Alleviating the Corporate Social Responsibility Reporting-Performance Inconsistency: A Tentative Proposal of the “Reflexive Law Plus” Model by SI HAO LL.B., China University of Political Science & Law, 2007 LL.M., China University of Political Science & Law, 2010 A DISSERTATION SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY in THE FACULTY OF GRADUATE AND POSTDOCTORAL STUDIES (Law) THE UNIVERSITY OF BRITISH COLUMBIA (Vancouver) September, 2016 ○C Si Hao, 2016 ii Abstract The present research identifies corporate reporting-performance inconsistency as a major issue that undermines the current practice of corporate social responsibility (CSR). The inconsistency manifests in that companies either avoid disclosing negative information in their CSR reports or use vague and empty expressions to cover their CSR inaction. In most situations, instead of providing a complete and balanced picture and causing companies to re-examine their own CSR behaviour, CSR reporting has been declining into a strategic corporate communication tool that primarily serves firms’ own interests. Such a problem greatly challenges the fundamentals of CSR and raises hard questions as to the reliability of private regulation and corporate self-regulation pertaining to CSR reporting. Taking Canada as a field of research, the present study combines theoretical with empirical research methodology in order to thoroughly investigate the problem of the CSR reporting-performance inconsistency and provide a plausible solution to it from a law and regulation perspective. The main empirical research methods it takes are qualitative interviews and documentary analysis. In particular, the present research builds on the literature and empirical observations to explain the inconsistency and identify the regulatory gaps that currently exist in CSR reporting. As a side issue, it also questions the primary purpose of the CSR reporting regime, suggesting that CSR reporting should be used to transform irresponsible corporate performance and serve broader public goals. iii Inspired by the reflexive law literature and the empirical evidence, the present research develops a concrete model of “reflexive law plus” to address the CSR reporting-performance gap. “Reflexive law plus”, as named by the present research, is a refined form of reflexive law, in the sense that it is faithful to the fundamentals of the reflexive law theory, yet incorporates regulatory design components that can better catalyze and consolidate the self-referential capacity of the companies involved in CSR reporting. The present research holds that “reflexive law plus” provides a sound solution to remediate the inconsistency because it is pertinent to the regulatory circumstance in which CSR reporting is situated. iv Preface This dissertation is an original intellectual product of the author, Si Hao. The fieldwork reported in this dissertation was covered by UBC Ethics Certificate number H13-01143. v Table of Contents Abstract .............................................................................................................................. ii Preface ............................................................................................................................... iv Table of Contents ...............................................................................................................v List of Tables ......................................................................................................................x Acknowledgements .......................................................................................................... xi Introduction ........................................................................................................................1 Chapter 1: Research Methodology ...................................................................................6 Introduction ..................................................................................................................... 6 1.1 Justifying the Research Methodology ................................................................. 7 1.1.1 Empirical & Qualitative .................................................................................. 7 1.1.2 Interviews ........................................................................................................ 9 1.2 Explaining the Interview Research Process ...................................................... 12 1.2.1 The Scope of the Research ............................................................................ 12 1.2.2 The Interview Recruitment ........................................................................... 16 1.2.3 Data Collection & Analysis .......................................................................... 21 1.3 Supplementary Data .......................................................................................... 23 1.4 The Limits of the Empirical Research & the Justification ................................ 27 Summary of Chapter 1 .................................................................................................. 29 Chapter 2: The Research Background ..........................................................................32 Introduction ................................................................................................................... 32 2.1 Corporate Social Responsibility (CSR) Reporting: An Overview ................... 33 vi 2.1.1 What Is CSR? What Means to Be Socially Responsible? ............................ 34 2.1.2 What Is CSR Reporting? ............................................................................... 48 2.2 CSR Reporting as an Organizational Learning Process ................................... 59 2.2.1 The Links between CSR Reporting & Organizational Learning .................. 60 2.2.2 The Advantages of Viewing CSR Reporting from the Prospects of Organizational Learning ........................................................................................... 61 2.3 The Canadian CSR Reporting Context ............................................................. 63 2.3.1 The Uniqueness of Canada in CSR Reporting .............................................. 64 2.3.2 The Canadian Regulatory Regimes that Address CSR Reporting at the Periphery ................................................................................................................... 66 2.3.3 The Policy-Making Debate surrounding Mandatory CSR Reporting ........... 72 Summary of Chapter 2 .................................................................................................. 77 Chapter 3: The Research Thesis: The CSR Reporting-Performance Inconsistency .81 Introduction ................................................................................................................... 81 3.1 Three Examples ................................................................................................ 82 3.2 The Literature.................................................................................................... 87 3.3 The Empirical.................................................................................................... 92 3.3.1 An Unsatisfying Portrayal of the Reality ...................................................... 92 3.3.2 The Lack of a Regulatory “License to Operate” ........................................... 96 3.4 The Research Question ..................................................................................... 99 Summary of Chapter 3 ................................................................................................ 102 Chapter 4: Proposed Solutions & Analyses .................................................................104 Introduction ................................................................................................................. 104 vii 4.1 Existing Private Actions ................................................................................. 106 4.1.1 False Advertising Litigation ....................................................................... 107 4.1.2 Securities Fraud Litigation .......................................................................... 112 4.1.3 Shareholder Resolutions ............................................................................. 119 4.2 Identifying the Regulatory Gap ...................................................................... 122 4.2.1 The Limits of Private Actions ..................................................................... 122 4.2.2 A Call for Governmental Regulation .......................................................... 124 4.3 The Reflexive Law Proposal ........................................................................... 134 4.3.1 What Reflexive Law Is ............................................................................... 134 4.3.2 Reflexive Law and the New Governance Scholarship ............................... 137 4.3.3 A Critical Analysis of the Reflexive Law Theory ...................................... 139 4.3.4 The Reflexive Law Approach for CSR Reporting: A Need to Substantiate the Theory ............................................................................................................... 144 4.4 The Empirical Findings................................................................................... 148 4.4.1 Where the Problems Lie.............................................................................. 149 4.4.2 Opportunities for Realignment ................................................................... 163 Summary of Chapter 4 ................................................................................................ 176 Chapter 5: A Working Model of “Reflexive Law Plus” .............................................179 Introduction ................................................................................................................. 179 5.1 Why Reflexive Law Needs a “Plus”? ............................................................. 180 5.1.1 The Feasibility: Reflexive Law Beyond Procedural Law ........................... 180 5.1.2 The Necessity: The Corporate Self-Referential Function Revisited........... 183 5.2 The Components of “Reflexive Law Plus” pertaining to CSR Reporting ...... 190 viii 5.2.1 Procedural Requirements ............................................................................ 192 5.2.2 Learning-Driven Elements .......................................................................... 200 5.3 The Pertinence of the “Reflexive Law Plus” Model ....................................... 207 5.3.1 Comparing “Reflexive Law Plus” with Traditional Regulation ................ 208 5.3.2 Comparing “Reflexive Law Plus” with Other Contemporary Forms of Governmental Regulation ....................................................................................... 214 Summary of Chapter 5 ................................................................................................ 219 Chapter 6: Conclusion ...................................................................................................223 6.1 Overarching Analysis & Conclusion .............................................................. 224 6.1.1 The Explicit Line of Argument: How the CSR Reporting-Performance Inconsistency Can Be Alleviated ............................................................................ 224 6.1.2 The Implicit Line of Argument: The Primary Goal of CSR Reporting ...... 226 6.1.3 The Implicit Line of Argument: The Regulatory Gap with Respect to CSR Reporting................................................................................................................. 228 6.1.4 The Overarching Conclusion ...................................................................... 230 6.2 The Research Implications .............................................................................. 231 6.2.1 Policy Implications ..................................................................................... 231 6.2.2 Theoretical Implications ............................................................................. 232 6.3 Research Contributions & Limitations ........................................................... 233 6.3.1 Research Contributions ............................................................................... 233 6.3.2 Research Limitations .................................................................................. 236 6.4 The Future Research Agenda .......................................................................... 237 Bibliography ...................................................................................................................239 ix Statutes & Case Law ................................................................................................... 239 Journal Articles & Books ............................................................................................ 240 Research Reports ........................................................................................................ 266 x List of Tables Table 1 A Coded List of the Interviewees ........................................................................ 16 Table 2 A Provisional Comparison of Disclosure-Based Regulation, Reflexive Law & "Reflexive Law Plus" ...................................................................................................... 188 Table 3 The Analytical and Empirical Basis of “Reflexive Law Plus” .......................... 190 xi Acknowledgements The PhD project represents a key milestone in my life, from which I learned, grew and found my true talent and passion. This exciting yet challenging journey would be impossible without the help and support of faculty, friends and family. I would like to express my special appreciation and thanks to my supervisor Professor Cristie Ford. Thank you for teaching, guiding and inspiring me in both academic and personal life during the past six years. You have been a tremendous mentor for me. I would like to acknowledge the contributions of my thesis committee Professor Li-Wen Lin and Professor James Tansey to this research project. Thank you for your serious engagement and valuable insights that improved this manuscript. It has been a privilege to have you on my committee. I would also like to express my gratitude to Ms. Joanne Chung, Professor Doug Harris, Professor Ljiljana Biuković, Professor Benjamin Richardson and Professor Robert Paterson for your encouragement and inspiration at different stages of this research project. I would like to acknowledge China Scholarship Council and the Law Foundation of British Columbia for their generous fellowships that funded me four out of my six years at UBC. Thank you for allowing me the precious opportunity to experience Canada and explore the beauty of research. I would also like to thank Mr. Robert Bertram and Canadian Foundation for Governance Research for the generous research grant that xii enables me to fly across Canada to undertake the empirical research and attend conferences and training sessions that expand my knowledge of the research field. I am indebted to the 26 interviewees who contribute to the richness of this research project. Thank you for your time, openness and insights. Although earning a Ph.D. was a mostly-solitary process, I would not have made it without the support of my colleagues. Thank you for the delightful conversations and the wonderful companionship. Above all, I owe an immerse debt of gratitude to my parents and my family, who love and support me through this journey. Thank you. I could not be more fortunate. 1 Introduction In his classic work, Anthony Downs vividly describes the shift of public attention, which he calls the “issue-attention cycle”, as it relates to many major social problems, such as poverty, racism, environmental degradation and unemployment.1 According to Downs, public interest regarding those problems that “once was elevated to national prominence” wanes, as people realize that solving the problems is difficult and costly, meanwhile people who suffer most from the issues are the powerless minorities.2 Consequently, heightened concern about the problems and enthusiasm for solving them gradually retreat to low interest and faded attention, with the problems remain largely unresolved. The present research observes a similar pattern with respect to the social and environmental crises that large, publicly-traded companies are responsible for. These crises, usually manifesting in the forms of land pollution, water contamination, sweatshops, or health and safety accidents, garner widespread attention and public outcries immediately after they happen. In the wake of such incidents, questions regarding the purpose of corporation have been hotly debated and corporate social responsibility (CSR) has emerged as a buzz word for news reports and critics. Unfortunately, the debates and discussions gradually quiet down as the public diverts its 1 Anthony Downs, “Up and Down with Ecology: The 'Issue-Attention Cycle'” (1972) 28 Public Interest 38 (describing the public attention cycle in the face of ecological problems). Downs identifies five stages of the “issue-attention cycle”, which starts from “the pre-problem stage”, turning to “alarmed discovery and euphoric enthusiasm” to solve the problem, moving to “realizing the cost of significant progress”, then to “gradual decline of intense public interest”, and eventually to “the post-problem stage”. See: 39-41. 2 Ibid. Downs highlights three conditions in which a given problem is likely to go through the “issue-attention cycle”. In particular, he notes that public attention on a certain issue tends to shift when 1) the majority of people in society are not suffering directly from the problem, 2) solving the problem requires fundamental changes in social institutions that may threaten the vested interest of a majority or a powerful minority of the population, and 3) there is no intrinsic excitement within the issue that may interest the majority public for a long period of time. See: 41-42. 