Mandate of the Special Representative of the Secretary- General (SRSG) on the Issue of Human Rights and Transnational Corporations and other Business Enterprises

CORPORATE LAW PROJECT JURISDICTION: United Kingdom FIRM: Clifford Chance LLP DATE: September 2009

This survey is an independent submission to the SRSG’s Corporate Law Project. It is the sole work of Clifford Chance LLP and the SRSG takes no position on any views expressed or implied in this report.

More information about the Corporate Law Project is available at: http://www.business- humanrights.org/SpecialRepPortal/Home/CorporateLawTools.

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A NOTE FROM THE UN SPECIAL REPRESENTATIVE ON BUSINESS AND HUMAN RIGHTS September 2010

This survey is an independent submission to a project on corporate law and human rights under my mandate as Special Representative of the UN Secretary-General on Business and Human Rights: the “Corporate Law Project”. I am delighted that nineteen leading corporate law firms from around the world have agreed to make submissions to this project, and thank them for their engagement. The willingness of so many firms to provide their services pro bono in order to expand the common knowledge base indicates that corporate law firms worldwide appreciate that human rights are relevant to their clients’ needs.

It is important at the outset to understand how this project fits into my wider work. I was appointed in 2005 by then UN Secretary-General Kofi Annan with a broad mandate to identify and clarify standards of corporate responsibility and accountability regarding human rights, including the role of states. In June 2008, after extensive global consultation with business, governments and civil society, I proposed a policy framework for managing business and human rights challenges to the United Nations Human Rights Council (Council). The Framework of “Protect, Respect and Remedy” rests on three differentiated yet complementary pillars: the state duty to protect against human rights abuses by third parties, including business, through appropriate policies, regulation, and adjudication; the corporate responsibility to respect human rights, which in essence means to act with due diligence to avoid infringing on the rights of others; and greater access for victims to effective remedy, judicial and non-judicial. You can read more about the Framework in my 2008, 2009 and 2010 reports to the Council, available at my website: http://www.business- humanrights.org/SpecialRepPortal/Home.

The Council unanimously welcomed what is now commonly referred to as the U.N. Framework and extended my mandate by another three years, tasking me with “operationalizing” the Framework— that is, to provide “practical recommendations” and “concrete guidance” to states, businesses and others on the Framework’s implementation. There has already been considerable uptake of the U.N. Framework by all relevant stakeholders. It has also enjoyed unanimous backing in the Council; strong endorsements by international business associations and individual companies; and positive statements from civil society.

A key aspect of the first pillar, the state duty to protect, is that states should foster corporate cultures respectful of rights both at home and abroad, through all appropriate avenues. In particular, I have been exploring the opportunities and challenges that corporate and securities law can provide in this regard. Corporate law directly shapes what companies do and how they do it. Yet its implications for human rights remain poorly understood. The two have often been viewed as distinct legal and policy spheres, populated by different communities of practice.

The Corporate Law Project will allow me to explore this area further by gaining knowledge from over 40 jurisdictions as to how national laws and policies dealing with incorporation and listing; directors’ duties; reporting; stakeholder engagement; and corporate governance more generally currently require, facilitate or discourage companies from respecting human rights. I am interested not only in what laws currently exist, but also how corporate regulators and courts apply the law to require or facilitate consideration by companies of their human rights impacts and preventative or remedial action where appropriate.

The project thus formally comprises part of my work on the state duty to protect. It will assist me to understand whether and how national corporate law principles and practices currently encourage

UK-2218783-v1 - 2 - OFFICE companies to foster corporate cultures respectful of human rights. I will in turn consider what, if any, policy recommendations to make to states in this area, following consultation with all relevant stakeholders. However it is just one element of my work on the state duty to protect, which also looks at other areas of the law and national policies which might help states to encourage companies to respect human rights.

The project will also support my work on the corporate responsibility to respect and access to effective remedy. In relation to the responsibility to respect, I have explained that in addition to compliance with national laws, the baseline responsibility of companies is to respect human rights. To discharge the responsibility, I have recommended that companies conduct ongoing human rights due diligence whereby they become aware of, prevent, and mitigate adverse human rights impacts. The responsibility exists even where national laws are absent or not enforced because respecting rights is the very foundation of a company’s social license to operate. It is recognized as such by virtually every voluntary business initiative, including the UN Global Compact, and soft law instruments such as the International Labour Organization Tripartite Declaration and the OECD Guidelines on Multinational Enterprises. Nevertheless, an understanding of national laws, including corporate law, remains vital to ensure companies understand and comply with their national legal obligations. Moreover, as my 2010 report to the Council highlights, companies may face non- compliance with corporate and securities laws where they fail to adequately assess and aggregate stakeholder-related risks, including human rights risks, and may thus be less likely to effectively disclose and mitigate them, as may be required.

The Corporate Law Project’s website is http://www.business- humanrights.org/SpecialRepPortal/Home/CorporateLawTools. There you will find the original press release for this project; the research template the firms have agreed to follow; summary reports from two consultations held to date on the project; an over-arching trends paper bringing together the main themes from the firms’ surveys; and all completed firm surveys.

My thanks again to all stakeholders who have contributed to this project.

John G. Ruggie Special Representative of the UN Secretary-General on Business and Human Rights

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CLIFFORD CHANCE LLP

UNSRSG ON BUSINESS AND HUMAN RIGHTS

CORPORATE LAW TOOLS PROJECT - UNITED KINGDOM

Executive summary

Setting the legal landscape

Although the UK has no constitution protecting human rights, many pieces of legislation address human rights-related issues, and some provisions of international human rights treaties are reflected in domestic law.

Regulatory Framework

A variety of regulators have powers relevant to business and there are a number of Recognised Investment Exchanges.

Incorporation and Listing

The concepts of "limited liability" and "separate legal personality" exist. These do not require the recognition of any duty to society upon incorporation or listing, although certain codes of practice may be relevant once a company is incorporated or listed.

