Corporate Social Responsibility and the Law : Foley Hoag LLP

Gwen Jaramillo and I recently authored an article for BNA Corporate Governance Report on the role of the board of directors in overseeing a company's CSR initiatives and commitments.  A copy of the article ("Board Oversight and Corporate Social Responsibility: Obligations and Considerations") is available here (.pdf).

At the conclusion of the article, we identify a number of questions that board members may wish to consider when thinking about their role in overseeing a company's approach to, and implementation of, CSR commitments.  These questions are set forth below:

Considerations for CSR Positioning

1. How does the company currently perceive CSR? Is CSR seen as a foundation for risk management and compliance, philanthropic efforts, and/or sustainability reporting?
2. What are the major legal, operational, and reputational challenges faced by the company and its industry peers? Are the company’s CSR initiatives, along with other company policies and practices, preparing the company to meet those challenges?
3. Who are the company’s stakeholders? How does the company’s CSR program enable the company to engage with, and assess the concerns of, those stakeholders?
4. How does the company compare with its industry peers in terms of its view and implementation of CSR? What value do industry members derive from their CSR positioning?
5. What voluntary commitments, codes, or standards have the company’s industry peers signed on to? Has the company done the same? Why or why not?
6. Does company management see the company as a leader? Does management want the company to be perceived as an industry leader or as in “the middle of the pack”? Is the company’s CSR positioning appropriate given management’s goals and self-perception?
7. What are potential avenues for better calibrating the company’s CSR positioning with its internal and external goals?

Considerations for CSR Implementation

1. What is the company’s CSR strategy? To what extent has the company implemented CSR initiatives? What is the state of awareness among company personnel of the existence and importance of these initiatives?
2. Does the board have a clearly defined role in overseeing the company’s CSR strategy? If not, how can a role for the board be established? Can it be linked with existing compliance oversight functions of the board? What are the risks and benefits to the company of formalizing a role for the board with regard to CSR?
3. Is the board currently informed regarding CSR-related compliance and reputational issues? What information is regularly provided to the board regarding the social and environmental impacts of the company’s operations?
4. Who is responsible for defining and overseeing CSR at the company? What oversight and accountability mechanisms reinforce the company’s CSR strategy?
5. What specific resources are required to implement the company’s current CSR policies and initiatives? Have those resources been effectively deployed or allocated? Have, or can, existing compliance mechanisms been utilized to build CSR capacity? What costs does the board perceive will be involved in implementing or augmenting a CSR strategy, and are such resources appropriately allocated to CSR at this time?

 Ultimately, as we state at the conclusion of the article,

...the board is charged with fulfilling its duties of care and loyalty. Whether the ultimate impact of CSR lies in its ability to protect against legal, reputational, and operational risks, or its capacity to create shared value for the company and its stakeholders, the board can best fulfill these duties to the corporation, and to stakeholders, by considering CSR’s value for the corporation and acting upon its conclusions.

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This post, authored by Sarah A. Altschuller and Gwendolyn W. Jaramillo, was originally published, in excerpted form, by The Elm Consulting Group.

The U.S. Securities and Exchange Commission (“SEC”) failed to issue a final rule on conflict minerals regulations before the end of 2011, and companies still await clear guidance on the scope of Section 1502 and the nature of the relevant reporting requirements. In an announcement regarding "upcoming activity" related to the implementation of Dodd-Frank, the SEC has now indicated that the final rule for Section 1502 will be adopted between January and June 2012. Notably, the SEC’s announcement indicates that “this is an estimated timeline and may be subject to change.” The final rule was originally scheduled to be issued no later than April 15, 2011.

The Conflict Minerals Report Requirement

Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires companies that utilize tin, tungsten, tantalum, and gold to conduct and disclose due diligence on their supply chains in order to identify whether the those minerals originated in the Democratic Republic of Congo (“DRC”) or adjoining countries. If an issuer either determines that its conflict minerals originated in the DRC countries, or cannot conclude that the conflict minerals did not originate in the DRC countries, the issuer will be required to disclose this information in its annual report. The issuer must then furnish a Conflict Minerals Report (“CMR”) as an exhibit to the annual report, and must disclose the Internet address at which this exhibit is available.

