Global Market Brief: The Bold British Companies Bill

14 MINS READOct 20, 2006 | 01:48 GMT
A surprise amendment to the enormous Companies Bill under discussion in the British House of Commons was proposed Oct. 17. The amendment would require publicly listed companies in the United Kingdom to report annually on their interactions with other companies in their supply chains — including on environmental and social matters. Even if this disclosure amendment fails, the bill will still require publicly listed companies to include environmental and social reporting in their annual Business Review. The bill could throw a wrench into London's battle to remain the global financial center of choice. London already boasted a burgeoning financial district in 2002, when the passage of the Sarbanes-Oxley Act in the United States drove some companies away from listing on the New York Stock Exchange. Now the British Companies Bill could create a new burden for London-listed companies, tilting the balance back toward New York — particularly since there are rumors that some of the more onerous elements of Sarbanes-Oxley will be reformed. In an Oct. 18 meeting with financial services executives, British Prime Minister Tony Blair's heir apparent, Gordon Brown, pledged to reduce the executives' regulatory burden to make London a more attractive financial center. This may or may not be a sufficient spoonful of sugar to convince bankers that the controversial provisions in the Companies Bill are worth swallowing. Even so, advocates argue that requiring expanded reporting from publicly listed companies will actually be a financially sound move. It is difficult to understand the new reporting requirements in the bill as anything other than a potential surrender of all of the advantages gained in London as a result of Sarbanes-Oxley. Perhaps the United Kingdom is gambling that triple bottom line, or "sustainability," reporting — economic, environmental and social — by corporations is an inevitable societal demand that all Western governments will have to require sooner or later. According to this line of thought, such reporting is an unavoidable outcome of the attempt to wed liberal values to the sharp edges of globalized capitalism. As in the case of carbon caps, British leaders are convinced that expanding legally enforced social responsibility is not only a moral demand and a political necessity, but it also will give British finance an edge in the medium term. By becoming the first major financial center to require companies to comply with this more-stringent reporting standard, London hopes to force the United States to follow suit, at which point British institutions will have a few years of golden sanctimony and a significant head start on the matter — while the United States tries to play catch-up. This explanation is not entirely satisfactory. It is hard to conclude that such a gamble would pay off — that the potential benefit of gaining an eventual competitive edge outweighs the risk that companies worldwide will start to avoid listing in London. It could be that ultimately, despite some hopes of ameliorating the downsides, this piece of legislation is motivated not by competitive instinct but by the British polity's evolving social values. In addition, it could be that after an initial adjustment period, such reporting will turn out not to be the dragon people feared. There was once a business outcry over the idea of environmental impact statements, for example — something that has become matter-of-course these days. Regardless of the underlying motivations and assumptions, for now this is a tricky game. To avoid spooking companies in its attempt to be pioneering, the section of the Companies Bill requiring a Business Review contains no specifications as to what this social, economic, environmental — and possibly supply chain — reporting should look like, nor does it demand an auditing function. It is merely a shell of a requirement, allowing companies to take it as seriously as they wish. In December 2005, a more stringent version of the same concept, the Operating and Financial Review, was removed from consideration by Parliament — but companies in London already had begun to prepare to satisfy its requirements. Meeting the demands of the more modest Business Review, then, will not appear as burdensome. Meanwhile, although the Companies Bill does not provide guidelines on how to conduct environmental and social reporting, a de facto standard for such reporting has emerged in the marketplace: the Global Reporting Initiative (GRI). This month, GRI released the third version of its reporting guidelines (G3) to general fanfare, not just by human rights and environmental activists but by some of the world's largest banks and accounting firms. The latter anticipate significant business opportunities by providing ancillary services associated with this new form of reporting. They also view it as a form of political cover, providing companies and projects with a line of defense against lawsuits and market campaign activism. This is not to say that Parliament or a regulatory agency is likely in the short run to turn to the G3 for ready-made standards. Instead, companies are likely to voluntarily adopt this standard, rather than attempt to re-invent the wheel and risk criticism for doing so inadequately. Oct. 17 was the first of three consecutive days of the House of Commons' consideration of the Companies Bill. In the days leading up to the