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A New Model for Social Auditing

Author: Elliot Schrage, Adjunct Senior Fellow for Business and Foreign Policy
May 27, 2002
Financial Times


US constitutional law produces strange bedfellows but it is hard to imagine a more unlikely combination than Nike, the sportswear business, and the American Civil Liberties Union.

Yet both were outraged by the California Supreme Court's decision this month that Nike's trumpeting of the benefits of its corporate "code of conduct" was not political discourse protected by the US Bill of Rights but far less protected "commercial" speech. Nike's claims about improvements in conditions at its Indonesian factories, the court concluded, were little more than another form of advertising and public relations.

The collective outrage was misplaced, however. California's Supreme Court may have defined a new level of accountability for what corporations say - and do - to show they are responsible corporate citizens at home and abroad. The ruling 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. The European models of corporate social reporting offer valuable guidance to US multinationals - and US policymakers.

Nike has vowed to appeal against the ruling in the US Supreme Court. The decision was certainly bad news for the growing number of multinational corporations in industries targeted by anti-globalisation activists. Their public insistence that globalisation benefits workers in poor countries as well as consumers in wealthy ones now invites serious - or frivolous - litigation in the US. Attorneys worldwide will spend the coming weeks reviewing company publications and scrubbing websites to clarify corporate commitments to social responsibility, ethical sourcing and international worker rights.

The obvious danger is that companies will conclude that it is better to say nothing - and perhaps even to do nothing - than risk endless battles in court. Perversely, the attempt by Marc Kasky - who calls himself a concerned Nike customer - to promote corporate transparency in global commerce may backfire.

The safe bet is that the court ruling will make companies even less willing to speak out. That was the argument the free speech purists made to the California court.

But silence is not a solution. Corporate self-censorship will create a vacuum that will quickly be filled by the voices of the anti-globalists. Nor should the lesson of the Kasky case be that better or more disclosure by responsible business will avoid liability. The sad truth is that both silence and greater self-disclosure, no matter how well-intentioned, simply invite more suspicion, cynicism and litigation. They empower the forces opposed to globalisation and harden the scepticism of interested consumers.

The message to multi-national business - and to global regulators - is that social accountability demands the same kind of independent scrutiny as financial auditing. Just as the Securities and Exchange Commission and Financial Accounting Standards Board establish a framework in the US for public accountants to evaluate corporate financial performance, a new reporting system is needed for independent review of corporate social performance. If Enron exposed the need to strengthen the system of financial disclosure, the Kasky decision may prove to be the call for policymakers to establish a similar framework for social auditing.

As aminimum, such a framework will have to consist of three elements. The development of clear social standards - in such areas as labour conditions, environmental performance and promotion of human rights - will guide corporate practices. A professional corps of social auditors - independent of corporate control and accountable to the public - will be needed to review corporate operations. And safe harbours that limit legal liability will be essential to encourage companies to open their businesses to social audits.

Many of the most innovative models for corporate social reporting are already developing in Europe. The adoption in March of new social reporting requirements for French corporations is only the most recent demonstration of European belief in the benefits of government intervention.

Projects such as the recently launched Global Reporting Initiative and AA1000 standards are approaches gaining support in Europe that will lead to standardised reporting for all companies.

In future, companies will need to move way from self-promotional corporate social responsibility reports - such as those recently published by Reebok, Nike, McDonald's and Shell - and move towards independent evaluations by qualified third parties. They will have to open up their factories to independent audits that disclose publicly whether conditions have improved. And they will need to team up with local groups to educate workers and managers or to offer healthcare programmes and invite outsiders to evaluate their effectiveness.

Properly validated by third parties, transparency can also serve as a shield from future liability. If the result of the court's decision makes private initiatives more open to outside scrutiny, companies will not control the information communicated to the public. They will be no more accountable for what the public hears than they are today for evaluations by groups such as Consumer Reports or Underwriters Laboratories.

Ironically, the benefits of greater openness and transparency have not been lost on Nike. Since the lawsuit was first filed, the company has taken big steps towards greater openness, disclosing many (but not all) factory locations, inviting student critics to inspect their facilities and reaching out to groups in Vietnam, Indonesia and Thailand to report publicly on workplace conditions. In future, many companies would do well to adopt at least one aspect of the Nike ethos reg-arding transparency: just do it.

The writer, formerly senior vice-president of global affairs at Gap, teaches at Columbia Business School and Columbia Law School.

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