The CMR must describe the due diligence that the issuer conducted on the source and chain of custody of its conflict minerals. Issuers will be required to describe: products that are not "DRC conflict free"; the country of origin of those conflict minerals; the facilities used to process those minerals; and efforts taken to locate the mine or source of the minerals with the greatest possible specificity.

The Reporting Timeframe

Section 1502 requires impacted issuers to submit their first disclosures regarding their first full fiscal year which begins after the promulgation of the final rule. With a final rule now delayed again, issuers currently subject to the legislation must evaluate how to prepare for the future disclosure requirements.

Looking ahead, and based on previous experience, it is most likely that the SEC will introduce a phased approach for disclosures, whereby certain initial disclosures will be required in the first reporting year that will need to be augmented in subsequent years. Many stakeholders have urged the SEC to adopt a phased approach in comments to the proposed regulations issued in December 2010.

Groups calling for a phased approach include the U.S. Chamber of Commerce, the National Association of Manufacturers, and the House Financial Services Committee. This could logically take the form of requiring larger issuers to fully comply in the first year following the issuance of the final rule, while giving smaller issuers the benefit of more time to comply. This approach has been used in several prior instances, including: the requirement for the inclusion of XBRL (eXtensible Business Reporting Language) data files in corporate filings; and the requirement, pursuant to Section 404 of the Sarbanes-Oxley Act, for an independent auditor’s report on the effectiveness of internal controls over financial reporting (although the requirement for smaller companies was eliminated by Dodd-Frank).

If the rule is issued in the next few months, issuers with fiscal years beginning in March/April or June/July would be required to issue their first reports in early to mid-2013. Issuers may fear being required to report on due diligence efforts undertaken during a time period unguided by final regulations, but that appears unlikely based on the language of Section 1502. That said, however, issuers with fiscal years beginning soon should be prepared to hit the ground running and ideally will have identified appropriate internal groups or departments who would be charged with collecting the required information in order to facilitate full compliance.

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Former UN Special Representative on Business and Human Rights John Ruggie, now a senior advisor to our CSR practice, recently authored an article in Corporate Secretary magazine in which he observed that there has been a "convergence of expectations" with regard to business responsibilities in the area of human rights.  

These expectations are set forth in the UN Guiding Principles on Business and Human Rights, authored by Professor Ruggie and his team.  As discussed previously, these Principles were endorsed by the UN Human Rights Council in June of this year. Central to the Principles is the expectation that companies have a responsibility to respect human rights and that this requires companies to conduct human rights due diligence on their operations.  As noted by Professor Ruggie,

[h]uman rights due diligence requires companies to develop effective policies and procedures to assess the actual and potential human rights impacts associated with their activities and business relationships, and to act upon the findings.

Professor Ruggie observes that the Guiding Principles are "not just another set of voluntary standards vying for attention in an increasingly crowded space" but rather represent "authoritative UN standards around which the articulated expectations of many public and private institutions have already converged." (emphasis added)

Specifically, as noted in the article, the United States Council for International Business, the International Organization of Employers, and the International Chamber of Commerce have all voiced support for the Principles. The guidance set forth in the Principles has also been incorporated into:

• The revised Organization for Economic Cooperation and Development ("OECD") Guidelines for Multinational Enterprises;
• The revised International Finance Corporation ("IFC") Sustainability Policy and the corresponding Performance Standards; and
• The ISO 26000 social responsibility standard adopted by the International Organization for Standardization ("ISO"). 

The formal endorsement, and rapid incorporation, of the Guiding Principles marks 2011 as a transformative year in the field of business and human rights. Looking ahead to 2012 and beyond, companies should expect that stakeholder expectations with regard to corporate impacts on human rights will increasingly be informed by this new framework. 

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I recently authored an article for IR Magazine on "CSR and the Role of the Board." In looking at board oversight in the area of CSR, one source that I relied upon was the 2010 report, Board Oversight of Environmental and Social Issues, published by Calvert Asset Management Company and The Corporate Library. 

