Say you represent a publicly held company that sells products manufactured in Southeast Asia. It is late on a Friday afternoon. You are just about to head out for the weekend when your phone rings. It’s your client, panicking: “there are cell phone video clips and reports on the Internet … two 15-year-old girls were trapped in a factory fire overseas. There were bars on the windows and the doors were locked because the factory supervisor outlawed bathroom breaks.”

Your client’s panic builds, “People are protesting in front of our U.S. headquarters. Our stock is down 15 points, and we’ve just received a shareholder resolution demanding that we address human rights in our supply chain. My investor relations and public relations teams are being swamped with calls from the media and analysts [sell-side]. We’re all over the press! They’re posting a negative version of our logo and trademarks on the Web. What do I do?” The answer for the client lies in three words: Corporate Social Responsibility.

As this prior vignette demonstrates, companies may be exposed to a variety of legal and reputational risks if they do not have adequate social compliance or corporate social responsibility/sustainability programs in place. This article will give examples of CSR issues embedded in the risks companies face, and will describe benefits of CSR programs. It will also summarize the recent work of the United Nations’ Special Representative for Business and Human Rights, who has recently proposed a three-part framework for CSR.

DEFINING SUCCESS

What exactly is CSR? The term refers to the practices and measures taken by companies that wish to protect the health and rights of their workers, their suppliers’ workers and their stakeholders, and in so doing, to protect their own companies’ reputations, brand names and goodwill. Is CSR crucial to a company’s success? Experts agree on its importance, though some may view the notion of Corporate Social Responsibility as a contradiction in terms. As Nobel prize winning economist Milton Friedman viewed it, in substance, the business of business was … business: profit maximization, albeit by playing well, and according to the rules. [FOOTNOTE 1]

Many companies exhibit corporate citizenship through charity or philanthropy. Over time, however, a view evolved, for some corporate stakeholders, [FOOTNOTE 2] that success should be defined by evaluating businesses using a “Triple Bottom Line” [FOOTNOTE 3] comprised of its social, environmental and financial performance. Must, or may, corporations be socially responsible? Is CSR an exercise of business judgment, or compliance with a legal mandate? The answer is both, judgment and mandate.

MANAGING RISKS

Why implement a CSR program? In short, to manage risks, and to ensure legal compliance. Those who argue in favor of CSR programs note that corporations implement programs in order to avoid being … “TIONed.” [FOOTNOTE 4] This does not mean expulsion from a religious order, but rather being subjected to investigaTION, litigaTION, prosecuTION, regulaTION or legislaTION. They serve as prophylactic measures for companies; and in fact, companies that have not implemented CSR programs have faced certain risks. Such risks include: lawsuits under the Alien Tort Claims Act, and related class action litigation; governmental investigation by federal and state labor departments, project finance/investment contract issues, and the receipt of shareholder resolutions on labor, human rights, supply chain and sustainability issues, among others.

Corporations have also faced economic damage when their corporate reputations and brands were assailed, and possible lost sales through consumer boycotts. Leading-edge companies have gained market share, key personnel, and investment by seriously addressing labor and “green” issues.

What follows are specific examples of the categories of selected risks posed by a gap in CSR programs.

Investigations: Federal and state labor departments investigate compliance with wage and hour laws. They may, very publicly, at times, report the results of their investigations. They also may impose fines, penalties, and in some cases, seek profit disgorgement from companies that sell to the public goods purchased from non-compliant manufacturers. [FOOTNOTE 5] A change in the White House may lead to increased federal enforcement by the U.S. Department of Labor, particularly in light of a recent Government Accountability Report critical of how the USDOL’s Wage & Hour Division conducted and resolved certain investigations. [FOOTNOTE 6]

Private parties also conduct investigations. “Sweat Free Communities,” a national network of U.S. anti-sweatshop campaigns, released a report in July 2008 titled “ Subsidizing Sweatshops: How Our Tax Dollars Fund the Race to the Bottom, and What Cities and States Can Do.” [FOOTNOTE 7] This report alleges numerous human rights and labor violations throughout the uniform industry, including, but not limited to, child labor, illegal wages, excessively long work hours, forced and unpaid overtime and verbal, physical and sexual abuse.

