Environmental and social transparency under the ... - ClientEarth

About this bookSince the Companies Act 2006 came into force, UK companieshave been required to report each year on environmentaland social issues linked to their operations.However, the law lacks detail and the structures intendedto ensure compliance are weak.With a review of the Act and its reporting requirementsexpected in 2010, Digging deeper examines the legal framework,identifies its shortcomings and proposes improvements.Taking the mining and extractives industries as anexample, it looks at how they have managed environmentaland social issues in the past, and why changes are neededto ensure that they report in detail on these issues in thefuture.This book is intended to have both dynamic and referencefunctions. It is for legislators, regulators, companies,investors, civil society, the public and academia, indeedall those with a stake and interest in progressing the waythat companies respond to some of the most importantchallenges faced in the 21st century. We have sought to setout, in clear terms, the legal and regulatory status quo forcompany environmental and social reporting, and what weconsider to be the necessary next steps. The informationmay be used as a tool or catalyst for action, a starting pointfor debate, or simply a resource to increase understandingof the issues and of the law.ClientEarth would like to thank the Holly Hill Trust and theStaples Trust for their support of this work.

ForewordAbout ClientEarthClientEarth is an organisation of activist lawyers committedto securing a healthy planet. We work in Europe andbeyond, bringing together law, science and policy to createpragmatic solutions to key environmental challenges.For more information see http://www.clientearth.org/About ClientEarth’s work oncorporate transparencyClientEarth is working to strengthen and stimulate the legalframework discussed in this book, through the book itselfand other initiatives. To stay updated on what ClientEarthis doing in the area, and for any further studies that we produce,please see http://www.clientearth.org/A copy of the text of this book will be available in PDF formaton the website. A separate PDF of the endnotes willalso be available, for ease of use alongside the book.In the early ‘90s, I was one of a group of people who came together to forman organisation called the Long Now Foundation. We had a shared interestin the idea of time, and the idea of responsibility for the future. Thephrase ‘Long Now’ suggests the future as an extension of the present: anacknowledgement that we are making the future now. While our approachand activities at the Foundation are different to ClientEarth’s, many of ourfundamental beliefs are shared.As a society we need to get better at looking at the ‘long now’, rather thanthe myopic ‘here and now’ frame of reference that dominates us today.This is a societal, cultural change, and if it is to succeed, companies need tobe a part of it. Central to it is a new habit of thought - the expansion of thetimescale within which we evaluate our decisions. When we think longterm,we think about building up cooperative, sustaining relationships.When we think long-term, we think about preserving the balance andviability of life in our biosphere, for all its inhabitants. So it must be forcompanies. Humanity can’t continue driving solely for ‘faster, cheaper’if the costs are to be borne by the future - we must look for ways that arebetter.ClientEarth’s treatise sets out simple legal steps that can be taken to helpensure that companies consider and address the questions and challengesof the future openly and transparently. That they should do so is alreadyset out in law, and these proposals are not calling for the overhaul of theUK’s company law, or fundamental changes to the way the law works.What the proposals identify are simple measures that can be introducedto ensure that the law achieves its fundamental objectives, in a way thatdoesn’t unnecessarily burden business.While it shares much in its foundations with my interests elsewhere,before reading this book I had not directly considered the questions thatsurround corporate transparency. I ask that anyone with an interest in theway that we as a society can work together towards a liveable future readthis text, and consider well its implications.- Brian Eno, Patron, ClientEarth

ClientEarthBen Bundock | Tim Malloch | James ThorntonEnvironmental and social transparency underthe Companies Act 2006:Digging deeperIn this review, the information and analysis is presented in an increasing level ofcomplexity as the book goes on. The most important points are set out in the proposalsand chapters, in summary. The annexes then provide background to the mainbody, going back over some of the content with supplemental detail and legislativequotation, as well as presenting some new subject matter. The annexes will primarilybe of interest to those wishing to go into considerable depth, and to consider thebroader analysis that has informed ClientEarth’s conclusions and proposals.In this way we have aimed to make the book useful and accessible for readers witha range of needs.Barbican Press* * *

ContentsClientEarth3 Chapel PlaceLondonEC2A 3DQUKwww.clientearth.orgBarbican Press4 Osborne Place #2Lockyer StreetPlymouthPL1 2PUThis review was authored by Ben Bundock, Tim Malloch and James Thornton.The rights of B Bundock, T Malloch and J Thornton to be identified as authors of this workhave been asserted by them in accordance with the Copyright, Designs and Patents Act1988.The advice and information in this review are believed to be true and accurate at the dateof publication, but neither the author nor the publisher can accept any legal responsibilityor liability for any errors or omissions. This document is not intended to provide legaladvice.ClientEarth would like to thank Richard Solly and the London Mining Network for theircontributions to our research for this review. We would also like to thank Martin Stanley,Dr Robert Goodland, Clive Wicks, and Perry Rudd and Matt Crossman at Rathbone Greenbank,whose comments contributed to the refinement of this review.Copyright © ClientEarth 2010Cover design by Sean Alexander www.seanalexanderdesign.comCover photography: Jez Coulson / Panos Pictures; jumblejet / Creative CommonsPrinted in Great Britain by the MPG Books Group, Bodmin and King’s Lynn.ISBN 978-0-9563364-0-8Executive SummaryAims and approachScopeClientEarth’s Proposals 11 Regulations to supplement section 417(5) 3Companies Act 20062 A reformed Financial Reporting Review Panel 113 Regulations to consolidate and enhance the role of 15company Annual General MeetingsChapters 231 Governance of company accounting and reporting of 25environmental and social impacts2 The ‘Company Law Review’ and the policy 43underpinning the Companies Act 20063 Environmental and social issues: Business issues 474 The business need to engage with environmental 61and social issuesAnnexes 651 UK law governing company accounting and reporting 67on environmental and social impacts2 Environmental and social reporting in review: 91the Operating and Financial Review3 EU law on company accounting and reporting on 101environmental and social impacts4 Auditing of company environmental and social 109accounting and reporting5 Regulatory implementation and compliance: 121the Financial Reporting Review Panel6 UK law governing company AGMs 1337 Company AGMs in practice: the mining industry 147ivviiNotes 159Bibliography 187

| Environmental and social transparency under the Companies Act 2006 | iExecutive SummaryUK-based companies are required by the Companies Act 2006 to publishannual accounts and reports. The law in this area 1 mainly seeks to keepshareholders informed of the company’s performance that year, mattersthat have had bearing on the company’s performance and position thatyear, and matters that may do in the future. The requirements are alsointended to allow shareholders to see whether company management arelooking after their investment properly, and how they are performing intheir statutory duties.Legal requirements and standards set out the information that companiesmust account and report. These requirements include explicit obligationsfor some types of company to account and report information aboutenvironmental and social issues, policies and impacts, but only wherethey have implications for the company’s business.Environmental and social issues have implications for many companies’businesses, in many different ways. The way that companies approachthem will be fundamental to their long-term business success. TheCompanies Act 2006 established a legal framework for reporting thatrecognised this, but there is currently a lack of detail in the requirements,which undermines the effectiveness of the framework. Specifically, reputation,social licence to operate, regulatory freedom, access to capital andthe risk of litigation can have substantial implications for businesses, andthese success factors can be directly and significantly affected by companyenvironmental and social impacts, interaction and performance.There is a need for the law to explicitly require quoted companies toreport in relation to these intangible assets and risks where relevant,and on the environmental and social issues that may have implicationsfor them. This information is already required by law, but clearer andmore detailed requirements are needed to ensure that company practicereaches the standard envisioned by policy, and that certainty is providedto companies when reporting.Reporting requirements covering these matters are not against the interestsof business – on the contrary, companies that have a grip on the waysin which environmental and social issues interact with their business, and

ii | Environmental and social transparency under the Companies Act 2006| iiiwhich engage with and discuss them effectively, will be the best-placed tosucceed in the future.“[In the next 50 years] successful companies will be those who embedsocial, environmental, and ethical risk management into their corebusiness processes and performance measures.” 2- John Browne, former Director of Reputation Assurance,PricewaterhouseCoopersDirectors need to understand the risks that they are taking and the impactsthey are having on the company’s business, and how to effectively managethose risks and opportunities. Shareholders need to have the opportunityto be accurately and appropriately informed of and engaged with theseissues in order to monitor the directors’ performance and stewardship oftheir investment. Investors need to be aware of the issues that may havebearing on a potential investment, and of the quality of management inplace in the company. The proper recognition and reporting of the waythat these issues interact with business in the long-term will be essentialto ensuring stable and sustainable investor confidence.Company accounts and reports are also subjected to scrutiny from anumber of legal mechanisms established under the Companies Act2006, to ensure that the accounts and reports comply with the relevantrequirements, and meet the needs of their users. The key legal mechanismsare:- External audit carried out by private consultants, in accordance withlegal requirements.- Regulatory oversight by the Financial Reporting Review Panel (FRRP),the independent regulator appointed and mandated by statute to monitorand ensure compliance with legal requirements.- The laying of accounts and reports before the company at its AnnualGeneral Meeting, to be subjected to scrutiny and questioning fromshareholders.Again, although the Companies Act 2006 established the legal framework(the mechanisms exist) there are fundamental weaknesses that need to beaddressed. ClientEarth does not consider that these mechanisms can beeffective or fit for purpose in their current form. Therefore ClientEarthconsiders that reforms are necessary to provide adequate scrutiny to thereporting process.ClientEarth’s proposed measures are entirely consistent with the UKgovernment’s policy on company law, and its ‘light touch’ regulatoryapproach. The proposals strongly support the achievement of the policyobjectives that underpin the Companies Act 2006, as grounded in thefindings and views of the group of highly esteemed experts, practitionersand business people who were given the task of setting the foundations forthe Companies Act 2006, the Company Law Review. Furthermore, theproposals would not impose excessive cost on companies or unnecessarilyinterfere in their operations.ClientEarth’s proposalsClientEarth considers that the legal framework governing companyreporting on environmental and social issues is currently inadequate.There is a need for supplemental regulatory and governance measures, togive clarity as to what companies are legally required to report, to provideeffective safeguards on the exercise of discretion by company directorswhen reporting these matters, and to deliver the objectives of the CompaniesAct 2006.ClientEarth considers that three key actions are required in law and governanceto reinforce and enhance the legal framework established by theCompanies Act 2006:1. Regulations made by the Secretary of State under section 416(4) and468(1) of the Companies Act 2006 to clarify and better articulate theexisting reporting obligations of quoted companies under section417(5) Companies Act 2006, relating to environmental and socialissues. Regulations should include:i. Explicit provisions to give substance to the types of businessfactor that can be affected by environmental and social issues.ii. Explicit provisions to outline the types of environmental orsocial issue that can be particularly relevant to companies, anda structure as to how they must be reported.iii. General provisions to ensure certainty and consistency in narrativereporting, requiring balanced, reliable and comparableinformation.

iv | Environmental and social transparency under the Companies Act 2006| v2. A reformed Financial Reporting Review Panel (FRRP) that properlyexercises its function as the public body mandated to monitor andensure compliance of company reporting of environmental and socialissues with UK legal requirements. The FRRP must:i. Increase and diversify capacity. Specifically it is necessary forthe FRRP to secure the membership of a number of specialistsin this area (as detached from the interests of the regulatedindustries) so as to provide the expertise and momentum toeffectively engage with environmental and social issues.ii. Begin to engage effectively with companies regarding environmentaland social reporting.3. Regulations made by the Secretary of State under section 468(1)(d)(iii) of the Companies Act 2006 to consolidate and enhance the roleof company Annual General Meetings as a forum for scrutiny of companyreporting on environmental and social matters. Regulationsshould provide:i. An explicit obligation on companies to provide an opportunityat the Annual General Meeting to question, discuss and scrutinisethe company annual accounts and reports.ii.A codified right of access to company Annual General Meetingsfor persons who have been negatively affected by companyactivities, or their representatives, so as to provide representationsas to the impacts that companies are having, where theyhave not been appropriately represented in the company annualreports. These representations can provide essential context tothe reporting process. In practice this mechanism is alreadyestablished, is accepted by many companies, and is in effectproviding important scrutiny to the reporting process in thosecases – it simply needs to be codified.iii. Broader transparency through publication requirements, particularlyin relation to the internet, and access to the meetingsfor the media.Aims and approachThe practical context within which this review’s legal analysis is set is thepractice of the mining and extractives industries. These companies haveparticularly significant environmental and social impacts, and many ofthe largest are based in the UK. Therefore, where appropriate to illustratethe points, the law is related to those industries in practice, to demonstratethe significance of these issues.The key aims of the review are:- To examine the legal and regulatory framework that governs companyaccounting and reporting on environmental and social matters in theUK.- To identify and explain key proposals that will improve the standardof this accounting and reporting.First, the review sets out the three key proposals that ClientEarth considerscould most effectively improve the currently existing regulatoryframework for company accounting and reporting of environmental andsocial issues.The review then examines the way that company accounting and reportingon these matters is governed, with reference to (i) the legal requirementsfor content (the extent to which companies are required to reporton environmental and social matters); (ii) the legal mechanisms that existto scrutinise accounting and reporting, and ensure compliance with legalrequirements; and (iii) non-binding guidance documents and initiativesthat aim to improve the standard of this type of accounting and reporting,and provide context to legal requirements.The review then examines the policy that underpins the Companies Act2006.The review then sets out the ways in which businesses may be directlyand significantly impacted by environmental and social issues, givingexamples of where this has happened in the past. This will explain theways in which environmental and social issues must be reported under the

vi | Environmental and social transparency under the Companies Act 2006| viirequirements of section 417 Companies Act 2006, and explain the contentof ClientEarth’s proposed regulations.The review also explains why it is in companies’ self-interest to report onthese matters accurately and fully.The Annexes contain detailed examination and explanation of relevantlaw, governance and practice, to supplement the analysis presented in themain body of the review.In this review, the information and analysis is presented in an increasinglevel of depth and complexity as the book goes on. The most importantpoints are set out in the proposals and chapters, in summary. The annexesthen provide background and further detail to the main body, going backover some of the content of the main body with supplemental detail andlegislative quotation, as well as presenting some new subject matter. Theannexes will primarily be of interest to those wishing to go into considerabledepth, and to consider the broader analysis that has informed ClientEarth’sconclusions and proposals.ScopeThe Companies Act 2006 is the legislative foundation of UK company law.This review focuses on the legal framework that it establishes to governcompany reporting. 3The review focuses on the annual reporting of public, ‘quoted’ companiesbased in the UK. The review is an examination of UK law, and whilethe reporting obligations of unquoted companies are discussed to someextent, quoted companies are the primary focus, and the subject of theproposed regulation.Quoted companies are required to produce annual accounts and reportscovering a wide range of company activities. This review examinesthe extent to which environmental and social matters fall within theserequirements. Reporting of these matters is explicitly required in relationto the narrative, contextual annual directors’ reports. Reporting of someenvironmental and social matters is also required in company financialaccounts (e.g. large liabilities for environmental clean-up). However, thisreview does not lay out in complete detail the complex rules and contentrequirements relating to financial accounting, or analyse how such mattersrelate to them. Instead the broad framework is outlined, and the focusof analysis is on narrative reporting.The key legal requirements for environmental and social reporting, the‘business review’ of section 417 Companies Act 2006, only came into effectfor company reports for financial years beginning on or after 1 October2007. At time of writing, the first reporting cycle subject to these requirementswas yet to be completed. Therefore this review lays out the relevantlegal frameworks and a range of relevant contextual material, but doesnot in any detail analyse reporting in practice, as most existing reports attime of writing were not prepared in relation to current legal standards.For details of what ClientEarth is doing in relation to reporting practice,please see our website for updates.The review addresses the issue of annual accounting and reporting.Companies are required by law to provide a range of less detailed interimreports – these requirements are not examined here.

viii| Environmental and social transparency under the Companies Act 2006When the review refers to ‘social’ matters, it refers to a wide range ofissues. As the review focuses on the practice of industries with high directenvironmental and social impacts, some of the most important ‘social’matters of concern relate to the treatment of local communities in areasof company operations (e.g. practices and policies of community engagement,displacement, compensation, employment etc), particularly in amultinational context. While the legal requirements draw a distinctionbetween ‘social and community issues’, this review considers ‘community’issues within the bracket of ‘social’ matters, for the purposes of straightforwardcommunication.ClientEarth’s analysis in this review does not examine in great detail thescale or specifics of the impacts and irresponsibilities worldwide whichhave been alleged against or linked to multinational extractive companiesbased in the UK. Many such studies have already been undertaken by arange of individuals and bodies in expansive detail. 4 Instead this reviewevaluates existing UK company law, and identifies steps which can betaken in the UK in order to promote transparency and accountability inrelation to these matters, and which ultimately may drive higher standardsof corporate practice.* * *

| Environmental and social transparency under the Companies Act 2006| 1ClientEarth’s ProposalsProposal 1: 3Regulations to supplement section 417(5) CompaniesAct 2006Proposal 2: 11A reformed Financial Reporting Review PanelProposal 3: 15Regulations to consolidate and enhance the role ofcompany Annual General Meetings

2 | Environmental and social transparency under the Companies Act 2006Proposal 1: Regulations to supplement section 417(5) Companies Act 2006 | 3Proposal 1:Regulations to supplement section 417(5)Companies Act 2006Section 417(5) Companies Act 2006 explicitly requires quoted companiesto report on environmental matters (including the impact of the company’sbusiness on the environment), and social and community issues, tothe extent necessary for an understanding of the development, performanceor position of the company’s business. It also requires the reportingof information about any company policies relating to those matters, andcomment on the effectiveness of those policies, again to the extent necessaryfor an understanding of the development, performance or positionof the company’s business. However, the requirements lack specificity.There is a need for Regulations to make explicit the types of issues companiesshould be expected to report under these requirements.The Secretary of State should make Regulations under section 416(4), 5428(2) 6 or 468 7 of the Companies Act 2006, subject to Affirmative ResolutionProcedure 8 as set out in section 1290 9 Companies Act 2006, to makespecific and detailed provisions regarding the matters to be disclosed byquoted companies in the directors’ report, as relating to environmentaland social matters.ClientEarth considers that the Secretary of State should make Regulationsunder these powers so as to require that:• the business review must contain, where relevant:(a) details of intangible assets or risks as relevant to the development, performanceor position of the company’s business, including:(i) reputation;(ii) social licence to operate;(iii) regulatory changes;(iv) access to capital;(v) litigation risk;(vi) any other relevant intangible assets or risks;(b) having specific regard to environmental and social issues and impacts,including:(i) biodiversity impacts;(ii) local environmental impacts, such as pollution of water or air;

4 | Environmental and social transparency under the Companies Act 2006Proposal 1: Regulations to supplement section 417(5) Companies Act 2006 | 5(iii)(iv)(v)(vi)climate change (without prejudice to any obligations under otherRegulations specifically addressing the reporting of climatechange impacts);diversity in company management and workforce;community opposition or support, including details of the consultationand engagement processes undertaken;impacts on local communities including but not limited to directpersonal injury, adverse health impacts, infringement of humanrights;(vii) details of indigenous peoples’ rights in areas of current or prospectiveoperation;(viii) policies in relation to local employment content, procurement andtraining;(ix) contracts with or payments to military or security personnel, andany associated issues or incidents;(x) payments or donations made to Host State authorities or personnel;(xi) general political and social climate in Host States;(xii) departure from internationally recognised environmental practicestandards or other voluntarily undertaken codes of practicerelating to environmental issues;(xiii) departure from internationally recognised human rights standardsor Conventions, or other voluntarily undertaken codes ofpractice relating to social issues;(xiv) exemptions from Host State laws;(xv) evidence of non-compliance with Host State laws;(xvi) legal judgements;(xvii) any other environmental or social issue as relevant.• discussion of these matters in the directors’ report should include details of:(a)(b)(c)the specific risks and opportunities for the company;company policies or responses relating to the circumstances; andthe process and justification for decisions made relating to the circumstances.• where any of the above may result from the activities or impacts of any legalperson with which the company has a contractual or economic relationship,joint venture, minority shareholding or other relevant association, those risksmust also be disclosed, subject to section 417(11) Companies Act 2006.General requirements• the content of the annual reports relating to section 417(5) Companies Act2006 and any other environmental or social matters must give a true and fairview of the development, performance or position of the company’s businessduring the financial year.• where company policies, systems or achievements relating to environmentaland social matters are reported, they must be evidenced in a manner that givesa true and fair view of development, performance or position of the company’sbusiness during the financial year.• where non-financial Key Performance Indicators are used:(a)(b)they should be used consistently across all company reports within andbetween financial years;where they are not, explanation must be given.• the directors’ report must clearly state the scope and nature of the audit undertakenin relation to the report, and must state an opinion as to the extent towhich that ensures the accuracy of the report.• where audit or assurance has not been sought beyond minimum legal requirements,that fact must be clearly stated in the directors’ report.Environmental and social content of the summary financial statement• the summary financial statement of a quoted company preparing:(a)(b)(c)(d)Companies Act individual accounts (other than a banking or insurancecompany);Companies Act group accounts (other than a banking or insurancecompany);IAS (International Accounting Standards) 10 individual accounts; orIAS group accounts;must include a summary of information disclosed in the directors’ reportunder section 417 Companies Act 2006, as relating to environmental or socialissues as required by [these Regulations], to the extent necessary to give a trueand fair view of development, performance or position of the company’s businessduring the financial year.These requirements, in the context of ClientEarth’s other proposals, wouldhelp to ensure meaningful and detailed reporting under section 417(5)Companies Act 2006, providing clear direction to companies as to whatfactors must be considered. They would also create certainty and consistencyin the law, and ensure that more reliable and comparable informationis reported by quoted companies.

6 | Environmental and social transparency under the Companies Act 2006Proposal 1: Regulations to supplement section 417(5) Companies Act 2006 | 7Circumstances relevant to the development, performance orposition of the company’s businessThe proposed provisions simply give further detail and substance to theexisting requirements under section 417(5)(b) Companies Act 2006. Chapter3 below discusses and demonstrates the intangible assets and risks thatare directly relevant to the development, performance or position of companies,and how those assets or risks are affected by the environmentalor social issues, in the context of the mining and extractive industries. Awide range of environmental or social issues, from biodiversity impactsto friction with local communities, can have significant negative impactson a company’s business through reputational damage, erosion of sociallicence to operate, regulatory shifts or reduced access to capital. On theother hand, companies may maximise business development or performancepotential in these regards by ensuring high standards of practice inrelation to environmental and social issues. It is important that shareholdersand other users of the accounts and reports have an understandingof the company’s performance or position in relation to these issues.Regulations should explicitly recognise these risks and opportunities, andrequire companies to report on them where appropriate.Companies will often have a variety of close economic relationships withother legally distinct companies, making up structures of merged interests,operations and control. These relationships and the environmentaland social impacts of such related companies are extremely relevant to acompany’s business performance. Where these activities have an impacton the development, performance or position of the company’s business inany of the ways mentioned above, it is important that the company reporton those activities also. This is already provided for by section 417(5)(c)Companies Act 2006, but Regulations should make explicit the variety ofassociations that may be of relevance in this way.A true and fair viewIt is important that in the same way that company annual accounts arerequired to give a ‘true and fair view’ of the financial position of thecompany for the financial year, information which is provided relating toenvironmental and social matters must so far as possible give a ‘true andfair view’ of the development, performance or position of the companyduring the financial year.Many companies make statements in their reports regarding policies orsystems that they have adopted to address environmental or social matters.The requirements of the Companies Act 2006 make this mandatoryin many cases. The robustness and effectiveness of these policies or systemsis of central importance to a company’s ability to maximise value inthe short and long term, and so it is vital that they are reported and evidencedin a way that gives a true and fair view of company activities. Thismeans providing contextual information that is not exclusively positive,and which acknowledges, describes and explains situations which demonstratesystemic weaknesses or operational failures that demonstrate theinadequate nature or implementation of any given policy or system.The need for consistent Key Performance IndicatorsWhere non-financial Key Performance Indicators (KPIs) are used, 11 it isimportant that they are used in a way that provides clarity and allowsusers to usefully compare and analyse company performance. Thereforethe use of KPIs must be consistent throughout company reports withinand between financial years, where possible.ClientEarth also considers that the UK government or the appropriaterule-making body should develop and publish detailed guidance frameworksfor the use of KPIs in company reporting on environmental andsocial issues, so as to ensure consistent use within and across industries,as well as within individual companies.AuditChapter 1.2.1 identifies considerable problems with the current role ofexternal audit requirements in providing effective scrutiny to the reportingprocess, in relation to environmental and social information. However,ClientEarth does not propose higher mandatory requirements forthe substance of the audit. This is in light first of the concerns of the UKgovernment that led to the removal of the higher audit requirements ofthe OFR Regulations (see Annex 2), relating to the financial burden onbusiness and the need for ‘light-touch’ regulation, and secondly of theunsuitability of the auditing profession in relation to this task. Instead,as outlined in Proposals 2 and 3, ClientEarth considers that the role ofthe other key mechanisms for providing scrutiny must be reinforced andenhanced, as they can provide an arguably equal measure of scrutiny, but

10 | Environmental and social transparency under the Companies Act 2006Proposal 2: A reformed Financial Reporting Review Panel | 11Proposal 2:A reformed Financial Reporting Review PanelThe Financial Reporting Review Panel (FRRP) is the key regulatory bodycovering company compliance with accounting and reporting law in theUK. It is mandated to monitor and ensure compliance of companieswith the full range of relevant accounting and reporting requirementsin the UK, including those relating to environmental and social matters.However, ClientEarth considers that the FRRP currently lacks adequatecapacity to address these issues, in terms of both size and diversity. Neitheris it treating the requirements with sufficient priority in their previousor projected activities. This is not an acceptable situation. The FRRPmust ensure that its capacity is adequate to address these issues, and mustengage with them effectively.In ClientEarth’s view, in order to adequately fulfil its statutory purposethe FRRP must:• diversify and increase its capacity, so as to provide the expertise and impetusto effectively engage with the issues. Specifically it is necessary for it tosecure the membership of a number of persons with expert understandingof the interaction between business interests and environmental and socialissues, particularly in relation to industries where these issues are most relevant.These experts must be detached from the interests of the regulatedindustries.• begin to engage effectively with companies regarding environmental andsocial reporting.ClientEarth considers that these changes are essential to ensure the effectivefunctioning of the legislative framework, and to achieve the goalsidentified during the legislative process.CapacityThere is a need to recognise that the task of properly monitoring andensuring appropriate standards of accounting and reporting on environmentaland social issues presents new and novel challenges, and requiresnew types of expertise to provide sophisticated understanding of the waythat these issues interact with business. The FRRP therefore needs specialistcapacity on these issues.

12 | Environmental and social transparency under the Companies Act 2006Proposal 2: A reformed Financial Reporting Review Panel | 13The only current member with a vocational specialism directly related toenvironmental or social issues is Mr. Jimmy Daboo, Partner at KPMG. 12He is Vice Chairman of KPMG’s Global Energy and Natural ResourcesPractice, 13 and lead contact for KPMG’s Mining Practice, 14 which dealswith corporate social responsibility (‘CSR’) issues for the mining industry.Notably, Mr. Daboo is also a member of the Oil Industry AccountingCommittee (OIAC), which was established “to play a key role in representingthe views of the oil and gas industry in various accounting forumsand to give guidance on the interpretation and application of accountingstandards to the industry”. 15Mr Daboo’s associations highlight the other key issue relating to theFRRP’s constitution: the balance of interests.The FRRP is primarily populated by former or current city lawyers,accountants, auditors, or finance / commerce-related civil servants.“Panel members are qualified accountants or lawyers who specialisein company law and who hold or have held senior positions in theirchosen field. They may be, or have been, in practice, in the publicsector or in industry, for example as a senior partner in a majoraccounting firm or as Finance Director of a FTSE 100 company.…The underlying principle is that companies are reviewed by theirpeers. This ensures that the Panel’s approach takes note of businessconsiderations and is sensible and practical.” 16– FRRP websiteIt is perhaps appropriate that monitoring and regulation of complex financialaccounting is primarily performed by individuals with business experience,and who understand business from the inside out. However, evenrelating to strictly financial issues, there is a need for balance; it shouldbe ensured that ‘sensible and practical’ review does not allow companiesexcessive discretion, and that companies are obliged to account and reportin a way that gives an accurate picture of the company’s activities duringthe year. This is a particularly important consideration in relation to theaccounting and reporting of environmental or social issues.Institutionalised inertia is a considerable obstacle to the proper recognitionof environmental and social issues in relation to business, theirintegration into business models and practices, and their appropriateaccounting and reporting. A regulator can have a key role in driving theproper application of legal standards and progressive company practice.Therefore a balance of interests is needed within the regulator exercisingthis public duty, to ensure pro-active engagement with these key issues.ClientEarth considers that current representation on the FRRP does notappear to represent a balance of interests, and cannot ensure that standardswill be interpreted and applied in a way that does not necessarilyfavour the interests of industry management, as opposed to shareholders,investors or other relevant stakeholders as appropriate.There is also the question of the FRRP’s overall capacity. At the time ofwriting the FRRP is constituted of one Chairman, two Deputy Chairmen,twenty-four members and one Secretary. Other than the Chairman andDeputy Chairman, they are unpaid positions. ClientEarth considers thatto allow the proper performance of the significant regulatory task thatthe FRRP is supposed to perform in relation to the new requirements ofsection 417 of the Companies Act 2006, it must appoint the additionalpersonnel, to the extent necessary to allow it to fulfil its mandated role.To summarise, new capacity for the FRRP should provide:- specific expertise as to how environmental and social issues should beunderstood by companies as relating to their business;- members drawn from outside of the restricted peer group from whichmembers have so far been drawn, to provide balance to the overwhelmingrepresentation of business interests on the FRRP; and- the number of additional members necessary to adequately cover theenvironmental and social reporting requirements that the FRRP ismandated to monitor and consider, at least across industries to whichenvironmental or social issues are particularly relevant.ActivityIn 2007/08 (year ending 31 March) the FRRP reviewed a total of 300 setsof accounts and wrote letters to 138 companies requesting information. 17It reported that comments on business reviews now feature regularly in itscorrespondence with companies, 18 and that of those the issues raised mostfrequently related to the disclosure of principal risks and uncertainties

14 | Environmental and social transparency under the Companies Act 2006Proposal 3: Regulations to consolidate and enhance the role of company AGMs | 15facing companies, and the identification of key performance indicators.However, there is no indication that the FRRP has raised any reportingissues relating specifically to environmental or social reporting. In its2008 ‘Review and Recommendations’ document, the FRRP noted that:“Boards of quoted companies should give particular attention to thebusiness review in their reports in the light of the enhanced disclosurerequirements… The review extends to a discussion of the maintrends and factors likely to affect the future development, performanceand position of the company.” 19It is necessary for the FRRP to explicitly recognise and highlight theimportance of reporting on environmental and social issues, and to beginto engage proactively with companies and industries to which these issuesare particularly relevant. It must be clear to companies that they areobliged to report on the issues in significant detail, and that if they do notfulfil their legal obligations in that regard they run the risk of regulatoryintervention.It is also vital that when the FRRP begins to undertake investigations intocompany environmental and social reporting, that it draws on expertiseand evidence from a range of sources to verify the accuracy and quality ofthe reporting of specific issues. Environmental and social issues, and theirinteraction with a company’s business, cannot be adequately understoodand verified without reference to sources outside of the company. The useof multiple and varied sources of information is essential in order to gatheran accurate picture of these issues, and an understanding of whether thecompany has reported them appropriately according to law. This mightinvolve engagement with directly involved stakeholders, external Socialand Environmental Impact Assessment experts, or other groups and individualswith direct experience of the issues ‘on the ground’.Proposal 3:Regulations to consolidate and enhance therole of company Annual General MeetingsCompany Annual General Meetings (AGMs) are a key forum for the scrutinyof company annual accounts and reports. Under UK law, the annualaccounts and reports must be laid before the AGM, and in practice therewill be the opportunity for those attending to discuss their content. Individualsand organisations also often routinely gain access to the AGMsof large companies, particularly those with high environmental or socialimpacts, to make representations regarding those impacts. This practiceis accepted by many companies. This practice and its acceptance is documentedin relation to the UK-based mining industry in Annex 7. Theinput provided by such individuals and organisations plays an essentialscrutinising role in the reporting process. This role should be formalisedand codified, along with a number of specific changes to enhance transparencyat the AGMs of public companies.The Secretary of State should make Regulations under section 468(1)(d)(iii) 20 of the Companies Act 2006, subject to Affirmative Resolution Procedure21 as set out in section 1290 Companies Act 2006, 22 to reinforceand enhance the vital role played by AGMs in providing scrutiny to theaccounting and reporting process.ClientEarth considers that the Secretary of State should make Regulationsunder these powers so as to:• explicitly require companies to provide the opportunity, as an agenda itemat the Annual General Meeting, for directors to be questioned by attendeesregarding the content of the annual accounts and reports.• explicitly provide a right of access to company Annual General Meetings for:(a)(b)(c)all members of the company;persons who have been negatively affected by company activities, ortheir representatives, where appropriate with regard to the reportingobligations of companies under section 417 of the Companies Act 2006;representatives of the media.• explicitly provide the opportunity to speak, at the company Annual GeneralMeeting, in relation to the directors’ report and any inclusions or omissionstherein for:

16 | Environmental and social transparency under the Companies Act 2006Proposal 3: Regulations to consolidate and enhance the role of company AGMs | 17(a)(b)all members of the company;persons who have been negatively affected by company activities, ortheir representatives, where appropriate with regard to the reportingobligations of companies under section 417 of the Companies Act 2006.• impose an obligation on the Secretary of State, when relevant changes arebeing made to the law, to ensure that the rights and roles established by theseRegulations are considered and so far as possible secured in relation to meetingsconducted by electronic means in the future.• create a framework for the exercise of authority over the AGM process, or todelegate this authority to such competent person or body as is appropriate,to:(a) develop guidelines to regulate access to company AGMs;(b)(c)determine access to meetings;determine and allocate appropriate support with regard to linguisticbarriers or economic restrictions, and maintain an independent fundfor such purposes;with regard to persons who have been negatively and directly affected by companyactivities, or their representatives, where appropriate in providing contextualperspective to the reporting obligations of companies under section417 of the Companies Act 2006.• require companies to publish full minutes of their Annual General Meetingon their website.ClientEarth considers that provisions such as these would greatly enhancethe scrutinty provided to and by company annual reporting on environmentaland social matters.Discussion of the annual accounts and reportsUnder the Companies Act 2006, the annual accounts and reports mustbe laid before the company at the AGM. 23 Members (shareholders) of thecompany have the right to receive notice of the AGM, 24 and in practicethey will be invited to attend. 25 There will usually be the opportunity atthe AGM for shareholders to discuss the content of the annual accountsand reports, and to put questions about them to the company directors.This provides an important opportunity for the scrutiny of accounts andreports, directly from their primary users. However, this opportunity isnot explicitly provided for by statute; Regulations should provide explicitlyfor it.Rights of attendance and representationUnder the Companies Act 2006, shareholders also have the right to appointa proxy, who may then enjoy any of their rights to attend, speak or vote,in their place. 26 Shareholders almost always have broad rights to discusscompany practices and performance.It has long been common practice in relation to industries with high environmentalor social impacts, such as mining or extractives, for individualswho have direct experience of company environmental or social impactsto use this legal mechanism to attend company AGMs and make representationsto the shareholders and directors, regarding those impacts. This isoutlined in detail in Annex 7.This practice provides essential context and scrutiny to company reportingon environmental and social matters, safeguarding the discretion thatcompany directors are allowed in the reporting process under Section 417Companies Act 2006. It provides transparency to shareholders on matterswhich underpin the long-term success of the company, directly frompeople who have relevant experience of company impacts on the ground,in a forum where they can engage with directors and elicit responses onthe issues.As a codified mechanism, it would be entirely consistent with the UKgovernment’s consistently restated preference for ‘light touch’ regulation,by creating incentives for improved company reporting practice withoutoverly expensive or interventionist measures. It is a low cost solution,requires minimal regulatory oversight, and only affects problematiccompanies rather than interfering with all. Furthermore, it providesregulatory added value, by offering a uniquely direct interaction betweencompany members and relevant stakeholders. It is fundamentally important,in order to properly understand the relationships between companiesand the environments and communities in and around which they operate,that directors and other remote company stakeholders are exposed to‘realities on the ground’. It may often be the case that the directors of largemultinational companies, and certainly shareholders, simply do not havean understanding of the impacts that their company’s practices are havingand the broader perceptions of the company, and the associated implicationsfor the business. If they do, their understanding will most likely begarnered from impersonal facts, figures or news reports. Yet they are inenormously powerful positions to affect change throughout the company.

