Home-Grown Pressures on U.S. Companies

Home-Grown Pressures on U.S. Companies

But the pressure on U.S. companies to monitor and take ethical responsibility for their overseas supplier connections does not simply end with consumer, NGO, or investor pressures, or with European governments that promise to put great pressure on U.S. multinational corporations, by law and by competition, to also provide audited reports of their supply chain policies. Possibly more important, there are also some significant and ominous lawsuits moving through the U.S. court system that potentially may have a significant effect on how companies interpret their responsibilities with regard to their extended supply chain.

Many states, of course, already require all government purchases to conform to anti-sweatshop requirements, and the federal government has a plethora of social and environmental procurement policies in force for government purchases. Although there has been little discussion of social and environmental reporting in Congress ” certainly nothing on the scale now taking place in Europe and Japan ” in July 2003, a symposium hosted by Senator John Corzine, entitled Environmental and Social Disclosure and the Securities and Exchange Commission: Meeting the Information Needs of Today s Investors, may mark the beginning of a new level of concern and awareness and activity by Congress. Although mostly focused on the potential for environmental liabilities of listed corporations, the symposium did include SEC Commissioner Harvey Goldschmid, and congressional speakers revealed a new level of concern for social and environmental reporting.

Not only can corporate decisions cause substantial and often irreparable-harm to our natural resources and public health, warned Texas Representative Lloyd Doggett, co-sponsor of the symposium, they can expose a company to costly civil and criminal liabilities.

American investors have been denied crucial information about the companies in which they have invested, agreed Representative Barbara Lee, from California. Consumers want to both protect the environment and understand their own [risk] in this process through socially and environmentally responsible investing. For that, we need the SEC to ensure better corporate disclosure of relevant information. Some speakers called for a Blue Ribbon Panel to be formed to study the issue and to recommend how the SEC should promote this type of social and environmental reporting. [28 ]

[28 ] News Release, Friends of the Earth, July 10, 2003 at www.foe.org/new/releases/0703secsymp.html .


One of the most important legal issues facing modern U.S. corporations and their leadership comes from an obscure law established in 1789 known as the Alien Claims Tort Act (ACTA), which may potentially form the basis for an important precedent in international litigation.

The ACTA is potentially important for three reasons. First, under the statute , U.S. companies and their executives may be held liable for transgressions committed by foreign organizations or governments in another country if it can be proven that the American company encouraged or abetted those actually guilty of the activities. Second, it opens the door for companies themselves (as opposed to governments ) to be held responsible for human rights violations. Finally, and possibly most important, the statute allows non-U.S. residents to sue U.S. companies in U.S. courts for violations that they may have committed overseas.

The obscure ACTA statute, originally intended as a remedy for representatives of the young United States when foreign companies or individuals (i.e., pirates) violated diplomatic safe conduct agreements for protecting U.S. diplomatic staff in the early years after the American Revolution, is only now making its way through the U.S. Federal Court system for validation and interpretation, but is attracting considerable attention in the corporate supply chain world because of a spate of major cases that involve major U.S. corporations and serious accusations of human rights violations. These cases include examples such as:

  • Wiwa v. Royal Dutch Petroleum Co ., which involves a civil lawsuit filed against Shell Oil company, alleging that the giant multinational was complicit in human rights violations ” specifically the persecution and execution of environmental activists ” by the government security forces in Nigeria.

  • Doe v. Unocal , a similar scenario, where the energy giant Unocal is accused of being complicit in human rights violations in Burma, and is concerned with events that occurred during the construction of the Yadana natural gas pipeline in the south of the country. The plaintiffs contend that Unocal, a company based in the United States, colluded with the Burmese military to force villagers through violence and intimidation to work against their will on the pipeline ” and subjected opponents of the pipeline to threats, rape, and murder. Given the reputation of the Burmese military (under the argument that even if Unocal didn t know, they should have suspected), Unocal is accused of standing by while knowing that the abuses were occurring, and in fact benefiting from the brutality. Hundreds of witnesses testified in the case that the Burmese military not only provided security for the building of the pipeline, but also forced many villagers at gunpoint to work as unpaid labor. In March of 2002, the U.S. Court of Appeals for the Ninth Circuit in California agreed, in a landmark decision, that Unocal could be tried under the ACTA statute. [29 ]

As Terry Collingsworth, General Counsel of International Labor Rights Fund, explains, A verdict of significant monetary damages against Unocal could also serve as a warning to investors, including large institutional funds, that companies at risk of exposure for human rights violations may not be a good investment. [30 ]

The decision of the Appeals Court, says Kenny Bruno, writing for the The Bangkok Post, comports with what most people believe: a company that knows of abhorrent and illegal practices and provides assistance to the perpetrators while reaping economic benefits, is culpable. [31 ]

  • A third lawsuit, filed in California by the International Labor Rights Fund and the Center for Human Rights at Northwestern University Law School in the summer of 2003, claims that Occidental Petroleum knew of, supported, and possibly paid for an aerial assault against a small village of Santo Domingo, Columbia in December 1998 which killed 19 civilians.

