Corporate Social Responsibility and the Law : Foley Hoag LLP

This post was originally published on January 21, 2011 by Vault.com's CSR Blog, "In Good Company."

Last week’s post, "Why Don’t Executives Understand CSR?" prompted me to reflect on the risks to companies where executives claim pride in corporate CSR programs, but don’t really see CSR as a core element of their business strategy.

As a lawyer, it’s hard for me not to talk about risk. I see CSR as critical to corporate risk management, and it worries me when I see companies that state a commitment to CSR, but, in reality, limit CSR to a section on the corporate website and a few standards that no management-level personnel are accountable for implementing.

There is a Business Case for Well-Managed CSR

Why the worry? Many people talk about the business case for CSR, but I qualify this slightly – there is a business case for well-managed CSR. A CSR approach that is not sufficiently integrated into the company’s operations and that very few people, especially at the executive level, actually understand, can present business risks.

What are those risks?

1. Disconnect With Stakeholders

A poorly managed CSR program can diminish corporate capacity to understand the concerns of its stakeholders about the social and environmental impacts of its operations. Companies may think that by stating a commitment to CSR they are somehow responsive to these concerns, and this may preclude the diligent effort required to evaluate legitimate and evolving stakeholder expectations. This lack of understanding is then revealed when corporate contributions to local charities fail to preclude a community from lobbying against company activity.

References to acts of corporate citizenship do not mitigate against the risks associated with a lack of internal commitment to CSR.

2. All Talk, No Action

If CSR is limited to high-level policies and glossy philanthropic reports, few people within the company are actually tasked with assessing and understanding the complex impacts of company operations. Even fewer are developing strategies to respond in both the short- and the long-term.

Many people talk about how to define CSR, but I think it is more interesting to ask "What does CSR do?" and "What is its function within the company?" At its core, I think CSR creates a culture of listening and provides the discipline to know when, and how, to respond to what is being said.

What can companies do?

1. Listen

Companies need to be skilled at listening to a range of stakeholders, including employees, investors, governments, and local communities. They need to develop a strong understanding of stakeholders’ expectations of the company and their concerns about the impacts of corporate activity. Listening is an active process: it requires proactive engagement and seeking out new perspectives, both internally and externally. Giving a voice to stakeholders provides companies with invaluable information and perspectives on how to run their operations, if they are willing to hear what is being said.

2. Respond

If CSR begins with listening, it ends with a management system that is responsive to the information that stakeholders provide. If stakeholder concerns and expectations are not understood--and the company seen as unresponsive--stakeholders begin to take action. Employees leave, consumers shop elsewhere, investors express concern, and communities protest. And perhaps, legislation is passed and lawsuits get filed.

In order to be responsive to stakeholder concerns, a company needs to develop the internal capacity to evaluate these concerns, assess potential responses, and make decisions about corporate strategy. A strong CSR approach requires both active stakeholder engagement and an internal management system that provides the oversight mechanisms and training resources necessary to develop the capacity of employees in many functional areas to engage effectively on these issues.

And this is why executive-level understanding is key.

I’m not saying that executives need to be CSR experts. But they need to understand that CSR, to be effective, is not something that is solely the responsibility of a few people within the company. Without high-level support and oversight, CSR policies are drafted but not implemented, and stakeholders are heard, but not understood.

Ultimately, executives need to understand the relevance of CSR programs to the company’s overall business strategy and to its engagements with internal and external stakeholders, who will always be sole arbiters of its future success.

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In previous posts, we have discussed the requirements and implications of Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (.pdf), which requires companies that utilize certain conflict minerals to conduct and disclose due diligence on their supply chains in order to identify whether the sourcing of these minerals is supporting the conflict in the Democratic Republic of Congo.  The Security and Exchange Commission released its proposed rule on conflict minerals in on December 15, 2010.  The rule is open for comment until January 31, 2011.

Recently, Sarah Altschuller, one of the attorneys in our CSR practice, recorded a podcast on the SEC's proposed conflict minerals rule for Compliance Week.  The podcast is available here.  Conflict minerals consist of columbite-tantalite (tantalum precursor), wolframite (tungsten precursor), cassiterite (tin precursor), and gold.  As noted in the podcast, these minerals are used in the production of automobiles, jet engines, computers, cell phones, jewelry, medical equipment and many other products, and the rule will thus affect a broad range of industries. 

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2010 was a big year for indigenous rights. By the end of the year, the four countries that had voted against the U.N. Declaration on the Rights of Indigenous Peoples (“UNDRIP”) in 2007 – the United States, Canada, Australia, and New Zealand – had reversed their positions and declared their support for the Declaration. This development reflects the rising importance of indigenous rights on the international stage, and points to specific implications for business in 2011 and beyond.

Although the UNDRIP is not binding international law, it nevertheless will have an increasingly significant impact on the acquisition of land and intellectual property by companies in situations where indigenous peoples have conflicting property claims.