The report analyzed board committee charters at S&P 100 firms and found that only 65 companies in the S&P 100 have board committees with some level of responsibility for oversight of corporate responsibility concerns. One of the most notable statistics from the study was the finding that less than 50% of those 65 boards monitor and provide recommendations on CSR trends and developments.

Ultimately, this lack of focus on trends is troubling.  Looking at developments in the CSR field over the previous decades, it is not hard to see that stakeholder expectations in the areas of environmental and social standards have often lead to the developments of new regulations, legislation, and lending guidelines.  As I noted in the article,

Understanding key trends is an integral component of effective long-term strategy development and can help ensure that companies have the capacity to respond to concerns when they arise. Companies regularly seek to identify trends in consumer preferences and in regulatory environments. Companies should exercise the same diligence in identifying future stakeholder expectations with regard to social and environmental performance. Stakeholder expectations in the area of CSR frequently ask companies to go “beyond compliance” with existing legal and regulatory standards. At the same time, these expectations are often predictive of the future content of legal and regulatory requirements.

A full copy of the article is available here (.pdf).

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Business Ethics magazine recently published an interview with John Ruggie, the former U.N. Special Representative on Business and Human Rights who recently joined Foley Hoag's CSR practice as a senior advisor. Michael Connor, Editor and Publisher of Business Ethics, conducted the interview.  The conversation focused on the Guiding Principles on Business and Human Rights, the business drivers for respecting human rights, and the ways in which the Principles have been adopted by both public and private stakeholders.  

Speaking about the corporate responsibility to respect human rights, Professor Ruggie observed that,

The corporate responsibility to respect human rights is a social responsibility over and above compliance with applicable laws. It is the minimum expectation society has of business conduct in relation to human rights. It means that as business goes about its business, it should not infringe on the rights of others. So manufacture your mouse traps, deliver whatever services you provide, but don’t infringe on others’ human rights in the process.

He also discussed the "business case" for respecting human rights, in particular noting some of the costs that may be associated with lawsuits and community opposition when companies fail to address human rights concerns.  In this context, he referenced recent research on the costs of conflict that was initiated under his former mandate.  Specifically with regard to mining companies, he noted that,

For a world-class mining operation, which requires about $3-5 billion capital cost to get started, there’s a cost somewhere between $20 million and $30 million a week for operational disruptions by communities. Another estimate used by the mining industry is that an asset manager is supposed to spend between 5% and 10% of his or her time on community engagement issues. We found that it can be anywhere from a one-third to 50%, and in some cases 80% of their time. So there are opportunity costs, financial costs, legal costs and reputational costs. 

Finally, speaking about the fundamental concept of human rights due diligence, which is a core element of the Guiding Principles, Professor Ruggie observed the extent to which this normative obligation has been adopted in both voluntary and legislative standards:

Human rights due diligence is now...in the requirements of the OECD (Organisation for Economic Development and Cooperation) guidelines on multinational enterprises. ..The principle has been incorporated into a new ISO (International Standards Organisation) standard, ISO 26000. The International Finance Corporation has updated the performance standards it requires of clients, which now reference the business responsibility to respect human rights. The European Commission has incorporated the same principles, including human due diligence, into a new EU strategy on corporate social responsibility. In the U.S., the Dodd-Frank Act includes a due diligence element for companies sourcing certain minerals closely tied to conflict in the Democratic Republic of Congo.

The full text of the interview is available here. 

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Corporate social responsibility and nuclear power? Indeed. In September, the very first code of conduct for the nuclear power plant industry was launched.

The development of the "Principles of Conduct" was facilitated by the Carnegie Endowment for International Peace. Representatives of all of the major exporters of nuclear power plants participated in the drafting process, which was initiated in 2008. I had the honor of being selected by the Carnegie Endowment to help facilitate the negotiations.

The Principles set forth expectations in the following areas: 

1. Safety, Health, and Radiological Protection; 
2. Physical Security;
3. Environmental Protection and the Handling of Spent Fuel and Nuclear Waste;
4. Compensation for Nuclear Damage;
5. Nonproliferation and Safeguards; and
6. Ethics.

