Effectively Enforcing Corporate Social Responsibility Norms in the ...

Effectively Enforcing Corporate Social Responsibility
Norms in the European Union and the United States




















Alissa Mickels
Universite de Paris-Panthéon-Assas
Professor De Frouville
EU Human Rights
April 19, 2009
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I.
INTRODUCTION: IRRESPONSIBLE CONDUCT LEADS TO IRREPARABLE HARM

In the current market-based economy, consumers and directors all over the world are
questioning whether corporations should exist solely to maximize shareholder profit. Many for-
profit US and European corporations abide by the neoclassic assumption that in order for a
manager to maximize profit, he must “take the wage demand as a given and produce its output at
the lowest possible cost.”1 Capitalism, as commonly understood to be the institution holding
maximization of monetary wealth for enterprise owners as the utmost goal, has widely been
criticized as a practice fostering such things as global warming, human rights abuse and labor
violations.2 Many of these claims are highly debatable, and aspects of profit maximization have
certainly been applied positively to social betterment. However, the fact remains that much of
the business world does not properly account for environmental and social impacts within third
world countries.3
Some US and EU corporate directors no longer abide by Milton Friedman‟s famous
declaration that a corporation‟s only social responsibility is to provide a profit for its owners.4
Now more than ever, businesses are refusing to define the highest social good as trading wealth
and prosperity freely and fairly in open markets and are choosing to hold themselves to a higher
standard of care; a “corporate social responsibility (CSR)” standard that goes beyond their legal
obligations under European and American law. Appropriately, corporate directors are not legally
required to abide by CSR principles. Defining CSR as a voluntary initiative essentially allows
subsidiaries of EU companies to inflict human rights abuse in developing without any

1 Daniel T. Ostas, Deconstructing Corporate Social Responsibility: Insights from Legal and Economic Theory, 38 AM. BUS. L.J. 261, 285 (2001).
2 Institute for Economic Analysis, Towards the Integration of Economic Science, available at http://www.iea-macro-economics.org/int-ec-sci-
pol.html (last visited Mar. 17, 2007) (“[I]t has become obvious that continued depletion of economic resources at the present rate cannot be
sustained indefinitely, particularly if the rest of the world attempts to achieve the present U.S. standard of waste").
3 Id.; see also MUHAMMAD YUNUS, CREATING A WORLD WITHOUT POVERTY 3-6, 18 (PublicAffairs 2007) [hereinafter “YUNUS, WORLD
WITHOUT POVERTY”] (explaining that the “mainstream free-market-theory suffers from a „conceptualization failure,‟ a failure to capture the
essence of what it is to be human.”). Yunus further explains that people and businesses are multi-faceted and that business should not be bound
to serve one single, purely-profit driven objective.
4 See Milton Friedman, Op-Ed, The Social Responsibility of Business Is to Increase Its Profits, N.Y. TIMES, Sept. 13, 1970, at SM17.
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consequences. In order to effectively deter human rights abuse by corporations, EU parent
companies should be held liable for actions committed by their subsidiaries and the EU should
pass binding legislation requiring EU companies to report social and environmental harm
incurred by the parent company and its subsidiaries.

II.
A BRIEF HISTORY OF CORPORATE SOCIAL RESPONSIBILITY IN EUROPE AND THE US
a. Corporate Social Responsibility in the US
Social entrepreneurs in the US have adopted a sustainable corporate policy known as
corporate social responsibility that attempts to benefit the society and environment in which they
reside.5 This model, also known as the triple bottom line, was developed by John Elkington in
1994. The triple bottom line focuses on promoting the three “P‟s”: people (human rights), profit
(efficiency), planet (environment).6 This triple bottom line business model maintains fair and
equitable business practices toward their employees, the community, and the region in which a
corporation conducts business.7
CSR in the U.S. is “an ongoing commitment by business to behave ethically and to
contribute to economic development while demonstrating respect for people, communities,
society at large, and the environment.” 8 CSR attracts an integrated community of global citizens
who feel an innate calling to be environmental stewards and are interested in sustainable
development. The main problem a socially responsible company faces is how to succeed in

