In 1974, the New York Times reported on plastic producers which had exposed their workers to vinyl chloride in full knowledge of its harmful effects; during the 1980s asbestos manufacturers were severely criticised for allowing young children play in piles of toxic material in South Africa while being aware of how such conduct would not be permitted in their home countries. During the Vietnam war, awareness in the United States had increased about large companies (such as General Motors, Dow Chemical and Chrysler) which seemed to be making huge profits from the warfare and even activities like napalm bombing. These, and innumerable other examples, show us why discussions about corporate social responsibility (hereinafter referred to as "CSR") have moved largely from the academic forum (beginning from the time Berle and Dodd first had their classical debate) to the boardroom, and why they should continue to progress towards a level of reform which would serve the public interest in a better way. The question focuses on, firstly, the extent to which company law should play a role in such reform; and secondly, the techniques available in company law to encourage this. For the purpose of clarity it would be apt to answer these questions in three stages: (i) What is the meaning of CSR and its advantages? (ii) What legal mechanisms are available for achieving CSR? (iii) What advantages and disadvantages do legal techniques in company law have in relation to other types of reform?

CSR is defined by Brudney as "incurring uncompensable costs for socially desirable but not legally mandated action". While many other definitions of CSR exist, Parkinson perceptively provides a distinction between "profit-sacrificing social responsibility" of the type defined by Brudney and "social involvement", which is wider and involves an overall increase in sensitivity to social concerns and third parties affected by corporate activities without necessarily deviating from the goal of profit maximisation. To clarify things further, he also distinguishes between CSR which concerns parties directly affected by a company’s primary activities ("relational responsibility") and CSR which is advantageous to those outside the ambit of such operations ("social activism"). Both types of CSR are subject to the same set of distinctions; there is the relational responsibility / social activism which involves a change in corporate goals, and there is the relational responsibility / social activism which allows the pursuit of existing goals within certain constraints (‘obligations’ in the case of the latter). ‘Prudential’ constraints/obligations are further distinguished from ‘other-regarding’ constraints/obligations: the former refer to measures which protect profitability in the long term by sacrificing short term profits, while the latter reflect more ethical and moral concerns which may necessitate the sacrificing of some profits in order to benefit others. For example, a self-imposed constraint on a company to have higher safety standards than those required by the law would be ‘other-regarding’, whereas one which requires a company to adopt environmentally-friendly policies in order to attract more customers would qualify as ‘prudential’.

It is the area of ‘prudential’ constraints and obligations which the current legal framework is most conducive towards. Can anything be done to make the other forms of CSR more favourable in the eyes of the law?

There is a perceived need for CSR because of an increasing awareness of market failures (such as negative externalities and inadequate information) in the economic sphere, deficiencies in current systems of corporate governance and state regulation, as well as a growing sensitivity towards moral, ethical and public policy issues in the corporate context. Julia Tolmie specifically refers to (large) corporations as being the real target of the CSR debate, because unlike small businesses run by individuals, their large-scale operations, separate legal identities and the protection conferred upon them by limited liability enable them to relinquish responsibility for many of their wrongdoings (Freiberg). Glasbeek explains this is why most corporations are in fact very small; they were formed in order to take advantage of a legal form which would empower them to "avoid some of the usual costs of doing business" and "dodge responsibility". One argument in favour of executing change through the channels of company law thus results from this phenomenon: since the law which attempts to protect shareholder interests has really evolved with regard to the smaller (and "more controlled") entity, it is not entirely appropriate for the regulation of huge corporations where "this problem is so quantitatively different that it has become qualitatively different".

These observations aside, there are other benefits of using CSR as a reform tool. Tolmie suggests that since government regulation is generally seen to be the best solution to market failures, CSR thus only "usefully adds something to the present position…if it effectively redresses deficiencies…in the regulatory process". CSR, in theory at least, should offer the advantages of speed, innovation and reduction in informational distortion at three stages in the political process, and be supported by the fact that forms of the concept already exist effectively in the law (eg. tort, environmental legislation) as well as outside the law (eg. public relations). Other potential benefits of CSR include the promotion of closer relationships between governments and corporations, the relief of governmental resources from the strain of enforcement and monitoring costs, the protection of real concerns from switches in policy, political capture and/or political capitalisation, the emphasis on preventive rather than reactionary measures, the flexibility and accuracy resulting from a focus on factual situations instead of rigid and generalised rules, the inculcation of internalised values and the production of more cost-effective solutions.