While the Principles were initiated prior to the Fukushima nuclear accident, the completed text reflects certain initial lessons learned from that disaster, especially in the area of safety. At the time of the Principles' launch, Richard Giordano, Chairman of the Board of Trustees for the Carnegie Endowment, observed

Whatever lessons particular countries draw from Fukushima over time, new nuclear plants will continue to be built, some in countries that have only recently begun to utilize nuclear power. It is therefore imperative that nuclear energy is implemented safely and responsibly in both emerging and developed markets. 

I was especially involved in the drafting of Principle 6, which focuses on ethics. Principle 6 helps nuclear exporters meet three primary objectives:

1. Safeguarding the environment and the wellbeing of communities near nuclear power plants, including through effective communication with those communities;
2. Respecting human rights, including the fundamental labor rights of employees; and
3. Fighting corruption.

Principle 6 is important because it addresses measures to mitigate the potential effects of nuclear power on communities and the environment. Principle 6 states that the exporters will work with their customers to consult with communities near nuclear power plants regarding the social and environmental effects of planned activities. The exporters also agree to take sustainable development into account in their activities.

Principle 6 also states that the exporters will respect the fundamental labor rights of their employees, including the right to collective bargaining. They also pledge to respect the Universal Declaration on Human Rights -- a commitment which has implications for their interactions not only with employees, but also with communities and other stakeholders.

Finally, Principle 6 addresses the challenge of corruption, which can arise in the context of large infrastructure projects. The exporters commit to having internal programs in place to fight corruption, and to seek a reciprocal commitments from customers.

The Principles represent a significant new development for the nuclear industry.  As stated on the Principles'  website, 

The Principles of Conduct reflect a recent trend in the management of global challenges. Leading industries, including those in the oil and gas, apparel and pharmaceutical sectors, increasingly have recognized the value of their reputations as socially responsible actors to their long-term business success.

Ultimately, the launch of these new Principles reflects a convergence of international expectations regarding corporate behavior and self-discipline: companies in every industry are expected to demonstrate responsible stewardship with regard to the social and environmental impacts of their operations.

To date, the following companies have adopted the Principles:

• AREVA
• ATMEA (an AREVA-Mitsubishi joint venture)
• Atomstroyexport
• Candu Energy (the successor exporting company to Atomic Energy of Canada Limited)
• GE Hitachi Nuclear Energy
• Hitachi-GE Nuclear Energy
• Korea Electric Power Company (KEPCO)
• Mitsubishi Heavy Industries (including Mitsubishi Nuclear Energy Systems, a subsidiary)
• Toshiba
• Westinghouse Electric Company

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On September 20, the Obama Administration announced its intent to join the Extractive Industries Transparency Initiative ("EITI"). Government members of the EITI are required to disclose the payments that oil, gas, and mining companies make to them, and companies operating in those countries publish their payments to the governments. The two can then be reconciled for greater transparency and certainty regarding payments to governments.

A working group in each EITI member country – made up of the government, companies, and civil society -- determines precisely how the reporting is conducted for that jurisdiction. In most countries, the information is presented in a partially aggregated manner so that, for example, the precise dollar amount paid in royalties by a particular company for a specific project is not clear.

The Obama Administration’s statement would make it the first G8 government to become a reporting country under the EITI. Other G8 governments are "supporters" of the EITI, but this does not require them to undertake reporting on their own extractive industry revenues. As a political gesture, the Obama Administration’s statement is significant because it implies that western countries should be subject to the same reporting standards as less-developed nations. It also means that oil, gas, and mining companies with contracts with the U.S. government would be required to report on their payments.

The Obama Administration’s statement arrives amid continuing controversy in the United States regarding the best way to increase revenue transparency. Section 1504 of the Dodd-Frank Wall Street Reform Act requires companies reporting to the Securities Exchange Commission ("SEC") to disclose their payments to the SEC on a project basis. Civil society celebrated this development, stating that it will increase the accountability of governments to their citizens regarding the use of oil, gas, and mining money, and thus ensure more benefits reach the general public. Industry, however, has raised concerns regarding the cost and political implications of the reporting required by Section 1504, which is likely to be more detailed than that required by the EITI. Industry maintains that the EITI remains the best mechanism to enhance revenue transparency. The SEC has yet to issue its final rule to guide implementation, so it is not clear whether it will demand reporting significantly more detailed than the EITI requires. Therefore, the precise implications of the law are uncertain.

