What are the consequences of taking a legal approach to corporate social responsibility?

Going beyond CSR

For years, corporate social responsibility (CSR) was seen as the department that looked after a company’s philanthropic side projects. Over the past decade that view has been changing, with CSR being viewed less as a tacked-on ‘nice to have’ and more as a moral imperative of modern business. The Covid-19 pandemic further accelerated this shift, with companies being forced to consider what role they could play in the global effort to stop the disease.

While the turning of the corporate eye to issues like climate change and social injustice is, of course, positive, it is worth considering where this behaviour fits within the context of the law. Are businesses being more benevolent out of the goodness of their hearts, or are there legal obligations that they are also fulfilling?  What are the consequences of taking a legal approach to CSR?

“Are businesses being more benevolent out of the goodness of their hearts, or are there legal obligations that they are also fulfilling?”

There are a variety of legal structures in place to encourage companies to think about their purpose beyond profit. In addition to the disclosure requirements that have been in place from listed companies in Europe and the UK since 2017, several types of voluntary solutions exist for companies interested in making a more concrete commitment to social purpose.

On the one hand, certification models, such as B-Corp, allow companies to complete an evaluation process that leads to a sustainability rating or membership within a group of companies committed to following best practice.  Certain corporate laws, including in France, also allow companies to adopt a social mission or status that is then included in its by-laws and subject to oversight and independent audit.  

Equally, due diligence frameworks, including those adopted in the UK, Germany and Denmark, as well as the proposed pan-EU rule, require companies to undertake risk assessments, complaint mechanisms and remedial measures in order to assess the human rights and environmental impact of their supply chains.  

Duty of care in action

Complementing these approaches is a wave of purpose-driven advocacy and strategic litigation led by claimants and NGOs.  One such recent case involves farmers in Nigeria.  In a claim brought by four Nigerian farmers and Milieudefensie, a Dutch environmental organization, the Court of Appeals of The Hague recently held Shell liable for damage caused by oil spills, ordering it to pay compensation and install a leak detection system for its pipeline. 

Notably, although the oil spills in question were likely caused by external interference or sabotage, the Court considered that it was nonetheless the responsibility of Shell to remediate the damage, taking an expansive approach to the duty of care owed to third parties affected by the company’s operations outside the company’s home jurisdiction.

“Combining strategic litigation and due diligence frameworks can encourage companies to carefully consider who and what their operations will affect.”

A similar line of reasoning was adopted by the English Supreme Court in the 2019 Vedanta case, whereby a duty of care was found to be owed to third parties based on the disclosure included in company’s corporate social responsibility disclosures.  “Even where group wide policies do not of themselves give rise to such a duty of care to third parties, they may do so if the parent does not merely proclaim them, but takes active steps, by training, supervision and enforcement, to see that they are implemented by relevant subsidiaries. Similarly, it seems to me that the parent may incur the relevant responsibility to third parties if, in published materials, it holds itself out as exercising that degree of supervision and control of its subsidiaries, even if it does not in fact do so.  In such circumstances its very omission may constitute the abdication of a responsibility which it has publicly undertaken.”

There are several points that are striking about these decisions.  First, they are remarkably simple from a legal perspective.  In contrast to corporate law and disclosure regimes, which require complex data analytics, reporting and auditing frameworks and input of third-party advisors and experts, courts have chosen to look to the basics of tort law to define the duty of care.  In a nutshell, tort law provides that we all have a legal obligation to take reasonable steps not to cause foreseeable harm to another person or his or her property.  Where this obligation is breached, and where a link of causation can be established, a claim in tort may exist.

“Not only is society demanding more from their corporations today, the laws that govern those corporations are demanding more.”

The cases also arrive at the same conclusion even while considering fact patterns that took place in different industries and countries.  That is likely a reflection of tort law itself—although these concepts necessarily vary from jurisdiction to jurisdiction, tort law is among the oldest legal theories in both common and civil law countries. 

Equally, the cases allow claimants to benefit from the principle of extra-territoriality in a much broader way.  Historically, claimants pursuing multinationals for human rights abuses ran into jurisdiction issues—most notably the case in the United States with the Alien Tort Statute, which has been interpreted in a fairly narrow manner by U.S. courts. 

The Shell and Vedanta cases, however, demonstrate a willingness of courts to hear claims in Europe for facts that occurred elsewhere under the theory that the corporate maintained an office or domicile in Europe. In particular, the Netherlands could prove to be a promising venue for claims based on the presence of a financing entity, as many multinationals benefit from Dutch B.V. structures for tax and transfer pricing purposes.

Implications for operations going forward

More significantly, the “duty of care” approach could have a significant impact on the way multinationals operate and manage risk going forward.  Historically, courts in the United States (particularly Delaware) have traditionally taken the position that a corporation and its directors could be shielded from liability when making decisions that were in the reasonable interest of the company.

The Shell and Vedanta cases, however, stand in opposition to this traditional “business judgment rule” approach.  The courts spend little time analyzing the decisions of senior management but rather look at the substance of how the in-country operations were managed and the level of control exercised by the mother company.  Under a business judgement rule approach, policies and procedures might be construed as a reasonable attempt to manage risk, thereby protecting the company and its directors from liability.  Under the emerging “duty of care” approach seen in Shell and Vedanta, however, these very policies appear to become the source of liability.

“Greater autonomy for in-country operations could potentially lead to a meaningful improvement in how local stakeholders are involved and compensated.”

The impact of this approach could be quite critical going forward.  Indeed, we should not discount the risk that these decisions could actually have a chilling effect in terms of CSR.  If it becomes accepted law that enforcing a global compliance or CSR program through policies, procedures and training can give rise to liability (as the Vedanta decision suggests), companies may choose to move away from the top-down HQ-driven globalized CSR model currently in place and instead defer to in-country subsidiaries to manage their own affairs, thus shielding the mother company from liability. 

The impact of doing so could be significant in terms of management strategy for the modern multinational and stakeholder engagement. Indeed, greater autonomy for in-country operations could potentially lead to a meaningful improvement in how local stakeholders are involved and compensated.

Stakeholder impact

What does all this mean for the future of stakeholder capitalism? Do legal remedies such as these, which involve significant financial and procedural hurdles, provide meaningful relief for stakeholders?  

It is clear that combining strategic litigation and due diligence frameworks can encourage companies to carefully consider who and what their operations will affect. But of course, there is still a risk that companies will maintain a business-as-usual approach, only revising their operations on an ex post basis.

Another tool to complement these solutions would be to involve stakeholders in a more meaningful way ex ante—for example, in designing and approving infrastructure projects, troubleshooting safety and operational issues and continually ensuring that the impact of operations is suitable to local communities.  This is very much echoed in the spirit of the European Parliament’s March 2021 Corporate due diligence and corporate accountability resolution, which reinforces the importance of consulting with trade unions, workers’ representatives and civil society organizations. 

Twenty years ago, an organisation with an active CSR department might have felt satisfied that they were doing their bit for the world. Not anymore. Not only is society demanding more from their corporations today, the laws that govern those corporations are demanding more. It may be that business’s biggest shift towards stakeholder capitalism comes not from a new, progressive mindset, or a more compassionate outlook, but rather the oldest motivator in the world: because it’s the law. 

CPM

This article was originally published on September 7, 2021 in The Beautiful Truth Magazine, available here.