The discussion over which method is best in achieving greater levels of CSR in corporations has largely revolved around the distinction between legal and extra-legal techniques. Advocates of the former believe, inter alia, that since the present legal framework limits the extent to which corporations can allow for non-profit maximising considerations in their decision-making, the starting point for reform should be the law. On the other hand, academics like Professor Kenneth Andrews of Harvard University proclaim that if corporate power is controlled more by law than by conscience, this would require the expenditure of too much national time, energy and resources on setting and enforcing standards. Before we proceed further with this debate, it would be fitting to remember to avoid what Professor Eisenberg has labelled the "Quack-Cure Problem"; that is, the profitless emphasis on ‘cures’ that have no potential to solve the problem at issue.

Corporations are creations of law, and thus a scrutiny of the current legal approach to their governance should constitute an enlightening prologue. Directors’ duties are legally defined around the notion of the best interests of the company as a whole, which are in turn interpreted by the courts as being the "best interests of shareholders". Evidence of this can be gleaned from such documents as the City Takeover Code, which forbids directors from certain forms of conduct that undermines the supremacy of shareholders’ interests in potential takeover situations. Cases like Hutton v West Cork Railway and Evans v Brunner also show how the courts accept corporate generosity only to the extent that it benefits or is capable of benefiting the company. In Simmonds v Heffer, the court held a donation to the Labour Party’s general campaign fund to be ultra vires while another political donation was construed as being valid because it went to the funding of publicity that helped furthered its own object of opposing cruelty to animals. Because these cases involved the consideration of what directors (subjectively) believed to be in the best interests of the shareholders, they have attracted a lot of criticism for not having displayed an accurate assessment (on the courts’ part) of the probable return to the companies in the long term. Antithetically, this has strengthened the position of those who argue that the legal model will accommodate some degree of profit-sacrificing responsibility. They are further supported by the ruling of the Court of Appeal in Re Horsley & Weight that a company’s objects are not restricted to commercial ones (as long as they are not illegal) and that a company would be allowed to use its capital for gratuitous or non-commercial reasons if such action fell within its stated objects. Furthermore, s. 309 of the 1985 Companies Act imposes a statutory duty on directors to "have regard" to the interests of employees; this is a useful tool as it can be interpreted liberally to imply that a director could, in circumstances regarded by himself as appropriate, subordinate the shareholders’ interests to his employees’.

To augment a point made under section (1)b above, Professor Weiss’s analysis of the regulatory crisis (albeit in America) provides a helpful insight into the real crux of the problem: because the crisis has resulted from systemic failure, the best way to resolve it is by making structural alterations to one or more of the institutions within the system. Among the three institutions involved in the regulatory system – government, society and the corporation – the first (government) appears to Professor Weiss to be the most suitable platform for reform, while the corporation takes second place. A suggestion for reform in the former would be to substitute command-and-control regulatory programmes with market-based schemes of incentives and disincentives. Even so, Professor Weiss acknowledges that due to political, informational and implementation difficulties, such market-based regimes will only have a limited effect unless a high level of corporate cooperation is present. This leads him to conclude that regulatory reform can only be achieved if corporate reform is first attained!

Thus Professor Weiss proposes two fundamental changes in American corporate law: (1) the development of a new legal norm, "altruistic capitalism", by which corporate conduct can be measured; and (2) the creation of a "National Directors Corps", an elite group of socially responsive directors from which the state should require all large companies to draw two-thirds of their management personnel. Striking similarities can be drawn between the latter recommendation and one of Parkinson’s four strategic proposals for company law reform in the UK - the alteration of the composition of the board of directors. In fact the model of responsibility to which Professor Weiss’s proposal can be attributed is described by Parkinson as one which attempts to insert a ‘conscience’ into the company by introducing people with that faculty onto its highest level of management, as distinct from another model where representatives of affected groups (such as employees) are given direct input into the decision-making process. The "general public directors" of Stone and "constituency directors" of Nader, Green and Seligman thus belong to this (mainly American) model, while employee representation schemes such as that present in Germany fall within the other (mainly European) category.

