Labor’s Approach To Corporate Social Responsibility Stephen Conroy - Deputy Leader of the Opposition in the Senate, Shadow Minister for Trade, Shadow Minister for Corporate Governance and Financial Services

Speech

Transcript - 11 December 2003

Introduction

Good morning.

I'm very glad to be here today to present the Third Annual Ethical Investor Sustainability Awards and to have the opportunity to discuss Labor's approach to corporate social responsibility (CSR) and corporate governance generally.

2003 has been a landmark year for corporate governance with:

• the release of corporate governance guidelines by ACSI, CGI, the ASX and others;
• the release of the CLERP 9 bill;
• the Boral AGM;
• Stan Wallis giving back his payout from AMP;
• Chris Cuffe's $33 million payout upon leaving Colonial;
• Brian Gilbertson's payout of $10.2 million in cash and tens of millions in super after only 6 months at the helm of BHP Billiton;
• AMP executives sharing in a pool of $40million as one-off "demerger payments" in addition to their normal salaries; and
• the Business Council of Australia entering the governance debate.

Hugh Morgan's comments that if shareholders didn't like the way a company is being run then they should sell out – highlights how little the BCA understands about corporate governance and the international corporate governance movement which aims to promote long term, sustainable investing.

The BCA are the true dinosaurs of the corporate world!

One of the highlights of 2003 has been the growing awareness amongst both institutional and retail shareholders about the role they can play in the governance of the companies they invest in.

This awareness has been put into action in relation to Harvey Norman and News Corp - where shareholders have effectively vetoed unacceptable remuneration packages.

History

Many in the business community will say that the current debate about corporate governance has resulted from the collapses of Enron and WorldCom in the US and One-Tel, HIH and Ansett in Australia.

They say that corporate governance is a fad and that it will fade as people forget about the latest scandal as share prices rise and as time moves on.

Whilst I think these scandals highlight the problems, in my view the issue runs deeper than the latest corporate scandal.

Let me see if you can guess the year in which following topics were major issues in the corporate world:

• Mismanagement at the biggest companies;
• Insider trading;
• Misstated profit & loss accounts;
• Excessive remuneration of executives;
• The need for accounting standards;
• The role of hedge funds;
• The need for independent directors;
• Shredding of internal documents;
• Directors and officers liability insurance; and
• Socially responsible investing.

Some of you might guess that these issues came to fore in the late 1980's or even in the last few years.

In fact many of these issues were raised by shareholders in 1620[1] in relation to the Dutch East India Company.[2]

Centuries later, shareholders in Australia expect that CLERP 9 will address the very same issues.

Recently, the BCA, said that Labor's CLERP 9 proposals "are a response to short-term concerns".[3]

Clearly, the BCA have some history to catch up on!

Corporate Social Responsibility

For Labor, corporate social responsibility (CSR) is a high priority on our corporate governance agenda.

In our view, CSR is a critical issue for all companies. We believe that in addition to their obligations to shareholders, that companies have a wider obligation to the community.

Labor believes that the community through Parliament has granted companies a "licence to operate" as limited liability entities. This licence brings with it reciprocal obligations to the community.

The Mays Report (released in September) highlights the financial and intangible benefits which accrue to companies who effectively manage and report on environmental and social risks.[4]

The UK Group, called Pensions Investment Research Consultants Ltd (known as PIRC) take the view that, quote:[5]

"High standards of corporate social responsibility are a pre-requisite for the creation of truly ‘sustainable' companies able to generate wealth for all their stakeholders by adjusting themselves to the needs and expectations of the societies in which they operate."

Labor endorses PIRC's view.

However, corporate social responsibility is an issue which many Australian boardrooms are struggling to come to terms with.

In my view, more can be done to create a culture conducive to CSR issues.

In Labor's view there are a number of options open to us to develop CSR in Australia:

1. Firstly, we could change the current financial reporting framework to enhance discussion of non-financial issues.
2. Secondly, we could require institutional investors like super funds to disclose whether they take CSR issues into account when investing (similar to the UK).
3. Thirdly, we could try to raise voting levels amongst institutional investors.

Reporting Framework

The current framework for financial reporting does not easily lend itself to discussion of non-financial issues and in particular, CSR issues.

Labor would like to create a framework that lends itself to disclosure of non-financial issues such as environmental, social and ethical issues (including labour standards).

The nature of that framework is an issue which needs to be debated.

Product Disclosure Statements

We have already begun to create a more inclusive framework in relation to socially responsible investing (SRI).

In 2001, Labor supported an amendment to the Financial Services Reform Act to require disclosure of the extent to which environmental, social or ethical standards (including labour standards) are taken into account in the selection, retention or realisation of the investment.[6]

ASIC have released SRI guidelines in relation to the inclusion of this information in the product disclosure statements of investment products.

In my view, these guidelines do not go far enough to enhance disclosure in relation to investment products.