18 | Environmental and social transparency under the Companies Act 2006Proposal 3: Regulations to consolidate and enhance the role of company AGMs | 19There is therefore a strong case for a legal mechanism that ensures greaterconnection between physically and psychologically remote companymembers and the way that their business and investment decisions playout ‘on the ground’. 27 The proposed reform solidifies this link, helping toreduce the detachment that can be maintained between business and itsimpacts, and making for more effective regulation of companies.Not only does this process provide scrutiny to the reporting requirementsof section 417(5)(b), it plays a broader role in providing context to thedirectors’ reporting process as a whole. The directors’ report is in largepart designed to help shareholders assess how the directors have performedtheir duty to promote the success of the company, 28 which underthe Companies Act 2006 requires that directors must act in the way theyconsider, in good faith, would be most likely to promote the success of thecompany having regard to “the likely consequences of any decision in thelong term” and “the impact of the company’s operations on the communityand the environment”. 29While in practice this scrutiny can already be provided under existinglaw, and in many important cases it is already being provided, there are anumber of problems with this process remaining unreflected and unsupportedin law:- The law does not reflect reality or the expectations of the partiesinvolvedThe law as it stands is artificial. In reality these practices are standardprocedure for companies at their AGMs, and reflect dynamicsof expectation that no responsible director would seek to challenge;company directors know that they are expected by the public at large(and indeed the law) 30 to take account of, and have sensitivity to, factorsother than the short-term financial bottom line. That the practiceoutlined in Annex 7 remains uncodified is unacceptable: it sustainslegal fallacy that some companies may try to exploit.- There is no standardised procedure to control access to meetingsWithout a procedure which formally acknowledges and demarcates theright of access, abuse or over-use is an obvious possibility and practicemay lend itself to disadvantage from both individual and companyperspectives.From the perspective of the individuals who have been affected,over-use of the opportunities of access may lead to their submissions,however serious or concisely presented, being received by jadedshareholders (or indeed fewer shareholders - they may be put off fromattending by the expectation of long questions and discussion). Thereis a limited amount of time in any given meeting that may usefully bespent discussing these aspects of company activity, and so a procedureto ensure that that time is used most efficiently is to the advantage ofall parties.- Attendees receive limited supportOften the people who have been negatively affected by company activitiesmay be at a disadvantage when pitched against directors and companyrepresentatives in meetings. English is rarely their first language,and when confronted with commercial or legal sophistry and technicality,they may have difficulty responding in a way that convincesshareholders of the importance of their perspective.Furthermore, there are major logistical barriers to such people attendingmeetings in the UK; the attendant travel and subsistence costs areoften significant.Often in practice this advocacy or logistical support is provided bynon-governmental organisations or concerned individuals who arealready stretched for resources.- There is a need for enfranchisement in relation to electronic meetingsPhysical company meetings are decreasing in relevance, for twomutually precipitating reasons. First, especially in the case of largepublicly-traded companies, attendance at AGMs is not necessarilyhigh. Increased shareholding by institutional investors, advances incommunications technology encouraging and facilitating physicallyremote shareholding, or a number of other factors, may contributeto this. Secondly, partially as a result of this trend, and advances intechnology, there is a movement towards the use of electronic communicationtechnology to conduct the business of meetings.This development is reflected in and enabled by recent and forthcominglegal reform. The Companies Act 2006 included a number of

20 | Environmental and social transparency under the Companies Act 2006Proposal 3: Regulations to consolidate and enhance the role of company AGMs | 21provisions beginning to facilitate this shift, 31 and the The Companies(Shareholders’ Rights) Regulations 2009 32 have taken further steps inthis direction. Significant fundamental reforms are yet necessary toallow this process of facilitation to be completed, 33 but it is a trend thatis likely only to continue.Therefore, in the future, physical meetings will not necessarily bean effective forum for aggrieved parties to inform shareholders andengage with directors, thereby providing important scrutiny to thereporting process. It is vital that these people are able to continue toengage with the business of AGMs, whether conducted physically orelectronically. Indirect legal mechanisms may not sustain this type ofactivity and engagement. Accordingly it is necessary to look at waysthat people who are routinely granted access to and audience withcompany AGMs can be enfranchised in ways that remain meaningfulas technology moulds and shifts the way in which general meetings areconducted in the future.These problems, combined with the clear positive case for this reform,provide a compelling case for codification.Logistical supportIt has been noted that in practice there may be financial and communicationbarriers to the attendance and proper representation of the peoplediscussed above. If these people are to be given access to meetings andplay this important role, as they have been in practice for many years,support should be provided by an independent and public fund to ensure(i) that they are able to communicate the importance of their experienceson a level footing with the directors or representatives of companies, and(ii) that prohibitive cost does not stand as a barrier to access.Enfranchisement in relation to electronic meetingsIt has been noted that there is a movement in the law and administrationof company AGMs towards the use of electronic means rather thanphysical, to conduct the business of company meetings. The facilitation ofthis process in law is far from complete. However, the Regulations shouldinclude an obligation on the Secretary of State to ensure so far as possiblethat the rights and roles established by the Regulations are secured in relationto meetings conducted electronically in the future.The role of the Secretary of State or other body as appropriateFor the codification of this mechanism, it is necessary that the Secretary ofState, or such other body as competent, oversees and regulates the process.While it is proper that such powers derive from the Secretary of State, inpractice it would be pragmatic and appropriate for the role to be delegatedto a separate body. If the FRRP’s capacity were considerably diversified asproposed above then it might be an appropriate choice. It might be fittingfor distinct positions to be created on the FRRP to oversee this process,for which appropriate individuals could be retained. However, it is of theutmost importance that the body exercising oversight of this process isindependent of the interests of corporate management or indeed any specificindustry, and therefore only were the FRRP re-constituted in such asignificant way, as proposed, would it be an appropriate body to undertakethis role.The role of such a body would be to monitor and regulate the access of personswho have been negatively and directly affected by company activities,or their representatives, to determine where their attendance and representationswould be appropriate in providing contextual perspective to thereporting obligations of companies under section 417 of the CompaniesAct 2006. It could do this on a case-by-case basis, but such a body mightalso develop guidelines so as to simplify the process. The body would alsoplay the vital role of determining and allocating support as appropriate tosuch persons, to ensure that linguistic, advocacy or financial considerationswould not undermine the input that they might have to the process.For these purposes it would need to maintain a fund, independent of theinterests of corporate management or any specific industry.TransparencyCurrent legal requirements provide inadequate transparency aroundAGMs. Independent media have no right of access to AGMs, and companieshave no obligation to make minutes of the meetings easily available toshareholders who were not in attendance, or available to the public at all.

22 | Environmental and social transparency under the Companies Act 2006| 23This lack of transparency undermines the role that AGMs can play inproviding effective scrutiny to the reporting process, and ensuring thatcompanies are prepared to meet the challenges of the future. The lack oftransparency is also inappropriate in relation to the role that companiesplay in society, and the transparency that large and powerful entities arebroadly required to provide.There is therefore a need for legal provisions that ensure greater transparencyaround company AGMs. Specifically, the law should providemembers of the media with rights of access 34 so as to provide, in thepublic interest, independent accounts of events, and companies should berequired to publish the minutes of their AGMs in the same manner thatthey are required to publish their annual accounts and reports. 35ChaptersChapter 1: 25Governance of company accounting and reporting ofenvironmental and social impactsChapter 2: 43The ‘Company Law Review’ and the policy underpinningthe Companies Act 2006Chapter 3: 47Environmental and Social Issues: Business IssuesChapter 4: 61The business need to engage with environmental andsocial issues* * *

24 | Environmental and social transparency under the Companies Act 2006Chapter 1: Governance of company accounting and reporting | 25Chapter 1:Governance of company accounting andreporting of environmental and social impacts1.1 Legal requirements for accounting and reporting of 27environmental and social impacts1.1.1 Contenti. Annual accountsii. The directors’ report1.1.2 Coveragei. Company groupsii. Contractual or ‘other’ relationships1.1.3 Circulation1.1.4 Publication1.2 Legal mechanisms established to provide scrutiny to 35accounting and reporting of environmental and socialimpacts1.2.1 Auditing of environmental and social accounting and reporting1.2.2 Regulatory implementation and compliance: The FinancialReporting Review Panel1.2.3 Internal corporate scrutiny of accounting and reporting:Annual General Meetings1.3 Non-binding guidance documents and initiatives for 41accounting and reporting of environmental and socialimpacts1.3.1 UK guidance on environmental and social reporting1.3.2 Major international reporting standards and initiativesUK companies are required to prepare accounts and reports annually, togive a view of the financial position of the company that year. As partof this process, directors of quoted companies are explicitly required toreport on social and environmental matters, to a certain extent.The original purpose of annual accounts and reports was to provide astewardship report by directors to shareholders, to inform the company

26 | Environmental and social transparency under the Companies Act 2006Chapter 1: Governance of company accounting and reporting | 27shareholders of the business of the company in that financial year. Thereremains a strong sense of this in legal requirements. 36 The law sets outrequirements as to what kind of information shareholders need in orderto have an understanding of the way the business is performing, and theway that company directors are managing the company and performingtheir duty to promote the success of the company. The legal requirementsof the Companies Act 2006 for annual accounting and reporting includeobligations on companies to disclose information on environmental andsocial matters. The law provides explicitly for quoted companies to reporton their environmental and social impacts. However, there is a lack ofclarity and detail in these explicit requirements. There is also a lack ofclarity in relation to the reporting requirements for ‘unquoted’ companies,which are not explicitly required to report on environmental or socialmatters in the Companies Act 2006, but which inevitably must do so insome circumstances, to the extent that they are business issues in theirown right, and therefore fall within one of the provisions of section 417other than 417(5).The law also establishes a number of legal mechanisms to scrutinise thestandard of accounting and reporting in practice and ensure that companydirectors deliver reports that fulfil legal requirements. Externalaudit, regulatory oversight, and the laying of the accounts and reportsbefore the company at its Annual General Meeting (AGM) provide thisscrutiny. However, there are currently problems with these mechanisms,some in law or principle and some in practice, which render them inadequateto their task of ensuring appropriate standards in reporting. Thisis particularly the case in relation to legal requirements to account andreport on environmental and social matters.Annex 1 contains further examination of the accounting and reportingobligations of companies relating to environmental and social matters,to provide additional detail to the overview given by this Chapter. It alsocontains analysis of accounting and reporting requirements under the FSA(Financial Services Authority) Rules governing the London Stock Exchangeand Alternative Investment Market.1.1 Legal requirements for accounting and reporting ofenvironmental and social impactsUnder the Companies Act 2006, companies are required to prepareannual accounts and reports on certain matters of company business. 37They must prepare detailed accounts 38 to give a view of the financial situationof the company. They must also prepare a directors’ report, 39 to giveinformation that is either difficult to accurately express in numerical form,or that is more contextual, but which is nonetheless extremely importantto understanding the position of the business. The directors’ report isalso intended to inform members of the company (shareholders), and helpthem to assess how the directors have performed their duty to promote thesuccess of the company under section 172 Companies Act 2006. 40Statutory accounting and reporting requirements at UK level implementand satisfy minimum European Union requirements stemming from anumber of European Directives, most importantly the Fourth CouncilDirective on the annual accounts of certain types of companies (Directive78/660/EEC), as amended by the Accounts Modernisation Directive(Directive 2003/51/EC). The EU Directives do not directly place legal obligationson companies, 41 only placing obligations on the UK to implementtheir requirements, 42 which the UK has done. See Annex 3 for furtherdiscussion of the EU legal context.1.1.1 Contenti. Annual accountsCompanies may prepare their individual annual accounts in accordancewith either the Companies Act 2006, or International Accounting Standards.43 If preparing accounts under the Companies Act 2006, detailedrequirements as to form and content are provided by the Large andMedium-sized Companies and Groups (Accounts and Reports) Regulations2008. 44 Otherwise, detailed requirements for form and content areprovided by the various International Accounting Standards. 45While these requirements do not explicitly require accounting of environmentalor social information, they inevitably do require the accountingof some such issues. ‘Environmental’ and ‘social’ issues do not exist ina vacuum; they are also business issues. 46 Some environmental or social

28 | Environmental and social transparency under the Companies Act 2006Chapter 1: Governance of company accounting and reporting | 29liabilities may be historical, tangible and significant (for example, clean-upcosts for pollution or contaminated land, environmental operating costs,costs for the de-commissioning of long-lived assets), or may be prospectivearising out of a present obligation, but likely to occur, and possibleto estimate with reasonable certainty. 47 In these circumstances they mayneed to be accounted under the Companies Act 2006. 48ii.The directors’ reportThe Companies Act 2006 sets out requirements for the content of the directors’report. Most importantly, this must contain a ‘business review’. 49Section 417 of the Companies Act 2006 lays out the content requirementsfor the business review.Section 417 Companies Act 2006Contents of directors’ report: business review(1) Unless the company is subject to the small companies’ regime, the directors’report must contain a business review.(2) The purpose of the business review is to inform members of the company andhelp them assess how the directors have performed their duty under section 172(duty to promote the success of the company).(3) The business review must contain—(a) a fair review of the company’s business, and(b) a description of the principal risks and uncertainties facing the company.(4) The review required is a balanced and comprehensive analysis of—(a) the development and performance of the company’s business during thefinancial year, and(b) the position of the company’s business at the end of that year,consistent with the size and complexity of the business.(5) In the case of a quoted company the business review must, to the extent necessaryfor an understanding of the development, performance or position of thecompany’s business, include—(a) the main trends and factors likely to affect the future development, performanceand position of the company’s business; and(b) information about—(i) environmental matters (including the impact of the company’s businesson the environment),(ii) the company’s employees, and(iii) social and community issues,including information about any policies of the company in relation tothose matters and the effectiveness of those policies; and(c) subject to subsection (11), information about persons with whom thecompany has contractual or other arrangements which are essential to thebusiness of the company.If the review does not contain information of each kind mentioned in paragraphs(b)(i), (ii) and (iii) and (c), it must state which of those kinds of information itdoes not contain.(6) The review must, to the extent necessary for an understanding of the development,performance or position of the company’s business, include—(a) analysis using financial key performance indicators, and(b) where appropriate, analysis using other key performance indicators,including information relating to environmental matters and employeematters.“Key performance indicators” means factors by reference to which the development,performance or position of the company’s business can be measuredeffectively.(7) Where a company qualifies as medium-sized in relation to a financial year (seesections 465 to 467), the directors’ report for the year need not comply with therequirements of subsection (6) so far as they relate to non-financial information.(8) The review must, where appropriate, include references to, and additional explanationsof, amounts included in the company’s annual accounts.(9) In relation to a group directors’ report this section has effect as if the references tothe company were references to the undertakings included in the consolidation.(10) Nothing in this section requires the disclosure of information about impendingdevelopments or matters in the course of negotiation if the disclosure would,in the opinion of the directors, be seriously prejudicial to the interests of thecompany.(11) Nothing in subsection (5)(c) requires the disclosure of information about a personif the disclosure would, in the opinion of the directors, be seriously prejudicialto that person and contrary to the public interest.Under section 417(5) Companies Act 2006 there are explicit requirementsfor ‘quoted’ companies 50 to report information on environmental, socialand community issues (including any related company policies and theireffectiveness) ‘to the extent necessary for an understanding of the development,performance or position of the company’s business’. 51 This informationis extremely important to providing an understanding of a company’sbusiness, but due to the contingent liabilities that may be involved theyare difficult to quantify precisely in financial terms, and so must insteadbe described narratively. However, companies are required to use (again,‘to the extent necessary for an understanding of the development, performanceor position of the company’s business’) key performance indicators(KPIs) 52 in relation to environmental and social matters ‘whereappropriate’. 53

30 | Environmental and social transparency under the Companies Act 2006Chapter 1: Governance of company accounting and reporting | 31Detailed provisions have been made under the Large and Medium-sizedCompanies and Groups (Accounts and Reports) Regulations 2008 as tocertain matters that must be disclosed as part of the directors’ report. Inthese detailed provisions, no environmental matters are covered. Thesocial issues covered are primarily a restatement of those previouslyrequired by Schedule 7 of the Companies Act 1985, the very requirementsthat the Company Law Review process sought to and determined toimprove upon. This is not an adequately detailed regulatory framework.It is also important to note that even ‘unquoted’ companies, to which section417(5) does not apply, are required to report on some environmentalor social issues, where that information is necessary: for a fair review ofthe company’s business; 54 as part of a description of the principal risksand uncertainties facing the company; 55 as part of a balanced and comprehensiveanalysis of the development and performance of the company’sbusiness during the financial year, 56 and the position of the company’sbusiness at the end of that year. 57Section 417 of the Companies Act came into effect on 1 October 2007, 58and applies to all reporting years starting on or after that date. For reportsfor financial years before this date, the provisions of the Companies Act1985 applied.The directors’ report before the Companies Act 2006Under the Companies Act 1985, the legal requirements for the directors’report were considerably less extensive. The report only had to containa fair review of the development of the business of the company and itssubsidiaries during the year, its position at the end of it, 59 and the informationwhich was required by Schedule 7 of the Companies Act 1985. 60Schedule 7 set out a range of matters which the directors’ report had toinclude. 61 The requirements were considerably less demanding than therequirements of the Companies Act 2006, and it was considered by theCompany Law Review that they did not represent a coherent philosophy,and invited “standard and valueless statements”. 62To avoid the environmental and social reporting requirements of theCompanies Act 2006 encouraging similarly ‘standard and valuelessstatements’, Regulations are needed to provide specificity and detail asto the precise scope of those requirements, complemented by robust andeffective mechanisms to provide scrutiny to the process. This would representa considerable improvement on the 1985 Act in terms of ensuringthat broader contextual, non-financial information is included in annualreporting where appropriate.The ‘Operating and Financial Review’ (OFR) is also worth noting here(discussed in detail in Annex 2), as the predecessor to the directors’ reportof the Companies Act 2006. The OFR was initially a guidance frameworkdesigned to help directors effectively report on the main factors underlyingthe company’s performance and financial position, 63 including informationon non-financial factors. 64 In March 2005, a legal requirement forquoted companies to produce an OFR was introduced, 65 including explicitrequirements to report on environmental and social matters. However,just over half a year after enactment, it was announced that that statutoryobligation was to be abolished.The content requirements for environmental and social reporting whichhave been subsequently brought into law by the ‘business review’ requirementsof section 417 Companies Act 2006 are for the most part the sameas those of the OFR Regulations and Reporting Standard. 66 The mainprevailing impact that the OFR’s removal has had in this area of law is onthe standard of scrutiny that environmental and social reporting is subjectto from external audit. The cost to business of the OFR’s higher auditstandard was the central justification for its removal. ClientEarth considersthat its proposals would not be in conflict with this policy decision,as it seeks to establish a regulatory framework that is cost-effective and‘light-touch’, scrutinising only those companies which are problematic,rather than imposing burden and expense on all companies regardless ofthe quality of their reporting practices.1.1.2 CoverageCompany operations and impacts are often very complex, especially inthe multinational context, and especially in industries such as mining andother extractives. Companies will often have a variety of close economicrelationships with other legally distinct companies, making up structuresof merged interests, operations and control. These relationships, and theenvironmental and social impacts of such related companies, are extremelyrelevant to a company’s business performance.

32 | Environmental and social transparency under the Companies Act 2006Chapter 1: Governance of company accounting and reporting | 33The most obvious example of such a relationship is subsidiaries withincompany groups, over which a parent company has essential control.While technically legally distinct, the relationship of control and associationmeans that the performance, practices, and impacts of one cannot beconsidered properly without considering the other. Another significantexample is the joint venture. Often two or more companies will enterinto partnership, creating a separate legal entity to carry out a specificproject. These vehicles are often not subsidiaries (being either minorityshareholdings or other contractual arrangements), but they may constitutea significant part of a company’s operations and impacts. Otherminority shareholdings may also be important to understanding a company’simpacts. Companies also often operate in other ways via contract,with other entities or individuals playing key roles in their work. Thesecontractors may make significant contributions to a company’s environmentalor social impacts, and in turn may have considerable bearing onthe company’s business development, performance or position.Appropriate reporting requirements relating to these closely associatedcompanies or individuals are therefore extremely important.i. Company groupsMost international mining companies have large and complex structures.In fact, rather than being a single company, most of what would often bereferred to as a mining ‘company’ is in fact a group of companies, constitutedof any number of companies each with distinct legal ‘personality’. 67However, while they are legally distinct, a ‘parent company’ 68 ultimatelyhas control over its subsidiaries, which in turn have control over theirsubsidiaries, and so on.The existence of these separate legal personalities has many very significantconsequences, not least in relation to how companies can be held toaccount for the activities of a group over which they have essential control.69 In most areas, the law recognises legally distinct companies onlyas distinct legal persons. However, for certain purposes the law makesan exception and treats the group as a single entity. Accounting andreporting requirements are one such exception; the parent company isrequired to report, to a certain degree, on the activities of the group as awhole. Parent companies are required to produce group accounts, 70 and adirectors’ report 71 for the entire group, unless one of the statutory exemptionsapplies. 72ii.Contractual or ‘other’ relationshipsThe Companies Act 2006 explicitly provides that companies must report 73information about persons with whom the company has contractual orother arrangements which are essential to the business of the company, tothe extent necessary for an understanding of the development, performanceor position of the company’s business. 74 This provision has implicationsfor company reporting of environmental and social performance,and responsibility in relation to supply chains, joint ventures, minorityshareholdings, contractual or other relationships, through which companiesmay have significant impacts. Prior to the Companies Act 2006,companies had no explicit obligation to report on their contractual relationshipsor associations.The provision was added at a late stage in the development of the CompaniesAct 2006, in response to the work of non-governmental organisations. 75As the Companies Bill passed through Parliament, the UK government’srepresentative in the House of Lords explained the government’s intentionfor this provision:“Let me provide some clarity on what the Government expect tobe reported... This is not a requirement on companies to list theirsuppliers and customers, or to provide detail about contracts. Theprovision is about reporting significant relationships, such as withmajor suppliers or key customers critical to the business, which arelikely to influence, directly or indirectly, the performance of thebusiness and its value.” 76- Lord Sainsbury of Turville (Parliamentary Under-Secretary ofState, Department of Trade and Industry circa 2006)This provision has significant implications in the context of environmentaland social matters. Companies are affected as businesses by thesematters through damage to valuable intangible assets such as reputationand social licence to operate, or by strengthening these assets . Theseimpacts on companies do not take effect in strict accordance with strictrules of separate legal personality. For example, if a company owns aminority of shares in joint venture that is viewed as responsible for grave

34 | Environmental and social transparency under the Companies Act 2006Chapter 1: Governance of company accounting and reporting | 35environmental or social damage, the reputation of the company may be1.2 Legal mechanisms established to provide scrutiny todamaged, or the social licence to operate may be damaged, regardless ofaccounting and reporting of environmental and socialwhether the company had majority control over the relevant decisions, orimpactswhether the operation was undertaken through a subsidiary.There are a number of mechanisms established by law that provide scrutinyto the accounting and reporting process. These mechanisms areThere is a limited exemption to this requirement, whereby reporting is notrequired where it would, in the opinion of the directors, be seriously prejudicialto that person and contrary to the public interest. 77 This exemptionreports exercise their discretion appropriately when preparing them, anddesigned to ensure that those responsible for preparing the accounts andwas reportedly added following government discussions with the pharmaceuticalindustry, with the intention of avoiding ‘misuse’ by extrememechanisms are not currently providing an adequate standard of scru-fulfil their legal obligations. However, ClientEarth considers that theseanimal rights activists who might target business associates of companiestiny, indeed particularly in relation to accounting and reporting on environmentaland social matters. They do not currently provide adequatewho test on animals and thus compromise their safety. 78safeguards to ensure the provision of information that fulfils legal requirements,or that accurately or fairly reflects the position, performance and1.1.3 Circulationactivities of the company.Companies are required, as the default position, to circulate copies ofthe annual accounts and reports to every member of the company, every1.2.1 Auditing of environmental and social accounting andholder of the company’s debentures, and every person entitled to receivereportingnotice of general meetings. 79 However, the company now often has theoption to send a ‘summary financial statement’, along with explanatoryOne way in which company accounts and reports are subjected to scrutinymaterial relating to the directors’ report (in the case of listed companies), 80is by external ‘audit’. Under the Companies Act 2006, there are obligationson companies to ensure that independent auditors are appointed,instead of the full annual accounts and reports. This explanatory materialdoes not need to include information about environmental or socialgiven certain rights of access to information, and charged with a duty tomatters.prepare an ‘auditors’ report’, 84 the purpose of which is to verify the accuracy,reliability and quality of the accounts and reports. The report mustWhile persons entitled to receive copies (see above) retain the right tothen be presented to the company members alongside the accounts andreceive the full accounts and reports if they expressly notify the companyreports. 85as such, 81 and companies must open consultation with all such personsbefore they can send summary financial statements, 82 it is uncertain as toAuditors have broad and wide-reaching rights of access to information fromhow many shareholders will go out of their way to receive the full accountsthe company. As well as access at all times to company books, accountsand reports. Many companies will now take this option to save costs, andand vouchers, 86 an auditor may require any information or explanationsthis considerably reduces the level of detail that shareholders will receivethat they think necessary for the performance of their duties 87 from a widein hard copy relating to environmental and social matters.range of persons currently or formerly related to the company. 881.1.4 PublicationThe auditor’s report must satisfy a number of requirements, primarily inrelation to the annual accounts. The report must describe the scope of theQuoted companies are required to publish their full annual accounts andaudit, and the auditing standards which were applied in carrying it out. 89reports on an open website maintained by or on behalf of the company,The auditor’s report must either be unqualified (i.e. report that the financialstatements give a true and fair view), or qualified (report a significantavailable free of charge and at least until the next financial year’s annualaccounts and reports are made available. 83

36 | Environmental and social transparency under the Companies Act 2006Chapter 1: Governance of company accounting and reporting | 37disagreement with the disclosures made or techniques employed, or anopinion that the audit has been too limited in scope). 90The auditor’s report must state a clear opinion as to whether the accountshave been properly prepared in accordance with the requirements of theCompanies Act 2006, 91 and the relevant financial reporting framework. 92It must also state a clear opinion as to whether the accounts give, at bothindividual and group level as applicable, a true and fair view of the stateof affairs of the company as at the end of the financial year (in relationto the balance sheet), 93 and of the profit or loss of the company for thefinancial year (in relation to the profit and loss account). 94 Auditors mustcarry out all necessary investigations 95 to form an opinion as to whetheradequate accounting records have been kept, 96 and whether the company’sindividual accounts are in agreement with the accounting records andreturns. 97 Where the auditor is of the opinion that any of the above is notthe case, they must state that fact in their report. 98 If they fail to obtain allinformation and explanation necessary for the audit, they must state thatfact in the report. 99However, in relation to the directors’ report, and therefore the majorityof environmental and social information provided, auditors are onlyrequired by law to make a statement as to whether in their opinion thedirectors’ report is consistent with the company annual accounts. 100 Thereis no requirement for the audit to check for any inconsistencies againstany information other than the annual accounts. 101 These requirementsare inadequate. The narrow standard of scrutiny required by law is illsuitedto reporting of this nature. Assessment of the accuracy and qualityof reporting on environmental or social matters requires reference toa broader range of information than this; an audit which only providesassurance in relation to broad financial data is inadequate and potentiallymisleading in this context. 102Some companies, especially those with high public profiles, now gobeyond minimum legal requirements for auditing, and contract ‘assurance’engagements for their ‘corporate responsibility’ reporting. ‘Assurance’often involves broader and more detailed investigations into thequality of reporting, sometimes from new, novel or specialist types of‘provider’. However, these assurance exercises are entirely voluntary andare not regulated by law; there is no legal standard for the form, scopeor methodology of assurance that such information is subject to. Thereis no uniformity of practice between companies, leading to a confusinglandscape of verification and “assurance” for environmental and socialreporting which renders the area of reporting as a whole devoid of clarityor certainty, despite the efforts of and progress made by a number ofinternational assurance standards and frameworks. 103 Essentially thesepractices allow company management to engage in unregulated communicationpractices, where they set the rules of play and the boundaries oftheir scrutiny.Questions must also be asked as to the suitability of the mainstream auditingprofession for the new challenges presented by scrutinising reportingof environmental and social issues.The firms that carry out the majority of audits on these reports, such asthe ‘Big Four’ accountancy firms, bring financial and legal expertise tothe table, which is necessary to apply and understand the complex rulesrelating to financial accounting. But are these individuals necessarily bestplaced to ensure and embrace the integration of environmental or socialmatters into business reporting? Institutional inertia, deep-set culturesand internal pressures (discussed below) all may have influence on the wayin which these issues are interpreted and the rigor with which any suchstandards are applied. What is required to provide effective scrutiny tothese reports is a body that balances financial expertise with progressiveunderstandings of the risks and opportunities for companies relating toenvironmental and social matters, and ensures that an appropriate institutionalbalance is struck. There are also questions as to the suitability ofsolely desk or data-based audits for this kind of information. It is commonlycomplained that in the context of environmental or social reporting,there is a lack of ‘reality’ to such processes, and that there is a need foraudits that involve research and engagement conducted ‘on the ground’ oron site, 104 to properly scrutinise the effectiveness of policies and managementsystems in reality. 105In summary, the current auditing system is not effective or fit for thepurpose of providing adequate or appropriate verification and assurancefor the reporting of information on environmental and social issues. ClientEarth’sproposals would compensate for these inadequacies by creatinga low cost legal framework that would ensure that the objectives of theCompanies Act 2006 are fulfilled, with adequate scrutiny provided to the

38 | Environmental and social transparency under the Companies Act 2006Chapter 1: Governance of company accounting and reporting | 39reporting process by the Financial Reporting Review Panel (the appropriateregulatory body) and company AGMs.1.2.2 Regulatory implementation and compliance: The FinancialReporting Review PanelThe Financial Reporting Review Panel (FRRP) is an independent regulatorybody, which has responsibility and authority for monitoring thecompliance of companies with relevant accounting and reporting requirementsin the UK. When appropriate, it is authorised to intervene toensure compliance. Its legal authority and powers are derived from theSecretary of State, and provided for by statute. 106 It is an operating bodyof the Financial Reporting Council (FRC), which is ‘the UK’s independentregulator responsible for promoting confidence in corporate reportingand governance’. 107The FRRP is primarily populated by former or current city lawyers,accountants, auditors or finance / commerce-related civil servants. At thetime of writing it was constituted by 1 Chairman, 2 Deputy Chairmen, 24members and 1 Secretary. FRRP members are recruited by public advertisement,and other than the Chairman and Deputy Chairman, they areunpaid.The FRRP enquires into cases where it appears that UK accounting andreporting rules have not been followed. It has broad investigative powers;it may require companies, officers, employees or auditors of the companyto provide any information recorded in any form or any explanationswhich it may reasonably require for the purposes of deciding whether tomake an application to court in respect of defective reports. 108 It also hasa right to apply to a court to secure any such information or explanationas necessary. 109 If it decides there is a likelihood of non-compliance andthe company will not voluntarily revise the accounts or reports, the FRRPis authorised to make an application to court for a declaration of noncomplianceand an order requiring the directors of the company to revisethe accounts or reports. 110 The FRRP also maintains a legal costs fund of£2million for the purposes of pursuing any of these court orders and/ordeclarations. 111 To date it has resolved all cases brought to its attentionwithout having to apply for a court order. 112The FRRP normally only exercises its authority in connection with theaccounts of public limited companies and companies within a groupheaded by a PLC. 113 This was agreed with BERR (now BIS), to which theremaining cases fall. 114 In 2007/08 the FRRP reviewed a total of 300 sets ofaccounts and wrote letters to 138 companies requesting information. 115 Itreported that comments on business reviews now feature regularly in theircorrespondence with companies, 116 and reported that the issues it raisedmost frequently relating to business reviews were regarding the principalrisks and uncertainties facing the company, and identifying key performanceindicators. There is no indication that any issues have been raised bythe FRRP which relate to environmental or social reporting. 117In its 2008 ‘Review and Recommendations’ document, the FRRP notedthat:“Boards of quoted companies should give particular attention to thebusiness review in their reports in the light of the enhanced disclosurerequirements, effective for reports prepared for periods beginningon or after 1 October 2007. The review extends to a discussionof the main trends and factors likely to affect the future development,performance and position of the company.”The FRRP is mandated by statute to regulate and ensure compliancewith the full range of company accounting and reporting requirements,including those relating to environmental and social issues. However,as explained above in Proposal 2, as currently constituted the FRRP isnot well suited to ensuring the appropriate incorporation of environmentaland social issues into company reporting. Its capacity needs to beincreased and diversified to allow it to fulfil its statutory mandate, whichplays a vital role in ensuring compliance with legal reporting standards.The FRRP’s practice and communication thus far has indicated that environmentaland social issues in reporting are not amongst its priorities andthat it is not planning to pay specific attention to the issues in the comingyear (as the first reports subject to the new business review requirementsare published). This is an unacceptable situation, and is not consistentwith the FRRP’s statutory remit and regulatory role.1.2.3 Internal corporate scrutiny of accounting and reporting:Annual General MeetingsCompanies are required to ‘lay’ their annual accounts and reports beforethe company in general meeting, 118 which in practice will be the AGM.This is where company shareholders are usually given the opportunity to

40 | Environmental and social transparency under the Companies Act 2006Chapter 1: Governance of company accounting and reporting | 41ask questions relating to the reports, get clarification on certain pointsor scrutinise the treatment of any issues as accounted or reported by thedirectors.The company AGM is a key forum for the scrutiny of the annual accountsand reports. In theory, shareholders have been said to be the primaryregulators of corporate behaviour. 119 They are certainly regarded as theprimary users of the annual accounts and reports, and so the opportunityfor them to engage with directors regarding the content of the accountsand reports and the treatment of any issue within them is central to thereporting process. 120In practice, there is usually the opportunity for discussion of the reportsat the AGM, when they are laid before it. However, this is not explicitlyrequired by law. Neither is there any legal requirement that the annualreports have the shareholders’ approval or acceptance; shareholders haveno ability to reject them. 121In practice, there may be discussion at company AGMs relating to environmentalor social matters associated with the company’s business, andmanagement’s approach to them (especially at AGMs of those companieswith particularly significant environmental and social impacts). Indeedin practice, individuals and organisations often routinely attend companyAGMs to make representations to the company regarding these issues.This practice is discussed in much greater detail in Annex 7.This process plays a key role in safeguarding the discretion of directorswhen they reporting on company activities, in ensuring that shareholderswho are present, and before whom the accounts and reports are laid, aremade aware of significant issues relating to company activities, which mayhave bearing on the business of the company, but which may not havebeen treated with sufficient detail in the annual accounts or reports.As explained above in Proposal 3, ClientEarth considers that this essentialscrutinising role in the reporting process must be formalised and codified,along with a number of specific changes to enhance transparency aroundAGMs.1.3 Non-binding guidance documents and initiatives foraccounting and reporting of environmental and socialimpactsThere is a range of voluntary, non-binding guidance relating to companyenvironmental and social reporting, and initiatives that encouragesuch reporting, at both national and international level. These guidancedocuments and initiatives, particularly at international level, have enjoyedconsiderable success in increasing the volume and consistency of environmentaland social information provided by the largest multinationalcompanies, and enhancing their engagement with the issues. They arealso useful in presenting an aspirational upper ceiling in reporting standards,encouraging incrementally higher quality in reporting. However,they can only be a part of the solution, as they need to be supplementalto robust and appropriate minimum standards, against which adequatecompany performance can be monitored and ensured by mechanismssuch as those identified in Chapter 1.2 above.1.3.1 UK guidance on environmental and social reportingThere are currently two key non-binding guidance documents on environmentaland social reporting in the UK, issued by bodies exercisinggovernmental powers: the Accounting Standards Board’s ‘ReportingStatement: Operating and Financial Review’, 122 and the Department forEnvironment Food and Rural Affairs’ ‘Environmental Key PerformanceIndicators: Reporting Guidelines for UK Business’. 123 These documentsprovide ‘best-practice’ guidance for company reporting of environmentaland (in the case of the ASB’s statement) social issues. However, as wellas lacking legal force, this guidance has, as a whole, been described asambiguous. 1241.3.2 Major international reporting standards and initiativesThere are also a number of voluntary standards and initiatives at internationallevel which aim to achieve higher standards of corporate reportingrelating to environmental or social issues.The Global Reporting Initiative (GRI) is a worldwide multi-stakeholdernetwork of thousands of experts, which strives to provide companies withguidance and support in adopting higher standards of ‘sustainability’

42 | Environmental and social transparency under the Companies Act 2006Chapter 2: The ‘Company Law Review’ | 43reporting practice. It is led by a small coordinating secretariat. Theprimary focus of its work is its ‘Sustainability Reporting Framework’, 125which provides guidance for organisations to use as a basis for disclosureabout sustainability performance, and provides a universally-applicable,comparable framework within which to understand disclosed information.More than 1,500 companies have declared their voluntary adoptionof the Guidelines worldwide, including many of the world’s largestand most controversial mining and extractives companies such as Shell,Vedanta Resources and Anglo American. Therefore, using a voluntaryapproach, the GRI has improved the amount of environmental and socialinformation that companies disclose, and the attention they give to theissues. However, the extent to which the GRI has stimulated reportingwhich gives a true and fair reflection of companies, including informationwhich might reflect the company in a negative light but which it is necessaryfor shareholders and other users to be party to, should be questioned.Furthermore, as an aspirational process, rather than one tied to specificstandards and subject to monitoring and compliance, it cannot be reliedupon to ensure a high or consistent standard of transparency. Nonetheless,it has an important place in the overall governance landscape ofcorporate reporting of these issues, one which must be complemented bymore robust and unambiguous reporting obligations at national level.The Carbon Disclosure Project gathers and disseminates voluntarily disclosedclimate change data from the world’s largest corporations, to informthe global market place. It has made considerable progress in engagingcompanies to be transparent about carbon emissions and climate changeimpacts. However, as well as remaining a voluntary scheme, and thus tosome extent unreliable, it relates only to climate change, not to any of theconsiderable range of other environmental or social issues that companiesneed to report on. Therefore while it has been instrumental in enhancingcorporate disclosure of climate change related data, and corporateengagement with the issue, it plays but one role in the broader spectrumof governance tools that are needed to ensure appropriate corporate transparencyon environmental and social issues.The International Accounting Standards Board (IASB) 126 is currentlydeveloping non-mandatory guidance for reporting of non-financialforward-looking information. It is aiming to develop principles andcontent requirements to make ‘management commentary’ reporting (theequivalent of directors’ reporting) useful to investors. It is expected to becompleted in the second half of 2009.Chapter 2:The ‘Company Law Review’ and the policyunderpinning the Companies Act 20062.1 An overview 432.2 Key concepts in review and reform 442.2.1 ‘Enlightened Shareholder Value’2.2.2 Enhancing shareholder engagement and dialogueThe Companies Act 2006 was the result of a long process of review, knownas the ‘Company Law Review’. Key themes and policy goals to emergefrom the Company Law Review are directly relevant to the resultingenvironmental and social reporting requirements. These policy goalswere restated as priorities by the UK government’s White Paper, whichled directly to the Companies Act 2006. The need (i) to enshrine in lawand develop in practice the idea of ‘enlightened shareholder value’, andthe importance of management’s long-term vision for a company’s success,and (ii) to enhance the engagement of shareholders with the businessof the company and increase their dialogue with company management,were seen as central priorities for company law. When read together, thesepolicy objectives demand effective and extensive company reporting ofenvironmental and social matters. The current lack of clarity in legalobligations for environmental and social reporting and the weaknesses inthe regulatory mechanisms that scrutinise such reporting undermine theachievement of the UK government’s policy objectives.2.1 An overviewThe Company Law Review (CLR) was launched in March 1998 by MargaretBeckett, then Secretary of State for Trade and Industry, with the publicationof the Department of Trade and Industry (DTI 127 )’s consultationpaper, ‘Modern Company Law for a Competitive Economy’: 128“[T]he Government commissioned the Company Law Review (CLR),an independent group of experts, practitioners and business people,to take a long-term and fundamental look at our underpinning systemof company law, to see how it could be brought up to date.” 129

44 | Environmental and social transparency under the Companies Act 2006Chapter 2: The ‘Company Law Review’ | 45The CLR published a number of focused papers on a range of corporategovernance issues. 130 The Review culminated in the CLR Steering Group’sFinal Report in 2001.The government responded to the CLR’s findings with the publication its2002 White Paper, ‘Modernising Company Law’, which was opened to publicconsultation. Following consultation and review, the DTI published its2005 White Paper, 131 which set out the legislative framework which wouldbecome the Companies Act 2006.In the 2005 White Paper, which drew heavily on the work done by theCLR, DTI set out its objectives in legislative reform (emphasis added):“We are committed to creating a modern, enabling and robustframework for our companies. We are determined to ensure that oursystem of company law and corporate governance is one which:- facilitates enterprise by making it easy to set up and grow a business;- encourages the efficient allocation of capital by giving confidenceto investors;- promotes long-term company performance through shareholderengagement and effective dialogue between business andinvestors; and- maintains the UK’s position as one of the most attractive placesin the world to set up and run a business.” 132– Department of Trade and Industry, ‘Company Law Reform’2.2 Key concepts in review and reform‘Enlightened shareholder value’ and improved transparency and shareholderengagement were held out by government and stakeholders alikeas fundamental cornerstones of the Companies Act 2006, and some of thekey achievements of the reform process.“The combination of enlightened shareholder value and greatertransparency is the key to successful corporate governance… [theCompany Law Review Steering Group’s report] gets it absolutelyright by treating the shareholder versus stakeholder argument as apiece of bogus British adversarialism, and rightly concludes that thecorrect approach is ‘both and’ rather than ‘either or’...” 133– Sir Philip Goldenberg, Senior Corporate Finance Partner,SJ Berwin2.2.1 ‘Enlightened Shareholder Value’One of the fundamental themes to emerge from the CLR and the 2005White Paper was the development of the concept of ‘enlightened shareholdervalue’ in UK company law. 134 The Companies Act 2006 sought toset it as the foundation of corporate governance.‘Enlightened shareholder value’ is the idea that while the ultimate objectiveof a company should be to generate maximum (financial) value forshareholders, 135 in order to successfully do so, company management mustrecognise that in many cases the way to success is through building longterm relationships, dependent on trust. It is argued that exclusive focuson the short-term financial bottom line, in the belief that this equates toshareholder value, will often be incompatible with the cultivation of cooperativerelationships, which may involve short-term costs but will bringfar greater benefits in the longer term. 136Essentially the law now recognises that ‘shareholder value’, or the interestsof the shareholders, cannot be understood solely as short-term financialbottom line. The Company Law Review argued that as previouslyexpressed and understood the law failed to deliver the necessary inclusiveapproach, and so a number of reforms aimed at delivering this shift inmanagement perspective and governance were undertaken. As a result itwas decided that directors should be required by law to have regard to keyissues that affect the company in the long-term (the new legal definition ofdirectors’ duties) 137 , and communicate on those issues with the company’sshareholders (the extended requirements for the directors’ report, includingthe requirement to report on environmental and social matters).The recognition that company performance can no longer be understoodsolely in terms of immediate short-term financial bottom line is at the veryfoundation of UK company law. The policy recognises the importanceof issues such as company impacts on local communities and the environmentto business success and shareholder value. The way in which acompany’s business may be affected by these matters is through intangibleassets such as reputation, social licence to operate, regulatory freedom,access to capital and litigation risk. This is expanded below in Chapter 3.