2 attention from these incidents, yet the undesirable environmental or social practices underlying the crises have only changed slightly or remain the same.3 Two major supply chain incidents, the Rana Plaza building collapse and the Foxconn workers suicides, are cases in point.4 The “issue-attention cycle” explains precisely why the achievements of the CSR movement, which started more than two decades ago, have so far been very limited and unsubstantial.5 This is exactly the challenge that the CSR scholars are facing: although the research of CSR has had significant implications for effecting changes in the performance of corporations and motivating them to avoid the recurrence of past disasters, the importance of the research has been very much underestimated because of the public’s lack of sustained interest in CSR-related matters. It is within this context that the present research unveils. With the general purpose of elevating CSR and generating sustained attention to it, the present research takes CSR 3 Referring to Downs’ three conditions of “issue-attention cycle”, the present research finds that public attention on CSR-related crises did not last long, since: the population who suffered directly from these incidents was small numerically and isolated geographically; in addition to corporate performance changes, addressing such issues requires fundamental shift of consumers’ purchasing habits; people quickly got occupied with newly emerged issues as the incident lost its appeal. 4 A string of fire and building collapses happened in Bangladesh both before and after the Rana Plaza disaster. However, research shows that the workplace dangers persisted after public interest faded. See: Julfikar Ali Manik & Jim Yardley, “Building Collapse in Bangladesh Leaves Scores Dead”, New York Times (April 24, 2013), online: <http://www.nytimes.com/2013/04/25/world/asia/bangladesh-building-collapse.html>; Jana Kasperkevic, “Rana Plaza Collapse: Workplace Dangers Persist Three Years Later, Reports Find”, The Guardian (May 31, 2016), online: <https://www.theguardian.com/business/2016/may/31/rana-plaza-bangladesh-collapse-fashion-working-conditions> (last visited June 12, 2016). In 2010, 18 workers of Foxconn factory, a major provider of Apple electronic devices, committed a string of suicides owing to severe working conditions. However, when public attention shifted, the issue remained. See: Malcolm Moore, “‘Mass Suicide’ Protest at Apple Manufacturer Foxconn Factory”, The Telegraph (January 11, 2012), online: <http://www.telegraph.co.uk/news/worldnews/asia/china/9006988/Mass-suicide-protest-at-Apple-manufacturer-Foxconn-factory.html>; Margaret Heffernan, “What Happened after the Foxconn Suicides?”, CBS News (August 7, 2013), online: <http://www.cbsnews.com/news/what-happened-after-the-foxconn-suicides> (last visited June 12, 2016). 5 See infra note 227-230 for the literature that corroborates such a view. 3 reporting as the starting point. This is because: first, CSR reporting has been the most developed component of CSR during the past two decades; second, the problem of CSR has been primarily manifested in how companies maneuver CSR reporting to sing high praise for themselves.6 The decisive role of CSR reporting in the CSR movement also highlights the urgency of the research, as CSR will become groundless if it “[degenerates] into costly exercises in paper pushing or excuses for avoiding real action”.7 In terms of CSR reporting, the present research finds that behind the social and environmental crises that large, publicly-traded companies are responsible for are those companies’ glossy CSR reports that are full of positive information, with the crises either lightly mentioned or not mentioned at all.8 As the ensuing chapters will show, this CSR reporting-performance inconsistency is ubiquitous.9 It would primarily serve corporate interests rather than promote social progress, if firms claim that they are committed to CSR yet make performance changes only at a superficial level or remain inaction. 6 Ronen Shamir, “The De-Radicalization of Corporate Social Responsibility” (2004) 30:3 Crit Sociol 669 (positing that the actions taken by many corporations in terms of CSR are symbolic and actually strategic moves toward "shaping the meaning of CSR in ways that do not threaten entrenched commercial interests and in ways that invest the term with a voluntary, self-regulatory meaning"). 7 Archon Fung, Mary Graham & David Weil, Full Disclosure: The Perils and Promise of Transparency (Cambridge University Press, 2007) at 106 (explaining why certain government-mandated disclosure policies are effective and why others are not). 8 For instance, there was no mentioning of the workers’ suicides in Foxconn’s 2010 and 2011 CSR reports. See: Foxconn CSER Annual Reports, online: <http://ser.foxconn.com/SelectLanguageAction.do?language=1&jump=/cser/Annual_Report.jsp> (last visited June 12, 2016). In Loblaw’s 2013 CSR report, although the Rana Plaza collapse was mentioned, the report actually used the incident as an example to show how the company took the lead in being committed to responsible supply chain management. See: Loblaw, 2013 Corporate Social Responsibility Report, online: <http://www.loblaw.ca/content/dam/lclcorp/pdfs/Responsibility/Reports/CSRR/en/2013/CSRR-en-2013.pdf>, at 16. 9 See Section 3.1-3.3 for the illustration, literature review and empirical examination of the CSR reporting-performance gap. 4 Therefore, a key purpose of the present research is to address the CSR reporting-performance gap. The present research combines theoretical inquiry with empirical examination. It is comprised of six chapters. Chapter one introduces and defends the methodology of the entire research, with the emphasis on describing the empirical research process. Chapter two examines the notion of CSR reporting within both conceptual and theoretical frameworks, providing important background information concerning the research thesis and explaining why the present research investigates CSR reporting from an organizational learning perspective. Chapter three identifies the research thesis based on practical examples, the literature and empirical data, and puts forward the primary research question of the doctoral dissertation: from a law and regulation perspective, how can the ubiquitous CSR reporting-performance discrepancy be alleviated? It further hypothesizes that the reflexive law approach would be a plausible solution to the discrepancy. Chapter four takes a close examination of the research hypothesis and the regulatory context. In particular, it advocates that: 1) CSR reporting should be officially mandated through either legislation or regulatory rules; and 2) the reflexive law approach may be used to alleviate the CSR reporting-performance inconsistency. Furthermore, acknowledging that an elaboration on the meaning of the reflexive law approach necessitates a thorough empirical examination, Chapter four identifies empirically where the problems lie with respect to the current CSR reporting field. Chapter five develops a concrete model of “reflexive law plus” based on the reflexive law literature and the empirical evidence. In particular, it outlines six regulatory design components required 5 by “reflexive law plus”. The chapter then illustrates the pertinence of the “reflexive law plus” model by comparing it to traditional regulation and other contemporary forms of regulation. Chapter six concludes the dissertation and identifies the research contributions and limitations. It also proposes a future research agenda based on the present research. The present research makes one of the first scholarly attempts to systemically analyze and respond to the CSR reporting-performance inconsistency. It enriches the new governance scholarship and fills the research gap in the literature that has barely used qualitative research methodology to study the problem with CSR reporting. The research result sheds light on the CSR advocacy practice and informs policy making in Canada in terms of constructing the Canadian regulatory regime surrounding CSR reporting. It also has a wider application beyond national boundaries since the issue that the present research centres on is a worldwide phenomenon that challenges the fundamentals of CSR. 6 Chapter 1: Research Methodology Introduction The present research combines theoretical with empirical research methodology to support the thesis argument. Theoretically, it accords with the mainstream regulatory literature and frames the reflexive law theory within the new governance paradigm. It adopts the broader regulation and governance literature to critically analyze the benefits and limitations of the reflexive law approach in addressing the CSR reporting-performance discrepancy.10 It cogently shows why the reflexive law approach, compared to traditional regulation and other contemporary regulatory forms, provides a more pertinent cure for the CSR reporting-performance inconsistency. Empirically, the study focuses on making a thorough, contextual-based analysis of the research thesis. The empirical research facilitates a detailed portrayal of the CSR reporting field in Canada and solicits a comprehensive discussion in terms of where the problems lie and what promoting factors there are for realigning CSR reporting with corporate performance. These empirically grounded observations not only carry 10 See infra note 376-380 and the accompanying texts for an explicit discussion of the relationship between reflexive law and new governance. 7 significant academic value in themselves, but also inform the present research in refining the reflexive law approach and enriching the regulatory design components. In particular, this chapter addresses why the qualitative research methodology has been adopted and what the research limitations are. In terms of the procedural issues, it introduces the interview recruitment, the data collection and the data analysis process. 1.1 Justifying the Research Methodology 1.1.1 Empirical & Qualitative The choice of the empirical research methodology is buttressed by three considerations. First, the research question of this project, which requires a thorough investigation of the current CSR reporting practice to identify where the problems lie, cannot be fully answered by theory-based textual analysis. To comprehensively respond to the practical, concrete dimension of the research thesis, it is necessary to learn from the field. Without a thorough empirical investigation, one does not have a solid ground to interpret how CSR reporting functions in the practical world, how companies and people deal with the reporting process, and how they comprehend the process. Second, the thesis argument, which is backed by the theory of reflexive law, requires an elaboration on the empirical ground. This is because reflexive law is a theory that exists on a broad and abstract level. In order to put the theory to use, the meaning of reflexive law ought to be substantiated in concrete settings.11 The empirical portion of the research 11 This is the standard practice of the reflexive law literature. See Section 4.3.4 for a discussion of the literature. 8 was therefore designed to provide a detailed description of the current CSR reporting field as well as its deficiencies, in order to precisely elaborate on the meaning of reflexive law in the present research and to refine the theory of reflexive law on that basis. Third, existing empirical research on parallel topics has advanced our understanding of the dynamic of companies as regulatory respondents, which motivates the current research. For instance, to explore the reasons of firms’ resemblance and discrepancy in environmental performance, i.e. why most firms are able to perform within a behavioural range yet only some move “beyond compliance”, Gunningham et al. conducted interview-based case studies of fourteen firms in their environmental performance and made seminal findings, which provide important policy implications for regulatory designs and the greening of pulp and paper industry.12 As Section 1.2.1 will further illustrate, In the context of the present thesis, a number of publicly-traded Canadian companies were chosen as the samples for the empirical research. While quantitative research methodology has been extremely popular among existing literature concerning CSR reporting issues in Canada, qualitative research on the topic has been hard to find. Among the existing literature in Canada, most concentrates on analyzing the content of CSR reports, not the process of reporting and its connection with corporate performance, which necessitates an in-depth qualitative research about the CSR reporting instrument to fill the research gap.13 12 Neil Gunningham, Robert A Kagan & Dorothy Thornton, Shades of green: business, regulation, and environment (Stanford Law and Politics, 2003). 13 Most research on this subject in Canada is based on content analysis of CSR reports. For instance, see: Daniel Zeghal & Sadrudin A Ahmed, “Comparison of Social Responsibility Information Disclosure Media Used by Canadian Firms” (1990) 3:1 Account Audit Account J (discussing the media vehicles used by Canadian companies for CSR disclosure in 9 1.1.2 Interviews The majority of the information that feeds the empirical research comes from in-depth, one-on-one research interviews. An interview is an important source of evidence because the affairs of an organization should be reported and interpreted through the eyes of individuals involved in everyday operations of it. Corporate management, frontline employees who prepare CSR reports, external consultants, advisors and lawyers who facilitate the reporting process, and CSR-conscious institutional investors all play an important role in shaping the impacts of CSR reporting within and beyond a company. The interviews therefore aim at exploring, presenting and theorizing these impacts. In essence, the interviews aim for two purposes: first, to examine how people in publicly-traded companies and their stakeholders comprehend the meaning of CSR reporting and what their roles and obligations are in the firms’ undertaking of CSR reporting; and second, to investigate their assumptions with respect to corporate performance in CSR aspects and how these assumptions are related to their day-to-day engagement with CSR reporting.14 addition to the annual reports). Nola Buhr & Martin Freedman, “Culture, Institutional Factors and Differences in Environmental Disclosure between Canada and the United States” (2001) 12:3 Crit Perspect Account 293 (arguing that the Canadian culture and institutional infrastructure is more conducive to the production of environmental reporting than the US counterparts). Greg Davis & Cory Searcy, “A Review of Canadian Corporate Sustainable Development Reports” (2010) 1:2 J Glob Responsib 316 (suggesting that the report structure used by Canadian firms varied widely). Laurence Clément Roca & Cory Searcy, “An Analysis of Indicators Disclosed in Corporate Sustainability Reports” (2012) 20:1 J Clean Prod 103 (showing the total number of indicators used by companies in their CSR reports and how the indicators used are varied between sectors). The only exception so far comes from Beare et al., who conduct interviews to study the connection between CSR reporting and public policy. See: Dan Beare, Ruvena Buslovich & Cory Searcy, “Linkages between Corporate Sustainability Reporting and Public Policy” (2014) 21:6 Corp Soc Responsib Environ Manag 336 (positing that public policy was not a strong consideration by companies in their CSR reporting owing to the lack of a clear direction from government). 14 The first part of the research purposes is inspired by Conley & Williams, whose seminal empirical research aims to investigate “the meaning of ‘corporate social responsibility’ to people in corporations and their various stakeholders, 10 The interviews were designed following a semi-structured pattern.15 Compared to structured interviews, asking questions in a semi-structured format facilitates a deeper and more focused exploration of the research thesis, because semi-structured interviews leave enough room for new research to concentrate on the important questions left unanswered by prior interviews, while building upon the prior research experience and findings. In addition, the open-ended nature of semi-structured questions enables the research participants to reflect more broadly on their own experience and raise illuminating points that otherwise may be disregarded. As Conley & Williams illustrate, “in addition to the substantive information that may be provided, the informant’s selection of some topics, avoidance of others, and relative emphasis on particular subjects is itself an invaluable form of data”.16 With respect to the present research, during the research interviews, when asked about their own experience in preparing and producing CSR reporting documents, participating individuals were encouraged to provide thoughts on the overall structure and functioning of their firms in CSR matters. This brought about further rounds of discussion on individual-tailored questions. A few new issues, such as the issue of knowledge gaps among lower-level corporate employees who feed and the potential impact, within a company and beyond, of a firm’s undertaking CSR initiatives”. See: John M Conley & Cynthia A Williams, “Engage, Embed, and Embellish: Theory versus Practice in the Corporate Social Responsibility Movement” (2005) 31 J Corp Law 1 at 8. According to the literature, senior corporate managers possess three personas, as an individual, a person holding a particular position (e.g. CEO) and a representative of the corporation. See: Robert J Thomas, “Interviewing Important People in Big Companies” (1993) 22:1 J Contemp Ethnogr 80 at 85. To allow the expression of critical opinions and avoid rigidity, the present research is especially interested in seeking views and experience-based accounts from an individual’s perspective. This stance was well-articulated in the interview consent form and communicated to the interviewees. 15 See Section 1.2.3 for an outline of the interview questions. 16 Conley & Williams, supra note 14 at 8. 