Directors' Duties

The duty under section 172 of the Companies Act 2006 to promote the success of the company means that directors cannot ignore human rights concerns if those are relevant to the business. Instead, they must have regard to matters which include the likely long-term consequences of their decisions, the interests of the employees, relationships with suppliers, customers and others, the impact of the company's operations on the community and the environment and the desirability of the company maintaining a reputation for high standards of business conduct.

Reporting

The Companies Act 2006 requires a company's annual report to contain a business review, to inform members of the company about the development, performance or position of the company's business. Codes such as the Combined Code on Corporate Governance issued by the Financial Reporting Council also give guidance about the reporting of CSR-related matters.

Stakeholder engagement

Institutional investors are not required by law to consider human rights impacts in their investment decisions (although they may be required to do so by the specific mandates of the funds they manage) but may do so subject to the general principle that their main duty is to advance the financial interests of their investors.

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Other issues of corporate governance

There are no specific UK laws directed at corporate governance which promote or require a culture respectful of human rights. However, human rights issues form part of the Sustainable Development Action Plan published by the Department for Business, Innovation and Skills, there is guidance published by other bodies on governance issues and many UK companies have now voluntarily adopted CSR programmes, which are audited and are the subject of reports.

Setting the legal landscape

1. Briefly explain the broader legal landscape regarding business and human rights.

1.1 Unlike many other countries, the UK has no constitution that sets out human rights protections. However, the UK is a party to the seven core international human rights conventions.1 Rights set out in these conventions are incorporated into domestic law in various legislation.

1.2 The UK also has the Human Rights Act 1998, which, broadly speaking, incorporates the provisions of the European Convention on Human Rights into domestic law. That Act requires public authorities to act in a way which is compatible with Convention rights. There have been several cases investigating whether companies or similar entities could be said to be public authorities for the purposes of the Act, although the correct test to be applied is still unclear, perhaps in part because of the variety of different types of entities in question. Perhaps the most controversial recent decision on the point was that in Johnson v Havering London Borough Council [2007] UKHL 27, in which the House of Lords decided that a privately- owned care home was not performing functions of a public nature in providing care and accommodation for residents placed with it by a local authority, and could not therefore be sued for breaching the Article 8 right to respect for private and family life of one of those residents.

1.3 Other entities are accepted to be "hybrid" public authorities, which means that some of their acts are public and others private, and there has been litigation about which category a particular act falls into. For example, in London & Quadrant Housing Trust v R (Weaver) [2009] EWCA Civ 587 the appellant housing trust had purported to terminate the tenancy of the respondent. She objected on the basis that the termination breached her Article 8 rights. The trust argued that the decision to terminate was part of its "private" function and not susceptible to challenge on human rights grounds. The Court of Appeal disagreed, holding that the decision to terminate was part of the "public" functions of the trust.

1.4 There have also been cases in which the courts have held that Convention rights are relevant in litigation between parties that are not public authorities. For example, in Campbell v Mirror Group Newspapers [2004] UKHL 22, a claim by the fashion model Naomi Campbell against a

1 These are the International Convention on the Elimination of All Forms of Racial Discrimination, the International Covenant on Civil and Political Rights, the International Covenant on Economic, Social and Cultural Rights, the Convention on the Elimination of All Forms of Discrimination Against Women, the Convention Against Torture and other Cruel, Inhuman or Degrading Treatment or Punishment, the Convention on the Rights of the Child and the Convention on the Rights of Persons with Disabilities.

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newspaper for invasion of her privacy in contravention of her Article 8 rights, Lord Nicholls stated at [17] that "The values embodied in articles 8 and 10 are as much applicable in disputes between individuals or between an individual and a non−governmental body such as a newspaper as they are in disputes between individuals and a public authority."

1.5 The Northern Ireland Human Rights Commission is currently the only UN-recognised National Human Rights Institution in the UK. It was established under the Northern Ireland Act 1998. One of its roles is to draft a Bill of Rights to supplement the European Convention on Human Rights. It can also conduct investigations, assist individuals when they are bringing court proceedings and bring court proceedings itself.

1.6 The UK Parliament's Joint Committee on Human Rights is currently undertaking an inquiry into business and human rights which will involve considering whether the existing UK regulatory, legal and voluntary framework provides adequate guidance and clarity to business as well as adequate protection to individual rights. The inquiry's terms of reference relate specifically to the work of the SRSG.2

1.7 Companies may be held liable for acts resulting in harm to their employees which, although not specifically couched as human rights protections, do nevertheless result in remedies for damage to human rights. Examples include corporate manslaughter and personal injury.

1.8 It now appears that companies may also be held liable for acts committed abroad by their subsidiaries. In Connelly v RTZ Corporation and ors [1998] AC 854 the House of Lords held that the defendant company could be sued in the English courts for injuries alleged by the claimant to have been suffered while he was working in Namibia for a subsidiary of the defendant and a similar decision was reached in Lubbe v Cape plc [2000] 4 All ER 268 in which the claimant alleged personal injury arising from work in South Africa for a subsidiary of the UK defendant.

1.9 The possibility of prosecution in the UK for international law crimes committed abroad depends on whether the relevant offence has been incorporated into law by domestic legislation and, in the case of a corporation, whether the offence is one which by definition may be committed by a legal entity. Pursuant to its treaty obligations, the United Kingdom has passed legislation to confirm that international crimes such as genocide, torture, war crimes and crimes against humanity are offences under UK law. A corporate entity cannot commit an offence for which imprisonment is the only punishment. Nor can it commit an offence which may only be committed by natural persons. Whether a corporation might be prosecuted for crimes committed outside the United Kingdom will depend on the offences in question.