46 | Environmental and social transparency under the Companies Act 2006Chapter 3: Environmental and social issues: Business issues | 472.2.2 Enhancing shareholder engagement and dialogue“The Government believes that companies work best…where thereis effective communication and engagement between directors andshareholders, and where there are efficient mechanisms for takingdecisions critical to the running of the company ...Shareholders have a key role to play in driving long-term companyperformance and economic prosperity. Informed, engaged shareholders– or those acting on their behalf – are the means by whichthe directors are held to account for business strategy and performance...It is important that shareholders have access to clear and meaningfulinformation to enable them to have a constructive dialogueand increase their engagement with the company in which they holdshares.” 138– Department of Trade and Industry, ‘Company Law Reform’Another central objective of the company law reform agenda that theCompanies Act 2006 sought to bring into effect was the improvement ofdialogue between shareholders and those who carry out the business of acompany. The relevance of this policy objective to reporting requirementsis obvious; company reporting is the primary means of communicationwith shareholders, and the accounts and reports are the primary source ofinformation for shareholders about company activity. Therefore effectiveand adequate reporting is of central importance to the achievement of thispolicy objective.Chapter 3:Environmental and social issues:Business issues3.1 Intangible assets 483.1.1 Reputation3.1.2 Social licence to operate3.1.3 Regulatory freedom3.1.4 Access to capital3.2 Intangible risks 573.2.1 Litigation riskEnvironmental and social issues are also business issues. Business practicesthat interact with a wide range of environmental or social issues canhave significant implications for business. For example, where companieshave negative impacts on local communities and local environments, theyare exposed to business risks in both the long and short term, and limitingtheir ability to capitalise on business opportunities related to environmentaland social issues. This has been widely acknowledged by businesses,governments and civil society alike, and as Chapter 2 demonstrates, is aconcept that is explicitly a part of the policy that underpins UK companylaw.Section 417(5) Companies Act 2006 requires that the directors’ reportmust include information about environmental and social matters so faras they are relevant to an understanding of the development, performanceor position of the company’s business. There are a number of extremelysignificant intangible assets and risks, key to a proper understanding ofthe development, performance or position of the company’s business,which may be directly affected by a company’s environmental or socialimpacts. Environmental or social impacts must therefore be reported byquoted companies under section 417(5) Companies Act 2006 where theycarry implications for these intangible assets and risks.ClientEarth’s proposed Regulations aim to make explicit the key intangibleassets and risks that quoted companies must consider in relation to the

48 | Environmental and social transparency under the Companies Act 2006Chapter 3: Environmental and social issues: Business issues | 49reporting requirements of section 417(5)(b) Companies Act 2006, relatingto environmental and social matters. This chapter identifies these keyintangible assets and risks, and gives examples where appropriate to illustratehow these issues have affected businesses in the past, in the contextof the mining and extractives industries.3.1 Intangible assets“The continuous evolution and enhancement of non-financialcapital is not only a core purpose of business, but a prerequisite toits durability and vitality... the single-minded focus on financialcapital... has diverted attention from other equally – or arguablygreater – sources of wealth creation...” 139– Allen L. White, Co-founder and former CEO,Global Reporting Initiative“Asset structures are changing, and becoming increasingly ‘soft’, inthe sense that a significant proportion of the value, or capacity, of abusiness is to be found in intangibles, rather than in tangible assetssuch as buildings and machinery.” 140– Company Law Review Steering Group, ‘Modern Law for aCompetitive Economy: The Strategic Framework’Definitions of intangible assets (or ‘intangibles’) vary. However, they canusefully be defined as drivers of economic performance, or generators ofcorporate value, which are manageable and often quantifiable, but whichdo not show up on balance sheets or income statements. 141 They are factorswhich have bearing on the business performance and prospects of acompany, but which are non-physical, and rooted in human knowledge orperception.While increasing investment in certain intangibles (e.g. brand, research &development) suggests progress, it is perhaps still fair to argue that “managerslive in a world where intangibles remain under-recognised, undermanagedand under-reported.” 142There are a number of key types of intangible asset (and associated businessrisks and opportunities) which relate to company impacts on theenvironment and people.3.1.1 Reputation“The future will be dominated by competition for public trust.” 143- Darrel Bricker, President and Chief Operating Officer,Ipsos-Reid Public Affairs North AmericaThere are many ways in which reputation may have an impact on a company’sbusiness. For companies whose business is highly dependent ondirect relationships of trust with consumers, company reputation amongstconsumers will often carry massive significance, and may have a directimpact on sales and returns. Mining and other extractive companies areperhaps affected in this way to some extent, but they may often be moreaffected by the impact that serious reputational damage or long-termreputational neglect may have on employee morale and productivity (or‘human capital’). Human capital is a very significant intangible asset, andreputational damage or neglect feeds into the performance of this intangiblein a number of increasingly significant ways:- Low morale in the existing workforce can often result from ethicalscandal or a broadly negative societal reputation (few people will feelproud or motivated to work for a company with a bad reputation). Thiscan have substantial impacts on employee productivity and loyalty.- Poor company reputation can affect recruitment. The best and brightestemployees are increasingly opting to work for companies whichthey feel proud to be a part of; in the career choices of the most capableyoung people, company reputation (relating to matters from internalculture to external environmental impacts) has increasing weightagainst any slim financial advantages that can be offered against competitors.A study by the organisation Net Impact of 2100 MBA 144 studentsfound that more than half said they would accept a lower salaryto work for a socially responsible company. 145 Thus a company withpoor reputation in any given sector may well lose out in the bid for thebest new workers, while one with a positive reputation may win in thatbid. The quality of individual that a company is able to recruit andretain will be a strongly determinant factor in the company’s successin the long term, especially in industries which will rely heavily oninnovative practices and technology to sustain their market positionor advantage.

50 | Environmental and social transparency under the Companies Act 2006Chapter 3: Environmental and social issues: Business issues | 51Reputation amongst State actors may also be extremely important for companiesin the mining and extractives industries. As well as their regulatoryroles, States may often be project partners for large mining and extractivesoperations, and so maintaining relationships of trust with them can becentral to a company’s business prospects. These relationships must oftenbe maintained across several political regimes or administrations, whichcan present particular difficulties and complexities. Reputation is alsocentral to investor confidence and a range of other business relationships.Companies need to ensure and demonstrate strong and progressive managementof environmental and social issues to secure the confidence ofthese key actors in their business.However, as we will see below in Chapter 4, shareholders and investorsshould be wary of superficial PR and issue avoidance, or any course ofaction which does not create a fundamental culture of corporate transparency,openness and accountability.3.1.2 Social licence to operate“Social licence is the acceptance and belief by society, and specificallyour local communities, in the value creation of [company]activities, such as [they] are allowed to access and extract mineralresources…You don’t get your social licence by going to a government ministryand making an application or simply paying a fee. It is not a simplecase of throwing money at a problem and hoping that it goesaway.” 146– Pierre Lassonde, former President,Newmont Mining Corporation“In the extractive sectors, communities are the linchpins for accessto raw materials, without which companies’ operations wouldcease.” 147– Allen L. White, Co-founder and former CEO,Global Reporting InitiativeSocial licence to operate is essentially the extent to which society acceptsor tolerates company activities. This is most relevant to company successin relation to individuals or groups in key positions who might complicateor obstruct company operations in the short, medium or long term. Sociallicence is particularly important to mining and extractives operations,which can be particularly highly affected by the willing consent of localpeople (as apart from any formal consent licence as granted by government).Such a licence has been broadly recognised as a critical success factorin mine development, 148 with companies such as Rio Tinto recognisingits vital importance to project development. 149 Respect for the needs anddemands of local communities, and meaningful community participationin decision-making, are key.Factors involved for the mining and extractive industries in earninga social licence to operate with local communities include (but are notlimited to): level of meaningful community consultation and participationin decision-making that affects them; level of local content employment,training and procurement; level of corporate transparency andcommunication with communities; avoidance of involvement with localindividuals or groups that may be divisive in local communities, includingmost importantly the avoidance of divisive relationships with militarisedgroups or aggressive security forces; efforts to build business partnershipswith communities; efforts to seek community support and capacity building;level of collaboration with communities to help meet their infrastructureneeds; and degree of understanding of local culture, language andhistory. 150Company reputation also interacts with social licence to operate. Companieswith poor reputations may be less readily trusted by local people,and thus gaining social licence may be more difficult and more expensivefor companies with a bad reputation, and the costs of its absence may begreater. Likewise poor relations with or treatment of people in specificcircumstances may have broad impacts on company reputation.The risk posed to a company’s social licence to operate by company activitiesthat negatively affect local communities and environment is almostself-evident. Operational disruption caused by a lack of social acceptancecan have very significant implications for a company’s business. This is aparticularly central concern for mining and extractives companies, whichcan be illustrated with reference to case study examples.Newmont in Peru: the opportunity loss of lacking sociallicence to operateIn 2004, Minera Yanacocha (a subsidiary of Newmont Mining Corp.) withdrewfrom its explorations at Cerro Quilish, following massive community

52 | Environmental and social transparency under the Companies Act 2006Chapter 3: Environmental and social issues: Business issues | 53protests. This, despite the fact that the company had expended substantialamounts of capital on exploration, and that the mine contained goldreserves reportedly worth an estimated $2 billion. 151Newmont stated, as published in a number of Peruvian newspapers, that ithad not always listened to the valid claims and concerns expressed by theCajamarca community in the past, and that community opposition was apart of their decision to withdraw. 152 Minera Yanacocha’s operations manager,Guy Lansdown, was quoted as reflecting: “We thought we could goahead and explore Cerro Quilish… obviously the community did not thinkthat, so we pulled back. We’ve got to sharpen our pencils and get out andcommunicate with them and work with them.” 153In particularly extreme scenarios, the implications of failing to obtain ormaintain a social licence to operate may be volatile, extreme and disastrousfor companies.Shell in Nigeria: lacking a social licence?Shell has been exploring in Nigeria since the 1930s, and first successfullydrilled in the Niger Delta in 1956, 154 where it has been operating since.Many reports have suggested that its practices have faced opposition fromlocal communities in areas of operation. 155 It has been reported that Shellis perceived by Nigerian communities as having been ‘on side’ with corruptand repressive military regimes 156 , and that many communities do not feelthat they have benefitted from oil production, seeing only ill effects. 157Militant rebel groups, such as the Movement for the Emancipation of theNiger Delta, have proliferated in recent years and disrupted Shell operationsin increasingly severe ways, reportedly with the support of many membersof local communities: 158 insurrection, bombings, hostage-takings and otherviolent attacks on oil facilities are now common occurrences in the Delta. 159In early 2006, violence in the Niger Delta forced Shell to shut down almosthalf of its Nigerian oil production. 160 In 2007, kidnappings and protests hadslashed production by nearly 1 million barrels per day. 161 A single facilityoccupation in 2007 caused cuts of 170,000 barrels per day. 162 In early 2008sources close to the situation were suggesting that Shell’s future in the areawas in severe doubt, 163 and in late 2008 large scale rebel attacks were stillcommonplace and causing severe damage to operations. 164To analyse the situation in terms of their ‘social licence to operate’, it couldbe argued that in the past oil companies in Nigeria have not focused enoughon gaining ‘social licence’ to operate by engaging with the Nigerian people’sneeds, focusing instead on the formal consent of the Nigerian state.As a result, their business is being affected in significant ways. In contrast,Newmont in Peru recognised that the potential for their operations wasbeing severely compromised by their lack of proper engagement with localcommunities – they saw that their social licence to operate was weak, andrecognised the business implications stemming from that.As resources become scarcer, companies will increasingly need to accessresources in environments with greater political and social complexity;the way that companies manage their social licence is only set to becomemore important to the business prospects of mining and extraction companies.If operations in an area are not realistic or likely to be profitable,as a result of such opposition and risk, shareholders should be aware of thefactors involved so as to ensure that capital is not used to pursue flawedoperational strategies, only to see them fall apart at a later stage.3.1.3 Regulatory freedomWhen companies engage in practices which are subject to controversy orwhich have significant local or international opposition, they are exposingthemselves to the risk that a future change in law or other regulation willbe made by the host state government in the future which may significantlyincrease the costs for those operations and reduce the attractivenessof investment.Where company practices are having impacts on local communities orenvironments, and are facing opposition as a result, they are running therisk of inducing such regulatory shifts, and it is in shareholders’ intereststo have access to all relevant information, so as to be aware of the ways inwhich their investment may be being put at risk by company practices.Fuel extraction from the Canadian tar sands: regulatory riskand stranded assets‘Tar sands’ (also commonly known as ‘oil sands’) are bituminous sands;deposits of an extremely dense and viscous form of petroleum called bitumen.They are found in large quantities in a number of places worldwide,including Alberta, Canada. They are very expensive both to extract andupgrade into usable products. 165 However, rocketing global oil prices madethe tar sands an economically viable option, and major extraction companiespiled in with capital investment. 166

54 | Environmental and social transparency under the Companies Act 2006Chapter 3: Environmental and social issues: Business issues | 55As well as being economically expensive, their extraction is also extremelycontroversial, primarily due to environmental impacts such as: significantlyhigher greenhouse gas emissions than conventional sources (by someestimates production from tar sands generates an average of three timesmore GHG emissions than conventional crude); 167 associated land and ecosystemdamage from strip mining; 168 extremely high water use and riverdiversion; 169 and potentially considerable issues relating to pollution fromextraction tailings. 170 There are also considerable social issues regardingthe impacts that the rush of activity has had on local infrastructure and thequality of life in areas of intensive speculation and operations. 171Tougher regulation now looms on account of the social and environmentalimpacts of the activity, and the companies stand to lose significantly, withcapital-intensive assets likely to be left stranded in a regulatory environmentwhich cannot necessarily yield the projected profits which justifiedinvestment.Three key sources of pressure for regulatory intervention in Canada:- Local discontent with the impacts of operations on social infrastructurein the locality. 172- Specific international pressure on Canada due to the environmentalimpacts of tar sands operations, induced by the high profile operationsof major companies. In the USA, the key market place for the product,discomfort with tar sands production is becoming more and morevisible, 173 and protests have been proliferating. 174- Broad international pressure and movement on climate change,which is likely to lead to stronger emissions reduction commitments inCanada. As tar sands projects play a huge role in Canada’s emissionsgrowth, they will become the focus of tighter regulation as the urgencysurrounding climate change deepens. 175There is also an additional indirect regulatory risk, in that fuel derived fromtar sands faces emissions regulation in California, a major market, whichtakes account of the entire lifecycle of transport fuels. Florida, Ontario,British Columbia and the European Union are all developing similar legislationto California, while Oregon and Washington are also exploring theissue. 176 This has the potential to make tar sands operations less and lessprofitable.In February 2009, a U.S. coalition representing institutional investors managinga total of $1.9 trillion in assets drew attention to a number of thelarge energy companies extensively involved in the tar sands, arguing thatthey are not adequately dealing with climate-related business impacts fromphysical changes and emerging regulation. They called for greater disclosurefrom the companies on their financial exposure and response strategiesto climate-related business trends. 177Furthermore, corporations that demonstrate high standards of practiceand transparency in relation to social, environmental, ethical, and health& safety risk management will find themselves receiving much less scrutinyfrom regulatory agencies. This can result in quicker approvals forpermits, fewer inspections, and greater strategic flexibility. 178There is also increasingly potential for an international dimension to ‘regulatoryrisk’. An example of this is where international tribunals have recognisedand upheld the human rights of indigenous peoples (which havenot been protected by the State), forcing host states to secure those rightsand thereby precipitating regulatory change. This, again as above, canlead to unexpected restrictions on company activity, leaving companieswith significant operational disruption or even the need to cease operationsentirely, having invested considerable funds in the development andestablishment of operations in a given area.The Mayanga Awas Tingni community: internationalenforcement of human rightsMayanga Awas Tingni Community v Nicaragua 179 – On 31 August 2001,the Inter-American Court of Human Rights ruled to uphold the land rightsof the Awas Tingni people, where the Nicaraguan state had failed to do so,holding that the state must secure the effective enjoyment of those rights.The Court ordered Nicaragua to: demarcate and title the lands in accordancewith traditional land and resource tenure patterns; refrain from anyaction that might undermine the Awas Tingni’s interests in those lands;and establish an adequate mechanism to secure the land rights of all indigenouscommunities of the country. It strengthened a contemporary trend ininternational law that empowers indigenous peoples as distinct groups withsecure territorial rights. 180This was a legally binding decision by an international tribunal. The Statewas therefore forced to bring in regulatory changes or enforce existing lawsthat would have major implications for any company operations in thearea.

56 | Environmental and social transparency under the Companies Act 2006Chapter 3: Environmental and social issues: Business issues | 57As long as companies continue to operate in ways that have impacts oncommunities and the environment worldwide, and States prove inadequateor unwilling to regulate them appropriately and ensure protection,international institutions or tribunals will be keen to intervene to ensurethe adequate protection of people or the environment. It is far better froma business perspective for companies to build a corporate culture whichopenly considers the social and environmental impacts of their practices,and any associated business risks, in a transparent manner, lest they beunexpectedly forced to do so by a Host State or an international body.3.1.4 Access to capitalMore and more investors are focusing on environmental, social andgovernance issues in deciding allocation of capital, and adopting projectreview criteria to reflect that. Positive management of social and environmentalrisks is becoming increasingly material in access to project finance,and thus a company’s capacity to capitalize on business opportunities inthe future.- Project finance – Major new initiatives are developing all of the time,such as the widespread adoption of the Equator Principles 181 (by majorinstitutions such as Citigroup, JPMorgan Chase, Wells Fargo, Bank ofAmerica and ABN AMRO), and the IFC’s social and environmentalstandards.ING Bank: the Equator Principles in practiceIn April 2006, ING Bank (a Dutch bank) withdrew its support ofaround $400 million for a paper mill complex on the Uruguay-Argentinaborder, on account of environmental concerns around the projectand inadequate environmental and social impact assessment. 182- Institutional investment – Increasing numbers of investors are recognisingsocial and environmental issues as material to investment decisions.In April 2006 the Principles for Responsible Investment wereannounced on the New York Stock Exchange with the support of manymajor financial institutions such as CalPERS, ABN AMRO AssetManagement and BNP Paribas Asset Management. 183 Goldman Sachshas also developed an Energy Environmental and Social Index, whichassesses companies based on 30 social and environmental criteria. 184In this index, Goldman Sachs highlights to its clients that in relationto the extractive industries, “[e]nvironmental and social issues count...environmental and social issues will become increasingly important foroil and gas companies seeking to access the new legacy assets, which weview as the key driver of future performance and valuation”. 185- Insurance – Political and social risk stand to become increasinglyimportant as resources become scarcer, and mining and extractioncompanies are forced to operate in increasingly volatile environments.As a result, the insurance industry’s perception of the adequacy of corporaterisk management practices will become increasingly importantto project viability.In extreme cases, there is also the risk of shareholder activism and massdivestment. Politically active or aware investors are nothing new. Themassive divestment from companies operating in South Africa duringApartheid attests to this fact. Companies that engage in damaging practicesmay be subject to this kind of investor action, which if on a greatenough scale, may have significant and direct impacts on a company’sbusiness.Talisman Energy: the potential of mass divestmentTalisman Energy was targeted by a divestment campaign due to their activityin Sudan during the ongoing political disaster, in which a range of seriousallegations were made against the company relating to its operationsin southern Sudan. During Talisman’s investment in Sudan, share pricereportedly declined by up to 20%, 186 which has been attributed in large partto the successful campaign to persuade institutional investors to divest thecompany’s stock. 1873.2 Intangible risksAs the examples given have demonstrated, the intangible assets identifiedin Chapter 3.1 give rise to direct business risks, which can have considerableimpacts for companies. Therefore they can also be viewed as ‘intangiblerisks’ for companies. A further significant and intangible risk forcompanies which relates to environmental or social impacts is the threatof litigation.

58 | Environmental and social transparency under the Companies Act 2006Chapter 3: Environmental and social issues: Business issues | 593.2.1 Litigation riskWhere companies adversely affect local communities and environments,and engage in practices that are controversial and disputed, the risk oflitigation remains ever-present. Aside from the impacts that significantlitigation can have on company reputation (see above), it can also carryconsiderable tangible and immediate costs, most obviously compensationpayouts and settlements, any legal and lobbying costs accumulated inattempting to oppose any claim, and any PR costs accrued managing thesituation and addressing the reputational fallout.For any given situation, there may or may not be a legal threat. However,company structures should be transparent enough to ensure that shareholdersare party to information about all relevant practices and potentialmaterial risks, so that they can make informed decisions as to how theywish their investment to be handled, and whether the directors are carryingout their duties appropriately.Royal Dutch Shell: liability for cleanup costs at the RockyMountain ArsenalIn 1983, the State of Colorado filed an action against Shell for damages tothe State’s Natural Resources due to releases of hazardous substances froma chemicals plant at the Rocky Mountain Arsenal. 188 The polluted site hadpreviously been used by the U.S. Army for weapons manufacture, and soresponsibility for pollution was to be apportioned between them. Followingextended litigation, Shell and the U.S. Army signed the Rocky MountainArsenal Settlement Agreement in 1989 which apportioned liability forcleanup costs. 189In a separate court case, a Californian court held that Shell was not coveredby any of its 800 insurance policies for the costs, on account that the companyhad been fully aware that it was polluting at the site. 190Overall, Shell’s cleanup costs are estimated to have totalled $600million. 191It has also settled to pay a further $20million for acquisition, enhancement,and restoration of natural resources in and around the site. 192Newmont and ASARCO payout: liability for localenvironmental damageIn July 2008, under the terms of a ‘consent decree’ filed in a U.S. DistrictCourt, ASARCO agreed to pay $10 million, and Resurrection / NewmontUSA Ltd. to pay $10.5 million, in “natural resource damages”, for an allegedlegacy of polluted streams, fish kills and contaminated groundwater fromdecades of hard rock mining around Leadville. 193 Aside from the $20.5million settlement, the companies had already incurred significant cleanupcosts (they were not obligated to reveal the figures), and Resurrection / Newmontwill also have to spend an estimated $118 million operating a watertreatment at the Yak Tunnel in perpetuity. 194Rio Tinto’s Capper Pass tin smelter: damages payouts forpersonal injuryCapper Pass was once one of the world’s largest tin smelters, on the northbank of the Humber River near Hull. It was acquired by Rio Tinto in 1967.It was surrounded by significant controversy as a result of radioactive, carcinogenicand other toxic discharges allegedly made into the local atmosphereand Humber River, and the associated allegations of having causedincidence of leukaemia, brain tumours and other cancers in workers andother local people. 195For many years Rio Tinto denied responsibility for the health problems. 196 Itcited a number of grounds, including claims that its health and safety practiceshad been completely appropriate; company directors stated repeatedlyto company shareholders, up until 1999, that the company had compliedwith all statutory regulations. 197At Rio Tinto’s UK AGM held in London on 12 May 1999 Robert Wilson,Executive Chairman of Rio Tinto, personally represented to Shareholdersthat the company had, ‘at all material times’, complied with environmentaland Health and Safety Regulations in its Capper Pass Operation. AtRio Tinto’s Australian AGM held in Perth on 27 May 1999 he personallyresponded to a question from a Shareholder representing an organisationholding $8 million of Rio Tinto shares, stating that the Capper Pass Smelteralways operated under approval by the appropriate Authorities. 198In 1988, the British Health and Safety Executive had undertaken an investigationof the plant, and had found that Rio Tinto had contravened, and

60 | Environmental and social transparency under the Companies Act 2006Chapter 4: The business need to engage with environmental and social issues | 61was continuing to contravene, multiple sections of the Health and Safetyat Work etc Act 1974, the Factories Act 1961, and other workplace laws,including serious non-compliance with the Control of Lead at Work Regulations1980, the Ionising Radiations Regulations 1985, and the Control ofSubstances Hazardous to Health Regulations 1988. 199Following years of opposition to the legal campaign, it has been reported thatthe company eventually agreed to negotiate when the campaign threatenedto publish an investigative report documenting the company’s practices, anddetails of around 400 former Capper Pass workers and Hull residents whohad developed serious illness. 200 After negotiations, a non-legal process wasagreed: an ‘independent review board’ was appointed to oversee the ‘CapperPass Claims Review Scheme’. This eventually led to the payouts.As of July 2008, Rio Tinto has made payouts of total £3.2m to lung cancerclaimants, and £144,000 for chronic obstructive pulmonary diseaseclaims. 201 This in addition to the significant costs that the company wouldhave incurred during 20 years of opposition to the claimants.The example serves to demonstrate the lack of transparency that can existfor shareholders relating to potential legal liabilities, and how this can contributeto a lack of certainty as to how their investment is being handled,and future implications for company liabilities.Chapter 4:The business need to engage withenvironmental and social issues4.1 The need for management and pre-emption 614.2 Nowhere to hide: the information age and pressure groups 624.3 Internal corporate governance: the basis of a company 63The obligations on companies to report on the types of situations, risksand opportunities identified in Chapter 3 should not be viewed as ‘antibusiness’.It is in companies’ self-interest to engage with the issues anddevelop business practices which understand and effectively manage therisks involved and the proper boundaries to their activities and strategies.Detailed discussion of these issues has an appropriate place in companyaccounts, reports and Annual General Meetings. In the modern world itis in both company directors’ and shareholders’ interests to address thempositively, proactively and openly.4.1 The need for management and pre-emptionCompanies will be far more successful in the long run if they build a corporateculture which ensures consideration of environmental and socialimpacts, risks and opportunities, and which positively and proactivelymanages them, rather than reacting retrospectively to damage that hasalready been caused to their business.“Our experience indicates that companies that actively managethese issues [social, ethical] are most likely to be accepted inemerging markets, successfully launch new products, and recoverfrom sudden and unexpected events such as...possible reputationcrises.” 202– Harold Kahn, Leader of PricewaterhouseCoopers’U.S. Reputation Assurance Practice

62 | Environmental and social transparency under the Companies Act 2006Chapter 4: The business need to engage with environmental and social issues | 63“We believe...that companies with superior environmental andsocial management are likely to be more successful in operatingprojects in the new world.” 203– Goldman Sachs, ‘Global Energy: Sustainable Investing in theEnergy Sector’“However slick a company’s communications, it will sustain a strongreputation only if its actions stand up to scrutiny.” 204– Stuart Lewis, Head of the Ipsos MORI Reputation CentreOne need only look at the case studies in Chapter 3 for evidence of theother side of the coin; the negative impacts that poor management of thesepractices can have on a business.Reporting requirements for environmental and social matters serve twopurposes in this regard. First, transparency is integral to the kind of progressivemanagement culture necessary to succeed in the future (creatinga transparent company in which company management engages withshareholders and stakeholders about these issues). Secondly, effectivereporting requirements act as an incentive for the development of a successfulmanagement culture more broadly (the threat of forced disclosure,and the potential damage that that may do, provides company directorsand management with added incentive to recognise, engage with andmanage these impacts, risks and opportunities).4.2 Nowhere to hide: the information age and pressuregroups“The marriage of the most highly educated generation in historyand the Internet places phenomenal power in the hands of a newlyenfranchised class of knowledgeable citizens and consumers.” 205- Darrel Bricker, President and Chief Operating Officer,Ipsos-Reid Public Affairs North America“[T]he combination of the Internet and new satellite and cabletelevision technologies has made the distribution of information– instantly from virtually anywhere in the world – a part of ourday-to-day lives...NGOs...are increasingly able to uncover things on a new andunprecedented scale – poor employment policies, unethical investments,and environmental exploitation – that companies expectedto be able to keep hidden from public view only a decade ago.” 206– Dale Neef, ‘Managing Corporate Reputation and Risk:Developing a Strategic Approach to Corporate Integrity UsingKnowledge Management’“[C]ompanies wishing to maintain and grow sustainable shareholdervalue on the back of a solid reputation, will need real substance toback up the ‘spin’ of traditional PR and branding techniques.” 207– John Browne, former Director of Reputation Assurance,PricewaterhouseCoopersIt is short-sighted for companies to attempt to hide their negative impactsfrom view. Advances in communications technology and increasinglywell-resourced, organised and driven groups and individuals have increasingpower to investigate, evaluate and communicate the practices of companiesworldwide. These revelations can have disastrous implications forcompanies, as we have examined above.Directors who ignore or downplay the risks and opportunities involved arefailing to deliver management strategies which ensure long-term ‘enlightened’shareholder value , and are failing to fulfil their duties as directorsand stewards of the shareholders’ investments. Similarly, shareholdersand investors who do not ensure that they are informed of and engagedwith these issues are doing themselves and their investment a disservice;it is in shareholders’ financial interests for there to be corporate transparencyaround these issues.4.3 Internal corporate governance: the basis of a companyShareholders should, as a matter of the ideas that underpin ‘the company’,have access to information that has bearing on their investment, so as todecide how they wish it to be protected. In the theory that underpinsthe public company, directors are simply stewards for the shareholders’investments. Many consider that shareholders are, in theory, the primaryregulators of corporate behaviour. 208 Therefore shareholders have legalrights to influence and ultimately determine the behaviour of the company,and as such should have access to all information that has bearingon that future.

64 | Environmental and social transparency under the Companies Act 2006| 65Shareholders have an important place in the management of the signifcantrisks and opportunities presented by environmental and social issues, andtherefore should have access to detailed information on these matters.AnnexesAnnex 1: 67UK law governing company accounting and reporting onenvironmental and social impactsAnnex 2: 91Environmental and social reporting in review: the Operatingand Financial ReviewAnnex 3: 101EU law on company accounting and reporting on environmentaland social impactsAnnex 4: 109Auditing of company environmental and social accounting andreportingAnnex 5: 121Regulatory implementation and compliance: the FinancialReporting Review PanelAnnex 6: 133UK law governing company AGMsAnnex 7: 147Company AGMs in practice: the mining industry* * *The Annexes are intended to give detail and background to the main text above.In some cases they are simply a restatement of the same materials with greaterdepth and supporting information, in others they address ideas and issues notdealt with above other than in passing.All legislative quotation is of the Companies Act 2006 unless otherwise noted.

66 | Environmental and social transparency under the Companies Act 2006Annex 1: UK law governing company environmental and social accounting and reporting | 67Annex 1:UK law governing company accounting andreporting on environmental and socialimpactsA.1.1 Legal requirements for individual accounting and reporting 68of environmental and social impactsA.1.1.1The Companies Act 2006: The basic frameworki. Annual accountsii. The directors’ reportA.1.1.2Detailed requirements for form and content of accounts andreportsi. UK Regulationsii. International Accounting StandardsA.1.1.3Listing rulesi. The FSA Disclosure Rules and Transparency Rulesii. The AIM RulesA.1.2 How do companies have to account and report in relation to 83subsidiaries or other associates?A.1.2.1A.1.2.2A.1.2.3Company groups and subsidiariesMinority shareholdingsContractual or ‘other’ relationshipsA.1.3 How must the accounts and reports be circulated and published? 88A.1.3.1A.1.3.2A.1.3.3Who are the directors required to circulate hard copies of thereports to?The role of Annual General MeetingsHow are companies required to publish their accounts andreports?UK companies are required to prepare annual accounts and reports, togive a view of the financial position of the company that year. As part ofthis, directors of companies are required to report on social and environmentalmatters, to a certain extent.

68 | Environmental and social transparency under the Companies Act 2006Annex 1: UK law governing company environmental and social accounting and reporting | 69A.1.1Legal requirements for individual accounting andreporting of environmental and social impactsThe law that governs company reporting on environmental and socialmatters in the UK exists in a number of different legislative sources. Itexists in primary and secondary domestic legislation, and internationalstandards.A.1.1.1The Companies Act 2006: The basic frameworkThe Companies Act 2006 is the legislative foundation of UK company law.It provides the fundamental legal framework for company accounting andreporting in the UK.i. Annual accountss393 Accounts to give true and fair view(1) The directors of a company must not approve accounts for the purposes of thisChapter unless they are satisfied that they give a true and fair view of the assets,liabilities, financial position and profit or loss—(a) in the case of the company’s individual accounts, of the company;(b) in the case of the company’s group accounts, of the undertakings includedin the consolidation as a whole, so far as concerns members of the company.s394 Duty to prepare individual accountsThe directors of every company must prepare accounts for the company for eachof its financial years. Those accounts are referred to as the company’s “individualaccounts”.s395 Individual accounts: applicable accounting framework(1) A company’s individual accounts may be prepared—(a) in accordance with section 396 (“Companies Act individual accounts”),or(b) in accordance with international accounting standards (“IAS individualaccounts”).This is subject to the following provisions of this section and to section 407 (consistencyof financial reporting within group).(2) The individual accounts of a company that is a charity must be Companies Actindividual accounts.(3) After the first financial year in which the directors of a company prepare IASindividual accounts (“the first IAS year”), all subsequent individual accountsof the company must be prepared in accordance with international accountingstandards unless there is a relevant change of circumstance.(4) There is a relevant change of circumstance if, at any time during or after the firstIAS year—(a) the company becomes a subsidiary undertaking of another undertakingthat does not prepare IAS individual accounts,(b) the company ceases to be a company with securities admitted to trading ona regulated market in an EEA State, or(c) a parent undertaking of the company ceases to be an undertaking withsecurities admitted to trading on a regulated market in an EEA State.(5) If, having changed to preparing Companies Act individual accounts followinga relevant change of circumstance, the directors again prepare IAS individualaccounts for the company, subsections (3) and (4) apply again as if the first financialyear for which such accounts are again prepared were the first IAS year.Companies are required by the Companies Act 2006 to prepare accountsfor the company for the financial year (“individual accounts”). These mustbe prepared in accordance with either the Companies Act 2006, or InternationalAccounting Standards; 209 thus companies in the UK can choosewhich regime to prepare their individual accounts under.s396 Companies Act individual accounts(1) Companies Act individual accounts must comprise—(a) a balance sheet as at the last day of the financial year, and(b) a profit and loss account.(2) The accounts must—(a) in the case of the balance sheet, give a true and fair view of the state ofaffairs of the company as at the end of the financial year, and(b) in the case of the profit and loss account, give a true and fair view of theprofit or loss of the company for the financial year.(3) The accounts must comply with provision made by the Secretary of State byregulations as to—(a) the form and content of the balance sheet and profit and loss account, and(b) additional information to be provided by way of notes to the accounts.(4) If compliance with the regulations, and any other provision made by or underthis Act as to the matters to be included in a company’s individual accounts or innotes to those accounts, would not be sufficient to give a true and fair view, thenecessary additional information must be given in the accounts or in a note tothem.(5) If in special circumstances compliance with any of those provisions is inconsistentwith the requirement to give a true and fair view, the directors must departfrom that provision to the extent necessary to give a true and fair view.Particulars of any such departure, the reasons for it and its effect must be givenin a note to the accounts.

70 | Environmental and social transparency under the Companies Act 2006Annex 1: UK law governing company environmental and social accounting and reporting | 71When prepared in accordance with the Companies Act, the accounts mustcontain a balance sheet as of the last day of the financial year, and a profitand loss account. These must give a ‘true and fair view’ of (respectively)the state of affairs of the company as at the end of the financial year, andthe profit or loss of the company for the financial year. The Companies Act2006 also requires companies to comply with any Regulations made by theSecretary of State as to the form and content of the balance sheet and profitand loss account, and any additional information to be provided by wayof notes to the accounts. Pursuant to this, detailed Regulations have beenmade on the form and content of accounts prepared under the CompaniesAct 2006. These are examined in Annex 1.1.2 below.s414 Approval and signing of accounts(1) A company’s annual accounts must be approved by the board of directors andsigned on behalf of the board by a director of the company.(2) The signature must be on the company’s balance sheet.(3) If the accounts are prepared in accordance with the provisions applicable to companiessubject to the small companies regime, the balance sheet must contain astatement to that effect in a prominent position above the signature.(4) If annual accounts are approved that do not comply with the requirements of thisAct (and, where applicable, of Article 4 of the IAS Regulation), every director ofthe company who—(a) knew that they did not comply, or was reckless as to whether they complied,and(b) failed to take reasonable steps to secure compliance with those requirementsor, as the case may be, to prevent the accounts from being approved,commits an offence.(5) A person guilty of an offence under this section is liable—(a) on conviction on indictment, to a fine;(b) on summary conviction, to a fine not exceeding the statutory maximum.s437 Public companies: laying of accounts and reports before general meeting(1) The directors of a public company must lay before the company in general meetingcopies of its annual accounts and reports.(2) This section must be complied with not later than the end of the period for filingthe accounts and reports in question.(3) In the Companies Acts “accounts meeting”, in relation to a public company,means a general meeting of the company at which the company’s annual accountsand reports are (or are to be) laid in accordance with this section.The accounts must be approved by the board of directors and signed bya director of the company on behalf of the board. The Companies Act2006 requires that the directors must not approve the accounts unless theyare satisfied that they give a true and fair view of the assets, liabilities,financial position and profit or loss of the company. In the case of publiccompanies, the accounts must also be laid before the company in generalmeeting.When prepared in accordance with International Accounting Standards(‘IAS’), companies must follow the detailed and extensive provisions relatingto form and content provided by the various IAS. These are now setout in a European Commission Regulation, which will be discussed belowin Annex 1.1.2.Environmental and social elementsWhile these requirements do not explicitly require environmental orsocial accounting, they will inevitably require the accounting of somesuch issues, to the extent that they impact the balance sheet or profit andloss account. ‘Environmental’ and ‘social’ issues do not exist in a vacuum;they are business issues also. It is therefore important to recognise that therequirements for financial accounting will require the incorporation ofcertain ‘environmental’ and ‘social’ issues into overall financial accounts.CommencementThe majority of the accounting and reporting requirements of the CompaniesAct 2006 (other than the provision relating to narrative reporting,discussed below) came into effect on 6 April 2008, and apply to all reportingyears starting on or after that date. 210ii.The directors’ reports415 Duty to prepare directors’ report(1) The directors of a company must prepare a directors’ report for each financialyear of the company.s416 Contents of directors’ report: general(1) The directors’ report for a financial year must state—(a) the names of the persons who, at any time during the financial year, weredirectors of the company, and(b) the principal activities of the company in the course of the year.(2) In relation to a group directors’ report subsection (1)(b) has effect as if the referenceto the company was to the undertakings included in the consolidation.

