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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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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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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Last week, Sarah Altschuller was interviewed on Capital Thinking, an internet radio program on VoiceAmerica Business Network. During the interview, she addressed several recent legal developments in the field of corporate social responsibility, including the Dodd-Frank provisions on conflict minerals and disclosure of payments to governments, as well as the California Transparency in Supply Chains Act. She also discussed the Draft Guiding Principles recently released by the U.N. Special Representative on Business and Human Rights. A podcast of the interview is available here (.mp3).

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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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