies are designed and bound by law to maximise financial value for their shareholders. Increasingly, companies are recognising that in order to maximise ‘value’ in the long run, they need to pay due regard to environmental and social issues and manage them effectively. This long-term understanding of shareholder value, sometimes called 'enlightened shareholder value', was enshrined in UK law in the Companies Act 2006. This idea defines the statutory duties of company directors, and the issues that companies are required to report on annually. UK-based public companies are now required by law to report annually on environmental, social and community issues, to the extent that they are relevant to the business of their company. ClientEarth considers that this now requires companies to report extensively on a great many of these issues in many contexts, from localised air or water pollution, to human rights impacts, to their approach to climate change and beyond. Vitally, UK-based companies are also required to report on these issues whether they occur within the UK or not. Parent companies of large corporate groups must also report on the impacts and operations of all their subsidiaries, whether they too are UK-based or not. However, ClientEarth believes that the current legal requirements lack detail. They do not spell out the kinds of issues companies might need to report on, or the ways in which the issues affect businesses. Equally importantly, we do not consider that the structures that are supposed to ensure that companies comply with these legal requirements are working effectively. In ClientEarth’s view: • Current mandatory audit requirements provide no rigour or certainty to the reporting process. • The regulator that is empowered and entrusted by law to oversee and ensure company compliance with legal requirements, the Financial Reporting Review Panel, does not have the right capacity or interest to properly regulate reporting on these issues. • The system by which the reports are put before company shareholders in the Annual General Meeting is designed as a closed circuit. Company management has massive control of the issues that shareholders hear about, and the events and discussions of the AGM can be largely closed off to the outside world. ClientEarth's work A legal framework is in place in the UK to govern these issues, but it needs to be consolidated and implemented to achieve its intended objectives. One of the key aims of the Companies Act 2006 was a greater emphasis on the long term, and therefore greater transparency about the relationship between businesses and environmental, social and community issues. ClientEarth has analysed this legal framework in a significant legal study, and has developed specific proposals for how it thinks the system can be improved. We have delivered our review and proposals to the UK government and the reporting regulator, and we expect these discussions to continue through the year. We are working in a number of ways to push our ideas forward and further our objectives. We plan to publish our review as a short book in spring 2010. |