NGOs have welcomed the Obama Administration’s intent to join the EITI, stating that it ensures that privately held companies with oil, gas, or mining contracts with the U.S. government will be required to report their revenues. Such companies do not report to the SEC, and therefore are not covered by Section 1504. At the same time, the American Petroleum Institute has welcomed the Obama Administration’s decision, claiming that, based on the Administration’s support for the EITI, the SEC should simply follow the EITI’s reporting standards when devising its rule. Time – and the SEC rule – will tell which side has read the tea leaves correctly.

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In the Carbon Disclosure Project's 2011 analysis of the largest 500 companies, the Global 500, there is a very interesting statistical trend -- the companies who were the most strategically focused on accelerating low-carbon growth had returns from January 2005 to May 2011 that doubled the Global 500 as a whole, with returns totaling over 85%, compared to the 42.7% returns for the index.  Even more amazingly, the 13 companies that had been recognized by CDP for this strong focus for the last 3 years outperformed the Global 500 by over 60 percentage points over the same period.  Does monitoring and disclosing a company's carbon footprint and incorporating the risks and opportunities of climate change at executive levels actually lead to increased financial performance?  This report suggests there is a high correlation, at least. 

The report analyzes the responses the Global 500 companies submitted to a questionnaire that has CDP has sent on behalf of institutional investors every year since 2002.  Participation has increased each year -- up to 81% for 2011 -- as has the quality of the companies' answers and reporting, and the targets and goals that companies set for themselves.  This year's results show significant progress by all of the reporting companies in a few key areas, such as 74% of respondents setting greenhouse gas reduction targets, and 59% reporting a payback period of 3 years or less on their emission reduction activities. This year's survey also marked the first time that a majority (68%, up from 48% in 2010) of respondents have integrated carbon reduction efforts into the heart of their business strategies.

The set of 58 companies that doubled the returns of their peers were listed by CDP as part of the Carbon Disclosure Leadership Index (CDLI) (those that scored the highest on carbon emission measurement techniques and subsequent public disclosure) and Carbon Performance Leadership Index (CPLI) (those that fell within the top 10% of respondents when scored on strategic commitment to the business issues related to GHG emissions, energy use, and climate change).  There were 23 companies who made both lists.  Companies in Canada, Japan and the US were under-represented on these lists, compared to their peers in Australia, Germany, Italy, Switzerland and the U.K.  Surprisingly, given the regulatory focus it faces, the energy sector lags behind other sectors with the lowest proportion of companies setting targets (55%) and under-representation on both the CDLI and CPLI.

What did the CDLI and CPLI companies do differently?  As the report highlights, one notable difference between the companies named to the CDLI and those that were not is the practice of setting emissions reduction targets on which the company places significant emphasis -- 96% of the CDLI companies have emissions reduction targets, versus just 70% of the remaining companies.  Also significant seems to be whether the companies dedicated resources and time to identifying the new opportunities, investments and potential partnerships that a low-carbon economy could bring about -- the average score for the CDLI companies on this rubric is 88 (out of 100) compared to 54, across all respondents.  Similarly, all 29 of the CPLI companies have integrated their climate-related risks and opportunities into their business strategy, and used monetary incentives to encourage employees to meet carbon reduction goals.  The CPLI companies also universally submitted their emissions data for adequate verification -- something that only 37% of the remaining companies did, despite the importance of providing investors validated data.

Although the authors of the report argue that this data is a clear indicator that it makes good business sense to manage and reduce carbon emissions, correlation is not necessarily causation.  The companies who are better managing their carbon may just be better managed overall, leading to better performance.  Either way, the fast-rising number of Global 500 companies who are moving to capitalize on these opportunities highlights that more sustainable business models are, increasingly, simply the way business is done.

