Our response to BIS consultation
Q. Are comparable, voluntary metrics on social and environmental aspects desirable? What might be the costs and benefits of this? What role should Government play in determining what these metrics might be and how might we encourage more businesses to adopt them?
On balance, yes, comparable metrics are desirable. Government could determine key metrics and encourage businesses to sign up on a voluntary basis, with the obvious incentive that those signing up are likely to receive praise for their transparency while those that fail to do so would be criticised for secrecy. The French ‘Nouvelle Regulations Economique’ (NRE) provide a successful model that could be applies in the UK. The NRE require French companies to report on measures including:
- Employment policies (gender balance, staff turnover/absenteeism, working hours/use of contracted workers – could also include pay ratio between highest and lowest paid workers)
- Environment management (resource use and carbon emissions)
- Human rights (work with NGOs, consumer groups and trade union coverage)
- Community relations (tax paid)
The French model has made sustainable development a more integral part of French companies, according to academic analysis. Though a similar approach in the UK would prompt kneejerk (and somewhat clichéd) criticism of ‘red tape’ it is worth noting that France still maintains more companies represented in the Fortune 500 list of the world’s biggest businesses than the UK. For more details on the NRE see:
- ‘France’s Mandatory “Triple Bottom Line” Reporting: Promoting Sustainable Development through Informational Regulation’ by Mary Lou Egan, Fabrice Mauléon, Dominique Wolff and Marc Bendick Jr; Journal of Environmental, Cultural, Economic and Social Sustainability; Vol 5 Number 5; 2009 via http://www.bendickegan.com/pdf/FINALPublishedPaper2009.pdf
The tax system and public procurement are two further obvious levers for encouraging reporting against standardised metrics. Differentiated levels of corporation tax could be levied for those companies committed to measuring and disclosing their impact on the environment and society and those that fail to do so. The obvious argument against this is that it would add complexity to the tax system – this is true, but businesses already have to cope with a wide range of different taxbreaks, penalties and subsidies. Differentiated levels for compliance with reporting metrics would be easily understandable and hard to manipulate in comparison.
The development of ‘triple bottom line’ reporting – quantifying a company’s social, environmental and financial performance – allied to the social value act ought to make it possible for the public sector to award contracts on a more considered basis than the immediate cost to the procuring authority.
Corporations are likely to object to the promotion of prescriptive measures. In this respect, it is important to recall how ferociously the corporate lobby has resisted other measures designed to support social or environmental ends – the minimum wage, for example, or the raft of environmental legislation in the late 1980s (including tighter environmental standards for motor vehicles, restrictions on pesticides in drinking water, the phasing out of CFC aerosols or the international treaty on the shipment of toxic waste). These are now an accepted part of the regulatory landscape acknowledged by everybody – including the business community – to support the kind of safe, sustainable, fair economy that business depends upon.
The stronger counter-argument is that meaningful comparisons are not possible without some degree of standardisation. This is of particular relevance to investors – who might be interested in a business’s relations with its employees; or the likelihood of negative publicity arising from unsustainable practices, for example. Comparable metrics also help consumers who want to support responsible businesses.
In summary, Government could act as an independent body with democratic legitimacy to decide on what corporate responsibility metrics are of greatest importance to stakeholders in business performance. The resulting data is likely to benefit investors and reward the most responsible businesses.
Q. What are the main barriers to businesses contributing more to social outcomes?
The concept of Maximising Shareholder Value as the overriding objective for businesses, enshrined in the 2006 Companies Act. Though the Act encourages company directors to have regard for wider society and the environment, this is within a duty to maximise returns to shareholders. The Kay Review confirms that this is how most company directors interpret their primary duty. Analysis of the remuneration reports of virtually every FTSE 100 company also states that their remuneration policy is designed to align the interests of executives with shareholders.
As their employers, businesses contribute hugely to the life chances and wellbeing of millions of UK citizens. Businesses provide critical products such as fuel, food and delivery of public services. The business sector accounts for around a third of the carbon emissions.
Yet there are obvious examples of how pursuit of shareholder value might incentivise businesses to cut training budgets or employee wages; increase prices or reduce supply of vital products (particularly in near monopolistic industries, such as supermarkets or energy); or use cheaper but more polluting sources of energy.
For more information on stakeholder value, see the High Pay Centre report ‘Paid to Perform: What do we want our business leaders to achieve?’ – https://highpaycentre.org/files/HPC_11_Paid_to_perform_06.pdf
Q. 11. What more could Government do to make it easier for businesses to support social initiatives? How might Government showcase innovative approaches that others might consider adopting?
- Revision of the Companies Act to incorporate equal responsibility to all stakeholders – for example, employees, customers, wider society and future generations. This should be matched by an equivalent duty on investors and all those involved in the ‘investment chain’ to ensure that investors do not pressurise companies to undertake socially/environmentally destructive activities in pursuit of short-term profit
- Shareholder/Stakeholder value often converge in the long-term, but conflict in the short-term. The increasingly short-term nature of shareholding in the UK means that many investors are only interested in immediate profits. A qualifying period for voting rights for shareholders would mean that those investors with the company’s long-term interests at heart could exert greater influence
- A company’s long-term employees are most closely aligned with those of society as a whole. They want a sustainable business that will provide good jobs on a fair wage in the long-term. They don’t want to work for a company whose social or environmental record makes it a pariah. They recognise criticisms from ordinary people that the comparatively insulated executives don’t see. Therefore, the best way of encouraging a pro-social outlook from the business community is to give workers the right to democratic representation at board level, as currently enjoyed in Germany and other European countries. For more information on corporate governance in Germany, see the High Pay Centre report ‘Workers on Boards: Interviews with German Employee Directors’ – https://highpaycentre.org/files/workers_on_German_boards.pdf