hearings, activists, including ActionAid International, the Corporate Responsibility Coalition (better known as CORE), Friends of the Earth and the Trade Justice Movement, demanded three changes be made to the bill in order to "plug loopholes," and hinted at a fourth more vague demand. The three demands are that the Business Review include specific reporting standards and audit requirements, that it extend to a company's supply chain and that it apply to all medium and large businesses operating in the United Kingdom — not merely those listed on the stock exchange. The supply chain amendment appears to have been the one concession politicians were willing to make, and as such, will probably survive final passage of the bill. Thus far, the bill is sufficiently similar to the version passed in the House of Lords that it likely will win acceptance by both houses of Parliament and passed into law. If Lords balks, the bill could be delayed by a year. The fourth demand hints at the future: ActionAid in particular is calling for an amendment requiring companies to be held responsible for reporting on the extent to which they are ameliorating poverty through their company's activities. Although this idea is not likely to see the light of day in the current Companies Bill, it is part of a larger idea that is gaining traction as more modest notions of corporate social responsibility become enshrined in de facto — and now de jure — public policies. This emerging concept is that corporations have the ability — and therefore the duty — to contribute to humanitarian pursuits such as helping developing nations reach their Millennium Development Goals. Currently, companies are voluntarily playing off this concept for image purposes. For example, Gap, Motorola and Apple now offer a version of select products under the RED brand, promising part of the profits to the Global Fund to Fight AIDS, Tuberculosis and Malaria. Returning to the supply chain issue, the amendment's introduction this week caused a general outcry among business groups, including the Confederation of British Industry (CBI) and the Association of British Insurers. Some of the initial consternation was likely caused by a misunderstanding — companies thought the amendment might require them to disclose the full list of their suppliers. Industry Minister Margaret Hodge refuted this, saying the amendment merely requires a narrative account of "relationships essential to the business." This kind of vagueness reassures some businesses, while further alarming others. Few companies currently publicly disclose their full list of suppliers, and none wants to be forced to start. At the same time, companies do not like uncertain and vague demands placed on them. If the supplier amendment had actually demanded full supply chain disclosure — and such legislation might be only a matter of time — it would have raised concerns about competition and business privacy. It would have raised a security concern. Groups such as Stop Huntingdon Animal Cruelty (SHAC) have developed a strategy of targeting not only their primary target (in this case, Huntingdon Life Sciences), but also all other companies that do business with the primary target. SHAC has been known to threaten and harass not only company executives, but also their children at school. Its members engage in vandalism and have occasionally turned violent. Although disclosure exemptions will likely be allowed if a company can demonstrate that specific disclosures pose a danger to its employees, such proof of vulnerability might only be compelling following an unpleasant incident — at which point it is too late. Even without the supplier amendment, the Company Bill is revolutionary — and in a way that is more fundamental than reporting requirements. The beginning of the bill's section on the general duties of directors states: 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, and in doing so have regard (amongst other matters) to — (a) the likely consequences of any decision in the long term, (b) the interests of the company's employees, (c) the need to foster the company's business relationships with suppliers, customers and others, (d) the impact of the company's operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company. In other words, the primary document detailing the reason corporations exist in the United Kingdom is departing from the established capitalist mantra that the sole duty of a corporation is to generate profits for shareholders (although the argument goes that in the future these considerations will be the best way to generate profits). The eventual implications of this departure will be far-reaching, requiring that companies submit their activities to democratic scrutiny and approval, judging whether the company is serving appointed social purposes. The United Kingdom is deviating from the wisdom of Adam Smith on this issue, in part because of a popular cultural difference with the United States. Public opinion momentum in the United Kingdom is strongly in favor of holding companies to more stringent environmental and social requirements. Even Tory leader David Cameron has been remaking the Conservative image into an environmentally conscious one. Whereas abortion and gay marriage might be hot topics backed by religious conviction in the United States, the pressing issues addressed from British pulpits are more than likely related to social justice and global poverty. As the average person gains more and more access to