 

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The topic for today's #CSRChat on Twitter (hosted bi-weekly by Fenton) was “CSR and Corporate Philanthropy: Do the Two Align?” The chat fostered a lively debate and brought together a range of different viewpoints (all expressed in 140 characters!) on corporate social responsibility and philanthropic initiatives.

Reading through the discusssion, I reflected on the ways in which my role as an attorney has shaped my perspective on the distinctions between CSR and corporate philanthropy. In our practice, we advise clients on the development and implementation of policies and standards, and on strategies to manage both legal and reputational risk. Ultimately, this advice is intended to impact the management of a company's operations.

Effective implementation of corporate CSR standards requires strong accountability and oversight mechanisms, and requires buy-in from representatives across the company, not just from the people with CSR in their job titles. When I see companies that use CSR and philanthropy interchangeably in developing strategic initiatives, I worry about the degree to which this reflects a reluctance to integrate social and environmental commitments into day-to-day business management.

Last year, I published an article in the American Bar Association’s International Law News looking at some of these issues and the risks inherent in blurred distinctions between CSR and philanthropy. In the article, Distinctions with Differences: The Lawyer’s Role in Distinguishing CSR and Corporate Philanthropy (available here, at p.11 (.pdf)), I observed that:

CSR is about the core business functions of a company, and about the increasing demands of company stakeholders that companies be held accountable for the social and environmental impacts of their operations. …The expectations of those stakeholders are expressed in forms ranging from legislation and regulation to shareholder resolutions and disruptive protests. CSR is a strategic response to the changing nature of those expectations: stakeholders increasingly expect companies to abide by a wide range of proscriptive and normative standards. Against this backdrop, there are risks for companies that claim to have embraced CSR and then point to the glossy reports of their company foundation to demonstrate the degree of their commitment.

To be sure, a company’s philanthropic commitments are often aligned with its strategic vision and values and provide critical support to a range of external stakeholders. That said, effective implementation of CSR requires a level of internal, and external, commitment and engagement that goes beyond what is required for corporate giving programs.

You can follow me on Twitter @saltschuller and Foley Hoag @foleyhoag.

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On June 16, the U.N. Human Rights Council formally endorsed the Guiding Principles on Business and Human Rights prepared by the U.N. Special Representative for Business and Human Rights, Professor John Ruggie. The Human Rights Council's endorsement represents the conclusion of the Special Representative's mandate, which began in 2005. 

The Principles are intended to provide guidance on the implementation of the "Protect, Respect, and Remedy" Framework first introduced by the Special Representative in 2008. As observed in our earlier commentary, while the Principles are not law, they are likely to influence national law and policy in jurisdictions around the world. At the time of the endorsement, Professor Ruggie himself observed

The Council's endorsement establishes the Guiding Principles as the authoritative global reference point for business and human rights.

In his final presentation to the Human Rights Council (.pdf), delivered on May 30, Professor Ruggie noted that

For business enterprises, the Guiding Principles outline a human rights due diligence process. This entails assessing actual and potential human rights impacts; integrating and acting upon the findings; tracking the effectiveness of responses; and communicating how impacts are addressed. Human rights due diligence is meant to include dealings with third parties linked to the business enterprise.

In our experience advising companies on how to identify, prevent, and mitigate the adverse human rights impacts of their operations, Professor Ruggie's work has been a key reference point since the outset of his mandate.

The Principles provide high-level guidance applicable to all business enterprises, and many companies have already begun the hard work of interpreting how best to apply this guidance to their specific activities. In a manner appropriate to their industry and the scope of their operations, companies face the challenge of developing adequate mechanisms to assess the actual and potential human rights impacts associated with their activities. Companies must then determine how best to integrate the findings from these assessments into their management plans and into their dialogues and contracts, as appropriate, with business partners. While this work is challenging, ultimately it can play a key role in managing a company's legal, reputational, and operational risks.

In the resolution endorsing the Guiding Principles, the Human Rights Council also announced the formation of a new working group, consisting of five independent experts, to promote the effective dissemination and implementation of the Principles. The five experts will be appointed at the Council's eighteenth session in September 2011. As part of its work, the working group will host an annual Forum on Business and Human Rights.

