Commanding heights

In March 2000 the British government created the world's first minister for corporate social responsibility (Nigel Griffiths, appointed in the latest reshuffle, is now the fourth to hold that post). A few months later an amendment to the Pensions Act came into force which has been a model for other countries wanting pension fund investors to address social, environmental and ethical dimensions of their investments. Within a year or so from now, public companies will have to include the new operating and financial review - OFR - in their annual reports to shareholders, once again aiming to lead the world in public company transparency. And to help managers throughout business get to grips with corporate responsibility, the new CSR Academy was launched in June.

The Department of Trade and Industry has also taken a more fundamental view of CSR than in many countries, or indeed in many companies. Despite Gordon Brown's preoccupation with charitable donations, the last CSR minister, Stephen Timms, made it clear the government believes it is about how companies make money, not how much money they give away: "What we are talking about here is beyond philanthropy. CSR is not an add-on. It must be about the very way we do business, both at home and overseas."

In comparison to most countries, it is an impressive record, although of course there are people who argue that much more could and should have been done. The UK Social Investment Forum (UKSIF) thinks the government should have followed up the Pension Act amendment with further measures to make trustees live up to their statements of investment principles, or Sips, and to spread transparency and social responsibility beyond pensions to other investment funds. UKSIF chief executive Helen Wildsmith says the pension fund amendment was not enough: "The government should encourage pension funds to report against their Sips and the Myners principles, in order to close the gap between policy and practice on responsible investment issues."

The Corporate Responsibility Coalition of NGOs and trade unions, known as Core, has campaigned for much tougher reporting requirements than will be included in the OFR, and for directors to have formal responsibility for their social and environmental impacts. Deborah Doane, the Core chair, says: "The government is using CSR to avoid taking action on sustainable development. They refuse to consider adequate regulation, even on reporting, and instead rely on voluntary CSR programmes, which amounts to business as usual."

Core has managed to get an MP to sponsor a corporate responsibility bill on no less than three occasions, and has won the backing of more than 300 MPs. But the government has always argued that CSR is an essentially voluntary development that cannot be mandated. In fact, ministers have argued that attempting to force companies to be responsible could be counter-productive because it would provoke a minimalist, rule-following response instead of the desired creative approach focused on opportunities rather than duties.

Nigel Griffiths stresses the importance of voluntarism, but also acknowledges that government needs to be ready to intervene when necessarily. "CSR makes good business sense and is at its most inventive and inspiring when on a voluntary, business-led approach," the minister says. "But government has an equally vital role to play in setting an enabling policy framework, including regulatory and other approaches that set decent minimum standards, whilst stimulating companies to raise their performance beyond these levels."

The legislative action the government has pursued has been aimed at transparency. The Pensions Act amendment requires pension fund trustees to disclose their policy on social, environmental and ethical issues. It does not actually require them to do anything - not even to have a policy. That is left to individual trustee boards, subject to pressure from members.
Similarly, the OFR will require disclosure, not action. It will still be up to individual company boards to decide what they should be doing. In fact it will be up to individual boards to decide what to put in the OFR, so far as social and environmental issues are concerned. Mr Griffiths says he hopes the OFR will lead to a "step change" in the quality of company reporting. But as boards only need to include information "to the extent necessary" for shareholders to understand their company's prospects, some may conclude that there is nothing important enough to burden shareholders with.

Retaining this focus on shareholders, even in reporting, demonstrates a central element of the government's approach which has limited how far it has been prepared to go in pushing the CSR agenda. There was a strand of the Company Law Review (the major overhaul of company law which came up with the idea of the OFR) which would have broadened directors' responsibility beyond their traditional duty to shareholders. This reflects the view that companies have significant social and environmental impacts but the law requires directors to prioritise shareholder value.

Attempts to broaden directors' duties were rejected on practical legal grounds, but it would be a bold government that overturned the central corporate concept - that shareholders own companies so company law must require directors to be answerable only to them and act in their interests. Reporting is another matter. The accountancy profession recognised 30 years ago that annual reports are used by a much broader audience than the shareholders. Reflecting that in the purpose of the OFR would not have been terribly radical, but the government preferred to stick to the formal position that annual reports are addressed to shareholders.

This is in keeping with its position on CSR, however, which is that responsibility is in the interests of the shareholders, so there need be no conflict with other stakeholders. This "business case" argument has been developed by the proselytisers for CSR in the business world, notably Business in the Community. The nub of the argument is that responsible businesses will find it easier to attract, retain and motivate staff, especially young graduates; will be rewarded by consumers, who are increasingly concerned about corporate behaviour; by investors, more and more of whom want to invest responsibly; and will be in a better position to manage risks and opportunities.

The government's voluntarist position has rested on the business case. It follows that if it is in shareholders' interests for companies to act responsibly, then it is necessary only to make sure managers understand that, and to help them manage more responsibly. The CSR Academy has been created to do that.

The ethical trading initiative is another early example of helping to work out how best to be responsible - a business/union/NGO scheme backed by the Department for International Development to work out how British buyers can help to improve labour standards in developing countries. DfID is also behind the extractive industries transparency initiative, which brings together the oil, gas and mining industries with governments and NGOs to try and ensure the wealth generated by countries' oil and mineral resources benefits the wider community in those countries. Nigeria, Ghana, the Kyrgyz Republic and Azerbaijan have agreed to pilot the scheme.

