What is Corporate Social Responsibility?

As the field of human rights develops, wideness and increases in importance, it influences and also it intertwines with the corporations and business world. Therefore, the concept of corporate social responsibility has developed. We shall start by defining this term.

The broadest definition of corporate social responsibility, often abbreviated “CSR”, is concerned with what is or should be the relationship between global corporations, governments of countries and individual citizens (Crowther & Aras, 2008). It refers to a corporation’s initiatives to assess and take responsibility for the company’s effects on environmental and social wellbeing. The term generally applies to efforts that go beyond what may be required by regulators or environmental protection groups. It may also be referred to as “corporate citizenship” and can involve incurring short-term costs that do not provide an immediate financial benefit to the company, but instead promote positive social and environmental change (Investopedia, 2016).

After having explained the terminology I would like to emphasise my opinion on the matter by employing two quotes of great men. The first quote belongs to William Clay Ford Jr., who said that “Creating a strong business and building a better world are not conflicting goals – they are both essential ingredients for long-term success” (Sustainability report, 2009/10). The second one is the quote of Benjamin Franklin, who believed that “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently”. I strongly believe that the focus should be on two matters, on one hand the general control and on the other hand, on holding multinationals in check which implies an ex-ante approach rather than an ex-post one, which always entails that harm has already been done.

Moreover, the development of CSR is linked with the right to healthy environment which is part of the third generation of human rights which now is in a transition from soft-law to hard, substantive law. It has been proclaimed both in the Stockholm Declaration 1972 (First proclamation) and in Rio Declaration 1992 (Principle 1). In March 2012, the UN Human Rights Council decided to establish a mandate on human rights and the environment focusing on the human rights obligations relating to the enjoyment of a safe, clean, healthy and sustainable environment, while promoting the best practices relating to the use of human rights in environmental policymaking (Special Rapporteur on human rights and the environment, 2015). There is a timely correspondence between this and the UN “Protect, Respect and Remedy” Framework (2008) and its practical implementation (2011).

As we can see, originally CSR refers to the conduct of the corporation outside the regulatory framework, but the current trend in policy is towards creating a legal instrument to govern this matter. They are addressing the companies directly, imposing obligations on them in order to prevent harm and deterring them from involving in violations of human rights and hence controlling the corporations, keeping them in check.

UN intervention

Proof of this is the UN “Protect, Respect and Remedy” Framework for Business and Human Rights (Ruggie, 2008),  which was created to fill the governance gaps created by globalisation. Through the implementation of this Framework, the transnational corporation gain more and more rights in order to promote international trade and investments. This state of affair might lead to the instance where there is an imbalance of power between corporation and the State (Ruggie, 2008), the latter not being able to hold businesses in check which might be detrimental to human rights as they become collateral victims. 

The framework is built on three pillars. The first one concerns  the protection, provided by the state duty, against human right abuses committed by third parties through policies and regulations.  The second one delves into the corporate responsibility to respect by acting with due diligence in order not to violate the rights of others, whilst, at the same time the third pillar spans into addressing any harm that might occur and accessing an effective remedy. Evidently, the focus here, too, is on the prevention and also the obligation imposed to the major actors (States and Corporations) to act with due diligence in order to avoid infringing on the rights of others and only the last part addresses adverse effects that occur while providing access to those affected to an effective remedy.

The UN “Protect, Respect and Remedy” Framework for Business and Human Rights was implemented through the “Guide Principles on Business and Human Rights” (United Nations Human Rights Office of the High Commissioner, 2011), which provides step-by-step guidance for states and businesses. However, they need further implementation from the states.

National initiatives 

1. United Kingdom

In addition to the work of the UN, the UK adopted Modern Slavery Act (first pillar) which refers to the presence of forced labour and slavery in the operations and supply chains and it urges companies who meet certain criteria regarding their total turnover (£ 36 m) to prepare each year a slavery and human trafficking statement (second pillar). In case businesses fail to comply with the requirements, the State Secretary will bring civil proceedings against them (Section 54 (11), Modern Slavery Act). This refers both to the business itself and also to the supply chains and it is aimed to control the corporations in order to prevent violations. Furthermore, at an overview of the Act’s table of content the rules regarding prevention by both the State and the corporations outnumber those aimed towards victims and reparations for damages.

The benefits predicted by the UK Government (Rt Hon Theresa May MP - Home Secretary, 2015) include   protecting and enhancing an organisation’s reputation and brand, protecting and growing the organisation’s customer base - as more consumers seek out businesses with higher ethical standards, improved investor confidence, greater staff retention and loyalty based on values and respect, and finally developing more responsive, stable and innovative supply chains. 

2. United States of America 

On the same note, The United States took a step into regulating CSR by introducing in August 2012 the Conflict minerals rule - Section 1502 DFA which requires to disclose annually whether any conflict minerals that are necessary to the functionality or production of a product of the person, as defined in the provision, originated in the Democratic Republic of the Congo or an adjoining country.  If the aforementioned is confirmed it is required to provide a report describing, among other matters, the measures taken to exercise due diligence on the source and chain of custody of those minerals, which must include an independent private sector audit of the report that is certified by the person filing the report. Certain aspects of this rulemaking will require consultation with other federal agencies, including the State Department, the Government Accountability Office, and the Commerce Department.  People are not required to comply with these rules until their first full fiscal year after the date on which the Commission issues its final rules (U.S. Securities and Exchange Commission, 2014).