5 See David G. Mandelbaum, Corporate Sustainable Strategies, 26 TEMP. J. SCI. TECH. & ENVTL. L. 27, 30 (2007).
6 John Elkington, Towards the Sustainable Corporation: Win-Win-Win Business Strategies for Sustainable Development, CAL. MGMT. REV.,
Winter 1994, at 90-100.
7 Darrell Brown, et al., Triple Bottom Line: A Business Metaphor for a Social Construct, available at
http://www.recercat.net/bitstream/2072/2223/1/UABDT06-2.pdf. For a more detailed analysis, see HARVARD BUSINESS SCHOOL PRESS ET AL.,
HARVARD BUSINESS REVIEW ON CORPORATE RESPONSIBILITY (2003); TOM CHAPPELL, THE SOUL OF A BUSINESS: MANAGING FOR PROFIT AND
THE COMMON GOOD (1993); STUART L. HART, CAPITALISM AT THE CROSSROADS: THE UNLIMITED BUSINESS OPPORTUNITIES IN SOLVING THE
WORLD'S MOST DIFFICULT PROBLEMS (2007); ANDREW W. SAVITZ & KARL WEBER ,THE TRIPLE BOTTOM LINE: HOW TODAY'S BEST-RUN
COMPANIES ARE ACHIEVING ECONOMIC, SOCIAL AND ENVIRONMENTAL SUCCESS -- AND HOW YOU CAN TOO; BOB WILLARD ,THE
SUSTAINABILITY ADVANTAGE: SEVEN BUSINESS CASE BENEFITS OF A TRIPLE BOTTOM LINE (2006).
8 See WHAT MATTERS MOST, supra note 3, at 29 (citing Business: The Ultimate Resource (2002)).
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implementing a heightened standard of “socially responsible” values without being overburdened
by the financial demands from pragmatic execution of such values.9
b. CSR in Europe
The definition of CSR in the U.S. mirrors that in Europe to a certain extent. According to
the European Commission, CSR is “a concept whereby companies integrate social and
environmental concerns in their business operations and in their interaction with their
stakeholders on a voluntary basis.”10 CSR has three main features in Europe. First, it is a
behavior by businesses over and above legal requirements, voluntarily adopted because
businesses deem it to be in their long-term interest.11 Further, it promotes sustainable
development of a business by integrating the economic, social and environmental impact of their
activities.12 Lastly, CSR is not an optional “add-on” to business core activities; instead, it
represents the way businesses are managed above and beyond its legal obligations.13 Although
the European and the U.S. definitions are vague, both embody a conviction that a corporation‟s
existence should not relate solely to making money for the sake of making money but that a
corporation has a social responsibility to contribute and improve the community in which it
operates.
European interest in CSR promoted the European Council in Lisbon14 in March 2000 during
which the European Council encouraged companies to become more socially responsible by
taking into consideration “lifelong learning, work organization, equal opportunities, social

9 Id. at 192.
10 Communication from the Commission concerning Corporate Social Responsibility: A Business Contribution to Sustainable Development, at 3,
COM (2002) 347 final (July 2, 2002), available at http://eur-lex.europa.eu/ LexUriServ/LexUriServ.do?uri=COM:2002:0347:FIN:EN:PDF.
11 Id. at 5.
12 Id.
13 Id.
14 Commission Green Paper on Promoting a European framework for Corporate Social Responsibility, at 3, COM (2001) 366 final (July 18,
2001).
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inclusion and sustainable development.”15 Further, the European Commission recognized that
shareholder value is not achieved merely through maximizing short-term profits, but also
through “market-oriented yet responsible behavior.”16 Since the first EU communication on
CSR, European support of CSR businesses has been increasing exponentially.17 On March 13,
2006, the European Commission enacted a Resolution entitled, “Corporate Social Responsibility:
A New Partnership.”18 In this resolution, Europe acknowledged that CSR has become “an
increasingly important concept for competitiveness both globally and within the EU, and is part
of the debate about globalization, competitiveness and sustainability.”19 The resolution led to the
creation of the European Alliance for CSR, which recognized that all stakeholders must be taken
into account when making business decisions.20 This Alliance operates around three core
principles: 1) raising awareness and improving knowledge on CSR and reporting on its
achievements; 2) helping to mainstream and develop open coalitions of cooperation; and 3)
enabling the environment for CSR.21
In December 2008, the European Alliance produced the first-ever tool box for CSR
companies as a practical guide for implementing CSR principles in EU businesses. More
recently, on February 10, 2009, the European Commission held the second multi-stakeholder
forum on Corporate Social Responsibility in Europe. The European Union invited more than
250 key stakeholder groups in order to review progress on CSR in Europe and globally, and