The report alleges that state procurement agencies bought uniforms and footwear from well-known manufacturers whose international supply chains included contract manufacturers with “sweatshop conditions and other human rights and labor violations” in their production facilities. The report notes that numerous states, including California, Illinois, Pennsylvania, Maine, New Jersey, New York and Vermont, as well as dozens of cities and counties, have adopted sweat-free procurement statutes.

Litigation/Prosecution: Failing to have an adequate Foreign Corrupt Practices Act compliance program can lead to investigation, payment of multimillion dollar fines, and anti-terrorism act litigation. [FOOTNOTE 8] Inadequate knowledge of a company’s supply chain may enable a supplier to use an unauthorized subcontractor that employs child laborers to make products. Additionally, companies that did business in apartheid-era South Africa are being sued for allegedly aiding and abetting alleged human rights abuses that occurred under that regime. [FOOTNOTE 9]

Regulation/Legislation: Companies that do not adequately police their foreign suppliers’ product safety systems face product liability suits, and a raft of proposed (more strict) federal and state safety regulations. [FOOTNOTE 10] Also, proposed Free Trade Agreements with key U.S. trading partners (e.g., Colombia) have stalled because legislators and constituents are concerned that neither the agreements nor the countries have adequate labor, health and safety standards or enforcement. Finally, legislation has been drafted that would enable retailers to sue their competitors for selling consumers products made in alleged sweatshops. [FOOTNOTE 11]

MAKE CSR MANDATORY?

Some executives and some investors still may not be convinced about the value of CSR programs. They may ask: What is the upside? What is the ROI (Return on Investment)? Perhaps these are unfair questions, like asking for the ROI or metrics for funds spent on adequate insurance coverage, or the exact return for advertising and marketing “spend.” The benefits of CSR include:

• Protecting tangible and intangibles. A company’s brands, intellectual property and goodwill may represent a significant amount of its present and future economic value.

• Attracting and retaining key employees. Talented personnel weigh a company’s CSR policies among other factors when deciding where to work, and how long to stay there. “Greening” businesses may add to their bottom line. Reduced energy use, employee travel/commutation, supplier packaging, paper procurement policies and recycling, may reduce operating expenses in a readily measurable way, with a clear positive impact on the bottom line.

• Building market share. Companies are deriving revenue from “ethically sourced” and “fair trade” products. [FOOTNOTE 12]


Recently, some stakeholders, including nongovernmental organizations (NGOs) that focus upon human rights issues have called for a legal framework to make CSR programs mandatory. They are concerned that existing CSR obligations are insufficient, and voluntary CSR programs are inadequate. For example, instances of noncompliance with CSR standards are periodically reported despite the existence of individual corporate CSR programs and sector-based joint CSR initiatives. Delisting of companies affiliated with CSR initiatives for inactivity,[FOOTNOTE 13] or threatened expulsion from voluntary membership in financial/investment sector initiatives,[FOOTNOTE 14] for failing to meet requirements will not suffice to resolve perceived shortcomings. Their solution: mandatory, global, legally required, and actionable CSR.

In this context, the article will briefly summarize the past and expected future work of John Ruggie, the United Nations’ Special Representative for Business and Human Rights. Last month,[FOOTNOTE 15] Ruggie’s mandate was renewed for three more years by a resolution of the United Nations Human Rights Council. As part of his initial mandate, Ruggie analyzed existing CSR programs and initiatives and related legal and policy constructs, and engaged in extensive global stakeholder dialogues.

Ruggie has issued a report in which he proposes a new three-part framework concerning CSR. Going forward, he will examine state (country/governmental) and corporate obligations and systems to “Protect, Respect and Remedy” human rights and important CSR principles.

CHALLENGES REMAIN

There are an array of CSR standards, and initiatives. Despite an ongoing effort to develop a global CSR guidance standard,[FOOTNOTE 16] unhappiness about the “state of play” exists along the spectrum of stakeholders. No “silver bullet” solution has yet been presented. NGOs and action campaigners want corporations to be legally responsible and accountable for human rights violations and CSR lapses. Too much regulation, or uncertainty about its form and arrival time, may present concerns for corporations and other actors.