There is a problem for the government with this voluntarist approach. While the business case is undoubtedly valid, in many cases it is not very strong. The more responsible companies seem to get precious little reward from consumers or investors, and the least responsible ones still seem to find enough graduates. At the same time, companies tend to find that social and environmental risks rank fairly lowly when subjected to risk assessment processes. For some high-profile companies, such as Nike, the risks to reputation and brand make a powerful business case for action. But for most companies most of the time the link to shareholder value is either too weak, or too long term, to provide a financial justification to do things they wouldn't otherwise do, such as paying wages above the market rate; or not to do things that make financial (but not social or environmental) sense, such as selling SUVs.

In fact the government has tacitly acknowledged this in several ways. The Pensions Act amendment, for example, aims to stimulate investor pressure on companies. Getting pension fund trustees to think about ethical issues should lead to more pressure on fund managers to incorporate social responsibility in their investment strategies, which should ultimately be reflected in the share prices of CSR leaders. The OFR should have the same sort of effect - by increasing transparency, it should make it easier for investors and other users of accounts to understand which companies are acting more responsibly.

These two examples also demonstrate that CSR is much bigger than a junior DTI minister's responsibility suggests. It certainly extends beyond the DTI. This is obvious in the case of pensions, DfiD's involvement in international development issues, the Environment Department's responsibility for pollution, climate change and other green aspects of CSR. Indeed, once government involvement with CSR is liberated from the field of company law, opportunities open up for creative intervention.

Just sticking with the business case, there are several ways in which government could strengthen it further, even without resorting to legislation or taxation. First, political leadership could give corporate responsibility a higher profile. If senior ministers repeatedly demonstrated in their speeches that they take it seriously, corporate leaders and others will follow suit. The business case would be strengthened by more employees, consumers and investors taking companies' social and environmental performance more seriously.

Such political leadership would be more credible if ministerial words were backed up with action in the government's own procurement and employment actions. The public sector's purchasing power can be much more influential than individual consumers. The government encourages large companies to drive higher standards through their supply chains, but it has struggled to do the same itself. Mr Griffiths points out that the government is committed to ensuring that its own ?13bn civil purchases every year will be sustainable, and says that since last November all new contracts by central government departments must apply minimum environmental standards as well as value for money when purchasing certain types of product.

The green ministers group (now called the Sustainable Development in Government Network ) is also beginning to have an impact. "All 20 government departments purchase renewable sourced electricity, and 53% of total waste was recovered across government in 2003", Mr Griffiths says.

The business case could also be strengthened by better information. Even if more consumers, employees and investors were eager to focus on corporate responsibility, it is difficult to know which products or which companies are more responsible than others. The government has supported developments such as BitC's Corporate Responsibility Index, but this covers a relatively small number of companies and has had relatively little impact so far. Potential employees' judgements could be aided by a broader version of the Investors in People scheme, for example - perhaps Investors in Society. Consumers could exercise their preferences more easily with some kind of product labelling scheme extending the A-G coding for domestic appliances.

This kind of non-legislative government action is important. But experience with environmental issues has demonstrated that ultimately it is necessary to intervene to push markets in the desired direction, for example taxing landfill to encourage waste reduction. The Treasury has steadily extended the scope of environmental taxes but the scale remains very limited. Companies and consumers do respond to price signals, especially if they are substantial and obviously permanent - unleaded petrol being a prime example. Further action, such as using VAT rates to discriminate in favour of more "responsible" products could help make the financial case for such products.

All these actions could make it more worthwhile financially for companies to do what is desirable for society. But as well as encouraging the positive there is also a negative aspect to government involvement. Not even the most enthusiastic proponent of the business case suggests it can replace legislation to protect employee or consumer rights, or anti-pollution measures. The stick is as important as the carrot. As Mr Griffiths acknowledges, the government needs to enforce minimum standards as well as encouraging even better performance.

"It is government's role to ensure that it constantly reviews possible financial incentives. The use of well designed and targeted measures clearly have an important role to play. But where government does intervene, we must make sure the approach is focused and effective," he says, citing the combination of the recent Disability Discrimination Act and capital allowances for businesses as "an outstanding example" of stick and carrot working together.

The government has acted on employment issues, thanks mainly to EU directives, but has been more reluctant elsewhere. This element is more difficult for a government nervous of alienating business people. Stephen Timms, the previous CSR minister, did beef up the DTI's capacity to deal with complaints under the OECD guidelines for multinationals (the guidelines require OECD member governments to provide a contact point for anybody complaining that a company has not followed the guidelines, but in the UK this had amounted to just half a DTI civil servant). But the government dragged its feet over complying with the OECD anti-bribery convention, and has backtracked over anti-bribery requirements at the Export Credits Guarantee department.

Similarly, it has often been reluctant to mandate higher standards, whether in environmental performance (such as in building regulations), or even in transparency, caving in to business pressure to water down the OFR. If only it made good business sense for companies to do the right thing all the time, Mr Griffths' new job would be so much easier.

· Roger Cowe is a business journalist specialising in corporate responsibility, sustainability and social enterprise.