Corporate Social Responsibility: Mitigating Legal And Reputational Risk In The Global Arena

Sunday, October 1, 2006 - 01:00

Editor: Since the corporate scandals and Sarbanes-Oxley, we have seen an increased focus on corporate culture and corporate social responsibility. What is meant by the term Corporate Social Responsibility?

Smith: Corporate Social Responsibility (CSR) is a business concept pursuant to which companies seek to address social and environmental issues through support for international legal norms and sustainable business practices.

CSR is connected to globalization, and leading multinational corporations regard it as a way to manage legal and reputational risks in a meaningful manner. Most of us view globalization, on balance, as a good thing, and it is certainly the cornerstone of business for multinationals in this millennium. There are stakeholders, however, who see a dark side to globalization, including the exploitation of workers, injury to the environment, and increased economic and social inequalities. CSR is a byproduct of globalization, reflecting both its advantages and the concerns about its impact. An effective CSR strategy helps a company to address the risks of globalization in a way that seeks to benefit all stakeholders.

CSR predates Sarbanes-Oxley, although the recent corporate scandals have increased attention to CSR and ethical corporate practices. CSR probably began in the late 1970s and 1980s, but gained momentum in the 1990s due to scandals in the apparel industry regarding sweatshop conditions in factories abroad, and allegations that members of the extractive sector were complicit in human rights abuses committed by foreign host governments. Since then, CSR has grown remarkably as a field. The first corporate "code of conduct" for a U.S. manufacturing company was launched in 1991. Today, thousands of major multinationals have such codes, and there has been a proliferation of social responsibility funds that scrutinize a company's CSR record before investing in it. Accordingly, business leaders increasingly seek counsel regarding how to design, implement, and oversee effective CSR programs.

Editor: Foley Hoag is the only AmLaw 200 law firm with a stand-alone CSR practice. What is its origin?

Smith: Foley Hoag's CSR practice began in 2000 when I returned to practicing law after time in government service and the corporate world. I had served as Vice President of Levi Strauss & Co., with responsibility for global implementation of Levi's code of conduct, and previously had been the Principal Deputy Assistant Secretary in the U.S. State Department's Bureau of Democracy, Human Rights and Labor. The opportunity to join Foley Hoag was particularly appealing because it gave me the platform to build the first U.S. legal practice advising clients from a range of industries regarding risks related to international human rights, labor rights, and environmental concerns.

Feldman: Gare's particular expertise and his credibility with a range of stakeholders - not only in the private sector, but also in government and in the civil society world - was the keystone in launching our practice. He was at the forefront of CSR as the field was developing, as he served as the State Department representative to the White House Apparel Industry Partnership in the mid-1990s and helped launch President Clinton's Model Business Principles. We have been able to grow the practice by augmenting it with a unique group of attorneys who bring special skills with respect to the intersection of business and human rights. In addition to legal expertise, each of them has spent time working on CSR issues in business, government, or in civil society. As CSR has become relevant to a growing range of industry sectors, we have had the personnel and expertise to grow our practice along with it.

Editor: Many multinationals are operating in foreign countries because labor costs are low. The employees are glad to have these jobs even if they are underpaid by Western standards. How does the company respond to the criticism that ensues?

Smith: From a CSR perspective, the fact that some countries have low labor costs is not an issue. Virtually every code of conduct states that companies should pay wages according to the local laws of the jurisdiction, or industry best practices. The CSR challenge for companies sourcing abroad tends to be related to implementation of either applicable national laws or internationally recognized legal standards, such as International Labor Organization (ILO) conventions on discrimination, forced labor, child labor, and freedom of association. The failure of local factories to respect these internationally recognized labor rights, which virtually all nations have endorsed, leaves the brand company open to legal and reputational risks.

Feldman: CSR is not an effort to impose Western standards on emerging economies. Rather, it attempts to provide accountability for certain standards that have been adopted internationally. For instance, virtually every country in the world has adopted laws regulating child labor, but many don't implement them adequately. CSR mechanisms, such as a company's code of conduct, can help to ensure that such laws are respected and enforced, thereby bolstering the rule of law.

Editor: Does the CSR group draw upon other disciplines and practice groups in serving its clients?

Smith: Yes, we draw upon the full resources of the firm to serve our clients. The nature of CSR issues, including environmental concerns, labor issues, federal affairs, and corporate governance, provides built-in synergies between CSR and many of the firm's other legal practice areas. We work frequently with our colleagues in the international, environmental, labor and employment, government strategies, health care, and corporate governance groups, among others.

