I. Introduction
Nonfinancial information disclosure is one of the most important avenues to promote corporate social responsibilities (CSR) in global supply chains. However, it is identified that such an approach has several shortages, mainly due to the ambiguity in narrative reporting and non-directness of the model. This essay summarizes the features in the current practice of transparency law in CSR in global supply chains, identifying some of the deficiencies as well as the innovations that could serve as inspirations for its future development. Comparisons are made among transparency laws and other avenues that promote CSR.
Then, this essay explored the disclosure mechanism in corporate law context to find general characters in this kind of approach in the course of achieving their purpose. In this way, the deficiencies in the implementation of the disclosure statutes can be traced to their nature. Bits of Advice is given to enhance the impact of the transparency laws in CSR.
II. The UK Approach in CSR transparency laws
The UK regulatory setup in CSR transparency laws mostly lies in the Companies Act 2006 and Modern Slavery Act 2015.
In section 414 of the Companies Act 2006, the requirement of a “strategic report” is stated. The strategic report is the current replacement of the former “operating and financial review” and “business review”. It is a narrative reporting mechanism of the directors’ duties that are outlined in s.172, which represents the enlightened shareholder value.[1] The report contains how directors fulfill their duties on issues listed in s.414CB, the contents of the nonfinancial report. This includes a wide range of human rights, anti-corruption and other ESG[2] matters. In practice, the reporting is also guided by the Financial Reporting Council (FRC) which is trying to promote transparency and integrity in corporate governance and has issued several pieces of guidance on the strategic report.[3]
The statutes in the Companies Act are the regulations in the context of company law and corporate governance, which shows clear features similar to other legal tools within this section. In another word, it is subject to common shortages. Firstly, the definitions lack elaboration and accuracy. The strategic report is a narrative report, which by itself has a high risk of empty talks and vague statements that extricate the companies from fulfilling due diligence in CSR. According to the Annual Review of Corporate Reporting published by FRC, omissions of important matters in several sample companies’ strategic reports are identified showing a deficiency in the current practice and areas for improvement.[4] Also, due to the ambiguity and softness that have been argued regarding the s.172,[5] the same problem exists here in s.414. The duty of the companies to promote CSR would also be a “damp squib”[6] that would not introduce specific liabilities for the companies, just like the s.172 duties.
Another important transparency law is from the Modern Slavery Act 2015, In section 54, where annual slavery and human trafficking statement is required to be prepared. When statutes in the Companies Act require disclosure on a wide range of ESG issues, this statute focuses on the transparency in the company’s global supply chain, which makes it much more specific and concentrative. The Modern Slavery Act took a human rights-based approach[7] and so the reporting requirement is backed by the hard prohibition of modern slavery. Though the adequacy of the disclosure and meta-regulatory approach is criticized to be doubtful in addressing modern slavery issues, [8] the Act is a step forward, at least to educate companies about the importance to take initiatives to promote the CSR goals in the supply chain.[9]
The Modern Slavery Act’s approach is a different story from the one of the Companies Act regarding legislative status. The Companies Act treats the CSR issues as a supplementary component in its own reporting regulations. Financial reporting in the UK has a long history and now has a mature and stable tradition. The nonfinancial report, though is quite young, is the accessory to the financial reports and follows the tradition of how UK companies report on their performance. The enforceability of such a supplementary component is especially at stake when it is not connected to a widely recognized Rechtsgut(good things that the law protects). It is not the case in the Modern Slavery Act as it implements specific prohibition and protection that the Act is devoted to. The s.54 requirement of disclosure is one of the vehicles that the Act utilizes to achieve its clear goal, which gives the disclosure not just justification but also enforceability. The fourth part of this essay will discuss this comparison in depth.
III. Comparisons to Other Avenues in Promoting CSR
Among other legal tools, contract law, consumer protection law and tort law are also important avenues in promoting CSR.[10] These vehicles go into the specific incidents and transactions that occur in the day-to-day operation of the companies.