2 The Committee's website page for the inquiry is at http://www.parliament.uk/parliamentary_committees/joint_committee_on_human_rights/business_and_hu man_rights.cfm Clifford Chance LLP provided a submission to the inquiry which is available with other submissions at http://www.parliament.uk/documents/upload/BHRevidence210509.pdf

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Regulatory Framework

2. To what legal tradition does the jurisdiction belong, i.e. civil/common law, mixed?

2.1 The United Kingdom consists of four countries and three legal systems (England and Wales, Scotland, and Northern Ireland). England and Wales and Northern Ireland have common law legal systems. Scotland has a mixed legal system.

3. Are corporate/securities laws regulated federally, provincially or both?

3.1 This depends on the particular legislation under consideration. Under the framework for the devolution of Scotland and Northern Ireland, certain matters are outside the legislative competence of the Northern Ireland Assembly and/or the Scottish Parliament, meaning that relevant laws are made in Westminster and apply throughout the UK. However, some of them may still be amended by the Northern Ireland Assembly or the Scottish Parliament.

3.2 In respect of Northern Ireland, company law is a transferred matter. Prior to the coming into force of the Companies Act 2006, the provisions of Great Britain's company law were generally replicated, at a future date, in separate legislation applying to Northern Ireland. The Companies Act 2006 provides for a single company law regime applying to the whole of the UK, which means that companies are UK companies rather than Great Britain companies or Northern Ireland companies, as was previously the case, but the Northern Ireland Assembly can still separately amend or repeal the legislation in Northern Ireland if it wishes to do so.

3.3 In respect of Scotland, Companies Acts have extended to the whole of Great Britain, but the Companies Act 2006 does deal with some matters that are devolved. These were the subject of a legislative consent motion agreed to by the Scottish Parliament in March 2006.

3.4 European Union law also has an impact on corporate and securities law. Directives may be adopted into national laws by a variety of measures, while European Union regulations are self-executing.

4. Who are the government corporate/securities regulators and what are their respective powers?

4.1 The following regulators have powers relevant to business:

4.1.1 The Department for Business, Innovation and Skills (BIS), which focuses on raising and sustaining the UK's economic performance and keeping it competitive. BIS is also the department with responsibility for the Companies Act 2006. Its Companies Investigation Branch can investigate companies where there is a suspicion of corporate abuse or other grounds to investigate. BIS can also bring proceedings to disqualify unsuitable directors. BIS promotes sustainable development and houses the UK's National Contact Point for the OECD Guidelines for Multinational Enterprises.

4.1.2 The Financial Services Authority, which regulates listed companies through its UK Listing Authority and those which operate financial services businesses. It is accountable to Treasury Ministers and through them to Parliament. It has a wide range of rule-making, investigatory and enforcement powers in order to meet its four

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statutory objectives of (a) market confidence: maintaining confidence in the financial system; (b) public awareness: promoting public understanding of the financial system; (c) consumer protection: securing the appropriate degree of protection for consumers; and (d) the reduction of financial crime: reducing the extent to which it is possible for a business to be used for a purpose connected with financial crime.

4.1.3 The Office of Fair Trading, which is the UK's consumer and competition authority. Its mission is to make markets work well for consumers. It gathers intelligence about markets and trader behaviour, can undertake market studies and can fine or prosecute conduct which breaches consumer and competition legislation.

4.1.4 The Competition Commission, which is responsible for investigating mergers, markets and other inquiries related to regulated industries. If its investigation concludes that a situation significantly damages or restricts competition in the UK, then it determines and implements appropriate remedies.

4.1.5 The Panel on Takeovers and Mergers, which administers the City Code on Takeovers and Mergers. The Panel regulates takeover bids and other merger transactions for companies which have their registered offices in the United Kingdom, the Channel Islands or the Isle of Man if any of their securities are admitted to trading on a regulated market in the United Kingdom or on any stock exchange in the Channel Islands or the Isle of Man. Its remit also extends to unlisted companies and certain private companies which are resident in the United Kingdom.

4.1.6 The Pensions Regulator, which is the UK regulator of work-based pension schemes. It has the power to investigate schemes, to take action to protect the security of members' benefits (by issuing notices requiring specific action to be taken within a certain time, by taking action on behalf of a scheme to recover unpaid contributions from an employer, by issuing a freezing order to halt all activity within the scheme so that concerns can be investigated, by prohibiting trustees who are not considered fit and proper, by imposing fines and by prosecuting certain offences in the criminal courts) and to force an employer to meet its obligations to the scheme (by issuing contribution notices, financial support directions and restoration orders).

4.1.7 The Financial Reporting Council, which is responsible for promoting confidence in corporate governance and reporting. It promotes standards of corporate governance through its Combined Code on Corporate Governance, discussed further in the response to question 22, below. The Financial Reporting Council includes the Accounting Standards Board and the Auditing Practices Board.

5. Does the jurisdiction have a stock exchange(s)?

5.1 The United Kingdom has a number of Recognised Investment Exchanges, which are the London Stock Exchange plc, The London Metal Exchange Limited, PLUS Markets plc, SWX Europe Limited, LIFFE Administration and Management, ICE Futures Europe and EDX London Limited

Incorporation and listing

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6. Do the concepts of "limited liability" and "separate legal personality" exist?

6.1 The concepts of "limited liability" and "separate legal personality" do exist.

6.2 Limited liability considers the shareholders of a company as not liable for any acts or omissions of such company. Unlike a sole proprietorship or general partnership in which the owner could be held responsible for all or part of the debts of the undertaking, a limited liability company allows for a limited personal liability of its shareholders. This is limited to the fully paid up value of the shares owned by such shareholder. In a company limited by guarantee, the liability of the shareholders is limited to the amount of the guarantee.

