July 02, 2010

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CSR Reporting and the UK Companies Act <P style="TEXT-ALIGN: justify; MARGIN: 0in 0in 0pt; BACKGROUND: white" class=MsoNormal align=justify><span><span style="FONT-FAMILY: Arial; COLOR: black; FONT-SIZE: 10pt">Since the passing of the UK's</span></span><span class=apple-converted-space><span style="FONT-FAMILY: Arial; COLOR: black; FONT-SIZE: 10pt">&nbsp;</span></span><span class=apple-style-span><span style="FONT-FAMILY: Arial; COLOR: black; FONT-SIZE: 10pt"><A href="http://www.opsi.gov.uk/acts/acts2006/pdf/ukpga_20060046_en.pdf" target=_blank><span><font color=#810081>Companies Act</font></span></A>&nbsp;</span></span><span><span style="FONT-FAMILY: Arial; COLOR: black; FONT-SIZE: 10pt">in 2006 companies and <A href="http://corporate-responsibility.org/" target=_blank>NGOs</A> have been asking themselves about the implications of directors' duties. In particular, there has been much discussion about s.172's obligation for a director&nbsp;to</span></span><span><span style="FONT-FAMILY: Arial; COLOR: black; FONT-SIZE: 10pt">&nbsp;“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, and in so doing have regard (amongst other matters) to the impact of the company’s operations on the community and the environment.” What is the required scope of any such enquiry and how does this relate to a company's CSR programme? Whilst NGOs have been exploring opportunities to hold companies accountable on this legal basis there has, in fact,been no judicial guidance to date,&nbsp;although the Government did clarify in 2007: </span></span></P> <P style="TEXT-ALIGN: justify; MARGIN: 0in 0in 0pt; BACKGROUND: white" class=MsoNormal align=justify><span><span style="FONT-FAMILY: Arial; COLOR: black; FONT-SIZE: 10pt"></span></span>&nbsp;</P> <P style="TEXT-ALIGN: justify; MARGIN: 0in 0in 0pt; BACKGROUND: white" class=MsoNormal><span><span style="FONT-FAMILY: Arial; COLOR: black; FONT-SIZE: 10pt"></span></span><span><em><span style="FONT-FAMILY: Arial; COLOR: black; FONT-SIZE: 10pt">“The words ‘have regard to’ mean ‘think about’; they are absolutely not about just ticking boxes. If ‘thinking about’ leads to the conclusion, as we believe it will in many cases, that the proper course is to act positively to achieve the objectives in the clause, that will be what the director’s duty is. In other words ‘have regard to’ means ‘give proper consideration to’”.</span></em></span><span style="FONT-FAMILY: Arial; COLOR: black; FONT-SIZE: 10pt"><br><br></span></P><O:P></O:P> <P style="TEXT-ALIGN: justify; MARGIN: 0in 0in 0pt; BACKGROUND: white" class=MsoNormal><span><span style="FONT-FAMILY: Arial; COLOR: black; FONT-SIZE: 10pt">However, the story does not end here. Under s. 417 of the Act an annual business review must be given “to inform members of the company and help them assess how the directors have performed their duty under section 172. […] The business review must contain a description of the principal risks and uncertainties facing the company.” For quoted companies the obligation explicitly includes environmental matters and social and community issues “to the extent necessary for an understanding of the development, performance or position of the company’s business.”