11 information to the CSR reporting staff yet were uninformed of the large picture of CSR reporting, were identified during this process.17 To relieve the concerns of potential interviewees and ensure the yield of high-quality data, the present research has agreed to keep the names of both the organizations and the interviewees anonymous.18 In retrospect, this decision has proved to be wise. At the contact stage, many interviewees explicitly expressed their concerns regarding confidentiality. During the interviews, several paused until they were assured that neither their names nor the companies’ names will be acknowledged. When chatted with after the interviews, almost all of the respondents confided that their answers to the questions may be more conservative if the interviews are not anonymous. Despite the anonymity of the interview data, the present research is confident that the data collected are still reasonable data. As the next section will further illustrate, in the study of the sample firms, information drawn from interviews was supplemented by secondary data, and key factual evidence provided by one person was checked against narratives of another. Although the academic value of the entire research may be lessened to some extent owing to the anonymity, there is currently no better means to gain high-quality data that are of a sensitive nature while in the meantime fulfilling the ethical expectations for researchers. 17 See Section 188.8.131.52 for a discussion of this problem and related issues. 18 For this reason, in later chapters, firms and persons will appear in coded names (see Table 1). However, drawing a balance between information and confidentiality, the research will provide necessary background information concerning the targeted companies as well as the occupations and positions of the individual interviewees. 12 1.2 Explaining the Interview Research Process 1.2.1 The Scope of the Research As briefly aforementioned, to balance the research width and depth, the present research sets the empirical focus on publicly-traded Canadian companies. This choice was made based on two considerations. First, from the perspective of possibility, large publicly-traded companies provide extremely rich and accessible data for study. Because these companies tend to have a longer history of CSR reporting compared to private companies, the CSR reporting records from them are more complete and consistent. Also owing to the securities disclosure requirements imposed on these firms, their reporting documents are publicly accessible online and can easily be retrieved for cross-reference. Second, from the perspective of necessity, while there are a small number of private companies and other entities, such as universities and NGOs, also reporting on CSR issues, the majority of CSR reports available in the market are generated by large publicly-traded companies. Research targeted on these enterprises is thus more representative and urgent. In addition, large publicly-listed companies are under combined external pressure—such as institutional investors and proxy voting agencies—to build their CSR profile, which provides a unique perspective for evaluation. Out of the following two considerations, Canada has been chosen to be the targeted country for research. First, compared to the abundance of the qualitative research studies with regard to CSR reporting in other countries, scholarly discussion concerning CSR disclosure in Canada is extremely scarce and one-dimensional, which necessitates an in-13 depth interview-based qualitative research.19 Second, the current reporting practice in Canada is vibrant with unique characteristics that deserve a country-specific research of CSR reporting. For instance, according to Canadian Business for Social Responsibility (CBSR), different from many jurisdictions, in Canada the private sector has been leading and setting the agenda for CSR, while the government has been in catch-up mode.20 Also a thorough analysis of company and investor typology indicates that Canadian companies in general rank very low (i.e., 26 out of 29 countries) in integration of environmental and social information with financial information, yet Canadian investors show extremely high interest (i.e., 3 out of 23) in CSR performance metrics compared to investors in other countries.21 In light of the growing demand for research on CSR reporting in this country, a comprehensive study of the thesis is expected to fill the research gap. Inspired by the literature on a related CSR topic, the present research was initially designed as a sector-specific study that centres on the retail industry, with interviewees serving a role of senior-level management.22 However, owing to the low turn-over rate of the interview requests and the knowledge gap expressed by the interviewees regarding 19 The lack of academic debate in Canada about CSR reporting was also mentioned in the literature. See: Aaron Dhir, “The Politics of Knowledge Dissemination: Corporate Reporting, Shareholder Voice, and Human Rights” (2009) 47:1 Osgoode Hall Law J 47, at 54 (noting that "[t]o date, the concept of social disclosure has received scant consideration in Canadian academic legal literature"). Also see supra note 13 and the accompanying texts for an overview that shows existing Canadian literature in terms of CSR disclosure is dominated by quantitative content analysis. 20 CBSR, Government and Corporate Social Responsibility: An Overview of Selected Canadian, European and International Practices (Vancouver, 2001). CBSR is a nation-wide non-profit organization in Canada that is dedicated to advancing corporate citizenship and responsibility. 21 Robert Eccles & George Serafeim, “Accelerating the Adoption of Integrated Reporting”, in Francesco de Leo & Matthias Vollbracht, eds, CSR Index 2011 (InnoVatio Publishing Ltd, 2011) at 80–82. 22 Sector-specific study is a more common research strategy for corporate social and environmental matters. For example, see: Gunningham et al., supra note 12 (focusing on the pulp and paper industry). The research seeks opinions from senior managers and board of directors primarily because of their unique role in the corporate hierarchy. Being designated as directors or senior managers gives prima facie evidence of their involvement in corporate operation and CSR reporting. Therefore, views from those at the top are important sources of evidence for the study and cannot be replaced by other sources. In addition, this kind of research evidence is lacking in the academic literature with respect to CSR reporting. See supra note 13 and the accompanying texts. 14 how CSR reporting actually operates in the field, the original research plan was modified on two dimensions in order to achieve the intended research breadth and depth.23 For one thing, being aware of the knowledge gap between corporate senior managers who make decisions and execute actions at a distance and CSR staff who are involved in day-to-day operation of the decisions, the present research enlarged the touch of the interviewees and solicited views from people with more diverse roles in the process of CSR reporting. In particular, to strengthen the robustness of the interview data, the research sought for multiple visions within the same company and paired interviews from people serving at two different positions for data analysis. For instance, it interviewed both the frontline CSR reporters and people at the senior ranks in the same company. When that was not feasible, an alternative was to interview managers in different functional departments to see whether they perceived the situation of CSR reporting differently, and if so why. This combination allows for a fuller understanding of how people in the practical world interpret the meaning of CSR reporting and how they connect it with corporate performance in CSR aspects. In addition to industry people,24 this study also sought ideas from a few well-established CSR experts, who either were outside the corporations but perform significant roles on the chain of CSR reporting or 23 Because a great number of companies in the retail industry in Canada are private companies, the proposed candidates for the interviews who satisfied the criteria of serving as senior management in publicly-traded companies are a relatively small number of people. Furthermore, among the 21 interview requests sent by e-mail and followed up by telephone calls, only seven people responded and only four agreed to be interviewed. When asked to express their views regarding how CSR reporting was implemented in their firms respectively, while showing wholehearted support for it, most interviewees acknowledged that they do not have hands-on experience with respects to how CSR reporting actually operated in their companies and suggested that the frontline staff of their firms who produced the CSR reports and the external consultants who facilitated the process could be better sources of information. 24 In the present thesis, industry people refers only to people working in the three industries that the present research centres on. 15 served in multiple institutional contexts over a long career and were familiar with the sectors in research.25 They provided valuable outsiders’ perspectives on CSR reporting of the targeted industries. For another, to accumulate more profound interview data, the present research decided to have mining and banking as the two additional industry sectors to focus on.26 The cross-sector approach is feasible in the current research context, because the research thesis, the CSR reporting-performance inconsistency, is a phenomenon that has spread across different business sectors.27 The existing examples of the issue has not exhibited significant inter-sector differences.28 Furthermore, although the available interview data is not enough to run a sector-specific research, in accumulation with the interview data from the two other industries, it has a strong explaining power and is enough to provide a robust account of the CSR reporting-performance inconsistency. In retrospect, the cross-sector study has not only yielded rich and high-quality data for analysis, but also posed a unique and interesting research stance that facilitates a comprehensive understanding of the research question. In terms of the time span of the research, although the present research tries to reflect the most updated conditions of CSR reporting in the field, owing to the volume of fieldwork 25 As will be shown in the coded list of the interviewees, these external voices came from people in a relatively wide array of occupations, such as staff from stock exchanges, consultants, lawyers, managers of institutional investing agencies, staff from industry associations, and officer of an international organization. 26 The three industries were picked up because large publicly-listed companies have been densely spread in these sectors in Canada and they are all featured for their global reach and close ties with stakeholder groups, which provides a common platform for comparison. The comparability of the three industries in Canada were later confirmed by the field research, since many respondents in one industry explicitly referred to examples of the other two industries to illustrate their points. 27 See Section 3.1 for the illustration of the problem using practical examples. 28 Ibid. 16 and documentary analysis, a five-year range has been established for in-depth study. The research interviews were conducted from September 2013 to August 2014, covering issues during the reporting period between 2009 and 2013.29 1.2.2 The Interview Recruitment Altogether, 26 interviewees participated in the research interviews. The interviewees came from three sources: prior personal contacts, cold e-mails /calls, and people encountered at industry conferences. Among the three, cold e-mails /calls yielded the majority of the informants. Table 1 A Coded List of the Interviewees No. Group Interviewee Industry Company Source of Recruitment 1 Industry Senior Manager 1 Retail R1 Cold E-mail 2 Manager 1 Retail R1 Cold E-mail 3 Senior Manager 2 Retail R2 Cold E-mail 4 Manager 2 Retail R2 Cold E-mail 29 To make sure that the more recent development of CSR reporting in the targeted companies is covered, the present research also examines the 2014 CSR reports of these firms and identifies major changes in the research notes, which are incorporated in the data display as it relates to these companies. 17 No. Group Interviewee Industry Company Source of Recruitment 5 Senior Manager 3 Retail R3 Cold E-mail 6 Manager 3 Retail R3 Cold E-mail 7 Senior Manager 4 Mining M1 Cold E-mail 8 Manager 4 Mining M1 Cold E-mail 9 Senior Manager 5 Mining M2 Cold E-mail 10 Manager 5 Mining M2 Conference 11 Board Director 1 Banking & Mining B1, M2 Personal Contact 12 Manager 6 Banking B2 Cold E-mail 13 Senior Manager 6 Banking B3 Cold E-mail 14 Consultation Consultant 1 Retail Cold E-mail 18 No. Group Interviewee Industry Company Source of Recruitment 15 Consultant 2 Mining Conference 16 Consultant 3 Mining Personal Contact 17 Consultant 4 Banking Cold E-mail 18 Industry Association Senior Officer 1 Retail Cold E-mail 19 Officer 1 Retail Cold E-mail 20 Senior Officer 2 Mining Conference 21 Senior Officer 3 Mining Conference 22 Institutional Investing Senior Manager 7 Personal Contact 23 Manager 7 Personal Contact 24 International Organization Officer 2 Cold E-mail 19 No. Group Interviewee Industry Company Source of Recruitment 25 Legal Service Lawyer 1 Mining Conference 26 Stock Exchange Officer 3 Cold E-mail First and foremost, in the present research, companies are important vehicles that link the research with individual interviewees in the industry. Therefore, for cold e-mails, the names of companies were selected in the first place so that the potential interviewees can be identified. In particular, the present research referred to a few lists, such as S&P/TSX 60 and S&P/TSX Composite Indexes, to identify companies with large market capitalizations in the Canadian equity market in the three business sectors.30 20 companies were finally chosen, based on the consistency of their CSR reporting history and the accessibility of information with respect to corporate decision making and implementation on environmental and social dimensions, such as the management structures and arrangements with respect to environmental and social matters. The senior management and CSR officers of these companies were shortlisted as the potential 30 Both indexes are authoritative in Canada. They are calculated and managed by S&P Dow Jones Indices, using a measure of market capitalization to weigh the companies included. TSX 60 is a subset of the TSX Composite. It has 60 constituents, all of which are companies with large market caps in the Canadian securities market, with a view of sector balance. In comparison, TSX Composite involves a broader scope and incorporates publicly-traded companies that are under-represented in TSX 60. 20 industry interviewees. Then I did a search on the Internet to look up for their contact information.31 Based on publicly available information as of fall 2013, 60 candidates were identified for cold e-mail contact. Next, I sent individualized interview invitations via e-mail to these candidates. In the initial contact e-mail, I documented the research purpose and other necessary information, inviting them to participate in the study. With people who indicated a willingness to be interviewed, I followed up by sending each a copy of the consent form and made further explanation regarding how the interview would be conducted. As to the persons who did not respond to the invitation e-mail, I sent them a reminder e-mail several days afterwards, and made telephone calls or leave voice messages if their numbers were available. Trying not to be desperate or pestering, I did not go further to seek responses from people who remained silent after being reminded once. Out of the same consideration, I also discontinued with people who agreed to be interviewed in the first place yet did not respond to my follow-up e-mails or calls. In general, from July 2013 to June 2014, among the 60 people who were contacted by cold e-mail, 18 agreed to be interviewed. However, only 17 actually attended the one-on-one interviews. As shown in Table 1, the eight companies that these industry interviewees work for naturally become the sample companies for in-depth questions.32 In addition to sending cold e-mails, I also invited a few industry people whom I met at conferences to participate in the research interviews. Five interviewees were recruited in 31 The companies’ websites, Canadian Law List and LinkedIn were the main sources used for identifying the contact information of the candidate interviewees. 32 These companies are all large scale, with a high degree of public visibility and acknowledgement, and have a consistent history of CSR reporting since 2009 or prior to 2009. 21 this manner. The remaining four informants were put in touch by contacts in my own network. The gaps in the interview list will be discussed in Section 1.4. The snowballing technique, which has been frequently used to solicit interviews by asking interviewees to put the researcher in contact with other potential interviewees, was tried out but not eventually adopted in the present research.33 This is because: for one thing, the research was concerned that the potential influence of the power relationship within the company may hurt the independence of the industry interviewees’ opinions, because the senior managers interviewed tended to nominate either their subordinates, who may be pressured to say or not say something, or the corporate spokesperson, who had been trained in representing the company to the outside world.34 For another, asking the interviewees to put me in contact with people they thought suitable for the interviews may discredit the anonymity of the research.35 1.2.3 Data Collection & Analysis Depending on the interviewees’ availability and interests in the topics, each interview lasted from 45 minutes to 1.5 hours. The interviews were all tape-recorded upon the permission of the interviewees, in order to maintain accuracy and richness of data. They 33 In an unusual case, I was given the e-mail addresses of two persons, to whom I contacted by sending them interview requests. But these seem more like cold calls rather than snowballing since in both situations, I followed the requests of the introducers that I shall not have their names mentioned when approaching the new candidates. 