Corporate Social Responsibility and the Law : Foley Hoag LLP

Raise the topic of due diligence in a room of corporate lawyers and you might expect the conversation to turn to a discussion of mergers and acquisitions or environmental site assessments.   Increasingly, however, corporate counsel are being asked to help clients develop due diligence strategies and systems to identify the human rights concerns that may be associated with their existing, or potential, operations. 

Corporate stakeholders, including both legislators and shareholders, are requesting that companies demonstrate that they have due diligence mechanisms in place to assess, and respond to, human rights concerns in their supply chains and operating areas.

Recent legislative developments in this area include:

• Section 1502 of the new Dodd-Frank financial reform legislation requires companies using minerals originating in the Democratic Republic of Congo (“DRC”), or adjoining countries, to report on their “due diligence measures” regarding the source and chain of custody of those minerals. This provision, meant to address concerns that the purchase of “conflict minerals” is fueling conflict in the DRC, could impact companies in a wide range of industries depending on the final language of implementing regulations. 
• The new California Transparency in Supply Chains Act of 2010 asks retailers and manufacturers operating in California to disclose their efforts to “evaluate and address" the  risks of human trafficking and slavery in their product supply chains. 

Compliance with these requirements will not be straight-forward.  It is frequently hard to identify consistently reliable sources of information regarding, for example, the source of specific minerals or the veracity of supplier assurances regarding the status of certain workers.  What is clear is that these new requirements reflect a desire on the part of corporate stakeholders to ensure that corporate commitments to human rights go beyond short policy statements.  Stakeholders increasingly expect companies to demonstrate that they have systems in place to assess, avoid, and mitigate the adverse impacts of their activities on human rights. 

In the 2010 proxy season, socially responsible investors filed resolutions with a number of companies, including Caterpillar, Hewlett-Packard, Motorola, and KBR, asking for the adoption of comprehensive human rights policies and assessment mechanisms.  The resolutions filed with Motorola and Hewlett-Packard urged these companies to develop policies sufficient to provide assurance that their “products and services are not used in human rights violations.”  The resolution filed with KBR asked the company to report on the extent to which the company’s “contractors and suppliers are implementing human rights policies in their operations, including monitoring, training, [and] addressing issues of non-compliance[.]”

The legislative provisions and shareholder resolutions cited above are consistent with the recommendation put forward by the U.N. Special Representative for Business and Human Rights that companies carry out “human rights due diligence” in order to discharge their responsibility to respect human rights.  As framed by the Special Representative (.pdf), human rights due diligence involves the implementation of policies, assessment mechanisms, and internal oversight and control systems to identify, prevent, and address the actual and potential adverse human rights impacts associated with a company's operations. 

With the recent emergence of human rights due diligence as a mechanism to ensure accountability for the adverse human rights impacts associated with corporate activity, companies, and their counsel, should evaluate the extent to which they have developed policies and oversight mechanisms sufficient to address stakeholder concerns and expectations.

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The new Good Practice Guide - Indigenous Peoples and Mining released by the International Council on Mining & Metals (“ICMM”) should prove informative to a wide variety of stakeholders concerned the impacts of corporate activities on indigenous communities.  The topics covered by the guide include: engagement and consultation; impact assessments and baseline studies; negotiated agreements; benefit sharing; and grievance mechanisms.

ICMM produced the guide for companies in the mining industry, including its 19 member companies, but explicitly notes that the guide has relevance for companies in the oil and gas and construction industries, as well as indigenous peoples' groups, governments, and civil society organizations. The guide is intended, in part, to implement the commitments set forth in ICMM's Position Statement on Mining and Indigenous Peoples, published in 2008. 

The guide both underscores the ethical importance of "acknowledging and respecting Indigenous Peoples' rights and interests," and seeks to emphasize the business case for responsible corporate engagement with indigenous communities.  Throughout the guide are examples of "The Costs of Getting It Wrong," and the stories are convincing.  In one example, a company received government approval for the resettlement of a specific population, but ultimately had to abandon the project after community opposition led to attacks on the mine site and a nearly-unanimous public referendum against the mine development.  Through such case studies, the guide highlights the challenges that may be faced by companies that fulfill government regulatory requirements regarding environmental and social impact assessments, but fail to meet the expectations of the communities that may be impacted by their operations.  The examples cited in the guide demonstrate that gaining a social license to operate may be more challenging than gaining governmental approval, and that failure to secure a social license can slow or halt a project.

Although indigenous groups may be disappointed that the ICMM maintains its standard of free, prior, informed consultation and broad community support, rather than consent, they may be pleased with some aspects of the guide. For instance, one section of the guide recommends establishing agreements with indigenous groups, akin to Impact Benefit Agreements in Canada, claiming that this is “mutually beneficial.” Although this may not be a “consent” policy, obtaining a formalized agreement through the processes described in the guide would be quite challenging without the community’s implicit consent.