6.3 The separate legal personality of a company means that it is a different legal entity from the individual shareholders. A company may sue and be sued in its own name and holds property separately to its shareholders. As such the shareholders do not own the assets of the company, nor are they liable for its debts: these constitute assets and liabilities of the company. This concept of the separate identity of the company and its shareholders is metaphorically referred to as the "corporate veil". The corporate law concept of piercing (lifting) the corporate veil describes a legal decision where a shareholder or director of a company is held liable for the debts or liabilities of the company despite the general principle that shareholders are immune from suits in contract or tort that otherwise would hold only the company liable. For the veil to be pierced or lifted, proof would be required that the company was merely a formality or that the company neglected corporate formalities and protocols, such as voting to approve major corporate actions in the context of a duly authorised company meeting. This would be particularly difficult in the case of a publicly traded company because of the large number of shareholders and the extensive mandatory filings entailed in qualifying for listing on an exchange.

7. Did incorporation or listing historically, or does it today, require any recognition of a duty to society, including respect for human rights?

7.1 Incorporation and listing have not historically required recognition of any duty to society, and they do not do so today.

7.2 Companies are now allowed unrestricted purposes under the Companies Act 2006, so could include a respect for human rights in those purposes, but are not obliged to do so.

7.3 Regardless of what is (or is not) stated to be a company's purpose, the Secretary of State may apply under section 124A of the Insolvency Act 1986 for a company to be wound up if he considers it "expedient in the public interest" to do so, and the court may grant such an application if it thinks it just and equitable to do so.

8. Do any stock exchanges have a responsible investment index, and is participation voluntary?

8.1 The FTSE Group Responsible Investment Unit manages and develops the FTSE’s suite of indices and services designed to support investors and listed companies in the responsible investment arena. The FTSE offers a range of custom and off the shelf index products covering corporate social responsibility and corporate governance. The best-known product in this area is the FTSE4Good Index Series, and alongside it sits the FTSE’s in-house

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engagement programme. This comprises a team of CSR and RI specialists whose remit is to: (i) work with companies and investors to develop the FTSE4Good criteria; and (ii) work with listed companies to explain eligibility for the FTSE4Good Series.

8.2 Participation is voluntary, but subject to meeting the relevant criteria. These fall into five groups: (1) Working towards environmental sustainability; (2) Developing positive relationships with stakeholders; (3) Upholding and supporting universal human rights; (4) Ensuring good supply chain labour standards; and (5) Countering bribery. The FTSE4Good inclusion criteria3 list "a clear statement of support for the Universal Declaration of Human Rights" as one of the criteria for companies in the Global Resource Sector (the "group of companies identified as potentially having the highest impact on human rights"). It is also relevant to "Companies with Significant Involvement in Countries of Concern", which must either make a clear statement of support for the Universal Declaration or communicate their human rights policy to employees globally.

8.3 One of the latest areas in which the FTSE has been developing its capabilities is environmental technology. The FTSE Environmental Markets Index Series comprises global companies in two phases. Environmental Technology relates to those whose core business is in the development and deployment of environmental technologies, such as alternative energy, water treatment, pollution control and waste management. Environmental Opportunities refers to those companies that are beginning to adapt their business models towards a growing low carbon economy and have some involvement in environmental business activities.

9. To whom are directors' duties generally owed (i.e. to the company, non-shareholders, etc)?

9.1 The directors' duties (fiduciary and general) are owed to the company under section 170(1) of the Companies Act 2006. Only the company will be able to enforce them, although in certain circumstances shareholders may be able to bring a derivative action on the company's behalf. Third parties, including shareholders, will normally only have a cause of action against the company, not against individual directors. However, directors may incur liabilities to shareholders and third parties under the common law where they act in a way that creates a personal obligation. This is not lightly implied, but could be assumed, for example, by an express representation by a director accepting a personal obligation to the shareholder or third party.

9.2 Under Section 172 of the Companies Act 2006, it is the directors' duty to promote the success of the company. Section 172 states:

"(1) A director 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 so doing have regard (amongst other matters) to –

3 http://www.ftse.com/Indices/FTSE4Good_Index_Series/Downloads/FTSE4Good_Inclusion_Criteria.pdf

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(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.

(2) Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.

(3) The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company."

9.3 The section was intended to codify the law existing before the Companies Act 2006 was passed. In Re Southern Counties Fresh Foods Ltd [2008] EWHC 2810, Warren J confirmed at [52] that "The perhaps old-fashioned phrase acting “bona fide in the interests of the company” is reflected in the statutory words acting “in good faith in a way most likely to promote the success of the company for the benefit of its members as a whole”. They come to the same thing with the modern formulation giving a more readily understood definition of the scope of the duty."

10. Are there duties to avoid legal risk and damage to the company's reputation? If so, are they duties in their own right or are they incorporated into other duties?

10.1 The directors' duty to promote the success of the company will certainly include an assessment of possible legal risk and damage to the company's reputation. However, directors are required to "have regard to" the matters set out in section 172 of the Companies Act. "Have regard to" does not mean "give primacy to" or "not act inconsistently with". Some degree of legal risk or potential reputational damage may be appropriate if the company believes that its approach is the correct one, and that it will, for example, be exonerated in litigation and the long-term value of the company will rise.

11. More generally, are directors required or permitted to consider the company's impacts on non-shareholders, including human rights impacts on the individuals and communities affected by the company's operations? Is the answer the same where the impacts occur outside the jurisdiction? Can or must directors consider such impacts by subsidiaries, suppliers and other business partners, whether occurring inside or outside the jurisdiction? (see eg., s.172 CA 2006).

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Impact on non-shareholders

11.1 The text of section 172 of the Companies Act 2006 is set out above, and requires directors to "have regard to" certain issues which affect non-shareholders, including those that have an impact on the community and the environment. This could presumably encompass human rights issues where they are relevant to the business.

11.2 Directors are also permitted to consider anything else they consider relevant, although section 172(1) requires them to act in a way that they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. The impact of decisions on members is again key.

Impact outside the jurisdiction

11.3 There is no express guidance on whether the duty to have regard to the company’s impact on the community is understood to encompass communities outside the UK, although there would appear to be no reason why it could not, and every reason why it might do so if the company's relevant operations were situated out of the UK and overseas communities were those primarily affected by those operations. Even if "community" is intended to be more narrowly defined, the directors are still required to have regard to "the desirability of the company maintaining a reputation for high standards of business conduct" which would include all of its operations.