72 | Environmental and social transparency under the Companies Act 2006Annex 1: UK law governing company environmental and social accounting and reporting | 73(3) Except in the case of a company subject to the small companies regime, the reportmust state the amount (if any) that the directors recommend should be paid byway of dividend.(4) The Secretary of State may make provision by regulations as to other matters thatmust be disclosed in a directors’ report.Without prejudice to the generality of this power, the regulations may make anysuch provision as was formerly made by Schedule 7 to the Companies Act 1985.Company directors are also required to produce an annual ‘directors’report’. These reports are intended to provide broader, narrative contextto the primarily numerical annual accounts, but also to inform membersof the company (shareholders), and help them to assess how the directorshave performed their duty to promote the success of the company undersection 172 Companies Act 2006. 211s417 Contents of directors’ report: business review(1) Unless the company is subject to the small companies’ regime, the directors’report must contain a business review.(2) The purpose of the business review is to inform members of the company andhelp them assess how the directors have performed their duty under section 172(duty to promote the success of the company).(3) The business review must contain—(a) a fair review of the company’s business, and(b) a description of the principal risks and uncertainties facing the company.(4) The review required is a balanced and comprehensive analysis of—(a) the development and performance of the company’s business during thefinancial year, and(b) the position of the company’s business at the end of that year,consistent with the size and complexity of the business.(5) In the case of a quoted company the business review must, to the extent necessaryfor an understanding of the development, performance or position of thecompany’s business, include—(a) the main trends and factors likely to affect the future development, performanceand position of the company’s business; and(b) information about—(i) environmental matters (including the impact of the company’s businesson the environment),(ii) the company’s employees, and(iii) social and community issues,including information about any policies of the company in relation tothose matters and the effectiveness of those policies; and(c) subject to subsection (11), information about persons with whom thecompany has contractual or other arrangements which are essential to thebusiness of the company.If the review does not contain information of each kind mentioned in paragraphs(b)(i), (ii) and (iii) and (c), it must state which of those kinds of information itdoes not contain.(6) The review must, to the extent necessary for an understanding of the development,performance or position of the company’s business, include—(a) analysis using financial key performance indicators, and(b) where appropriate, analysis using other key performance indicators,including information relating to environmental matters and employeematters.“Key performance indicators” means factors by reference to which the development,performance or position of the company’s business can be measuredeffectively.(10) Nothing in this section requires the disclosure of information about impendingdevelopments or matters in the course of negotiation if the disclosure would,in the opinion of the directors, be seriously prejudicial to the interests of thecompany.(11) Nothing in subsection (5)(c) requires the disclosure of information about a personif the disclosure would, in the opinion of the directors, be seriously prejudicialto that person and contrary to the public interest.The Companies Act 2006 provides that the directors’ report must includea ‘business review’. 212 The business review must contain a fair review ofthe company’s business, and a description of the main risks and uncertaintiesfacing the company. It must be a balanced and comprehensiveanalysis of the development and performance of the company’s businessduring the year, and the position of the company’s business at the end ofthat year. In the case of quoted 213 companies, the business review mustalso include a review of the main trends and factors likely to affect thefuture development, performance and position of the company’s business.As above, while none of these provisions explicitly require the reportingof environmental and social matters, many such matters would fall withintheir scope – many environmental and social issues are business issuesalso 214 – especially in a reporting context designed to provide broader perspectiveto company activity, relating to less tangible or precisely quantifiablematters.However, the Companies Act 2006 also explicitly provides that the businessreview of quoted companies must include information on environmental,social and community issues (including any related company policies andtheir effectiveness) ‘to the extent necessary for an understanding of thedevelopment, performance or position of the company’s business’.

74 | Environmental and social transparency under the Companies Act 2006Annex 1: UK law governing company environmental and social accounting and reporting | 75Companies are required to use 215 key performance indicators (KPIs) 216 inrelation to forward looking financial matters, and ‘where appropriate’ inrelation to environmental and social matters.Liability for non-compliances419 Approval and signing of directors’ report(1) The directors’ report must be approved by the board of directors and signed onbehalf of the board by a director or the secretary of the company.(2) If the report is prepared in accordance with the small companies regime, it mustcontain a statement to that effect in a prominent position above the signature.(3) If a directors’ report is approved that does not comply with the requirements ofthis 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 requirementsor, as the case may be, to prevent the report from being approved,commits an offence.(4) A person guilty of an offence under this section is liable—(a) on conviction on indictment, to a fine;(b) on summary conviction, to a fine not exceeding the statutory maximum.Where a directors’ report does not comply with the requirements of theCompanies Act 2006, every director who knew it was non-compliant orwas reckless as to compliance, and failed to take reasonable steps to securecompliance, is guilty of an offence and liable on conviction to a fine.CommencementSection 417 of the Companies Act 2006 came into effect on 1 October2007, 217 and applies to all reporting years starting on or after that date.Therefore at the time of writing very few reports had been published towhich the new narrative reporting requirements apply. For reports forfinancial years before this date, the provisions of the Companies Act 1985applied.The directors’ report before the Companies Act 2006Companies Act 1985s234 Duty to prepare directors’ report(1) The directors of a company shall for each financial year prepare a report—(a) containing a fair review of the development of the business of the companyand its subsidiary undertakings during the financial year and of their positionat the end of it, and(b) stating the amount (if any) which they recommend should be paid as dividendand the amount (if any) which they propose to carry to reserves.(2) The report shall state the names of the persons who, at any time during the financialyear, were directors of the company, and the principal activities of the companyand its subsidiary undertakings in the course of the year and any significantchange in those activities in the year.(3) The report shall also comply with Schedule 7 as regards the disclosure of thematters mentioned there.(4) In Schedule 7—Part I relates to matters of a general nature, including changes in asset values,directors’ shareholdings and other interests and contributions for political andcharitable purposes,Part II relates to the acquisition by a company of its own shares or a charge onthem,Part III relates to the employment, training and advancement of disabled persons,Part IV relates to the health, safety and welfare at work of the company’s employees,andPart V relates to the involvement of employees in the affairs, policy and performanceof the company.(5) In the case of any failure to comply with the provisions of this Part as to thepreparation of a directors’ report and the contents of the report, every personwho was a director of the company immediately before the end of the period forlaying and delivering accounts and reports for the financial year in question isguilty of an offence and liable to a fine.(6) In proceedings against a person for an offence under this section it is a defencefor him to prove that he took all reasonable steps for securing compliance withthe requirements in question.Under the Companies Act 1985, the directors’ report only had to contain afair review of the development of the business of the company and its subsidiariesduring the year, their position at the end of it, and the informationwhich was required by Schedule 7 of the Companies Act 1985. Schedule7 included matters of a general nature (including changes in asset values,directors’ interests political and charitable contributions); acquisition bythe company of its own shares or a charge on them; the employment, trainingand advancement of disabled persons; the health, safety and welfareat work of the company’s employees; and the involvement of employees inthe affairs, policy and performance of the company.

76 | Environmental and social transparency under the Companies Act 2006Annex 1: UK law governing company environmental and social accounting and reporting | 77A.1.1.2Detailed requirements for form and content of accountsand reportsi. UK RegulationsThe Companies Act 2006 sets out the broad legal framework for companyaccounting and reporting, and provides certain powers for the executiveto make secondary legislation in order to implement and administer itsrequirements.In exercise of their powers under the Companies Act 2006, 218 the Secretaryof State made the Large and Medium-sized Companies and Groups(Accounts and Reports) Regulations 2008. 219 These Regulations providedetailed rules for accounting and reporting obligations under the CompaniesAct 2006, including specific form and content requirements relatingto:- the format and content of individual accounts (for companies generally,plus specific regimes for banking and insurance companies);- information on related companies;- information about benefits of directors;- group accounts;- the directors’ report; and- the directors’ remuneration reports.In relation to general accounting (for companies other than banking orinsurance companies), the Regulations make detailed provision as togeneral rules, required format for accounts, accounting principles andrules, the content of the notes to the accounts, and other miscellaneousmatters.As noted above, the Regulations also govern the content of the directors’report. However, they make no provision relating to environmental matters,and extremely limited provision relating to social matters. 220 Regulationson the reporting of certain environmental information are expectedto be forthcoming in relation to the Climate Change Act 2008, to explicitlyrequire the reporting of greenhouse gas emissions for which companiescan be said to be responsible. 221 However, there is currently an absence ofstatutory reporting standards that give detailed substance to the environmentaland social requirements of section 417(5) and (6) Companies Act2006.ASB accounting standardsThe Accounting Standards Board (ASB) is authorised by statute to issueaccounting standards. These standards provide a framework as to howcompanies must account their assets in order to give a ‘true and fairview’ of the state of affairs of the company. They cover matters such as,for example, how provisions (liabilities that are of uncertain timing oramount) should be ‘recognised’ and calculated (FRS 12), and when differentmethods of accounting for a business combination (acquisitionaccounting and merger accounting) should be used (FRS 6).ii.International Accounting StandardsAs seen above, under the Companies Act 2006, companies may preparetheir individual accounts in accordance with ‘International AccountingStandards’ (IAS). 222The IAS system was created by the European Union, pursuant to the ongoingobjectives of the European single market. It was initiated by EuropeanRegulation in 2002. 223 As seen in Annex 1.1.1 above, UK companies arepermitted by the Companies Act 2006 to prepare their individual accountsin accordance with them. All companies listed on a stock exchange in theEU are required to prepare their consolidated accounts in accordance withthem. 224The standards set out in considerable detail the required form and contentof accounts prepared under IAS. The requirements under ‘IAS’ come froma number of sources: International Accounting Standards (IAS); InternationalFinancial Reporting Standards (IFRS); and Interpretations originatingfrom the International Financial Reporting Interpretations Committee(IFRIC) or the former Standing Interpretations Committee (SIC). 225 Therules were previously fragmented across 18 separate Regulations, 226 butare now consolidated in a single Commission Regulation. 227IAS 1 Presentation of Financial Statements sets out the overall requirements,while the other Standards or Interpretations provide detailedrequirements for specific recognition, measurement and disclosureissues. 228 Relevant Standards and Interpretations in the context of environmentaland social matters include, amongst others: IAS 36 Impairmentof Assets; IAS 37 Provisions, Contingent Liabilities and Contingent Assets;IAS 38 Intangible Assets; IFRS 6 Exploration for and Evaluation of Mineral

78 | Environmental and social transparency under the Companies Act 2006Annex 1: UK law governing company environmental and social accounting and reporting | 79Resources; IFRIC 5 Rights to Interests arising from Decommissioning, Restorationand Environmental Rehabilitation Funds.A.1.1.3Listing rulesi. The FSA Disclosure Rules and Transparency RulesCompanies Act 2006s1269 Corporate governance rules(1) The competent authority may make rules (“corporate governance rules”)—(a) for the purpose of implementing, enabling the implementation of or dealingwith matters arising out of or related to, any Community obligationrelating to the corporate governance of issuers who have requested orapproved admission of their securities to trading on a regulated market;(b) about corporate governance in relation to such issuers for the purpose ofimplementing, or dealing with matters arising out of or related to, anyCommunity obligation.Financial Services and Markets Act 2000Part VI: Official Listings72 The competent authority(1) On the coming into force of this section, the functions conferred on the competentauthority by this Part are to be exercised by the Authority.s73 General duty of the competent authority(2) The competent authority’s general functions are—(a) its function of making rules under this Part (considered as a whole);(b) its functions in relation to the giving of general guidance in relation to thisPart (considered as a whole);(c) its function of determining the general policy and principles by referenceto which it performs particular functions under this Part.s74 The official list(1) The competent authority must maintain the official list.…(4) The competent authority may make rules (“listing rules”) for the purposes of thisPart.The Financial Services Authority (FSA) is authorised by the FinancialServices and Markets Act 2000 229 to make rules that govern companieslisted on the London Stock Exchange (LSE). 230 The ‘Listing Rules’ set outa range of initial and ongoing obligations for companies to be accepted fortrading on the LSE. In relation to reporting and disclosure, the requirementsare minimal. Therefore while they apply to all companies on theLSE regardless of their Home State, they do not impose significant reportingrequirements.However, in addition to the ‘Listing Rules’, the FSA have produced ‘DisclosureRules and Transparency Rules’ (DTRs), which govern the type ofinformation that certain companies listed on the LSE must disclose, andthe degree of transparency they must maintain. 231The DTRs came into effect for financial years beginning on or after 20January 2007. 232Scope of applicationThe DTRs only apply to those companies quoted on the London StockExchange whose ‘Home State’ is the UK. 233Periodic Financial ReportingThe DTRs require annual financial statements in accordance with thesame detailed rules as does the Companies Act 2006.FSA Full Handbook / DTR / 4: Periodic Financial Reporting (DTR 4)R 234 4.1.6(1) If an issuer is required to prepare consolidated accounts according to the SeventhCouncil Directive 83/349/EEC, the audited financial statements must comprise:(a)(b)consolidated accounts prepared in accordance with IFRS, andaccounts of the parent company prepared in accordance with the nationallaw of the EEA State in which the parent company is incorporated.(2) If an issuer is not required to prepare consolidated accounts, the audited financialstatements must comprise accounts prepared in accordance with the national lawof the EEA State in which the issuer is incorporated.R 4.1.8The management report must contain:(1) a fair review of the issuer’s business; and(2) a description of the principal risks and uncertainties facing the issuer.R 4.1.9The review required by ■ DTR 4.1.8 R must:(1) be a balanced and comprehensive analysis of:(a) the development and performance of the issuer’s business during thefinancial year; and

80 | Environmental and social transparency under the Companies Act 2006Annex 1: UK law governing company environmental and social accounting and reporting | 81(b) the position of the issuer’s business at the end of that year, consistent withthe size and complexity of the business;(2) include, to the extent necessary for an understanding of the development, performanceor position of the issuer’s business:(a)(b)analysis using financial key performance indicators; andwhere appropriate, analysis using other key performance indicators includinginformation relating to environmental matters and employee matters;and(3) include references to, and additional explanations of, amounts included in theissuer’s annual financial statements, where appropriate.R 4.1.11The management report required by ■ DTR 4.1.8 R must also give an indication of:(1) any important events that have occurred since the end of the financial year;(2) the issuer’s likely future development;(3) activities in the field of research and development;(4) the information concerning acquisitions of own shares prescribed by Article 22(2) of Directive 77/91/EEC;(5) the existence of branches of the issuer; and(6) in relation to the issuer’s use of financial instruments and where material for theassessment of its assets, liabilities, financial position and profit or loss:(a) the issuer’s financial risk management objectives and policies, includingits policy for hedging each major type of forecasted transaction for whichhedge accounting is used, and(b) the issuer’s exposure to price risk, credit risk, liquidity risk and cash flowrisk.Individual accounts of a parent company must be prepared in accordancewith the law of the UK 235 (i.e. either under the Companies Act 2006and the Large and Medium-sized Companies and Groups (Accounts andReports) Regulations 2008, or IAS), while consolidated accounts must beprepared in accordance with IAS. 236The DTRs also require, as a part of company annual reporting, a ‘managementreport’. This is the equivalent of the directors’ report of the CompaniesAct 2006, but it differs slightly in requirements.The FSA rules and the Companies Act 2006 comparedThe annual financial accounting requirements of the FSA DTRs are identicalto those of the Companies Act 2006.The explicit environmental and social reporting requirements of the FSArules are similar in scope to those of section 417 Companies Act 2006, butnot quite as extensive. Under the FSA rules, companies only need to reporton environmental issues when they can be quantified using key performanceindicators (solid, quantifiable indicators); they keep environmentaldisclosure obligations tied to KPIs. In contrast, as we have seen above,the Companies Act 2006 includes an additional provision that requiresreporting of environmental and social issues whether they can be quantifiedusing KPIs or not. 237 Furthermore, in contrast to the CompaniesAct 2006, the FSA Rules include no explicit requirement for disclosure on‘social and community issues’.In terms of breadth of application, the general financial accountingrequirements of the Companies Act 2006 apply more broadly, applying toall UK-based companies that do not qualify as ‘small’, while the FSA Rulesonly apply to UK-based companies listed on the LSE. 238 With regard tonarrative reporting, the Companies Act 2006 applies to a broader class ofcompany than the FSA DTRs. The majority of the business review appliesto all UK companies that do not qualify as small, and section 417(5) ofthe Companies Act 2006 applies to ‘quoted companies’, a definition whichincludes companies listed both in the UK and a number of other countries.239 In contrast, the FSA DTRs apply only to UK-based companieslisted in the UK.Therefore for the purposes of this review, further analysis relating to thereporting requirements of the FSA rules was not worthwhile, and was notundertaken.ii.The AIM RulesThe Alternative Investment Market is the LSE’s international market forsmaller growing companies. 240 Its stated purpose is to provide smallercompanies with the opportunity to raise capital on a market that takes“a pragmatic and appropriate approach to regulation”. 241 Its rules apply toall companies listed on the AIM, including those with Home States otherthan the UK.AIM Rules for CompaniesAnnual accounts19.An AIM company must publish annual audited accounts which must be sent toits shareholders without delay and in any event not later than six months after theend of the financial year to which they relate.

82 | Environmental and social transparency under the Companies Act 2006Annex 1: UK law governing company environmental and social accounting and reporting | 83A.1.2 inAn AIM company incorporated in an EEA country must prepare and presentthese accounts in accordance with International Accounting Standards. Where,at the end of the relevant financial period, such company is not a parent company,How do companies have to account and reportrelation to subsidiaries or other associates?performance of the company’s business during the financial year, and theposition of the company’s business at the end of that year. 246 s400 247 Exemption for company included in EEA group accounts of larger groupit may prepare and present such financial information either in accordance withInternational Accounting Standards or in accordance with the accounting andA.1.2.1 Company groups and subsidiariescompany legislation and regulations that are applicable to that company due toits country of incorporation.An AIM company incorporated in a non-EEA country must prepare and presents1162 Parent and subsidiary undertakingsthese accounts in accordance with either:(1) This section (together with Schedule 7) defines “parent undertaking” and “subsidiary• International Accounting Standards;undertaking” for the purposes of the Companies Acts.• US Generally Accepted Accounting Principles;(2) An undertaking is a parent undertaking in relation to another undertaking, a• Canadian Generally Accepted Accounting Principles;subsidiary undertaking, if—• Australian International Financial Reporting Standards (as issued by the(a) it holds a majority of the voting rights in the undertaking, orAustralian Accounting Standards Board); or(b) it is a member of the undertaking and has the right to appoint or remove a• Japanese Generally Accepted Accounting Principles.majority of its board of directors, orThe accounts produced in accordance with this rule must disclose any transactionwith a related party, whether or not previously disclosed under these rules,(c) it has the right to exercise a dominant influence over the undertaking—(i) by virtue of provisions contained in the undertaking’s articles, orwhere any of the class tests exceed 0.25% and must specify the identity of the(ii) by virtue of a control contract, orrelated party and the consideration for the transaction.(d) it is a member of the undertaking and controls alone, pursuant to an agreementwith other shareholders or members, a majority of the voting rightsCompanies listed on the AIM are required to prepare annual accounts inin the undertaking.accordance with International Accounting Standards 242 (see above), US,Canadian or Japanese Generally Accepted Accounting Principles (GAAP),or Australian International Financial Reporting Standards. 243Under the Companies Act 2006, a ‘parent company’ is one which ultimatelyhas control over its subsidiaries, through one of the means identifiedby section 1162(2).However, there are no other reporting requirements set by the AIM. Thiscan be particularly problematic, as the AIM is used by many mid-to-smallGroup accountscompanies to raise capital, whose environmental or social impacts may bevery significant. This is particularly the case with mining companies. 244s399 Duty to prepare group accounts(2) If at the end of a financial year the company is a parent company the directors, aswell as preparing individual accounts for the year, must prepare group accountsHowever, it is important to note that UK-based companies on the AIMfor the year unless the company is exempt from that requirement.will be required to prepare a business review under the Companies Act2006. 245 (3) There are exemptions underAlthough they will be exempt from the provisions of section 417(5)section 400 (company included in EEA accounts of larger group),relating explicitly to environmental and social reporting, AIM companiessection 401 (company included in non-EEA accounts of larger group), andbased in the UK are required to report on environmental and social matterssection 402 (company none of whose subsidiary undertakings need bewhere necessary: for a fair review of the company’s business; as part ofincluded in the consolidation).a description of the principal risks and uncertainties facing the company;as part of a balanced and comprehensive analysis of the development and(4) A company to which this section applies but which is exempt from the requirementto prepare group accounts, may do so.If the company is a subsidiary of a parent company, and has been included inEEA 248 accounts of a larger group, which have been drawn up and audited inaccordance with a certain standard (EC or international). This situation needsto be clearly explained in the subsidiary’s individual account, and details of theparent company must also be given. Copies of the group accounts and reports

84 | Environmental and social transparency under the Companies Act 2006Annex 1: UK law governing company environmental and social accounting and reporting | 85need to be delivered to the registrar. The exemption cannot apply to a companywhose securities have been admitted for trading on a regulated market in a EEAstate.s401 Exemption for company included in non-EEA group accounts of larger groupIf the company is a subsidiary of a parent company, and has been included inconsolidated non-EEA accounts of a larger group, which have been drawn upin accordance with EC standards or equivalent, and audited in accordance withwhatever applicable domestic law. This situation needs to be clearly explained inthe subsidiary’s individual accounts, and details of the parent company must alsobe given. Copies of the group accounts and reports need to be delivered to theregistrar. The exemption cannot apply to a company whose securities have beenadmitted for trading on a regulated market in a EEA state.s402 Exemption if no subsidiary undertakings need be included in theconsolidationIf under all of the company’s subsidiary undertakings can be excluded from consolidationunder section 405 Companies Act 2006.Parent companies in the UK 249 must prepare consolidated group accounts,unless one of the statutory exemptions applies as set out in sections 400-402 Companies Act 2006.REGULATION (EC) No 1606/2002 OF THE EUROPEAN PARLIAMENT ANDOF THE COUNCIL of 19 July 2002 on the application of international accountingstandardsArticle 4 Consolidated accounts of publicly traded companiesFor each financial year starting on or after 1 January 2005, companies governedby the law of a Member State shall prepare their consolidated accounts in conformitywith the international accounting standards adopted in accordance withthe procedure laid down in Article 6(2) if, at their balance sheet date, their securitiesare admitted to trading on a regulated market of any Member State withinthe meaning of Article 1(13) of Council Directive 93/22/EEC of 10 May 1993 oninvestment services in the securities field (1).Companies Act 2006s403 Group accounts: applicable accounting framework(1) The group accounts of certain parent companies are required by Article 4 ofthe IAS Regulation to be prepared in accordance with international accountingstandards (“IAS group accounts”).Under Article 4 of the EC Regulation on the application of InternationalAccounting Standards, 250 and as restated by the Companies Act 2006,parent companies listed on a stock exchange in any EU Member Statemust prepare their consolidated annual accounts in accordance with therequirements of International Accounting Standards.Directors’ reports for company groupss415 Duty to prepare directors’ report...(2) For a financial year in which—(a) the company is a parent company, and(b) the directors of the company prepare group accounts,the directors’ report must be a consolidated report (a “group directors’ report”)relating to the undertakings included in the consolidation.Where the directors of a holding company are required to prepare groupaccounts (see above), they must also prepare a directors’ report for thewhole group.A.1.2.2Minority shareholdingsLarge and Medium-sized Companies and Groups (Accounts and Reports) Regulations2008.Schedule 4: Information on related undertakings required whether preparing CompaniesAct or IAS AccountsSignificant holdings in undertakings other than subsidiary undertakings4.— (1) The information required by paragraphs 5 and 6 must be given where at theend of the financial year the company has a significant holding in an undertakingwhich is not a subsidiary undertaking of the company, and which does not fallwithin paragraph 18 (joint ventures) or 19 (associated undertakings).(2) A holding is significant for this purpose if—(a) it amounts to 20% or more of the nominal value of any class ofshares in the undertaking, or(b) the amount of the holding (as stated or included in the company’sindividual accounts) exceeds one-fifth of the amount (as so stated)of the company’s assets.5.— (1) The name of the undertaking must be stated.(2) There must be stated—(a) if the undertaking is incorporated outside the United Kingdom, thecountry in which it is incorporated,(b) if it is unincorporated, the address of its principal place of business.(3) There must also be stated—(a) the identity of each class of shares in the undertaking held by thecompany, and

86 | Environmental and social transparency under the Companies Act 2006Annex 1: UK law governing company environmental and social accounting and reporting | 87(b)the proportion of the nominal value of the shares of that classrepresented by those shares.6.— (1) Subject to paragraph 14, there must also be stated—(a) the aggregate amount of the capital and reserves of the undertakingas at the end of its relevant financial year, and(b) its profit or loss for that year.(2) That information need not be given in respect of an undertaking if—(a) the undertaking is not required by any provision of the 2006 Actto deliver a copy of its balance sheet for its relevant financial yearand does not otherwise publish that balance sheet in theUnited Kingdom or elsewhere, and(b) the company’s holding is less than 50% of the nominal value of theshares in the undertaking.(3) Information otherwise required by this paragraph need not be given if it isnot material.(4) For the purposes of this paragraph the “relevant financial year” of an undertakingis—(a) if its financial year ends with that of the company, that year, and(b) if not, its financial year ending last before the end of the company’sfinancial year.The Large and Medium-sized Companies and Groups (Accounts andReports) Regulations 2008 provide certain accounting requirements relatingto ‘significant’ holdings other than subsidiaries. A holding above 20%of total nominal value of any class of share of a company is ‘significant’ forthese purposes. Companies must report basic identification and financialdetails about such ‘significant holdings’. 251The provisions of the directors’ report also require reporting of these shareholdingsin some circumstances, under both the general requirements ofsection 417 Companies Act 2006 and specifically of section 417(5)(c). 252A.1.2.3Annual accountingContractual or ‘other’ relationshipsAgain, the Large and Medium-sized Companies and Groups (Accounts andReports) Regulations 2008, 253 and International Accounting Standards, 254set out requirements under the broad framework of the Companies Act2006 as to what financial details must be accounted relating to contractualrelationships.Annual reportingCompanies Act 2006s417 Contents of directors’ report: business review(5) In the case of a quoted company the business review must, to the extent necessaryfor an understanding of the development, performance or position of thecompany’s business, include—(c) subject to subsection (11), information about persons with whom thecompany has contractual or other arrangements which are essential to thebusiness of the company.If the review does not contain information of each kind mentioned in paragraphs(b)(i), (ii) and (iii) and (c), it must state which of those kinds of information itdoes not contain.(11) Nothing in subsection (5)(c) requires the disclosure of information about a personif the disclosure would, in the opinion of the directors, be seriously prejudicialto that person and contrary to the public interest.The Companies Act 2006 explicitly provides that companies must reportinformation in the directors’ report about persons with whom the companyhas contractual or other arrangements which are essential to thebusiness of the company, to the extent necessary for an understanding ofthe development, performance or position of the company’s business.There is a limited exemption to this requirement, whereby reporting isnot required where it would, in the opinion of the directors, be seriouslyprejudicial to that person and contrary to the public interest.A.1.3A.1.3.1How must the accounts and reports be circulated andpublished?Who are the directors required to circulate hard copies ofthe reports to?s423 Duty to circulate copies of annual accounts and reports(1) Every company must send a copy of its annual accounts and reports for eachfinancial year to—(a) every member of the company,(b) every holder of the company’s debentures, and(c) every person who is entitled to receive notice of general meetings.(6) This section has effect subject to section 426 (option to provide summaryfinancial statement).

88 | Environmental and social transparency under the Companies Act 2006Annex 1: UK law governing company environmental and social accounting and reporting | 89s426 Option to provide summary financial statement(1) A company may—(a) in such cases as may be specified by regulations made by the Secretary ofState, and(b) provided any conditions so specified are complied with,provide a summary financial statement instead of copies of the accounts andreports required to be sent out in accordance with section 423.The annual accounts and reports must, as default, be circulated to everymember of the company, every holder of the company’s debentures, andevery person entitled to receive notice of general meetings. However, insome circumstances the company may be allowed to send a ‘summaryfinancial statement’ instead of the full annual accounts and reports.‘Summary financial statements’The Companies (Summary Financial Statement) Regulations 2008 set outthe rules relating to summary financial statements. 255 Subject to a numberof conditions, a company may send a summary financial statement insteadof full annual accounts and reports. The most important condition is that ifany individual shareholder wishes to receive the full accounts and reports,the company is obliged to send them to that individual. 256 Companies arealso obliged to undertake a process to give notice to shareholders of theirintention to send a summary financial statement, and to ascertain theirwishes in that regard. 257In the circumstance that a publicly-traded company 258 may send a summaryfinancial statement, they must also send (at the same time) the explanatorymaterial relating to the directors’ report 259 required by paragraph 14 of theLarge and Medium-sized Companies and Groups (Accounts and Reports)Regulations 2008. The required material, to summarise, is “any necessaryexplanatory material” with regard to: securities transfer restrictions;details of significant direct or indirect holdings; details of special rights ofcontrol; rights of control of any employees’ share schemes; restrictions onvoting rights; restrictions on the transfer of securities or on voting rights;rules that the company has about appointment and replacement of directors,or amendment of the company’s articles of association; powers of thecompany’s directors; information relating to takeover bids. 260 None of thisrequired explanatory material relates to environmental or social matters.Therefore in the circumstances that a company sends out a ‘summaryfinancial statement’ in lieu of its full annual accounts and reports, there isno explicit requirement to send any materials relating to the environmentalor social matters.A.1.3.2The role of Annual General Meetingss437 Public companies: laying of accounts and reports before general meeting(1) The directors of a public company must lay before the company in generalmeeting copies of its annual accounts and reports.(2) This section must be complied with not later than the end of the period forfiling the accounts and reports in question.(3) In the Companies Acts “accounts meeting”, in relation to a public company,means a general meeting of the company at which the company’s annual accountsand reports are (or are to be) laid in accordance with this section.Company accounts and reports, including the directors’ report, must be‘laid’ before the company in general meeting. In practice, there will usuallybe the opportunity for discussion of the reports in the general meeting,when they are laid before it. However, this is not explicitly requiredby law. Neither is there legal requirement that the annual reports needthe shareholders’ approval or acceptance; shareholders have no ability toreject them. 261A.1.3.3How are companies required to publish their accounts andreports?s430 Quoted companies: annual accounts and reports to be made available onwebsite(1) A quoted company must ensure that its annual accounts and reports—(a)(b)are made available on a website, andremain so available until the annual accounts and reports for the company’snext financial year are made available in accordance with this section.(2) The annual accounts and reports must be made available on a website that—(a) is maintained by or on behalf of the company, and(b) identifies the company in question.(3) Access to the annual accounts and reports on the website, and the ability toobtain a hard copy of the annual accounts and reports from the website, mustnot be—(a)(b)conditional on the payment of a fee, orotherwise restricted, except so far as necessary to comply with any enactmentor regulatory requirement (in the United Kingdom or elsewhere).(4) The annual accounts and reports—(a) must be made available as soon as reasonably practicable, and

90 | Environmental and social transparency under the Companies Act 2006Annex 2: Environmental and social reporting in review: the OFR | 91(b) must be kept available throughout the period specified in subsection (1)(b).(5) A failure to make the annual accounts and reports available on a website throughoutthat period is disregarded if—(a) the annual accounts and reports are made available on the website for partof that period, and(b) the failure is wholly attributable to circumstances that it would not be reasonableto have expected the company to prevent or avoid.(6) In the event of default in complying with this section, an offence is committed byevery officer of the company who is in default.(7) A person guilty of an offence under subsection (6) is liable on summary convictionto a fine not exceeding level 3 on the standard scale.Quoted companies are required to publish their full annual accountsand reports, including the directors’ report and business review, on anopen website maintained by or on behalf of the company, available freeof charge and at least until the next financial year’s annual accounts andreports are made available.Annex 2:Environmental and social reporting in review:the Operating and Financial ReviewA.2.1 Environmental and social reporting in review 92A.2.2 The ‘Operating and Financial Review’ 92A.2.3 The removal of the OFR requirement 98A.2.4 The removal of the OFR requirement as relating to ClientEarth’s 98proposalsA.2.3.1A.2.3.2Substantive requirements for reporting on environmental andsocial issuesScrutiny requirements for environmental and social reportingIn 2005 a major change was made in law with the introduction of themandatory Operating and Financial Review (OFR) for quoted companies,which included the first explicit legal requirements for the reporting ofenvironmental and social matters. However, the OFR requirement wasswiftly removed by the UK government, primarily justified on the groundsof the OFR’s cost to business and the regulatory burden.In this context, it is important to stress that regardless of what substancemight have been lost, ClientEarth’s proposed Regulations to supplementsection 417(5) Companies Act 2006 would not impose further reportingobligations on companies than currently exist in law; the Regulationswould simply give detail to existing legal requirements. Therefore thesubstantive differences between the OFR and the Companies Act 2006 arefor the most part irrelevant to ClientEarth’s proposal.The main difference between the requirements of the OFR and the CompaniesAct 2006 is in relation to audit requirements. Under the CompaniesAct 2006, auditors are required to undertake an audit of non-financialreporting which is considerably less extensive in scope than that whichwas required for the OFR. The broader audit requirement of the OFR wasassessed by the UK government to be the primary source of the OFR’scost burden to business, and this was the primary grounds on which theremoval of the OFR was recommended. 262 ClientEarth does not consider

92 | Environmental and social transparency under the Companies Act 2006Annex 2: Environmental and social reporting in review: the OFR | 93that the audit requirement of the Companies Act 2006 for the directors’report provides adequate scrutiny to the reporting of environmental andsocial matters (as discussed in Chapter 1.2.1 and Annex 4). However, ClientEarthdoes accept that the cost burden to business of higher mandatoryaudit standards would be considerable, and considers that because auditrequirements impose obligations on all companies, regardless of the qualityof their reporting, it is not the most efficient way to provide scrutinyto the reporting process. Therefore ClientEarth is not pursuing highermandatory auditing requirements. However, the lower standard of auditrequirement currently in statute is only acceptable if the other meansby which scrutiny is provided to the reporting process (by the FinancialReporting Review Panel and at company Annual General Meetings) areenabled to play a greater and more effective role.A.2.1Environmental and social reporting in reviewThe idea that companies need to report non-financial information in orderto properly reflect the position of the company and satisfy the needs of theusers of the report is not new in company law review. For example, in1992, the Cadbury Committee 263 recognised that there would be an advantageto users if they were provided with some explanation of the factorslikely to influence a company’s future progress. 264 It recommended theOperating and Financial Review (OFR) as an appropriate means to servethis purpose, which was at that point being developed by the AccountingStandards Board (ASB).A.2.2The ‘Operating and Financial Review’The ASB originally issued the Statement ‘Operating and Financial Review’in 1993. Building on existing ‘best practice’ in industry, the Statementprovided a framework for directors to discuss the main factors underlyingthe company’s performance and financial position. 265 In this form, theOFR remained not as a binding legal standard but as recommended bestpractice for many years.In 2001, the Company Law Review Steering Group recommended in itsfinal report that the OFR be made mandatory for quoted companies. Followingthis recommendation and the consultation response to the 2002White Paper ‘Modernising Company Law’, the government decided to putthe OFR into law, and require quoted companies to prepare and publishOFRs. 266 After consultation on drafts, the OFR Regulations 267 were passedinto law in March 2005, to take effect from April 2005.The Companies Act 1985 (Operating and Financial Review and Directors’ Reportetc.) Regulations 2005Objective and contents of operating and financial reviewSCHEDULE 7ZAReview objective1. An operating and financial review must be a balanced and comprehensive analysis,consistent with the size and complexity of the business, of -(a) the development and performance of the business of the company duringthe financial year,(b) the position of the company at the end of the year,(c) the main trends and factors underlying the development, performance andposition of the business of the company during the financial year, and(d) the main trends and factors which are likely to affect the company’s futuredevelopment, performance and position,prepared so as to assist the members of the company to assess the strategiesadopted by the company and the potential for those strategies to succeed.Other general requirements2. The review must include -(a) a statement of the business, objectives and strategies of the company;(b) a description of the resources available to the company;(c) a description of the principal risks and uncertainties facing the company;and(d) a description of the capital structure, the treasury policies and objectivesand the liquidity of the company.Details of particular matters3.- (1) To the extent necessary to comply with the general requirements of paragraphs 1and 2, the review must comply with paragraphs 4 to 6.(2) If the review does not contain information and analysis of each kind mentionedin paragraphs 4 and 5, it must state which of those kinds of information andanalysis it does not contain.4.- (1) The review must include -(a) information about environmental matters (including the impact ofthe business of the company on the environment),(b) information about the company’s employees, and(c) information about social and community issues.(2) The review must, in particular, include -(a) information about the policies of the company in each area mentioned insub-paragraph (1), and(b) information about the extent to which those policies have been successfullyimplemented.

