Corporate Social Responsibility

• Author: J. Anthony VanDuzer
• Pages: 611-661

611

CHAPTER 13

CORPORATE SOCIAL

RESPONSIBILITY

A. INTRODUCTION

In Chapter 1, we described a business organization as the intersection

of the claims of a variety of people with a stake in the organization,

including owners, managers, creditors, customers, the public, gov-

ernment, tort victims, and others. In this context, both partnership

law and corporate law represent an intervention into the marketplace

which allocates among these stakeholders the risks associated with

business activities carried on through corporations and partnerships.

As we have seen, in many respects the law of corporations favours the

interests of shareholders over those of other stakeholders by allocating

the risks associated with a business to other stakeholders as a way of

encouraging shareholders to invest in businesses.

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 this chapter, we shift

the focus to the interests of non-shareholder stakeholders. In particular,

we examine the extent to which corporate law permits or requires dir-

ectors and off‌icers (often referred to together in this chapter as manage-

ment) to take stakeholder interests into account in making decisions

about the business.

One view on the responsibil ity of corporations to groups other than

shareholders, sometimes referred to as corporate social responsibility,

or CSR, comes from the late Charles Gonthier:

THE LAW OF PARTNERSHIPS AND COR PORATIONS612

The idea that collective entit ies have a responsibility b eyond the mere

benef‌its of their memb ers . . . is as old as humanity itsel f. . . . Despite

variance s in specif‌ic def‌initions of the term , CSR generally embodies

the notion that a corporation must act in a responsible manner with

regard to the envi ronment, community and bro ader society in which

it operates. In its most basic form, CSR emphasizes an approach to

corporate governance and operations that integrates and balances

the self-interest of the corporation, and those of its investors, with

the concerns and interests of the public. The role of the corporation

goes beyond providing individual benef‌its to its shareholders; it also

includes a responsibility towards a wider community.1

The main legal approach used to protect the interests of corporate

stakeholders and, more generally, to address the environmental and

other social consequences of corporate behaviour is the direct impos-

ition of standards for behaviour. Liability is imposed on corporations

as well as on their director s and off‌icers for failing to comply with these

standards. For example, we rely on environmental standards to pro-

tect the environment, and consumer protection legislation is enacted

to protect consumers against certain kinds of corporate misbehaviour,

such as misleading advertising. Inevitably, however, direct regulation

provides incomplete protection. No regulatory scheme can respond

comprehensively and perfectly to the universe of possible social harms

caused by corporations. As well, there is always a gap between stan-

dards set and their enforcement. When the activities of corporations

take place outside Canada, enforcement through domestic courts and

agencies may not be possible. The main issue that we will 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 arguments regarding the appropriateness of

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

holders’ investment in the corporation as compared to a much broader

obligation to take all stakeholder interests into account. In the remain-

der of the chapter, we will discuss three other 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, en-

hance corporate social responsibility — shareholder proposals, disclo-

1 C Gonthier, “Foreword” in M Kerr, R Janda, & C P itts, Corporate Social Respon-

sibility: A Legal An alysis (Markham, ON: Lexi sNexis, 2009) at vii [Kerr, Janda, &

Pitts].

Corporate S ocial Responsibi lity613

sure by corporations regarding how they deal with the environmental

and social impacts of their operations, and requirements for greater

diversity on corporate boards.

B. THE INTERESTS OF NON-SHAREHOLDER

STAKEHOLDERS IN THE CORPOR ATION2

1) Introduction

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

dimensional impact on society both in Canada and abroad. Decisions

taken by management on a day-to-day basis affect the prof‌itability of

the corporation and the value of shareholder investments; the security

of the stakes of those with f‌inancial claims against the corporation, in-

cluding employees, creditors, customers and suppliers; the interests of

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

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

the sense that they all have a general interest in the f‌inancial health of

the corporation. 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 claims of creditors, employees,

suppliers, and customers.3 Maximizing shareholder value means maxi-

mizing the surplus over what is required to pay f‌ixed claims. In most

situations, maximizing this surplus makes it more likely that f‌ixed

claims will be paid.4 As well, the community in which a corporation

operates benef‌its from the direct employment that the corporation

generates as well as economic benef‌its associated with local spending

by employees. There is also evidence that behaviour by corporations

that is sensitive to a broad range of stakeholder interests is prof‌itable,

2 Some of this ch apter is a revised and up dated version of JA VanDuzer, “To Whom

Should Corporation s Be Responsible? Some Ideas for Improv ing Corporate

Governance” in Go vernance in the 21st Century: Transactions of the Royal Soc iety

of Canada Series (VI, Vol X, 1999) (Toronto: University of Toronto Press, 200 0),

with per mission.

3 R Romano, “Comment: What Is t he Value of Other Constituency Statute s to

Shareholders?” (1993) 43 University of Toronto Law Journal 533 [R oman o].

4 As discus sed below (see note 40 and accompanyi ng text), where the corpora-

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

shareholders ma y prejudice f‌ixed-claim holders.