While documented strides have been made through “green” business, or sustainability initiatives, challenges remain in addressing labor and “social” risks posed by corporate operations and those whom they affect. There may be a temptation to focus on environmental risks and “solving” some of them by going “green,” but this focus may not be enough to ensure a company’s health. Ignoring non-green CSR issues leaves a company open to significant financial and reputational risks. This is definitely a case where going green can leave you in the red – management might suffer thinner coffers and embarrassment from a CSR oversight.

Ultimately, key components of effective CSR programs include having sufficient capacity (the right personnel analyzing CSR legal and operational issues, and acting upon the CSR program data that is obtained) to provide support, and legally protected advice and counsel in order to implement and effectively sustain CSR programs and the companies and stakeholders they seek to protect.

Michael A. Levine is a member of Epstein Becker & Green, resident in its New York office, and chairs the firm’s corporate social responsibility/sustainability practice. Saira Khan, a summer associate at the firm, assisted in the preparation of this article.

:::::FOOTNOTES:::::

FN1 Milton Friedman, “The Social Responsibility of Business Is to Increase Its Profits,” N.Y. Times Mag., Sept. 13, 1970, available at http://www-rohan.sdsu.edu/faculty/dunnweb/rprnts.friedman.dunn.pdf or www.ethicsinbusiness.net/case-studies/the-social-responsibility-of-business-is-to-increast-its-profits.

FN2 A stakeholder may be defined as any entity affected by or interested in the operations, functions, practices, and policies of a corporation. Michael A. Levine, “Corporate Social Responsibility Standards and Monitoring Programs,” International Corporate Practice, The Practising Law Institute, 2008, at 7-3.

FN3 John Elkington, “Cannibals With Forks: The Triple Bottom Line of 21st Century Business” (Capstone Publishing, 1999) (1997).

FN4 Reflects the author’s own phrasing.

FN5 On July 23, 2008, the New York State Department of Labor issued a press release in which it announced that Jin Shun, a garment factory located in Queens, which supplies clothes to prominent retail chains, owes its workers more than $5 million in minimum wage and overtime pay. The Department of Labor alleges that the factory’s management gave workers a “cheat sheet” to use in answering questions from compliance auditors and investigators in a way that would mask compliance violations. See http://www.labor.state.ny.us/pressreleases/2008/July23_2008.htm. A recent U.S. General Accounting Office (GAO) report “Department of Labor: Case Studies From Ongoing Work Show Examples in Which Wage and Hour Division Did Not Adequately Pursue Labor Violations,” issued July 15, 2008, advocates thorough investigations into Fair Labor Standards Act violations. See http://www.gao.gov/new.items/d08973t.pdf. See also, Press Release, New York State Department of Labor, Contractor for Major Clothing Lines Cited for More Than $5 Million in Unpaid Wages (July 23, 2008). The investigation may portend a return to enhanced enforcement, as was the case in the “No Sweat” program, first initiated by U.S. Secretary of Labor Robert Reich, under the Clinton administration. Under that program, noncompliance penalties included public posting of violations, fines, profit disgorgement and compliance agreements/programs.

FN6 The GAO reports criticized the USDOL’s Wage and Hour Division’s lax enforcement of the FLSA. It stated that many complaints alleging failure to pay overtime, final paycheck, and back-pay were not investigated. The GAO recommended expanding proactive investigations into low-wage industries where FLSA violations are likely to occur and recording repeat violators so harsher penalties may be imposed. Thus, companies may have to re-evaluate and enhance their supply chain CSR programs to adequately address the heightened risks posed by the practices uncovered in this investigation. Case Studies From Ongoing Work Show Examples in Which Wage and Hour Division Did Not Adequately Pursue Labor Violations: Hearing before the H. Comm. on Education and Labor, 110th Cong. (2008).

FN7 See http://www.sweatfree.org/docs/subsidizing_sweatshops_hr_color.pdf.
FN8 See Julian, et. al. v. Chiquita Brands International Inc. (S.D. Fla. 2007).

