Corporate Social Responsibility and the Law : Foley Hoag LLP

Foley Hoag's CSR practice serves as the Secretariat for the Voluntary Principles on Security and Human Rights (the "Voluntary Principles”).  The Voluntary Principles, a tripartite multi-stakeholder initiative established in 2000, provide guidance to companies in extractive industries on maintaining the safety and security of their operations within a framework that ensures respect for human rights and fundamental freedoms. The Voluntary Principles urge companies to

recognize a commitment to act in a manner consistent with the laws of the countries in which they are present, to be mindful of the highest applicable international standards, and to promote the observance of applicable international law enforcement principles.

This week, Voluntary Principles participants gathered in Washington, D.C., for the two-day Annual Plenary Meeting.  The meeting was hosted by the U.S. State Department, and Secretary of State Hillary Clinton delivered remarks to the attendees. 

The press release copied below provides more details on this annual event.   

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Voluntary Principles on Security and Human Rights Focus on Promotion of Human Rights and Increasing Total Number of Participants

WASHINGTON, March 22, 2011 /PRNewswire/ -- Participants in the Voluntary Principles on Security and Human Rights (the "Voluntary Principles") have gathered in Washington, D.C., this week for the two-day Annual Plenary Meeting. 

Since their inception, the Voluntary Principles have been used by extractive companies to strengthen their capacity to address complex security and human rights issues in their operations around the world. Members of the Plenary include representatives from three pillars: governments, companies, and NGOs. There are currently seven member governments, eighteen companies, and nine NGOs participating in the initiative. This year, the Voluntary Principles are pleased to welcome Barrick Gold Corporation as a new corporate participant.

At the 2010 Annual Plenary Meeting, participants collectively adopted a vision to:

Strengthen the Voluntary Principles on Security and Human Rights' significance as a business and human rights best practice framework by: increasing our participants' base, strengthening accountability, and actively promoting universal respect for human rights.

Consistent with this vision statement, during the past year, participants have focused on initiatives intended to promote the future growth of the framework, including the drafting of new entry criteria for governments, companies, and NGOs, as well as the creation of documents intended to facilitate outreach to potential participants in all three pillars. On March 21, 2011, to promote the Voluntary Principles with potential government participants, the U.S. State Department hosted an open house at which participants spoke with representatives of a number of interested governments regarding the benefits of joining the framework.

Participation in the initiative is voluntary. For questions on how to participate, contact the Secretariat at VoluntaryPrinciples@foleyhoag.com.  For more information about the VPs, visit www.voluntaryprinciples.org.

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Institutional Shareholder Services ("ISS") recently released a report on engagement between investors and public corporations in the United States that included the finding that this “engagement is expanding beyond financial and strategic issues and ‘traditional’ governance topics to include more environmental and social issues.” The report, The State of Engagement between U.S. Corporations and Shareholders, was based on a survey of 355 issuers of stock and 161 investors.

While popular attention to shareholder advocacy often focuses on the filing of shareholder resolutions, engagement between shareholders and companies often begins with letters and phone calls. Asset managers reach out to investor relations departments, corporate secretaries, and other senior executives, to initiate dialogue about issues of shareholder concern. The report notes that

Asset managers with an ESG (environmental, social, and governance) or SRI (socially responsible investment) orientation often contact an issuer's CSR (corporate social responsibility) or sustainability office, and one such asset manager noted that ‘the most effective engagements tend to be with the people actually working on the issue.’

Notably, the report found that both investors and issuers believe that “constructive dialogue” is indicative of a successful engagement, but investors were, unsurprisingly, much more likely to be satisfied with concrete corporate actions. Both sides felt that a withdrawn shareholder proposal was as much a sign of accomplishment as a proposal with high support votes. A withdrawn proposal is often a sign of productive discussions.

The report by ISS is intended to provide a comprehensive picture of engagement between investors and issuers and, in doing so, raises a number of questions for those monitoring shareholder advocacy on social issues, particularly in the area of human rights.

In the 2011 proxy season, members of the Interfaith Center on Corporate Responsibility have filed a number of resolutions raising human rights concerns including: resolutions asking for the adoption or amendment of human rights policies (e.g., Carnival Corporation, Caterpillar); resolutions asking for the identification of gaps in existing human rights policies (e.g., General Dynamics, KBR); and resolutions asking for companies to adopt policies articulating respect for the human right to water (e.g., Johnson & Johnson, Green Mountain Coffee Roasters).

Resolutions like the ones noted above likely reflect unsuccessful attempts at constructive dialogue. It is important therefore to ask what needs to happen, on both sides, for these resolutions to lead to the types of discussions, and/or actions, that each side can view as successful.