One advantage which the latter model has over the former is that it enables company policies to emerge as a result of interaction and bargaining between the affected parties and decision-makers, thus avoiding a major problem with the former approach – a lack of easily identifiable and reliable principles of guidance. Other difficulties with the former model, such as weak bargaining position and lack of information, may also be prevented from arising. But neither is the latter approach free from practical problems of its own (for instance, the difficulty of working out a suitable scheme of representation where hundreds of small suppliers are involved).

At present, non-executive directors are required by the Cadbury Code to carry out certain supervisory functions and be ‘independent’ of management. The reality, however, is that these directors are usually appointed by management, and so the effectiveness of their role has been severely undermined (Parkinson). Therefore, in order to redress this defect, Parkinson proposes a change in the way non-executive directors are nominated and appointed - one possibility would be for the company’s supervisory board to nominate its own members, whose final appointments are then approved by the shareholders and employees (through a works council, for example). Although these directors could carry out their supervisory duties in a single-tier board, a two-tier board structure would perhaps be more desirable because of its functional clarity. Such a system would also have several advantages over the current disciplinary framework; for example, an improved cognitive base on which decisions can be made and the enabling of management to run its business effectively without the adverse effects of being preoccupied with share price.

The second of Parkinson’s proposals for legal reform is to expand the scope of director’s fiduciary duties. Following Sealy’s line of argument, he believes that such an extension would not lead in reality to a departure in company behaviour from the will of management, whether in objective or subjective form, but is still essential to the creation of "an appropriate legal setting for changes in management behaviour that are the intended consequence of other methods of inducing responsibility". For example, a duty could be reformed to include non-profit maximising obligations in a director’s conduct of company affairs. Although many fear that such an expansion would lead to a hazardous loss of control over management, Parkinson believes this is unfounded as the present duty to maximise profits does not even provide as much a significant form of control over managerial discretion as it is currently believed to. The main difficulty is not so much with the impairment of control as it is with ensuring that directors become more responsive to third-party interests in a meaningful way. Thus "procedural fiduciary duties" would surely play a useful role in the internalisation of negative externalities into the corporate decision-making process (Teubner).

An example of a procedural measure, apart from that already mentioned (alteration of the board structure), would be to extend current disclosure requirements. The obligations presently imposed by the Companies Act (for instance s. 234 which requires a company to disclose its policy on employment of disabled people) are extremely limited (Parknson), and various propositions have already been raised with the view of increasing their scope – most notably from a White Paper in 1973 and the Social Audit in 1974. These recommendations are premised mainly on the basis of either embarrassing managers into more socially responsible behaviour, or furnishing them with an incentive to do so. Parkinson submits two further justifications relating to this: (1) A society run by democratic principles should be supportive of the greatest level of accessibility to information about what companies are doing; and (2) a higher level of disclosure would help "balanc[e] and supplemen[t] purely financial indicators of company performance". Furthermore, the Accounting Standards Steering Committee has asserted in their Corporate Report (1975) that managers naturally respond to indicators which judge their performance (though Parkinson warns against the danger of overrating such responsiveness to public opinion).

Sanctions could be provided in the form of ethical shareholders (such as the British Medical Association or Unity Trust) refusing to buy shares in companies which have been revealed to be socially irresponsible, or divesting the shares they already hold in such companies. They could also exercise those means of shareholder control which are available to them (such as board nominations and shareholder resolutions) in order to bring pressure on management. Other forms of sanctions could come from groups with contractual relationships with companies (such as employees and consumers), or social monitors like the media and public regulatory agencies. All the abovementioned parties would benefit from a more comprehensive disclosure framework, but only if the extended duties are effected on a mandatory basis and require both favourable and unfavourable information to be announced. To augment the system further, some form of standardization of disclosure reports should be developed as well as an external check on them. Alternatively, of course, information about companies could be collected and reported on by other organisations (such as Social Audit Ltd) instead of requiring the companies to perform these activities themselves.

The last proposal put forth by Parkinson is to provide for mandatory consultation with third parties affected by company decisions. By giving consultees a channel through which their opinions can be heard, a better accommodation of interests can be achieved since the parties have at least an opportunity to influence the decision-making process. Mandatory consultation can already be found in some quarters of industrial relations, especially in the areas of health and safety and transfers of undertakings. However, we are called to pay attention to situations where due to factors such as high unemployment rates and recession, the bargaining strength of a third party relative to that of the company may be weakened considerably and a mere obligation (on the part of the latter) to negotiate in good faith may not be effective enough to remedy this. A better solution would be to call for a duty to agree instead; this would require an external mediator to impose a solution where the bargaining process has reached a deadlock.

