German Confederation of Trade Unions Federal Executive Board Statement of the German Confederation of Trade Unions on a proposal by the EU Commission for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND COUNCIL amending Council Directives 78/660/EEC and 83/349/EEC as regards disclosure of non-financial and diversity information by certain large companies and groups Responsible: Dietmar Hexel DGB Federal Executive Board Enquiries to: Rainald Thannisch Codetermination Policy Department 030 240 60 605 rainald.thannisch@dgb.de Status as of 27 May 13
1) Introduction and general notes On 16 April 2013 the EU Commission presented a draft to amend the Accounting Directives with the objective of increasing corporate transparency on social and environmental matters. It would require large companies to report on their policies, risks and results as regards environmental, social and employee-related matters, respect for human rights, anti-corruption efforts and bribery issues, and diversity within management and supervisory bodies. The Commission had already announced a proposal for regulation on the transparency of social and environmental information in its communication "A renewed EU strategy 2011-14 for Corporate Social Responsibility" in October 2011. 1 The proposals for amendment relate to the Fourth (Articles 46 and 46 a) and Seventh (Article 36 paragraph 1) Accounting Directives. 2 The German Confederation of Trade Unions (DGB) welcomes the proposal as a first step in the right direction but others must follow. Furthermore, it is necessary to expand publicity requirements of non-financial information and to state them more precisely. On its 19th ordinary Federal Congress in May 2010, the DGB already called upon German and European politicians to introduce accountability and publicity requirements for companies as regards the environment, social matters and human rights, referring to transparency, verifiability, comparability and cooperation as indispensable criteria for CSR. From the standpoint of the DGB, CSR reporting must include specific reports on working and employment conditions throughout the entire enterprise, opportunities for employee participation, cooperation with employee representation bodies, promotion of disadvantaged groups of individuals and the compatibility of family and career. Furthermore, reporting on value orientation and social responsibility must include equality of opportunity with equal career prospects and in-house promotion opportunities. 3 1 EU Commission: A renewed strategy 2011-2014 for Corporate Social Responsibility (CSR), KOM (2011) 681 (25 October 2011) 2 Directive of the European Parliament and Council amending Directives 78/660/EEC, 83/349/EEC, 86/635/EEC and 91/674/EEC on the annual accounts and consolidated accounts of certain types of companies, banks and other financial institutions as well as insurance undertakings 3 See resolution "Nachhaltige Unternehmensverantwortung (CSR) Verbindliche Regeln, die für alle gelten!" of the DGB's 19th ordinary Federal Congress in May 2010, http://www.dgb.de/-/a3i 2
Consequently, in its statement from 6 February 2012 the DGB in principle welcomed the EU Commission's plans to increase transparency of social and environmental information by means of regulation, while demanding, among other things, that the democratically elected workers' representatives are to be involved in the publications. 4 However, we must emphasise that the increase in transparency aimed for by the EU Commission constitutes, in our opinion, only a first step towards more commitment. In light of recent reports about scandalous working and production conditions, such as witnessed on the supply side of textile companies in Bangladesh, it becomes clear that we need an international regulatory framework that treats social, environmental and economic goals as equal. Therefore disclosure requirements constitute only the first step towards more commitment in terms of taking social and environmental responsibility. Furthermore, the DGB stresses that disclosure requirements must and can never be a substitute for workers' codetermination rights in the workplace and throughout the company or for collective agreements. These are central instruments for good working conditions in the workplace and throughout the company. Therefore, democratically elected workers' representatives in the works council, European Works Council and on the codeterminated supervisory board are to be involved in the publications. In the following, we will examine in greater detail some specific requirements found in the proposal for a directive as regards disclosure of non-financial information that we believe must be expanded as a whole and stated more clearly. 2) Clearer definition of "employee-related matters" Article 1 (a) of the proposal will require large companies to disclose a statement in their annual report "including material information relating to at least environmental, social, and employee-related matters, respect of human rights, anti-corruption and bribery aspects." Within these dimensions, the statement is to include a description of policies, results and risk-related aspects. 4 See Statement of the German Confederation of Trade Unions on the CSR Communication of the EU Commission of 25 October 2011, http://www.dgb.de/-/676 3
The DGB supports this proposal since the companies in question will be obliged for the first time to make a statement on the so-called non-financial factors regardless of their corporate policy. The inclusion in the annual report can also be interpreted as a signal towards the fact that social and environmental aspects must not come second to economic goals. Another positive is that employee-related matters are explicitly mentioned. The DGB further welcomes that the EU Commission continues to define corporate social responsibility (CSR) as "the responsibility of enterprises for their impact on society". The DGB expressly views this new definition which had already been used in the 2011 CSR communication as an important step away from the current dogma of mere voluntary participation prevalent in the CSR context. The passage in the EU publication stating that "respect for applicable legislation, and for collective agreements between social partners, is a prerequisite for meeting that responsibility" is of particular importance to the DGB. 5 From the standpoint of the National CSR Forum 6 "compliance with the law and the relevant tariff agreements is a prerequisite for exercising corporate social responsibility. 