Notably, the guide emphasizes the value of community involvement in and co-design of baseline studies and impact assessments, a best practice also highlighted in Foley Hoag’s recent report, Implementing a Corporate Free, Prior, and Informed Consent Policy: Benefits and Challenges.  In addition, it offers numerous examples of companies that have helped indigenous communities take advantage of training and employment opportunities, as well as companies that have worked to ensure that development funds are allocated in accordance with community priorities.  The guide places significant importance on cultural impacts, rather than only emphasizing physical or economic impacts on indigenous people, and also highlights the need for cultural heritage assessments and management plans.  In short, the new guide is a significant addition to the practical guidance available to mining and other extractive companies regarding indigenous peoples.

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On October 4, the Securities and Exchange Commission ("SEC") granted a stay of the new proxy access rules that are intended to allow certain shareholders to: (1) nominate directors and have those nominations included in corporate proxy materials; and (2) propose amendments to corporate procedural requirements for shareholder director nominations.  The proxy access rules, adopted in August, had been scheduled to go into effect on November 15, 2010.  A request for a stay was filed by the U.S. Chamber of Commerce and the Business Roundtable after these organizations sought judicial review of the rules before the D.C. Circuit Court of Appeals.

At the time the SEC announced that it was exercising its discretion to issue the stay, SEC spokesman John Nester stated that, because the business groups had sought expedited judicial review, "it is our expectation that the legal issues will be resolved by late spring."  Even assuming that the rules are upheld, given the time that will likely be required for judicial review, it is unlikely that the new rules will be a significant factor in the upcoming proxy season. 

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Earlier today, the United States Supreme Court issued an order (.pdf) declining to grant a writ of certiorari in response to plaintiffs' petition, and defendant's conditional cross-petition, seeking review of the Second Circuit's decision in Presbyterian Church of Sudan v. Talisman Energy, Inc., 582 F.3d 244 (2nd Cir. 2009).  The Second Circuit upheld a lower court decision dismissing the case, which involved allegations that Talisman Energy aided and abetted the Sudanese Government in committing human rights abuses in Southern Sudan. 

The Second Circuit's earlier decision, widely cited in Alien Tort Statute ("ATS") jurisprudence, held that companies may only be found liable for violations of customary international law under an aiding and abetting theory of liability if they provide substantial assistance to the primary violator with the intent of furthering the human rights violation.  The Court determined that international law is the proper source for establishing a standard for accessory liability, and that “the mens rea standard for aiding and abetting liability in ATS actions is purpose rather than knowledge alone.”  Notably, the 2009 decision predates the Second Circuit's recent decision in Kiobel v. Royal Dutch Petroleum, in which the Court held that corporations cannot be sued under the ATS for violations of customary international law. 

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On September 30, California Governor Arnold Schwarzenegger signed The California Transparency in Supply Chains Act of 2010 into law.  The legislation will require companies to disclose their efforts to ensure that their supply chains are free from slavery and human trafficking. 

The legislation will go into effect on January 1, 2012 and applies to retail sellers and manufacturers doing business in California that have annual gross receipts exceeding one hundred million dollars.

Once the legislation goes into effect, companies will be required to disclose what actions they are taking, if any, to:

• Evaluate and address the risks of human trafficking and slavery in their product supply chains. These disclosures must state if companies are not using third parties to verify the risks in their supply chains.
• Require their direct suppliers to certify that the materials incorporated into company products comply with laws regarding slavery and human trafficking in the countries in which they are doing business.
• Conduct audits of their suppliers to evaluate compliance with company standards on trafficking and slavery.  These disclosures must state whether independent, unannounced audits are conducted.
• Maintain accountability standards and procedures for employees or contractors that fail to meet corporate standards regarding slavery and human trafficking.
• Provide employees and managers, who have direct responsibility with supply chain management, with training on the mitigation of human trafficking and slavery risks.

Companies are required to make these disclosures on their websites.  If a company does not have a website, the information must be made available in writing within 30 days of a consumer request for the disclosure.  The exclusive remedy for failure to comply with the law is an action brought by the Attorney General of California for injunctive relief.

A coalition of institutional investors, faith-based investors, and research firms had urged Governor Schwarzenegger to sign the legislation, which was passed by California's Senate and Assembly in July.  Rev. David M. Schilling, program director for human rights at the Interfaith Center on Corporate Responsibility, recently observed that the legislation's requirements are in line with the recommendations of the U.N. Special Representative for Business and Human Rights, specifically with regard to corporate implementation of human rights due diligence processes (.pdf). 

Initial estimates suggest that the legislation will impact approximately 3,200 companies.  That said, as was noted by the legislation's supporters, many companies are already disclosing detailed information about the human rights risks associated with their supply chains.  The intent of the legislation is to provide consumers with the information they need to make purchasing decisions with the elimination of slavery and human trafficking in mind.  The language of the bill specifically cites a September 2009 report by the U.S. Department of Labor (.pdf) that lists 122 goods from 58 countries that the Department of Labor has reason to believe were produced with either forced labor or child labor, and states that "[a]bsent publicly available disclosures, consumers are at a disadvantage in being able to distinguish companies on the merits of their efforts to supply products free from the taint of slavery and trafficking."   

The legislation does not require companies to take specific actions other than the disclosure of what, if any, efforts are being made to address the risks of slavery and human trafficking in their direct supply chains.  Ultimately, the impact of the legislation will depend on both consumer behavior and the extent to which advocates, including investors, are able to use the required disclosures to pressure companies to monitor, and mitigate, the human rights risks in their supply chains. 

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