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Out-Law Guide 1 min. read

Corporate social responsibility – the UK Corporate Governance Code

This guide is based on UK law as at 1st February 2010, unless otherwise stated.   It is part of a series on corporate governance.

Although no part of the UK Corporate Governance Code is specifically concerned with corporate social responsibility (CSR), there is some recognition that a company’s duties extend beyond its shareholders:

"The board should set the company’s values and standards and ensure that its obligations to its shareholders and others are understood and met" – supporting principles, A.1.

Moreover, the Turnbull Guidance (annexed to the Code) makes clear that risk assessment should cover not only narrow financial risks but also those related to “health, safety and environmental, reputation, and business probity issues”.

The Companies Act 2006 has now added to those pressures by requiring directors to have regard to community and environmental issues when considering their duty to promote the success of their company (see: Directors' duties, an OUT-LAW guide) and by the disclosures to be included in the Business Review. (See: The Business Review, an OUT-LAW guide.)

Increasingly, CSR is seen as part of best practice by both the City and the government. The Association of British Insurers, whose members own more than 20 per cent of the companies on the London Stock Exchange, publishes guidance on CSR-related issues for both companies and investors. Its 2007 “Socially Responsible Investment Guidelines” ask that the annual report highlights a company’s environmental, social and governance (ESG) risks. A remuneration committee should also disclose whether it considers corporate performance on ESG issues when setting remuneration for senior executives, and whether an incentive structure may inadvertently encourage “irresponsible” ESG behaviour.

The government sponsors a CSP website, on which it says it has “an ambitious vision for UK businesses to consider the economic, social and environmental impacts of their activities, wherever they operate in the world”.

Most companies are keen to talk about social and environmental issues in their annual reports, and many argue that complying with CSR guidelines has become a commercial necessity. At the least, the growing number of ‘green’ and ethical investment funds needs to find ‘green’ and ethical businesses to invest in.

The charity Business in the Community claims a membership of over 850 of the UK’s top companies “committed to improving their positive impact on society”. It publishes a Corporate Responsibility Index, which measures the performance of companies in terms of how well they apply CSR values to their business.

For bigger companies in particular, CSR is, it can be argued, not an add-on or an optional extra: it is an integral part of good governance.

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