15 Id.
16 Communication from the Commission concerning Corporate Social Responsibility: A Business Contribution to Sustainable Development, at 5,
COM (2002) 347 final (July 2, 2002), available at http://eur-lex.europa.eu/ LexUriServ/LexUriServ.do?uri=COM:2002:0347:FIN:EN:PDF.
17 Id.; In the past decade, numerous reports have been published on CSR. “The Sustainable Development Strategy for Europe” adopted during the
Goteborg European Council of June 2001 acknowledged that the long-term, economic growth, social cohesion and environmental protection go
hand in hand and encouraged businesses to adopt such policies in their own bylaws. Additionally, the EU Multi-Stakeholder Forum on CSR
(CSR Forum) was formed in 2002, and the European Coalition for Corporate Justice (ECCJ) formed in 2006. For more information see
http://www.corporate-responsibility.org/C2B/document_tree/ViewACategory.asp?CategoryID=35.
18 Communication from the Commission to the European Parliament, The Council and the European Economic and Social Committee
Implementing the Partnership for Growth and Jobs Making Europe a Pole of Excellence on Corporate Social Responsibility, COM (2006) 136
final (March 22, 2006), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2006:0136:FIN:EN:HTML. (hereinafter
“2006 CSR COMMUNICATION”)
19 Id. at 2.
20 Id.
21 Id. at 11.
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discuss possibilities for future joint initiatives. At the end of this forum, stakeholders agreed that
there must be more binding legislation on accountability and reporting in the EU. Günter
Verheugen, Vice President of the EU Parliament, proposed that the Commission launch a study
to asses and clarify the applicable legal framework for EU companies in their operations abroad.
Commissioner Verheugen states:
“I will therefore encourage my fellow Commissioners responsible for the
different aspects of this matter to further deepen our knowledge about the nature
and scope of the existing EU legal framework applicable to European
companies operating in third countries, for example through an analytical report
with multi-stakeholder involvement. It is in our interest and in the interest of
obtaining a level-playing field for our businesses to remind each and everybody
that human rights are universal and should be globally respected.”22

Essentially, the study is intended to unveil the gaps that allow companies to violate human
rights and environmental rights abroad. The commission has allocated until March 2010 to
publish the report. This report will be one way in which to assess whether EU subsidiaries are
the source of a substantial amount of human rights abuse and may inform the Commission as to
whether subsequent legislation on EU parent company liability is necessary. .

III.
THE CONSEQUENCES OF VOLUNTARY COMPLIANCE WITH CORPORATE SOCIAL
RESPONSIBILITY PRINCIPLES

a. Problems with integrating CSR principles into the legal order
Despite the adoption of CSR into the European agenda in 2002, and into the US corporate
dialogue in 1984, CSR remains a voluntary initiative in both the US and Europe. In 2006, the
commission took an explicit political decision to refrain from proposing binding legislation on
CSR principles.23 Even after the most recent multi-stakeholder forum on CSR, the EU restated
its intention to keep CSR as a voluntary measure. One of the main problems with the lack of

22 See http://www.corporatejustice.org/IMG/pdf/CSR_Forum_-_speech_GV_-_delivered.pdf
23 See 2006 CSR COMMUNICATION supra note 18.
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binding EU legislation on CSR is that EU companies have no incentive to abide by these norms
and have even used CSR as a marketing incentive to attract more customers. Although much
progress has been made, the lack of a binding regulation on CSR principles, has allowed certain
EU and US companies to mislead consumers into thinking they are investing in CSR companies
when, in fact, they are not. It could be argued that EU companies are bound to abide by a higher
set of norms than US companies due to the strict regulations the EU legislation has implemented
in the specific areas of social law, labor law and environmental law. In regards to human rights,
EU companies are not obliged to implement certain principles found in the EU charter of
fundamental freedoms because there is no horizontal effect of the charter. Thus, the main
legislation relevant to CSR principles in Europe would fall under the EU social policy and
environmental law.
US environmental and social laws impose an even lower standard.24 In fact, US companies
may be penalized for environmental and social decisions that do not maximize shareholder
profit.25 Even though European companies must abide by a high standard in relation to US
companies, they are not liable for human rights abuse committed by their subsidiaries abroad.26
This is a huge problem for deterring companies from merely outsourcing certain operations so
that it is less costly and less restrictive.
Corporate social responsibility is even more difficult to enforce in the US because US
companies are only governed by the corporate code of the state in which it is incorporated.
Consequently, most US companies incorporate in Delaware because the company law is most
favorable to the directors and to maximization of profit and therefore have a very low standard of