<O:P></O:P></span></span></P> <P style="TEXT-ALIGN: justify; MARGIN: 0in 0in 0pt; BACKGROUND: white" class=MsoNormal><span><span style="FONT-FAMILY: Arial; COLOR: black; FONT-SIZE: 10pt"><O:P></O:P></span></span></P> <P style="TEXT-ALIGN: justify; MARGIN: 0in 0in 0pt; BACKGROUND: white" class=MsoNormal><span style="FONT-FAMILY: Arial; COLOR: black; FONT-SIZE: 10pt">More and more companies are producing such reports – often offering well-edited hard- and soft-copy versions full of images displaying the harmony between operations, the environment and the local community. An interesting parallel debate has sprung up amongst CSR experts about the preferred (and possibly required) format of such reports. But much more important than format and form of CSR reports should be their content. In particular, the question must be raised whether a CSR report is providing an accurate&nbsp;account of matters necessary to understand the development, performance or position of the company’s business.<O:P></O:P></span></P> <P style="TEXT-ALIGN: justify; MARGIN: 0in 0in 0pt; BACKGROUND: white" class=MsoNormal><span style="FONT-FAMILY: Arial; COLOR: black; FONT-SIZE: 10pt"><O:P></O:P></span></P> <P style="TEXT-ALIGN: justify; MARGIN: 0in 0in 0pt; BACKGROUND: white" class=MsoNormal><span style="FONT-FAMILY: Arial; COLOR: black; FONT-SIZE: 10pt">The ongoing allegations against Vedanta and their mining activities in Niyamgiri provide a good example:<span> Vedanta has continuously portrayed itself as concerned about communities and employees affected by their operations and has published <A href="http://ar2009.vedantaresources.com/sustainability_2.html" target=_blank>CSR reports</A> to this effect. In particular, it has emphasised the importance it gives to stakeholder engagement. But the evidence gathered by</span><span class=apple-converted-space>&nbsp;</span><A href="http://www.actionaid.org.uk/101192/vedanta_mining_poverty.html" target=_blank><span><font color=#810081>NGOs</font></span></A><span class=apple-converted-space>&nbsp;</span><span>tells a completely different story, including evidence that no such engagement has ever been effectively pursued. The report also fails to address any conflict with communities over the Niyamgiri operations and instead highlights choice projects. News that the <A href="http://af.reuters.com/article/metalsNews/idAFLDE66Q13U20100727" target=_blank>Indian government</A> is now further looking into the complaints made against Vedanta and the <A href="http://edmi.parliament.uk/EDMi/EDMDetails.aspx?EDMID=41509" target=_blank>UK Parliament’s</A> recent motion to condemn the company’s actions as unethical and that plans for mining should be abandoned undoubtedly demonstrate a link between the claims made by NGOs and not addressed in Vedanta’s CSR report and the current hostile climate towards the miner’s operations. <span style="mso-spacerun: yes">&nbsp;</span><O:P></O:P></span></span></P> <P style="TEXT-ALIGN: justify; MARGIN: 0in 0in 0pt; BACKGROUND: white" class=MsoNormal><span><span style="FONT-FAMILY: Arial; COLOR: black; FONT-SIZE: 10pt"><O:P></O:P></span></span></P> <P style="TEXT-ALIGN: justify; MARGIN: 0in 0in 0pt; BACKGROUND: white" class=MsoNormal><span><span style="FONT-FAMILY: Arial; COLOR: black; FONT-SIZE: 10pt">It will be interesting to see whether the <ST1:COUNTRY-REGION w:st="on"><ST1:PLACE w:st="on">UK</ST1:PLACE></ST1:COUNTRY-REGION> company is ever legally challenged about the content of its report <span style="mso-spacerun: yes">&nbsp;</span>and the&nbsp;alleged&nbsp;inaccuracies. Admittedly, it’s pretty unlikely. Nevertheless, companies should take this to heart and learn their lessons before they are legally&nbsp;challenged – and possibly publicly&nbsp;exposed.</span></span><span style="FONT-FAMILY: Arial; COLOR: black; FONT-SIZE: 10pt"><O:P></O:P></span></P> <P style="TEXT-ALIGN: justify; MARGIN: 0in 0in 0pt" class=MsoNormal><O:P><span style="FONT-FAMILY: Times New Roman" size="3"></span></O:P></P> <P style="TEXT-ALIGN: justify">&nbsp;</P>

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