Annual reports

To enhance disclosure of CSR matters, one option is to require disclosure in annual reports.

Another option is to require a separate document relating to non-financial disclosures.

The important issue is whether companies are disclosing their approach to environmental, social and ethical issues.

Disclosure in relation to these issues is increasingly important as shareholders, such as trustees of super funds, are looking for long term investments.

Companies that are viable for long term investment must be sustainable or in other words "durable".

However, financial reporting is not the only indicator of the "durability" of a company in the long term.

Other issues like the company's performance on environmental issues will impact on their durability in the long term.

Conversely, as the Mays report indicates, long term investors such as superannuation funds are the most exposed to the social and environmental risks embedded in the companies in which they invest.[7]

This means that there is a missing link in our existing reporting framework in Australia as companies are currently not required to report on social and ethical issues such as labour standards.

That missing link is highlighted by research conducted by the PSS/CSS which found that around 80% of the ASX200 companies were not providing disclosure of lag (after the event) indicators of workplace health and safety performance.

As many of you here today are aware, in the UK, the Association of British Insurers (ABI) publish guidelines setting out what institutional investors expect to see included in the annual reports of listed companies.

Those guidelines require disclosures in relation to social, environmental and ethical issues.

According to ABI, the company should discuss a number of factors in its annual report including the following:

1. Whether the board takes regular account of the significance of social, environmental and ethical matters.
2. Whether the board has identified and assessed the significant risk to the company's short and long term value arising from social, environmental and ethical matters.
3. Whether the board has received adequate information to make this assessment and that account is taken of these matters in the training of directors.
4. Whether the board has ensured that the company has in place effective systems for managing significant risk.[8]

Institutional shareholders in the UK consider whether companies adhere to these principles.[9]

Labor is considering whether Australian listed companies should be required to make similar disclosures and whether institutional investors such as super funds should be required to report whether they take these issues into account.

Our proposals in this area are still under development and I plan to consult with many of you here today on our proposals early in the New Year.

Many of you here today will also be familiar with the Global Reporting Initiative (GRI) which aims to develop a global set of guidelines on Sustainability Reporting.

The guidelines relate to reporting on economic, environmental and social performance.

The development of global guidelines on CSR issues highlights the importance of these issues.

Environmental Reporting

In 1998, Labor began its campaign to enhance disclosure of these issues in annual reports by amending the Company Law Review Act 1998 with the Democrats. Our amendment inserted section 299(1)(f) of the Corporations Act which requires that companies disclose in the annual report their performance in relation to environmental regulation.

The Howard Government is now proposing to remove this requirement.[10] They have published a draft bill called the Corporations Amendment Bill which aims to delete this requirement from the law on the basis that disclosure will, quote:[11]

"….develop in response to competitive economic, commercial and international pressures, rather than in response to prescriptive rules managed by Government".

Labor does not share the Government's optimism.

The Howard Government believes in taking a self-regulatory approach.

In our view, self-regulation has been a green light to corporate greed.

We believe that without a regulatory catalyst, disclosure of the company's views on social, environmental and ethical issues will remain the exception rather than the rule.

Sustainability issues on a global scale

So far I've discussed ways to enhance disclosure of environmental, social and ethical issues – all of which are considered non-financial issues.

However, I believe that in the future many of these issues will have a financial impact.

In fact, many CSR issues will eventually be viewed as economic issues and not environmental or social issues.

This will occur over time as the definition of "property rights" is expanded to encompass future risks or externalities.

As "property rights" are refined, costs will be allocated to the bottom line.

Changing the way we classify issues as economic or social issues is best illustrated with water.

Once water was considered free.

It was not given an economic value.

Now it is a commodity with a price with property rights attached. In some cases farmers' property rights relating to water are worth more than the value of the land itself.

A similar situation exists in relation to companies.

Once companies could pollute the environment with no economic consequences attached. Companies could pollute the environment and there was zero cost to the company and a high price paid by the community.

With the introduction of environmental laws, there has been recognition of the cost of that pollution to the community and a transfer of that cost back to the company.

Today, the cost of disposing of pollutants in a way that is acceptable to the community (as well as the cost of breaching environment laws) will impact on a company's balance sheet.

In the future, other risks like climate risk will impact on a company's bottom line.

At a recent corporate governance conference which I attended in Amsterdam, some speakers argued that companies which are classified as CO2 emitters, pose a risk to the environment and the consequential risks should be factored into the company's bottom line.

This is not some esoteric issue being considered by tree huggers in Europe. In July this year, an Australian law firm acting on behalf of Climate Action Network Australia (CANA) wrote to the directors of the top 200 Australian companies regarding the financial risks that climate change presents to their businesses.