The disclosure requirements seek board-level recognition on CSR. Unlike contract law or consumer protection law, the transparency law requires the directors to take the responsibility of preparing a report with statements regarding specific CSR issues, making the CSR promotion part of the company strategies, whereas the contract law or consumer protection law is only of the company’s legal department’s concern. However, on the other hand, it steps into the realm of corporate governance which is another topic in which the law is evolving in this historical period. Regarding corporate governance, controversies haven’t stopped around the voluntary approach of a series of regulations including the Corporate Governance Code and Stewardship Code[11].[12] Therefore, despite the high level of the entry point of the company law approach, the effect of the promotion of CSR is not as significant as that of other avenues, at least for the time being. The process of education and persuasion won’t be short. The other part of the transparency law within CSR context, the Modern Slavery Act, also brings the recognition of human rights hazards in supply chains to the board level.
It is also important to note that the context of CSR confines the enforceability of legislation. It is widely perceived that the whole context of CSR is generally on a voluntary and self-regulatory basis. The law requires directors to prepare the statement containing information about how they devise and carry out policies that promote CSR agenda, but the decisions taken by the directors and how they are performed by the staff of the company is beyond these regulations’ scope. The contract law and other avenues are more or less indifferent tools, wielded by people with incentives or willingness to promote CSR. The particular part of the disclosure approach is that it sets out guidelines. So it could have a more direct impact on the practice of the companies. However, it is contradictory that such a clear tendency of the legislators is not backed by compelling force. The contradiction may release a signal that the legislator allows a low level of compliance. Such a mild attitude may exacerbate the promotion of CSR.
Therefore, this essay concludes that although the disclosure approach, though possesses traits that other legal avenues don’t have, but doesn’t necessarily constitute significant advantages over others.
IV. Disclosure Mechanism
Substantive discussion on the nonfinancial information disclosure approach has found some key obstacles. First and foremost is the shortage of narrative reports which is the lack of data evidence. The quantity and quality of the disclosure are hard to measure. It is a detriment to not only the enforceability of the approach but also the difficulties in the legislative procedure. The deficiencies identified above can mostly trace back to this shortage in disclosure mechanism. This also causes the indirectness of the disclosure approach. The legislator intends to reform the companies’ practice in addressing CSR issues, but the disclosure approach seems to have failed to grasp the root of the matter. The problems facing s.414 Companies Act 2006 and s.54 Modern Slavery Act 2015 are not alone. As mentioned above, in the realm of corporate governance, the Stewardship Code is also struggling to achieve its full purpose. One of the utmost reasons is that, similarly, the adoption of an indirect policy that requires signatories to simply report and explain on what they’ve been doing makes the effect of the policy insignificant.[13] The paradox of self-regulation is that the companies only comply when the compliance serves their interest whereas it usually couldn’t do. The compliance it can achieve is merely superficial and perfunctory.
Another obstacle is the incentive issues. Though the vision of CSR is comprised of ethical traders with high moral standard, this essay tends to base its analysis on the presumption that the companies have few incentives other than those lead to generating profit for shareholders while taking a close range of stakeholders into account. Under this presumption, the incentives that the companies have to promote CSR under the light of the nonfinancial information disclosure duties are summarized as the fulfillment of the stakeholders’ expectation, the investors’ perceptions and appraisals, the fear of more strict regulations, the restrain of the companies’ internal norms and other issues that may influence the companies’ reputation and business goodwill. The employees and the consumers are vital to the daily operation of the company. They may have moral concerns about the company and such concern can be lifted by comprehensible documents listing the companies’ efforts in maintaining integrity in business activities. The investors, on one hand, may be subject to the Stewardship Code that asks them to be responsible for the companies’ activities, and on the other hand, may have their own investment policies that prohibit them from investing in companies with moral uncertainties. Moreover, the auditing procedure may also be simplified due to the overlap between the nonfinancial report and the auditors’ pre-engagement investigation. This is also to the investors’ delight.
