Corporate Social Responsibility

• Author: J. Anthony VanDuzer
• Profession: Faculty of Law University of Ottawa
• Pages: 548-589

548

Cha pter 13

CORPOR ATE SOCIAL

RESPONSIBILIT Y

a. INtrODUCtION

In Chapter 1, we described a busines s organization as the intersection

of the claims of a variety of people with a stake i n the organization,

including owners, managers, creditors, customers, t he public, govern-

ment, tort victims, and others. In this context, both partnership law and

corporate law represent an intervention into the marketplace which, to a

greater or lesser extent, pre-empts bargaining between these groups and

puts in place a regime that allocates among the stakeholders the risks

associated with business activities carr ied on through corporations and

par tnersh ips. As w e have se en, in ma ny resp ects th e law of c orporat ions

favours the interest s of shareholder s over those of ot her stakeholder s by

allocating the risks associated with a business to other stakeholders as a

way of encouraging shareholders to invest in busine sses.

Most of the previous chapters focused on the relationship between

management and shareholders in corporations incorporated under the

CBCA and other Canadian corporate statutes. In thi s chapter, we shift

the focus to the interests of non-shareholder stakeholders. In pa rticu-

lar, we examine t he extent to which corporate law per mits or require s

directors and off‌icers (often referred to together in this chapter as man-

agement) to take stakeholder interests into account in making deci-

sions about the business. The main legal approach used to protect the

interests of cor porate stakeholders and, more generally, to address the

environmental and other social consequences of corporate behaviour is

Corporate Soc ial Responsibilit y 549

through direct regulation of st andards for behaviour, typica lly backed

up by liability for failure to comply with the standards. Liability is im-

posed on corporations as well as on their directors and off‌icers. We rely

on environmental standards to protect the environment, and consumer

protection legisl ation is enacted to protect consumers against certain

kinds of corporate m isbehaviour, such as misleading advertising. In-

evitably, however, direct regulation provides incomplete protection. No

regulatory scheme responds comprehensively and perfectly to the un i-

verse of possible social harms caused by corporations. As well, there

is always a gap between standards set and their enforcement. When

the activ ities of corporat ions take place outside Canada, enforcement

through domestic courts and agencies is problematic. The issue that

we w ill address in this chapter is to what extent these gaps can and

should be addressed by legally binding norms for corporate governance

in corporate law.

Once we have sketched out the general nature of the interests of

non-shareholder stakeholders and their protection under existing law,

we will look at the policy arg uments regardi ng the appropriateness of

an obligation for management to maximize only the value of sharehold-

ers’ investment in the corporation as compared to a much broader obli-

gation to take all stakeholder interests into account. In the remainder of

the chapter, we will discuss two ways that corporate and securities law

rules may be used to enhance management sensitivity to the broader

social consequences of their actions and, as a result, enhance corporate

social responsibility — the shareholder proposal and social reporting

by corporations.

B. the INtereStS OF NON-Sha rehOLDer

StaK ehOLDerS IN the COrpOr atION1

1) Introduction

It is a trite observation th at corporations have an enormous and multi-

dimensional impact on society bot h in Canada and abroad. Decisions

taken by ma nagement on a day-to-day ba sis affect t he prof‌itabilit y of

the corporation and the value of shareholder investments; t he security

1 Some of this ch apter is a revised and upd ated version of J.A. VanDuzer, “To

Whom Should Corporat ions Be Responsible? Some Ideas for Improv ing Corpor-

ate Governance” in G overnance in the 21st Century: Transactions of the Ro yal So-

ciety of Canad a Series (VI, Vol. X, 1999) (Toronto: University of Toronto Pres s,

2000), with permi ssion.

THE LAW OF PARTNERSHIPS AND COR PORATIONS550

of the stakes of others with f‌inancial clai ms against the corporation, in-

cluding employees, creditors, customers and suppliers; the intere sts of

the community in which t he corporation operates; and, in some cases,

society at large. The interests of all of these stakeholders often coincide

as they all have a general interest in the f‌inancial health of the corpora-

tion. Often, maximizing the value of shareholders’ residual claim to the

assets of the corporations, at least in the long run, will have the effect of

increasing the security of any f‌ixed claim that a stakeholder has against

the corporation, including those of creditors, employees, suppliers,

and customers.2 Max imizing sha reholder value means maxim izing the

surplus over what is required to pay f‌ixed claims. In most situations,

maximi zing this surplus makes it more likely t hat f‌ixed claim s will be

paid.3 As well, the community in which a corporation operates benef‌its

from the direct employment that the corporation generates as well as

economic benef‌its associ ated with local s pending by employees. There

is also increasing evidence that behaviour by corporations that is sensi-

tive to a broad range of st akeholder intere sts is often prof‌itable, sug-

gesting that maximi zing shareholder value and the consideration of

other stakeholder interests are not incompatible.4

Sometimes, however, the value of the shareholders’ investment in

the business of the corporation may be max imized only at the expen se

of other st akeholder interests. Shutting down a money-losing plant to

preserve corporate prof‌itability is one example. The laid-off workers

and the community in which they live and work may suf fer greatly

from such a decision designed to sa feguard shareholders’ f‌inancial in-

terests. Seeking to maximi ze prof‌its by scrimping on pollution-control

technology is another example of management imposing a cost on soci-

ety for the benef‌it of shareholders.

2 R. Romano, “Comment: Wh at Is the Value of Other Constituency St atutes to

Shareholders?” (1993) 43 U.T.L.J. 533 [Romano].

3 As discu ssed below (see note 36 and accompanyi ng text), where the corpora-

tion is on the bri nk of insolvency, high-risk strat egies to create some value for

shareholders ma y prejudice f‌ixed-claim holders.

4 M. Kerr, R. Janda, & C. P itts, Corporate Social Respons ibility: A Legal Analysis

(Markham, ON: Lex isNexis Canada, 20 09) at 32–45 [Kerr, Janda, & Pit ts]; C.

Forcese, Owning Up: The Case for Making Corp orate Managers More Responsive

to Shareholder Values (Ottawa: Demo cracy Watch, 1997) at 7 [Forcese]; and

E. Reguly, “Winn ing in Industry Doesn’t Have to Me an Wasting the Environ-

ment” Globe and Mail (5 March 2002). See J. Andriof e t al., Unfolding Stakeholder

Thinking: Theory, Responsibility a nd Engagement (Sheff‌ield: Greenleaf, 20 02), for

an extensive st udy of the link between good cor porate citizenship and f‌i nancial

success.