FN9 In American Isuzu Motors, Inc. v. Ntsebeza, 128 S. Ct. 2424, previously known as Khulumani v. Barclay Bank, 594 F.3d 254 (2d Cir. 2007), plaintiffs sought relief inter alia under the Alien Tort Claims Act, and the Torture Victim Protection Act, from corporations that conducted business under the apartheid regime in South Africa. The decision by the U.S. Court of Appeals for the Second Circuit to reinstate Alien Tort Claims Act claims was undisturbed by the U.S. Supreme Court, which could not hear the case because several justices abstained, citing conflicts of interest.

FN10 On June 26, 2007, nearly half a million Chinese-made tires were recalled. The New Jersey-based distributor, Foreign Tires Sales, became the defendant in a wrongful death suit, after a tire, made by Hangzhou Zhongce Rubber, caused an accident killing two people. In turn, the New Jersey company sued its Chinese supplier; both companies claimed they were not at fault. As supply chain accountability grows in importance, proposed legislation becomes more prevalent. Senate bill S. 1776, introduced by U.S. Senators Richard Durbin and Sherrod Brown seeks to amend the Federal Food. Drug, and Cosmetic Act to establish a user fee program to ensure food safety. See (http://www.govtrack.us/congress/bill.xpd?bill=s110-1776 ) Senate bill 1833, introduced by Senators Durbin and Bill Nelson, favors amending the Consumer Product Safety Act to require third-party verification of compliance of children’s products with consumer safety standards. See http://www.govtrack.us/congress/bill.xpd?bill=s110-1833.

FN11 U.S. Senators Byron Dorgan and Lindsey Graham have introduced S. 367, “Decent Working Conditions and Fair Competition Act,” which would enable private plaintiffs, including other retailers, to sue corporations that have engaged in unfair competition and deceptive trade practices by manufacturing merchandise in “sweatshops.” The bill would prohibit merchandise made in “sweatshops” from being incorporated or sold within the United States. Corporations found violating the act would pay a minimum of $10,000 per violation, or the fair market value for the goods, whichever is greater. The violating corporation would also pay the plaintiff’s litigation costs, including “reasonable” attorney’s fees, and be subject to injunctive relief. See http://www.govtrack.us/congress/bill.xpd?bill=s110-367.

FN12. Ali Hewson and Bono started EDUN, a socially conscious fashion company whose mission is to create “beautiful clothing while fostering sustainable employment in developing areas of the world.” EDUN promotes ethical fashion through organic clothing. See http://www.edunonline.com/.

FN13. On June 25, 2008, the United Nations Global Compact Office announced that 630 companies have been delisted from its list of participants for their failure to progress in accordance with the Integrity Measures first implemented in 2004. The United Nations Global Compact, http://www.unglobalcompact.org/AboutTheGC/index.html.

FN14. The Principles for Responsible Investment provide a voluntary and aspirational framework for incorporation of environmental, social and corporate governance into mainstream investment decision-making and ownership practices. The minimum requirement to remain a signatory is active participation and continued improvement according to the Principles. Firms failing to meet the standards may face expulsion, if continued progress and disclosure are not maintained. Principles for Responsible Investment (2007), http://www.unpri.org/.

FN15. On June 18, 2008, the United Nations’ Human Rights Council issued resolution 8/7, extending the mandate of John Ruggie, the U.N. Special Representative for Business and Human Rights for another three years. As such, Ruggie will provide practical recommendations on ways to strengthen human rights protections from abuses by international corporations and explore other ways to enhance effective remedies to those whose lives are impacted by corporate activities. Press Release, “Human Rights Council, Mandate of the Special Representative of the Secretary General on the Issue of Human Rights and Transnational Corporations and Other Business Enterprises,” U.N. Resolution 8/7 (June 18, 2008).

FN16. The International Organization for Standardization (ISO) provides global guidelines for social responsibility. The guidance standard will be published in 2010 as ISO 260000, for voluntary use. Stakeholder groups participating in the ISO Working Group on Social Responsibility (WG SR), included industry, government, labor, consumers and nongovernmental organizations. The guidelines will assist organizations in addressing social responsibility needs, while respecting a variety of conditions, from cultural to environmental. The emphasis will be put on performance results and improvements, with efforts geared toward increasing consumer confidence and satisfaction. In the end, the ISO pursues broader awareness of social responsibility. ISO Social Responsibility, http://www.iso.org/sr.