94 | Environmental and social transparency under the Companies Act 2006Annex 2: Environmental and social reporting in review: the OFR | 955. The review must also include -(a) information about persons with whom the company has contractual orother arrangements which are essential to the business of the company;and(b) information about receipts from, and returns to, members of the companyin respect of shares held by them.6.- (1) The review must include analysis using financial and, where appropriate, otherkey performance indicators, including information relating to environmentalmatters and employee matters.(2) In sub-paragraph (1), “key performance indicators” means factors by reference towhich the development, performance or position of the business of the companycan be measured effectively.Reference to and explanation of company’s accounts7. To the extent necessary to comply with the general requirements of paragraphs 1and 2, the review must, where appropriate, include references to, and additionalexplanations of, amounts included in the company’s annual accounts.Compliance with standards8. The review must -(a) state whether it has been prepared in accordance with relevant reportingstandards, and(b) contain particulars of, and reasons for, any departure from suchstandards.Application of Schedule to group operating and financial review9. In relation to a group operating and financial review this Schedule has effect as ifthe references to the company (other than the last such reference in paragraph 1)were references to the company and its subsidiary undertakings included in theconsolidation.”Auditors’ reports on operating and financial reviews10. In section 235 of the 1985 Act (auditors’ report), after subsection (3) insert -“(3A) If the company is a quoted company, the auditors must state in their report-(a)(b)whether in their opinion the information given in the operating andfinancial review for the financial year for which the annual accounts areprepared is consistent with those accounts; andwhether any matters have come to their attention, in the performance oftheir functions as auditors of the company, which in their opinion areinconsistent with the information given in the operating and financialreview.”The OFR Regulations required a ‘balanced and comprehensive analysis’ ofthe development, performance and position of the business, the main factorsand trends underlying the development, performance and position ofthe company, and those likely to affect the company’s future development,performance and position. The Regulations included a requirement for adescription of the principal risks and uncertainties facing the companyand, to the extent necessary for the general requirements of the review,information about environmental matters, social and community issues,and persons with whom the company has contractual or other arrangementswhich are essential to the business of the company. The Regulationsalso required the statutory audit to have regard not only to the annualaccounts in their assessment of non-financial reporting, but to any mattersthat had come to their attention while carrying out their audit function.Supplemental to the Regulations, the Accounting Standards Board issuedReporting Standard 1: Operating and Financial Review (RS 1), a detailedinterpretive standard that set out the way that quoted companies wererequired to carry out the OFR. It set out detailed interpretive principlesfor the general elements of the OFR (the equivalent provisions to sections417(3) - (4) Companies Act 2006).However, RS 1 did not add legally binding further detail to the specificrequirements for information on environmental and social matters, simplyrestating the provisions of the Regulations. The only further provisionsmade by RS 1 in relation to these matters were incidental to broaderprinciples.REPORTING STANDARD 1: OPERATING AND FINANCIAL REVIEW“32. The OFR shall include a description of the business and the external environmentin which it operates as context for the directors’ discussion and analysisof performance and financial position......34. Every entity is affected by its external environment. Depending on the natureof the business, the OFR shall include discussion of matters such as the entity’smajor markets and competitive position within those markets and the significantfeatures of the legal, regulatory, macro-economic and social environment thatinfluence the business. For example, an entity may disclose the fact that it hassignificant operations in a number of different countries, which could have animpact on the future development and performance of the business......35. The OFR shall discuss the objectives of the business to generate or preservevalue over the longer-term......37. The nature of the industry will affect the directors’ determination of an appropriatetime perspective for reporting in the OFR. For example, a business thatfocuses on large long-term projects must carry out its strategic planning overthe full project lifecycle, which may be 20 years or more. Furthermore, where aproject has a long-term impact on the environment, this is likely to affect long-

96 | Environmental and social transparency under the Companies Act 2006Annex 2: Environmental and social reporting in review: the OFR | 97term value and shall therefore determine the time perspective for reporting in theOFR. By contrast, a service industry with few physical assets and depending onthe supply of particular employee skills for its source of competitive advantage,will plan over a period consistent with its ability to recruit, train and develop itsstaff, which may be much shorter.”RS 1 was also accompanied by non-binding ‘Implementation Guidance’,which included some further guidance relating to the reporting of environmentaland social matters:RS 1: IMPLEMENTATION GUIDANCE“This guidance accompanies, but is not part of, the Reporting Standard...IG9. Paragraph 29 (a)-(e) of the Reporting Standard requires that, to the extent necessaryto meet the requirements set out in paragraph 28 of the Reporting Standard,the OFR shall include information about a number of particular matters, e.g.employees, and environment. As explained in paragraph 28 of the ReportingStandard, the OFR shall provide the information necessary to assist membersto assess the strategies adopted by the entity and the potential for those strategiesto succeed. Accordingly, where the management of a particular matter couldsignificantly affect the entity’s ability to successfully implement its strategies orthe entity’s short or longterm value, that matter shall be addressed within theOFR...Environmental mattersIG21. Environmental matters, particularly environmental risks and uncertainties,impact to some extent on all businesses, as they can affect investment decisions,consumer behaviour and Government policy. Poor management of energy, naturalresources or waste can affect current performance; failure to plan for a futurein which environmental factors are likely to be increasingly significant mayrisk the longterm future of the business. Proper attention to the environmentalimpacts of supply chains and products and to regulatory compliance of the company’sown operations are both important for a business’ public reputation andfor its licence to operate.IG22. Environmental matters cover a very wide range of areas. The matters that willbe of concern to a particular entity will vary depending on both the industry inwhich it operates and the strategies it has adopted. However, some consensus asto the generic environmental concerns facing all companies has been reached$,which might serve as a useful reference point for directors:- Water use;- Energy use;- Waste;- Climate change, including global warming contribution or emissionsmanagement;- Ozone depleting substances.IG23. Entities in industries that have a significant environmental footprint may setobjectives and adopt strategies to specifically address key environmental risks,as illustrated in IG Examples 12 to 14. 268 For others, whilst the managementof environmental risks will impact the company’s reputation, monitoring ofperformance in this area will not be considered a KPI. However, as set out inparagraph 20 of the Reporting Standard, the directors shall support the informationprovided in the OFR with other evidence, for example consumption rates ofscarce resources (energy and/or water) if this significantly impacts the entity’sreputation, by providing the information required in paragraphs 43 and 44 ofthe Reporting Standard...Social and community mattersIG28. The management of an entity’s social and community matters can affect itsreputation and licence to operate in a similar way to the management of environmentalmatters. Social concerns with regard to product safety, e.g. geneticallymodified foods, product responsibility, underage drinking or smoking, andthe ethical management of the supply chain are all examples of issues that cansignificantly impact on the reputation of an entity. Furthermore, disregard forlocal community concerns can result in successful opposition to developmentapplications.IG29. As with the other areas noted under particular matters, the areas that will be ofconcern to a particular entity will vary depending on both the industry in whichit operates and the strategies it has adopted.IG30. Currently, there is no commonly held definition of social and community matters,nor is there a common understanding of the generic issues. It is also thecase that specific matters within the broad social and community category canchange as new issues arise. However, areas that directors might want to considerinclude:- Public health issues, such as obesity, perceived safety issues related to highuse of mobile phones, smoking;- Employee health and safety (can also be considered an area under employees,see IG26);- Social risks existing in the supply chain, for example the use of child labourand payments of ‘‘fair wages’’;- Diversity in either the employee (see IG26) or customer base;- Impact on the local community, for example noise, pollution, transportcongestion (these areas could also link to environmental matters);- Indigenous and human right issues relating to communities local to overseasoperations.IG31. Entities where reputation is a key concern might set objectives and adopt strategiesthat specifically address key social or community concerns, as illustrated inIG Examples 17 and 18. 269 Alternatively, the monitoring of social and communitymatters may not be considered a KPI, however, directors will still monitor theirperformance in these areas. In such situations, it would be appropriate for theOFR to include these as other performance indicators.”

98 | Environmental and social transparency under the Companies Act 2006Annex 2: Environmental and social reporting in review: the OFR | 99A.2.3The removal of the OFR requirementHowever, just over half a year after the OFR Regulations’ enactment, theChancellor of the Exchequer announced in his Pre-Budget Report 2005 270that the statutory obligation on quoted companies to publish OFRs was tobe abolished. Regulations to repeal the OFR requirement 271 were laid inDecember 2005 and came into force on 12 January 2006. With its removal,the ASB’s Reporting Standard 1 also lost its legal force. 272The unfortunate decision to remove the OFR requirement was framed intwo strongly related ways in the Treasury press release: regulatory reformso as to ‘regulate only where necessary’, ‘reducing the burden on businessby £33 million’ while ‘maintaining enhanced reporting standards’; 273 and‘meeting the productivity challenge’ by ‘taking measures to reduce costson business by removing unnecessary regulatory burdens’. This decision,it was also argued, was consistent with the government’s general policynot to ‘gold-plate’ regulation; not to impose regulatory requirementson UK businesses over and above the relevant EU Directive minimumrequirements. 274There was also opposition to the mandatory OFR from some membersof the business community, which was expressed during the consultationperiods. 275 In a 2005 poll, 48% of ‘business leaders’ polled opposedthe OFR requirements. 276 However, it is important to note that much ofthis opposition from business focused on the timing of the requirement’sintroduction, in the context of broader changes to corporate governanceand reporting regulation, 277 and indeed that many in the business communityexpressed considerable disappointment and frustration at theremoval of the OFR requirements. 278A.2.4A.2.4.1The removal of the OFR requirement as relating toClientEarth’s proposalsSubstantive requirements for reporting on environmentaland social issuesSince the removal of the OFR, the Companies Act 2006 has entered intostatute, and section 417 Companies Act 2006 now provides the explicitlegal standard for company reporting on environmental and social issues.As already mentioned, section 417 Companies Act 2006 brought into lawthe great majority of the specific content requirements for these issues thathad been lost with the removal of the OFR. 279Regardless of this fact, it is important to stress that ClientEarth’s proposedRegulations to supplement section 417(5) Companies Act 2006 would notimpose any further requirements on companies than already exist. Theproposed Regulations would simply give a detailed framework for theproper interpretation of existing and currently applicable legal provisions.Therefore the substantive differences between the OFR and the CompaniesAct 2006 are for the most part irrelevant to ClientEarth’s proposal.A.2.4.2 Scrutiny requirements for environmental and socialreportingThe main difference between the requirements of OFR and the CompaniesAct 2006 in relation to reporting on environmental and social issues is thescope of the audit that is required for such information.THE COMPANIES ACT 1985 (OPERATING AND FINANCIAL REVIEW ANDDIRECTORS’ REPORT ETC.) REGULATIONS 2005Auditors’ reports on operating and financial reviews10. In section 235 of the 1985 Act (auditors’ report), after subsection (3) insert -“(3A) If the company is a quoted company, the auditors must state in their report -(a) whether in their opinion the information given in the operating andfinancial review for the financial year for which the annual accounts areprepared is consistent with those accounts; and(b) whether any matters have come to their attention, in the performance oftheir functions as auditors of the company, which in their opinion areinconsistent with the information given in the operating and financialreview.COMPANIES ACT 2006s496 Auditor’s report on directors’ reportThe auditor must state in his report on the company’s annual accounts whetherin his opinion the information given in the directors’ report for the financial yearfor which the accounts are prepared is consistent with those accounts.Under the OFR, the auditor was required to carry out an audit of nonfinancialreporting that had regard to the consistency of non-financialinformation with (a) the annual accounts, and (b) any other matters thathad come to the auditor’s attention in the performance of the audit. Under

100 | Environmental and social transparency under the Companies Act 2006Annex 3: EU law on company environmental and social accounting and reporting | 101the Companies Act 2006, the auditor need only have regard to the annualaccounts.The cost to business of implementing the higher mandatory audit standardof the OFR was the basis on which the OFR’s removal was recommended, 280and was the UK government’s primary public justification for the OFR’sremoval.The current audit requirement of the Companies Act 2006 cannot providean adequate standard of scrutiny in relation to reporting on environmentalor social issues, which are not usually verifiable in relation solely tobackward-looking financial information (see Chapter 1.2.1 for furtherdiscussion). However, in light of the UK government’s concerns relatingto the cost and regulatory burden for business, along with the broadunsuitability of the current audit profession in providing effective scrutinyto the reporting of environmental and social issues, ClientEarth considersthat the most efficient and effective scrutiny for this type of reporting canbe provided through an increased role for the FRRP, and the improvementof the role of AGMs in the reporting process, as proposed by ClientEarth.These processes, as reformed in the ways proposed, can provide moreeffective scrutiny than a mandatory audit, while operating at a much lowercost to business and imposing a much lower regulatory burden, only interferingwith companies which are not reporting accurately or adequately.Annex 3:EU law on company accounting and reportingon environmental and social impactsA.3.1 Fourth Council Directive: on the annual accounts of certain 102types of companies (Directive 78/660/EEC)A.3.2 The Accounts Modernisation Directive (Directive 2003/51/EC) 103A.3.3 Commission Recommendation on the recognition, 103measurement and disclosure of environmental issues in theannual accounts and annual reports of companies(Recommendation 2001/453/EC)A.3.4 The Transparency Directive (Directive 2004/109/EC) 106Many legal reporting requirements at UK domestic level are derived fromEU legal requirements. These provide common minimum standards acrossthe EU. While the EU Directives do not apply directly to companies, 281they impose obligations on the Member States to implement their requirements.In this way, EU requirements underpin UK law.EU law sets in place explicit requirements for reporting on environmentalmatters, but explicit requirements to report on social matters are as yetundeveloped.The Fourth Council Directive on the annual accounts of certain types ofcompanies, 282 as amended by the Accounts Modernisation Directive, 283provides the explicit EU law relating to environmental accounting andreporting. The Transparency Directive, 284 which covers stock exchangesin the EU, also incorporates these requirements along with a number ofother disclosure obligations.The Accounts Modernisation Directive was the legislation that broughtenvironmental reporting into EU law. The introduction of environmentalreporting requirements at EU level was driven by a CommissionRecommendation of 2001, 285 which set out in detail how companies needto incorporate environmental matters into accounting practices, andrecommended that Member States take appropriate measures to promotesuch incorporation. The Recommendation demonstrates how companies

102 | Environmental and social transparency under the Companies Act 2006Annex 3: EU law on company environmental and social accounting and reporting | 103might incorporate environmental matters into accounting and reportingpractices.A.3.2The Accounts Modernisation Directive (Directive2003/51/EC)A.3.1Fourth Council Directive: on the annual accounts ofcertain types of companies (Directive 78/660/EEC) 286The Fourth Council Directive was an early step in the creation of commonstandards of company reporting across the European single market. Itsets out a range of requirements that limited liability companies have tofulfil in their annual accounting and reporting, and prescribes a range ofsubstantive elements that must be included. This directive remains thebasis of annual reporting legal standards at EU level.Article 46, as amended by the Accounts Modernisation Directive, is thebasis of environmental and social reporting requirements at EU level.DIRECTIVE 2003/51/EC OF THE EUROPEAN PARLIAMENT AND OF THECOUNCIL of 18 June 2003 amending Directives 78/660/EEC, 83/349/EEC, 86/635/EEC and 91/674/EEC on the annual and consolidated accounts of certain types ofcompanies, banks and other financial institutions and insurance undertakingsArticle 1Directive 78/660/EEC is hereby amended as follows:14. Article 46 shall be amended as follows:(a) paragraph 1 shall be replaced by the following:‘1. (a) The annual report shall include at least a fair review of the developmentand performance of the company’s business and of its position, togetherwith a description of the principal risks and uncertainties that it faces. Thereview shall be a balanced and comprehensive analysis of the developmentand performance of the company’s business and of its position, consistentwith the size and complexity of the business;(b)(b) To the extent necessary for an understanding of the company’s development,performance or position, the analysis shall include both financialand, where appropriate, non-financial key performance indicators relevantto the particular business, including information relating to environmentaland employee matters;(c) In providing its analysis, the annual report shall, where appropriate,include references to and additional explanations of amounts reported inthe annual accounts.’the following paragraph shall be added:‘4. Member States may choose to exempt companies covered by Article 27from the obligation in paragraph1(b) above in so far as it relates to nonfinancialinformation.’In 2003, the Fourth Council Directive was amended and updated bythe Accounts Modernisation Directive (see above for details of theprovisions).This is the legal standard that underlies UK legal standards, as expressedby the business review requirement of Companies Act 2006.It was with the Accounts Modernisation Directive that the need forreporting on environmental impacts was incorporated into the EU legalframework. This need was originally highlighted by the European Commission,as expressed in its Recommendation of 2001 on company reportingof environmental issues.A.3.3Commission Recommendation on the recognition,measurement and disclosure of environmentalissues in the annual accounts and annual reports ofcompanies (Recommendation 2001/453/EC)Commission recommendation 2001/453/EC, of 30 May 2001, set out inconsiderable detail what the European Commission considered to constituteappropriate company disclosure in relation to environmental issues.It examined the way that environmental information should be providedin annual business accounts and reports, not dealing with ‘special purposereporting’ (i.e. ‘public interest reporting’ – separate environmental or sustainabilityreports).As a Recommendation, it has no legal force. It merely ‘recommends’ thatthe Member States ‘take the appropriate measures to promote the applicationof this recommendation’, and ‘notify the Commission of the measurestaken’.However, as well as leading to the development of the Accounts ModernisationDirective and thus providing contextual insight as to what theAMD’s obligations might entail, its content is interesting as an example ofhow more detailed reporting standards might be formulated in relationto environmental reporting. It is also highly relevant in that it relates to

104 | Environmental and social transparency under the Companies Act 2006Annex 3: EU law on company environmental and social accounting and reporting | 105environmental reporting as part of business reporting. The Recommendation’skey substance is outlined below.Key definitionsHaving delineated its scope, the Recommendation outlines a number ofkey definitions. It defines ‘environmental expenditure’, as including thecosts of steps taken by a company to prevent reduce or repair damage tothe environment resulting from company activities, including, amongstothers: the disposal and avoidance of waste; the protection of soil and ofsurface water and groundwater; the protection of clean air and climate;noise reduction; and the protection of biodiversity and landscape. Itexcludes costs whose primary purpose is to respond to other needs (thanto prevent, reduce or repair environmental damage), such as to increaseprofitability, health and safety at the workplace or production efficiency.It also excludes costs resulting from fines or penalties for noncompliancewith environmental regulation or compensation for past environmentalpollution, which it holds should be accounted separately.Recognition and measurementThe Recommendation then sets out a detailed set of guidelines for the waythat various issues should be recognised and measured in accounting andreporting: recognition of environmental liabilities (including contingentand offset); recognition of environmental expenditure (including guidanceon capitalisation and asset impairment); measurement of environmentalexpenditure (including guidance on site restoration / dismantling costs,and discounting of long-term liabilities).DisclosuresFinally, the Recommendation sets out the environmental issues thatshould be disclosed in various places in the reports:- Annual and consolidated accounts – Policies and programmes adoptedin respect of environmental protection; improvements in key areasof environmental protection; relationship of policies or measures toenvironmental legislation; (where appropriate for size of company)information on environmental performance on energy use, materialsuse, water use, emissions, waste disposals (recommending consistentand comparable quantitative eco-efficiency indicators); references toany separate company environmental report.- Balance sheet – Environmental liabilities.- Notes to annual and consolidated accounts – Valuation methodsapplied; extraordinary environmental expenditures charged to theprofit and loss account; contingent environmental liabilities; descriptionsof each environmental liability (nature, indication of the timingand terms of settlement, explanation of the damage and laws or regulationswhich require its remediation, and restoring or preventive stepsbeing taken / proposed); undiscounted liability and discount rate used;accounting policy regrading long-term restoration / decommissioning/ dismantling costs; amount of environmental expenditure charged toprofit and loss account; amount of environmental expenditure capitalised;costs incurred as result of fines and penalties for non-compliancewith environmental regulations and compensation paid to thirdparties; government incentives related to environmental protectionreceived or entitled to by the company.N.B.In the Recommendation recitals, 287 the Commission stated that:“(4) The lack of explicit rules has contributed to a situation where different stakeholders,including regulatory authorities, investors, financial analysts and the publicin general may consider the environmental information disclosed by companiesto be either inadequate or unreliable. Investors need to know how companiesdeal with environmental issues. Regulatory authorities have an interest in monitoringthe application of environmental regulations and the associated costs.Nonetheless, voluntary disclosure of environmental data in the annual accountsand annual reports of companies is still running at low levels, even though it isoften perceived that enterprises face increasing environmental costs for pollutionprevention and clean-up equipment and for waste clean-up and monitoringsystems, in particular those enterprises operating in sectors that have significantimpacts on the environment.(6) The costs of collecting and reporting environmental data and the sensitivenessor confidentiality that might be associated, in certain cases, with such informationare frequently regarded as deterrent factors for disclosure of environmentalinformation in the financial statements of companies. Nevertheless, these argumentsdo not eliminate the need to stimulate the provision of environmentalinformation. Users of financial statements need information about the impactof environmental risks and liabilities on the financial position of the company,

106 | Environmental and social transparency under the Companies Act 2006Annex 3: EU law on company environmental and social accounting and reporting | 107and about the company’s attitude towards the environment and the enterprise’senvironmental performance to the extent that they may have consequences onthe financial health of the company.”Current legal requirements, and the regulatory framework established inUK law to ensure compliance with them, are inadequate to address theproblems that the Commission identified here.A.3.4The Transparency Directive (Directive 2004/109/EC)The Transparency Directive was introduced with the aim of creating acommon framework across Europe for information disclosure by companiestraded on stock exchanges in the EU. It was part of the FinancialServices Action Plan (FSAP), an even broader European project, whichwas designed to create a single European capital market. The TransparencyDirective works alongside other pieces of FSAP legislation, in particularthe Market Abuse Directive. 288N.B.In the Transparency Directive’s recitals, 289 the Council comments on thenature of the appropriate body to supervise compliance with accountingand reporting obligations, stating that [emphasis added]:‘whereas:… (28) A single competent authority should be designated in eachMember State to assume final responsibility for supervising compliance withthe provisions adopted pursuant to this Directive, as well as for internationalcooperation. Such an authority should be of an administrative nature, and itsindependence from economic players should be ensured in order to avoidconflicts of interest. Member States may however designate another competentauthority for examining that information referred to in this Directive is drawnup in accordance with the relevant reporting framework and taking appropriatemeasures in case of discovered infringements; such an authority need not be ofan administrative nature.’This is of obvious relevance to the appropriate constitution of the UKauthority, the FRRP (see Proposal 2 above).DIRECTIVE 2004/109/EC OF THE EUROPEAN PARLIAMENT AND OF THECOUNCIL of 15 December 2004 on the harmonisation of transparency requirementsin relation to information about issuers whose securities are admitted totrading on a regulated market and amending Directive 2001/34/ECChapter II: PERIODIC INFORMATIONArticle 4Annual financial reports2. The annual financial report shall comprise:(a) the audited financial statements;(b) the management report5. The management report shall be drawn up in accordance with Article 46 of Directive78/660/EEC and, if the issuer is required to prepare consolidated accounts,in accordance with Article 36 of Directive 83/349/EEC.The Directive includes an obligation on companies to produce (as part ofits annual financial reports) a ‘management report’, in accordance withArticle 46 of Directive 78/660/EEC, which now includes certain (limited)environmental and social requirements as a result of the amendments ofDirective 2003/51/EC (the Accounts Modernisation Directive).The Transparency Directive’s requirements for environmental and socialreporting at EU level are incorporated at UK level in both the CompaniesAct 2006 and the FSA Disclosure Rules and Transparency Rules.

108 | Environmental and social transparency under the Companies Act 2006Annex 4: Auditing of company environmental and social accounting and reporting | 109Annex 4:Auditing of company environmental andsocial accounting and reportingA.4.1 Auditing under the Companies Act 2006 109A.4.1.1A.4.1.2A.4.1.3Appointment of auditorsAuditors’ powersRequirements for the auditor’s reportA.4.2 Assurance 116A.4.2.1A.4.2.2A.4.2.3Voluntary take-up of external assurance for voluntaryenvironmental and social reportingTypes of assurance providerInternational assurance standards for non-financial reportingA.4.1 Auditing under the Companies Act 2006The annual accounts and reports of UK companies must be subjected toan audit process whereby independent auditors are appointed, given certainrights of access to information, and charged with a duty to prepare an‘auditors’ report’. 290 The purpose of this process is to verify the accuracy,reliability and quality of the accounts and report. The process is laid outin statute by the Companies Act 2006.A.4.1.1Appointment of auditorsCompanies Act 2006s489 Appointment of auditors of public company: general(1) An auditor or auditors of a public company must be appointed for each financialyear of the company, unless the directors reasonably resolve otherwise on theground that audited accounts are unlikely to be required.(2) For each financial year for which an auditor or auditors is or are to be appointed(other than the company’s first financial year), the appointment must be madebefore the end of the accounts meeting of the company at which the company’sannual accounts and reports for the previous financial year are laid.(3) The directors may appoint an auditor or auditors of the company—(a) at any time before the company’s first accounts meeting;(b) following a period during which the company (being exempt from audit)did not have any auditor, at any time before the company’s next accounts

110 | Environmental and social transparency under the Companies Act 2006Annex 4: Auditing of company environmental and social accounting and reporting | 111(c)meeting;to fill a casual vacancy in the office of auditor.(4) The members may appoint an auditor or auditors by ordinary resolution—(a) at an accounts meeting;(b) if the company should have appointed an auditor or auditors at an accountsmeeting but failed to do so;(c) where the directors had power to appoint under subsection (3) but havefailed to make an appointment.(5) An auditor or auditors of a public company may only be appointed—(a) in accordance with this section, or(b) in accordance with section 490 (default power of Secretary of State).s490 Appointment of auditors of public company: default power of Secretary ofState(1) If a public company fails to appoint an auditor or auditors in accordance withsection 489, the Secretary of State may appoint one or more persons to fill thevacancy.s492 Fixing of auditor’s remuneration(1) The remuneration of an auditor appointed by the members of a company must befixed by the members by ordinary resolution or in such manner as the membersmay by ordinary resolution determine.(2) The remuneration of an auditor appointed by the directors of a company must befixed by the directors.(3) The remuneration of an auditor appointed by the Secretary of State must be fixedby the Secretary of State.(4) For the purposes of this section “remuneration” includes sums paid in respect ofexpenses.(5) This section applies in relation to benefits in kind as to payments of money.Auditors must be appointed each financial year. For public companies,this is usually agreed at the ‘accounts meeting’. The ‘accounts meeting’is the company general meeting at which the company’s annual accountsand reports are laid. 291 The appointment of auditors is usually decided byshareholders by ordinary resolution, at the accounts meeting. In certainother (unusual) circumstances the auditors can be appointed by the directorsalone, or in exceptional circumstances the Secretary of State.The auditors’ remuneration is also fixed in the same way that they areappointed.A.4.1.2Auditors’ powerss499 Auditor’s general right to information(1) An auditor of a company—(a) has a right of access at all times to the company’s books, accounts andvouchers (in whatever form they are held), and(b) may require any of the following persons to provide him with such informationor explanations as he thinks necessary for the performance of hisduties as auditor.(2) Those persons are—(a) any officer or employee of the company;(b) any person holding or accountable for any of the company’s books,accounts or vouchers;(c) any subsidiary undertaking of the company which is a body corporateincorporated in the United Kingdom;(d) any officer, employee or auditor of any such subsidiary undertaking or anyperson holding or accountable for any books, accounts or vouchers of anysuch subsidiary undertaking;(e) any person who fell within any of paragraphs (a) to (d) at a time to whichthe information or explanations required by the auditor relates or relate.(3) A statement made by a person in response to a requirement under this sectionmay not be used in evidence against him in criminal proceedings except proceedingsfor an offence under section 501.(4) Nothing in this section compels a person to disclose information in respect ofwhich a claim to legal professional privilege (in Scotland, to confidentiality ofcommunications) could be maintained in legal proceedings.Auditors have broad and wide-reaching rights of access to informationfrom the company. As well as access at all times to company books,accounts and vouchers, an auditor may require any information or explanationsthat they think necessary for the performance of their duties froma wide range of persons currently or formerly related to the company.s500 Auditor’s right to information from overseas subsidiaries(1) Where a parent company has a subsidiary undertaking that is not a body corporateincorporated in the United Kingdom, the auditor of the parent companymay require it to obtain from any of the following persons such information orexplanations as he may reasonably require for the purposes of his duties as auditor.(2) Those persons are—(a) the undertaking;(b) any officer, employee or auditor of the undertaking;(c) any person holding or accountable for any of the undertaking’s books,accounts or vouchers;(d) any person who fell within paragraph (b) or (c) at a time to which the informationor explanations relates or relate.

112 | Environmental and social transparency under the Companies Act 2006Annex 4: Auditing of company environmental and social accounting and reporting | 113(3) If so required, the parent company must take all such steps as are reasonablyopen to it to obtain the information or explanations from the person concerned.(4) A statement made by a person in response to a requirement under this sectionmay not be used in evidence against him in criminal proceedings except proceedingsfor an offence under section 501.(5) Nothing in this section compels a person to disclose information in respect ofwhich a claim to legal professional privilege (in Scotland, to confidentiality ofcommunications) could be maintained in legal proceedings.Auditors also have the right to oblige parent companies to take all stepsthat are ‘reasonably open to it’ to secure any information or explanationsthat are necessary for the purposes of the audit from a subsidiary (oremployee of that subsidiary) not subject to UK law.s502 Auditor’s rights in relation to resolutions and meetings(1) In relation to a written resolution proposed to be agreed to by a private company,the company’s auditor is entitled to receive all such communications relating tothe resolution as, by virtue of any provision of Chapter 2 of Part 13 of this Act,are required to be supplied to a member of the company.(2) A company’s auditor is entitled—(a) to receive all notices of, and other communications relating to, any generalmeeting which a member of the company is entitled to receive,(b) to attend any general meeting of the company, and(c) to be heard at any general meeting which he attends on any part of thebusiness of the meeting which concerns him as auditor.(3) Where the auditor is a firm, the right to attend or be heard at a meeting is exercisableby an individual authorised by the firm in writing to act as its representativeat the meeting.Auditors also have considerable rights relating to company general meetings.They are entitled: to receive notice of any meeting; to receive allcommunications relating to a meeting; to attend any meeting; to be heardat any meeting; and to appoint a representative to exercise out any of thoserights.A.4.1.3Requirements for the auditor’s reports495 Auditor’s report on company’s annual accounts(1) A company’s auditor must make a report to the company’s members on all annualaccounts of the company of which copies are, during his tenure of office—(a) in the case of a private company, to be sent out to members under section423;(b)in the case of a public company, to be laid before the company in generalmeeting under section 437.The auditor must make a report, which must accompany the company’sannual accounts and reports. The auditor’s report must satisfy a numberof requirements.Annual accountss495 Auditor’s report on company’s annual accounts(2) The auditor’s report must include—(a) an introduction identifying the annual accounts that are the subject of theaudit and the financial reporting framework that has been applied in theirpreparation, and(b) a description of the scope of the audit identifying the auditing standards inaccordance with which the audit was conducted.(3) The report must state clearly whether, in the auditor’s opinion, the annualaccounts—(a) give a true and fair view—(i) in the case of an individual balance sheet, of the state of affairs of thecompany as at the end of the financial year,(ii) in the case of an individual profit and loss account, of the profit orloss of the company for the financial year,(iii) in the case of group accounts, of the state of affairs as at the end ofthe financial year and of the profit or loss for the financial year ofthe undertakings included in the consolidation as a whole, so far asconcerns members of the company;(b) have been properly prepared in accordance with the relevant financial(c)reporting framework; andhave been prepared in accordance with the requirements of this Act (and,where applicable, Article 4 of the IAS Regulation).Expressions used in this subsection that are defined for the purposes of Part 15(see section 474) have the same meaning as in that Part.(4) The auditor’s report—(a) must be either unqualified or qualified, and(b) must include a reference to any matters to which the auditor wishes to drawattention by way of emphasis without qualifying the report.The auditor’s report must identify the annual accounts being audited, andwhich financial reporting framework was used to prepare them. It mustalso describe the scope of the audit, and the auditing standards which wereapplied in carrying it out. The auditor’s report must either be unqualified(i.e. state that the financial statements give a true and fair view), orqualified (state a significant disagreement with the disclosures made ortechniques employed, or opinion that the audit has been too limited in

114 | Environmental and social transparency under the Companies Act 2006Annex 4: Auditing of company environmental and social accounting and reporting | 115scope). The report must also refer to any matters the auditor wishes todraw attention to without qualifying the report.The auditor’s report must also state clear opinions on a number of issues.The auditor must state their opinion as to whether the accounts give, atboth individual and group level as applicable, a true and fair view of thestate of affairs of the company as at the end of the financial year (in relationto the balance sheet), and of the profit or loss of the company forthe financial year (in relation to the profit and loss account). The auditormust also state an opinion as to whether the accounts have been properlyprepared in accordance with the relevant financial reporting framework,and prepared in accordance with the Companies Act 2006 or Article 4 ofthe IAS Regulation, as applicable.s498 Duties of auditor(1) A company’s auditor, in preparing his report, must carry out such investigationsas will enable him to form an opinion as to—(a) whether adequate accounting records have been kept by the company andreturns adequate for their audit have been received from branches not visitedby him, and(b) whether the company’s individual accounts are in agreement with theaccounting records and returns, and(c) in the case of a quoted company, whether the auditable part of the company’sdirectors’ remuneration report is in agreement with the accountingrecords and returns.(2) If the auditor is of the opinion—(a) that adequate accounting records have not been kept, or that returnsadequate for their audit have not been received from branches not visitedby him, or(b) that the company’s individual accounts are not in agreement with theaccounting records and returns, or(c) in the case of a quoted company, that the auditable part of its directors’remuneration report is not in agreement with the accounting records andreturnsthe auditor shall state that fact in his report.(3) If the auditor fails to obtain all the information and explanations which, to thebest of his knowledge and belief, are necessary for the purposes of his audit, heshall state that fact in his report.(4) If—(a)(b)the requirements of regulations under section 412 (disclosure of directors’benefits: remuneration, pensions and compensation for loss of office) arenot complied with in the annual accounts, orin the case of a quoted company, the requirements of regulations undersection 421 as to information forming the auditable part of the directors’remuneration report are not complied with in that report,the auditor must include in his report, so far as he is reasonably able to do so, astatement giving the required particulars.(5) If the directors of the company have prepared accounts and reports in accordancewith the small companies regime and in the auditor’s opinion they were notentitled so to do, the auditor shall state that fact in his report.Auditors have a range of other duties relating to annual accounts. Auditorsmust carry out all necessary investigations to form an opinion as towhether adequate accounting records have been kept, whether the company’sindividual accounts are in agreement with the accounting recordsand returns, and whether the auditable part of the directors’ remunerationreport is in agreement with the records and returns. Where the auditoris of the opinion that any of the above is not the case, they must state thatfact in their report. If they fail to obtain all information and explanationnecessary for the audit, they must state that fact in the report.Directors’ reports496 Auditor’s report on directors’ reportThe auditor must state in his report on the company’s annual accounts whether in hisopinion the information given in the directors’ report for the financial year forwhich the accounts are prepared is consistent with those accounts.Auditors must make a statement in their report as to whether in their opinionthe directors’ report is consistent with the company annual accounts.There is no legal requirement that the audit have regard to any informationother than the annual accounts, to check for any other inconsistenciesor omissions. 292Information surplus to legal requirementIn the past, company reports have often included environmental or socialinformation beyond minimum legal requirements. For example, manycompanies extensively document their environmental sustainabilityinvestments in their annual report, which is information that prior tothe Companies Act 2006 was not required by law. Therefore the questionarises; how far must this type of information be audited under currentUK law?So far as any of this information can be said to constitute a part of thedirectors’ report, 293 it must be audited according to the legal standard

116 | Environmental and social transparency under the Companies Act 2006Annex 4: Auditing of company environmental and social accounting and reporting | 117explained above. However, some environmental and social informationwill fall below the threshold of what companies are required to reportunder section 417 Companies Act 2006. There is no legal requirement forthe auditor to scrutinize this information.A.4.2AssuranceAssurance is a broader concept than audit. It is an evaluation method thatuses a specified set of standards to assess the quality of an organisation’sreporting, and its underlying systems, processes and culture. 294 Auditing,verification and validation are some of the tools and processes by whichassurance is obtained. It is a voluntary process for companies that wishto go beyond minimum legal requirements. It is heavily associated with‘corporate responsibility’ reporting, and providing scrutiny to this type ofnon-financial information.In the vocabulary of ‘assurance’, greater emphasis is usually placed on theneeds of diverse ‘users’ of the reports. 295 It is also often framed as an aspirationalprocess, the ultimate goal being to assure all users, rather thansolely to certify data with a certain degree of rigour.Thus ‘assurance’ is a broader concept than ‘audit’ (perhaps most accuratelyfinancial auditing might be said to be a specific form of assurance), and ithas less clearly defined edges and limits. Its nebulous character reflectsthe nature of the reporting that it is usually applied to.A.4.2.1Voluntary take-up of external assurance for voluntaryenvironmental and social reportingKPMG’s periodic survey of corporate responsibility reporting in 2005296provided insight into the scale of voluntary take-up of assurance for voluntaryenvironmental and social reporting. It found that globally, anaverage of 33% of N100 297 company corporate responsibility reports containedexternal assurance statements, 298 while 54% of UK N100 companycorporate responsibility reports contained external assurance statements.Interestingly, the statistics show that large UK companies have voluntarilysought assurance statements for their ‘corporate responsibility’ reportingin higher numbers than the global average. 299However, the scope and methodology of the assurance is left entirely tothe individual company’s discretion. Indeed the KPMG 2005 study foundin its detailed analysis of the statements of the G250 (Global Fortune 250companies), 300 that there was considerable variation in the scope of theassurance engagement and the methodologies used, which led to greatlydivergent statements. 301 KPMG found that it ranged from scrutiny solelyof company reporting on management systems at company-selected sites,up to detailed and wide-ranging opinions on aggregated performancedata. 302 However, it found that the majority was restricted to assurance onspecific information or data sets. 303 Only 22% covered the entire corporateresponsibility report. 304While assurance has been undertaken by a fair number of large companiesbased in the UK for their ‘corporate responsibility’ reporting, the standard,scope, and value of the assurance undertakings are highly variableand difficult to understand.A.4.2.2 Types of assurance providerThere are a range of external providers which carry out assurance forenvironmental and social reporting. These providers range from themajor accountancy firms, such as KPMG and PricewaterhouseCoopers,to specialist corporate social responsibility (‘CSR’) consultancies suchas SustainAbility, SD3 and many others worldwide. However, the majoraccountancy firms still dominate the field; in 2005, an average of 58% ofN100 companies used major accountancy firms to carry out assurance ontheir voluntary environmental and social reports. 305New types of assurance provider are also being used to provide greater (ordifferent types of) assurance. A significant example is the use of ‘StakeholderPanels’. Stakeholder panels are groups of experts, ‘stakeholders’, 306or their representatives who are invited by a company to examine someaspects of its policies, actions or performance and deliver reports or statementsto which the company has made a specific commitment to respond. 307While they were originally used mostly in relation to the development ofcompany policies on corporate responsibility, they have found increasingprominence in providing assurance for corporate responsibility reporting.308 When used in relation to reporting, a panel may be used to giveinput to determine the scope of the report, and on the extent to which theexpectations of stakeholders have been met in that regard. Thus they servea different purpose to standard assurance: they usually seek to commenton whether the company is reporting on the right things, not whetherthose things are being reported well. 309

118 | Environmental and social transparency under the Companies Act 2006Annex 4: Auditing of company environmental and social accounting and reporting | 119A.4.2.3 International assurance standards for non-financialreportingInternational standards on assurance give guidance to assurance providerson how best to carry out their work, and provide companies withrecognizable assurance ‘brands’ to apply to their reports, which can helpusers understand the standard of scrutiny that has been applied.The most important are summarized below.i. International Standard on Assurance Engagements (ISAE)3000: ‘Assurance Engagements Other Than Audits orReviews of Historical Financial Information’ISAE 3000 was developed (and subsequently revised) by the InternationalAuditing and Assurance Standards Board (IAASB) of the InternationalFederation of Accountants (IFAC), the body responsible for issuing internationalaccounting and auditing standards for the accounting professions.All members of IFAC, including all Big Four firms, 310 are ‘encouraged’ touse the ISAE 3000 standard. 311AA1000AS seeks to provide guidance for those carrying out sustainabilityassurance. It covers the full range of an organisation’s disclosure andperformance based on three core principles: ‘materiality’; ‘completeness’;and ‘responsiveness’. There are two types of AA1000AS engagement: Type1, which is intended to give stakeholders assurance on the way an organisationmanages sustainability performance, and how it communicatesthis in its sustainability reporting, without verifying the reliability of thereported information; and Type 2, which also involves evaluation of thereliability of specified sustainability performance information.It provides guidance to assurance providers by outlining processes to followand issues to consider when carrying out assurance. It also outlines‘levels’ of AA1000AS assurance (‘high’ and ‘moderate’), and explains whatcharacterises each.ISAE 3000 establishes basic principles and essential procedures for allassurance engagements other than audits or reviews of historical financialinformation (which are covered by ISAs and ISREs). This includes environmental,social and sustainability reports.It sets out guidelines for providers to consider on a range of issues whencarrying out their assurance review, seeking to ensure the best possibleprocess. These include: ethical issues; quality control; engagement acceptance;planning; using the work of an expert; obtaining evidence; documentation;and preparing the assurance report.ii.AA1000 Assurance Standard (AA1000AS)AA1000AS was developed by the UK-based organisation ‘AccountAbility’:the Institute for Social and Ethical Accountability, a body that bringstogether businesses, academics and practitioners to develop ways tomeasure and report on social and ethical performance of organisations.AA1000AS is a voluntary standard, but is internationally recognised andwidely used.