34 This situation was to some extent confirmed in the interview practice. For instance, in one occasion, one senior manager, who declined the interview invitation, upon my request passed my e-mail to the director of CSR. The CSR head showed a great interest in the research topic and agreed to be interviewed in the first place, yet suddenly he refused further contact, saying he wouldn’t be interviewed “given competing demands and priorities” (e-mail on file with the author, November 8, 2013). 35 This concern was at first expressed by the interviewees. In a couple of situations, the interviewees refused my requests for nomination on the basis that they thought the interviews were anonymous and putting me in touch with people they knew would betray the anonymity. 22 were then carefully transcribed and cataloged under a group of identified themes and sub-themes.36 These themes will be further explored in Chapter 2-4. Since the research interviews were designed as semi-structured, an outline was used to open up the questions. Specifically, the interviews asked, inter alia,37 1. How CSR-related information has been managed in the corporation and how the firm communicates internally and externally on CSR matters; 2. What the company’s general approaches and established policies to CSR reporting are; 3. What functional and operational adjustments the firm has made are in accommodating CSR reporting; 4. How and to what extent has the adoption of CSR reporting triggered the company’s internal management and self-regulatory processes; 5. How the interviewees sense the necessity of scaling up the regulation on CSR reporting, i.e. whether it will be advisable to keep the open-endedness of the regulatory structure and defer to corporations themselves to champion and self-adopt CSR reporting, or to make CSR disclosure a mandate through law. 36 The themes and sub-themes were not pre-identified. Rather, they were generated after thorough reading and back-and-forth check with the transcripts. 37 Some of the questions were inspired by Conley & Williams, 2005, supra note 14. In their ethnographic interviews that aim at comparing CSR theory with practice, they report (p. 6): “We compare the theory and practice of the CSR movement by addressing such questions as what these participants seek to accomplish, whether they are achieving those ends, and what the social consequences of their activities—both intended and inadvertent—may be”. 23 Although it seems convenient to bundle up the interview data to show how many interviewees are for or against a certain viewpoint, on second thought, the present study is hesitant to take such an endeavor. First, the purpose of the current empirical research is not to generalize. Rather, it is intended to raise issues and exemplify how these issues can illuminate the research theories and the regulatory practices. Second, within the current context, making quantitative generalization of the interview data can be misleading. During the interviews, some topics were favoured by a great number of informants yet others were very lightly responded to. However, it is too facile to claim that the former questions are better grounded than the latter. Moreover, in many occasions, the interviewees’ expressed stances were inconsistent with their reasoning. Therefore, instead of calculating the numbers of similar propositions, this research pays particular attention to how the interviewees supported their arguments and whether their argumentation can be backed up using other sources of data. Third, generalizing the interview data in a quantitative way may jeopardize the depth of the research. The interview provides an invaluable platform for the researcher to test her presumptions—to tease out some issues and to raise new issues for further rounds of discussion. Such a back and forth process cannot simply be reduced into numbers and percentages. 1.3 Supplementary Data Collecting qualitative data by interviews is a frequent design when the research is about business firms.38 However, owing to two reasons, it is problematic to base the conclusion 38 Donald R Cooper & Pamela S Schindler, Business Research Methods, 9th ed (London, UK: Mcgraw Hill, 2005), at 204 (noting that interview is "the primary data collection technique for gathering data in qualitative methodologies"). 24 entirely on interviews. First, the interviewees are individuals while the research subjects are companies. Although the affairs of an organization should be reported and interpreted through the eyes of individuals involved in everyday operations of it, the two are by no means identical, especially under the condition when the personal views were solicited.39 Second, the interviewees’ opinions were generated from the information filtered through their lens, which may be subjective, selective and bounded by their knowledge sets. As Officer 1 notes: I can imagine that people might respond by saying that reporting is not driving changes in their company—they’re already doing the things and they’re just reporting on it. And they might genuinely believe that. It can still be wrong. They’re just not aware of how much reporting is changing things. It also depends on how long they’ve been to the company, if they’re in relatively new positions and if they’re new persons who have only been there for a couple of years. Sometimes opinions can be wildly misleading.40 For the above-mentioned reasons, additional sources of evidence were introduced to corroborate and cross-check with the interview data. In particular, the supplementary data came from two sources, documentary data and ethnographic data. Documentary data was mainly collected from the companies’ websites and the System for Electronic Document Analysis and Retrieval (SEDAR), an open-access document retrieval system for mandatory filings from Canadian publicly-traded companies.41 It was 39 See Thomas, supra note 14 for a discussion of the three personas of corporate senior managers. 40 Interview transcripts on file with the author, November 19, 2013. 41 An introduction as well as access to SEDAR can be found at <http://www.sedar.com/sedar/sedar_en.htm> (last visited June 12, 2016). 25 in the form of corporate securities filings, CSR publications, memoranda, and other public filings. The present research is interested in collecting clues from these sources regarding: first, how the process of CSR reporting has been developed and institutionalized within the targeted companies through the years; second, whether the information collected in the previous CSR reports has been used by the companies to refine corporate environmental and social policies, upgrade management systems, engage stakeholders and set up corporate substantive goals, etc.; third, how CSR information interacts with corporate financial filings in the case of each company; fourth, whether and how the improvement or degradation of corporate environmental and social performance compared to the previous year is reflected in the companies’ CSR reports. These four aspects were paid particular attention because they provide indispensable background of how CSR reporting functions in each firm and serve as a basis for questions and discussion during the semi-structured interviews. To lead the research interviews in a more effective way, related information from multiple documentary sources was collected and cross-checked ahead of each interview, with incompatible and unclear statement flagged and asked for clarification in the research interviews. The present research has also been informed by media sources, online databases, government policy statements and academic research paper. This secondary data, as discussed as it arises in the ensuing chapters, not only prepares this study with prerequisite knowledge for the development of interview questions, but also works to “fact check” the corporate self-reporting documents. For instance, by comparing the content of news coverage and corporate self-reporting documents in a given year with 26 respect to one of the targeted firms, I found that the CSR report from the firm missed important information concerning the controversy on its site cleanups, while the issue was heavily debated in multiple media sources. This discrepancy corroborates the existence of the CSR reporting-performance gap in this particular firm. Then during the interview, I asked both the front-line reporter and the senior manager to explain how the decisions with respect to what to report and what not to report were made and to express views surrounding the absence of such information.42 The method of ethnographic observation was drawn from Conley & Williams, who took use of business ethnography to explore the meaning of CSR to people in corporations and stakeholder groups.43 However, instead of participating in CSR conferences and then conducting mass follow-up interviews, the present research only applied this method at a primitive level, namely attending CSR conferences and training sessions, engaging formal and informal interactions with industry participants during these gatherings, and keeping ethnographic notes.44 The original purpose of attending these events was to clear thoughts and gain some “insider” knowledge. However, in retrospect, watching how the issue of the CSR reporting-performance gap was debated among practitioners allows 42 This refers to M1. See Section 3.3.1 for further discussion of this event. 43 Conley & Williams, supra note 14, at Section II. According to Conley & Williams, business ethnography is a variation on anthropology’s ethnographic method. It involves participant observation of gatherings as well as wide-ranging interviews of the participants. 44 During the fieldwork, I attended three national- and international-wide industry conferences in 2014 that all have a close tie with the present research thesis. They are Convention of Canadian Institute of Mining, Metallurgy and Petroleum (“CIM”), National Conference of Institute of Corporate Directors (“ICD”), and the annual Conference of Principles for Responsible Investment (PRI) in Person. Among the three, I presented my tentative research findings formally at the CIM Convention and discussed informally with other participants at the other two occasions. In addition, I attended the Accountability Project Sustainability Practitioner Course, a series of training sessions designed exceptionally for CSR practitioners and were featured for in-person task-focused discussion and collaboration in small work groups (i.e. around four to five people in each group and altogether three groups). This relatively close, intimate class arrangement allowed me to interact in depth with CSR practitioners during class participation and at coffee and lunch breaks. 27 access to rich information that complements the interview data.45 In particular, the formal and informal interactions with people in the field provide an invaluable entry-point for grasping the overall industry stances toward CSR reporting. 1.4 The Limits of the Empirical Research & the Justification While striving for a comprehensive empirical study, in retrospect, the present research is limited in two aspects. First, the research was conducted within a limited timeframe. Because of the time horizon of the research, this study only provides a temporal snapshot of the trajectory of CSR reporting in companies, with broader issues and more recent development to be addressed by future investigations. Second, the interview sampling is imperfect. Although it covers a satisfactory spectrum of population and occupations, as can be seen from the interview list, a fairly small number of companies were concentrated on and the number of informants from each company was far too small to furnish anything but hints of what is happening in the field. However, the two shortfalls are almost unavoidable. With respect to the first issue, fieldwork in itself is time-consuming and labor-intensive, especially for a single researcher, not to mention the pre-fieldwork preparation and the post-fieldwork analysis of data. Although there is a time lag between the fieldwork and the generation of the research results, the present research remains current and has both academic and practical value, because recent CSR crisis cogently shows that the problem of the CSR reporting- 45 For instance, both the research interview and the ethnographic data show that rather than apprehending key CSR issues as significant in their own right to the business, practitioners tended to sense CSR reporting from a pragmatic and strategic perspective, emphasizing the business case of practicing CSR reporting. See Section 184.108.40.206 for a more detailed analysis. 28 performance inconsistency does not fade, but persists and even intensifies. A case in point is the recent Volkswagen emission scandal, which evidently exhibits the widening gap between what was reported and what was done in terms of CSR.46 In terms of the second limit, for the present qualitative research, the biggest hurdle was gaining access to the field.47 As precisely described in the literature, despite that corporate people are highly visible, they are not easily accessible.48 Even for seasoned qualitative researchers, interviewing corporate insiders, especially senior managers and directors, is still a challenging task.49 The difficulty in negotiating for entrance explains why the present research only involves a small number of companies and from each company one or two interviewees. Nevertheless, the shortfall of samples has been compensated to a great extent by collecting and cross-checking data from different sources and from individuals 46 In September 2015, the US Environmental Protection Agency alleged that many Volkswagen cars being sold in the United States had been installed special software (known as a “defeat device”) in diesel engines that artificially reduced nitrous oxide (NOx) emissions during the emission testing for certain air pollutants. Later, the Chief Executive of Volkswagen admitted that the company had cheated during emissions tests of its vehicles since 2009. According to the news reports, as many as 11 million vehicles world-wide were equipped with the alleged software. Without the emission cheating software, the engines in fact emitted NOx pollutants up to 40 times above what is allowed in the United States. See: EPA, “Volkswagen Light Duty Diesel Vehicle Violations for Model Years 2009-2016”, online: EPA <http://www2.epa.gov/vw>; Volkswagen, News Release (September 22, 2015), online: <http://www.volkswagenag.com/content/vwcorp/info_centre/en/news/2015/09/Volkswagen_AG_has_issued_the_following_information.html>; Jack Ewing, “Volkswagen Says 11 Million Cars Worldwide Are Affected in Diesel Deception”, The New York Times (September 22, 2015), online: <http://www.nytimes.com/2015/09/23/business/international/volkswagen-diesel-car-scandal.html?_r=0 >. (Last visited June 12, 2016.) However, before the deceit was discovered, the auto giant was reputable as a global leader in CSR and was for many years in a row listed on the Dow Jones Sustainability Indices (DJSI). The company had an accomplished track record of CSR reports, with ambitious goal setting, sound records of emission-reduction and strong external assurance. Ironically, in its 2014 CSR report, Volkswagen said that its emission of NOx in its cars and trucks had dropped by 45% since 2010, which has now been proven false. 47 Although the names of the senior managers and directors were listed on the companies’ websites and can be found in the companies’ reporting documents, the contact information of these people was not readily available. A 40-hour search on the Internet only yielded the e-mail addresses of 60 industry people. Among the 60 industry people who were contacted for interview, only 18 responded with a yes and only 17 actually took the interview. Not to mentioned that some respondents were repeatedly reminded. 48 See: Thomas, supra note 14; P A Adler & P Adler, “The Reluctant Respondent” in Jaber F Gubrium & James A Holstein, eds, Handbook of Interview Research: Context & Method (Thousand Oaks: SAGE, 2002) 515 at 521 (noting that corporate executives "strive to keep in place the kinds of shields that will keep social researchers at bay"). 49 See ibid. 29 both inside and outside the corporations.50 Moreover, the present research is aware that companies exhibit significant variations in their scopes and sophistication of CSR reporting. As a result, being the first among its kind, rather than trying to cover the CSR reporting details of a large group of companies, the present research aims to examine the CSR reporting-performance relationship in concrete practical situations and serves as a starting point for further debates. Summary of Chapter 1 This chapter introduces the methodology of the present research and defends its choices. In general, the present research combines theoretical and empirical research methodology to corroborate the thesis argument. It sets the empirical focus on publicly-traded Canadian companies. Canada has been chosen to be the targeted country for research, because: first, scholarly discussion of CSR disclosure is scarce in Canada; second, the Canadian CSR reporting practice shows unique characteristics that deserve a country-specific research. Besides, the present research limits its research breadth to three business sectors, retail, banking and mining. The choice of empirical research methodology is buttressed by three considerations. First, the research question cannot be fully answered by a theory-based analysis. Second, the thesis argument, which is backed by the theory of reflexive law, requires an elaboration on the empirical ground. Third, existing empirical research on parallel topics has gained a fruitful result. In specific, considering that the existing literature on CSR reporting is 50 See supra note 42 and the accompanying texts for an illustration of the cross-reference. More examples will be given in Section 3.3 and 4.4. 