With CSR programs the new normal, consumers and investors increasingly factoring CSR performance into their decision-making, and companies eager to display "good corporate citizenship," strict CSR due diligence is required to manage legal risks. More than ever, words must match deeds.
Companies are familiar enough with the consequences of false or misleading financial reporting not to take it for granted. Over time, especially since the "invisible hand" famously "corrected" markets in 2008, nonfinancial performance reporting (covering corporate social responsibility or CSR, for instance) has gained increasing importance as an equally key business fundamental. This phenomenon is due in no small part to tectonic shifts in the regulatory landscape mandating nonfinancial reporting in certain jurisdictions and industries. Examples include Dodd Frank's reporting requirements for US companies investing in Myanmar or "conflict" minerals, the EU directive on nonfinancial and diversity transparency, and domestic disclosure requirements in places like the UK, France, and Brazil.
One of the greatest challenges businesses and their lawyers face in this area is understanding the on-going convergence of business and CSR issues, beginning with recognition that companies exist in the larger context of society. Hence, the growing demand for transparent accountability, the need for companies to "know" the impact of their operations on people and the environment – in terms of human rights, environmental sustainability, ethical sourcing, labor practices, anti-corruption and so on – and to "show" the steps being taken to identify, avoid and remediate any negative impacts.
CSR-Reporting Liability Scenarios
While lots of progress is being made in this space – the UN Guiding Principles on Business and Human Rights, the Global Reporting Initiative, and the Human Rights Reporting and Assurance Frameworks Initiative, being good examples – companies do not have the luxury of waiting to see what ends up sticking in terms of either mandated or generally agreed CSR reporting standards. Nowhere perhaps is this inconvenient fact felt more palpably than in the US, where class-action lawyers with a nose for "rules" and money will not wait for that gap to be filled. Abhorring a vacuum, they will use the legal system to fill the gap, holding companies to their own "rules."
Claims by Consumers
Nike discovered as much nearly twenty years ago, long before CSR became a buzzword and business fundamental in its own right, when the company faced allegations of "sweatshop" conditions in the Asian factories where its products were manufactured. The story, aired by a major network news program on US television in 1996, included accusations of wage and hour violations, abuse of various sorts, and exposure to chemicals and other occupational hazards. Denying the allegations, Nike commissioned an independent investigation, and then went on the offensive – widely publicizing the largely exculpatory findings of that review and defending its operations with advertorials and letters to opinion-makers.
Two years later, a consumer filed a class action against Nike under California law on theories of unfair competition and false advertising, alleging that the company made false or misleading statements in denying claims of its reliance on Asian "sweatshop" labor. The case eventually made its way to the California Supreme Court, where Nike unsuccessfully argued that its public statements were political speech protected by the First Amendment of the US Constitution, not commercial speech subject to state prohibition or penalty. A sharply divided court rejected Nike's effort to characterize its speech as noncommercial (because it was aimed at influencing policymakers and capital markets), holding that the statements at issue were "primarily intended to reach consumers and to influence them to buy the speaker's product." See Kasky v. Nike, Inc., 45 P.3d 243 (Cal. 2003).
In reaching this conclusion, the court reasoned that "[i]n describing its own labor policies and the practices and working conditions in factories where its products are made, Nike was making factual representations about its own business operations" to promote sales. It also noted the importance of labor practices to a growing segment of consumers, which is no less true today. The US Supreme Court decided not to hear the case, sending it back to the California trial court in 2003, when Nike agreed to settle the dispute by making a $1.5 million contribution to a worker's rights organization.
Claims by Investors and Others
Consumer fraud class actions of course are not the only legal risk a company faces when affirmatively or defensively identifying itself as a "good corporate citizen." CSR reporting issues can also lead to class action lawsuits by investors, as oil giant BP discovered following the Deepwater Horizon accident in the Gulf of Mexico in 2010. In the aftermath, US shareholders and institutional investors seized on pre-2010 statements contained in the company's CSR "sustainability" reporting, including its boasted ability to "recover approximately 491,721 barrels of oil per day (or more than 20.6 million gallons) in the event of an oil spill in the Gulf of Mexico," and sued BP in federal court in Texas. This litigation is ongoing, with plaintiffs claiming that alleged misstatements by BP about its operations in CSR reporting (and mismanagement generally) cost them billions of dollars in losses when BP shares fell.
The US court system can also be used to sue companies for alleged human rights abuses occurring beyond the country's boundaries under the Alien Tort Statute, which gives federal courts jurisdiction to hear claims grounded on violations of settled international law that typically sound in tort. The door to the modern-era of ATS litigation in the US was opened by Filitarga v. Peña-Irala in 1980, and plaintiffs keep knocking – most recently in Kiobel v. Royal Dutch Petroleum Co., a Supreme Court decision from 2013 that bars the door a bit (for now).
Oyez! Bananas in the Dock
The lesson is that statements made (or not made) in CSR reporting can subject US and non-US companies alike to liability risks in the American court system, and the risk is not likely to abate any time soon. The plaintiff bar’s latest attempt to probe the scope and boundaries of legal liability for CSR reporting is another consumer class action for unfair and deceptive trade practices; this one against Chiquita – an American producer and distributor of bananas.