Editor: Who are the clients?

Smith: We have a wide range of corporate clients - primarily brand-name multinationals - in a number of industry sectors. We're currently doing quite a bit of work in the extractive sector. For instance, we have been advising the Baku-Tbilisi-Ceyhan (BTC) oil pipeline, operated by BP, regarding human rights and labor rights practices. We helped that project establish industry benchmarks regarding implementation of the Voluntary Principles on Security and Human Rights that have been recognized by the United Nations. In the light manufacturing sector, we represent a variety of apparel and footwear corporations, particularly with respect to their sourcing issues in Asia and in Latin America. We advise clients in the health care and pharmaceutical industries with respect to best practices for conducting medical testing. We have also counseled the banking industry regarding the establishment of human rights policies related to private lending.

In addition, we represent some important non-corporate clients. We work extensively with multilateral institutions and have authored three books for The World Bank and the International Finance Corporation on CSR best practices. We also work with sovereign governments with respect to the drafting of labor laws and ensuring accountability for human rights abuses.

Feldman: In addition to our signature brand clients, we have advised several important industry associations on identifying and implementing best practices. Notably, we were selected by IPIECA (the International Petroleum Industry Environmental Conservation Association) to draft a human rights training program that is now available for use by all of its member companies, thereby helping the industry address and respond to a growing range of human rights challenges.

Editor: How do you advise clients on risks to reputation?

Smith: Reputational challenges can lead to greater economic damage for a company than legal challenges, because they can have an immediate effect on a company's share price, and a more lasting impact than a lawsuit. Examples of reputational risk include divestment campaigns, boycotts, hostile shareholder resolutions, negative media articles, sanctions laws, attacks on corporate property, and coordinated campaigns by non-governmental organizations (NGOs). We help to devise comprehensive and integrated CSR strategies to effectively respond to the challenges our clients confront.

Our work in mitigating reputational risk often entails serving as a bridge between the corporate client and a range of other stakeholders, including NGOs, religious groups, indigenous leaders, labor unions, governments, multilateral institutions, and socially responsible investment companies. By helping to foster dialogue, and ensure that the company complies with industry standards and the rule of law, we can often negotiate solutions to the reputational risk that benefit both the client and the stakeholder.

Editor: Would you give us an overview of the services that this practice offers its clients?

Smith: Our services are tailored to individual industry sectors, and therefore vary significantly from industry to industry. At a generalized level, however, we help to create legal strategies and business policies that incorporate respect for human rights and comply with existing laws and voluntary codes. For instance, we frequently help to draft or revise a company's internal code of conduct or human rights statement and then ensure it's implemented in a meaningful fashion. Part of this implementation means that we undertake human rights assessments and CSR due diligence reviews of current and potential projects to evaluate legal and reputational risks. We also conduct periodic monitoring of projects to ensure compliance with company standards and fundamental human rights. We ensure that constructive input is received from key stakeholders, and incorporated into a client's human rights initiatives. In the event of a crisis, we develop plans to ensure that companies are prepared to respond quickly and effectively.

Although some of our clients are more concerned about reputational risk than legal risk, everything that we do is grounded in the rule of law and we have considerable expertise in responding to legal challenges in the CSR and human rights domain. Many oil and gas companies, for example, have been sued under the Alien Tort Claims Act ("ATCA"), and we provide both ex ante and ex post advice to our clients regarding how to avoid, respond to, and resolve ATCA claims.

Editor: Presumably, you are very often brought into crisis situations.

Smith: We certainly are. Generally, the first thing we attempt to ensure in a crisis situation is that our client is able to stand by the commitments it has already made, including anything that may be in its code of conduct. Ensuring that those commitments are implemented is part of a comprehensive response to the stakeholders involved. In a crisis situation, it's also important to act swiftly, since the dynamic can change rapidly. Whether we're asked to take the role of lead strategist, or work alongside the client's internal team, we help to coordinate the various aspects of a client's response in a timely fashion, and bring focus and direction to the effort.

Editor: Where would you like this practice to be in, say, five years?

Smith: While we would like to continue providing CSR services to the sectors in which we are already engaged (such as the extractives, light manufacturing, health care, and banking industries), we also see a host of other CSR challenges looming on the horizon - including in the agribusiness, insurance, technology, and tourism industries. There is a growing recognition among Fortune 500 companies regarding the importance of CSR mechanisms; we look forward to helping these companies successfully manage their social and environmental challenges.

Please email the interviewees at gsmith@foleyhoag.com or dfeldman@foleyhoag.com with questions about this interview.