11.4 The same is the case for impacts by subsidiaries, suppliers and other business partners. The activities of all of these people and organisations have a potential impact on the reputation of the company, and can certainly be considered by directors.

12. If directors are required or permitted to consider impacts on non-shareholders to what extent do they have discretion in determining how to do so?

12.1 As discussed above in questions 9 and 10, there is wide discretion as to the manner in which the directors may determine the company's impact on non-shareholders, as no strict guidelines exist. They must instead "have regard to" certain issues "amongst other matters".

12.2 The Minister of State for Industry and the Regions said on 17 October 2006 that "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". "

12.3 The Government stated during the House of Lords Committee stage of the Bill that "we have included the words "amongst other matters". We want to be clear that the list of factors is not exhaustive." It does not appear that the Government intends to provide any further guidance on section 172 at this time. The Corporate Responsibility (CORE) Coalition has however

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provided some guidance for directors on how it considers they should discharge their duties and responsibilities under the Companies Act 2006.4

13. What are the legal consequences for failing to fulfil any duties described above; and who may take action to initiate them? What defences are available?

Action by the company

13.1 As noted above, the codified duties are owed to the company and only the company will be able to enforce them, although in certain circumstances shareholders may be able to bring a derivative action on the company's behalf. This right does not extend to persons or groups other than shareholders.

13.2 The Companies Act 2006 introduces a new derivative procedure that replaces the common law action. The common law will, however continue to be relevant in respect of claims arising from acts or omissions occurring before 1 October 2007, in which case the court may only exercise its powers under sections 260 to 264 to hear the claim if, or to the extent that, it would have been allowed to proceed as a derivative claim under the common law in force before 1 October 2007 (paragraph 20(3), Schedule 3, Companies Act 2006 (Commencement No. 3, Consequential Amendments, Transitional Provisions and Savings) Order 2007) (Third Commencement Order).

13.3 The circumstances in which a derivative action may be brought have been extended by the Companies Act 2006. Such an action may be brought in respect of an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company (section 260(3)). The effect of this provision is that a derivative claim may be brought in respect of an alleged breach of any of the general duties of directors in Chapter 2 of Part 10 of the Companies Act 2006, including the duty under section 174 to exercise reasonable care, skill and diligence. There is no longer a requirement for the director to have benefited personally from the breach, as was the case under common law. The cause of action may arise before the person seeking to bring a derivative claim became a member of the company (section 260(4)), in line with the common law position.

13.4 However, a member will face a number of procedural hurdles in bringing an action. For example, a court must refuse permission for a claimant to bring a derivative claim where it is satisfied that either: (a) a person acting in accordance with the general duty to promote the success of the company (under section 172) would not seek to continue the claim; or (b) the act or omission giving rise to the cause of action has been authorised or ratified by the company (section 263(2)).5

13.5 Further, section 263(3) prescribes factors that the court must take into account when considering whether to give permission. These include: (a) whether the member is acting in good faith in seeking to continue the claim (the intention being to assist in preventing

4 http://www.corporate-responsibility.org/module_images/directors_guidance_final.pdf

5 We are not aware of any derivative actions in respect of section 172 that have been decided by the courts at the time of writing.

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vexatious claims at an early stage); (b) the importance that a person acting in accordance with the duty to promote the success of the company would attach to continuing the claim; (c) whether the act or omission giving rise to the cause of action could be (and in the circumstances would be likely to be) authorised or ratified by the company; (d) whether the company has decided not to pursue the claim; (e) whether the act or omission in respect of which the claim is brought gives rise to a cause of action that the member could pursue in his own right rather than on behalf of the company; and (f) any evidence before the court as to the views of members of the company who have no personal interest (direct or indirect) in the matter.

13.6 There will also be significant practical deterrents to bringing a derivative claim, including that: (a) costs will usually be awarded against unsuccessful claimants; and (b) if a claim is successful, the relief will be awarded to the company - the claimant cannot benefit.

Remedies

13.7 Under section 178, the consequences of a breach or threatened breach of the duties are the same as for breach of the corresponding common law or equitable principles, and with the exception of the duty to exercise reasonable care, skill and diligence (section 174), the statutory duties are enforceable in the same way as other fiduciary duties owed by directors to their company. This means that the company may obtain remedies including an injunction to prevent the director from carrying on the infringing conduct, or damages for negligence, or an account of profits, or may rescind a contract in which the director has failed to disclose an interest. The director may also be dismissed.

Relief from liability

(a) Ratification

13.8 Section 35(3) of the Companies Act 1985 prohibited the validity of an act done by a company from being called into question on the ground of lack of capacity by reason of anything in the company's memorandum. That section has not been re-enacted in the Companies Act 2006 (it was considered unnecessary given that a company may have unrestricted objects under the Companies Act 2006, and that section 171 specifically requires the directors to abide by the company’s constitution). Once the section has been repealed, it would appear that a company may ratify all breaches of section 171 by ordinary resolution. Section 35(3) of the Companies Act 1985 is expected to be repealed on 1 October 2009, along with the rest of the provisions of that Act dealing with a company's capacity. Until then separate special resolutions will be required in the case of acts which are also ultra vires the company, both to ratify the act and to relieve the relevant director from liability in respect of the transaction.

13.9 Section 239 of the Companies Act 2006 sets out the procedure for the ratification of acts of directors where those acts amount to negligence, default, breach of duty or breach of trust in relation to the company. Section 239(2) provides that the decision of the company to ratify such conduct must be made by resolution of the members of the company. Under section 239(3), where the resolution is proposed as a written resolution neither the director (if a member of the company) nor any member connected with him is entitled to vote on it. Section 239(4) states that where the resolution is proposed at a meeting, it is passed only if the

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necessary majority is obtained disregarding votes in favour of the resolution by the director (if a member of the company) and any member connected with him. However, the director and members connected with him are not prevented from attending, being counted towards the quorum and taking part in the proceedings at any meeting at which the decision is considered.