In Jablonowski v. Chiquita Brands, Inc., a case filed on 9 February 2015, in the US District Court for the Southern District of California, plaintiff follows in the steps of Karsky v. Nike, claiming that "[w]hen a company falsely represents itself as an exemplar of environmental stewardship and/or omits the truth about its environmental and harvesting practices which would be material to a reasonable consumer, and thereby induces consumers to buy its products, that company has engaged in unfair and deceptive business practices."
Drawing liberally from Chiquita's CSR reports, including its description of important "ethical" lessons learned from the company's "complex history" as a direct descendant of United Fruit Company, which was known for its "improper government influence, antagonism toward organized labor … and disregard for the environment," plaintiff claims that Chiquita's "carefully crafted [CSR] marketing campaign omits any mention of the true conditions under which a substantial portion of its bananas are grown." The complaint then lays a litany of alleged environmental abuses by a Guatemalan company from which Chiquita sources "a substantial amount of its bananas" at the latter's feet.
Claiming he never would have purchased Chiquita bananas had he known the company's true "environmental and local social responsibility record" – that it "in fact pollutes and otherwise destroys the drinking water of communities" – plaintiff accuses Chiquita of unjust enrichment and seeks "an order requiring Chiquita to make restitution to him and other members of the Class" of unspecified sums (in excess of $5 million) paid for the company's bananas over an as-yet unspecified period of time.
The outcome remains to be seen, but just as the class-action bar in the US has been en masse scouring supermarket shelves and company websites for allegedly false and misleading product labels (e.g. "all natural" and so on), and filling court dockets around the nation with "food litigation" for several years now, Nike, BP andChiquita copycat suits in the CSR space are sure to follow.
Practical Steps for Mitigating CSR Reporting Liability
In response to changing social values and priorities, companies are increasingly being held to duties and standards above and beyond those codified by law. While US plaintiff lawyers and other groups cannot be prevented from doing what they do, there are tried-and-true tools companies can use to manage the risk of CSR reporting liability.
As a general rule, though, a company should strive for nonfinancial reporting that is every bit as rigorous and cautious as their financial reporting, involving (among others) outside auditors and legal counsel in a comprehensive appraisal of its CSR performance. Other factors to consider in managing "social risk" include the following.
- The Customer is King. Forty-five years ago no less a light than economist Milton Friedman was bashing CSR talk as "hogwash," arguing that "a corporation’s responsibility is to make as much money for the stockholders as possible … within the rules of the game." He won the Nobel Prize in 1976. Peter Drucker, viewed by some as the founder of modern business management, argued against the maximization of shareholder value as the corporation's raison d'être in Management: Tasks, Responsibilities, Practices (1973), claiming that the only valid purpose of business was "to create a customer." Given how dramatically the social concept of what it means to be a "good corporate citizen" has changed over the past decade or so, CSR is serious business to customers – who are "the foundation of a business and keep it in existence." Simply put, companies need to care about CSR because their customers do.
- Systematize CSR Due Diligence Practices. To protect against legal claims of fraud, aiding and abetting, complicity, or mismanagement, companies need to have systems or protocols in place to ensure compliance with applicable standards and that public statements about their CSR performance are accurate in all material respects (with procedures for the prompt discovery and full disclosure of potential misrepresentations). CSR reports, marketing material, and websites should be reviewed to ensure that they reflect what the company knows or has learned from periodic due-diligence exercises. Another consideration is adopting a code of conduct for factories and others in the supply chain that has teeth, with compliance clauses in manufacturing or production contracts.
- Align CSR Reporting with Emergent Best Practices. In the absence of a single global reporting standard for CSR performance, it’s difficult for companies to reliably mitigate the risk of lawsuits linked to CSR reporting. A good North Star to follow for compliance purposes, however, is the recently issued draft UN Guiding Principles Reporting Framework, which offers comprehensive guidance on what is meaningful to report, consistent with UN Guiding Principles on Business and Human Rights. This reporting framework is supposed to be finalized by year end, based on stakeholder feedback and learning from pilot projects being conducted by various companies.
In short, to protect the core asset of "brand" in both the judicial system and the "court of public opinion," companies (and their lawyers) should approach CSR reporting as a core element of business strategy (i.e. risk management).
The reality nowadays is that companies are more commonly expected – by investors, customers, employees, business partners, regulators and other stakeholders – to account for the economic, social, and environmental impacts of their operations on a variety of fronts under the CSR banner, giving in-house lawyers yet another thing to worry about, in terms of both reputational and legal risks. Attorneys advising companies, meanwhile, must add the growing scope of CSR considerations to their client-service offerings to ensure that the social risks of doing business on a global basis are a topmost priority.
In closing, those eying the promise and perils of the emerging field of corporate social responsibility would do well to heed the words of Guy Kawasaki, a former Apple Fellow and venture capitalist: "Doing things that benefit you and your organization to the detriment of the rest of society doesn't scale."