30 mostly quantitative-based, the present research takes interview-based, qualitative research methodology to fill the research gap. The majority of the information that feeds the empirical research comes from in-depth, one-on-one research interviews. The interviews were designed following a semi-structured pattern. Each interview lasted from 45 minutes to 1.5 hours. The 26 interviewees who participated in the research interviews were recruited from prior personal contacts, cold e-mails /calls, and by meeting people at the industry conferences. To relieve the concerns of potential interviewees and ensure the yield of high-quality data, the present research has agreed to keep the names of both the organizations and interviewees anonymous. To ensure the research credibility, additional sources of evidence have been introduced to corroborate and cross-check with the interview data. In particular, the supplementary data come from two sources, documentary data and ethnographic data. The documentary data is primarily in the form of corporate securities filings, CSR publications, memoranda, and other public filings. It provides important clues on issues such as: how the process of CSR reporting has been developed and institutionalized within the companies, whether the companies use previous CSR reporting to refine their policies and elevate internal management systems, and how the improvement and degradation of corporate environmental and social performance compared to the previous year is reflected in the companies’ CSR reports. Moreover, the study has also used media sources, online databases and government policy statements to “fact check” the corporate self-reporting documents. The ethnographic data was gained by attending CSR conferences and training 31 sessions, engaging formal and informal interactions with industry participants during these gatherings, and keeping ethnographic notes. While striving for a comprehensive empirical study, in retrospect, the present research is limited in two aspects. First, the research was conducted within a limited timeframe and only provided a temporal snapshot of CSR reporting in companies. Second, the interview sampling is imperfect, as it covers only a fairly small number of companies. Regarding the first aspect, although there is a time lag between the fieldwork and the generation of the research results, the present research remains current and has both academic and practical value, because recent CSR crisis, the Volkswagen emission scandal, cogently shows that the problem of the CSR reporting-performance inconsistency does not fade, but persists and even intensifies. With respect to the second aspect, the shortfall of samples has been compensated by collecting and cross-checking data from different sources and from individuals both inside and outside the corporations. 32 Chapter 2: The Research Background Introduction This chapter provides necessary background information as it relates to the research thesis. It carefully examines what CSR reporting is on a conceptual and analytical basis. It then explains why CSR reporting can be viewed as a corporate learning tool and therefore studied from the perspective of organizational learning. It also digs deeply into the Canadian CSR reporting field, noting the uniqueness of Canada and of the Canadian regulatory structure in terms of CSR reporting. In the first part, the present chapter briefly introduces the definition and the theoretical underpinning of CSR from a fiduciary perspective. It offers an explicit discussion on the factors surrounding business case, voluntary action, and legal obligation that are intertwined in shaping the direction of CSR. It then differentiates the descriptive and normative perspectives of CSR reporting, noting that although this research generally adopts a descriptive view, both dimensions are to be considered and discussed. In addition, it justifies why CSR reporting instead of other synonymous terms is used in this thesis. Based on the literature, this research defines CSR reporting as the corporate-dominated process of developing plans and procedures for gathering information, disseminating a CSR report and analyzing stakeholder reactions toward the report. By establishing this definition, it not only distinguishes CSR reporting from CSR reports, but also draws a line between CSR reporting and corporate transparency. 33 Next, this chapter examines the relationship between CSR reporting and corporate learning, arguing that CSR reporting can be viewed as a corporate learning process and studied from the perspective of organizational learning. Such a view expands the research horizon of the present research and provides a more nuanced look into the research problem. In addition, it encourages a reference to the organizational learning literature to address the issue of the CSR reporting-performance inconsistency. Furthermore, this chapter presents a thorough introduction of the Canadian CSR reporting context, including Canada’ uniqueness in terms of the primary impetus for companies to publish CSR reporting, the Canadian regulatory regime that only regulates CSR reporting at the periphery, and the policy-making debate in Canada with regard to mandatory CSR reporting. All these characteristics have shaped CSR reporting to what it is today. 2.1 Corporate Social Responsibility (CSR) Reporting: An Overview Since the CSR reporting-performance inconsistency is the central theme of the present research, first and foremost, it is necessary to inspect how the terms of CSR and CSR reporting are defined respectively in the present research. In terms of CSR, this includes the inquiry of what means for business to be socially responsible, where CSR is derived from theoretically, why CSR bears a business case meaning, and how CSR is linked with governmental laws and regulation. With respect to CSR reporting, the present chapter examines the meaning of CSR reporting on both descriptive and normative dimensions, explains why the present research uses CSR reporting instead of other synonymous terms, and differentiates CSR reporting from corporate transparency. 34 2.1.1 What Is CSR? What Means to Be Socially Responsible? 220.127.116.11 The Definition of CSR Although there is little dispute that CSR goes beyond charitable causes,51 the literature is still filled with heated debates at least at two dimensions with respect to the definition of CSR. Firstly, scholarly work departs over whether an over-arching definition of CSR is desirable. On the one hand, the universalists argue that it is preferable to maintain a standardized definition of CSR because otherwise what means to be socially responsible is often vague, incomparable and subjective.52 On the other hand, the individualists claim that “[t]he notion of what is socially responsible is situated by contemporary needs and concerns and thus cannot be pinned down in precise and unchanging terms”.53 The second debate point with respect to the definition of CSR addresses whether corporate economic performance is considered an integral component of CSR.54 One group of definitions of CSR, the inclusivist, suggests that in addition to legal and ethical responsibility, CSR includes corporate economic responsibility that serves the company’s core business.55 Supporters of this view argue that economic responsibility is the “first 51 See: Janet E Kerr, “The Creative Capitalism Spectrum: Evaluating Corporate Social Responsibility through a Legal Lens” (2008) 81 Temple Law Rev 831 at 853 (positing that “CSR is neither philanthropy nor a cog in a marketing machine”). 52 The terms universalists and individualists used in the present thesis are borrowed from Chiu, who nevertheless seems to take a middle ground by arguing for a thin form of standardization which preserves the capacity of individualized corporate reflection and response. See: Iris H-Y Chiu, “Standardization in Corporate Social Responsibility Reporting and a Universalist Concept of CSR--A Path Paved with Good Intentions” (2010) 22 Fla J Int Law 361 at 361–62. Also see: Wan Saiful Wan-Jan, “Defining Corporate Social Responsibility” (2006) 6:3-4 J Public Aff 176 (noting that the lack of a widely agreed definition of CSR contributed to misunderstandings and cynicism toward the concept itself). 53 Michael Kerr, Richard Janda & Chip Pitts, Corporate Social Responsibility: A Legal Analysis (LexisNexis, 2009) at 5. 54 A similar observation is made by Wan-Jan, who differentiates definitions of CSR as an ethical stance from those of CSR as business strategy. See: Wan-Jan, supra note 52. 55 For example, Industry Canada adopts the inclusive definition of CSR. It defines CSR as “a company’s environmental, social and economic performance and the impacts of the company on its internal and external 35 and foremost social responsibility of business”.56 On the contrary, the counter-argument holds that CSR refers only to “activities that companies undertake to directly benefit society” and it should exclude corporate economic performance that is mainly aimed at enhancing corporate profitability.57 With respect to the first discussion, the present thesis is in sympathy with the view that there is a need for a common ground that “[gives] meaning to the setting of any targets or goals”.58 However, it also realizes that CSR is context-based and ought to be individual-tailored according to each firm’s unique circumstance. As to the second dispute, although a firm’s motivation to practice CSR may be a mix of self-interest and desire to benefit society, CSR as a definition ought to transcend a company’s economic performance. It is unacceptable that a company claims being socially responsible by merely maximizing its economic profit. Meanwhile, an over-expanded definition of CSR would undermine the value of CSR as a promise to resolve social issues brought about by large corporations.59 For these above-mentioned considerations, the present research defers to Waddock’s stakeholders”. See: Industry Canada, “Governance for Sustainability”, online: Industry Canada <https://www.ic.gc.ca/eic/site/csr-rse.nsf/eng/h_rs00577.html> (last visited June 12, 2016). 56 Archie B Carroll, “A Three-Dimensional Conceptual Model of Corporate Performance” (1979) 4:4 Acad Manage Rev 497 at 500. Also the literature argues that incorporating corporate economic value into the definition of CSR makes sure that CSR will not reduce to an “add-on penumbra” of corporate responsibility. See: Bryan Horrigan, Corporate Social Responsibility in the 21st Century: Debates, Models and Practices across Government, Law and Business (Cheltenham, UK ; Northampton, MA, USA: Edward Elgar Publishing, 2010) at 38–39. 57 Sandra Waddock, Building the Institutional Infrastructure for Corporate Social Responsibility (Working Paper No. 32, John F Kennedy School of Government, 2006) at 5. Also see: Henry Mintzberg, “The Case for Corporate Social Responsibility” (1983) 4:2 J Bus Strategy 3 (stating that CSR can be practiced in four forms: the purest form of CSR is when CSR is practiced for its own sake; less pure is when CSR is undertaken for enlightened self-interest of the firms; a third form is when CSR is viewed as a sound investment; and the fourth, the least pure form, favours for practicing CSR in order to avoid interference from governmental and legislative authorities that use more forceful methods to address the same issues). 58 Adaeze Okoye, “Theorising Corporate Social Responsibility as an Essentially Contested Concept: Is a Definition Necessary?” (2009) 89:4 J Bus Ethics 613, at 623 (arguing that CSR is an essentially contested concept and there is need for a "common reference point" although universal meaning for CSR is unnecessary). 59 For a detailed discussion of the harms and exploitation made by corporations to the society, see: Joel Bakan, The Corporation: The Pathological Pursuit of Profit and Power (Free Press, 2004). 36 definition that describes CSR as “activities that companies undertake to directly benefit society”.60 The scope of CSR is also a controversial topic. Arguably, information that could fall into the realm of CSR includes issues related to climate change, human rights, supply chain ethics, workplace safety, environmental performance, community investment and much more. However, in order to gain profound research results while keeping the study manageable, instead of visiting the full spectrum of CSR, the present thesis merely concentrates on its environmental and social aspects.61 This decision was made because environmental and social issues have traditionally formed the core of most CSR approaches and they constitute the backbone of the current CSR reporting architecture in most corporate entities. 18.104.22.168 The Theoretical Base of CSR From a legal perspective, the theoretical discussion surrounding CSR is intertwined with the debate concerning the purpose and the best interests of the corporation. In academia, two contradicting viewpoints are in prevalence as to this matter. At one side of the spectrum is the shareholder primacy theory, or sometimes called the shareholder-centric 60 Waddock, supra note 57, at 5. Also some literature trades in the word “responsibility” for “accountability”. However, according to Parker, “CSR requires responsibility”. She argues that responsibility goes beyond accountability since it encompasses the meaning of obligations and rules in addition to ideals and values. See: Christine Parker, “Meta-Regulation: Legal Accountability for Corporate Social Responsibility” in Doreen McBarnet, Aurora Voiculescu & Tom Campbell, eds, New Corp Account Corp Soc Responsib Law, (Cambridge: Cambridge University Press, 2007) 207, at 213. The present thesis is sympathetic with this view. Therefore, although it treats the two expressions as synonymous, it prefers to use the word responsibility instead of accountability. 61 According to Lin, corporate social and environmental disclosure includes issues of “labor, occupational safety, product safety, environmental protection, and consumer protection”. The present thesis adopts such a definition for environmental and social. See: Li-Wen Lin, “Corporate Social and Environmental Disclosure in Emerging Securities Markets” (2009) 35 N C J Int Law Commer Regul 1, at 3 (noting the three regulatory models of CSR reporting adopted in emerging securities markets and their respective challenges). 37 mode, which argues that making profits for shareholders is the primary purpose of the corporation and corporate directors and managers should focus on serving the interests of shareholders.62 On the contrary, the other standpoint, the stakeholder theory,63 holds that the best interests of a corporation should take into account parties that the company interacts with. In line with the latter contention, a growing body of literature suggests that corporate directors need to consider the interests of other corporate constituencies and even sometimes “subordinate shareholder interests to those of employees, communities, or other groups affected by corporate activities”.64 Among corporate law scholars, it has been widely recognized that the shareholder versus stakeholder debate was derived from Berle and Dodd in the 1930s.65 In a published journal article, Berle argues that corporate law is essentially trust law and therefore, “all powers granted to a corporation or to the management of a corporation ... are necessarily and at all times exercisable only for the ratable benefit of all the shareholders as their interest appears”.66 Dodd, who disagrees with Berle, states that corporate law transcends 62 For example, see: Stephen M Bainbridge, “In Defense of the Shareholder Wealth Maximization Norm” (1993) 50 Wash Lee Law Rev 1423 (arguing that the principle of shareholder wealth maximization is both a valid positive account of corporate law as well as a legitimate normative proposition). For a definitive statement of this view, also see: Milton Friedman, “The Social Responsibility of Business Is to Increase Its Profits”, N Y Times (13 September 1970) at 33. 63 This theory is in line with the definition of stakeholders as “anyone affected by the actions of a corporation other than the shareholders themselves, among them employees, consumers, communities, governments, the environment, [etc.]”. See: David Rosenberg, “Delaware’s Expanding Duty of Loyalty and Illegal Conduct: A Step Toward Corporate Social Responsibility” (2012) 52 St Clara Law Rev 81, at FN 8. 64 Ronald M Green, “Shareholders as Stakeholders: Changing Metaphors of Corporate Governance” (1993) 50 Wash Lee Law Rev 1409 at 1411 (positing that the corporate law metaphor of prioritizing shareholder interests is misleading, especially in situations where corporate responsibilities to other corporate constituencies cannot be justified by long-term shareholder benefit). 65 Lisa M Fairfax, “The Rhetoric of Corporate Law: The Impact of Stakeholder Rhetoric on Corporate Norms” (2005) 31 J Corp Law 675, at 676 (noting that the shareholder versus stakeholder debate "has received prominent attention" since the Berle and Dodd debate). But see: C A Harwell Wells, “Cycles of Corporate Social Responsibility: An Historical Retrospective for the Twenty-first Century” (2002) 51 Univ Kans Law Rev 77, at 79 (noting that the debate between Berle and Dodd was "very much a part of the debates over management overreaching and corporate power"). 66 A Berle Jr, “Corporate Powers as Powers in Trust” (1931) 44:7 Harv Law Rev 1049 at 1049. Also see: A A Jr Berle, “For Whom Corporate Managers are Trustees: A Note” (1931) 45 Harv Law Rev 1365 for Berle’s further response 38 the traditional trust conception and expands to a wider set of beneficiaries. He notes that managers “should concern themselves with the interests of employees, consumers, and the general public, as well as of the stockholders”.67 This dialogue gave rise to more recent research on the issue and the argument continues today.68 The above-mentioned debate, along with its successors, has a direct bearing on incorporating CSR into the corporate paradigm. This is because the modern business law creates the “division of power” corporate form, which “[vests] powers in corporate directors to manage the affairs of a corporation”.69 In exchange of financial and managerial benefits, directors and officers are mandated by law to abide by a series of duties and obligations. The fiduciary duty, which includes duty of loyalty and duty of care, is one obligation imposed on corporate directors and senior managers.70 The law of fiduciary duty requires board of directors and senior managers to act in good faith and (arguing that Dodd’s multi-fiduciary stakeholder position could lead to a “social-economic absolutism of corporate administrators”, i.e. a result that all corporate power falls into management’s hands). 