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On May 25, forty-two countries, including the 34 countries that are members of the Organization for Economic Co-operation and Development ("OECD"), committed to promote an updated version of the OECD Guidelines of Multinational Enterprises.

The OECD Guidelines (.pdf) are a non-binding code of conduct containing recommendations for responsible business conduct in a global context. The countries that adhere to the Guidelines agree to promote the guidelines among the business sector. Notably, the revised OECD Guidelines reflect a new focus on business and human rights.

The Guidelines state explicitly that "[r]espect for human rights is the global standard of expected conduct for enterprises."  Respect for human rights means that companies "should avoid infringing on the human rights of others and should address adverse human rights impacts with which they are involved" and should "[c]arry out human rights due diligence as appropriate to their size, the nature and context of operations and the severity of the risks of adverse human rights impacts." The Guidelines note that this due diligence can be included within broader enterprise risk management systems "provided that it goes beyond simply identifying and managing material risks to the enterprise itself to include the risks to rights-holders." 

 The Guidelines observe that 

Enterprises can have an impact on virtually the entire spectrum of internationally recognised human rights. In practice, some human rights may be at greater risk than others in particular industries or contexts, and therefore will be the focus of heightened attention. However, situations may change, so all rights should be the subject of periodic review. (emphasis added)

In the complex social, political, and economic contexts in which companies operate, risks to human rights are constantly fluctuating.  Human rights due diligence is not a one-time event, and while certain human rights may be the focus of greater attention depending on a company's operating context, all internationally recognized rights should be considered as part of the due diligence process.

The new revisions to the OECD Guidelines reflect the tremendous influence and rapid adoption of the United Nations Framework for Business and Human Rights ("Protect, Respect, and Remedy"), which was put forward by the U.N. Special Representative for Business and Human Rights in 2008, and subsequently adopted by the U.N. Human Rights Council.  The Guidelines were drafted in order to be aligned with the new Guiding Principles on Business and Human Rights, which the U.N. Human Rights Council is expected to adopt later this month.

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Earlier this week, a coalition of companies, investors, and organized labor announced a major new initiative in support of sustainable business practices. The Investor-Business Roundtable for a Sustainable Economy was launched during the 2011 Ceres Conference. Founding signatories include CalPERS and CalSTRS, the AFL-CIO, Levi Strauss & Co., Pacific Gas & Electric, SAP, Jones Lang LaSalle, Generation Investment Management, and the Skoll Foundation.

Participants in the Roundtable have agreed to leverage their position as "industry leaders and key market influencers to accelerate adoption of sustainability approaches and solutions across [their] networks, including employees, customers, supply chains, media and marketing." (.pdf) Individual commitments made by the founding signatories include:

• Levi Strauss & Co. announced new "terms of engagement" for its supply chain under which the company "will require contract factories to help make employees’ lives better by supporting programs for their workers that align with the UN Millennium Development goals."
• CalPERS, the largest pension fund in the United States, announced that it would integrate environmental, social, and governance factors into its investment decision-making across all asset classes.
• SAP, one of the largest business software companies in the world, announced that it will release new energy management solutions in the next quarter to assist companies in implementing energy saving initiatives. SAP estimates that its 170,000 customers emit 1/6th of the world's manmade greenhouse gas emissions.

In addition to the nine founding signatories, Ceres has said that it intends to engage more organizations in future Roundtable meetings. The Roundtable has its origins in a meeting hosted by Ceres and CalPERS in December 2010 which brought together companies, investors, and labor groups to discuss global sustainability challenges. The launch of the Roundtable highlighted the 21st Century Corporation: The Ceres Roadmap to Sustainability, a report and framework announced last year that is intended to help companies imbed sustainability into all aspects of their operations.  

Also this week, CalPERS and CalSTRs announced that they will join a group of more than twenty other investors in sending letters to all companies in the Russell 1000 index requesting that management teams and boards of directors address sustainability challenges in all aspects of company operations, including supply chains. The Russell 1000 tracks the largest 1000 U.S. securities.