What types of engagement might preclude the filing of resolutions? Who, on the corporate side, should be engaged in responding to the shareholder concerns regarding human rights policies and impacts? Who are the people "actually working on the issue" that can respond effectively? The answers to these questions are likely to vary considerably depending on the company and the specific issues involved. That said, they are important questions for both sides to consider as shareholder concerns about social concerns, especially with regard to human rights, continues to grow.

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Transparency International and Revenue Watch have released a report, Promoting Revenue Transparency: 2011 Report on Oil and Gas Companies, that is indicative of the pressure being placed on extractive sector companies to report on their payments to host governments and the value-sharing stipulations in their contracts.

The report ranks 44 oil and gas companies – both publicly listed and national oil companies – in three different areas:

1. Reporting on anti-corruption programs - This section of the report looks at corporate policies and management systems, including whether information on such programs is available to the public;
2. Organizational disclosure - This section examines whether companies disclose their upstream project partners, subsidiaries, fields of operations, and accounting practices; and
3. Country-level disclosure - This section reviews whether companies report on: payments to governments; operating data, such as reserves and production; and data from profit-and-loss accounts – all on a country-by-country basis.

According to the report, companies have improved their performance in the first category, but score much lower in the third category. Companies such as BP, BG Group, and BHP Billiton scored high in the first two categories, but joined their peers’ lower rankings in the third category. Generally, publicly listed companies scored significantly better than national oil companies, with the exception of Statoil, a Norwegian state-owned company.

The report's focus on country-level data suggests that civil society will continue to push companies to reveal more disaggregated data on payments made at the country and project levels. Led by umbrella organization Publish What You Pay, civil society organizations have already successfully advocated for legally-mandated extractive sector reporting regarding payments to governments through the passage of Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The Securities and Exchange Commission has yet to issue its final rules guiding the disclosures required by Section 1504, but it is likely that the reporting will be on a project basis, and by type of payment – such as taxes and royalties. These requirement are more specific than what is currently required by the Extractive Industries Transparency Initiative, a voluntary initiative in which many extractive sector companies participate.

Section 1504 has come under fire from a number of companies, including Royal Dutch Shell, whose CEO stated recently, “Dodd-Frank treats foreign governments not only as irrelevant, but as a problem and not a solution.” Meanwhile, civil society organizations are seeking to expand the requirements of Section 1504 to other jurisdictions - an initiative that received support from some European leaders. 

In January, French President Nicolas Sarkozy wrote to U2 rock star-activist Bono, stating “I have decided to ask the European Union to adopt as quickly as possible legislation forcing companies in the extractive sector to publish what they pay to host countries.” He has since reiterated this position. In February, the U.K. Finance Minister publicly supported a plan put forward by President Sarkozy for new E.U.-wide rules. Whether such rules are passed remains to be seen, but Section 1504 of the Dodd-Frank Act has already made it clear that the rules are changing, and that companies will be expected to be more transparent than ever before.

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Thirty of the largest apparel manufacturers and retailers – together comprising an estimated 60% of global apparel sales – recently announced the formation of the Sustainable Apparel Coalition. This group, which also includes academics, non-profits and the Environmental Protection Agency, is creating the industry’s first large-scale initiative to improve environmental and social performance through the establishment of standards and tools.

The Sustainable Apparel Index will be a tool for companies to evaluate the impacts of the entire life cycle of apparel products, including materials, manufacturing, packaging, transportation, use, and end of life.  It be not be "consumer facing" but rather will provide a tool for companies to evaluate their performance.  Version 1.0 of the Index is expected to be ready for pilot-testing in April 2011.

The long-term goals of the Sustainable Apparel Coalition include eventually creating a labeling system with a single numeric score to give consumers a much clearer picture of the impacts of their clothing and footwear – allowing consumers to take social and environmental costs into account in their buying decisions. For now, Coalition members will use the Index to drive change within the industry, by measuring and managing the impacts linked to their products using five categories:

• Water use and quality;
• Energy use and greenhouse gases;
• Waste; chemicals and toxicity; and
• Social and labor.  

The Index will build on Nike’s Apparel Environmental Design Tool and the Outdoor Industry Association’s Eco Index, both of which were launched last year.

As reported by various news sources, the Coalition’s goals include reducing the industry’s impacts on water and consumption, improving waste diversion, and reducing the use of chemicals. Members will share best practices information and commit to a specified level of best practices within each of their supply chains by establishing consistent expectations for brands, retailers and manufacturers.  

This group’s efforts to measure and manage the impacts of their products are particularly notable due to the fact that many brand companies do not own the production facilities and factories, and rely on very long and complicated supply chains over which they do not have control.  If successful, their focus on improving supply chain performance could also become a model for other industries.  

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