67 E Merrick Dodd Jr, “For Whom Are Corporate Managers Trustees?” (1932) 45:7 Harv Law Rev 1145, at 1156. 68 For instance, a more recent debate on the issue is between Green and Bainbridge, see: Green, supra note 64; Bainbridge, supra note 62. For a parallel debate in Canada, see: Corporate Stakeholder Conference Symposium, (1993) 43 U. Toronto L.J. 297 onward. The shareholder-stakeholder debate also stimulates the progressive corporate law movement in 1990s, which questions the private law nature of corporations and seeks changes from within. Well-recognized forerunners of the progressive law view see: Ralph Nader, Mark Green & Joel Seligman, Taming the Giant Corporation (W. W. Norton, Incorporated, 1977) (supporting federal corporate chartering to render more comprehensive protection to corporate constituencies other than shareholders in the face of corporate monopoly and state judiciary handicap). This school of thoughts were crystalized by two occasions, one the book Progressive Corporate Law edited by Lawrence E. Mitchell and the other a symposium held at the Washington & Lee University Law School in 1992. See: Lawrence E Mitchell, ed, Progressive Corporate Law (Westview Press, 1995); Symposium: New Directions in Corporate Law, (1993)50 Wash. & Lee L. Rev. 1373. Although the progressive corporate law movement advocates “structural changes in corporate law itself designed to serve the interests of nonshareholders with a stake in a corporation’s activities, such as ‘other constituency’ statutes that expand directors’ discretion”, it is in general viewed by critics as being modest and piecemeal. See: Antony Page & Robert A Katz, “Is Social Enterprise the New Corporate Social Responsibility?” (2010) 34 Seattle Univ Law Rev 1351 at 1383. 69 Jeffrey Bone, “Corporate Environmental Responsibility in the Wake of the Supreme Court Decision of BCE Inc. and Bell Canada” (2009) 27 Windsor Rev Legal & Soc 5 at 11. 70 But see: Claire A Hill & Brett H McDonnell, “Stone v. Ritter and the Expanding Duty of Loyalty” (2007) 76 Fordham Law Rev 1769 (arguing that the expanded duty of loyalty includes the duty of care). 39 reasonably believe the decision made is in the best interests of the corporation.71 Under the shareholder primacy model, the paramount duty of directors and managers is to maximize value for shareholders. This mode allows limited room for CSR, because it refrains companies from making unprofitable but socially beneficial decisions.72 In contrast, following the stakeholder model, “benefiting shareholders remains a goal, but not an overriding one”.73 Since directors and managers also assume a legal duty to be attentive to the interests of non-shareholders, such as the employees and the communities, they are refrained from making socially and environmentally harmful decisions, despite the fact that the corporate activities under such decisions may benefit the interests of the corporation and its shareholders. As summarized by the literature, the key disagreement between the two modes with respect to the law of fiduciary duty is “duty to owners alone versus duties to many constituencies”.74 That said, on second thought, the line between the two models is not as obvious as the theorists advocate. Some could argue that being a responsible corporate citizen is also compatible with the shareholder-centric mode, since a management decision that carries social and environmental significance may in the long run benefit the corporation in terms of reputation gains and therefore can be justified in front of the board. Likewise, as will be further discussed in the following section, there are indeed a few practical 71 At the federal level, Canadian Business Corporations Act prescribes that directors and managers should “act honestly and in good faith with a view to the best interests of the corporation”. See: Canada Business Corporations Act, RSC 1985, c. C-44, s. 122(1)(a). The texts of the provincial statutes convey a similar meaning. For instance, see: Business Corporations Act (BC), SBC 2002, c. 27, s. 142(1)(a). 72 Rosenberg, supra note 63, at 82 (noting that under the shareholder wealth maximization model, "managers pursue outcomes that are designed to generate the greatest long-term profits for the corporation without regard to the consequences to those outside the corporation"). Also see: Bakan, supra note 59 at 37 (arguing that under the shareholder-centric mode, "[c]orporate social responsibility is thus illegal--at least when it is genuine"). 73 Wells, supra note 65, at 81. 74 Ibid. 40 examples in which companies seek win-win solutions that both increase the profitability of the firms themselves and benefit their stakeholders.75 The problem, viewed by the present research, is not to argue against the shareholder-centric model when it comes to CSR, but rather to avoid pursuing it to the extreme and making it as an excuse for corporate inaction. A principle that provides protection for shareholders against management entrenchment, the shareholder primacy metaphor should not become a barrier for practicing CSR. In practice, for decades, the shareholder versus stakeholder debate is more of a case-law discussion than of a statutory law account, since “[statutory] corporate law says little about the [fiduciary duty] owed by directors and managers to entities outside the corporation itself”.76 The only exception is in the context of takeover. For instance, over 40 U.S. states have now implemented legislations that either permit or require directors to consider the interests of corporate constituencies other than shareholders when deciding whether to take an offer.77 With respect to case law, the literature argues that the shareholder-centric model is the norm.78 This stance was most explicitly shown in the US case Dodge v. Ford, which has been often cited as a leading case that affirms the 75 Michael E Porter & Claas Van der Linde, “Green and Competitive: Ending the Stalemate” (1995) 73:5, Harv Bus Rev 120 (illustrating how corporations that adopt the resource-productivity strategies can increase profit and competitiveness while being environmentally responsible). 76 Rosenberg, supra note 63. Although the author speaks about the phenomenon in general, the present thesis confirms that this situation applies in both US and Canada. 77 Kathleen Hale, “Corporate Law and Stakeholders: Moving beyond Stakeholder Statutes” (2003) 45 Ariz Law Rev 823, at 833. Also see Mitchell for an analysis of the theoretical ground of such movement. Lawrence E Mitchell, “Theoretical and Practical Framework for Enforcing Corporate Constituency Statutes” (1991) 70 Tex Law Rev 579. 78 Robert C. Clark, Corporate Law (Boston and Toronto: Little, Brown 1986), at 682 (noting that courts have not retreated from the assumption that the “residual” purpose of a business corporation is to make profits for its shareholders). 41 principle of shareholder primacy.79 However, more recent case law has witnessed a more liberal interpretation of the model. For instance, in Canada, in Peoples Department Stores Inc. (Trustee of) v. Wise (“Peoples”), the Supreme Court of Canada explicitly mentioned in the judgment that the interests of the environment is a factor in determining the best interests of the corporation.80 Later, in BCE Inc. v. 1976 Debentureholders (“BCE”), the same court, while repeating the doctrine adopted in Peoples, added three more aspects. First, the court emphasized that the best interests of the corporation is a long-term rather than short-term concept.81 Second, the court made aware that compliance with statutes is only a minimal requirement for the directors.82 Third, the image of business enterprises ought to be comparable to a good, responsible corporation citizen.83 Likewise, it is argued that recent developments in the courts of Delaware, the primary source of corporate law in the United States, “suggest that directors owe a duty of loyalty to stakeholders outside 79 Dodge v. Ford Motor Co.,  170 N.W. 668 (holding that Henry Ford has to operate the company in the interests of its shareholders rather than in the benefit of employees or customers). In the case, the Michigan Supreme Court made a famous quote (at 684): There should be no confusion …. A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of the directors is to be exercised in the choice of means to attain that end, and does not extend to ... other purposes. However, see: Lynn A Stout, “Why We Should Stop Teaching Dodge v. Ford”, (2008) 3 Va Law Bus Rev 163 (arguing that the judicial decision in Dodge v. Ford is a misinterpretation of corporate purpose and at odds with the doctrine of American corporate law). For the counter-argument against Stout, see: Jonathan R. Macey, “A Close Read of an Excellent Commentary on Dodge v. Ford”, 3 Va Law Bus Rev 177 (arguing that the “other-constituency” provisions prescribed in many states cannot be “construed to permit managers to benefit non-shareholder constituencies at the expense of shareholders” and reiterating that the goal of the corporation is shareholder wealth maximization). 80 Peoples Department Stores Inc. (Trustee of) v. Wise,  SCC 68,  3 S.C.R. 461, at para.42. “[I]t may be legitimate, given all the circumstances of a given case, for the board of directors to consider, inter alia, the interests of […] the environment”. 81 BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, at para. 38. “The fiduciary duty of the directors to the corporation is a broad, contextual concept. It is not confined to short-term profit or share value. Where the corporation is an ongoing concern, it looks to the long-term interests of the corporation”. 82 Ibid. “The content of [fiduciary] duty varies with the situation at hand. At a minimum, it requires the directors to ensure that the corporation meet its statutory obligations”. 83 Ibid, at para.66, 82. “Directors, acting in the best interests of the corporation, may be obliged to consider the impact of their decisions on corporate stakeholders […] This is what we mean when we speak of a director being required to act in the best interests of the corporation viewed as a good corporate citizen”. However, the impact of the case was undermined by an amended statutory provision in the province of Ontario, which explicitly limits the fiduciary responsibility to a duty “to the corporation”. See: Ontario Business Corporations Act (R.S.O.1990, c. B.16), s.134. 42 the corporation”.84 Nonetheless, in both circumstances, the judicial recognition is limited in its scope, which makes it still highly disputable with respect to the theoretical basis of CSR in law. In specific, under the Canadian circumstance, it is permissive rather than mandatory for directors to consider the interests of stakeholders,85 while in the US situation, CSR was mainly reduced to law obedience.86 For this reason, although the space has been created, it is safe to argue that the shareholder-centric mode is still the leading pattern. 22.214.171.124 The Business Case for CSR In contrast to the lack of an overarching definition of CSR, an overwhelmingly popular belief among the literature and practitioners is that “good corporate citizenship is also good business”, i.e. practicing CSR makes business sense.87 According to this view, corporate financial, social and environmental goals can all be pursued at the same time, since a more responsibly managed firm “will be more likely to avoid consumer boycotts, 84 Rosenberg, supra note 63, at 82 onward (discussing the aftermath influence of the decision made by the Delaware Supreme Court in Stone v. Ritter, in which the court affirmed that directors’ duty of good faith is a subset of the director duty of loyalty). See: Stone v. Ritter, 911 A.2d. 362 (Del. 2006) for additional detail. Early judicial recognition was also made in the context of takeover. In the landmark case Unocal Corp v. Mesa Petroleum Co., the Delaware Supreme Court confirms that directors and managers could consider the interests of other corporate constituencies when determining the nature of the threat incurred by a takeover bid. See: Unocal Corp v. Mesa Petroleum Co., 493 A.2d. 946 (Del. 1985). 85 Ed Iacobucci, “Indeterminacy and the Canadian Supreme Court’s Approach to Corporate Fiduciary Duties” 48 Can Bus LJ 232. 86 Although Rosenberg discussed the case Stone v. Ritter under the heading of CSR, he actually explores the situation in which corporate directors deliberately choose to make a decision that violates law or regulation for corporate cost saving purpose. See: Rosenberg, supra note 63. This observation is consistent with that of Hess, who explains, “[a] common view finds that a corporation that meets the requirements of the law is socially responsible”. See: David Hess, “Social Reporting: A Reflexive Law Approach to Corporate Social Responsiveness” (1999) 25 J Corp Law 41, at 45. 87 David Vogel, The Market for Virtue: The Potential and Limits of Corporate Social Responsibility (Washington, DC: Brookings Institution Press, 2006), at 11 (noting that the business case argument is "the most important driver of corporate interest in CSR"). 43 be better able to obtain capital at a lower cost, and be in a better position to attract and retain committed employees and loyal customers”.88 The idea “doing good by doing well” appeals to CSR advocates who look to inspire firms to become more socially responsible as well as corporate directors and managers who seek changes of the companies toward being more socially and environmentally conscious.89 Although this belief has been challenged academically owing to a lack of consistent study results in terms of the relationship between CSR and corporate profitability, the influence of the view is still vast.90 For instance, this business case scenario for CSR has been frequently taught at business schools and cited in the literature as a major justification for practicing CSR.91 It also underlies the business model of many socially responsible investment (SRI) funds.92 Additionally, it benefits the innovation of 88 Vogel, ibid, at 16-17. Also see: Chris Laszlo, The Sustainable Company: How to Create Lasting Value through Social and Environmental Performance, 1st edition ed (Washington, DC: Island Press, 2003). For a review of management literature on this topic, see: Archie B Carroll & Kareem M Shabana, “The Business Case for Corporate Social Responsibility: A Review of Concepts, Research and Practice” (2010) 12:1 Int J Manag Rev 85. 89 The quotation “doing good by doing well” has been frequently used in the academic literature and cited by practitioners. For example, see: Simon Zadek, Doing good and doing well: making the business case for corporate citizenship (Conference Board, 2000); Aneel Karnani, “‘Doing Well by Doing Good’: The Grand Illusion” (2011) 53:2 Calif Manage Rev 69; Alexander Chernev & Sean Blair, “Doing Well by Doing Good: The Benevolent Halo of Corporate Social Responsibility” (2015) 41:6 J Consum Res 1412. However, it is unclear where this expression was derived from. 90 See Vogel for an explicit analysis of the inconclusive nature regarding academic research on this topic. Vogel, supra not 87, at 29-35. Also see: Conley & Williams, supra note 14, at 14 (arguing that from their empirical work, "[w]ith the exception of those in the socially responsible investment business, we have not heard anyone make a robust claim that CSR can be shown to boost the traditional bottom line"). 91 For example, see: John Elkington, Cannibals with Forks: The Triple Bottom Line of 21st Century Business (New Society Publishers, 1998) (positing that reporting on CSR flips the predominant paradigm of corporations from “closed” to “open”); Simon Zadek, “Stalking Sustainability” (1999) Greener Manag Int 21 (noting that CSR reporting induces societal learning); Michael Porter & Mark Kramer, “Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility”, (2006) Harv Bus Rev 84:12. 92 Other common metaphors used for investments that integrate profits with moral considerations are conscious capitalism, ethical investment and ESG investing. 44 corporate forms, in particular, the creation of social enterprises, which are marked as both for-profit and mission-driven.93 Letting alone the fact that some CSR proponents are pessimistic about the companies’ strategic embrace of CSR, 94 it is fair to note that the business case argument for CSR has helped to popularize the notion of CSR and to some extent softened the shareholder versus stakeholder debate that underlies CSR. The danger, however, according to the present research, is that the increased embrace of the business case justification for CSR may not linearly translate into more CSR-conscious performance.95 On the contrary, in lack of moral and social beliefs, the market-based arguments for CSR can easily reduce CSR into a collection of symbolic actions. As noted by the literature, driven by the business case explanation, instead of genuinely identifying with the value of CSR, many companies simply act “as if CSR matters”.96 They create illusive corporate images showing that the companies are strongly committed to CSR while in fact being business as usual. Therefore, despite its tentative success in fostering the CSR agenda, the business 93 Social enterprises are defined as “business that aim to generate profits while advancing social goals”. See: Page & Katz, supra note 68 at 1353. 94 See infra note 227-30 for the literature that represents this view. 95 A related discussion surrounding the business case topic see: Lisa M Fairfax, “Board Diversity Revisited: New Rationale, Same Old Story” (2010) 89 N C Law Rev 855 (showing that the widespread acknowledgement of the business case for board diversity has yet to translate into actual changes in board diversity and arguing that such stagnation is most likely owing to the overemphasis on the business case and underemphasis on the social and moral justifications); Ronen Shamir, “Capitalism, Governance, and Authority: The Case of Corporate Social Responsibility” (2010) 6:1 Annu Rev Law Soc Sci 531, at 544 (positing that the business case scenario provides a key underpinning in corporate resistance to governmental regulation). 