Climate Action Network Australia have identified the following financial risks faced by corporations that fail to address climate change:

• Operational risk through disruption of company operations;
• Insurance risk via increased premiums and/or uninsurability;
• Regulatory risk via regulation of greenhouse gas emissions and ensuing compliance costs;
• Shareholder risk via shareholder activism and disruption;
• Litigation risk and costs resulting from climate litigation;
• Capital risk from an inability to raise capital; and
• Competitive risk such as loss of economic opportunity.

This letter was a wake-up call for many Australian companies, particularly those in the finance sector.

An Environment Australia / Ernst Young report found that Australia's finance sector lags internationally in its approach to assessing environmental risks.[12]

Empowering Shareholders

At the outset I mentioned that there are a number of ways to develop the CSR agenda in Australia – one of those ways to raise voting levels amongst institutional investors.

Labor believes that trustees of super funds have an obligation to vote the shares of the companies in which they invest.

As the retirement incomes of all Australians depend upon well-managed companies, we believe that institutional shareholders (such as super trustees and funds managers) have a responsibility to vote their shares and therefore take an active role in Australian companies.

Labor's amendments to the CLERP 9 bill will require:

• trustees of super funds to vote their proxies; and
• fund managers to disclose how they vote their proxies and to disclose their voting policy.

Institutional investors are increasingly aware of the importance of the corporate social responsibility (CSR) issues and as their activism in this area grows, boards will grow increasingly aware of their responsibilities in this area.

UN Award

At this point I'd like to mention the work that BT Financial Group is doing together with the PSS / CSS[13] to identify social, environmental and corporate governance risks in companies across the ASX 200.

As many of you may know, they recently received an award from the United Nations for their work.

Congratulations to Erik Mather and Steve Gibbs and their teams on this achievement.

Boral

Before concluding, I'd like to briefly discuss the Boral AGM in October as this is one example where institutional investors failed to take a stand.

I attended the Boral AGM to stand up for the rights of small shareholders.

The Boral resolution which I opposed, scraps the ability of 100 shareholders to propose certain resolutions (that is special resolutions relating to the company's constitution) for debate at the general meeting.

It does not relate to the 100 member rule in relation to calling a company meeting - it simply related to listing resolutions for debate.

Now that the resolution has been passed, Boral shareholders will need to have 5% of the capital (or about $160 million worth of Boral shares), or Board approval, in order to propose this type of resolution.

Boral has effectively denied each Boral shareholder the right to join with 99 other shareholders and propose this type of resolution for debate at the company meeting.

The ability of shareholders to propose resolutions for debate is a key aspect of shareholder democracy that should be protected.

Boral's resolution encroaches on the ability of shareholders to raise certain issues for debate and therefore their ability to hold boards accountable.

In my view, this is a direct attack on shareholders' rights.

Accordingly, I plan to move an amendment to the Corporations Act to ensure that Boral does not set a precedent for other companies to circumvent the spirit of the Act.

Institutions

One of the most disappointing aspects of the Boral AGM is that Australia's institutional investors turned a blind eye.

Despite warnings from the Australian Council of Super Investors (ACSI), the Australian Shareholders Association (ASA) and Corporate Governance International (CGI), institutions overwhelming supported a resolution which erodes shareholder democracy.

To ascertain why this occurred, I have written to IFSA asking them to clarify their position on Boral's resolution.

I have also raised Boral's resolution with ASIC during the Senate Estimates hearings earlier this month.

Conclusion

To conclude, corporate social responsibility is a high priority on Labor's corporate governance agenda.

I look forward to discussing these issues with you in 2004 and beyond.

Ends. Check Against Delivery

[1] Dr Paul Frentrop, Corporate Governance – Lessons from the Past, ICGN Conference, July 2003.

[2] The Dutch East India Company was established in Holland in 1602

[3] BCA Media Release, Labor's CLERP Package a Backward Step, 6 October 2003.

[4] Corporate Sustainability – an Investor Perspective, The Mays Report, September 2003.

[5] PIRC, Governance Plus, February 2003.

[6] Section 1013DA of the Corporations Act 2001

[7] Corporate Sustainability – an Investor Perspective, The Mays Report, September 2003, p. 18.

[8] Other factors include:

- Whether information is provided on the impact of social, environment and ethical related risks and opportunities on value.

- Whether policies and procedures for managing risks are described.

- Whether information is provided on compliance with policies and procedures for managing risks.

- Whether procedures for verification of social, environment and ethical disclosures are described.

[9] Note: British pension funds are required to report whether they are taking social investment considerations into account in their investment guidelines and, if so, how.

[10] Exposure Draft of the Corporations Amendment Bill 2002

[11] Explanatory Memorandum, Corporations Amendment Bill 2002 – Exposure Draft, p. 7.

[12] Environment Australia and Ernst Young, The Materiality of Environmental Risk to the Australian Finance Sector, July 2003.

[13] Public Sector and Commonwealth Superannuation Schemes (PSS/CSS)