CR Talk - Profit and responsibility

THERE are around 80 of us in the House of Commons this evening. We are part of a coalition of almost 100 non-profits, academics, trade unions and legal professionals. The late autumn chill curls around us but we are fired by the momentum of being part of history – the chance to review 150 years of the UK Companies Act. As Members of Parliament nod in agreement, a palpable optimism seeps into the room. It will take a year before the amendments come through but the journey towards literally "rewriting history" is remarkable. Not only was the legal tenet of shareholder profit maximisation questioned, but the very nature of the company and its functions was re-examined countless times in these few years in the run up to the amendments.

The re-examination of the corporate form is significant. This is because the notion of the company and the accompanying understanding of persona ficta is not new and has been well established at least as early as the 14th century. Some writers trace the lineage to ecclesiastical bodies, guilds and boroughs; both craft and mercantile. Once the idea of the corporation was turned to commercial organisation, its functions began to grow. The common law had come to accept the form of partnership to these commercial outfits, known to Roman law as the commenda and the societas, both of which were forms of medieval partnership.

The medieval law merchant supported a predominantly private commercial order, generating merchant laws and institutions that operated outside the local political economy of the period. These rules became known as lex mercatoria. Lex mercatoria can be seen as a set of good mercantile practices, growing out of the needs and customs of the marketplace that ultimately gave rise to law in a more recognisable and enforceable form.

Today, a new set of lex mercatoria is emerging through the notion of corporate responsibility (CR). Companies are talked about as a friendly neighbour and as key supporters of the community whether it is to support poverty or help during natural disasters. The new "lex mercatoria" is setting standards and rules of behaviour and improving society. The "caring corporation" image tells you what you want to hear. There is concern for communities, consumers, children and at the same time, companies were committed to pollution prevention, to people, to the planet. There is only one problem with this strategy – a lot of it is untrue.
Some of this is "greenwash" began in the 80s with the environmental movement and has moved on to a more sophisticated form under the umbrella of CR. A number of leading companies have adopted "good corporate citizenship" as their brand image, a kind of "halo branding".

To reduce CR to mere corporate philanthropy or charity is deeply problematic. An outcome of this benevolence is that direct CR is narrowed to charitable donations. The issue of such a "philanthropic mask" is not new. Since the industrial revolution, these actions are seen as a noblesse oblige especially as the state was unable to adapt to the task of providing assistance to mass urban society with the industrial explosion. For example, in the UK, The Northern Star ran a report in 1842 disclosing that employers were funding philanthropic activities by deliberately underpaying their employees. There are also many examples that can be drawn from the so-called US "robber barons" during this era. An example is when the employees of Colorado Fuel and Iron Company were being shot or burned alive in industrial strife while the company supported missionary work in China.

When done right, however, various forms of paternalism have given rise not just to new forms of public-private synergies but also instituted lasting changes in society. Companies like Rowntree's, Cadbury's, Boots and Lever Brother have become by-words for providing housing, education, baths, pubs and other recreational facilities. Interestingly, some of the pioneering works and standards of these corporations set the standards for subsequent public sector provision in later decades. A successful example can be seen in the UK local government emulation of Rowntree's housing standards, 1910-1920.

CR has long been discussed as a possible remedy to the inequalities experienced in society. From this standpoint, the lex mercatoria created by CR can potentially be a paradigm of changing global standards. Its boundaries are markets, professional communities or social networks, not territories.

The challenge is that the standard of responsibility that corporations owe to society needs clarity. A United Nations Conference on Trade and Development survey reveals that the social responsibility of the corporation is a question that has been raised through the adoption of various generalised and specialised approaches. As a result, a number of aspects, including developmental obligations, socio-political obligations as well as consumer protection and others (especially ethical business standards and human rights) seem to be perennial issues. CR can, for example, mean different things to practitioners seeking to implement CSR inside corporations and to researchers trying to establish CR as a discipline. It has also been differently interpreted by NGOs.

This is why amendments to legislation, global standards and stock-exchange-led standards are the cornerstones to a defined understanding of CR and its boundaries. These interventions are attempts to articulate the role of the corporation in society today.

Standards also help to explain that CR is not related to what companies do with their profits but is fundamentally about how profits are made. Corporate philanthropy and charity should not be used to mask actual responsibility in the workplace, marketplace, environment and community.

The amendments to the UK Companies Act 2006 is not only novel but significant. Section 172 now carries a "duty to promote the success of the company". Among the factors to be considered by directors are: employee interests; the need to foster relationships with customers and suppliers; and any impact on the community or environment. Reporting processes like the Global Reporting Initiative (GRI), which sets indicators of progress, provide guidance and a standardised approach in providing for transparency and accountability in the area. When standard setting is laid out this way, it provides the base from which companies regularly arrive at a more mutually satisfactory and meaningful range of decisions.

In recent years, Bursa Malaysia has taken various initiatives to issue guidelines and boundaries for companies approaching CR in a strategic manner. Since 2006, under the Bursa Malaysia Securities Berhad Main Market Listing Requirements, it is mandatory for listed companies to provide a description of the corporate responsibility activities or practices undertaken.

If there are no activities or practices undertaken in a reported year, the company must provide a statement to that effect. With the launch of the much awaited FTSE4Good Bursa Malaysia Index in December 2014, there is more interest by investors in the area. The index is designed to measure the performance of companies demonstrating good environmental, social and governance (ESG) practices and is aligned with other leading global ESG frameworks such as the Global Reporting Initiative (GRI) and the Carbon Disclosure Project.

The introduction of an ESG index is a further step in Bursa Malaysia's strategy to encourage and support enhanced ESG disclosure and practices for the Malaysian capital market.

The guidance and initiative by the regulators are applause-worthy, but at the end of the day, it is the living lex mercatoria that will calibrate the implementation of CR at a practical level, one that pushes CR to the strategic centre of the organisation. By doing so, CR becomes a part of competitive advantage.

In the coming weeks, I will be discussing both the dangers and advantages of CR. I would love to hear your thoughts on CR.Comments: letters@thesundaily.com