Corporate Social Responsibility: An Insider's View

Should compliance with the law fall under the rubric of CSR?

By Cheryl Marihugh

This article is from the May/June 2006 issue of Dollars & Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org/archives/2006/0506marihugh.html


issue 265 cover

This article is from the May/June 2006 issue of Dollars & Sense magazine.

Subscribe Now

at a discount.

More and more companies are adopting "corporate social responsibility” (CSR) programs. Broadly, CSR programs are supposed to assess and improve corporate operations in relation to a range of values beyond profit: human rights, environmental protection, contribution to local communities, and workplace diversity among others. A central feature of many CSR programs--codes of conduct--arose in response to activism around sweatshop conditions in the factories where consumer goods are manufactured. International brands--starting in the apparel, footwear, and toy industries, but spreading to others--have adopted these codes for the factories that form their global supply chains. The codes require monitoring of such conditions as freedom of association, child labor, discrimination, harassment, wages, working hours, and health and safety, all under the rubric of CSR. No doubt it's a positive development that multinational corporations are paying some attention to these issues. But should monitoring really be part of CSR? I'm not so sure.

For several years I led a compliance program for a large footwear company, and I strongly endorse holding companies responsible for monitoring their supply chains. What I object to is placing factory monitoring under the umbrella of CSR. Most monitoring relates to compliance with labor laws. But by combining compliance with existing laws, on the one hand, and aspirational goals that go beyond existing legal mandates, on the other, CSR dilutes the incentive for companies to improve conditions. Positioning legal and regulatory topics under the CSR rubric allows them to fall into an "optional” category. Differentiating compliance with the law as a distinct expectation could strengthen the case when asking multinationals to ensure basic standards, which could be met in many countries by complying with current labor regulations.

Conferences worldwide are now marketed to contract factory owners that manufacture for international brands, with "CSR” invariably in the title. However, the sessions relate largely to labor law. While not at all intentional, this language merges what is required with what is desired.

This confusion becomes more detrimental as the debate over CSR grows. Early last year, The Economist ran a special section on CSR. Clive Crook, a deputy editor of the magazine, expressed his skepticism of CSR in several articles. But like most CSR critics, Crook acknowledged that it is a matter of course that companies need to respect the regulatory arena. (Although regrettably, I did once hear a senior vice president state that legal compliance is essentially a "cultural” issue!) This baseline requirement typically receives a benign nod, as if compliance with existing laws and regulations is all taken care of.

In the CSR community itself, mention statutory obligations and eyes start glazing over, as if merely obeying the law is no particular challenge. But in my experience, compliance in the global outsourcing world is, in fact, quite hard. The annual report of the Fair Labor Association (FLA) illustrates this. The FLA represents a group of 20 brands that work together to improve factory conditions globally. Annual public reports present audit findings for factories that supply the member companies, and the findings are emblematic of the global picture.

The group's 2005 report presents audits of 88 factories. This small group of factories had over 1,600 violations, including 705 in health and safety, 231 in wages and benefits, 118 in working hours, 94 in overtime compensation, 81 in harassment & abuse, and 64 in freedom of association. Detailed audit reports show the majority of these to be violations not only of the FLA's code of conduct, but also of specific labor laws in each country. Moreover, the report notes that given the limitations of the audit process, violations may actually be higher than reported; for example, it acknowledges that "… it is likely that the rate of incidence of falsified records relating to hours and wages … is higher than actually reported.”

Other reports have noted similar findings. The Financial Times covered a report issued by a European organization on the impact of global factory monitoring and noted, "Social audits of clothing factories in developing countries are failing to detect excessive and forced overtime, abusive treatment of workers and violations of freedom of association ...” And Anuja Mirchandaney of The Hindu Times cited labor law violations as a major problem in India's garment industry: "Workers are not being paid even statutory wages, as payment is linked to reaching unreasonably high production targets--simply put, unpaid overtime.” In short, the global outsourcing world has a long way to go merely to attain legal compliance.

When subcontractors--even those that are subject to monitoring--still routinely violate local labor law, CSR programs and their advocates may be muddying the waters. The advocacy community presents wage demands--e.g. the demand that subcontractors pay a "living wage”--which are aspirational. But urging multinationals to pay higher wages assumes that legal wages are already being paid. When wages are viewed solely as a CSR issue, critics inside and outside of companies are able to sideline the wage discussion altogether by dismissing demands for "living wages” as unrealistic.