The UNDRIP sets forth the responsibility of governments to gain free, prior, and informed consent from indigenous peoples for development projects. It has already been cited in national court cases, particularly in Latin America, as support for the requirement that governments seek free, prior, informed consent from indigenous peoples and cease giving concessions to companies until consent is obtained. Thus, although the UNDRIP addresses governments, it will directly impact companies.

In an upcoming development, this spring the International Finance Corporation ("IFC") will release a revised version of its Environmental and Social Performance Standards, which apply to companies receiving its loans. It is rumored that the IFC will add language requiring free, prior, informed consent of indigenous peoples to the revised standards.

Companies engaged in oil, gas, mining, or other projects with significant physical footprints should consider the implications of evolving indigenous peoples’ rights. Companies seeking to use products that are the cultural heritage of indigenous peoples for pharmaceutical or beauty products may also be impacted by recent trends.

Foley Hoag's recent report, Implementing a Free, Prior, and Informed Consent Policy: Benefits and Challenges, outlines some of the considerations for companies seeking to effectively address indigenous rights in their policies and practices. For companies seeking to address concerns about indigenous peoples' rights in specific national contexts, the following due diligence steps may help manage potential legal, reputational, and operational risks:

• Identify national laws regarding consultation or consent of indigenous peoples.
• Evaluate whether the national government, in fact, observes laws on consultation, and work with the government, to the extent possible, to ensure that the relevant law(s) are fully implemented. 
• Review any pending cases against the host country in national courts or regional courts, such as the Inter-American Court of Human Rights, regarding the taking of land from indigenous peoples for development projects. 
• In challenging country contexts, consider following the IFC Performance Standards as a way to demonstrate to investors, civil society, and indigenous groups that the company is following best practices.

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Today is National Human Trafficking Awareness Day.  In less than one year, on January 1, 2012, The California Transparency in Supply Chains Act will go into effect.  As discussed in previous posts, many large retailers and manufacturers doing business in California will be required to disclose their efforts, if any, to ensure that their product supply chains are free from slavery and human trafficking.

Companies that will be impacted by the legislation include both brand name retailers that have already faced considerable scrutiny with regard to human rights issues in their supply chains, as well as companies that have not historically received much attention with regard to these issues.  All impacted companies must make the required disclosures on their corporate websites.

What should companies doing business in California be doing to prepare for this legislation?

• Identify whether the legislation applies to your company.  If your company does business in California and is identified on its tax returns with a "principal business activity code" that falls within the category of “manufacturing” or “retail trade”, the legislation applies if your company’s annual gross receipts exceed one hundred million dollars.  This will impact a range of companies, including clothing retailers, grocery stores, and metal manufacturers.

• Review any human rights policies and standards applicable to your product supply chain.  If the legislation applies, it is time to closely review your corporate policies and supplier standards that address issues of human rights.
  • Does your company have policies in place that address forced labor and human trafficking?
  • How does your company inform its suppliers of these policies?
  • Does your company have procedures to evaluate the risk of forced labor or human trafficking associated with the manufacture of its products?
  • Do your supplier standards require certification that the raw materials used in the manufacture of products were sourced in compliance with applicable laws on slavery and human trafficking?

These are all important questions to consider when evaluating your company’s capacity to produce the required disclosures.

• Review, or implement, auditing and verification mechanisms.  Policies and procedures must be implemented and verified.  It is important to evaluate the capacity of existing verification procedures: 
  • How does your company verify compliance with its human rights policies? 
  • Does your company have systems in place to audit suppliers for compliance with corporate human rights policies? 
  • Are existing, or planned, auditing procedures sufficient to evaluate the specific risks of forced labor and human trafficking associated with your product supply chain? 
  • Does your company use independent auditors? 

Note that the legislation will require companies to specify whether verification of supplier compliance is done through independent, unannounced audits.

• Review internal accountability mechanisms and training procedures.  Your supplier policies and standards provide little assurance unless they are effectively integrated into the management of your supply chain.
  • Are corporate human rights policies integrated into supplier guidelines and standards?
  • What functional areas within your company are best-positioned to implement policies on forced labor and human trafficking?
  • Are the correct people within the functional areas noted above held accountable for implementing corporate policies on forced labor and human trafficking?
  • Is your company providing sufficient training to the right personnel to ensure that corporate policies are carried out effectively?  

Note that the legislation specifically calls for disclosures regarding internal accountability mechanisms and training programs for employees and management.

• Start thinking about the content of disclosures.  When planning public disclosures, one year can go by very quickly.  It is important to begin internal discussions about the content of the required disclosures within your company.  The California statute requires disclosure of corporate efforts "if any" -- and this allows for a range of potential approaches.  It may be appropriate to engage in discussions with external, as well as internal, stakeholders when determining what information should be provided. 

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