120 | Environmental and social transparency under the Companies Act 2006Annex 5: Regulatory implementation and compliance: the FRRP | 121Annex 5:Regulatory implementation and compliance:the Financial Reporting Review PanelA.5.1 Legal basis 121A.5.2 Membership and appointment 123A.5.3 Powers and capacity 123A.5.4 Procedures 124A.5.4.1A.5.4.2A.5.4.3A.5.4.4Selection of accounts of reports for scrutinyInitial considerationPanel enquiryRevisionsA.5.5 Confidentiality and transparency 128A.5.5.1A.5.5.2GeneralEngagement with complainantsA.5.6 Accountability 131A.5.6.1A.5.6.2To the FRC / BISJudicial reviewA.5.1Legal basiss456 Application to court in respect of defective accounts or reports(1) An application may be made to the court—(a) by the Secretary of State, after having complied with section 455, or(b) by a person authorised by the Secretary of State for the purposes of thissection,for a declaration (in Scotland, a declarator) that the annual accounts of a companydo not comply, or a directors’ report does not comply, with the requirements ofthis Act (or, where applicable, of Article 4 of the IAS Regulation) and for an orderrequiring the directors of the company to prepare revised accounts or a revisedreport.s457 Other persons authorised to apply to the court(1) The Secretary of State may by order (an “authorisation order”) authorise for thepurposes of section 456 any person appearing to him—(a) to have an interest in, and to have satisfactory procedures directed to

122 | Environmental and social transparency under the Companies Act 2006Annex 5: Regulatory implementation and compliance: the FRRP | 123(b)(c)securing, compliance by companies with the requirements of this Act (or,where applicable, of Article 4 of the IAS Regulation) relating to accountsand directors’ reports,to have satisfactory procedures for receiving and investigating complaintsabout companies’ annual accounts and directors’ reports, andotherwise to be a fit and proper person to be authorised.(2) A person may be authorised generally or in respect of particular classes of case,and different persons may be authorised in respect of different classes of case.(5) An authorisation order may contain such requirements or other provisionsrelating to the exercise of functions by the authorised person as appear to theSecretary of State to be appropriate.No such order is to be made unless it appears to the Secretary of State that theperson would, if authorised, exercise his functions as an authorised person inaccordance with the provisions proposed.(6) Where authorisation is revoked, the revoking order may make such provision asthe Secretary of State thinks fit with respect to pending proceedings.The Companies Act 2006 confers power on the Secretary of State to authorise‘a person’ to apply to court in respect of defective company accounts orreports, 312 and set out requirements or provisions for that person as appropriate.The Secretary of State must consider the person to have an interestin securing compliance, and to have satisfactory procedures for receivingand investigating complaints about accounts or reports. The person maybe authorized generally or in respect of particular classes of case, and differentpersons may be authorized in respect of different classes of case.The Companies (Defective Accounts and Directors’ Reports) (Authorised Person)and Supervision of Accounts and Reports (Prescribed Body) Order 2008It appears to the Secretary of State that the Financial Reporting Review Panel is aperson or body—(a)…(b)having an interest in, and having satisfactory procedures directed to—(i) securing compliance by companies with the requirements of theCompanies Act 2006(1) (or, where applicable, Article 4 of the IASRegulation(2)) relating to accounts and directors’ reports;having satisfactory procedures for receiving and investigating complaintsabout the annual accounts and directors’ reports of companies;(c) which is otherwise a fit and proper person to be authorised and a fit andproper body to be appointed;(d) which will exercise its functions as an authorised person and as a prescribedbody in accordance with the requirements of this Order:The Secretary of State makes the following Order in exercise of the powers conferredby…section 457(1), (2), (5) and (6) of the Companies Act 2006The Secretary of State made the Companies (Defective Accounts andDirectors’ Reports) (Authorised Person) and Supervision of Accounts andReports (Prescribed Body) Order 2008 to authorise the FRRP as such a‘person or body’, mandating it to secure compliance by companies with therequirements of the Companies Act 2006 313 relating to company accountsand directors’ reports.A.5.2Membership and appointmentAt the time of writing the FRRP was constituted by one Chairman, twoDeputy Chairmen, twenty-four members and one Secretary. FRRP membersare recruited by public advertisement, and other than the Chairmanand Deputy Chairman, they are unpaid.A.5.3Powers and capacityPursuant to its purpose, the FRRP has a range of legal powers.s459 Power of authorised person to require documents, information and explanations(1) This section applies where it appears to a person who is authorised under section457 that there is, or may be, a question whether a company’s annual accounts ordirectors’ report comply with the requirements of this Act (or, where applicable,of Article 4 of the IAS Regulation).(2) The authorised person may require any of the persons mentioned in subsection(3) to produce any document, or to provide him with any information or explanations,that he may reasonably require for the purpose of—(a) discovering whether there are grounds for an application to the courtunder section 456, or(b) deciding whether to make such an application.(3) Those persons are—(a) the company;(b) any officer, employee, or auditor of the company;(c) any persons who fell within paragraph (b) at a time to which the documentor information required by the authorised person relates.(4) If a person fails to comply with such a requirement, the authorised person mayapply to the court.(5) If it appears to the court that the person has failed to comply with a requirementunder subsection (2), it may order the person to take such steps as it directs forsecuring that the documents are produced or the information or explanations areprovided.(7) Nothing in this section compels any person to disclose documents or informationin respect of which a claim to legal professional privilege (in Scotland, to

124 | Environmental and social transparency under the Companies Act 2006Annex 5: Regulatory implementation and compliance: the FRRP | 125confidentiality of communications) could be maintained in legal proceedings.(8) In this section “document” includes information recorded in any form.Where it appears to the FRRP that a company’s accounts or reports are ormay be non-compliant with the requirements of the Companies Act 2006,the FRRP has powers to require companies, officers, employees or auditorsof the company to produce any ‘documents’ (information recorded in anyform), or provide any information or explanations which it may reasonablyrequire, for the purposes of discovering whether there are grounds foran application to court in respect of defective reports, or deciding whetherto make such an application. It also has a right to apply to a court to securecompliance with any of these demands, if within the scope of the law. Anexception applies to information which could be classed as subject to legalprofessional privilege. 314s456 Application to court in respect of defective accounts or reports(1) An application may be made to the court—…(b)by a person authorised by the Secretary of State for the purposes of thissection,for a declaration (in Scotland, a declarator) that the annual accounts of a companydo not comply, or a directors’ report does not comply, with the requirements ofthis Act (or, where applicable, of Article 4 of the IAS Regulation) and for an orderrequiring the directors of the company to prepare revised accounts or a revisedreport.The FRRP is authorised to make an application to court for a declarationof a company’s non-compliance with legal reporting standards, and foran order requiring the directors of the company to revise the accounts orreports. In this situation the court has a range of powers to implementcompliance. See Annex 5.4.4 below for details of these powers.The FRRP also maintains a legal costs fund of £2million for the purposesof pursuing any of the above court orders and/or declarations. 315A.5.4 Procedures 316A.5.4.1Selection of accounts or reports for scrutinyThere are a number of ways in which the FRRP decides which companyaccounts or reports to examine:- Sectoral focus – The FRRP liaises with the FSA and its ‘Standing AdvisoryGroup’, to identify which sectors of the economy are under strainor likely to give rise to difficult issues, and it then chooses a numberof key sectors, reviewing a selection of accounts in each. 317 Its prioritysectors for 2008/09 are banking, retail, travel and leisure, commercialproperty and house builders. 318- Risk model – The FRRP is developing a risk model to identify specificcases where accounting problems are more likely (e.g. cases of poorcorporate governance).- Topical issues – The FRRP looks at ‘topical’ accounting issues. Forexample, in late 2008 it is applying close scrutiny to impairment 319 andliquidity 320 in reporting.- Complaints – The FRRP responds to complaints from the public, thepress and the City.- Public authority request – If requested by the Secretary of State forBIS, Treasury, Bank of England, FSA, or HM Revenue & Customs, theFRRP will normally be prepared to review a specific set of accountsand deliver its findings to the authority concerned, drawing attentionto any matters which the FRRP believes to be relevant to that authority’sregulatory function. 321Selection is based on the FRRP’s assessment of the risk of non-complianceand the risk of significant consequences if there is non-compliance. 322A.5.4.2Initial considerationReports are reviewed by FRRP staff, who draw up a recommendation forthe Chairman and Deputy Chairman, who then decide whether there is, ormay be, a question of non-compliance, and therefore whether to proceed.If the Chairmen are of the view that there may be a question of non-compliance,but require more information to decide whether there may havebeen a breach, they will write to the company Chairman (and, if appropriateFinance Director) to request documents, information or explanationin relation to their doubt. If necessary they may for this purpose use theirpowers under the Companies Act 2006, as detailed above.

126 | Environmental and social transparency under the Companies Act 2006Annex 5: Regulatory implementation and compliance: the FRRP | 127A.5.4.3Panel enquiryIf the Chairmen form the view that there may have been a breach ofrequirements worthy of investigation and correction, they will open anenquiry, and form a ‘group’ of FRRP members to conduct the enquiry.The company / entity under enquiry will be formally notified of the specificsof the enquiry and the members of the appointed group, and will begiven the chance to raise any perceived conflicts of interest in the group,and comment on the matters raised by the enquiry.The group will proceed to put its concerns to the company directors incorrespondence and at meetings. The FRRP encourages directors to consulttheir auditors, to involve their audit committee and to take any otheradvice they feel they need.The initial process is primarily informal, and the group aims to reachagreement with the directors of the company by persuasion. 323 It seeksto achieve voluntary revision of reports where they are non-compliant.However, if agreement cannot be reached (the group having formed aview that the report is in breach of requirements and the company beingunwilling to voluntarily revise the report), the group may decide to seek acourt order for compliance, at which point they will inform the company/ entity of their intention and offer a final opportunity to voluntarily reachagreement.A.5.4.4RevisionsThe FRRP exercises discretion over how accounts or reports must berevised, having regard to the context. Factors it will take into account are:nature and effect of the defect; the need to protect users of accounts; theneed to correct / prevent a false market operating; timing of the entity’sreporting cycle).Depending on context, voluntary revision may be effected by way of:- full revision and reissue of reports;- supplementary note to the reports; or- corrective statement issued separately or in the next interim report,along with a corrective statement issued in the following annualreport.If an order is to be made by a court, the court has broad powers, and discretionas to the form of revisory action it may take.s456 Application to court in respect of defective accounts or reports(1) An application may be made to the court—(a) by the Secretary of State, after having complied with section 455, or(b) by a person authorised by the Secretary of State for the purposes of thissection,for a declaration (in Scotland, a declarator) that the annual accounts of a companydo not comply, or a directors’ report does not comply, with the requirements ofthis Act (or, where applicable, of Article 4 of the IAS Regulation) and for an orderrequiring the directors of the company to prepare revised accounts or a revisedreport.(2) Notice of the application, together with a general statement of the matters at issuein the proceedings, shall be given by the applicant to the registrar for registration.(3) If the court orders the preparation of revised accounts, it may give directions asto—(a) the auditing of the accounts,(b) the revision of any directors’ remuneration report, directors’ report orsummary financial statement, and(c) the taking of steps by the directors to bring the making of the order to thenotice of persons likely to rely on the previous accounts,and such other matters as the court thinks fit.(4) If the court orders the preparation of a revised directors’ report it may give directionsas to—(a) the review of the report by the auditors,(b) the revision of any summary financial statement,(c) the taking of steps by the directors to bring the making of the order to thenotice of persons likely to rely on the previous report, and(d) such other matters as the court thinks fit.(5) If the court finds that the accounts or report did not comply with the requirementsof this Act (or, where applicable, of Article 4 of the IAS Regulation) it mayorder that all or part of—(a)(b)the costs (in Scotland, expenses) of and incidental to the application, andany reasonable expenses incurred by the company in connection with or inconsequence of the preparation of revised accounts or a revised report,are to be borne by such of the directors as were party to the approval of the defectiveaccounts or report.For this purpose every director of the company at the time of the approval of theaccounts or report shall be taken to have been a party to the approval unless heshows that he took all reasonable steps to prevent that approval.(6) Where the court makes an order under subsection (5) it shall have regard towhether the directors party to the approval of the defective accounts or reportknew or ought to have known that the accounts or report did not comply with therequirements of this Act (or, where applicable, of Article 4 of the IAS Regulation),and it may exclude one or more directors from the order or order the payment of

128 | Environmental and social transparency under the Companies Act 2006Annex 5: Regulatory implementation and compliance: the FRRP | 129different amounts by different directors.(7) On the conclusion of proceedings on an application under this section, the applicantmust send to the registrar for registration a copy of the court order or, as thecase may be, give notice to the registrar that the application has failed or beenwithdrawn.(8) The provisions of this section apply equally to revised annual accounts andrevised directors’ reports, in which case they have effect as if the referencesto revised accounts or reports were references to further revised accounts orreports.The court may make an order for the accounts or directors’ report of acompany to be revised. It may also give directions as to the audit of theaccounts or report, the revision of any summary financial statement, thetaking of steps by directors’ to bring the order to the attention of anyonelikely to have relied on the accounts or reports, or any other matters thatthe court thinks fit.If the court finds that the accounts or reports were not compliant, the costsof and incidental to the application, and any reasonable costs incurred bythe company in revising the accounts or reports must be borne by thedirectors who were party to the approval of the defective accounts orreports.A.5.5A.5.5.1Confidentiality and transparencyGeneralThe FRRP is subject to legal restrictions on disclosure and confidentiality.s460 Restrictions on disclosure of information obtained under compulsory powers(1) This section applies to information (in whatever form) obtained in pursuance ofa requirement or order under section 459 (power of authorised person to requiredocuments etc) that relates to the private affairs of an individual or to any particularbusiness.(2) No such information may, during the lifetime of that individual or so long asthat business continues to be carried on, be disclosed without the consent of thatindividual or the person for the time being carrying on that business.(3) This does not apply—(a) to disclosure permitted by section 461 (permitted disclosure of informationobtained under compulsory powers), or(b) to the disclosure of information that is or has been available to the publicfrom another source.(4) A person who discloses information in contravention of this section commits anoffence, unless—(a) he did not know, and had no reason to suspect, that the information hadbeen disclosed under section 459, or(b) he took all reasonable steps and exercised all due diligence to avoid thecommission of the offence.(5) A person guilty of an offence under this section is liable—(a) on conviction on indictment, to imprisonment for a term not exceedingtwo years or a fine (or both);(b) on summary conviction—(i) in England and Wales, to imprisonment for a term not exceedingtwelve months or to a fine not exceeding the statutory maximum (orboth);(ii) in Scotland or Northern Ireland, to imprisonment for a term notexceeding six months, or to a fine not exceeding the statutory maximum(or both).s461 Permitted disclosure of information obtained under compulsory powers(1) The prohibition in section 460 of the disclosure of information obtained in pursuanceof a requirement or order under section 459 (power of authorized personto require documents etc) that relates to the private affairs of an individual or toany particular business has effect subject to the following exceptions.(2) It does not apply to the disclosure of information for the purpose of facilitatingthe carrying out by the authorised person of his functions under section 456.(3) It does not apply to disclosure to—(a) the Secretary of State,(b) the Department of Enterprise, Trade and Investment for Northern Ireland,(c) the Treasury,(d) the Bank of England,(e) the Financial Services Authority, or(f) the Commissioners for Her Majesty’s Revenue and Customs.(4) It does not apply to disclosure—(a) for the purpose of assisting a body designated by an order under section 46of the Companies Act 1989 (c. 40) (delegation of functions of the Secretaryof State) to exercise its functions under Part 2 of that Act;(b) with a view to the institution of, or otherwise for the purposes of, disciplinaryproceedings relating to the performance by an accountant or auditorof his professional duties;(c) for the purpose of enabling or assisting the Secretary of State or the Treasuryto exercise any of their functions under any of the following—(i) the Companies Acts,(ii) Part 5 of the Criminal Justice Act 1993 (c. 36) (insider dealing),(iii) the Insolvency Act 1986 (c. 45) or the Insolvency (Northern Ireland)Order 1989 (S.I. 1989/2405 (N.I. 19)),(iv) the Company Directors Disqualification Act 1986 (c. 46) or theCompany Directors Disqualification (Northern Ireland) Order 2002(S.I. 2002/3150 (N.I. 4)),

130 | Environmental and social transparency under the Companies Act 2006Annex 5: Regulatory implementation and compliance: the FRRP | 131(v) the Financial Services and Markets Act 2000 (c. 8);(d) for the purpose of enabling or assisting the Department of Enterprise, Tradeand Investment for Northern Ireland to exercise any powers conferred onit by the enactments relating to companies, directors’ disqualification orinsolvency;(e) for the purpose of enabling or assisting the Bank of England to exercise itsfunctions;(f) for the purpose of enabling or assisting the Commissioners for Her Majesty’sRevenue and Customs to exercise their functions;(g) for the purpose of enabling or assisting the Financial Services Authority toexercise its functions under any of the following—(i) the legislation relating to friendly societies or to industrial andprovident societies,(ii) the Building Societies Act 1986 (c. 53),(iii) Part 7 of the Companies Act 1989 (c. 40),(iv) the Financial Services and Markets Act 2000; or(h) in pursuance of any Community obligation.(5) It does not apply to disclosure to a body exercising functions of a public natureunder legislation in any country or territory outside the United Kingdom thatappear to the authorised person to be similar to his functions under section 456for the purpose of enabling or assisting that body to exercise those functions.(6) In determining whether to disclose information to a body in accordance withsubsection (5), the authorised person must have regard to the following considerations—(a) whether the use which the body is likely to make of the information issufficiently important to justify making the disclosure;(b) whether the body has adequate arrangements to prevent the informationfrom being used or further disclosed other than—(i) for the purposes of carrying out the functions mentioned in thatsubsection, or(ii) for other purposes substantially similar to those for which informationdisclosed to the authorised person could be used or furtherdisclosed.(7) Nothing in this section authorises the making of a disclosure in contravention ofthe Data Protection Act 1998 (c. 29).Under the Companies Act 2006, information obtained by the FRRP bycourt order cannot be disclosed if it relates to the ‘private affairs’ of anindividual or ‘any particular business’, unless consent is given. However,certain exceptions apply. Most importantly, the prohibition on disclosuredoes not apply if disclosure is to facilitate the carrying out of the FRRP’spurposes. Nor does it apply if the information is or has already been availableto the public from another source.maintained that this is essential to ensure co-operation from the companieswhose accounts it is reviewing. 324The FRRP’s policy is neither to confirm nor deny that it is enquiring into,or has ever enquired into, a particular report, unless the Chairman agreeswith the Chairman of the FRC that such a statement would be in the ‘publicinterest’.Where the directors agree to take remedial action, the FRRP will issue apress notice, but will not comment on or discuss its conclusions furtherin public. 325A.5.5.2 Engagement with complainantsIf a complaint is made by a member of the public, press or City, but noaction is taken by the FRRP, it will explain in a letter to the complainantwhy it has decided to take no further action, but will not enter into anyfurther discussion about the decision. 326 It justifies this by saying that anycomplaint ‘will have been carefully considered’. 327Where the directors agree to take remedial action, the FRRP will issue aninitial statement to the complainant, but will not comment on or discussits conclusions further in private with them.A.5.6A.5.6.1AccountabilityTo the FRC / BISCompanies Act 2006Financial Reporting CouncilOperating bodiesSupervisory function for company annual accountsand directors’ reportSecretary of State (BIS)Authorisation to share supervisoryfunctionHowever, the FRRP reportedly takes confidentiality beyond legal requirements,and treats all information that it obtains as confidential. It hasAccounting Standards Boardand other operating bodiesFinancial ReportingReview Panel

132 | Environmental and social transparency under the Companies Act 2006Annex 6: UK law governing company AGMs | 133Annex 6:A.5.6.2 Judicial reviewhibiting order, quashing order or injunction. 332 A.6.5.1 Information to be made available on a websiteAs a body performing public duties and functions, the FRRP could potentiallybe subject to judicial review, 328 regarding measures, actions or omissionsit takes in relation to its powers and authority.UK law governing company AGMsA.6.1 Requirement to hold an AGM 135Body performing public duties or functionsA.6.2 Discussion of environmental and social matters at company 135AGMsA claim for judicial review may be brought against any person or bodyA.6.2.1 Annual Reportingperforming public duties or functions. 329 A.6.2.2 ResolutionsPersons exercising powers orA.6.2.3 Matters in the business to be dealt with at the AGMperforming duties deriving from statute are generally seen as public bodiesA.6.2.4 Questionsfor these purposes, 330 and omissions done in the exercise of their statu-tory functions are generally amenable to judicial review.A.6.3 Rights of attendance at company AGMs 140A.6.3.1 Members of the companyReview of a decision, action, or failure to actA.6.3.2 Proxies appointed by a memberJudicial review can apply, under Rule 54.1(2)(a) Civil Procedure Rules, toA.6.3.3 Representatives of corporationsA.6.3.4 The media‘a decision, action or failure to act in relation to the exercise of a publicA.6.3.5 Guestsfunction’. The courts have taken a broad view of measures that may besubject to judicial review. 331A.6.4 Proxy rights at company AGMs 142A.6.4.1 To attend, speak and voteRemediesA.6.4.2 Relating to resolutionsA court may issue a range of remedies, including a mandatory order, pro-A.6.5 Transparency requirements for company AGMs 143A.6.5.2 Meeting transcriptsA.6.5.3 Media coverageWithin public listed companies, the primary executive bodies are (i) theboard of directors and (ii) its members 333 acting in general meeting. 334 Thedirectors conduct the day-to-day business of a company. They do so onbehalf of, and in the interests of, the shareholders, who have invested theircapital in the company. One of the main ways that shareholders exercisecontrol over their investment is through votes, actions and discussionsat general meetings. 335 Accordingly, the law which governs shareholders’meetings has sometimes been called the ‘machinery of corporate democracy’,and Annual General Meetings (‘AGMs’) are generally regarded asthe key mechanism for promoting transparency and accountability in themanagement of the company’s affairs. 336

134 | Environmental and social transparency under the Companies Act 2006Annex 6: UK law governing company AGMs | 135As seen in the main body of this review, the annual accounts and reportsare laid before the shareholders at the AGM, and discussion at the AGMconstitutes a key element in the reporting process. The AGM provides animportant opportunity for scrutiny and questioning, to ensure that thecompany directors are appropriately recognizing, reporting and managingissues relating to the business of the company, including environmentaland social matters.The rules for the running and regulation of any individual company’sinternal affairs are held in the company’s ‘articles of association’. Historically,companies have to a great extent been allowed to manage andregulate their internal affairs. 337 The role of company law in internalcorporate governance is to set baselines and a framework of acceptableinternal company practice. This is what the Companies Act 2006 does inrelation to AGMs.The provisions of the Companies Act 2006 which relate to meetings andresolutions came into force in October 2007. 338The Companies Act 2006 has since been amended and supplemented bythe Companies (Shareholders’ Rights) Regulations 2009 (‘the Shareholders’Rights Regulations’), which make a number of changes to the lawregarding company general meetings, effective as of 3 August 2009. 339Legislative quotation of the Companies Act 2006 below has been amendedaccordingly.‘Traded’ companiesA new definition introduced by the Shareholders’ Rights Regulations wasthat of a ‘traded company’, to which many of the new requirements apply.s360C. Meaning of “traded company”In this Part, “traded company” means a company any shares of which—(a) carry rights to vote at general meetings, and(b) are admitted to trading on a regulated market in an EEA State by or withthe consent of the company.‘Traded’ companies are those with shares voluntarily traded on any regulatedmarket in the European Economic Area (EEA). This includes theLondon Stock Exchange, as well as the PLUS-listed market and manymore. 340 It does not include the Alternative Investment Market (AIM).A.6.1Requirement to hold an AGMs336 Public companies: annual general meeting(1) Every public company must hold a general meeting as its annual general meetingin each period of 6 months beginning with the day following its accounting referencedate (in addition to any other meetings held during that period).s307A. Notice required of general meeting: certain meetings of traded companies(1) A general meeting of a traded company must be called by notice of—(a) in a case where conditions A to C (set out below) are met, at least 14 days;(b) in any other case, at least 21 days.(2) Condition A is that the general meeting is not an annual general meeting.Public companies must hold an AGM within 6 months of the end of thecompany’s financial year. A minimum of 21 days notice must be given tothose who have a right to notice.Many of the legal provisions relating to AGMs also apply to other company‘general meetings’. However, for the purposes of this review, reference willbe made to the specific context of AGMs.A.6.2Discussion of environmental and social matters atcompany AGMsThere are a number of opportunities at company AGMs for the discussionof environmental and social matters related to the business of thecompany.A.6.2.1Annual ReportingAs seen elsewhere in this review, UK companies are required to prepareannual accounts to give a true and fair view of the assets, liabilities, financialposition and profit or loss of the company, 341 and an annual directors’report to provide a range of contextual information.s437 Public companies: laying of accounts and reports before general meeting(1) The directors of a public company must lay before the company in general meetingcopies of its annual accounts and reports.(2) This section must be complied with not later than the end of the period for filingthe accounts and reports in question.(3) In the Companies Acts “accounts meeting”, in relation to a public company,

136 | Environmental and social transparency under the Companies Act 2006Annex 6: UK law governing company AGMs | 137means a general meeting of the company at which the company’s annual accountsand reports are (or are to be) laid in accordance with this section.The Companies Act 2006 requires that the annual accounts and reportsmust be ‘laid’ before the company in general meeting, which in practicewill be the AGM. There is no legal requirement that the annual reportsneed the shareholders’ approval or acceptance. Shareholders have no legalright to reject them. 342 Furthermore, there is no explicit provision in lawor guidance as to what the process of ‘laying’ the reports involves; whetherthere must be the opportunity for specific discussion of the accounts orreports. However, in practice there will always be the opportunity fordiscussion of the reports at the AGM.As discussed in the main body of this review, the AGM constitutes oneof the key opportunities for the annual accounts and reports prepared bycompany directors to be scrutinized, and the main opportunity for shareholdersto ask questions to clarify and ensure the accuracy and proprietyof reporting. This is extremely important for the proper internal workingsof the company. It is needed to ensure transparency between directorsand shareholders, to encourage shareholders to be engaged and informed,and to provide the opportunity for shareholders to exercise control overtheir investment and the future of the company.A.6.2.2 ResolutionsAt AGMs, resolutions are put to the shareholders for voting, on all mannerof company activities. Resolutions provide an opportunity for environmentaland social matters associated with a company’s activities to bediscussed at the AGM. 343s338 Public companies: members’ power to require circulation of resolutions forAGMs(1) The members of a public company may require the company to give, to membersof the company entitled to receive notice of the next annual general meeting,notice of a resolution which may properly be moved and is intended to be movedat that meeting.(2) A resolution may properly be moved at an annual general meeting unless—(a) it would, if passed, be ineffective (whether by reason of inconsistency withany enactment or the company’s constitution or otherwise),(b) it is defamatory of any person, or(c) it is frivolous or vexatious.(3) A company is required to give notice of a resolution once it has received requeststhat it do so from—(a) members representing at least 5% of the total voting rights of all the memberswho have a right to vote on the resolution at the annual general meetingto which the requests relate (excluding any voting rights attached to anyshares in the company held as treasury shares), or(b) at least 100 members who have a right to vote on the resolution at the annualgeneral meeting to which the requests relate and hold shares in the companyon which there has been paid up an average sum, per member, of atleast £100.See also section 153 (exercise of rights where shares held on behalf of others).(4) A request—(a) may be in hard copy form or in electronic form,(b) must identify the resolution of which notice is to be given,(c) must be authenticated by the person or persons making it, and(d) must be received by the company not later than—(i) 6 weeks before the annual general meeting to which the requestsrelate, or(ii) if later, the time at which notice is given of that meeting.s314 Members’ power to require circulation of statements(1) The members of a company may require the company to circulate, to membersof the company entitled to receive notice of a general meeting, a statement of notmore than 1,000 words with respect to—(a) a matter referred to in a proposed resolution to be dealt with at that meeting,or(b) other business to be dealt with at that meeting.(2) A company is required to circulate a statement once it has received requests to doso from—(a) members representing at least 5% of the total voting rights of all the memberswho have a relevant right to vote (excluding any voting rights attachedto any shares in the company held as treasury shares), or(b) at least 100 members who have a relevant right to vote and hold shares inthe company on which there has been paid up an average sum, per member,of at least £100.See also section 153 (exercise of rights where shares held on behalf of others).(3) In subsection (2), a “relevant right to vote” means—(a) in relation to a statement with respect to a matter referred to in a proposedresolution, a right to vote on that resolution at the meeting to which therequests relate, and(b) in relation to any other statement, a right to vote at the meeting to whichthe requests relate.(4) A request—(a) may be in hard copy form or in electronic form,(b) must identify the statement to be circulated,(c) must be authenticated by the person or persons making it, and(d) must be received by the company at least one week before the meeting towhich it relates.

138 | Environmental and social transparency under the Companies Act 2006Annex 6: UK law governing company AGMs | 139A number of resolutions at a meeting will be proposed by the directors,relating to matters such as the appointment of auditors and the fixing oftheir fees, or the election of new directors where some are retiring. However,shareholders can also propose resolutions for AGMs if they act insufficient numbers, 344 and they may require their proposed resolution to becirculated to all those with a right to attend the meeting. 345 These memberresolutions may relate to any matter of company activity or governance,provided that: it would not, if passed, be ineffective (whether by reason ofinconsistency with any enactment or the company’s articles or otherwise);it is not defamatory of any person; and it is not ‘frivolous or vexatious’.Shareholders may also require the circulation of a statement of up to 1,000words relating to the resolution, when acting in sufficient numbers. 346This mechanism provides an opportunity for shareholders to raise environmentaland social matters for discussion and vote at the AGM, and tocirculate information to support that discussion.A.6.2.3 Matters in the business to be dealt with at the AGMEnvironmental and social matters associated with the company’s businessmay also be added to the business to be dealt with at the AGM.338A. Traded companies: members’ power to include other matters in businessdealt with at AGM(1) The members of a traded company may request the company to include in thebusiness to be dealt with at an annual general meeting any matter (other than aproposed resolution) which may properly be included in the business.(2) A matter may properly be included in the business at an annual general meetingunless –(a) it is defamatory of any person, or(b) it is frivolous or vexatious.(3) A company is required to include such a matter once it has received requests thatit do so from—(a) members representing at least 5% of the total voting rights of all the memberswho have a right to vote at the meeting, or(b) at least 100 members who have a right to vote at the meeting and holdshares in the company on which there has been paid up an average sum,per member, of at least £100.See also section 153 (exercise of rights where shares held on behalf of others).(4) A request—(a) may be in hard copy form or in electronic form,(b) must identify the matter to be included in the business,(c)(d)must be accompanied by a statement setting out the grounds for therequest, andmust be authenticated by the person or persons making it.(5) A request must be received by the company not later than—(a) 6 weeks before the meeting, or(b) if later, the time at which notice is given of the meeting.Shareholders of traded companies may require the inclusion of a specificmatter in the business to be dealt with at the AGM if they act in sufficientnumber. The number of members required is the same as that requiredto require circulation of a resolution. 347 The item of business cannot bedefamatory of any person, frivolous or vexatious.Shareholders may also require the circulation of a statement of up to 1,000words relating to that matter to be dealt with at the meeting, when actingin sufficient numbers. 348This mechanism provides an alternative opportunity for shareholders toraise environmental and social matters for discussion at the AGM.A.6.2.4QuestionsAt company AGMs, shareholders may ask questions of the directors relatingto environmental and social matters.s319A. Traded companies: questions at meetings(1) At a general meeting of a traded company, the company must cause to beanswered any question relating to the business being dealt with at the meetingput by a member attending the meeting.(2) No such answer need be given—(a) if to do so would—(i) interfere unduly with the preparation for the meeting, or(ii) involve the disclosure of confidential information;(b) if the answer has already been given on a website in the form of an answerto a question; or(c) if it is undesirable in the interests of the company or the good order of themeeting that the question be answered.Traded companies are now under a general legal duty to ensure that anyquestions from shareholders at an AGM are answered. The company isonly exempt from this duty if: to answer it would interfere ‘unduly’ withthe preparation for the meeting or involve the disclosure of confidentialinformation; the answer has already been given on a website in the form

140 | Environmental and social transparency under the Companies Act 2006Annex 6: UK law governing company AGMs | 141of an answer to a question; or ‘it is undesirable in the interests of the companyor the good order of the meeting that the question be answered’.This provision confirms the right for environmental and social mattersto be raised by individual shareholders (or proxies, see below), and placesa general statutory duty on the company to ensure that any queries areanswered, other than in particular cases.A.6.3A.6.3.1Rights of attendance at company AGMsMembers of the companyCompany AGMs are a key forum through which shareholders exercisecontrol over their investment in a public company. A central purpose ofAGMs is for directors to engage with shareholders on matters relating tothe company’s business. Despite this, there is no explicit statutory rightfor all members of the company to attend the AGM.However, in practice it would be highly unlikely and controversial for acompany to seek to disenfranchise their shareholders or a class of shareholdersfrom attending the AGM, and such restrictions would be difficultto push through the corporate structure without very broad support fromshareholders. 349A.6.3.2 Proxies appointed by a memberA member of the company who is entitled to attend the AGM also has theright to appoint a ‘proxy’ to attend the AGM in their place.s324 Rights to appoint proxies(1) A member of a company is entitled to appoint another person as his proxy toexercise all or any of his rights to attend and to speak and vote at a meeting of thecompany.(2) In the case of a company having a share capital, a member may appoint morethan one proxy in relation to a meeting, provided that each proxy is appointed toexercise the rights attached to a different share or shares held by him, or (as thecase may be) to a different £10, or multiple of £10, of stock held by him.s325 Notice of meeting to contain statement of rights(1) In every notice calling a meeting of a company there must appear, with reasonableprominence, a statement informing the member of—(a)(b)his rights under section 324, andany more extensive rights conferred by the company’s articles to appointmore than one proxy.Any person may be granted a right of access to company meetings if theyare appointed as a proxy by a shareholder with a right of access. Indeed, ashareholder who holds a number of shares may appoint multiple proxies,each attached to different shares. Companies must clearly set out the rightof shareholders to appoint proxies in the notice of the AGM.Proxies are appointed using a ‘form of proxy’, which must be deliveredto the company to be processed. In the case of traded companies, thecompany may require certain evidence as regards the proxy’s identity andauthority. In the case of all companies, the deadline for delivery of proxyforms must not be earlier than 48 hours before the meeting (excludingnon-working days). 350A.6.3.3 Representatives of corporationss323 Representation of corporations at meetings(1) If a corporation (whether or not a company within the meaning of this Act) isa member of a company, it may by resolution of its directors or other governingbody authorise a person or persons to act as its representative or representativesat any meeting of the company.Where a corporation is a shareholder, it may authorize a person or multiplepersons to act as representative(s) at the AGM.A.6.3.4The mediaThe media have no statutory right of access to company AGMs. In practicethey usually are allowed access, and some companies even have a rightof access entrenched in their articles of association. However, whetherthe media are given access or not is left to the discretion of the individualcompany.A.6.3.5 GuestsCompanies may voluntarily allow guests to attend AGMs. There is nolegal provision for this.

142 | Environmental and social transparency under the Companies Act 2006Annex 6: UK law governing company AGMs | 143A.6.4Proxy rights at company AGMsAs mentioned elsewhere in this review, company AGMs operate as forumsto provide scrutiny to the annual reporting process. This includes theprovision of scrutiny to the company’s management of environmental andsocial matters. As part of this, shareholders regularly appoint individualswho have been affected by company activities (or their representatives) asproxies so that they may attend and make representations to the shareholdersand directors as to the realities of company practices. As proxies,individuals have a range of legal rights at company AGMs.A.6.4.1To attend, speak and votePreviously, many public companies’ articles would not have allowedproxies to speak or vote at meetings. 351 The Companies Act 2006 nowunequivocally provides proxies with the same right to speak at meetingsas the member that appoints them would have had.s324 Rights to appoint proxies(1) A member of a company is entitled to appoint another person as his proxy toexercise all or any of his rights to attend and to speak and vote at a meeting of thecompany.s324A. Obligation of proxy to vote in accordance with instructionsA proxy must vote in accordance with any instructions given by the member by whomthe proxy is appointed.Proxies are entitled to attend, speak and vote at AGMs, to the exact extentthat the shareholder who appointed them would have been. They areobliged to vote in accordance with any instructions given by the memberthat appointed them.A.6.4.2Relating to resolutionsResolutions are voted on at AGMs. 352 If voted on by a show of hands,each member present has one vote, subject to the company’s Articles ofAssociation. 353 Companies will now often choose to conduct voting byelectronic poll at the AGM, in which case voting will take account of specificallocations of voting rights.As we have already seen, under section 324(1), proxies are entitled to thesame voting rights at AGMs as the shareholder that appointed them.s285 Voting by proxy(1) On a vote on a resolution on a show of hands at a meeting, every proxy presentwho has been duly appointed by one or more members entitled to vote on theresolution has one vote.This is subject to subsection (2).(2) On a vote on a resolution on a show of hands at a meeting, a proxy has one votefor and one vote against the resolution if—(a) the proxy has been duly appointed by more than one member entitled tovote on the resolution, and(b) the proxy has been instructed by one or more of those members to vote forthe resolution and by one or more other of those members to vote againstit.(3) On a poll taken at a meeting of a company all or any of the voting rights of amember may be exercised by one or more duly appointed proxies.(4) Where a member appoints more than one proxy, subsection (3) does not authorisethe exercise by the proxies taken together of more extensive voting rights thancould be exercised by the member in person.(5) Subsections (1) and (2) have effect subject to any provision of the company’s articles.Proxies are usually entitled to one vote on a show of hands. If they arerepresenting two or more shareholders who have instructed the proxy tovote in different ways, the proxy has two votes. However, these rights aresubject to the provisions of the company’s articles of association. Wherevoting is conducted by poll at the meeting, proxies may exercise all votingrights of the members that they represent.The Companies Act 2006 does not provide the right for proxies to proposeto move a resolution, as proposing a resolution does not require physicalattendance at the meeting. 354 Therefore this right remains attached to theshareholder only.A.6.5A.6.5.1Transparency requirements for company AGMsInformation to be made available on a websiteThe Shareholders’ Rights Regulations introduced a number of new transparencyrequirements for traded companies in relation to the AGM.

144 | Environmental and social transparency under the Companies Act 2006Annex 6: UK law governing company AGMs | 145s311A. Traded companies: publication of information in advance of generalmeeting(1) A traded company must ensure that the following information relating to a generalmeeting of the company is made available on a website—(a) the matters set out in the notice of the meeting;(b) the total numbers of—(i) shares in the company, and(ii) shares of each class,in respect of which members are entitled to exercise voting rights at themeeting;(c) the totals of the voting rights that members are entitled to exercise at themeeting in respect of the shares of each class;(d) members’ statements, members’ resolutions and members’ matters of businessreceived by the company after the first date on which notice of themeeting is given.(2) The information must be made available on a website that—(a) is maintained by or on behalf of the company, and(b) identifies the company.(3) Access to the information on the website, and the ability to obtain a hard copy ofthe information from the website, must not be conditional on payment of a fee orotherwise restricted.(4) The information—(a) must be made available—(i) in the case of information required by subsection (1)(a) to (c), on orbefore the first date on which notice of the meeting is given, and(ii) in the case of information required by subsection (1)(d), as soon asreasonably practicable, and(b) must be kept available throughout the period of two years beginning withthe date on which it is first made available on a website in accordance withthis section.(5) A failure to make information available throughout the period specified in subsection(4)(b) is disregarded if—(a) the information is made available on the website for part of that period,and(b) the failure is wholly attributable to circumstances that it would not be reasonableto have expected the company to prevent or avoid.(6) The amounts mentioned in subsection (1)(b) and (c) must be ascertained at thelatest practicable time before the first date on which notice of the meeting isgiven.(7) Failure to comply with this section does not affect the validity of the meeting orof anything done at the meeting.(8) If this section is not complied with as respects any meeting, an offence is committedby every officer of the company who is in default.(9) A person guilty of an offence under this section is liable on summary convictionto a fine not exceeding level 3 on the standard scale.Traded companies are now required to make specific items and informationrelating to the AGM available on a publicly accessible website.Companies must publish information on shareholding (to be made availablefrom the date of notice), but also all members’ statements, members’resolutions and members’ matters of business received before the first datewhen notice of the AGM is given (to be made available ‘as soon as reasonablypracticable’). This information must be kept available for two yearsfrom the date that it is made available.s341 Results of poll to be made available on website(1) Where a poll is taken at a general meeting of a quoted company, the companymust ensure that the following information is made available on a website—(a) the date of the meeting,(b) the text of the resolution or, as the case may be, a description of the subjectmatter of the poll,(c) the number of votes cast in favour, and(d) the number of votes cast against.Quoted companies must also make the results of any poll taken at an AGMavailable on a website for a period of 2 years.A.6.5.2 Meeting transcriptss355 Records of resolutions and meetings etc(1) Every company must keep records comprising—(a) copies of all resolutions of members passed otherwise than at generalmeetings,(b) minutes of all proceedings of general meetings, and(c) details provided to the company in accordance with section 357 (decisionsof sole member).(2) The records must be kept for at least ten years from the date of the resolution,meeting or decision (as appropriate).Companies are required to keep recorded minutes of all proceedings atAGMs, for a period of at least 10 years from the date of the AGM.s358 Inspection of records of resolutions and meetings(1) The records referred to in section 355 (records of resolutions etc) relating to theprevious ten years must be kept available for inspection—(a) at the company’s registered office, or(b) at a place specified in regulations under section 1136...(3) The records must be open to the inspection of any member of the company withoutcharge.

