In September 1970, the New York Times Magazine headlined: “The social responsibility of business is to increase its profits.” The author of the article, Milton Friedman, wrote in response to a decision by the board of General Motors to establish a 'public-policy committee' that would formulate policies on how GM should deal with social and environmental issues. Friedman denounced this as “pure and unadulterated socialism.” Apparently, the Republican habit of labelling all actions by President Obama as socialist policies is not as new as it seems. On the other hand, however, the appreciation of corporations taking responsibility beyond increasing their profits has changed profoundly over the last forty years.
Because customers and investors consider it important that companies reflect on their impact on society, many businesses have adopted corporate social responsibility (CSR) policies. Most definitions of CSR stress the voluntary nature of the concept. The responsibility is not a legal but a moral one. For instance, when a Dutch company operates in a country that does not have (or does not enforce) child labour laws, the company itself may adopt higher standards. But if the company does not wish to have a child labour policy, it cannot be forced to have one.
This is different, however, for companies that receive state support. Since 2010, these companies are obliged to explicitly endorse the OECD-guidelines (which contain a minimum set of CSR standards) and have a ‘duty of care’ with regard to child labour and forced labour. This duty extends to the company’s own activities abroad, and the activities of its 'first essential suppliers'. Failure to conform may result in the withdrawal of state support. The current government, which is not known for its hostile attitude towards business, now proposes a new law to enforce labour-related notification obligations for companies who receive state support. When a company knows, or could know, about ‘facts and circumstances that indicate child or forced labour’ but fails to report this to the government, it could face a penalty of (max.) € 74,000.
The law is yet to be discussed in parliament, but the legislative memorandum highlights some interesting and novel legal issues.
The International Labour Organization (ILO) is the (main) international organization that drafts international labour conventions. States may ratify these, leading to the obligation to implement the terms of the convention in domestic legislation. If it does not ratify, the state (or companies within the jurisdiction of that state) has no obligations on the basis of that convention.
The new Dutch law, however, uses the norms and definitions in ILO treaties 28 & 105 (forced labour) and 138 & 182 (child labour) to determine whether child or forced labour has indeed occurred, irrespective of whether a host country has ratified that convention. India, for instance, has not ratified the child labour conventions and its child labour laws are quite lenient. But when a Dutch clothes company receives state support to set up a business in India, and an Indian company is contracted as a supplier, it is under the obligation to apply the stricter ILO definitions.
As a result, the Indian contractor is subjected to double standards. It could be in full compliance with Indian domestic law and India's international obligations, yet the Dutch company is unlikely to contract it because it does not meet the ILO standards. Strangely enough, the contract itself would be legal and there is no obligation to do something about the use of child labour. It is envisioned that when a company detects child labour, it will remedy the situation because the mere report of this could damage the reputation of the company.
There are various other trends that point to a 'juridification' of corporate social responsibility (which will be the subject of later blog posts). The linkage of domestic state support to international labour standards is at the forefront of this development. The discretion of companies to adopt CSR policies will become more limited, and enforcement mechanisms such as described above will likely be expanded towards new areas such as environmental standards.