Limited Liability Profit-Maximization Norm; Capital Markets (Quasi-Legal)
Duty of Care; Duty of Loyalty; Disclosure Law; Antifraud Law (10b-5); Insider Trading Law
Shareholder voting for directors; Right to sue derivatively; Right to vote on major corporate changes
Minimum Wage OSHA
ERISA (regulates retirement benefits; limited protection); Tort/Workers’ Compensation Law; Antidiscrimination Law; Federal Plant Closing Notification Requirements; Labor Law
“Command and control” Environmental Statutes; Superfund, Clean Air/Water Acts, etc.
Tort Law; Environmental Impact Statements; Planning/permitting/zoning processes
Contract Law; Consumer Safety Law; Regulatory protections (food and drug consumer protection, air safety, etc.)
Antifraud Law; Tort Law; Antitrust Law
Good Faith in Contract/Uniform Commercial Code; Antifraud Law; Bankruptcy Law
In fact, the US law currently provides various legislative protection devices for CSR, in terms of regulations governing certain “results,” and “processes or actions” of corporate activities.75
Americans are increasingly worried about societal harm arising from corporate activities such as that pertaining to the safety of products manufactured by corporations76 and to environmental issues.77 Thus, in the matter of protecting constituencies against certain negative “results” of corporate activities, namely the production of societal harm, American regulatory authorities have begun to mandate pertinent regulations.78 There exist numerous instances of US regulations compelling corporations to implement CSR when corporate activities trigger societal harm. For instance, the US federal legislation protects the environment from harm spawned by corporate activities through the National Environmental Protection Act,79 the Clean Air Act,80 the Clean Water Act,81 the Safe Drinking Water Act,82 the Toxic Substances Control Act,83 and other related environmental regulations.
The above examples of CSR legislation echo Greenfield’s attempt to show that numerous regulations require or encourage “certain results” for CSR. Arguably, one could dispute that such legislation lies within the domain of corporate law, rejecting these examples as CSR implementation due to corporate law’s preoccupation with internal matters such as securities, accountability, and financial and disclosure regulations. Nonetheless, for the purposes of this book, one needs to acknowledge a broader picture of the role and influence of corporations and, in this regard, to understand corporate law as a more substantive system that regulates society and its activities beyond strictly business-related matters. Individual laws regulating the types of corporate activities that may produce social harm surely represent an implementation of CSR that could potentially touch every sector of American society. CSR legislation embraces all these legal means for preventing social harms spawned by corporate activities.
As for the protection of constituencies against certain “processes or actions” of corporations, numerous laws and regulations establish restrictions aimed at improving CSR efficacy. These laws govern corporate activities focusing on business decisions, disclosures, and accountability in a traditional corporate legal context. For instance, the Sarbanes–Oxley Act,84 Securities Laws,85 and Securities and Exchange Commission Acts86 govern certain processes or actions that imply CSR obligations in corporations. This chapter examines these instances by illustrating cases where US laws require or encourage corporations to pursue certain “processes or actions” beneficial to constituency wealth.
In contrast to corporate laws governing certain results, processes, or actions of corporate activities, in terms of the internal structure of a corporation, many scholars believe that the law considers only the well-being of shareholders because they are the sole internal constituency among multiple other constituencies in the United States.87 Therefore, these other constituencies might typically be subject to regulatory protections relating only to the “results” and the “processes or actions” of corporate activities.88 American CSR advocates reject this approach, contending that US legislation should grant not only shareholders but also other constituencies the opportunity to adjust internal corporate structure and to obtain protection in pertinent matters.89 With this in mind, the following section will illustrate regulatory protections for constituencies against certain “processes or actions” of business in the US corporate law and related areas.
4.2.2 Examples of Regulatory Protection for Constituencies in Corporate Law
Regulatory protection for constituencies against corporate malpractice in corporate governance and securities fraud sectors plays a central role in CSR implementation by restricting undesirable business behaviors in the United States. Some of these laws are presently in a nascent stage in the United States and their effective enforceability is questionable. Nevertheless, at a minimum, such laws could suggest potential measures for the effective legal implementation of normative CSR in Korea.
