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Companies Need to Get a Social Life: The Argument for Voluntary Disclosure of Corporate Responsibility

Peter Montagnon, Head of Investment, Association of British Insurers


(These comments by Mr. Montagnon previously appeared in the Financial Times.)


The cynical view of companies is that they are like individuals: they'll
always act in their own interests. If they are to behave in the broader
interests of society, they must be made to do so by the full force of the
law.

This view explains why a debate is under way in the UK and the European
Union about how far corporate social responsibility should be backed by
mandatory requirements either to fulfil social obligations or at least to
disclose in detail their impact on sensitive areas.

The debate is important, not just because it will inform the actions of
regulators and lawmakers but also because an answer requires a deeper
understanding of what corporate social responsibility really means.

Some see the concept as being about compelling companies to adopt ever
higher standards of behaviour in limiting their environmental impact.

Yet if existing legal standards are inadequate, surely the answer is to
write new standards into the law, not find a roundabout way of making
companies conform to arbitrary higher requirements?

If corporate social responsibility means anything, it must involve some
voluntary recognition by companies that they cannot thrive in isolation or
opposition to the society in which they are trying to do business.

Companies ignoring the social context in which they operate could jeopardise
their businesses and undermine their value.

Investors - whose voting rights give them a significant role - have an
incentive to persuade companies that it is in their interests to avoid such
risks, or, better still, enhance their prospects through a positive and
properly considered relationship with the society that provides their
livelihood.

Mandatory disclosure requirements would not help - especially if they were
highly prescriptive. If requirements were too rigid, the result would be a
bureaucratic compliance culture, where disclosure would relate not to any
real commitment to good behaviour but to a simple desire to tick the right
boxes.

A further problem with mandatory disclosure is that it may home in on the
pet issues of a particular stakeholder. For example, a requirement for banks
to report extensively on the social impact of their lending to developing
countries could produce an abundance of almost-useless information while
missing other risks with a far greater social and corporate impact.

The Association of British Insurers' voluntary disclosure guidelines put the
onus on companies to single out and report on the risks that matter most to
their businesses. Social issues which impact most on a company will also be
the ones where the company impacts most on society.

This is a flexible approach, which should allow companies and investors to
focus closely on the issues that really matter. It also sets out the basis
on which shareholders expect to engage.

This is not a soft option. Some companies, which would happily carry on
producing glossy brochures proclaiming what worthy citizens they are, are
approaching this idea with some trepidation.

Nonetheless progress on the first phase - getting the information out in the
annual report - has proved encouraging. Of the 131 annual reports we have
monitored so far, 70 offer good or adequate responses to the questions we
have asked.

We are grateful to those companies, but also acutely aware that we could not
have expected such a positive response had the companies themselves not
understood the importance of managing risk.

Which brings us back to self-interest. If our experience suggests that a
voluntary approach backed by self interest is likely to work, then the
opposite must also be true: a mandatory approach with no discernible benefit
to companies is likely to disappoint.

Association of British Insurers
Url: www.abi.org.uk
Email:


 

 
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