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Gare Smith and I recently co-authored an article on corporate social responsibility ("CSR") and risk management for Executive Counsel magazine. In the article, "Making Corporate Social Responsibility Systemic," one issue we discuss is the potential risk to companies that "claim to have embraced CSR and then simply point to glossy reports reflecting anecdotal philanthropic initiatives to demonstrate the degree of their commitment." We believe that

such companies fail to develop the internal policies and mechanisms necessary to ensure that the correct people, in the right functional areas, are held accountable for following specific environmental and social standards. References to good deeds do not mitigate against the risks associated with lack of internal commitment and oversight.

We observe that a lack of executive-level oversight with regard to a company's approach to CSR may leave companies with little capacity to develop strategic and comprehensive responses to stakeholder concerns about the social and environmental impacts of the company's operations. 

A copy of the full article is available here (.pdf).

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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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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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Looking back at 2010, there have been a number of significant legal developments in the field of corporate social responsibility.  New federal and state statutes have imposed due diligence requirements on companies with the specific intent of addressing human rights concerns, ranging from forced labor to the ongoing conflict in the Democratic Republic of Congo.  Courts continue to grapple with the potential scope of corporate liability under the Alien Tort Statute (“ATS”).  At the international level, the concept of the corporate “responsibility to respect” human rights continues to gain credence, at the same time as access to water was recognized as a human right by the United Nations.

As lawyers, we advise clients on developments in both “hard law” requirements and “soft law” expectations for companies in the area of human rights and social responsibility.  The intersection of what is required and what is expected of companies can present both challenges and opportunities.  In no specific order, here are five “big developments” that we think will impact corporations, and the expectations of corporate stakeholders, in 2011 and beyond.

• The SEC, Conflict Minerals, and Disclosure of Payments.  Buried in the Dodd-Frank financial reform legislation are two provisions that impose significant new disclosure requirements on companies.  Section 1502 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.  Section 1504 requires companies in the extractive sector to report on taxes, royalties, fees, and other material benefits paid to foreign governments and the United States.  Compliance with these provisions will be a significant challenge for many companies.  In mid-December, the SEC released proposed rules pursuant to these two provisions, and final rules are expected to be in place by April 2011, although under the new Congress implementation of these rules may be delayed.

• Ruggie's Draft Guiding Principles.  The U.N. Special Representative on Business and Human Rights, John Ruggie, released his Draft Guiding Principles for the implementation of the three-part “Protect, Respect, and Remedy” framework first set forth in his 2008 report to the U.N. Human Rights Council.  Institutions ranging from the European Parliament to the OECD have already cited certain provisions of the framework, especially with regard to the corporate responsibility to respect human rights -- that is, not to infringe on rights -- and its central component of human rights due diligence.

• Water is a Human Right.  In July, the U.N. General Assembly declared access to safe water to be a human right.  In September, the U.N. Human Rights Council adopted a resolution recognizing access to clean water and sanitation as a fundamental human right, “equal to all other human rights” and capable of legal enforcement.  These developments came at the same time as increasing water scarcity is impacting communities, and companies, around the world.  Companies will likely find that stakeholders increasingly expect due diligence efforts, especially with regard to human rights impacts, to include assessments of corporate impacts on community water resources.

• The Second Circuit Declares that Companies are Not Proper Defendants Under the ATS.  In a controversial opinion, the Second Circuit Court of Appeals held in Kiobel v. Royal Dutch Petroleum that corporations cannot be properly sued under the ATS for violations of customary international law.  Already cited by other courts, and by many defendant briefs, this opinion, whether or not it is upheld, stands as one of the most significant ATS decisions to date.

• California Transparency in Supply Chains Act.  Retailers and manufacturers operating in California with global receipts in excess of $100 million will now be required to disclose what efforts they are taking, if any, to “evaluate and address” the risks of slavery and human trafficking in their supply chains.  This requirement applies to a wide range of companies, ranging from apparel companies that have grappled with concerns about their supply chains for many years, to companies in other sectors for which these due diligence requirements represent a new challenge.

As the New Year begins, we will continue to monitor these developments, and others, in the dynamic field of corporate social responsibility and the law.

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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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