7 Even though this should go without saying, German trade unions are aware of many cases of the German Works Council Constitution Act being violated, works council elections being prevented or works council work being impeded. Against this background, the DGB expressly calls upon the European bodies to recognise the violation of employee and codetermination rights within the context of their CSR policy. Therefore the dimension of employee-related matters existing in the proposal should be defined such that the companies in question are required to report, among other things, on their recognition of the right to organise, adherence to collective agreements and the existence of representation in the workplace and at company level. We further demand that the reports include the number of employees being employed through contracts for work and labour. As a reference framework for the definition of employee-related matters the OECD Guidelines should be referred to as well. 5 EU Commission: A renewed strategy 2011-2014 for Corporate Social Responsibility (CSR), KOM (2011) 681 (25 October 2011) 6 The DGB as well as its member trade unions IG BCE, IG Metall and ver.di are members of the National CSR Forum, along with employer and trade associations, non-governmental organisations and enterprises. 7 See CSR Forum resolution on EU publication on CSR, http://www.csr-indeutschland.de/fileadmin/user_upload/downloads/csr_in_deutschland/csr_forum/download/ Beschluss_Stellungnahme_CSR_Forum_zu_CSR_Mitteilung_EU_final-Reinschrift-.pdf 4
Furthermore, it may be advisable to use the indicators of the Global Reporting Initiative (GRI) as a reference, among others: - Employee turnover rates (GRI-LA2) - Benefits provided to full-time, temporary and part-time employees (GRI-LA3) - Level of unionisation and percentage of employees covered by collective bargaining agreements (GRI-LA4) - Composition of governance bodies by gender (GRI-LA13) - Ratio of basic salary by gender (GRI-LA14) It may also be considered to allow supervisory bodies / management boards to include further elements in their reports as well. For example, a supervisory board could require its management, through the EU Commission's reporting framework, to report on the payment of living wages in its field of activity or on working hours (according to ILO conventions). 3) Extend scope of reporting to include supply chain It is unclear to what extent the statement as required by the proposal for a directive also addresses social and environmental responsibility in the supply chain. The inclusion of the supply chain, however, is of great importance to the DGB since the majority of corporate violations of workers' and human rights happen within the supply chain. For instance, we know that labour and social standards in many developing nations are not on par with European standards and that compliance with adequate standards, should they exist, is not always monitored. Therefore, it is absolutely necessary to explicitly include the supply chain in the publicity requirements. In light of the before-mentioned challenges of works council work being impeded and works council elections being prevented it also makes sense to include suppliers located in Germany and Europe, respectively, in the disclosure requirements. 5
4) Necessity to organise international standards into a hierarchy As stated in recital 7 of the proposal, companies may rely on national frameworks, EUbased frameworks and international frameworks, such as the UN Global Compact, the UN Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprises, the ISO 26000 norm and the ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy, when providing the required information. From the standpoint of the DGB, however, putting these instruments on an equal footing is of little use and furthermore reflects a certain level of arbitrariness when it comes to CSR policy making. From the trade union perspective, the recently revised OECD Guidelines offer the most comprehensive reference framework on taking corporate responsibility in social and environmental matters, despite any still existing shortcomings. They also broach the issue of companies' conduct towards consumers, tax authorities and the public sector. The appeal procedure through national contact points is inseparably linked with the guidelines and makes them a particularly valuable instrument from the trade union perspective. In contrast, some of the other mentioned standards are less ambitious and more limited in scope. Consequently, a report on non-financial indicators in accordance with the more stringent rules of the OECD Guidelines will inevitably turn out to be much more ambitious than a report based on the Global Compact, for instance. Such arbitrariness in the choice of a disclosure standard could allow companies to shirk their responsibility to report on the social and environmental consequences of their activities. Furthermore, it makes it more difficult to compare different CSR policies. Therefore the DGB is of the opinion that the proposal should only rely on instruments that impose a high standard. Such include the OECD Guidelines and the ILO Tripartite Declaration, which European enterprises should be required to follow in the future, as well as reporting in accordance with the GRI standards. Otherwise there would also be the risk of new, unambitious standards manifesting at the European level which would particularly attract those companies interested in disclosing only a minimum of information. 6
5) Comprehensive definition of risk assessment In Article 46 a) (1) b) iii, the EU Commission states that the non-financial statement on the above mentioned subject matters disclosed in the annual report should comprise the following components: a) a description of the policy pursued by the company in relation to these matters b) the results of these policies c) the risks related to these matters and how the company manages those risks In principle, the DGB approves of this structure. However, it remains unclear how the EU Commission defines the term "risk". For instance, a company acting unethically could, in turn, face financial risks, as is the case if violations of workers' or human rights are made public. The DGB believes that the administrative, management and supervisory bodies of European companies should be required to factor in financial risks resulting from the disregard of social and environmental standards as part of their risk management. Such an obligation would also raise awareness for taking social and environmental responsibility. Furthermore, CSR must also address the risks for employees, environment and neighbourhood resulting from business operations. From the standpoint of the German National CSR Forum, "the impacts that business operations have on society can be of a positive or negative nature, for example, the creation of decent jobs being a positive aspect and violations of human rights being an adverse aspect. 8 However, in view of the intent and purpose of the disclosure requirement, it is neither factually possible nor desirable to mandate the disclosure of every potential social or environmental risk. Rather, only the most serious risks and impacts arising from the business operations in question should be identified and analysed. This understanding of risk is conform with the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises and their respective definitions of human rights due diligence requirements for companies. 8 Ibid., CSR Forum resolution on EU publication on CSR 7