126.96.36.199 Sarbanes–Oxley Act of 2002
In the past decade, America has struggled to overcome a spate of high-profile corporate abuses, beginning with the accounting scandals of Enron and WorldCom in 2000.90 Following hard upon Enron’s collapse, a succession of corporate fraud scandals has eaten away at Americans’ confidence in the reliability of US corporate governance and regulations.91
In 2002, Congress moved to reform corporate governance by passing the “Public Company Accounting Reform and Investor Protection Act”, also known as the Sarbanes-Oxley Act (SOX).92 President George W. Bush stressed the potential impact of the SOX Act as comprising “the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt.”93 This act was “designed to increase the transparency, integrity, and accountability of public companies and, in turn, to combat the kind of corporate deceit that had given rise to … scandals and financial breakdowns.”94 It mandated the creation of a detailed standard of corporate activities and the implementation of related regulations.95 The SOX Act was fundamentally aimed at restoring public trust, including that of investors, in the corporate auditing and financial reporting system. In this regard, the act was designed to tackle “the most elementary of CSR challenges.”96 This section will examine how the SOX Act implements measures to address CSR concerns in the US corporate law.
The act provides extensive investor protections without engaging in shareholder profit maximization.97 For instance, Sect. 404 mandates corporate annual reporting, including a disclosure of internal matters as follows:
(i) a statement of management’s responsibility for establishing and maintaining adequate internal controls over financial reporting; (ii) a statement identifying the framework used by management to evaluate the effectiveness of internal controls over financial reporting; (iii) management’s assessment of the effectiveness of internal controls over financial reporting as of the end of the most recent fiscal year; and (iv) a statement that the company’s auditor has issued an attestation report on the management’s assessment of the internal controls over financial reporting.98
These extensive requirements of disclosure are aimed at inspiring broader public trust in publicly held corporations.99 Such requirements promote the long-term benefits of all constituencies, including investors who rely on sound corporate governance practices.100
The SOX Act also regulates corporate anticorruption commitments through provisions governing the activities of chief executive officers and financial officers,101 general counsels,102 auditors103 and auditing firms,104 and boards and audit committees.105 Furthermore, it replaces the previous self-regulation system with a new supervisory body—the Public Company Accounting Oversight Board—to oversee public company auditing, publicize auditing standards, and investigate and discipline noncompliant auditing firms.106 In doing so, the act essentially rejects self-regulatory actions, i.e., voluntary corporate practices, as a measure to enhance the anticorruption responsibility of American corporations.
The SOX Act has been a matter of controversy in the United States because of its potential to trespass into areas of corporate governance traditionally circumscribed by state laws.107 Nevertheless, the act has established a clear standard of responsibility for corporate managers and considerations in business strategy, and has also mandated the creation of an audit committee responsible for monitoring corporate disclosures. Essentially, it represents the congressional will to implement normative CSR by increasing the role of federal mandatory regulations in corporate governance, transparency, and accountability.108
188.8.131.52 Securities Fraud
Are corporations liable for securities fraud stemming from CSR misconduct? Some scholars say “yes,” citing Sect. 10(b) of the Securities and Exchange Act of 1934 (“Securities Act”) and Rule 10b-5.109 A mandate for normative CSR implementation can arguably be found in the American securities regulation, wherein “Section 10(b) of [the Securities and Exchange Act of 1934] and Rule 10b-5 promulgated thereunder prohibit ‘fraudulent material misstatement or omissions in connection with the sale or purchase of a security.’”110 Securities fraud as defined under Sect. 10(b) and Rule 10b-5 occurs when a plaintiff shows “in connection with the purchase or sale of securities, the misstatement or omission of a material fact, made with scienter, upon which the plaintiff justifiably relied and which proximately caused the plaintiff’s injury.”111
In 2004, the findings of In re Ford Motor Company Securities Litigation declared that under these securities laws, the most difficult issue in CSR fraud cases would be to demonstrate materiality among these elements of misstatement or omission.112 This case was brought as a class action against the Ford Motor Company by investors claiming a violation of Sect. 10(b) of the Securities Exchange Act. The company was accused of making false or misleading statements or omissions about the danger of the Ford Explorer vehicles equipped with ATX tires.113 The plaintiffs alleged that Ford represented itself as a socially responsible company, even though their products were, in fact, dangerous. They argued that the company’s “statements regarding its commitment to quality, safety, and corporate citizenship, such as … Ford ‘want[s] to be clear leaders in corporate citizenship’ … Ford ‘is going to lead in corporate social responsibility,’” were false and misleading.114 However, the court dismissed the claim on the grounds that Ford’s CSR did not fall within the category of material information required by Sect. 10(b) and Rule 10b-5, declaring:115