13.10 The requirements imposed by section 239 are in addition to any other limitations or restrictions imposed by the law as to what may or may not be ratified and when (section 239(7)). Illegal acts, including those which contravene the laws referred to in section 1 above, will presumably continue to be incapable of ratification. However it is not clear if other restrictions on ratification developed by the courts (such as breaches involving expropriation of company property and dishonesty) will survive, given that they were largely developed in response to directors who have engaged in wrongdoing being permitted to vote their shares on a ratification resolution.

(b) Power of the court to grant relief: 1 October 2008

13.11 Section 1157 of the Companies Act 2006 provides that where proceedings for negligence, default, breach of duty or breach of trust are brought against a director, the court may relieve him from liability if it considers both that: (a) he has acted honestly and reasonably; and (b) considering all the circumstances of the case, he ought fairly to be excused. A director may also apply to the court for relief where he has reason to expect that a claim may be made against him. This provision came into force on 1 October 2008.

(c) Indemnity

13.12 Under section 232 of the Companies Act 2006, a company will not be able to exempt a director from any liability for negligence, default, breach of duty or breach of trust in relation to the company. The company may, however, indemnify the director against defence costs, or costs incurred in an application for relief under section 1157 (above), provided that the director repays the costs if he is unsuccessful.

(d) Insurance

13.13 As under section 309A(5) of the Companies Act 1985, section 233 permits a company to purchase insurance for its directors, and those of an associated company, against any liability attaching to them in connection with any negligence, default, breach of duty or breach of trust by them in relation to the company of which they are a director.

14. Are there any other directors' duties which might encourage a corporate culture respectful of human rights?

14.1 Section 174 of the Companies Act 2006 requires directors to exercise reasonable care, skill and diligence. Section 174(2) states that this means "the care, skill and diligence that would be exercised by a reasonably diligent person with— (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and (b) the general knowledge, skill and experience that the director has."

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15. For all of the above, does the law provide guidance about the role of supervisory boards in cases of two tier board structures, as well as that of senior management?

15.1 There is no two-tier board structure in the UK. The law does not provide specific guidance about the role of senior management, although senior managers will presumably be the people responsible for carrying out or overseeing most of the requirements under any legislation affecting the company, so any guidance about those activities will apply to them.

Reporting

16. Are companies required or permitted to disclose the impacts of their operations (including human rights impacts) on non-shareholders, as well as any action taken or intended to address those impacts, whether as part of financial reporting obligations or a separate reporting regime?

16.1 The Companies Act 2006 requires the preparation of a directors' report for each financial year of the company. Section 417 of the Companies Act 2006 requires the directors' report to contain a business review. The purpose of the business review is to inform members of the company and help them to assess how the directors have performed their duty to promote the success of the company. Section 417(5) states:

"In the case of a quoted company the business review must, to the extent necessary for an understanding of the development, performance or position of the company's business, include: -

(a) the main trends and factors likely to affect the future development, performance and position of the company's business; and

(b) information about -

(i) environmental matters (including the impact of the company's business on the environment),

(ii) the company's employees, and

(iii) social and community issues,

including information about any policies of the company in relation to those matters and the effectiveness of those policies

(c) subject to subsection (11), information about persons with whom the company has contractual or other arrangements which are essential to the business of the company."

16.2 Subsection (11) states that the disclosure of information about impending developments or matters in the course of negotiation is not required if the disclosure would, in the opinion of the directors, be seriously prejudicial to the interests of the company.

16.3 Section 417(6) states:

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"The review must, to the extent necessary for an understanding of the development, performance or position of the company's business, include:

…

(b) where appropriate, analysis using other key performance indicators, including information relating to environmental matters and employee matters.

16.4 The phrase "to the extent necessary" in section 417(6) was not the subject of any discussion in the explanatory notes to the Companies Act 2006 and does not appear to have been interpreted by the courts. However, it does signal that directors must assess the extent to which particular issues are required to be reported. Significant legal or reputational risks (which may include human rights impacts) may well require inclusion if they are a "key performance indicator" in the same way as environmental and employee matters and likely to affect the future development, performance or position of the company's business.

16.5 Companies subject to the small companies’ exemption need not provide a business review. Companies which qualify as medium-sized in relation to a financial year need not comply with the requirements of section 417(6) so far as they relate to non-financial information. Those companies are however permitted to publish that information if they wish to do so, and they are still required to comply with section 417(5).

16.6 The Combined Code on Corporate Governance6 issued by the Financial Reporting Council also gives guidance to companies about reporting CSR-related matters. The Listing Rules of the London Stock Exchange require companies incorporated in the UK and listed on the Main Market of the Exchange to report on how they have applied the Combined Code in their annual report and accounts. Overseas companies listed on the Main Market are required to disclose the significant ways in which their corporate governance practices differ from those set out in the Code.

16.7 The Combined Code provides that: "The board should set the company's values and standards and ensure that its obligations to its shareholders and others are understood and met." (Supporting Principle A.1). Under LR 9.8.6R(5) of the UK Listing Authority's Listing Rules, a listed company incorporated in the UK must include in its annual financial report a statement of how it has applied the main principles set out in section 1 of the Combined Code in a manner that would enable shareholders to evaluate how they have been applied.

17. Do reporting obligations extend to such impacts or actions outside the jurisdiction; to the impacts or actions of subsidiaries, suppliers and other business partners, whether occurring inside or outside the jurisdiction?

