The price of responsibility

There has been a noticeable culture shift in the business community’s
acceptance of corporate social responsibility. This could explain why a recent
KPMG survey found that 52% of the top 250 companies in the Fortune 500 published
CSR reports alongside their annual financial statements – an increase of 7% over
the past three years.

But while CSR’s advantages – particularly in terms of positive PR – may be
readily apparent, a strand of case law in the US has highlighted some potential

Take a recent action, filed in Los Angeles against Wal-Mart in September
2005. The lawsuit, taken out by labour rights lawyers on behalf of workers
across Asia, Africa and Central America, claims that the retail giant failed to
enforce its corporate code of conduct and made misleading public statements
about its labour and human rights practices.

What makes this lawsuit particularly significant is that the allegations
concerning, for example, conditions in its suppliers’ factories overseas do not
in themselves entail any breach of Californian law. Wal-Mart is being challenged
for breach of self-imposed norms – it is effectively being sued for false

This principle is not new – it was first explored in a case back in 2002 when
a labour activist sued Nike, claiming that information it provided about its
social performance was false under the California State Law.

Nike’s defence was based on the First Amendment to the US Constitution, which
protects the right to freedom of speech. The California Supreme Court initially
found against Nike, classifying its statements as ‘commercial’, rather than

They were, therefore, subject to advertising law, which states that they must
not be false or misleading. The case ultimately settled, with Nike donating
$1.5m (£0.9m) to the Fair Labor Association, but it left the issue of
‘commercial speech’ in a state of flux.

The Nike and Wal-Mart suits do not appear to be discrete actions: similar
suits have been filed against a number of other household names in the US,
including Ford and IBM.

Although these actions were all brought in the US, and as such are unlikely
to be of immediate concern to businesses in the UK and Europe, they will
certainly prick up the ears of multinationals operating in the States, and could
also be indicative of a trend set to emerge on this side of the Atlantic.

The overriding message to be gleaned is that seemingly benign statements
about a company’s social performance can be challenged for misrepresentation.
Companies must not treat CSR reporting simply as a public relations exercise,
and be mindful of the fact their CSR reports will not be beyond challenge.

The role of professional advisers in the preparation and auditing of CSR
reports is therefore vital. Auditors, in particular, need to be aware of the
consequences of signing-off directors’ reports that contain CSR statements.

The potential for liability in the course of auditing work is certainly not
news to the industry, but the possibility of being found liable for a failure to
properly examine statements about the company’s CSR performance may well be an
area of responsibility not previously considered.

At the same time, the introduction of the operating and financial review for
financial years from April 2005 adds a further stratum of responsibilities and
liabilities to both directors and auditors.

Although there is no obligation as such to include information about CSR and
corporate governance in the OFR, if directors choose to do so, the auditors will
have to state in their report whether those statements are consistent with
anything that has come to their attention in the performance of their functions
as auditors.

The recent spate of litigation in the US, as well as the increasingly
regulated reporting environment in UK, may be a fertile breeding ground for
future actions by a host of potential claimants. As there are at present no
‘safe harbour’ rules in Europe, a company undertaking a CSR audit is not
protected from liability on the basis of information that arises in the course
of that audit.

One thing that the US example highlights is that prevention is better than
cure. It is far better for companies to practice what they preach and ensure
they carry out their activities within a CSR-compliant framework.

Ultimately it’s about ensuring that CSR is a force for good, rather than
another avenue of potential liability, and ensuring that companies do not suffer
the consequences (whether legal or reputational) of failing to adhere to their
own CSR principles – a fact that Nike has learned and Wal-Mart may learn to its

Beth Freeman is a lawyer with Lovells

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