Such statements are either mere corporate puffery or hyperbole that a reasonable investor would not view as significantly changing the general gist of available information, and thus, are not material, even if they were misleading. All public companies praise their products and their objectives. Courts everywhere “have demonstrated a willingness to find immaterial as a matter of law a certain kind of rosy affirmation commonly heard from corporate managers and numbingly familiar to the marketplace–loosely optimistic statements that are so vague, so lacking in specificity, or so clearly constituting the opinions of the speaker, that no reasonable investor could find them important to the total mix of information available.”116
The court did not judge CSR misrepresentation as an instance of securities fraud. Rather, its opinion suggested the possibility of mandatory CSR implementation in securities fraud cases when CSR statements referred to more material information about the corporation.117 As Professor Janet Kerr noted, “While Ford Motor Company was able to escape liability, it was not because the court unequivocally found statements about CSR to be per se immaterial.”118 The increasing occurrence and popularity of socially conscious investments,119 coupled with the growing availability of information on CSR commitments,120 will likely push courts to find related statements nowadays to be material.121
184.108.40.206 SEC Nonfinancial Disclosure Regulations and Enforcement
US Securities and Exchange Commission (SEC) regulations governing disclosure requirements can provide another legal avenue toward implementation of normative CSR. While the SEC does not establish the responsibilities of managers under the principle of shareholder primacy, it can still provide for CSR implementation by mandating transparency and truthfulness in corporate disclosures.122 For example, item 101(c)(1)(xii) of the SEC guidelines promulgates environmental disclosure requirements, stating:
[D]isclosure … shall be made as to the material effects that compliance with Federal, State and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, may have upon the capital expenditures, earnings and competitive position of the registrant and its subsidiaries. The registrant shall disclose any material estimated capital expenditures for environmental control facilities for the remainder of its current fiscal year and its succeeding fiscal year and for such further periods as the registrant may deem material.123
This SEC regulation in itself does not clearly provide for CSR disclosures. Nevertheless, the possibility exists for the inclusion of CSR issues.124 In fact, some regulations require disclosure of the material effects of environmental costs, material pending or contemplated administrative or judicial proceedings, including CSR-related cases.125
Aside from these instances, other regulatory protections exist for corporate constituencies. Some CSR proponents emphasize the importance of regulations on “Faux CSR,” stating, “A corporation must guard against actions taken by consumers against the corporation for unfair competition or ‘false advertising’ for making misstatements about CSR policies.”126 The Dodd–Frank Wall Street Reform and Consumer Protection Act127 is another prominent example of legislation that implements CSR by regulating business behaviors.
This book, ultimately, does not argue which model would be desirable in the US corporate law and society, or describe at length the laws that implement CSR in the United States. Rather, it seeks to identify which model and laws would be appropriate in the legal and societal contexts of other countries when implementing normative CSR. Chapter 5 will thus examine the fiduciary duties of managers and the nature of corporations as articulated by Korean corporate law, making points of comparison with the American theories examined in Chap. 3. This comparison culminates in Chap. 6, which proposes a legislative framework for normative CSR in Korea, based on the US examples covered in Chap. 4. In this respect, Chaps. 34 can be seen as having provided the historical groundwork for examining debates about normative CSR and having suggested a legal framework for its implementation in Korea, as a model country, by appraising relevant US theories and laws.
For information about descriptive, instrumental, and normative approaches implementing CSR, see supra Sect. 2.2.3.
See, e.g., A.P. Smith Mfg. Co. v. Barlow, 98 A.2d 581, 586 (N.J. 1953); Theodora Holding Corp. v. Henderson, 257 A.2d 398, 405 (Del. Ch. 1969).
See A.P. Smith Mfg. Co. v. Barlow, 98 A.2d 581 (N.J. 1953).
See id. at 586.
See, e.g., Theodora Holding Corp. v. Henderson, 257 A.2d 398, 405 (Del. Ch. 1969); A.P. Smith Mfg. Co. v. Barlow, 98 A.2d 581, 586 (N.J. 1953), See Faith Stevelman Kahn, Pandora’s Box: Managerial Discretion and the Problem of Corporate Philanthropy, 44 UCLA L. Rev. 579, 581 (1997); Nancy J. Knauer, The Paradox of Corporate Giving: Tax Expenditures, the Nature of the Corporation, and the Social Construction of Charity, 44 DePaul L. Rev. 1, 56 (1994).
Del. Code Ann. tit. 8, § 122(9) (2001) (granting corporations the power to make donations for the public welfare or for charitable purposes); Rev. Model Bus. Corp. Act§ 3.02(13) (2004) (enabling corporations to make donations for the public welfare).
See Wells, supra note 199 in Chap. 2, at 102−07 (stating that “The corporation, they believed, was not merely an economic assemblage but a social institution serving employees, shareholders, customers, and communities …. Berle and Drucker [would have] the corporation treat shareholders as merely one constituency among many, and trust the managers to act for the ‘public good.’”)