17.1 The reporting obligations in the Companies Act 2006 extend to everything of relevance to the company within the terms of section 417 of the Act. There are no geographical restrictions on what information is relevant or may be disclosed. Subsection (c) requires the inclusion of "information about persons with whom the company has contractual or other arrangements

6 http://www.frc.org.uk/corporate/combinedcode.cfm

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which are essential to the business of the company" where this is relevant, which could include subsidiaries, suppliers and other business partners.

18. Who must verify these reports; who can access reports; and what are the legal consequences of failing to report or misrepresentation?

18.1 Section 419 of the Companies Act 2006 requires the directors' report to be approved by the board of directors and signed on behalf of the board by a director or the secretary of the company.

18.2 Section 419(3) states:

"If a directors' report is approved that does not comply with the requirements of this Act, every director of the company who -

(a) knew that it did not comply, or was reckless as to whether it complied, and

(b) failed to take reasonable steps to secure compliance with those requirements or, as the case may be, to prevent the report from being approved,

commits an offence."

18.3 A person convicted of such an offence may be fined or imprisoned, although there have been no reports to date of cases brought under this section. Behaviour of this type may also be a breach of a director's duty to the company under section 174 of the Companies Act 2006, which may then found an action by the company or a derivative action by shareholders.

18.4 The directors' report forms part of the company's annual report and accounts, and is therefore a publicly accessible document once the annual report and accounts have been filed with Companies House.

Stakeholder engagement

19. Are there any restrictions on circulating shareholder proposals which deal with impacts on non-shareholders, including human rights impacts?

19.1 There are no specific restrictions on these types of shareholder proposals. However, the Companies Act 2006 sets out certain requirements that must be followed in respect of all proposals (or "resolutions"), concerning the circulation of such resolutions to members in a particular form and within a particular time. Resolutions may be proposed by directors or by members. There are no restrictions on the types of resolutions that may be proposed by directors, but section 292(2) states that members' resolutions may not properly be moved as written resolutions if (a) they would, if passed, be ineffective (whether by reason of inconsistency with any enactment or the company’s constitution or otherwise); or (b) they are defamatory of any person; or (c) they are frivolous or vexatious. The same applies to members' resolutions to be moved at a meeting of the company.

20. Are institutional investors, including pension funds, required or permitted to consider such impacts in their investment decisions?

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20.1 The requirements applicable to pension fund investors are found in both the general principles of trust law and also in statute. Neither of these requires the trustees of UK occupational pension schemes to consider such impacts in their decisions. Although in theory trustees can take account of ethical factors if (a) they genuinely believe that the ethical factors will lead to better financial returns or (b) where two investments (one ethical, one unethical) are otherwise identical, this is unlikely in practice. Trustees would need to consider the legal position very carefully before considering human rights impacts as part of their investment decisions. The overriding principle is that the trustees must invest the assets in the best interests of the members, taking appropriate advice, bearing in mind that in most cases this will be the members' best financial interests.

20.2 As a matter of general trust law, trustees must have regard to the investment powers and/or restraints contained in the trust deed and rules of their pension scheme. They should "take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide" (and should seek appropriate advice) and must act in the best interests of the beneficiaries of the scheme. The courts have held that, when the purpose of a trust is to provide financial benefits for the beneficiaries, as is usually the case, the best interests of the beneficiaries are normally their best financial interests. Social and ethical criteria alone are not appropriate for directing the investment of financial trusts.

20.3 The main relevant statutory provisions relating to trustees' powers of investment are sections 33 to 36 of the Pensions Act 1995 and the underlying Occupational Pension Schemes (Investment) Regulations 2005.

20.4 Section 34(1) provides that trustees have, subject to section 36(1) and to any restriction imposed by the scheme, the same power to make an investment of any kind as if they were absolutely entitled to the assets of the scheme.

20.5 Section 36(1) (and the remaining subsections of section 36) provides that the trustees should invest in accordance with the requirements of regulations, obtain and consider proper advice before investing (other than when investing in certain National Savings products), should consider the suitability of the investment and have regard to the diversification of investments.

20.6 The underlying Investment Regulations provide that the trustees must invest the assets in the best interests of members and beneficiaries and, in the case of a potential conflict of interest, in the sole interests of members and beneficiaries (reg 4(2)). Other constraints on/requirements relating to their powers of investment are contained in reg 4.

20.7 The trustees must also ensure that any investment is in accordance with their statement of investment principles (SIP) (which they are obliged to prepare and maintain under section 35). It is in the statement of investment principles where social, environmental or ethical considerations are mentioned. Regulation 2(3) sets out the different matters which the SIP should cover, one of which is "the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments" (see reg 2(3)(b)(vi)).

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20.8 The Pensions Regulator, in its guidance to trustees, states that trustees have a "fiduciary duty to choose investments that are in the best financial interests of the scheme members - for example, you must not let your ethical or political convictions get in the way of achieving the best returns for the scheme...".

20.9 It should also be noted that, in practice, although the trustees set the investment strategy (after taking appropriate advice), they will not make individual stock selections themselves. These day to day decisions will be delegated to a person such as a fund manager appointed by the trustees and the terms of the delegation will generally require the delegate to take account of ethical factors only insofar as they do not prejudice returns, unless the SIP requires otherwise.

20.10 The Pensions Act 2008 established a form of retirement saving called the personal account. These accounts are designed for people on low and moderate incomes without access to a good-quality workplace pension, and are overseen by the Personal Accounts Delivery Authority (PADA). The Act also established a trustee corporation which is to act as trustee to the personal account scheme.

20.11 At the time the Act was being debated, several amendments were proposed to clarify the legal position regarding responsible investment and the ambit of the fiduciary duties of the trustee corporation. These included a clause requiring a written policy on responsible investment, (defined as determinations about the environmental, social, human rights and good governance (“ESHG”) practices of the institutions in which investments are made by or on behalf of the trustee corporation, and their relationship to the long term profitability and sustainability of those institutions). The policy was to include powers for the trustee corporation, and anyone appointed by the trustee corporation to manage the investment of pension money, to:

"(a) engage with persons, from whom the trustee corporation purchases securities, to ensure that such persons act, or take steps to act, in accordance with the trustee corporation’s policy on ESHG practices; and

(b) disinvest or sell, or not purchase or invest in, securities issued by persons whom the trustee corporation determines on reasonable grounds conducts, or has investment in, business operations that are associated with the commission of crimes against humanity, war crimes or genocide, the content of which is defined in the Rome Statue of the International Criminal Court and adopted into English law by the International Criminal Court Act 2001 (c. 17)."