96 Vogel, supra not 87, at 73 (emphasis in original). According to Vogel, there indeed is a subset of firms whose social commitments are internally driven. However, for many companies, practicing CSR is simply a defensive strategy to prevent competitive disadvantage. 45 case strategy should be carefully implemented and monitored. Most importantly, it should not crowd out the moral rationale of CSR.97 126.96.36.199 The Links between CSR & Governmental Law and Regulation98 Along with its development from being a niche activity to a mainstream phenomenon, CSR as a research topic has caught the eyes of researchers in many disciplines. The literature has cogently summarized that CSR is a field where “market forces, voluntary action and legal obligation [intertwine]”.99 However, in contrast to the major management literature that embraces the business case scenario, legal scholars are concerned more about how CSR could fit within the existing legal and regulatory environment and whether law should be used to facilitate or even enforce CSR. With respect to CSR, “[a] tension has emerged between what has grown to be the two wings of CSR: the voluntary, pro-self regulation wing and the mandatory, pro-regulation wing”.100 97 See: Fairfax, supra note 95. This contention echoes to the views expressed by some literature that responsible institutions must have “an inner commitment” to do good. For example, see: Parker, supra note 60 at 214. 98 This section concentrates on introducing how CSR is related to state law and regulation. Although CSR also intertwines with transnational law, especially in terms of transnational voluntary CSR standards, the present research chooses to focus on law and regulation that are backed by a governmental authority, which arguably is the default stance when it comes to the literature on CSR and the law. Likewise, owing to its limited scope, this section discusses governmental laws and regulations in general, without making a differentiation between traditional forms of law and new regulatory methods. However, it is aware of this variation and leaves more detailed analyses to later chapters, which will address the concept of reflexive law. According to Conley & Williams, new governance forms of regulation with respect to CSR were driven by the lack of traditional governmental regulation of corporate conduct. They view CSR practice as a test case of the new governance paradigm. See: Conley & Williams, supra note 14, at Section V. 99 Doreen McBarnet, “Corporate Social Responsibility beyond Law, through Law, for Law: The New Corporate Accountability” in Doreen McBarnet, Aurora Voiculescu & Tom Campbell, eds, The New Corporate Accountability: Corporate Social Responsibility and the Law (Cambridge: Cambridge University Press, 2009), at 35. The literature describes the interactions between market, state and non-state regulation as “regulatory capitalism”. See: David Levi-Faur, “The Global Diffusion of Regulatory Capitalism”, (2005) 598:1 Ann Am Acad Pol Soc Sci 12. Also see: J Braithwaite, Regulatory Capitalism: How It Works, Ideas for Making It Work Better (Edward Elgar, Cheltenham, UK 2008), at 1-31; Christine Parker & Vibeke Nielsen, “The Challenge of Empirical Research on Business Compliance in Regulatory Capitalism” (2009) 5:1 Annu Rev Law Soc Sci 45. Therefore, according to the literature, the regulatory field of CSR is a precise reflection of regulatory capitalism. See: Shamir, 2010, supra note 95. Limited by its research scope, this study only acknowledges this concept without exploring further into it. 100 Amiram Gill, “Corporate Governance as Social Responsibility: A Research Agenda” (2008) 26 Berkeley J Intl L 452 at 462 (arguing that the regulation of corporate governance and CSR can be coordinated against the background of New Governance and encompass both corporate self-regulation and meta-regulation). Shamir expresses similar views. 46 While the self-regulatory proponents argue for voluntary, self-reliant models of CSR, the regulatory advocates prefer to rely on governmental laws and regulations to promote the adoption and implementation of CSR policies within firms.101 As McBarnet puts, it essentially is a debate of CSR “beyond the law or through the law”.102 From a historic perspective, CSR was initiated as a self-regulated and market-driven attempt. Corporate managers and directors voluntarily engaged in more socially responsible activities out of various considerations, such as reputation and long-term profitability, or because they were driven by a sense of doing the right thing. Other informal mechanisms such as pressures from shareholders and consumers also functioned during this process, yet they did not change the voluntary nature of CSR. However, while corporate voluntarism still being the norm, with the worldwide advent of corporate scandals in ethical aspects and the growing jeopardies that multi-national corporations made in host countries, more and more researchers began to question the capacity and willingness of companies to genuinely cope with social and environmental problems. In particular, they were concerned whether the small wins made by the voluntary CSR movement were building momentum for expected social changes or just cosmetics for business as usual.103 In the face of the enormous corporate power, some argue that more According to Shamir, the field of CSR “may be more adequately understood as the hybrid product of a struggle between proponents of governmental regulation and advocates of voluntary self-regulation”. See: Shamir, ibid, at 545. 101 See infra note 104 for a list of the pro-regulation literature. 102 McBarnet, supra note 99, at 43. 103 For examples of doubts regarding corporate voluntarism, see: Edward S Herman, Corporate Control, Corporate Power: A Twentieth Century Fund Study (Cambridge; New York: Cambridge University Press, 1982), at Chap.7 (showing concern over CSR as a viable machinery of reform in the face of the autonomy and power of the business system); Vogel, supra note 87, at Chap.7; Kellye Y Testy, “Linking Progressive Corporate Law with Progressive Social Movements” (2001) 76 Tulane Law Rev 1227, at 1239 (noting that CSR may "become just another commodity that businesses sell in the service of short-term shareholder wealth maximization, rather than the basis for any substantive change in the way business is done"). 47 stringent governmental intervention should be in place to prevent the wrongdoings of large, publicly-traded corporations and CSR needs to be a part of this endeavour.104 According to the literature, beneath the interplay of corporate self-regulation and external pressure for legalization of corporate social duties lies in the corporations’ attempt to “shape the notion and practice of CSR as an essentially voluntary and nonenforceable issue”.105 As a result, the strategic maneuver of CSR by corporations, as exemplified by many companies’ unilateral or ad hoc projects such as adopting a code of conduct, producing a CSR report or developing specific projects to improve social and environmental practices, could be a useful supplement to governmental regulation in the short run, yet in the long run it cannot and should not replace governmental law and regulation because it is ultimately restricted by its purpose of serving the corporations’ own interests. As Vogel puts, “[t]he most effective strategy for reconciling private 104 Christine Parker, The Open Corporation: Effective Self-regulation and Democracy (Cambridge University Press, 2002), at 245 (arguing that the lack of CSR is "a failure of legal regulatory institutions to interact with corporate organizations to make them open and permeable"); Bakan, supra note 59; Geoffrey Chandler, “The Curse of ‘Corporate Social Responsibility’”, (2003) 2 New Academy Review 1 (viewing voluntary CSR as a smokescreen that obscures the governmental failure to demand accountability from companies); McBarnet, supra note 99 at 27–29 (summarizing viewpoints that call for legal regulation to facilitate CSR). Although both try to engage official laws and regulations in promoting more responsible corporate performance, the pro-regulation stance toward CSR differs considerably from the pioneer scholarly effort that argues against imposing social obligations upon corporations and seeks changes within corporate law. See supra note 68 for a description of the progressive corporate law movement, which is a major branch of the legal academy that distances itself from the shareholder primacy norm in corporate governance. In articulating the differences between the two approaches, Lawrence Mitchell argues: There have been critics throughout the history of the corporation who have recognized its distinctly public nature. For the most part, however, they have directed their efforts toward superimposing social obligations upon the corporation. The essays in this book take a different approach. They each look to the way in which the public goals of the corporation can be improved from within. Instead of regulating the uses to which the tool is put, these commentators look to redesign the tool itself…” (Progressive Corporate Law, supra note 61, at xiv). C.f. Testy, supra note 103 (coordinating both approaches under the heading of “new” corporate social responsibility and treating progressive corporate law and the “new” CSR movement as synonymous). Nevertheless, Testy acknowledges that CSR “can ill afford a singular focus on either imposing regulations from outside the corporation, or revising governance structures within, but must instead address both and more in a complex, interdisciplinary approach”. Testy, ibid, at 1251. 105 Ronen Shamir, “Between Self-Regulation and the Alien Tort Claims Act: On the Contested Concept of Corporate Social Responsibility” (2004) 38:4 Law Soc Rev 635 at 636 (using suits under the US Alien Tort Claims Act to illustrate the push and pull between the effort of consolidating CSR into legally binding duties and the strategic resistance from the corporations' side). Also see: Shamir, supra note 95. 48 business goals and public social purposes remains what it has always been, namely effective government regulation”.106 It is therefore the stance of the present thesis that CSR needs not only to be encouraged, but also be facilitated and in certain circumstances be enforced by the rule of law. It will return to this issue in Chapter 4. 2.1.2 What Is CSR Reporting? Although lots of CSR-related theoretical issues are still in controversy, CSR reporting as a practical matter has gained dramatic leverage in industrial practice, especially with respect to publicly-traded companies.107 For example, it has been reported that 75% of the companies in the S&P 500 Index,108 the most commonly followed equity indices of the US stock market, published CSR reports in 2014, a remarkable rise compared to 20% in 2011.109 Also according to CorporateRegister, the world’s largest directory of corporate non-financial reports, the global output of CSR reports exceeded 6,500 in 2012 alone, compared to less than 1,600 in 2002.110 Meanwhile, large professional data service platforms have unanimously started to provide elevated services on environmental, social, and governance (ESG) data, because institutional investors and proxy voting agencies have expressed growing interests in CSR information in recent years.111 As a 106 David Vogel, “The Limits of the Market for Virtue”, Ethical Corporation (August 2005), online: <http://www.ethicalcorp.com/content/limits-market-virtue> (last visited June 12, 2016). 107 See Section 1.2.1 for reasons of focusing on publicly-traded enterprises. That said, the present research disagrees with the viewpoint that CSR is about big business, although it acknowledges that large companies have more resources and capacity to be committed to CSR. See: Wells, supra note 65 at 80. 108 The S&P 500, or the Standard & Poor’s 500, is an American stock market index based on the market capitalizations of 500 large companies that are listed on the NYSE or NASDAQ. It is one of the best representations of the US stock market. 109 See: Governance & Accountability Institute, Inc., Flash Report (June 8, 2015), online: G&A <http://www.ga-institute.com/nc/issue-master-system/news-details/article/flash-report-seventy-five-percent-75-of-the-sp-index-published-corporate-sustainability-rep.html> (last visited June 12, 2016). 110 See: CorporateRegister, CR Perspectives 2013: Global CR Reporting Trends and Stakeholder Views, at 3. 111 At the provide side, influential data service providers, such as Bloomberg, Thomson Reuters and MSCI, all have their service lines surrounding ESG information. According to Bloomberg, the number of users accessing its ESG 49 result, more and more jurisdictions in the world have taken steps to encompass CSR reporting within their legal frame.112 In this vein, it is tremendously important to comprehensively explore the conception of CSR reporting, so as to precisely apprehend information increased 50% from 2010 to 2011 and is kept growing. See: Bloomberg, The Sustainability Edge: Sustainability Update 2011, online: Bloomberg <http://www.bloomberg.com/bcause/content/themes/sustainability-2014/report/BloombergSustReport2011.pdf>, at 6 (last visited June 12, 2016). At the demand side, it is recognized presently that awareness of ESG factors is “a minimum requirement in institutional investment”. See: Goldman Sachs, “The New Bottom Line”, online: <http://www.goldmansachs.com/our-thinking/podcasts/episodes/7-21-2015-hugh-lawson.html> (last visited June 12, 2016). 112 To date, the most common governmental reaction is promulgating laws or regulatory standards that require publicly-listed companies to make CSR disclosure regularly. This practice is especially popular in European countries. In 2014, the EU parliament adopted and the EU council further approved the Directive on disclosure of non-financial and diversity information by large companies (the “Directive”), asking member States to transpose the Directive into national legislation by December 2016. See: European Commission, “Non-Financial Reporting”, online: <http://ec.europa.eu/finance/accounting/non-financial_reporting/index_en.htm> (explaining the Directive 2014/95/EU on disclosure of non-financial and diversity information by certain large undertakings). Accordingly, a number of EU member states, such as France and Denmark, have already developed initiatives and laws to regulate CSR reporting from large, publicly-traded companies. See: France Diplomatie, “The French Legislation on Extra-Financial Reporting: Built on Consensus” (2012), online: <http://www.diplomatie.gouv.fr/en/IMG/pdf/Mandatory_reporting_built_on_consensus_in_France.pdf> (discussing the NRE Act 2001 that requires listed companies disclose the environmental and social impacts of their activities and the counter-measures in their annual report, as well as Article 225 of the Grenelle II Act 2010 that asks companies to report “on how they take into account the social and environmental consequences of [their] activity and [their] social commitments in favour of sustainable development”) (last visited June 12, 2016). Also see: DanWatch, “The Impact of the Danish Law on CSR Reporting” (2011), online: <http://germanwatch.org/de/download/10649.pdf>, at 4-5 (reporting that the Danish Parliament approved law requiring that since 2009, “[l]arge companies must supplement their management’s review with an account of social responsibility”, which includes “considerations for human rights, social relations, environmental and climate considerations as well as combating corruption, inter alia”) (last visited June 12, 2016). Another commonly held arrangement is formalizing CSR reporting by acknowledging it in public policy documents and delegate stock exchanges to finalize the requirements. For instance, in South Africa, the King III Code recommends that entities produce a report integrating their financial and CSR performance or explain why they do not. This policy is adopted as a listing requirement for the Johannesburg Stock Exchange (JSE). See: JSE Limited Listings Requirements, § 8.63, online: JSE <https://www.jse.co.za/content/JSERulesPoliciesandRegulationItems/JSE%20Listings%20Requirements.pdf> (last visited June 12, 2016). Likewise, Singapore Exchange (SGX) also makes it mandatory for all listed companies to publish CSR reports. See: SGX, “Guide to Sustainability Reporting for Listed Companies”, online: <http://rulebook.sgx.com/net_file_store/new_rulebooks/s/g/SGX_Sustainability_Reporting_Guide_and_Policy_Statement_2011.pdf> (last visited June 12, 2016). This regulatory type has a close affinity with the former one, since despite their lack of legal status, the requirements of CSR reporting in this category have nevertheless been officially endorsed. Therefore, some literature treats the two as both being “mandatory”. For instance, see: Ioannis Ioannou & George Serafeim, "The Consequences of Mandatory Corporate Sustainability Reporting: Evidence from Four Countries", online: SSRN <http://papers.ssrn.com/soL3/papers.cfm?abstract_id=1799589> (examining the regulatory mandates on firms in China, Denmark, Malaysia and South Africa). However, the present thesis argues that it is not enough for stock exchanges to have CSR reporting as part of their listing requirements. The biggest limitation of this arrangement is that the exchanges may be unwilling to punish listed companies out of business concerns. See: Marcel Kahan, “Some Problems with Stock Exchange-Based Securities Regulation” (1997) 83:7 Va Law Rev 1509. The thesis will come back to this theme at Section 188.8.131.52. 50 and appropriately respond to the trend in scholarly debate. The following text is therefore an endeavour toward that direction. 