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Creating a Corporate Conscience


Written by Emma Flood (Professional Diploma in Legal Practice)




In a rapidly changing world, the law has been unable to keep pace. National laws are unable to regulate the conduct of multi-national corporations because of territorial limits, and international law fails to recognise the multi-national corporation as an entity capable of being held accountable for inflicting or enabling human rights abuses. The term ‘Corporate Social Responsibility’ (CSR) has become synonymous with human rights protection. However, in practical terms the concepts are very different. Whilst CSR initiatives are commitments entered into by companies voluntarily, human rights protection needs a comprehensive and mandatory legal framework to successfully protect the most vulnerable from corporate abuses. This article considers the patchwork legal construct in UK law for protecting human rights from businesses and encouraging companies to be respectful of the social background in which the operate.

Disclosure Requirements

Disclosure requirements may persuade companies to act in a socially responsible manner as a result of the influence disclosure will have on consumers and investors.[1] However, disclosure requirements suffer from lack of effective enforcement. Furthermore, the level to which companies are required to disclose is unclear and far from comprehensive.

The Companies Act[2] s.417 provides for an ‘Enhanced Business Review’. This means that companies must make statements on environmental matters, employee matters, social and community issues including the company’s formal policy on those issues, and how effective that policy is. However, the wording of s.417 implies that if, in the good faith view of the directors, the information is not necessary to gain an understanding of the ‘development, performance or position of the companies business’, it may be left out of the Business Review.  This exemplifies the lack of clarity in meeting disclosure requirements, which may allow companies to avoid including any information which may negatively impact their reputation. This essentially undermines the protection intended to be provided by the provision.

The provisions are enforced by the Financial Reporting Review Panel (FRRP). However, the panel has been criticised for being overly secretive and lacking any real force. For example, legal campaign group ClientEarth lodged a complaint with the FRRP, claiming that mining company Rio Tinto had failed to adequately disclose its environmental impact, in line with the requirements of the Companies Act.[3] The FRRP concluded that Rio Tinto had in fact been in breach of reporting requirements. The brief report issued by the FRRP merely stated that Rio Tinto would be including sufficient information in their subsequent annual business review.[4] This is an example of one of the main concerns surrounding business and human rights; lack of effective enforcement.

However, the real pressure on companies lies in forces of the market, brought about by reputational risk. Shareholders will be dissuaded from investing in companies with a reputation of adverse environmental impact or subsidiaries involved in human rights abuse in third states. This is not only for moral reasons, but also as a matter of investment return. Consumers are sensitive to a company’s reputation, and this may have a significant effect on the prosperity of the company. For example, a study of ethics in the market showed that 70% of consumers surveyed have decided not to buy products from a company they believe to have questionable ethics.[5] The reverse trend is also significant, when Marks & Spencer changed all 38 of their tea and coffee products to their Fair-trade counterparts they noted a 27% rise in sales in just 3 months.[6] This evidence indicates the influence the Enhanced Business Review can have on consumer preferences, investment choices and on business practices. However, this provision would be more effective with greater clarity of what should be provided in the review, higher levels of non-financial disclosure and companies in violation of the requirements being dealt with more strictly.

Disclosure is a persuasive method, fostering a CSR culture and encouraging companies to respect human rights. However, disclosure cannot hold companies directly accountable for human rights abuses and provides no redress for victims.

Enlightened Shareholder Value and Director’s “success” Duty

Another principle within the Companies Act attempts to reconcile the objectives of company law with the wider community in which a company operates. Prior to the enactment of the Companies Act 2006 the Company Law Review, when discussing in whose interest a company should be run, preferred the “enlightened shareholder value” approach.[7] This model recognises that while the duty of directors is to maximise profits for shareholders, this is not best achieved by making short-term business decisions to achieve short term profits. The enlightened approach requires companies to take into account the wider environment in which the company operates, maximising relationships with other stakeholder groups such as customers, employees, the community and the environment, in order to fully realise the company’s potential for profit and successful long-term sustainability. This approach has materialised in s.172 of the Companies Act which provides; ‘A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole’.

As a result a director must consider the long term consequences of decisions, including employee matters, business relationships, the impact of the company on its operating environment, reputation and fairness. This is not an exhaustive list but merely provides areas of particular importance that should be borne in mind by directors.

However, although the Government has stated that the s.172 provision ‘marks a radical departure in articulating the connection between what is good for a company and what is good for society at large[8], this provision in practice does not provide for the more stakeholder inclusive method of decision making as was originally envisioned. In the Scottish case of Re West Coast Capital,[9] it was stated that s.172 did not confer a more substantial obligation on directors and merely codified pre-existing duties under pre-2006 common law. This undermines the idea that the new duty would purposefully contribute to the enlightened shareholder value principle, and promote more responsible corporate behaviour.

Furthermore, it is important to take into account enforceability of directors duties. Director’s duties are owed to the company and therefore can only be enforced by the company, shareholders acting on behalf of the company through the derivative procedure or by a liquidator in the event of winding up. Thus, while the duty may persuade directors to take into account social issues and the interests of other stakeholders, they cannot be held directly accountable by third parties for not taking such considerations into account. Again, a potentially positive contribution to the human rights and business framework is undermined by a lack of effective enforceability.