20.12 The amendment was not adopted, but the Parliamentary Under-Secretary of State, Department for Work and Pensions, Lord McKenzie of Luton, made a statement putting on record the Government's view of the law, which was "there is no reason in law why, in making investment decisions, trustees cannot consider social, ethical and environmental considerations, including sustainability, in addition to their usual criteria of financial returns, security and diversification. It follows from this that it may be appropriate for trustees to engage in these considerations with companies in which they invest. This may include disinvesting from such companies if, acting in accordance with their fiduciary duties and the objects of their trust, they consider that this is right and in the best interests of their members."

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20.13 PADA's consultation on the design of its investment approach for the personal account scheme included a section on responsible investment and its role within the scheme, as well as how such an approach could be best delivered in the context of achieving a low-charge and value- for-money scheme for members. "Responsible investment" is defined in the paper as "an approach that focuses on corporate governance and how businesses manage their relationship with society and the environment over the longer term." The closing date for responses was 7 August 2009, with a response from PADA expected three months later.

20.14 Other institutional investors may be required by the terms of their mandate to consider such impacts. For example, there are certain companies and funds which promise to take these impacts into account in their investment decisions, and may decline to invest in certain types of industries which they feel do not meet adequate standards. Otherwise, these investors are subject to the general principles of trust law in the same way as pension fund investors, which means that their duty is generally focused on the financial interests of their fund members. Some may, however, decide to follow certain principles for investment, where those do not conflict with their fiduciary duties. The UN's Principles for Responsible Business website7 lists 70 UK companies as signatories to those principles.

21. Can non-shareholders address companies’ annual general meetings?

21.1 Non-shareholders cannot address Annual General Meetings without an invitation from the company. However, it is not uncommon for people with an interest in a company's business and a desire to speak at a meeting to buy a small number of shares in order to be able to speak.

Other issues of corporate governance

22. Are there any other laws, policies, codes or guidelines related to corporate governance that might encourage companies to develop a corporate culture respectful of human rights, including through a human rights due diligence process?

22.1 Apart from the relevant provisions of the Companies Act featured in questions above, there are no other specific UK laws directed at corporate governance which promote or require a culture respectful of human rights.

22.2 However, human rights issues form part of the Sustainable Development Action Plan published by the Department for Business, Innovation and Skills (BIS).8 One of BIS's Guiding Principles for Sustainable Development is "Ensuring a Strong, Healthy and Just Society - Meeting the diverse needs of all people in existing and future communities, promoting personal wellbeing, social cohesion and inclusion, and creating equal opportunity for all." Its aims in this respect are:

22.2.1 Supporting sustainable communities and a fairer society by improving the quality of working life for individuals, promoting best practice and effective employment relations, creating opportunities for social enterprise, and alleviating fuel poverty.

7 http://www.unpri.org/

8 http://www.berr.gov.uk/files/file47243.pdf

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22.2.2 Ensuring a successful outcome on the Doha Development Agenda, including trade and how it can support the environment and development, and the inclusion of sustainable development in EU bilateral trade agreements.

22.3 BIS is also committed to helping finalise ISO 26000 on Corporate Social Responsibility.

22.4 The Combined Code on Corporate Governance issued by the Financial Reporting Council (see question 16, above) also provides guidance on governance issues and the London Stock Exchange has published its own guide.9

22.5 Corporate responsibility is, of course, taken increasingly seriously by many companies even absent legislation setting out specific requirements in this respect and regardless of the encouragement of government. Many companies now have their own CSR policies, and a specific internal function to ensure that the policies are promoted and acted upon. Companies' CSR-related activities may be audited and reported on. There is considerable support for the OECD Guidelines for Multinational Enterprises, which set out the standards that governments in OECD countries expect business to adhere to when they are trading or operating overseas. In the Final Statement by the UK National Contact Point for the OECD Guidelines for Multinational Enterprises in the matter of a complaint against Afrimex (UK) Limited (28 August 2008), 10 the NCP recorded that Afrimex had offered to formulate a corporate responsibility policy document to help shape its actions in the future, and drew Afrimex's attention to the SRSG's report: “Protect, Respect and Remedy: A Framework for Business and Human Rights”.

22.6 UK companies are among the participants in the UN Global Compact and the Corporate Global Citizenship and the Partnering Against Corruption initiatives of the World Economic Forum.

22.7 UK companies are also among the members of the Business Leaders Initiative on Human Rights. A key aim of this Initiative is to find "practical ways of applying the aspirations of the Universal Declaration of Human Rights within a business context and to inspire other businesses to do likewise". A key aim of the Initiative is to explore where business responsibility for civic goodness begins and ends, and it has published a guide for integrating human rights into business management.11

23. Are there any laws requiring representation of particular constituencies (i.e. employees, representatives of affected communities) on company boards?

23.1 There are no such laws in the UK.

24. Are there any laws requiring gender, racial/ethnic representation; or non-discrimination generally, on company boards?

9 http://www.londonstockexchange.com/companies-and-advisors/listing/guide-corporate-governance.pdf

10 http://www.berr.gov.uk/files/file47555.doc

11 http://blihr.zingstudios.com/

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24.1 There are no laws requiring gender or racial/ethnic representation on company boards. There are no non-discrimination laws specifically relating to company boards. However, general non-discrimination legislation protects office-holders as well as employees, which means that board directors would usually be covered whether they are also employed by the relevant company or only hold the office of director.

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