24 Ludwig Kramer Regional Economic Integration Organizations: The European Union as an Example IN BODANSKY, BRUNNEE AND HEY,
INTERNATIONAL ENVIRONMENTAL LAW, 873.
25 Daniel T. Ostas, Deconstructing Corporate Social Responsibility: Insights from Legal and Economic Theory, 38 AM. BUS. L.J. 261, 285
(2001).
26 European Coalition for Corporate Justice, Fair Law: Recent proposals to Improve Corporate Accountability for Human Rights and
Environmental Abuses available at www.corporatejustice.org.
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environmental and social obligations. The most stringent regulations for maintaining a high
level of accountability and transparency are imposed upon public companies.27 These
companies, however, do not have an obligation to abide by certain human rights norms.
b. Encouraging voluntary adoption of CSR principles through private certification schemes
Despite the lack of governmental regulation on businesses, US socially responsible
businesses are dedicating more resources than Europe to providing social and environmental
benefits.28 In addition, government and social-sector organizations are beginning to emulate for-
profit businesses by adopting earned-income governance models as a way to acquire the
necessary capital to sustain their social mission.29 The convergence of the mission and methods
of these non-profit and for-profit companies is producing a new type of “CSR” company, which
pursue social purposes while engaging in business activities. This CSR company emulates a new
generation of value-driven consumers and shareholders who are demanding that corporations
benefit their communities. In order to assess and identify businesses that are trying to position
themselves in the category of CSR corporations in the US, a number of different rating systems
have been developed.30 One of the most comprehensive of these rating systems was developed
in 2004 by S-Bar.31 More recently B-labs, a 501(c)(3) non-profit corporation, developed a
certification scheme, derived from S-Bar and other rating systems, which it uses to identify

27 15 U.S.C. § 7262 (also known as “Sarbanes-Oxley Act 2002”). Title III of the Sarbanes-Oxley Act holds senior executives individually
responsibility for the accuracy and completeness of corporate financial reports. It also specifies limits on the behaviors of corporate officers and
delineates the civil penalties for non-compliance. See also Bernhard Kuschnik; The Sarbanes Oxley Act: "Big Brother is watching" you or
Adequate Measures of Corporate Governance Regulation? 5 Rutgers Bus. Law Journal 64 - 95 (2008) available at
<http://businesslaw.newark.rutgers.edu/RBLJ_vol5_no1_kuschnik.pdf>
28 Heerad Sabeti, The Emerging Fourth Sector 3 (2008), http://fourthsector.net/prepdocs/FSExecutiveSummary_Draft.pdf.
29 Id.
30 See OpenSRI, http://www.opensri.com (last visited Sept. 18, 2008); Oekom Research AB in Germany, http://oekom.ve.m-
online.net/index.php?language=ukd# home (last visited Sept. 18, 2008); Dow Jones Sustainable Index, http://www.sustainability-indexes.com
(last visited Sept. 18, 2008); Ethibel, http://www.ethibel.org/subs_e/4_index/main.html (last visited Sept. 18, 2008); FTSE4Good,
http://www.ftse.com/Indices/FTSE4Good_Index_Series/index.jsp (last visited Sept. 18, 2008); KLD‟s Domini 400 Social Index,
http://www.kld.com/ indexes/ds400index/index.html (last visited Sept. 18, 2008); Corporate Governance Quotient (CGQ),
http://www.investopedia.com/terms/c/corporate_governance _quotient.asp (last visited Sept. 18, 2008); and Blabs in 2007,
http://www.bcorporation.net (last visited Sept. 18, 2008).
31 The Sustainable Business Achievement Ratings (S-BAR) was created in 2004 in response to the inability of the California state legislators to
agree upon a working definition of “social business.” As a result, a 2004 California bill giving state procurement preference to “social
businesses” was tabled. S-bar is “the first comprehensive system with a market-based, broadly applicable, and transparent means of assessing a
company‟s environmental, economic and social performance.” See http://www.sustainabilityratings.com/about/index.html.
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socially responsible for-profit businesses that it brands as “B corporations.”32 In order to be “B
certified,” a corporation must score eighty points out of two hundred on a test to determine
whether it meets a set of social and environmental performance standards.33 Once the
corporation has passed this initial test, it must institutionalize stakeholder responsibility by
inserting certain language into its corporate bylaws that allows managers to consider the interests
of employees, the community and the environment, which may, in some cases, require
companies to reincorporate into a state with a constituency statute allowing for such an
amendment.34 B-Lab‟s founders adopted their stakeholder accountability approach from
Upstream 21, a holding company which pioneered the idea of incorporating stakeholder
language in the articles of its portfolio companies.35 Once the corporation has become a B
corporation, it must donate one-tenth of one percent of its revenue to B-labs.36
The idea of certification remains an initiative implemented on a national level in Europe.
For example, BV-SERM is rating system by Bureau Veritas, an international company based in
Belgium, and SERM Rating Agency, a UK based company, which analyzes the financial impact
of safety, environmental and social risks to be quantified for individual companies.37 Another
popular ratings system is Vigeo, a French limited liability company established in 2002. Vigeo
took over Arese, the first Socially Responsible Index (SRI) rating system in France and assesses
the environmental, social, societal and corporate governance objectives of corporations and
public companies.38 All these systems are important, but are insufficient because there is no
governmental body that certifies the ratings systems used. Moreover, the lack of a uniform CSR