The act is recognised to be a response (United States Department of State, 2011) to the Organisation for Economic Cooperation and Development’s “Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict Affected and High-Risk Areas” (Adopted as a recommendation by the OECD in May 2011, under the chairmanship of Hillary Clinton). The guideline promotes a 5-step framework (OECD, 2016) : firstly, to establish strong company management systems, then identify and assess risk in the supply chain, later on design and implement a strategy to respond to identified risks and finally,  carry out an independent third party audit of supply chain due diligence and report annually on supply chain due diligence. Analysing the US Conflict Minerals Rule we realise that the disclosure element ensures the establishment of the strong company management as it obliges companies to have a thorough verification of their supply chain in order to identify risks and moreover, in the case that risks are indeed discovered, a report is required. This report would be the last step in the OECD guideline, which comprises both the risk assessment and private audit.

The four conflict minerals are: (1) columbite-tantalinte (coltan), (2) cassiterite, (3) gold, and (4) wolframite or their derivatives, which are used for mobile phones, gaming systems and other electronic devices (Woody, 2012).

It can be noted that the aim of the rule is to prevent companies from indirectly supporting financially the conflict in Central Africa and subsequently, to help them avoid committing a human rights violation by imposing transparency throughout the whole supply chain, as the rule is addressed not only to the manufacturers, but also to the contractors of manufacturers (Vytopil, 2013). Moreover, it must be underlined that there are no quantities mentioned in the act, therefore it imposes an extremely strict regime that reflects the seriousness and importance of the human rights violations, or more specifically the prevention of a reoccurrence . Despite the facts mentioned above, I strongly believe that the universal and broad application of section 1502 of DFA has a negative impact on Congo’s economy. Not all the mines are controlled by violent actors (Seay, 2012), a fact that is often disregarded  and, as a result, the strict legislation fails to make a difference between violent and non-violent mineral suppliers in order to avoid  extending the damage to the innocent parties involved . Given the fact that the mining industry is the country’s largest source of profit from export, and the amount of people that are working in the industry, if the current approach were to be fully implemented, it would lead to severe poverty as miners will no longer have a place to work (Morgan, 2009). This matter unfortunately is a serious and vast topic that requires extensive and separate research.

The sanction on non-compliance with Section 1502 DFA therefore is also tied in with transparency: if the companies file untruthful information with the SEC, they may be held liable under Section 18 of the Securities and Exchange Act for false and misleading statements. There are no ‘harder’ sanctions in respect of Section 1502 DFA. A significant non-legal sanction, nonetheless, remains (Vytopil, 2013).

Therefore, it can be observed that the American Act focuses on preventing the violations as it contains no provision addressing the victims affected by these violations. 

BP Deepwater Horizon case 

Why it is better to keep companies in check and prevent CSR violations

Moreover, to the issues described so far, I have come to the conclusion that by focusing on keeping corporations in check and by using due diligence processes and risk assessment mechanisms, companies are likely to reduce costs by avoiding the expenses of a civil suit itself, as well as the repercussion on the image and the overall company value. In order to support my statement, I will refer to the unfortunate case of BP Deepwater Horizon. 

BP Deepwater Horizon was the biggest oil leak in history (Pallardy, 2016). Could it have been prevented? The price of BP shares on the New York Stock Exchange on April 20, 2010 was 60.45 $, but it slowly began to drop, reaching 52.43 $ in just ten days on April 30, 2010 and by June 29, 2010 the price hit the alarming value of 27.32 $ (Yahoo! Finance, 2010) - almost a 55% decrease in value of the shares and therefore of the company. In only one year, BP had to pay over $40 billion in costs associated with clean up and recovery, not to mention the expense of the lawsuits, settlements and penalties. It is considered that if an independent test would have been conducted (Rascoe, 2011) regarding the platform, problems would have been detected with the cement seal led to that seal failing at a critical juncture (A problem that BP encountered in a previous disaster - Piper Alpha). Therefore, if the State would have imposed such an obligation on the corporation the whole catastrophe could have been avoided. Also, from a financial point of view, the price of the test is impossible to compare with the tenths of billions that BP had to pay in the end. Not to mention that, despite the exorbitant amount of compensations and cleaning expenses the environment was affected perhaps in an irreversible manner. 

Conclusion

In conclusion, the prevention of damage from CSR violations can only be accomplished through an extensive and ongoing effort to control and keep the companies in check. The victims’ compensation that is required after extreme violations that result to immense environmental repercussions are extremely expensive for the companies and, at the same time, ineffective for the injured.  One of the most typical examples are the people from the Niger Delta that were greatly affected by the Shell oil leaks and as a result have, according to current assessments,  become refugees (Donatus, 2016). This unfortunate example showcases not only the inability to bring justice to the people affected but also thedifficulty to restore the natural balance after serious environmental incidents. This fact further reinforces the need to focus on the prevention of such incidents in order to avoid the irreparable social and environmental consequences. 

 

By Alexandra Tomuța 

 

This article has been originally published in issue 5.1 of the magazine, which can be found here. All references used can be found at the end of that issue.