information through campaigns by nongovernmental organizations and news reports highlighting the dark side of doing business globally — particularly in the most unstable and poorly regulated foreign countries — expanded triple bottom line reporting could provide precisely the kind of reassurance investors need to mitigate their public risks of operating across the globe. Alternatively, the British Companies Bill could make London a financial center of the past. INDIA: India's Tata Steel offered nearly $10 billion to purchase London-based Corus, in what would be the biggest foreign acquisition by an Indian company in history. Currently, Tata steel is the 55th largest steelmaker in the world. If the deal goes through, it will become the sixth. The deal might be particularly well-timed for India since it coincides with lobbying by U.S. auto manufacturers to end protective tariffs on steel in the United States. It also coincides with trouble for the world's largest iron ore mining company, Brazil's Companhia Vale do Rio Doce, which is suffering from attacks by Xikrin Indians, who demand increased compensation for mining in their region. INDIA: India's National Security Council plans to prohibit foreign investment from China, Pakistan, Afghanistan, Bangladesh, Taiwan and North Korea based on intelligence that they could pose security risks, Pakistan's Daily Times reported Oct. 19. The government also plans to closely monitor any foreign investment in telecommunications, information technology and airports, and could restrict foreign investment in those areas as well. India has given Chinese companies problems recently with developing airport facilities. Though this could be an honest attempt by India to control security risks, it likely will turn into a bureaucratic boondoggle and a way for more middlemen to make money off of bribes. RUSSIA: The Russian Federal Service for Oversight of Natural Resources submitted documents Oct. 16 to the Federal Agency for Management of Mineral Resources to revoke 21 licenses held by the Russian private oil company LUKoil. The oversight body reports numerous violations at oil extraction sites as well as use by LUKoil of fraudulent documents. LUKoil has pledged to correct any violations within the allotted three-to-six months. The oversight service also submitted documents Oct. 19 for Rosneft's subsidiary Sakhalinmorneftegaz to have its license reviewed on similar allegations. Both investigations, as well as the ones involving foreign firms Royal Dutch/Shell and ExxonMobil, can be seen as a sign of the Kremlin attempt to exert greater control over its energy industry and force the energy giants to conform to Moscow's policy. CHINA: Wal-Mart placed a $1 billion offer for Trust-Mart in China, but still awaits the final approval from the Ministry of Commerce. If the deal succeeds, Wal-Mart will be able to rival its competitor Carrefour, the largest foreign chain in China. Wal-Mart recently has suffered setbacks in its attempts to gain market dominance outside of the United States, pulling out of South Korea and Germany. Its China bid indicates it will not give up on China as easily, despite China's increasing aggression to unionize foreign companies. CHINA: China's government, in a bid to cozy up with Taiwan's Democratic Progressive Party (DPP), announced Oct. 17 it will import more agricultural products from the island. Many of the island's rich farmers support President Chen Shui-bian's DPP, which promotes independence from China. Increasing trade between China and Taiwan is likely to make Taipei more hesitant to provoke its large neighbor to the north with talk of independence. U.S.: The Chicago Mercantile Exchange agreed to buy the Chicago Board of Trade for $8 billion Oct. 17. The merger aims to create the world's largest market for financial derivatives. Bankers worldwide are concerned that the combined Chicago exchange creates a near monopoly on futures trading, and they are seeking ways to create new competitive alternatives. BOLIVIA: Brazilian oil company Petroleo Brasileiro and France's Total overestimated the combined (proven and probable) reserves of the San Alberto and Itau natural gas fields in Bolivia by more than 4 trillion cubic feet (tcf), the Bolivian Energy Ministry reported Oct. 18, citing an audit of the fields. This brings the country's total estimated reserves down from 52.3 tcf to 48.7 tcf. This announcement could be part of the Bolivian government's strategy to portray foreign companies as irresponsible in the exploitation of Bolivian resources in the context of the nationalization negotiation. The discovery also could influence the royalty policy if the government feels it should receive a larger percentage for small fields. It also is possible Bolivia is trying to devalue foreign companies' assets to justify low-ball bids for them in the nationalization negotiations. OPEC: The Organization of the Petroleum Exporting Countries (OPEC) met Oct. 19 in Qatar amid promises to cut production by a million barrels per day beginning Nov. 1, with possible additional cuts in second quarter 2007. OPEC ostensibly is cutting production to keep prices up, but Venezuela probably had to cut production anyway because of infrastructure maintenance problems. With new oil finds being developed in the Gulf of Mexico, the African seaboard and elsewhere, the world is not nearly as dependent on OPEC as it once was and prices should continue to fall slowly.

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