Corporate Social Responsibility in the UK: Making Ethical Business Mandatory
Taryn Walker discusses the enforcement of Corporate Social Responsibility and prescribes mechanisms through which we can increase transparency and accountability. (This article won third place in our commercial article writing competition)
1. Introduction
Although Corporate Social Responsibility (CSR) is the ideal stepping-stone for setting standards and encouraging the positive impact of corporations, it does not go far enough in terms of providing hard legal consequences where human rights and environmental violations occur. This article will analyse the most significant reputational, political, and legal consequences that corporations face in terms of CSR and suggest mandatory transparency and due diligence obligations as viable solutions.
2. Case Study: Boohoo Group plc
In 2020, reviews of Boohoo’s supply chain revealed ‘failures in identity verification, recording of hours, payment of wages, health and safety violations and instances of potential furlough fraud.’[1] Payments below minimum wage and substandard, unsafe conditions in the city of Leicester were announced to the public on all major news platforms and as a result, shares decreased by 23%, to 297p per share on AIM.[2] Additionally, PwC resigned as auditor.[3] This is a prime example of consumer awareness and brand reputation working to sanction behaviour without the need for legal consequences. However, just months later the online retailer renowned for inexpensive fast-fashion has entered an asset sale agreement ‘to buy Debenhams’ brands, along with customer lists and selected contracts, for £55m’[4], whilst its share price has bounced back to 344p. The success and growth of this company which allegedly allowed modern slavery to take place in the supply chain not a year earlier, provided inspiration for this article reviewing the inadequacy of the law surrounding CSR.
3. Exploring Reputational Damage
CSR is based on the idea that corporations are held accountable for business and human rights violations without the need for legal enforcement.[5] With the wealth of information available to consumers through television, radio, and smartphones, a negative headline can cause a lot of damage. According to Robb, it would be a mistake to underestimate this power.[6] However, corporations go to great lengths to prevent incriminating information from being published, and the schemes created to increase transparency with regards to CSR are unsatisfactory. For example, the UN Global Compact is merely a ‘voluntary initiative based on CEO commitments’[7] threatening a ‘name and shame’ policy for breaching parties. Similarly, the optional Global Reporting Initiative requests full transparency on steps taken to realise CSR, but there are no consequences for the failure to do so and it has no way of confirming that any information provided is accurate. Finally, the OECD, regarded as the most powerful of these organisations, merely provides National Contact Points for negotiation where CSR has led to a deterioration in relations and provides non-binding recommendations for the future. CSR relies on consumers and shareholders to penalise corporations for unethical actions. Therefore, at the very least, transparency on these issues should become a legally binding requirement of all corporations so that clear and fully informed decisions can be made in terms of purchasing and investments.
Complying with industry standards can generate positive publicity for corporations, for example via publication in the Business Ethics ‘100 Best Corporate Citizens’. A good reputation can attract the best employees and the most customers.[8] Long-term, this approach may be increasingly profitable as trends show growing concerns about environmental and ethical impacts across the population.[9] Further, the UK government now offers subsidies for ‘excellence in responsible business practice’ via the ‘Business in the Community’ awards. Although consumers are becoming more aware, in most situations they will continue to choose goods of the highest quality or cheapest price, rather than those holding a particular certification.[10] Additionally, it would be wrong to expect each consumer to check the certificates held by every brand that they buy from. CSR moves corporations in an ethical direction, but hard law is needed to provide transparency and real consequences to protect both consumers and corporate abuse victims.
4. Directors Duties
The UK imposes mandatory director’s duties on corporations for which a breach can result in a fine or imprisonment.[11] With the primary aim of increasing shareholder profit, corporations must also “have regard to …the impact of the company’s operations on the community and environment”[12]. However, following common law interpretation of this statute, directors’ decisions would have to be distinctly irrational for a successful case on these grounds as mere good faith and a tick-box exercise considering the listed ethical issues is all that is required. Although this does not go far enough in terms of protection of victims, it would be inappropriate for directors to be further personally, criminally and financially liable for corporate wrongs. Consequently, the law should be changed to provide greater transparency and due diligence rather than encouraging the piercing of the corporate veil which threatens the separate entity principle and the confidence of business owners and directors within the UK.