Once again demonstrating the new rules of the extended global supply-chain, companies are finding themselves suddenly confronted with their past activities. This case builds upon the success we have had in using the Alien Tort Claims Act (ATCA) to address egregious human rights violations committed by U.S. companies in their overseas operations, said Terry Collingsworth, ILRF s Executive Director. The ILRF has made it a priority to focus on human rights violations in Colombia, and based on recent decisions in cases brought against Coca-Cola and Drummond Coal, we are confident that our case against OXY will go forward. Companies should not be profiting from murder. This case is the first of several we envision against OXY for its ongoing and willful participation in murder and other human rights violations in Colombia. [32 ]

Moreover, these may not simply be isolated cases. In a potentially devastating footnote for global business, warns Elliot Schrage, former Senior Vice President for Global Affairs at Gap and an adjunct senior fellow at the Council on Foreign Relations, the court acknowledged that other theories of third-party liability beyond aiding and abetting, such as negligence, could be used to link the violations of a state actor to a private corporation. This interpretation would dramatically increase a company s exposure to ATS [ATCA] liability by calling into question all sorts of relationships that it has with government officials and agencies and state enterprises . [33 ]

At this point, no case has gone to trial under the ACTA statute, but whatever-the merits of the individual cases, the ATCA is a sobering and important new development in U.S. law, and promises to focus even more attention in the future on new corporate responsibilities in developing nations.

Possibly even more important, a re-run of the Nike v. Kasky lawsuit settled out of court in October 2003 when Nike agreed to pay $1.5 million to the Fair Labor Association to be used on programs for improving and monitoring supplier factories, could potentially redefine the notion of corporate free speech and fundamentally affect the future of nonfinancial reporting in America. The case, which had been making its way through the U.S. court system for two years, reached the Supreme Court in June of 2003 but was left unresolved when Nike decided to settle out of court.

The case involved a situation in which Nike, in defending itself in a letter-to-the-editor war in The New York Times, made claims defending its employment policies in Vietnam, that, if found to be false, would have put them in violation of California s truth in advertising laws. Nike claimed that they were merely responding to charges made against them, that they replied in general terms, and were using the media as a tool for their right to defend their reputation. Kasky, an activist, claimed that whatever their response, because they were discussing company- related issues, Nike was still trying to entice consumers to buy their products, and therefore should be held to the high standards of truth normally applied in commercial speech. If their claims could be proved to be untrue, claimed Kasky (and he contended they were), Nike had potentially violated California s advertising laws, which require companies to be truthful when making public commercial speech.

The case constituted a minefield of difficult legal and ethical issues. Can a company only speak out in the media if it can quantify and prove its claims? Does the fact that the debate took place in a newspaper change a company s legal responsibilities for accurate advertising and disclosure? On the other hand, if corporations can say anything in the name of First Amendment freedoms, how can the consumer be sure companies are telling the truth?

Equally important, for many activists and supporters of social and environmental reporting, the suit represented one more reason why companies should begin to accept greater responsibility for their overseas suppliers ” and for accurately reporting on their efforts in this area. The ruling , says Elliot Schrage, invites the establishment of a framework to monitor corporate reporting on social performance, comparable with the regulatory framework that governs companies disclosure of financial and business performance. Seen in this light, even with the out of court settlement , the case still constitutes another strong reason why companies should begin legitimate , standardized, easily compared reporting of ethical, social, and environmental activities, in that through a similar case brought in the future against other companies, corporations could potentially be compelled to prove that claims of good social and environmental behavior in their supply chain are actually true. This could revolutionize corporate attitudes about nonfinancial reporting, forcing companies to move toward formal monitoring, third-party auditing, and reporting on their suppliers behavior. The message to multinational business ” and to global regulators, concludes Schrage, is that social accountability demands the same kind of independent scrutiny as financial auditing. [34 ]

On the other hand, even with the settlement, this litigious approach could still backfire on activists and advocates of SEAAR. The obvious concern of many observers is that U.S. companies, fearing prosecution for false or unverified claims about the good behavior of their suppliers, will simply assume that they are safer saying absolutely nothing about the activities of their suppliers and avoiding protracted and expensive litigation. This could mean, worry some activists, the abrupt end, not the beginning, of open social and environmental reporting, as companies close their shutters in response. As we have seen, Nike themselves, for example, in response to the case had already withdrawn its social responsibility report for 2002, explaining that to say anything about their ethical supply chain policies was too provocative and legally dangerous.

Whatever the outcome of similar cases in the future, however, in many ways the Nike v. Kasky case may mark a fundamental turning point in social and environmental reporting for U.S. companies. After all, the time when a company can choose the option of silence and stonewalling is well past. Activists, NGOs, politicians , consumers, and investors can investigate factory conditions for themselves these days, and the companies involved risk exposure whether they produce social and environmental reports or not. Silence alone will provide little comfort for a company in the future.

As we saw in Chapter Four, the more sensible reaction by Nike (and one that they have already partially taken) is to simply admit to supplier problems warts and all in their reports and to work with NGOs, other companies, and the factories themselves to improve on those conditions. It is therefore likely that the case will ultimately be seen as one more important reason for companies to move toward taking greater responsibility for their extended supply chain, and for more formal and audited efforts on those efforts.

As we have seen, much of the imperative for companies to adopt a SEAAR program depends on where they are located, the nature of their industry, what their company is doing in terms of social and environmental activities, and the relative risk that they face from employment or environmental violations in their extended supply chain. For those companies that will eventually adopt this framework (and by all accounts that will soon be many), it is important to understand the key features ” the codes, standards, and approaches ” that are emerging.

[29 ] Terry Collingsworth, Holding Businesses and Burma s Government Responsible for Human Rights Abuses, Open Society News, Fall “ Winter 2002/2003 at www.soros.org/osn/fall2002/holding.html.

[30 ] Ibid.

[31 ] Kenny Bruno and John Cheverie, The Bangkok Post, September 28, 2002.

[32 ] Lawsuit filed against Occidental for involvement in Colombian massacre, Alexander s Gas and Oil Connections, April 24, 2003 at www.gasandoil.com/goc/company/cnl32386.htm .

[33 ] Elliot Schrage, Emerging Threat: Human Rights Claims, Harvard Business Review, August 2003, p. 1.

[34 ] Elliot Schrage, A New Model for Social Auditing, The Financial Times, May 27, 2002.