6) No reporting based on "comply or explain" Article 46 a) (1) b) iii of the proposal states: "A company that does not apply a specific policy in one or more of these areas will be required to explain why this is the case." Hence the tool of "comply or explain" known from the discussion of good corporate governance in Germany and Europe finds its way into the CSR debate. However, the DGB doubts that there are actual cases of companies not having any policy at all covering the mentioned aspects of social and environmental matters. For this reason, we fear that the "comply or explain" approach in the context of publicity requirements could be misused by companies to evade potentially cumbersome reporting requirements without embracing the subject matter of taking social and environmental responsibility at all. Therefore we call upon the European bodies to eliminate this clause and to make sure that companies covered by the directive will actually report accordingly. 7) Verification of reporting and sanctions As early as January 2011, the DBG pointed out in its statement on the public consultation of the EU Commission as regards disclosure of non-financial information by companies "that business reporting on a solely voluntary basis is not sufficient." From the DGB's point of view, successful criteria for a company taking social and environmental responsibility are transparency, verifiability, comparability and cooperation. We therefore emphasise that the publicity requirements found in the proposal for a directive can be but one element of a comprehensive corporate sustainability strategy. This also means that corporate reports must be independently checked and that sanctions may be imposed in cases of non-compliance. The DGB also considers it crucial to involve the democratically elected workers' representatives in the works council and on the supervisory board in the drafting of the publications. This also makes sense since the workers' representatives can be rightly considered the experts on working conditions within the company. Furthermore, unionised workers' representatives can provide important information on working 8
conditions, as well as compliance with workers' and human rights at their company's international locations and on the supply side, through the networks of the international trade union movement and their structures (International Trade Union Confederation, international sector trade unions). 8) Consistent distinction between SMEs and large companies In principle, we welcome the requirement proposed by the EU Commission to disclose (and explain) non-financial information in the annual report as regards environmental, social and employee-related matters, compliance with human rights, corruption and bribery. However, we strongly oppose the new thresholds in Article 46 paragraph 1b defining when reporting becomes mandatory (companies whose average number of employees exceeds 500, and exceed either a balance sheet total of EUR 20 million or a net turnover of EUR 40 million.) We oppose the introduction of new thresholds in Article 46 paragraph 1b because for one, the threshold of 500 employees exceeds the commonly used threshold of 250 employees as applied in the Accounting Directives for the distinction between small and medium-sized enterprises (SMEs) and large companies. Furthermore, the introduction of new thresholds will result in added reporting complexity and, above all, creates a value system for the matters to be reported on (non-financial information and diversity) in addition to the company's status on the stock exchange. The DGB therefore expects the European bodies to establish a consistent distinction between SMEs and larger companies and, consequently, to equally apply the same size criteria to the reporting of non-financial information as well as a company's diversity policy. This means for us that we must generally follow Article 27 with possible exceptions only for companies that do not reach the thresholds of Article 27. Relying on Article 27 is productive since the general public as well as employees are justifiably interested in companies with more than 250 employees regardless of they are listed or not. For the small and medium-sized enterprises (SMEs) with less than 250 employees not covered by the directive, the European bodies should develop guidance to encourage such companies to set goals on a voluntary basis that do justice to their social as well as environmental responsibility and to possibly publish these goals as well. 9
9) Expansion of disclosure requirement as regards diversity policy In recital 15 the Commission states that "diversity of competences and views of the members of administrative, management and supervisory bodies of companies facilitates a good understanding of the business organisation and affairs. It enables members of these bodies to exercise a constructive challenge of the management decisions and to be more open to innovative ideas, addressing the similarity of views of members, the "group-think" phenomenon. It contributes thus to effective oversight of the management and a successful governance of the company. It would therefore be important to enhance transparency regarding the diversity policy companies have in place. This would inform the market of corporate governance practices and thus put indirect pressure on companies to have more diversified boards." The DGB welcomes the planned disclosure requirement of companies' diversity policies since this subject matter plays an important role in the context of corporate social responsibility. Another positive is that corporate diversity is not being restricted to the dimensions of gender and ethnicity as it the case in the debate on corporate governance but also includes the dimensions of age as well as one's educational and professional background. However, it remains unclear why measure to integrate individuals with disabilities are not being included in the reporting requirements. It is equally incomprehensible why the disclosure requirement according to Article 46a paragraph 1 remains limited to large listed companies. The DGB therefore demands that the reporting obligations such as the publicity requirements discussed above apply to all companies with more than 250 employees. 10