5. Due Diligence: The Solution?
Article 17 of the UN Guiding Principles on Business and Human Rights (UNGP) requires the human rights due diligence of business enterprises. Ruggie described the UNGP as the ‘end of the beginning’ of a ‘step by step’ movement to ethical business.[13] Although these principles are currently treated as a target to strive for rather than a binding requirement, the UK is moving towards the due diligence approach. The Human Rights Act 1998 is not binding on corporations. Instead, individuals can bring direct actions in the tort of negligence. Cassell claims that as an organ of the state, it is the judiciary’s role under Principle 1 to make human rights due diligence a direct defence to this tort.[14] Pursuant to the UK’s National Action Plan ‘Good Business’ Guidance, due diligence is expected of corporations ‘to identify, prevent and mitigate human rights risks’.[15] This should become mandatory rather than merely expected.
Notably, the Office of the UN High Commission for Human Rights has created a revised draft of the binding treaty on business activities and human rights. If agreed, this will legally oblige ‘all businesses’[16] in terms of ‘all human rights’[17] to undertake human rights due diligence including identification, assessment, prevention, monitoring, and communication in ‘business activities’, ‘contractual relationships’, and to shareholders.[18] Therefore, if the UK ratified this treaty, or if it became internationally binding through custom, corporations would finally be held to account for breaches.
6. Conclusion
Following Brexit, the UK should not seize the opportunity to lower standards and provide cheap labour. After being one of the first offending countries to abolish slavery, and later to introduce ideas of CSR, the UK should strive to remain at the forefront of ethical trading by enforcing corporate responsibility in law. As recommended by Cassell, human rights due diligence should become a direct defence to corporate torts against individuals. Further transparency regarding environmental harms and other significant CSR issues should be mandatory, particularly where corporations are carrying out public services.
Written by Taryn Walker.
[1] Jonathon Eley and Sarah Provan, ‘Boohoo has ‘significant issues’ in its supply chain, review finds’ (25/09/2020) Financial Times
[2] Rob Davies and Annie Kelly, ‘More than £1bn wiped off Boohoo value as it investigates Leicester factory’ (06/07/2020) The Guardian
[3] Jonathon Eley and Tabby Kinder, ‘PwC to quit as auditor to Boohoo on reputation concerns’ (16/10/2020) Financial Times
[4] Jonathon Eley, ‘Boohoo buys Debenhams brand for £55m’ (25/01/2021) Financial Times
[5] United Nations Industrial Development Organization, ‘What is CSR?’ https://www.unido.org/our-focus/advancing-economic-competitiveness/competitive-trade-capacities-and-corporate-responsibility/corporate-social-responsibility-market-integration/what-csr accessed 21/04/2020
[6] Kathy Robb ‘Soft Law in CSR’ Women’s Network for a Sustainable Future https://wnsf.net/2008/06/01/soft-law-in-csr/ accessed 22/04/2020
[7] UN Global Compact, ‘About the UN Global Compact’ https://www.unglobalcompact.org/about accessed 24/04/2020
[8] Paul Burke and Graham Dowling ‘The relative impact of corporate reputation on consumer choice: beyond a halo effect’ (2018) Journal of Marketing Management 1227-1257
[9] Baglayan and others, ‘Good Business: The economic case for protecting human rights’ (BHR Young Researchers Summit and others, 2018) p.21
[10] Johannes Habel and Laura Schons, ‘When Customers can see more cost than Benefit in CSR’ (Ideas for Leaders, 2016) Ideas for Leaders #591
[11] s.172 Companies Act 2006
[12] Ibid. s.172(d)
[13] United Nations (2011), Guiding Principles on Business and Human Rights: Implementing the United Nations “Protect, Respect and Remedy Framework”, A/HRC/17/31 p.5
[14] Douglass Cassell, ‘Outlining the Case for a Common Law Duty of Care of Business to Exercise Human Rights Due Diligence’ (2016) Notre Dame Law School p.181-182
[15] HM Government, Good Business (2016) OGL para 21
[16] Article 3(1) Preamble to the OEIGWG Chairmanship Revised Draft 16.7.2019
[17] n.16 Article 3(3)
[18] n.16 Article 5