32 “B corporation” is a trademark of B-lab
33 See http://www.bcorporation.net.
34 Hannah Clark, A New Kind of Company, Inc. Mag., July 2007, available at http://www.inc.com/magazine/20070701/priority-a-new-kind-of-
company.html
35. Id. Upstream 21 was co-founded by Leslie Christian. For more information see http://www.upstream21.com/
36 Id.
37 http://www.prnewswire.co.uk/cgi/news/release?id=62138
38 http://www.vigeo.com/csr-rating-agency/business-and-values.html
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definition gives a wide range of interpretation on what counts as “CSR” activity. In essence, the
ratings systems criteria are easy to achieve and therefore, do not achieve the goal of holding
companies to a higher standard of social and environmental responsibility. Something must be
done on a European level to raise the level of corporate responsibility.
IV.
FINDING A SOLUTION: ENFORCEMENT OF SOCIAL RESPONSIBILITY THROUGH
MANDATORY ACCOUNTABILITY AND REPORTING STANDARDS

One way to indirectly enforce CSR norms is to hold companies accountable for reporting
human rights and environmental abuse. In general, companies rely on reputation and quality to
sell a product or service to consumers. Thus, if a company is required to be transparent about the
types of human rights abuse that it has committed through a reporting requirement, it will have
less incentive to continue its abuse in fear that consumers will no longer buy its product or use its
services. Europe has initiated some binding reporting on CSR related issues. The Accounts
Modernisation Directive39 requires European public companies to report “...where appropriate,
non-financial key performance indicators relevant to the particular business, including
information relating to environmental and employee matters.”40 Although a company must
report on information relating to environmental and human rights issues, this obligation is
qualified by the condition that the information is relevant to the particular business operations.
Thus, for the most part, reporting on human rights abuse will not be required.
Additionally, a company may be held liable for misleading consumers under Directive
2005/29/EC on Unfair Commercial Practices41; however, this directive does not provide any
relief for damages for human rights abuse; it merely provides relief for a lack of transparency.

39 Directive 2003/51/EC of the European Parliament and of the Council of 18 June 2003 amending Directives 78/660/EEC, 83/349/EEC,
86/635/EEC and 91/674/EEC on the annual and consolidated accounts of certain types of companies, banks and other financial institutions and
insurance undertakings. (OJ L 178, 17.7.2003, p. 16–22 )
40 See Article 46 of Fourth Council Directive 78/660/EEC of 25 July 1978 based on Article 54 (3) (g) of the Treaty on the annual accounts of
certain types of companies, and Article 36 of Seventh Directive. (OJ L 222, 14.8.1978, p. 11–31 )
41 Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to consumer commercial
practices in the internal market and amending Council Directive 84/450/EEC, Directives 97/7/EC, 98/27/EC and 2002/65/EC of the European
Parliament and of the Council and Regulation (EC) No 2006/2004 of the European Parliament and of the Council . (OJ L 149/22, 11.6.2005, p.
22-39)
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