Furthermore, it is important to note the subjective nature of the duty. In the case of Cobden Investments Ltd[10] it was noted that the s.172 duty to ‘ act in the way he [the director] considers, in good promote the success of the company’ should be interpreted subjectively, as the previously un-codified duties to act bona fide in the interests of the company were.

In addition, the s.172 duty does not require that the director act in the interests of the example matters listed in the section; it merely requires that they have considered them when making their decision. Essentially this means that as long as the director can prove that these matters were taken into account, they will not have acted in breach of their duty. This makes the provision particularly weak in contributing to protection of third party human rights and good corporate citizenship. In addition, there is no requirement for any formal procedure to ensure that directors have taken into account the issues identified. This is a failure on the part of the UK Government to require that companies establish procedures ensuring due diligence on the part of directors, and is again a weakness in enforcement and ensuring compliance with the law.


Companies often have their reputations tarnished for the actions of their suppliers or joint venture partners. Many companies thus include a code of conduct in the terms of contracts negotiated with both external suppliers and subsidiaries, with particular provisions and requirements relating to human rights and CSR standards.[11]Again, this works in partnership with market influence as in order to secure business relationships with large companies, smaller suppliers will need to be able to meet and adhere to their human rights and CSR standards.

The Government is also able to use their market power to secure CSR standards in their procurement contracts. The UK Government has great market power with procurement spending amounting to nearly £220 billion per year.[12]This gives the Government superior contractual power to influence suppliers. Furthermore, the Government is further being held to account on procurement contracts by non-governmental organizations (NGO’s) using the Freedom of Information Act[13] to find out about Government procurement contracts and potential human rights and environmental issues that may arise as a result.

However, the state is increasingly contracting out what should be public functions, which when carried out by private bodies are potentially outside the reach of the framework for human rights protection.[14] One of the most contentious issues surrounding the Human Rights Act (HRA) is its application under s.6(3) to companies carrying out a ‘public function’. The term is not defined in the HRA and the narrow interpretation and reasoning of the courts of ‘public function’ through a series of cases, has created a significant gap in the regulatory framework. This was highlighted in the case YL v. Birmingham City Council.[15] The court had to decide whether Southern Cross Healthcare, who operated a privately owned nursing-home business, were carrying out a ‘public function’ for the purposes of section 6(3) of the HRA. The House of Lords decided that Southern Cross were not. This decision proved to be unpopular and problematic, and to remedy the immediate problem the Government introduced amending legislation to the effect that the provision of publicly funded residential care in privately owned care homes is a public function for the purposes of the HRA.[16] However, this legislative attempt affects only one area of private provision of a public function. The House of Lords noted their concern in their report assessing the Health and Social Care Bill, that while this remedied the immediate problem, it did not address the broader issue of the scope of the meaning of a public function. This provides a further example of the patchwork nature of the legal construct, and the lack of clarity in the standards required.

Concluding Remarks

These are but a few examples of highlighting how the current legal framework concerning human rights and CSR compliance for companies is fragmented, conciliatory and inadequate. While there may be scattered mechanisms for holding companies accountable for disregard of human rights and the wider community, the UK Government presently lacks a coherent strategy to reconcile the often conflicting objectives of company and human rights law.




[1] D.McBarnett.‘Corporate Responsibility; Beyond Law,Through Law,For law’,(2009),University of Edinburgh Press,2009/03

[2] Companies Act 2006

[3] Client Earth, Referral to the Financial Reporting Review Panel Re: The Rio Tinto Group Annual Report 2008,

[4] Ibid

[5] D. McBarnett,‘Corporate Responsibility; Beyond Law, Through Law, For law’, (2009)

[6] Ibid

[7] Lady Justice Arden DBE, ‘Regulating the Conduct of Directors’(2010) Journal of Corporate Law Studies, Vol.10

[8] Introduction and Statement of the Rt. Hon Margaret Hodge, Department for Trade and Industry,Duties of Company Directors’, June 2007

[9] Re West Coast Capital (LIOS) Ltd [2008] CSOH 72

[10] Cobden Investments Ltd v RWM Langport Ltd [2008] EWHC2810 (Ch).

[11]  K.M. Amashi,O.K. Osuji and P. Nnodim, ‘Corporate Social Responsibility in Supply Chains of Global Brands: A Boundary less Responsibility? Clarifications, Exceptions and Implications’(2008) Journal of Business Ethics 81:223–234

[12] National Audit Office, ‘A Review of Collaborative Procurement Across the Public Sector’(2010)

[13] Freedom of Information Act 2000

[14] S. Palmer, ‘ Public Functions and Private Services; A gap in Human rights Protection’(2008), International Journal of  Constitutional Law Vol.6,585-604 ,2008

[15] YL v. Birmingham City Council [2007] UKHL 27

[16] Health and Social Care Act 2008, Section 145

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