The question whether encouraging CSR should be an aim of company law calls for a general comparison between legal and extra-legal techniques as well as a specific comparison between techniques in company law and those in other types of law. Extra-legal mechanisms, such as self-regulation, are generally regarded as suitable gap-fillers for deficiencies found in the legal regulation of CSR. Tolmie identifies four main categories of such deficiencies. The first originates from the problematic nature of the social externalities concerned; because legislation in the UK tends to be reactive rather than preventive, many social problems are not politically recognised until they worsen into widespread crises. The second category involves the superior knowledge and expertise that companies have in relation to their activities and the externalities they create. Because of this, and the fact that governments are often trapped by their reliance on corporate information and cooperation, companies tend to conceal certain details from governmental agencies and antagonistic attitudes often develop between the two institutions. However, I would dispute Glasbeek’s assertion that the government is often "constrained and even intimidated by a closely connected and single-minded business elite" because, as an article in the Sunday Telegraph recently pointed out, companies also have a strong desire to "curry favour" with the government. The third category results from informational, political and implementation problems faced by the political process and the fourth consists of inherent defects found in legal rules themselves. Extra-legal solutions not only avoid most of these problems, they are also cheaper to enforce and many of the secondary costs associated with legal regulation are also reduced. Furthermore, as Professor Weiss has argued, unless CSR values are internalised within decision-making structures defiant corporations will continue to oppose and hinder the enactment of legislative measures which affect them directly (as has happened in America), and even after enactment contend with specific points and court decisions (usually on grounds of due process) and comply with regulations only at a minimum level. Inequalities in the economic system mean that only the wealthy corporations will be able to exploit weaknesses in the enforcement regime, and the system of governance is rendered more arbitrary by the fact that a possible overwhelming increase in precedents could weaken the principle of stare decisis.

However, this does not mean the law should not be employed at all: in many circumstances it can be used to create a favourable environment for extra-legal constraints to be imposed. Furthermore, many companies are involved in white-collar crimes and the only way to counteract this is via legal channels of reform. Also, since most constraints are interpreted within the ambit of the profit-maximising goal, an alteration in the legal approach to this ideal would provide directors with greater leeway in making socially responsive decisions. And although it is more expensive to enforce, legal control does provide a more tangible means of identifying and measuring social problems than the rather nebulous notion of ‘instilling conscience’.

As it is company law which defines the legitimate objectives of corporations, it is arguable that this should therefore be the primary medium for reform. Furthermore, other kinds of law are not as effective in inculcating an attitude of CSR within the corporate structure, since compliance with their provisions may only be borne out of a wish to maintain the company’s profitability in the long run. Use of the corporate legal machinery also takes advantage of the superior informational base of companies, and has been expounded by Professor Weiss as being a prerequisite for governmental reform (this implies that even if every tort, environmental, employment and health/safety legal rule that can be thought of is imposed, their effectiveness will still be undermined by unrectified deficiencies in the corporate legal framework).

Yet it should be remembered that company law cannot and should not be expected to regulate all the nooks and crannies of economic life. Alcock paints a picture of a complex and rapidly changing world economy, different in many aspects from the scenario described by Parkinson in the opening chapter of his book. Furthermore, increasing the power of employees in corporate management may lead to "governance chaos" and "social irresponsibility" instead of a more efficient economy. Directors’ duties, he submits, should not be modified to include CSR considerations but rather tightened up to enable the courts to impose a "professional standard of skill and care in trying to maximise profits" on management. And neither will giving shareholders superior rights of intervention be useful if they remain unwilling to exercise those rights. Moreover, it is extremely difficult to find suitable replacements for unsatisfactory managers (though the market for corporate control plays a significant role in mitigating this problem). Lastly, there is the ‘legitimacy argument’ which contends that by granting directors greater discretion, their influence over major decisions about public policy is increased and this usurps the democratic rights of the state.

Thus a preclusive focus on any one branch of the law would be best avoided; opt instead for a winning combination of company law strategies and other forms of legal reform. Most of the arguments for and against the former have yet to progress beyond the hypothetical stage; only time and experience will be able to prove their merit.