These incentives could be a good starting point for the disclosure approach to achieve its purpose, but the current regulatory tendency seems to be focusing on the content of the report. This essay believes that the above incentives should be utilized, and the reporting procedure should remain self-regulatory and voluntary. On the other hand, the procedures of verifying the truthfulness of these reports should be emphasized to make sure the companies make no false commitment. In the meanwhile, the criteria such as certain terms and expressions should be sorted out into a regulatory document to make sure the companies make no blurring.
V. Conclusion
To conclude, this essay argues that nonfinancial information disclosure is hardly the most effective way to promote CSR in the global supply chain. This approach doesn’t display significant advantages compared with others. Due to space limit, trivial arguments such as differences in cross-jurisdiction effectiveness are omitted. The current practice of the disclosure approach has multiple deficiencies and room for improvement. Suggestions are given, which mainly propose the shift of focus from the content of the report to the accuracy and occurrence review of the report, in order to make sure the control activities that the company commits take place. The natural incentives of companies making CSR commitments should be further utilized. This may not be able to cover all facets but due to the limit of the current regulatory context of corporate governance and CSR, these incentives are still important factors that the policymakers should consider.
VI. Bibliography
Books
Hannigan B, Company Law (5th edn, OUP 2012) chapter 10
Ruhmkorf A, Corporate Social Responsibility, Private Law and Global Supply Chains (Edward Elgar 2015) chapter 3, 4 and 5
Articles
FRC, ‘2020 Annual Review of Corporate Reporting’ (2020) <https://www.frc.org.uk/publications> accessed 13 February 2021
Iqbal T, ‘The Efficacy of the Disclosure Requirement under s.54 of the Modern Slavery Act’ (2018) 39 Comp Law 3
Keay A, T Iqbal, ‘The Impact of Enlightened Shareholder Value’ (2019) 4 JBL 304
Morris G, ‘Strategic Report Guidance’ (2018) 42 CSR 68
Okoye A, ‘Corporate Enterprise Principles and UK Regulation of Modern Slavery in Supply Chains’ (2017) 28 ICCLR 196
Reisberg A, ‘The UK Stewardship Code: On the Road to Nowhere’ (2015) 15 JCLS 217
Weatherburn A, ‘Using an Integrated Human Rights-Based Approach to Address Modern Slavery: the UK Experience’ (2016) 2 EHRLR 184
[1] Brenda Hannigan, Company Law (5th edn, OUP 2012) para 10-40.
[2] Environmental, Social, and Governance
[3] Glynis D. Morris, ‘Strategic Report Guidance’ (2018) 42 CSR 68
[4] FRC, ‘2020 Annual Review of Corporate Reporting’ (2020) 16 <https://www.frc.org.uk/publications> accessed 13 February 2021
[5] Andrew Keay and Taskin Iqbal, ‘The Impact of Enlightened Shareholder Value’ (2019) 4 JBL 304, 307
[6] Ibid.
[7] Amy Weatherburn, ‘Using an Integrated Human Rights-Based Approach to Address Modern Slavery: the UK Experience’ (2016) 2 EHRLR 184, 186
[8] Adaeze Okoye, ‘Corporate Enterprise Principles and UK Regulation of Modern Slavery in Supply Chains’ (2017) 28 ICCLR 196, 205
[9] Taskin Iqbal, ‘The Efficacy of the Disclosure Requirement under s.54 of the Modern Slavery Act’ (2018) 39 Comp Law 3, 10
[10] Andreas Ruhmkorf, Corporate Social Responsibility, Private Law and Global Supply Chains (Edward Elgar 2015) chapter 3, 4 and 5
[11] Both codes are issued by FRC, they are recent regulations guiding the practice of corporate governance.
[12] Arad Reisberg, ‘The UK Stewardship Code: On the Road to Nowhere’ (2015) 15 JCLS 217, 219
[13] Arad Reisberg, supra note 12, at p. 252