146 | Environmental and social transparency under the Companies Act 2006Annex 7: Company AGMs in practice: the mining industry | 147(4) Any member may require a copy of any of the records on payment of such fee asmay be prescribed.The minutes of AGMs must be open to any member of the company toinspect in person at the company’s registered office (or other designatedplace). The company must also provide copies to any member that requeststhem, at a prescribed fee.However, there is no statutory requirement for companies (even quotedcompanies) to make the minutes of their meetings available via a website,or to the general public for inspection in person. This means that anyshareholder who does not attend the meeting will have limited access toinformation regarding the events and conduct of the meeting, particularlywhere shareholding is geographically remote. More broadly it means alack of transparency to the public in general.A.6.5.3 Media coverageAs already discussed in section 6.3.4 above, there is no statutory right forthe media to be given access to AGMs. It is entirely at the discretion ofthe individual company as to whether to grant access and provide suchtransparency. 355Annex 7:Company AGMs in practice: the miningindustryA.7.1 The emergence of practice: The RTZ 1982 148Annual General MeetingA.7.2 Examples of practice in the UK 148A.7.2.1A.7.2.2A.7.2.3A.7.2.4Rio Tinto plc / RTZAnglo American plcBHP Billiton plcVedanta Resources plcA.7.3 Examples of relevant practice outside of the UK 156A.7.3.1A.7.3.2Rio Tinto LtdBHP BillitonAnnex 6 outlined the rights of shareholders and other key actors in relationto company Annual General Meetings (AGMs), including the right ofshareholders to appoint ‘proxies’ to attend the meeting in their place andexercise their rights, when they cannot (or choose not to) attend. Whilethese relationships were traditionally intended to better facilitate shorttermwealth accumulation for the individual shareholders, 356 they havebeen utilised in practice to allow access to meetings for (i) people whohave been affected by company activities, and (ii) individuals or groupsrepresenting the interests of those people, to explain to shareholders theimpacts that their company are having on communities or local environments,and to question the directors about company policies relating tothese impacts. 357Many large mining companies routinely and without challenge allowaccess to their AGM to people who have been affected by company activitiesor their representatives, and allow engagement and discussion duringthe meeting relating to the company’s environmental or social impacts.This practice has a long history which is well documented. The practiceprovides an extremely important scrutinising function within the companyreporting cycle (as explained earlier in this review). Along withexternal audit, and the role played by the Financial Reporting Review

148 | Environmental and social transparency under the Companies Act 2006Annex 7: Company AGMs in practice: the mining industry | 149Panel (FRRP), it plays an essential complementary role in ensuring thatcompany management are providing appropriate transparency to shareholders,and exercising the discretion they have in the reporting processin an appropriate manner.A.7.1The emergence of practice: The RTZ 1982 AnnualGeneral MeetingThe events of the 1982 RTZ 358 AGM in London have been cited as a keycatalyst for the increasing use of AGMs as an opportunity for people whohave been negatively affected by company activities (or their representatives)to air their grievances to shareholders, and for company social andenvironmental responsibility to be scrutinised.At that meeting, 359 after a stream of questions about the RTZ group’s uraniummining in Namibia, 360 two Aboriginal delegates (who were shareholdersand had travelled from Australia to attend) 361 asked the chair, SirAnthony Tuke, a question relating to the way that company activities wereaffecting their land rights. At that point the chair, ignoring the question,abruptly announced the closure of the meeting.The delegates then moved towards the platform, while the directors leftit. The delegates occupied the platform and held an open session on thecompany’s actions and their personal grievances for around 15 minutes,with considerable support from fellow protestors in the meeting. Subsequently,all protestors were ejected (in some cases physically) 362 by thepolice, in what was the first and only time that police are known to havethrown shareholders out of their own company meeting. The meeting, thechairman’s conduct, and the forced ejections received massive worldwidepublicity and widespread condemnation from commentators of manypolitical persuasions.At the next year’s AGM, the chair gave the floor to questions from aggrievedprotestors’ for nearly two hours.A.7.2Examples of practice in the UKSince the events of the 1982 RTZ AGM, this type of practice at companygeneral meetings has grown; a great number of mining company AGMshave been attended by individuals who have used them as an opportunityto take the company directors to task over the operations and impacts ofthe company (or its subsidiaries or associates), and expose shareholdersto important information about the impacts that their investments werehaving.This Chapter will outline practice relating to the AGMs of the three UKgiants of the mining industry, as well as those of Vedanta Resources, 363which is of particular note due to its highly controversial operations andhigh public profile in relation to social and environmental impacts.The level of detail on company AGMs varies between companies, as transparencyvaries between companies (as we have seen in Annex 6, they haveno obligation to publish detailed minutes of AGMs), and therefore evidencerelies to a great extent on the accounts of third parties in attendance. 364For each company, a brief summary of key facts will be given, before outliningexamples of the activity that their AGMs have seen in recent years.A.7.2.1Rio Tinto Plc / RTZRio Tinto Plc (formerly The RTZ (Rio Tinto Zinc) Corporation) is one of thetwo parent holding companies of the Rio Tinto Group, making up its ‘duallisted’structure. It is headquartered in London and listed on the LondonStock Exchange, while its corresponding twin parent company has executiveoffices in Melbourne and is listed on the Australian Stock Exchange. 365The Group’s major products include aluminium, copper, diamonds, energyproducts, gold, industrial minerals and iron ore. Its operations ‘span theworld’, 366 and as at 31 December 2007, had a market capitalisation of overUS$160 billion. 367- AGM 1995 – Two West Papuans attended and raised questions regardinga perceived lack of community consultation or recognition of violationof indigenous rights before RTZ’s deal with Freeport, drawinga connection between current mining, its further expansion, severepollution of the local environment, military oppression and denial ofIndigenous rights. 368- AGM 1996 – Over 40 speakers were in attendance to question companyactivities relating to environmental or social impacts, around half ofwhom were indigenous people from all over the world, in London forthe Mining and Indigenous Peoples Consultation. To name a few: an

150 | Environmental and social transparency under the Companies Act 2006Annex 7: Company AGMs in practice: the mining industry | 151Amungme spokesperson commented on RTZ-CRA’s uncritical support- AGM 2005 – Snowy Jones of Hull Action Against Child Cancers raisedconcern about Rio Tinto’s involvement in countries with poor humannies. It is a traditional ‘pyramid’ group of companies, listed on the Londonrights records, including Indonesia, Laos, Turkey and China, in relationto Rio Tinto’s new Human Rights Guidelines and accompanyingStock Exchange, and secondarily on the Johannesburg Securities Exchange.The head office of its parent holding company is in London. It was foundedclaims. 373 operations considerably since then, its focus remains natural resources. Itfor the Freeport mine in West Papua; Armando Perez Araujo, alawyer from Colombia representing the Wayuu people, condemnedRTZ’s decision regarding a new coal mine; Heidi Blackeye, a WesternShoshone, stated that the company was about to illegally exploit goldfrom her people’s treaty land. 369a published study funded by Rio Tinto (with British Nuclear Fuels)regarding lung cancer in work places at the Capper Pass smelter, andasked how generous Rio Tinto would be with regard to compensationfor the widows and survivors of cancer allegedly caused by the smelter.- AGM 1997 – A letter from Pagadian City’s diocesan Bishop ZachariasJimenez was read out to shareholders, which advocated corporatewithdrawal in relation to operations in the Philippines over consultationprocedures in relation to ancestral lands. 370- AGM 2008 – Marcelo Giraud, representing the Mendoza PopularAssembly in Argentina, asked about the Rio Colorado potash projectand its projected environmental impacts; Carmel Budiardjo of TAPOL,the human rights campaign for Indonesia, asked about the Freeport- AGM 1998 – Representatives of the International Federation of Chemical,Energy, Mine and General Workers’ Unions (ICEM), environmentgroups and indigenous peoples’ organisations attended and spokeusing proxy rights or by buying small shares. 371mine in West Papua, and its significant pollution of local rivers andwater sources; Susan LaFernier, (Keweenaw Bay Indian Community),Cynthia Pryor (Yellow Dog Watershed Preserve), Fran Whitman(Friends of the Land of Keweenaw) and Gabriel Caplett (Yellow DogSummer, Northwoods Wilderness Recovery) attended as either shareholders- AGM 2000 – Speakers held the floor for considerable time, asking aboutthe company’s exploits in many countries, including India, where RioTinto had reportedly funded a feasibility study for a huge iron ore minewhich would adversely affect the land and health of thousands of tribalpeople. 372or proxies, 375 to discuss and criticise a Rio Tinto subsidiary’s 376conduct relating to the proposed Upper Peninsula sulphide mine inMichigan; West Papuan leader Benny Wenda presented a statement onthe Freeport mine; Andy Whitmore of Partizans (a campaign groupwhich works on Rio Tinto) asked questions regarding the environmentalimpacts of the proposed Pebble Mine in Alaska, and the company’s- AGM 2003 – Snowy Jones of Hull Action Against Child Cancers asked aquestion regarding the company’s position on the Capper Pass smelterclaimants in the UK, where men were dying of cancer and childrenwere contracting leukaemia, allegedly due to Rio Tinto’s past operationsthere; Jacqueline Membup, of the Lihir community in PapuaNew Guinea, expressed fears for her children due to waste disposal bySubmarine Tailings Disposal from Rio Tinto’s Lihir gold mine; YuyunIndradi, of Down To Earth, asked a question on behalf of the communityof Poboya, Central Sulawesi in Indonesia concerning the possibilityattitude to community consultation; Owen Espley, of Friends of theEarth England Wales and Northern Ireland, asked a question regardingalleged community intimidation and lack of consultation at a minein Port Dauphin in Madagascar. 377Furthermore, prior to the meeting, London Mining Network handedout information leaflets on company practices, which stimulated challengingquestions in the meeting relating to environmental impactsand community engagement from two concerned shareholders, whoreferred to information from the leaflet. 378of gold mining in the protected Forest Park in which they liveand which protects water supply for the nearby city of Palu; LyndonA.7.2.2 Anglo American plcOrmond-Parker read out a statement on the Jabiluka uranium project,on behalf of the Mirrar people of Kakadu; Geoff Nettleton expressedAnglo American plc 379 is one of the world’s largest diversified mining compa-

152 | Environmental and social transparency under the Companies Act 2006Annex 7: Company AGMs in practice: the mining industry | 153operates in 45 countries across 6 continents, and as at 31 December 2007,had a market capitalisation of just under US$80 billion. 380- AGM 2003 – A great number of individuals attended as shareholdersand asked challenging questions on company social and environmentalimpacts: Sister Joan Keitch asked a question regarding the company’salleged forced displacement practices; Francisco Ramirez, presidentof SINTRAMINERCOL (a mine workers’ union in Colombia), askeda question regarding Anglo Gold’s alleged complicity in war crimes,crimes against humanity and the massive forced displacements conductedby associated companies; Desmond D’Sa, resident of Durban,South Africa, asked a question regarding the alleged polluting practicesof an Anglo American subsidiary; Richard Solly asked a questionregarding company activities in Venezuela. 381- AGM 2004 – Richard Solly, of the Colombia Solidarity Campaign, askeda number of questions regarding operations at the Cerrejon mine inColombia and impacts in the local communities; Andrew Whitmoreattended as proxy for Andy Higginbottom, to ask questions on behalfof Philippine communities and organisations regarding Anglo Americanoperations in the Philippines, and also to ask a question relatingto the company’s dialogue on ‘free prior and informed consent’ 382 as apart of the World Bank Group’s review of its activities in the extractiveindustries sector (the Extractive Industries Review, EIR). 383- AGM 2005 – Richard Solly asked a number of questions regardingoperations in Colombia (having visited and spoken to the local communities),relating to an alleged lack of community engagement, andduress exerted on local people by company representatives; AndrewWhitmore of Indigenous Peoples’ Links asked questions relating tooperations in the Philippines on behalf of communities he had visitedthere. 384- AGM 2006 – Geoff Nettleton attended as proxy, representing IndigenousPeoples’ Links, to ask a question relating to planned developmentin the Philippines and company dialogue with communitiesthere; Glevys Rondon, a Venezuelan representative of the indigenouspeople of Zulia, read a statement on their behalf, testifying to intimidation,harassment and a climate of fear surrounding the Sucoy mine(in which Anglo American held a quarter share of operations), andquestioned the extent to which Anglo American could sustain strongrelationships with the local communities in which it operates; RichardSolly discussed operations at El Cerrejon in Northern Colombia, raisingquestions relating to the denial of the fishing rights of local communitiesby mine security personnel, and the diversion of a local riverto access coal reserves (and associated questions of payments made topublic bodies in the area); Andrew Whitmore asked a question relatingto exploration in Mindanao in the Philippines (which had been raisedthe year before also), and a question on the health & safety policiesof the company, which had been related to 46 deaths in 2005; FrankNally, attending as proxy, questioned further regarding Anglo American’ssignificant (24%) shareholding in the Sucoy mine in Venezuelaand the allegedly repressive and intimidatory practices associated withit. 385- AGM 2008 – Phillipos Dolo, a South African community representative,raised water pollution, environmental destruction and the absenceof community engagement around Anglo Platinum’s operations inthe Limpopo Province in South Africa; Alex Wijeratna of the charityActionAid asked whether Anglo American would co-operate with awater investigation and the South African Human Rights Commissionto see if any of the company’s operations in Limpopo infringed rights toland, housing, water and food; Peter Bearder, of the Colombia SolidarityCampaign, spoke about the operations of Kedahda SA (a subsidiaryof Anglo Gold Ashanti) in Colombia, and read a prepared statementfrom Teofilo Acuna, President of the Agro-mining Federation of theSouth of Bolivar (FEDEAGROMISBOL) in Colombia who was presentoutside the AGM but had not entered as he felt that it would be anoffence to the dignity of those who were suffering in Colombia; PeterBearder also asked a question regarding an alleged campaign of intimidationand stigmatisation that Teofilo Acuna and his people had beensubjected to (he had been detained in 2007 for his opposition to AngloGold Ashanti’s operations), and asserted that it was unacceptable thatAnglo American was not willing to exercise pressure on Anglo GoldAshanti, given the size of its shareholding; Richard Solly, of ColombiaSolidarity Campaign, spoke about Anglo American’s involvement inthe Cerrejon coal mine in Colombia, supporting a report on the mine’simpacts by an Independent Panel established by the company, whichhe asserted had vindicated many of the points made over a numberof years by groups around the world(he asked that the company act

154 | Environmental and social transparency under the Companies Act 2006Annex 7: Company AGMs in practice: the mining industry | 155quickly to implement the Report’s recommendations); Geoff Nettletonof Philippine Indigenous Peoples’ Links raised issues regarding theConnor project in the Philippines, and a perceived lack of communityconsultation and engagement; Frank Nally of the Society of St Columban,raised concerns about the company’s operations in the north eastof Mindanao in the Philippines, and read a statement from residentsof Anislagan, Placer, Surigao del Norte, Philippines which outlined theperceived threat posed to their way of life by Anglo American operations.The chair, Sir Mark Moody Stuart, then made claims regardingthe legality of AA’s actions, the strength of governance in the Philippines,and the company’s efforts (or lack of) to engage with the communities.Geoff Nettleton and Frank Nally rebuffed the claims, withreference to direct and long-standing experience of operations on theground, at which point the chair made significantly revised claimsbefore the business of the meeting was reportedly swiftly movedon. 386A.7.2.3BHP Billiton plcBHP Billiton plc is one of the twin holding companies of the BHP BillitonGroup, as part of its ‘dual-listed structure’. It is listed on the London StockExchange, while its twin holding company BHP Billiton Ltd is listed on theAustralian Stock Exchange. 387 It was born of the merger of BHP (a majorglobal natural resources company working with minerals, oil, gas and steel),and Billiton (one of the world’s biggest mining companies) in 2001. 388 It nowoccupies ‘significant positions in major commodity businesses, includingaluminium, energy coal and metallurgical coal, copper, manganese, ironore, uranium, nickel, silver and titanium minerals, and [has] substantialinterests in oil, gas, liquefied natural gas and diamonds’. 389 It operates in 25countries worldwide and as at 31 December 2007, had a market capitalisationof over US$190 billion. 390- AGM 2005 – Geoff Nettleton of Philippine Indigenous Peoples’ Linksasked, on behalf of the local communities, whether the companywould making a clear commitment not to proceed with mining at GagIsland, and whether BHP would make a commitment to the emerginginternational principle of free prior and informed consent; RichardSolly, on behalf of families in Colombia, questioned the displacementactivities at Cerrejon Zona Norte (33% owned by BHPBilliton), relayinga message from a community representative expressing the displacedfamilies’ disappointment that dialogue had broken down overjust compensation and communal relocation; Andrew Whitmore ofPhilippine Indigenous Peoples Links questioned the company’s plansfor nickel exploration and extraction on the island of Mindanao, in theface of community opposition he had experienced on the ground.- AGM 2006 – Richard Solly, representing the peoples surrounding theCerrejon mine in northern Colombia, raised questions relating tocommunity rights. He raised the question in light of global protestsagainst the project, as well as wide-ranging worldwide support fromlabour organizations, politicians and NGOs. 391- AGM 2007 – Representatives of the Colombian coal miners’ unionSINTRACARBON made representations regarding alleged poor treatmentof labour at the Cerrejon Coal mine in La Guajira, one-thirdowned by BHPBilliton, and forced evictions in the local community;Datu Victor Aying, a community leader from Mindanao in the Philippines,spoke about ignored community opposition to BHPBilliton’sPujada Bay nickel project and environmental damage reportedly stemmingfrom the project; Jo Villanueva of LRC, the Philippine branch ofFriends of the Earth, questioned BHP’s involvement with a partner inthe Philippines that had reportedly been implicated in the death of asecurity guard; Andrew Hickman, of Down To Earth, called for thecompany to stay out of protected areas in Kalimantan, in IndonesianBorneo; Richard Solly, who accompanied the SINTRACARBON representatives,expressed concerns regarding alleged intimidation andsuppression of criticism at the Cerrejon mine. 392A.7.2.4Vedanta Resources plcVedanta Resources plc is a traditional pyramid group of companies, listedon the London Stock Exchange, and headquartered in London. It is a diversifiedand integrated metals and mining group, with principal operations inIndia (other significant operations in Zambia and Australia). In April 2007,it had market capitalisation of around £8 billion. 393- AGM 2004 – Individuals drawn from four UK NGOs raised a numberof questions, especially focusing on Vedanta’s construction of a hugeralumina refinery on tribal land in Orissa, and the blasting of theregion’s most sacred mountain, Nyamgiri, to provide the bauxite feedstock. 394

156 | Environmental and social transparency under the Companies Act 2006| 157- AGM 2008 – Representatives of the Mineral Policy Institute (MPI)- AGM 2007 – R. Sreedhar, a geologist, raised the company’s allegedlyabuses. 397illegal expansion of its smelter in South India, its polluting impactsin Zambia, the heightened prospect of a major penalty for Vedanta’soperations in Armenia (closed by government order); Samarendraattended as proxies and raised issues regarding tail dumping at thenotorious Freeport mine and their involvement in the civil war in Panguna.Das, a journalist from Orissa raised the question of Vedanta’s reporteddonations to political parties; representatives of Action Aid questionedA.7.3.2 BHP Billitoncompany claims regarding the rehabilitation it had provided to relocatedvillagers in Orissa; tribal representatives Kumuti Majhi andPhulme Majhi, attended as proxies, speaking with interpreters aboutthe perceived danger to their livelihoods and safety, which they linkedto Vedanta’s operations in Orissa. 395- AGM 2006 (Australia) – Representative of the Mineral Policy Instituteattended as a proxy and asked a question regarding BHP’s reportedrequested exemption to numerous national laws in South Australia. 399- AGM 2008 – Despite a press ban, the journalist Peter Popham wasable to gain access to the AGM as a proxy, in order to provide a pressaccount of the directors’ response to questions from numerous tribalrepresentatives in attendance, relating to the controversies of Vedanta’ssubsidiary’s operations in Orissa, India. 396A.7.3 Examples of relevant practice outside of the UKHere we will briefly examine some examples of this practice in the meetingsof the same company groups, held in other host states. While theseevents did not take place under UK law, they were permitted withoutresistance by company groups based in the UK, and thus are of relevancein understanding the degree to which this practice is accepted by UKcompanies.A.7.3.1 Rio Tinto- AGM 1998 (Australia) – Representatives of International Federation ofChemical, Energy, Mine and General Workers’ Unions (ICEM), environmentgroups and indigenous people’s organisations attended andspoke using proxy rights or by buying small shares.- AGM 2006 – Spokesperson for Papuan asylum seekers spoke as aproxy, regarding the alleged direct links between operations at theFreeport mine (in which Rio Tinto has a 40% share) and human rights

158 | Environmental and social transparency under the Companies Act 2006Notes | 159Notes1As relating to quoted companies.2PricewaterhouseCoopers, ‘Surveys Find Many Consumers Hold Companies Responsiblefor Their Actions’ (30 September 1999), quoted in D Neef, Managing Corporate Reputationand Risk: A Strategic Approach Using Knowledge Management (2003), p. 37.3The Financial Services Authority (FSA) also sets rules that govern UK-based companies onthe London Stock Exchange. These now cover transparency and reporting requirements.However, they will not play a role in the main body of the review, because their environmentaland social reporting requirements have application to a smaller class of companiesthan the Companies Act 2006 (all of which are covered by the Companies Act), and are notas stringent. This issue is examined in further detail in Annex 1.4For examples of such studies, see: R Moody, Rocks & Hard Places: The Globalization ofMining (2007) for an extremely thorough account of global social and environmental injusticeslinked to the mining industry; the Norwegian Council on Ethics’ ‘Recommendation of15 May 2007’ on the operations of Vedanta Resources (a recommendation which resulted inthe Norwegian Government Pension Fund divesting from Vedanta), or ‘Recommendationof 15 February 2008’ on the Rio Tinto Group (which also resulted in divestment); War onWant, ‘Anglo-American: The Alternative Report’ (August 2007).Proposals5“The Secretary of State may make provision by regulations as to other matters that must bedisclosed in a directors’ report”.6“The summary financial statement must be in such form, and contain such information, asthe Secretary of State may specify by regulations. The regulations may require the statementto include information derived from the directors’ report”.7“(1) The Secretary of State may make provision by regulations about— (a) the accounts andreports that companies are required to prepare; (b) the categories of companies required toprepare accounts and reports of any description; (c) the form and content of the accounts andreports that companies are required to prepare; (2) The regulations may amend this Part byadding, altering or repealing provisions”.8As required by section 473 Companies Act 2006. Note that negative resolution procedureapplies to provisions made regarding summary financial statements under section 428Companies Act 2006.9“Where regulations or orders under this Act are subject to “affirmative resolution procedure”the regulations or order must not be made unless a draft of the statutory instrument containingthem has been laid before Parliament and approved by a resolution of each House ofParliament”.* * *10Discussed in Chapter 1.1.1, Annex 1.1.2.ii, and note 43.11s 417(6)(b) Companies Act 2006 requires companies to use KPIs in relation to environ-

160 | Environmental and social transparency under the Companies Act 2006Notes | 161mental and social matters ‘where appropriate’, to the extent necessary for an understandingof the development, performance or position of the company’s business.12At the time of his appointment, it was reflected in the accounting press that he “shouldprovide some topical experience in today’s political climate” (Dan Martin, ‘Seven heavyweightssign up for the FRRP’ AccountingWEB.co.uk (13 March 2007)).13FRRP website, ‘Panel Members’ (accessed Nov 2009) .14KPMG website, ‘What We Do: Market Sectors: Mining’ (accessed Nov 2009) .15OIAC website, ‘About Us’ (accessed Nov 2009) .16FRRP website, ‘FAQs’ (accessed Nov 2009) .17Financial Reporting Review Panel, ‘Review Findings and Recommendations 2008’ (2008),p. 4.18Ibid., p. 15.19Ibid., p. 16.20“(1) The Secretary of State may make provision by regulations about— (d) the obligations ofcompanies and others as regards— (iii) the laying of accounts and reports before the companyin general meeting, (2) The regulations may amend this Part by adding, altering or repealingprovisions”.21s 473 Companies Act 2006.22“Where regulations or orders under this Act are subject to “affirmative resolution procedure”the regulations or order must not be made unless a draft of the statutory instrumentcontaining them has been laid before Parliament and approved by a resolution of each Houseof Parliament”.23s 437 Companies Act 2006.24s 310 Companies Act 2006.25While there is no statutory provision that shareholders must have the right to attend theAGM, in practice it is highly unlikely that any company would seek to disenfranchise theirshareholders or a class of them in such a way. For further discussion see Annex 6.3.1 andnote 349.26s 324 Companies Act 2006. Proxies also have some rights in relation to resolutions atgeneral meetings. See Annex 6 for further details.27This view is supported by a range of key stakeholders, including ethical institutionalinvestors (Interview Perry Rudd and Matt Crossman, Research Team, Rathbone Greenbank(Telephone, 15 October 2008)).28s 417(2) Companies Act 2006.29s 172 Companies Act 2006.30s 172 Companies Act 2006 requires that directors must have regard to considerations suchas ‘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 businessconduct’ when deciding how best to ‘promote the success of the company’.31s 333 Companies Act 2006; s 298 Companies Act 2006.32See Annex 6 for further discussion.33D Zetzsche, ‘Virtual Shareholder Meetings and the European Shareholder Rights Directive- Challenges and Opportunities’ CBC-RPS No. 0029 (26 June 2007).34Access could be vetted by the same body established to govern the access of persons whohave been negatively affected by company activities.35See section 430 Companies Act 2006.ChaptersChapter 136However, it is important to note that annual accounts and reports have long been recognizedas also being for the use of current or potential creditors (Company Law Review SteeringGroup, ‘Modern Company Law for a Competitive Economy: The Strategic Framework’(February 1999) p. 115), and that the ‘directors’ report’, prior to the Companies Act 2006,was viewed in the legislative reform process as containing requirements for ‘public interest’reporting (Company Law Review Steering Group, ‘Modern company law for a competitiveeconomy: Developing the Framework’ (March 2000) p. 158).37Directors’ must also prepare a directors’ remuneration report, under s 420 CompaniesAct 2006, to provide transparency as to the setting of directors’ pay. However, this is notdirectly relevant to this review and so will be omitted from discussion.38s 396 Companies Act 2006.39s 415 Companies Act 2006.40s 417(2) Companies Act 2006. Section 172 Companies Act 2006 provides that a director ofa company must act in the way he considers, in good faith, would be most likely to promotethe success of the company for the benefit of its members as a whole, and in doing so haveregard (amongst other matters) to — (a) the likely consequences of any decision in the longterm; (b) the interests of the company’s employees; (c) the need to foster the company’s businessrelationships with suppliers, customers and others; (d) the impact of the company’soperations on the community and the environment; (e) the desirability of the companymaintaining a reputation for high standards of business conduct; and (f) the need to actfairly as between members of the company.

162 | Environmental and social transparency under the Companies Act 2006Notes | 16341As a rule, without implementation at Member State level, EU Directives can only everhave legal direct effect by creating rights for individuals against the State, never againstprivate parties. This distinction is referred to in terms of ‘vertical’ direct effect (againstthe State) and ‘horizontal’ direct effect (against a private party). For explanation of whyhorizontal direct effect has not been accepted by the courts, see Case 152/84 Marshall vSouthampton and South West Hampshire AHA [1986] IRLR 140.42The extent to which a private individual could enforce rights provided by the AccountsModernisation Directive against the State is not a simple issue, although the EuropeanCommission can bring legal action against Member States for failing to implement therequirements of a Directive within the required time limit.43s 395 Companies Act 2006. The IAS system was created by the European Union, pursuantto the ongoing objectives of the European single market. It was initiated by EuropeanRegulation in 2002. Quoted companies are required to prepare their consolidated accountsin accordance with IAS standards, but in the case of individual accounts they have thechoice of Companies Act 2006 or IAS standards. Where the directors of a company prepareIAS individual accounts, they must state as such in the notes to the accounts (s 397Companies Act 2006).44As made by the Secretary of State in exercise of their powers under sections 396(3), 404(3),409(1) to (3), 412(1) to (3), 416(4), 421(1) and (2), 445(3)(a) and (b), 677(3)(a), 712(2)(b)(i),831(3)(a), 832(4)(a), 836(1)(b)(i) and 1292(1)(a) and (c) Companies Act 2006. See also SmallCompanies and Groups (Accounts and Directors’ Report) Regulations 2008 SI 2008/409,applying to small companies in the UK.45Soon to be incorporated into a single European Commission Regulation.46See Chapter 3 for further discussion.47See IAS 37 Provisions, Contingent Liabilities and Contingent Assets (1998), Paragraph 14.48Under either the Large and Medium-sized Companies and Groups (Accounts and Reports)Regulations 2008 SI 2008/410 Schedule 9, Part 1, Section 2, or IAS 37 Provisions, ContingentLiabilities and Contingent Assets, Paragraph 14.49Unless the company is subject to the small companies’ regime: if it qualifies as ‘small’, orif it is a parent if its group qualifies as ‘small’, so long as specific exceptions do not apply(s 381 Companies Act 2006). A company is ‘small’ if it satisfies 2 of the following conditions:turnover not more than £5.6 million; balance sheet total not more than £2.8 million;number of employees not more than 50 (s 382 Companies Act 2006). A parent companyis ‘small’ if its group satisfies two of the following conditions: aggregate turnover not morethan £5.6 million net (or £6.72 million gross); aggregate balance sheet total not more than£2.8 million net (or £3.36 million gross); aggregate number of employees not more than 50(s 383 Companies Act 2006). However, no company can be subject to the small companiesregime if it is a: public company; insurance, banking, e-money, ISD investment or UCITSmanagement company; or a member of an ineligible group of companies (s 384 CompaniesAct 2006).50s 385 Companies Act 2006 defines ‘quoted company’, for these purposes, as a companywhose equity share capital (a) has been included in the official list [i.e. the London StockExchange], or (b) is officially listed in an EEA State, or (c) is admitted to dealing on eitherthe New York Stock Exchange or the exchange known as Nasdaq [the major US stock markets].51s 417(5)(b) Companies Act 2006.52In this context, metrics used to help define and measure the development, performanceor position of the company in relation to environmental or social issues (for example, CO2emissions).53s 417(6) Companies Act 2006.54s 417(3)(a) Companies Act 2006.55s 417(3)(b) Companies Act 2006. For example, companies listed on the AIM (AlternativeInvestment Market) are classed as ‘unquoted’ for these purposes, but an AIM-listedmid-size mining company based in the UK might well face a ‘principal risk or uncertainty’relating to community opposition or forthcoming environmental regulation in a key areaof operations, in which case they would be required to report the issue in accordance withsection 417(3) Companies Act 2006.56s 417(4)(a) Companies Act 2006.57s 417(4)(b) Companies Act 2006.58Department for Business Enterprise and Regulatory Reform, ‘Companies Act 2006 Tableof Commencement Dates’ (December 2007).59s 324(1) Companies Act 1985.60s 324(3) Companies Act 1985.61These included details of: matters of a general nature (changes in asset values, directors’shareholdings, political and charitable contributions); the employment, training andadvancement of disabled people; the health, safety and welfare at work of the company’semployees; the involvement of employees in the affairs, policy and performance of thecompany.62Company Law Review Steering Group, ‘Modern Law for a Competitive Economy: TheStrategic Framework’, pp. 120-121.63Accounting Standards Board, ‘Reporting Statement: Operating and Financial Review’(January 2006) p. 3.64The OFR was developed by the Accounting Standards Board (ASB), an operating body ofthe Financial Reporting Council. The ASB’s specific role is to issue accounting standards.It is a sister body to the FRRP (see Chapter 1.2.2 and Annex 5).65The Companies Act 1985 (Operating and Financial Review and Directors’ Report etc)Regulations 2005 SI 2005/1011.

164 | Environmental and social transparency under the Companies Act 2006Notes | 16566Accounting Standards Board, ‘Reporting Standard (RS) 1 The Operating and FinancialReview’ (May 2005).67Companies exist as legal ‘persons’. The fundamental idea is that a company has a separatelegal existence to its shareholders. Thus a shareholding company has a separate legal personalityto the company in which it holds shares.68s 1162 Companies Act 2006 defines a company as a parent company if it fulfils one of thefollowing criteria: it holds a majority of the voting rights in the company; it is a member ofthe company and has the right to appoint or remove a majority of its board of directors; ithas the right to exercise a dominant influence over the company (i) by virtue of provisionscontained in the undertaking’s articles of association, or (ii) by virtue of a control contract;it is a member of the company and controls alone, pursuant to an agreement with othershareholders or members, a majority of the voting rights in the undertaking.69The doctrinal position is that as all shareholders have ‘limited liability’ in relation to acompany, thus parent companies (as shareholders of the subsidiary) are subject to limitedliability in relation to the subsidiary’s activities. This ‘limited liability’ of shareholdersapplies to shareholding by companies (parents in subsidiaries); therefore in most cases parentcompanies are not liable for the debts and responsibilities of its subsidiaries in law.Exceptions to the rule are as yet few and far between.70s 399 Companies Act 2006. Companies that are publicly listed in the European Communityare required to prepare their Group Accounts in accordance with InternationalAccounting Standards (IAS), under s 403 Companies Act 2006 and Article 4 of the ‘IASRegulation’ (Council Regulation (EC) 1606/2002 of 19 July 2002 on the application of internationalaccounting standards [2002] OJ L243/1). See Annex 1 for further detail.71s 415(2) Companies Act 2006.72The exemptions are, broadly, if (a) they are subsidiaries of a larger group who have preparedgroup reports (to a certain standard) which include that company, and a numberof procedural conditions are satisfied ; (b) all subsidiaries may be excluded under s 405Companies Act 2006 , by virtue of (i) the subsidiaries’ inclusion being immaterial to givinga ‘true and fair’ view of the company , (ii) severe long-term restrictions on the parent’sexercise of control over the subsidiary , (iii) disproportionate expense or delay , or (iv) theinterest held in the subsidiary being held exclusively with a view to resale . Unless one ofthese exemptions applies, parent companies must produce annual accounts for their companygroup as a whole. See Annex 1 for further detail.73Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations2008 Schedule 4 also provide certain specific accounting requirements relating to ‘significant’shareholdings, and other contractual relationships.74s 417(5)(c) Companies Act 2006.75Linklaters, ‘The Companies Act 2006: A Guide to the Reforms: Part 2: Narrative reporting,liability and auditors’ (December 2006), p. 5.76Hansard HL vol 686 col 453 (2 November 2006).77s 417(11) Companies Act 2006.78Linklaters, ‘The Companies Act 2006: A Guide to the Reforms: Part 2: Narrative reporting,liability and auditors’, p. 5.79s 423(1) Companies Act 2006.80As required to be included in the directors’ report by paragraph 14 of the Large andMedium-sized Companies and Groups (Accounts and Reports) Regulations 2008: “anynecessary explanatory material” with regard to specific aspects of the requirements of s416 Companies Act 2006. Broadly, these relate to the company’s capital structure; securitiestransfer restrictions; details of significant direct or indirect holdings; details of specialrights of control; rights of control of any employees’ share schemes; restrictions on votingrights; restrictions on the transfer of securities or on voting rights; rules that the companyhas about appointment and replacement of directors, or amendment of the company’sarticles of association; powers of the company’s directors; information relating to takeoverbids.81Regulation 5(2) Companies (Summary Financial Statement) Regulations 2008 SI2008/374.82Regulation 5(1) Companies (Summary Financial Statement) Regulations 2008.83s 430(1)(b) Companies Act 2006.84ss 475, 495, 496, 497 Companies Act 2006.85s 495(1) Companies Act 2006.86s 499(1)(a) Companies Act 2006.87s 499(1)(b) Companies Act 2006.88s 499(2) Companies Act 2006. Such persons are: any officer or employee of the company;any person holding or accountable for any of the company’s books, accounts or vouchers;any subsidiary undertaking of the company incorporated in the UK; any officer, employeeor auditor of any such subsidiary undertaking or any person holding or accountable forany books, accounts or vouchers of any such subsidiary undertaking; any person who fellwithin any of the above at a time to which the information or explanations required by theauditor relates or relate. Auditors also have the right to oblige parent companies to takeall steps that are ‘reasonably open to it’ to secure any information or explanations that arenecessary for the purposes of the audit from a subsidiary (or employee of that subsidiary)not subject to UK law (Section 500 Companies Act 2006).89s 495(2)(b) Companies Act 2006.90s 495(4)(a) Companies Act 2006.91s 495(3)(c) Companies Act 2006. Also, where applicable, in accordance with Article 4 ofthe IAS Regulation.

166 | Environmental and social transparency under the Companies Act 2006Notes | 16792s 495(3)(b) Companies Act 2006.93s 495(3)(a) Companies Act 2006.94Ibid.95s 498(1) Companies Act 2006.96s 498(1)(a) Companies Act 2006.97s 498(1)(b) Companies Act 2006.98s 498(2) Companies Act 2006.99s 498(3) Companies Act 2006.100s 496 Companies Act 2006.101Department for Business Enterprise and Regulatory Reform, ‘Companies Act 2006:Regulatory Impact Assessment’ (January 2007) p. 17.102At one point UK law was to require a higher standard of audit; Annex 2 explains in detailhow the UK government backed away from a higher standard of audit in relation to thiskind of information in 2005, with the removal of the Operating and Financial Review.103See Annex 4.2.3 for further details.104Interview Perry Rudd and Matt Crossman, Research Team, Rathbone Greenbank (Telephone,15 October 2008).105For example, where companies have put policies in place to screen contractors throughouttheir supply chains, proper scrutiny of those systems requires audit or research whichgoes out on the ground to verify the standard of practices on the ground, throughout thesupply chain.106ss 455-460 Companies Act 2006. Under the Companies Act 2006, the Secretary of Statehas certain powers to ensure that companies fulfil their reporting obligations. The Secretaryalso has powers under s 457 Companies Act 2006 to authorize a person for thosepurposes.107The FRC has a range of other operating bodies, including the Accounting StandardsBoard (ASB), which issues accounting and reporting standards, and the Auditing PracticesBoard (APB), which establishes and promotes standards of practice in the auditing profession.108s 459(2)-(3) Companies Act 2006.109s 459(4)-(5) Companies Act 2006.110s 456(1) Companies Act 2006.111FRRP website, ‘About the Panel’ (accessed Nov 2009) .112Ibid.113Also any private company not qualifying as small or medium sized and not excludedfrom being treated as such under ss 382-384 and 465-467 Companies Act 2006, or anyprivate company within a group which does not qualify as a small or medium-sized group.114Financial Reporting Review Panel website, ‘How the FRRP Works » Powers’ (accessedNov 2009) .115Financial Reporting Review Panel, ‘Review Findings and Recommendations’ (2008).116Ibid.117Although it is important to note that the new business review requirements of the CompaniesAct 2006 only applied to company reports for financial years starting on or after 1October 2007, and so the Panel’s work in 2007/08 related to the provisions of the CompaniesAct 1985, which did not include explicit requirements relating to environmental or socialmatters, nor to discussion of the main trends and factors likely to affect the future development,performance and position of the company (see Chapter 1.1.1, and further Annex 1,for details).118s 437(1) Companies Act 2006.119S Sheikh, A Guide to the Companies Act 2006 (2008) p. 3.120This function of the AGM was explicitly recognised by the Company Law Review when itwas preparing the framework that would become the Companies Act 2006 (Company LawReview Steering Group, ‘Modern Company Law: Completing the Structure’ (November2000) p. 116.121Pinsent Masons, ‘Companies – The basics: Company Meetings’ (August 2008).122Accounting Standards Board, ‘Reporting Standard (RS) 1 The Operating and FinancialReview’.123Department for Environment Food and Rural Affairs, ‘Environmental Key PerformanceIndicators: Reporting Guidelines for UK Business’ (January 2006).124Slaughter and May, ‘Companies Act 2006 - Practitioner Alert: Business Review’ (June2007).125Global Reporting Initiative website (accessed Nov 2009) .126The IASB is an independent international standard-setting for accounting and reportingstandards, responsible for producing International Accounting Standards, as seen above. Itis a body of the International Accounting Standards Committee Foundation (IASC Foundation).