Let's look at this situation in a real context. With its marketing strategy built on a rhetoric of "social justice,” The Timberland Company is a multinational that plays actively in the CSR field. The company's recently released 2004 CSR report includes a breakdown of factory violations by category that closely mirrors the FLA breakdown, with "compensation (i.e., minimum wage)” the second highest category of violations (12%). By definition, violations of this part of Timberland's code of conduct constitute primarily violations of law. Timberland's CSR report claims the company is stepping up its program "from compliance to enablement.” But isn't it premature to move beyond compliance when many workers are apparently not yet getting even the wages they're legally entitled to? If companies merely ensured that their suppliers obeyed the law, that could bring economic restitution to millions of workers whose pay is purposely miscalculated.

Unfortunately, many managers still question, or resent, the view that corporations are responsible for the compliance of their suppliers. They view monitoring as voluntary--a program that can be tweaked according to business needs. However, a legal linkage does exist through standard manufacturing contracts, which contain compliance clauses, and a recent case suggests that such contract language can have teeth. In Doe vs. Unocal, Burmese workers who suffered human rights abuses on a pipeline project brought suit against Unocal, which was a partner in the project. Commenting on the findings, the Chapman Law Review noted, "future plaintiffs seem on firm ground for pursuing corporations in federal court…for their human rights abuses abroad. Such plaintiffs may have even greater success pursuing comparable state claims based on state constitutional and statutory provisions forbidding forced labor, unfair competition, and unjust enrichment.”

The Unocal case "shows that corporations have both direct and indirect human rights responsibilities," says Susan Aaronson, director of globalization studies at the Kenan Institute, a Washington think tank. Today, human rights cases usually stem from extreme physical abuses, but society's concept of what constitutes "abuses” will likely continue to expand. If labor laws are consistently broken with the knowledge of business partners, this could conceivably be considered "unjust enrichment.” What could separating legal compliance out from CSR do?

  • Provide greater incentive for companies to focus on first keeping the law. Corporate leaders and their general counsels would give compliance issues a higher priority if they recognized the risk of increased scrutiny on the legal angle of their global operations. In Timberland's case, its sole performance indicator for monitoring is "percentage of factories assessed.” If the company were mandated to report legal compliance, this would be a much stronger indicator of actual working conditions.
  • Give greater accuracy to CSR ratings. Company CSR assessment questionnaires frequently put more emphasis on aspirational issues. While legal compliance is also included, it is not meaningfully probed. The socially responsible investment community would do well to separate out legal requirements and form one assessment on these, and then evaluate a company on "beyond compliance” issues.
  • Support company compliance staff, who must often make unpopular requests. In the experience of many staff, it seems as if upper management must be persuaded to support not only CSR goals, but regulatory recommendations as well, e.g., factory reimbursement of workers who were not paid legally.
  • Increase the number of companies engaged in these issues. If companies regard factory monitoring as a potential legal liability, they are more likely to attend to it whether or not they have a penchant for CSR.

Getting multinationals and their subcontractors to comply with local labor laws won't be easy. Many countries, north and south, do not direct sufficient resources to enforcement. Management practices that evade regulations persist. Furthermore, labor laws can indeed be difficult to interpret. But suppliers, companies, and countries can't point to these difficulties to elude legal accountability. Legal compliance will be hard to achieve, whether within the CSR rubric or not, but extracting legal compliance from CSR has the advantage of bringing to light a range of workplace and wage issues that companies are required by law to attend to.

In the face of CSR's ongoing controversy, let's strengthen the expectations of corporations and governments by reiterating their fundamental accountability to the law, not to the CSR community. Businesses, governments, and NGOs will continue to debate CSR, but legal compliance should not be up for debate.

Cheryl Marihugh has worked extensively on social and environmental issues globally with business, NGOs, and multilateral institutions. Most recently, she was director of the global labor practices program at Timberland.

Sources: Timberland Corporate Social Responsibility Report 2004; Armin Rosencranz and David Louk, "135 Doe v. Unocal: Holding Corporations Liable for Human Rights Abuses on their Watch,” Chapman Law Review, International Law Symposium, Spring 2005; Paul Magnusson, "A Milestone For Human Rights,” Business Week, January 24, 2005; Fair Labor Association, Washington DC, "FLA 2004 Independent External Monitoring (IEM): Findings and Analysis,” "Wages and Benefits,” FLA Annual Public Report, 2005; Alison Maitland, "Social audits ‘are failing to detect factory abuses.'” Financial Times, November 2, 2005; Clive Crook, "The Good Company,” The Economist, January 20, 2005; Anuja Mirchandaney, "Cross stitches."