168 | Environmental and social transparency under the Companies Act 2006Notes | 169Chapter 2127Now the Department for Business Innovation and Skills (BIS), previously also theDepartment for Business Enterprise and Regulatory Reform (BERR).128Department of Trade and Industry, ‘Modern Company Law for a Competitive Economy’(March 1998).129Ibid., p. 9.130Electronic copies of which can be found at (at February 2009). These will be discussed below where relevant.131DTI, ‘Company Law Reform’ (March 2005).132Ibid.133SJ Berwin Press Release, ‘Company Law Review “A Superb Process”, says SJ Berwin’sPhilip Goldenberg’ (27 July 2001).134See Company Law Review Steering Group, ‘Modern Law for a Competitive Economy: TheStrategic Framework’ (February 1999) note 27, p. 37.135Proponents of the concept argue that as well as (properly) protecting the property interestsof shareholders, this is also in principle the best means of securing overall prosperityand welfare for society more broadly. After considerable debate and consultation throughoutthe CLR, the idea that company directors should have regard to the interests of anyoneor anything above or on the same level as those of their shareholders (labelled the ‘pluralist’approach) was rejected.136Company Law Review Steering Group, ‘Modern Law for a Competitive Economy: TheStrategic Framework’, p. 37.137s 172 Companies Act 2006.138DTI, ‘Company Law Reform’ (March 2005), pp. 16-17.Chapter 3139Allen L. White, ‘Business Brief: Intangibles and CSR’ (February 2006), p. 8.140Company Law Review Steering Group, ‘Modern Law for a Competitive Economy: TheStrategic Framework’ (February 1999), p. 13.141J Low and P Kalafut, Invisible Advantage: How Intangibles are Driving Business Performance(2002) p. 6.142Allen L. White, ‘Business Brief: Intangibles and CSR’, p. 5.143Darrell Bricker, ‘The Resiliency Concept’, from Ipsos, ‘Corporate Reputation: ConnectingFantasies with Reality’ (March 2006).144An MBA is a ‘Master of Business Administration’, an internationally recognised master’sdegree in business administration.145Business for Social Responsibility, ‘Human Rights’ (May 2002), quoted in D Neef, ManagingCorporate Reputation and Risk: A Strategic Approach Using Knowledge Management,p. 35.146Pierre Lassonde, ‘How To Earn Your Social Licence: Without local community support,your project is going nowhere’, Mining Review (2003) Summer.147Allen L. White, ‘Business Brief: Intangibles and CSR’, p. 7.148J Nelsen and M Scoble, ‘Social License to Operate: An Industry Survey’, Mineral Exploration(2003) Spring.149Business for Social Responsibility, ‘Emerging Trends in Corporate Social Responsibilityin the Mining Industry’, Materials for PDAC Short Course, Toronto, 2-3 March 2007.150J Nelsen and M Scoble, ‘Social License to Operate: An Industry Survey’.151Business for Social Responsibility, ‘Emerging Trends in Corporate Social Responsibilityin the Mining Industry’.152Oxfam America, ‘Breakthrough on Quilish’ (19 November 2004).153Hannah Hennessy, ‘Gold mine sparks battle in Peru’ BBC News (1 June 2005).154Shell Nigeria website, ‘Shell in Nigeria – History’ (accessed Nov 2009) .155For example, see R Boele et al, ‘Shell, Nigeria and the Ogoni. A study in unsustainabledevelopment: I. The story of Shell, Nigeria and the Ogoni people - environment, economy,relationships: conflict and prospects for resolution’ (2001) 9 Sustainable Development 2, pp.74-86. One of the most controversial practices in Nigeria is that of ‘gas flaring’, wherebyexcess gases and hydrocarbons are ‘burnt off’ from the production line. This practice hasbeen reported to: have heavily polluting effects in the local atmosphere; be seen by localcommunities to have brought ill health and crop damage; have provoked law suits fromlocal communities, and; in a ruling of 2005, have been found by the Federal High Courtof Nigeria to be a ‘gross violation’ of human rights. See, respectively: The Climate JusticeFoundation and Environmental Rights Action, ‘Gas Flaring in Nigeria’ (June 2005); TerryMacalister, ‘Shell faces flaring lawsuit’ The Guardian (21 June 2005); Gbembre v. Shell PetroleumNigerian Limited, et al., FHC/B/CS/53/05 (Federal High Court of Nigeria).156In particular, reports proliferated during the regimes of General Ibrahim BadamasiBabangida and General Sani Abacha. See Geoffrey Lean, ‘Shell ‘paid Nigerian military’’Independent on Sunday (17 December 1995); Cameron Duodu, ‘Shell Admits ImportingGuns for Nigerian Police’ The Observer (28 January 1996); Ken Saro-Wiwa, ‘CompleteStatement To Ogoni Civil Disturbances Tribunal’ (21 September 1995).

170 | Environmental and social transparency under the Companies Act 2006Notes | 171157R Boele et al, ‘Shell, Nigeria and the Ogoni. A study in unsustainable development: I. Thestory of Shell, Nigeria and the Ogoni people - environment, economy, relationships: conflictand prospects for resolution’.158BBC News, ‘Nigeria’s shadowy oil rebels’ (20 April 2006).159Carl Mortished, ‘Attacks hit Shell oil production in Nigeria’ The Times (21 February2006).160Jad Mouawad, ‘Shell Expects Full Output From Nigeria’ The New York Times (5 April2007).161Nathaniel Ibigor, ‘Shell: Nigeria protests shut off 170,000 daily barrels of oil production’The Associated Press (15 May 2007).162Ibid.163Nick Mathiason, ‘Shell’s future in Nigeria in doubt’ The Observer (13 April 2008).164See, for example: Russell Hotten, ‘Shell shuts Nigerian oilfield after rebels attack’ TheDaily Telegraph (19 June 2008); The Associated Press, ‘Niger Delta rebels ratchet up oilrelatedviolence’ (17 September 2008).165Guy Chazan, ‘Oil Sands Are Shifting in Alberta’ The Wall Street Journal (5 Feb 2008).166Ibid. It should be noted that additional to the business uncertainties relating to regulatorychanges noted below, the volatile price for oil creates significant risks for operationswith such high costs as oil sands extraction.167Ibid. For further detail, see A E Farrell et al, ‘Risks of the oil transition’ 2006 Environ.Res. Lett. 1 014004 (Environmental Research Letters, Institute of Physics Publishing).168Natural Resources Defense Council, ‘Land Facts: Strip Mining for Oil in EndangeredForests’ (June 2006).169WWF-Canada and The Pembina Institute, ‘Under-Mining the Environment: The OilSands Report Card’ (January 2008).170Tim Webb, ‘Tide turns against ‘dirty’ oil sands’ The Observer (16 November 2008).171Guy Chazan, ‘Oil Sands Are Shifting in Alberta’.172Ibid.173Greenpeace and Platform, ‘BP and Shell: Rising Risks in Tar Sands Investment’ (September2008).174Ibid.175Ibid.176Ibid.177CERES Press Release, ‘U.S. Companies Face Record Global Warming Resolutions AmidGrowing Support in Washington for Clean Energy and Mandatory CO2 Limits’ (18 February2009); Timothy Gardner, ‘Investors target Exxon, Massey for lags on climate’ Reuters(18 February 2009).178D Neef, Managing Corporate Reputation and Risk: A Strategic Approach Using KnowledgeManagement, p. 36.179The Mayagna (Sumo) Awas Tingni Community v. Nicaragua Inter-Am. Ct. Hum. Rts. (Ser.C) Case No. 79 (Judgment of Aug. 31, 2001).180S J Anaya and C Grossman, ‘The Case of Awas Tingni v. Nicaragua: A New Step in theInternational Law of Indigenous Peoples’ 19 Ariz. J. Int’l & Comp. Law 1 (2002).181The Equator Principles are a set of (voluntary and unmonitored) environmental andsocial benchmarks for managing environmental and social issues in global project finance.In adopting them, banks and other financial institutions commit to refrain from financingprojects that fail to follow specific processes and meet specific standards, as defined by thePrinciples.182Bretton Woods Project, ‘Bank stumped on Uruguayan paper mills’ (19 June 2006).183Business for Social Responsibility, ‘Emerging Trends in Corporate Social Responsibilityin the Mining Industry’.184Ibid.185Goldman Sachs, ‘Global Energy: Introducing the Goldman Sachs Energy Environmentaland Social Index’ (February 2004), p. 1.186Tamsin Carlisle, ‘For Canadian Firm, an African Albatross’ The Wall Street Journal (17August 2000), quoted in S Kobrin, ‘Oil and Politics: Talisman Energy and Sudan’, 36 N.Y.U.J. Int’l L. & Pol. 425 (2004).187Ibid. (S Kobrin), p. 425.188Consent decree between Shell Oil Company and the State of Colorado, Civil Action No.83-C-2386, June 2008 (United States District Court for the District of Colorado).189United States General Accounting Office, ‘Report to Congressional Requesters: EnvironmentalCleanup - Inadequate Army Oversight of Rocky Mountain Arsenal Shared Costs’(GAO/NSIAD/AIMD-97-33, 1997).190Matthew L. Wald, ‘Wide Impact Expected in Shell Pollution Case’ The New York Times(21 December 1988).191United States General Accounting Office, ‘Report to Congressional Requesters: EnvironmentalCleanup - Inadequate Army Oversight of Rocky Mountain Arsenal Shared Costs’.Total estimated clean up costs were $2.1bn. It was agreed that Shell would pay 50% of costs

172 | Environmental and social transparency under the Companies Act 2006Notes | 173up to $500m, 35% between $500m-$700m, and 20% over $700m.192Colorado Department of Law Press Release, ‘Colorado Settles Rocky Mountain ArsenalSuit’ (29 May 2008).193Todd Hartman, ‘Mining companies agree to $20.5 million settlement’ Rocky MountainNews (1 July 2008).194Ibid.195Roger Cowe, ‘Rio Tinto feels pinch’ The Guardian (13 May 1999).196Statement by David Russell (Solicitor’s letter to Robert Wilson, Executive Chairman ofRio Tinto 7 October 1999) (accessed Nov 2009).197Ibid.198Ibid.199Ibid.200BBC News, ‘Claims review for smelter campaigners’ (25 January 2002).201Rio Tinto, ‘Media Briefing: Capper Pass Claims Review Scheme - all claims determined’(23 July 2008).Chapter 4202PricewaterhouseCoopers, ‘Surveys Find Many Consumers Hold Companies Responsiblefor Their Actions’ (30 September 1999), quoted in D Neef, Managing Corporate Reputationand Risk: A Strategic Approach Using Knowledge Management, pp. 36-37.203William Baue, ‘Spreading SRI: Goldman Sachs Adds Its Own Twist in Social and EnvironmentalAssessment’ Social Funds (5 October 2005).204Stewart Lewis, ‘Building Stakeholder Relations’ from Ipsos, ‘Corporate Reputation: ConnectingFantasies with Reality’ (March 2006).205Darrell Bricker, ‘The Resiliency Concept’, from Ipsos, ‘Corporate Reputation: ConnectingFantasies with Reality’ (March 2006).206D Neef, Managing Corporate Reputation and Risk: A Strategic Approach Using KnowledgeManagement, p. 24.207John Browne, ‘Companies need more than just ‘spin’ to measure up to new corporatereputation demands’, www.vnunet.com (2 November 1999).208S Sheikh, A Guide to the Companies Act 2006, p. 3.AnnexesAnnex 1209s 395 Companies Act 2006. Quoted companies are now required to prepare their consolidatedaccounts in accordance with IAS standards (see Annex 1.2.1 for further details),but in the case of individual accounts they have the choice of Companies Act 2006 or IASstandards. Where the directors of a company prepare IAS individual accounts, they muststate as such in the notes to the accounts (s 397 Companies Act 2006).210BERR, ‘Companies Act 2006 Table of Commencement Dates’.211s 417(2) Companies Act 2006. Section 172 Companies Act 2006 provides that a directorof a company must act in the way he considers, in good faith, would be most likely topromote the success of the company for the benefit of its members as a whole, and in doingso have regard (amongst other matters) to — (a) the likely consequences of any decisionin the long term; (b) the interests of the company’s employees; (c) the need to foster thecompany’s business relationships with suppliers, customers and others; (d) the impact ofthe company’s operations on the community and the environment; (e) the desirability ofthe company maintaining a reputation for high standards of business conduct; and (f) theneed to act fairly as between members of the company.212Unless the company is subject to the small companies’ regime: if it qualifies as ‘small’,or if it is a parent if its group qualifies as ‘small’, so long as specific exceptions do not apply(s 381 Companies Act 2006). A company is ‘small’ if it satisfies two of the following conditions:turnover not more than £5.6 million; balance sheet total not more than £2.8 million;number of employees not more than 50 (s 382 Companies Act 2006). A parent companyis ‘small’ if its group satisfies two of the following conditions: aggregate turnover not morethan £5.6 million net (or £6.72 million gross); aggregate balance sheet total not more than£2.8 million net (or £3.36 million gross); aggregate number of employees not more than 50(s 383 Companies Act 2006). However, no company can be subject to the small companiesregime if it is a: public company; insurance, banking, e-money, ISD investment or UCITSmanagement company; or a member of an ineligible group of companies (s 384 CompaniesAct 2006).213s 395(2) Companies Act 2006 provides that ‘quoted company’ is defined as “a companywhose equity share capital (a) has been included in the official list in accordance with theprovisions of Part 6 of the Financial Services and Markets Act 2000, or (b) is officially listedin an EEA State, or (c) is admitted to dealing on either the New York Stock Exchange or theexchange known as Nasdaq”.214For example, if a mining company is operating in an area where its presence is contestedand resisted by local communities, and there is some chance that they will be forced towithdraw or significantly modify operations, this would be a ‘social issue’ that is also abusiness issue – it is a major factor ‘likely to affect the future development, performance andposition of the company’s business’. See the analysis on ‘social licence to operate’ in Section3.1.2 above for further details and examples.215Again, to the extent necessary for an understanding of the development, performance orposition of the company’s business.

174 | Environmental and social transparency under the Companies Act 2006Notes | 175216Metrics used to help an organization define and measure progress toward organisationalgoals.217BERR, ‘Companies Act 2006 Table of Commencement Dates’.218Specifically in exercise of powers under sections 396(3), 404(3), 409(1) to (3), 412(1) to (3),416(4), 421(1) and (2), 445(3)(a) and (b), 677(3)(a), 712(2)(b)(i), 831(3)(a), 832(4)(a), 836(1)(b)(i) and 1292(1)(a) and (c) Companies Act 2006.219The Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 SI2008/409, apply to ‘small companies’ (see note 49) in the UK.220In exercise of powers under section 416(4) Companies Act 2006. Requirements includeto disclose matters: of a general nature (relating to asset values, political donations andexpenditure, charitable donations, financial instruments, R&D); regarding acquisition ofits own shares; concerning employment of disabled persons; employee involvement; policyand practice on payment of creditors; specific to certain publicly traded companies.221s 85 Climate Change Act 2008. The precise scope of these reporting requirements was yetto be decided at time of writing.222We will also see below that listed companies in the EU are required to prepare theirconsolidated accounts in accordance with IAS.223Council Regulation (EC) 1606/2002 of 19 July 2002 on the application of internationalaccounting standards [2002] OJ L243/1.224See Annex 1.2.1.225IAS 1 Presentation of Financial Statements, Paragraph 89.226Europa Press Release, ‘Accounting standards: Commission adopts consolidated text ofIFRS applicable in the EU’ (5 November 2008).227Ibid. At time of writing the full text was in force, but had not yet been published; onlythe accepted draft was available.228IAS 1 Presentation of Financial Statements, Paragraph 1.229Under section 74(4) Financial Services and Markets Act 2000, as the competent authorityunder Part VI of that Act.230It is also authorised by section 1269 Companies Act 2006 to make rules relating to theimplementation of European Community obligations of companies wishing to be tradedin the UK.231The DTRs implement the requirements of a range of EU directives, most notably the EU‘Transparency Directive’ (Council Directive (EC) 2004/109 on the harmonisation of transparencyrequirements in relation to information about issuers whose securities are admittedto trading on a regulated market and amending Directive 2001/34/EC [2004] L390/38),and (in the context of environmental and social reporting), the ‘Accounts ModernisationDirective’ (Council Directive (EC) 2003/51 amending Directives 78/660/EEC, 83/349/EEC,86/635/EEC and 91/674/EEC on the annual and consolidated accounts of certain typesof companies, banks and other financial institutions and insurance undertakings [2003]L178/16). These will be examined in considerable detail in Annex 3 below.232Financial Services Authority, ‘Disclosure Rules and Transparency Rules’, DTR TP1, p.1.233DTR 4.1.1. Broadly, this is the State in which the company has its head or registeredoffice. See the FSA Handbook Glossary for further detail.234Within the rules, R denotes a binding rule, while G denotes guidance (which replaces allprevious FSA guidance on the issues).235DTR 4.1.6(1)(b).236DTR 4.1.6(1)(a).237s 417(5) Companies Act 2006.238In any case, the requirements of the two regimes are identical, so it is of little bearing.239s 385 Companies Act 2006 provides that a ‘quoted’ company for its purposes is anyUK-based company that is (i) quoted on the official list of the London Stock Exchange, (ii)officially listed in an EEA State, or (iii) admitted to dealing on either the New York StockExchange or the National Association of Securities Dealers Automated Quotations.240London Stock Exchange Website, ‘About AIM’ (accessed Nov 2009) .241Ibid.242AIM companies incorporated in an EEA country are required to use IAS.243London Stock Exchange, ‘Aim Rules for Companies’ (February 2007), Rule 19.244The London Stock Exchange have, however, published Guidance for mining, oil and gascompanies, reportedly to address any concerns that such companies on the AIM are toospeculative (Charles Russell LLP, ‘AIM Rules for Companies: Guidance for Mining, Oil andGas Companies’ (March 2006)). In particular, this guidance sets out expectations for ongoingprovision of ‘exploration drilling updates’, to keep investors updated of the prospectsfor the company.245Unless they are classed as ‘small’ and therefore subject to the Small Companies Regime.246s 417 Companies Act 2006.247For the purposes of this review the full text of these exemptions is disproportionatelylong, so it will instead be summarised.248European Economic Area.

176 | Environmental and social transparency under the Companies Act 2006Notes | 177249Other than those subject to the small companies regime.250Council Regulation (EC) 1606/2002 of 19 July 2002 on the application of internationalaccounting standards [2002] OJ L243/1.251Provided that those holdings are required to deliver their balance sheets under the CompaniesAct, or otherwise publish them in the UK (reg 6(2)).252Quoted companies only.253Sch 4, Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations2008.254IAS 24 Related Party Disclosures.255With reference to the Large and Medium-sized Companies and Groups (Accounts andReports) Regulations 2008 and the Small Companies (Accounts and Directors’ Report)Regulations 2008. Under section 426(1) Companies Act 2006 the Secretary of State hasauthority to issue regulations which set out when companies can and cannot circulate a‘Summary Financial Statement’ in lieu of the annual accounts and reports, and what informationthese Summary Financial Statements must contain.256s 426(2) Companies Act 2006.257reg 5-7, Companies (Summary Financial Statement) Regulations 2008. Other key exceptionsinclude where no auditor’s report has been made in respect of any aspect of the annualreports; where the period for filing accounts has expired; where the summary financialstatement has not been approved by the board of directors; where company articles of associationprohibit them from doing so; where an individual debenture prohibits them fromdoing so in relation to a specific debenture holder (reg 4, Companies (Summary FinancialStatement) Regulations 2008).258For these purposes, a company which has securities carrying voting rights admitted totrading on a regulated market (para 13, sch 7, Large and Medium-sized Companies andGroups (Accounts and Reports) Regulations 2008).259reg 10(1)(b) Companies (Summary Financial Statement) Regulations 2008.260para 13, sch 7, Large and Medium-sized Companies and Groups (Accounts and Reports)Regulations 2008.261Pinsent Masons, ‘Companies – The basics: Company Meetings’ (August 2008).Annex 2262EASC, ‘Operating and Financial Review (OFR) Regulations: Proposal to roll-back toEU minima: Note to Chancellor’ (11 November 2005) .263A committee chaired by Adrian Cadbury, which produced the first UK Code of BestPractice on corporate governance. Its stated objective was ‘to help raise the standards ofcorporate governance and the level of confidence in financial reporting and auditing bysetting out clearly what it sees as the respective responsibilities of those involved and whatit believes is expected of them’.264Committee on the Financial Aspects of Corporate Governance, ‘Report of the Committeeon The Financial Aspects of Corporate Governance’ (December 1992), p. 16.265Accounting Standards Board, ‘Reporting Statement: Operating and Financial Review’(January 2006), p. 3.266Ibid.267The Companies Act 1985 (Operating and Financial Review and Directors’ Report etc)Regulations 2005 SI 2005/1011.268Example 12 related to spillage for a company involved in the transportation of hazardousmaterials; Example 13 related to CO2 emissions for a company involved in energy production;Example 14 related to waste monitoring for a retail group that promotes its ‘greencredentials’.269Example 17 related to social risks in the supply chain for companies selling brandedproducts; Example 18 related to noise infringements for an airport operator.270HM Treasury, ‘Pre-Budget Report: Britain meeting the global challenge: Enterprise, fairnessand responsibility’ (December 2005). It was announced on 28 November 2005.271The Companies Act 1985 (Operating and Financial Review) (Repeal) Regulations 2005SI 2005/3442.272RS 1 and the accompanying implementation guidance was subsequently re-worded andnow stands as ‘best practice guidance’ for companies reporting under section 417 CompaniesAct 2006 (see Chapter 1.3.1 for further detail).273HM Treasury Press Notice, ‘PBR 2005: Britain meeting the global challenge: Enterprise,fairness and responsibility’ (5 December 2005).274Accounting Standards Board, ‘A Review of Narrative Reporting by UK Listed Companiesin 2006’ (January 2007), p. 33. See Annex 3 for detail on EU minimum requirements.275Toby Webb, ‘What will the UK government do about its new reporting proposals?’ EthicalCorporation (16 September 2004).276Jo Sheldon, ’British business leaders split over support for Operating and FinancialReview (OFR)’ Edelman News (24 May 2005). It is, however, worth noting that 43% supportedthe requirements as they stood. This issue is considered further below.277EASC, ‘Operating and Financial Review (OFR) Regulations: Proposal to roll-back to EUminima: Note to Chancellor’, 11 November 2005. Also see Toby Webb, ‘What will the UKgovernment do about its new reporting proposals?’.

178 | Environmental and social transparency under the Companies Act 2006Notes | 179278AccountancyAge reported that “Confusion and fury from across the business communityhas met Gordon Brown’s decision to drop the mandatory operating and financialreview.” (Paul Grant, ‘Anger as OFR falls victim to Brown’s red tape blitz’ AccountancyAge(1 December 2005)). Charles Tilley, chief executive of the Chartered Institute of ManagementAccountants commented that “The drive to reduce the burden of red tape on businessis a laudable one, but we believe wholeheartedly in the value of the OFR. Confusing the OFRwith a reduction in bureaucracy risks losing the benefits it will deliver to all stakeholders,particularly shareholders. That would be the wrong step and a fundamentally bad one”(CIMA Press Release, ‘CIMA expresses disappointment at Chancellor’s plans to scrap mandatoryOFR’, 28 November 2005).279The main losses in substantive requirements were that the OFR explicitly required: thereport to be ‘prepared so as to assist the members of the company to assess the strategiesadopted by the company and the potential for those strategies to succeed’ (Section 1); thatinformation about environmental matters should include ‘the impact of the business ofthe company on the environment’ (Section 4), to the extent necessary to comply with thegeneral requirements of paragraphs 1 and 2; the review to (a) state whether it had beenprepared in accordance with relevant reporting standards, and (b) contain particulars of,and reasons for, any departure from such standards (Section 8). However, while not explicitin the business review, each of these requirements are still implicitly necessary to fulfil theother obligations under the Companies Act 2006. The further losses were the incidentalmentions of matters in paragraphs 34 and 37 of the ASB’s Reporting Standard 1.280EASC, ‘Operating and Financial Review (OFR) Regulations: Proposal to roll-back to EUminima: Note to Chancellor’, 11 November 2005.Annex 3281See, for explanation, Case 152/84 Marshall v Southampton and South West HampshireAHA [1986] IRLR 140.282Council Directive (EEC) 78/660 on the annual accounts of certain types of companies[1978] OJ L222/11.283Council Directive (EC) 2003/51 amending Directives 78/660/EEC, 83/349/EEC, 86/635/EEC and 91/674/EEC on the annual and consolidated accounts of certain types of companies,banks and other financial institutions and insurance undertakings [2003] OJL178/16.284Council Directive (EC) 2004/109 on the harmonisation of transparency requirements inrelation to information about issuers whose securities are admitted to trading on a regulatedmarket and amending Directive 2001/34/EC [2004] OJ L390/38.285Commission Recommendation (EC) 2001/453 on the recognition, measurement anddisclosure of environmental issues in the annual accounts and annual reports of companies[2001] OJ L156/33.286See also the Seventh Council Directive (EEC) 1983/349 based on the Article 54 (3) (g) ofthe Treaty on consolidated accounts [1983] OJ L193/1.287‘Recitals’ are the paragraphs which preface the body of the legislation, giving context toit.288London Stock Exchange, ‘RNS and the new Transparency Directive’ (December 2006),p. 4.289Directive ‘recitals’ have no independent legal value and do not need to appear in thenational legislation transposing the Directive. However, in case of litigation, the courtscan take them into consideration to ascertain the Council’s intention when drafting certainArticles.Annex 4290ss 475, 495, 496, 497 Companies Act 2006.291s 437(3) Companies Act 2006.292BERR, ‘Companies Act 2006: Regulatory Impact Assessment’ (January 2007) p. 17.293Up to this point, there has not been uniformity in reporting in terms of structure; notall reports explicitly lay their environmental or social reporting within a ‘business review’or ‘directors’ report’, even where it is included in the same document. For the purpose ofcomparative performance assessment, this renders them extremely unhelpful (confirmedby research team at Rathbone Greenbank in interview, 15 October 2008). How the introductioninto force of section 417 Companies Act 2006 affects this remains to be seen.294ACCA website, ‘The future of sustainability assurance’ (accessed Nov 2009) .295For example, AccountAbility, a leading assurance provider and author of the AA1000Assurance Standard, describes the process as follows: “Assurance is defined broadly interms of its outcome as: enabling the confidence of a party or group of people that theinformation they have is accurate and complete enough for them to make an informeddecision about a certain subject matter”. Quoted from PricewaterhouseCoopers, ‘The RightCombination*: Corporate Responsibility reports: the role of assurance providers and stakeholderpanels’ (December 2007) p. 15.296KPMG Global Sustainability Services, ‘KPMG International Survey of CorporateResponsibility Reporting 2005’ (June 2005).297National top 100 companies.298Averaged across 16 countries.299Indeed only Italy demonstrated a higher proportion of corporate responsibility reportswith audit statements in N100 companies.300It is important to note that these observations are not UK-specific, but regardless theygive some indication of the landscape in this uncertain area.

180 | Environmental and social transparency under the Companies Act 2006Notes | 181301KPMG Global Sustainability Services, ‘KPMG International Survey of CorporateResponsibility Reporting 2005’.302Ibid.303Ibid.304Ibid.305Ibid.306Individuals or groups that affect or could be affected by a company’s activities and associatedperformance.307PricewaterhouseCoopers, ‘The Right Combination*: Corporate Responsibility reports:the role of assurance providers and stakeholder panels’, p. 17.308AccountAbility and Utopies, ‘Critical Friends: The Emerging Role of Stakeholder Panelsin Corporate Governance, Reporting and Assurance’ (March 2007), p. 14.309The increasing use of these panels to decide how far company reporting should go addsfurther to the idea that in practice these reports are less and less strictly for company shareholders,and increasingly serving and communicating with a wider audience.310Deloitte Touche Tohmatsu; Ernst & Young; KPMG; PricewaterhouseCoopers.311SustainAbility, ‘Assurance: Issue Brief #15’ (June 2005).Annex 5312s 457 Companies Act 2006. s 14 of the Companies (Audit, Investigations and CommunityEnterprise) Act 2004 confers power on the Secretary of State to make an order appointinga body to monitor and review the accounts and reports of ‘issuers’ on the London StockExchange whose Home State is the UK. Under this Act the FRRP is authorized to monitorand ensure compliance with the LSE listing rules also.313Or, where applicable, Article 4 of the IAS Regulation.314s 459(7) Companies Act 2006. Information subject to legal professional privilege is,broadly, communications between a solicitor and their client that were conducted for thepurpose of receiving legal advice, both oral and in writing (“legal advice privilege”) anddocuments that are created for the dominant purpose of gathering evidence for use in legalproceedings (“litigation privilege”). There are limited exceptions.315FRRP website, ‘About the Panel’ (accessed Nov 2009) .316All information drawn from FRRP, ‘Operating Procedures’ (2008) unless otherwisenoted.317The FRRP website consistently refers only to ‘accounts’, and not ‘reports’. This may be areflection of the fact that directors’ reports are a relatively new subject of its mandate, butperhaps also broadly reflects its emphasis on strictly financial disclosure.318FRRP Press Release, ‘The Financial Reporting Review Panel Announces Priority Sectorsfor 2008/09’ (9 November 2007).319‘Impairment’ or downward revaluation of a fixed asset. Revaluation of fixed assets isan accounting technique sometimes required to accurately describe the true value of thecapital goods a business owns.320‘Liquidity’ in this context is the degree to which an asset or security can be bought or soldin the market without affecting its price.321FRRP website, ‘How the FRRP Works’ (accessed Nov 2009) .322Ibid.323Ibid.324Paul Grant, ‘FRRP opens up – a bit’ AccountancyAge (4 Aug 2008).325Ibid. If, following an enquiry, the FRRP is satisfied by a company’s explanations, the caseis closed and the fact that an enquiry was made remains confidential.326FRRP website, ‘Frequently Asked Questions’ (accessed Nov 2009) .327Ibid.328Judicial review is the power of the courts to review administrative acts of a public executivebody, and where necessary compel that body to refrain from certain acts or take certainsteps to fulfil its executive duties.329Lord Justice Waller (ed.), Civil Procedure Volume 1 (2008), p. 1523.330See, for example, Council of Civil Service Unions v Minister for the Civil Service [1985]A.C. 374.331Civil Procedure Volume 1, p.1525.332See CPR 54.2.Annex 6333In the case of public limited companies, the members are the shareholders. As this reviewis focusing on public limited companies, ‘members’ and ‘shareholders’ will be treated assynonymous unless otherwise stated.

182 | Environmental and social transparency under the Companies Act 2006Notes | 183334S Davies et al, Modern Law of Meetings (2005), p. 6.335AJ Boyle & J Birds, Boyle & Birds’ Company Law (2007), p. 443.336Ibid, p. 69.337Ibid.338BERR, ‘Companies Act 2006 table of commencement dates’.339The Shareholders’ Rights Regulations implemented the EU ‘Shareholders’ Rights Directive’(Council Directive (EC) 2007/36 on the exercise of certain rights of shareholders inlisted companies [2007] OJ L184/17).340BERR website, ‘What we do: Business Law: Companies Act 2006: FAQ Companies Act2006’, at . See, for further details of regulated markets under UKauthorities, FSA website, ‘FSA Register: Exchanges’, at .341s 393 Companies Act 2006.342Pinsent Masons, ‘Companies – The basics: Company Meetings’ (August 2008).343It is important to note, however, that due to the framework for company calendars establishedby the Companies Act 2006, specifically legal deadlines for submission of requests forthe circulation of resolutions (see sections 338 and 340 Companies Act 2006), opportunitiesto propose member resolutions relating directly to that year’s accounts and reports arerestricted.344Requests must be received from either (a) at least 5% of total voting rights on the proposedresolution, or (b) 100 members who have a right to vote who hold an average of £100of paid-up share capital each.345s 338 Companies Act 2006. If the resolution is received before the end of the financialyear, the company must the cover cost of circulation. If later, it has no obligation to do so(s 340 Companies Act 2006).346The same numbers are required as for proposing a resolution (see note 344), and the samearrangements for cost apply (see note 345).347Requests must be received by the company from members representing at least 5% of thetotal voting rights of all the members who have a right to vote at the meeting, or at least 100members who have a right to vote at the meeting and hold shares in the company on whichthere has been paid up an average sum, per member, of at least £100.348The same numbers are required as for proposing a resolution (see note 344), and the samearrangements for cost apply (see note 345).349See ss 630-640 Companies Act 2006.350See s 327 Companies Act 2006, as amended by Regulation 13, Companies (Shareholders’Rights) Regulations 2009.351Olswang, ‘Shareholder decision-making and rights: Changes to company law now inforce - the impact for fully listed companies’ (October 2007).352‘Ordinary’ resolutions require the support of a simple majority (over 50%) of thosepresent to be passed (s 282 Companies Act 2006), while ‘special’ resolutions require 75% (s283 Companies Act 2006).353s 284 Companies Act 2006. Companies may, for example, choose to restrict voting rightson specific issues to a specific class of shareholder.354The ‘purpose’ of proxy rights is to provide a means for shareholders to be represented atgeneral meeting when they cannot physically attend.355Some companies with particularly questionable social and environmental records havein the past used such discretion to try to deny access to the media. For example, VedantaResources has banned the media for the past 3 years running (see Mines and Communities,‘Vedanta’s Agarwal walks his talk - to little avail’ (4 August 2008)).Annex 7356Traditionally, proxies would be appointed to go to the meeting and act in pursuit of theshareholder’s immediate financial interests.357With regard to mining companies, often in practice such shareholders have been campaigngroups ranging from small, focused activist groups such as Colombia SolidarityCampaign, Partizans, and Philippine Indigenous Peoples Links to larger NGOs such asSurvival International, or Trade Union groups such as the International Federation ofChemical, Energy, Mine and General Workers’ Unions.358The company that is now known Rio Tinto plc, who with Rio Tinto Limited of Australiahead the dual listed structure of the Rio Tinto Group.359Description based on Roger Moody, ‘Rio Tinto Zinc Divestiture/Annual General MeetingCampaign’ (6 December 1991) .360These operations were controversial because Namibia at that point was regarded as beingillegally controlled by South Africa; RTZ was acting contrary to a number of UN resolutionsand widespread public and international condemnation of the South African regime’soccupation.361Roger Cowe, ‘Obituary: Sir Anthony Tuke’ The Guardian (12 March 2001).362Roger Moody, ‘The Gulliver File - Mines, people and land: a global battleground’ Minewatch(1992), quoted at .363Vedanta is both a mining company and based in the UK, but is not as large as the otherthree, as we will see below.

184 | Environmental and social transparency under the Companies Act 2006Notes | 185364For example, Anglo American AGMs are particularly well documented as until 2006they published full transcripts of the AGMs, and for 2008 an extremely detailed record wastaken by the London Mining Network.365The Group has a unified board, and shareholders of each holding company have equivalenteconomic and voting rights in the Group as a whole.366Rio Tinto Group website, ‘Who We Are: Business Overview’ (accessed Nov 2009) .367PricewaterhouseCoopers, ‘Mine*: As Good As It Gets?’ (2008). Note that as of late 2008the market capitalisation of all of the companies included here will almost certainly beconsiderably lower, as a result of the economic downturn.368Partizans, ‘Partizans West Papua Briefing’ (December 1995).369Partizans, ‘Corporate executives dodge rotten eggs, die-ins and awkward questions’Peace News (June 1996).370International Federation of Chemical, Energy, Mine and General Workers’ Unions, ‘RioTinto Tainted Giant: The Stakeholder Report’ (1997).371CFMEU, ‘The RIO TINTO Campaign: Protests at Annual General Meetings’ (13 May1998) .372Partizans, ‘Rio Tinto chair says code of labour practice unnecessary’ Corporate Watch(Summer Issue 2000).373Partizans, ‘Report of the Rio Tinto Annual General Meeting 2003’ (April 2003).374Partizans, ‘Rio 2005 - An account of Rio Tinto’s May 2005 London annual general meeting’(May 2005).375Save The Wild Up, ‘Mine opponents speak at Rio Tinto meeting in London’ (17 April2008) .376Kennecott Eagle Minerals Co.377London Mining Network, ‘Notes on the Rio Tinto plc AGM’ (17 April 2008).378Ibid.379All facts as of October 2008.380PricewaterhouseCoopers, ‘Mine*: As Good As It Gets?’.381Anglo American, ‘Anglo American AGM 2003’.382This has been defined as the recognition of ‘indigenous peoples’ inherent and prior rightsto their lands and resources and respects their legitimate authority to require that thirdparties enter into an equal and respectful relationship with them’ (Commission on HumanRights, Sub-Commission on the Promotion and Protection of Human Rights, WorkingGroup on Indigenous Populations, ‘Twenty-second session’ (19 -13 July 2004) p. 5). Fundamentallyit means that an extractive project should not proceed until companies are inreceipt of the consent of any and all indigenous peoples living in the area of proposed operations(i) without the people being subjected to duress, coercion or manipulation; (ii) meaningfullysought sufficiently in advance of any activities by a company; and (iii) with fulldisclosures of the development plans in accessible and understandable forms for affectedpeoples and communities. It is a right recognised by various intergovernmental organizations,international bodies, conventions, international human rights laws and nationallaws, but has of course been recognised and implemented to varying degrees in practice byextractive companies and international financial institutions.383Anglo American plc, ‘Transcript of proceedings at the Annual General Meeting held on21 April 2004’.384Anglo American plc, ‘Anglo American AGM 2005 Transcription’ (20 April 2005).385Anglo American plc, ‘Transcript of the Annual General Meeting of Anglo American plcheld in London on Tuesday, 25 April 2006’.386London Mining Network, ‘Notes on the Anglo American plc AGM held at the RoyalSociety, 6-9 Carlton House Terrace, London SW1, England, on Tuesday 15 April 2008’.387Also with secondary listings on the Johannesburg Stock Exchange (through BHP BillitonPlc) and American Depositary Receipts listings on the New York Stock Exchange.388The two holding companies have identical boards of directors and are run by a unifiedmanagement team. Shareholders in each company have equivalent economic and votingrights in the BHP Billiton Group as a whole.389BHP Billiton, ‘Company Overview: Our Profile’ (accessed Nov 2009) .390PricewaterhouseCoopers, ‘Mine*: As Good As It Gets?’.391North Shore Colombia Solidarity Committee Blog, ‘BHPBilliton plc AGM, London, 26October 2006’.392Richard Solly, ‘BHPBilliton plc AGM’ (25 October 2007).393Mines and Communities, ‘Vedanta Update’ (25 April 2007). Conversion based on Bankof England exchange rate data for April 2007 (accessed Nov 2009) .394Nostromo Research, ‘Not such a fair wind for Fowle - Review of Vedanta AGM’ (July2004).395Mines and Communities, ‘Vedanta update: besieged by accusations’ (4 August 2007).

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