184.108.40.206 The Descriptive & Normative Perspectives of CSR Reporting A distinction between the descriptive and the normative dimensions of CSR reporting lays the foundation of the present research and therefore should be emphasized prior to resolving the difficulty in defining the concept of CSR reporting. From a normative perspective, CSR reporting is viewed as a governance instrument that functions by measuring and comparing corporate performance in CSR aspects.113 However, as will be documented in the ensuing chapter, because corporations have “both incentive and opportunity to manipulate CSR”,114 in reality, the strategic use of CSR reporting by companies is the norm rather than the exception.115 As a result, how a corporation performs in terms of CSR has extremely weak connection with how well it is in CSR reporting. It is therefore imprecise in a descriptive sense to envision CSR reporting as a performance measurement tool with respect to CSR. On the contrary, from a descriptive perspective, CSR reporting has mostly reduced to a communication tool and a risk management tool.116 113 David Hess, “Social Reporting and New Governance Regulation: The Prospects of Achieving Corporate Accountability Through Transparency” (2007) 17:3 Bus Ethics Q 453 (arguing that social reporting can be an important form of New Governance regulation). 114 Conley & Williams, supra note 14, at 35. 115 For instance, Hess notes that the present CSR reporting “almost exclusively emphasizes only the positive aspects of the firm’s performance”. Hess, 2007, supra note 115, at 456. 116 In the management literature, CSR reporting is often discussed from the perspective of communication and risk management. For example, see: David Wheeler & John Elkington, “The End of the Corporate Environmental Report? Or the Advent of Cybernetic Sustainability Reporting and Communication” (2001) 10:1 Bus Strategy Environ 1. Also see: Jan Bebbington, Carlos Larrinaga & Jose M Moneva, “Corporate Social Reporting and Reputation Risk Management” (2008) 21:3 Account Audit Account J 337. In terms of the legal literature, Dhir also argues that “[t]he reporting of social information should be viewed as an integral part of a business’ overall risk management strategy”. 51 The purpose of this analysis is to clarify that the problem of the CSR reporting-performance inconsistency, as will be further described in Chapter 3, actually falls into the descriptive and empirical realm rather than the normative one. In normative theory, a CSR report is supposed to reflect the authentic state of corporate performance in CSR aspects, be it positive or negative. It is this full picture of CSR that has the potential of empowering corporate stakeholders and driving corporate directors and managers to self-examine internally and respond accordingly. However, in practice, more often than not, the picture that a CSR report displays falls short of being a complete and balanced portrayal of the reality. The theory-practice gap determines that solutions posed by the literature in a normative sense need to be tested and justified empirically, to see if they also work on the descriptive ground. However, this issue has been largely ignored in the existing CSR literature.117 To remediate this research gap, the present study combines theoretical analysis with empirical findings to exhibit a fuller picture of the CSR reporting field. In addition, it considers whether the viewpoints put forward theoretically can be empirically corroborated. For this reason, although the present research generally adopts a normative view in its argument, both normative and descriptive dimensions are to be considered and discussed.118 See: Aaron A Dhir, “Shadows and Light: Addressing Information Asymmetries through Enhanced Social Disclosure in Canadian Securities Law” (2008) 47 Can Bus Law J 435 at 462 (positing that the current Canadian securities law provides a sufficient legal basis for the disclosure of material social information). 117 For instance, the literature addresses the reflexive law theory largely from an analytical, normative perspective. See: Section 4.3.1 and 4.3.4 for the literature on this topic. 118 Specifically, the present research focuses on using the empirical, descriptive data to inform the normative issues of theory building and policy making with respect to CSR reporting. 52 220.127.116.11 The Definition of CSR Reporting & the Synonymous Terms For the purpose of the present research, CSR reporting is defined as the sum of corporate-dominated processes and activities surrounding CSR information collection, report production and post-report actions.119 By making such a definition, the present research differentiates CSR reporting from CSR reports and it focuses on the former, since the process of generating a CSR report is the key to incentivizing improvement of corporate self-regulation in CSR. As Chiu noted, “[w]hat is reported, how it is reported, and the reception of what is reported are all part of the wider discourse on framing the conception(s) of CSR itself”.120 Like CSR, CSR reporting is not a universally agreed term. Other terms that are used synonymously by the literature include non-financial reporting, triple-bottom-line (TBL) reporting, corporate citizenship reporting, corporate responsibility reporting, corporate sustainability reporting, and ESG reporting. The following text briefly examines three most widely used phrases in addition to CSR reporting and explains why the present research adopts CSR reporting instead of other terms. The term used most frequently by accounting professionals is TBL reporting. TBL is an abbreviation of people, planet, and profit.121 As such, TBL reporting provides 119 The present research refers to CSR reports in a broad sense. On the one hand, it recognizes that in practice, the manifestation of CSR reports is by no means identical between firms. Instead, they are in various forms. For instance, there are standalone CSR reports as well as CSR components integrated in corporate annual reports. Different from hardcopy reports, some CSR reports are paperless and were disseminated with contemporary forms of communications, such as blog and twitter. In addition, as previously mentioned, since CSR reporting activities are statutory in certain jurisdictions yet voluntary in others, depending on the circumstances, CSR reports may be either regulatory or non-regulatory. On the other hand, however, the present research does not confine itself to a particular type of CSR reports, since the problem this study focuses on exists generally in the CSR reporting practice, despite the forms of its outputs. 120 Chiu, supra note 52 at 366. 121 The concept TBL was arguably coined by John Elkington. See: Elkington, supra note 91. 53 information on business activities concerning these three aspects. The concept of TBL posits that the success of a corporation should not only be measured by the traditional financial bottom line, but also by two additional bottom lines—corporate social/ ethical and environmental impact.122 Although this term has gained popularity in industry, the academic literature finds it untenable and inherently empty.123 Norman & MacDonald criticize the concept as being a “good old-fashioned single bottom line plus vague commitments to social and environmental concerns” that is “exceedingly easy for almost any firm to embrace” and allows firms “to make almost no commitment whatsoever”.124 Elsewhere, Livesey worries that the metaphor of the TBL constructs CSR as “a measureable outcome to be objectively determined” and therefore can be easily fit into business discourse, yet it “left unchallenged certain fundamental values of economic and management models”.125 Another term that is equally favoured by industry, especially institutional investors, is ESG reporting. ESG reporting, based on the notion of ESG, encourages corporate reporting on issues related to the environmental, social and governance aspects of business operations.126 It conveniently links the environmental and social aspects, two key components of CSR, with corporate governance. The rationale behind the convergence is twofold: first, corporate governance mirrors “the company’s conscience 122 Ibid. 123 Wayne Norman & Chris MacDonald, “Getting to the Bottom of ‘Triple Bottom Line’” (2004) 14:2 Bus Ethics Q 243 (arguing that the TBL rhetoric is misleading and may be used by firms to avoid truly effective social and environmental reporting). 124 Ibid, at 256. 125 Sharon Livesey, “The Discourse of the Middle Ground: Citizen Shell Commits to Sustainable Development” (2002) 15:3 Manag Commun Q 309 at 330. 126 Although it is not clear where this term exactly comes from, ESG has been frequently adopted by the major data service platforms as a non-traditional way of examining corporate performance. See supra note 111. 54 and long-term commitment” to various constituencies and this long-term, sustainable component is aligned with the essence of CSR; second, corporate governance can be used as a vehicle for pushing management to consider broader social and ethical considerations, which are required by CSR. 127 However, although corporate governance has shifted “from a functional, economic focus on agency problems within a private law sphere to a public policy approach that seeks to protect investors and non-shareholder stakeholders”,128 corporate governance is still a corporation-oriented and business-amenable notion. The shortcoming of the governance-CSR intersection is that it may shape CSR in ways that compromise its transformative potential, because many corporate governance issues, such as board diversity and executive compensation, are only a surface reaction to CSR.129 Despite their improvements in corporate governance, companies can nevertheless “use their power to structure and dominate a CSR discourse that devolves into little more than a public relations exercise—a post-regulatory version of regulatory capture”.130 Corporate sustainability reporting is an expression that has been frequently used in the academic literature as well as by the Global Reporting Initiative (“GRI”) in its reporting guidance.131 This term was derived from the concept of sustainable development or sustainability, which is a very important guiding norm in environmental law.132 A widely 127 Gill, supra note 93 at 455. 128 Ibid at 456. 129 Shamir, supra note 6. 130 Conley & Williams, supra note 14 at 36. 131 The Global Reporting Initiative (GRI) is arguably the most influential standards provider of voluntary CSR reporting worldwide. For a detailed summary of the organization and the standards and a critical comment on both, see: Galit A Sarfaty, “Regulating through Numbers: A Case Study of Corporate Sustainability Reporting” (2012) 53 Va J Int Law 575. 132 John C Dernbach & Joel A Mintz, “Environmental Laws and Sustainability: An Introduction” (2011) 3:3 Sustainability 531. 55 agreed definition of sustainable development or sustainability is “development that meets the needs of the present without compromising the ability of future generations to meet their own needs”.133 Despite its environmental origin, the notion of sustainability now covers a full spectrum of economic, environmental and social factors and concentrates on the integration of these factors.134 However, since sustainability was initially associated with environmental and ecological development, the phrase runs the risk of being misunderstood among corporate management and even government officials as narrowly referring to environmental sustainability.135 While the majority literature uses these above-mentioned terms interchangeably, some holds that there are important differences in the varying connotations.136 Although agreeing that there are indeed divergences with respect to the different expressions of CSR reporting, the present thesis treats these phrases as synonymous, since the 133 World Commission on Environment and Development (WCED), Our Common Future (Oxford: Oxford University Press, 1987), at 43. 134 According to United Nations, these three factors are universally recognized as three pillars of sustainability. See: President of the 65th Session, General Assembly of the United Nations, “Sustainable Development”, online: UN <http://www.un.org/en/ga/president/65/issues/sustdev.shtml> (last visited June 12, 2016). 135 For instance, in its comments letter on the Federal Government’s consultation paper Planning for A Sustainable Future: A Federal Sustainable Development Strategy for Canada 2013-2016 (FSDS), Chartered Professional Accountants of Canada (CPA Canada) criticizes that although the FSDS acknowledged the need to integrate environmental, economic and social factors, it unfortunately focused only on environmental sustainability, “a term that is not defined and is much narrower in scope than sustainable development”. See: CPA, “Re: Comments on Planning for A Sustainable Future: A Federal Sustainable Development Strategy for Canada 2013-2016 Consultation Paper” (June 13, 2013), at 2-3, online: CPA <https://www.cpacanada.ca/en/the-cpa-profession/about-cpa-canada/cpa-canadas-key-activities/government-relations/other-government-input/Environment-Canada-Consultation-on-the-Federal-Sustainable-Development-Strategy> (last visited June 12, 2016). The research interviews with practitioners reinforced this conclusion. In fact, the study adopted the term corporate sustainability reporting instead of CSR reporting in the first place. However, when asked to express their views regarding corporate sustainability reporting, quite a number of interviewees responded by only addressing the environmental progresses their companies have made in the past and how the companies incorporated those issues in their reporting documents. They started talking about social factors only after being reminded that sustainability encompasses broader aspects such as social. Because of the widespread misunderstanding, the research then changed the expression to CSR reporting. 136 For instance, Williams differentiates the term CSR from corporate citizenship based on Matten & Crane. She notes that CSR conveys a meaning of duties while corporate citizenship signifies more of privileges. See: Cynthia A Williams, “A Tale of Two Trajectories” (2006) 75 Fordham Law Rev 1629, at FN18. 56 differences among various expressions of CSR reporting are irrelevant to the present thesis. However, the present research prefers to use the expression CSR reporting rather than its synonyms because CSR reporting is a generic name that describes corporate reporting of this kind. It is unambiguous and easily understood, an important advantage in research interviews, as shown in experience.137 The present research centres on official forms of regulation with respect to CSR reporting. In addition to official governmental regulation, in the field of CSR reporting, there are unofficial, private regulatory bodies, such as the GRI, that have become key players in setting CSR reporting standards using various indicators.138 However, the present research does not concentrate on these unofficial forms of regulation because the unofficial forms of regulation in terms of CSR reporting are challenged by concerns of legitimacy and credibility. As the literature notes, “[o]rganizations that produce indicators may become more preoccupied with perpetuating their existence and raising their status, rather than using the indicators as a tool to shape behaviour”.139 18.104.22.168 CSR Reporting & Corporate Transparency A well-articulated research theme that is closely related to but often mistakenly coupled with corporate reporting is corporate transparency. To clarify the ambiguous relationship between the two concepts, this section takes a brief look at corporate transparency and 137 The expression CSR reporting was better comprehended and accepted by interviewees in the research interviews. See supra note 125 for more information. 138 See: supra note 131 for a brief introduction of the GRI. 139 Sarfaty, supra note 131, at 607. For critics of the GRI, also see: Klaus Dingwerth & Margot Eichinger, “Tamed Transparency: How Information Disclosure under the Global Reporting Initiative Fails to Empower” (2010) 10:3 Glob Environ Polit 74. 57 explains why the present research goes further than the thesis of corporate transparency and has important separate value. Corporate transparency embodies an aspirational goal that corporations make full and credible disclosure to the public of information that concerns their operation and performance. Undoubtedly, corporate self-reporting of how CSR aspects impact the company and how it reacts to those challenges may lead to increased corporate transparency on CSR issues. However, the problem is that plenty of the literature takes corporate transparency as an uncontestable consequence of CSR reporting.140 This view is questionable on both normative and descriptive grounds, because: for one thing, from a normative perspective, corporate transparency should not be the sole purpose of CSR reporting; for another, from a descriptive perspective, CSR reporting does not necessarily improve corporate transparency. As to the normative reason, the literature has forcefully argued that CSR reporting functions on two major dimensions. First, it facilitates the flow of information and increases communications with corporate stakeholders, destined to achieve corporate transparency; second, it aims to improve corporate performance on CSR matters by shaping corporate management processes regarding CSR reporting, influencing corporate 140 Many scholarly work in this area either uses corporate disclosure and transparency interchangeably or views transparency as an undebatable consequence of CSR reporting. Among the literature that concerns this subject, some pieces use “transparency” in the title of their articles, yet the entire work is centred on CSR disclosure with little or no mentioning of how the two are related. For instance, see: Cynthia A Williams, “The Securities and Exchange Commission and Corporate Social Transparency” (1999) 112:6 Harv Law Rev 1197 (arguing that requiring expanded corporate reporting on social and environmental issues is in line with the language, purpose and legislative history of the US securities law). Also see: Hess, 2007, supra note 115. In other situations, the literature, especially that based on quantitative research, counts CSR reporting as a taken-for-granted proxy of transparency when the research is on how transparent a company or industry is compared to its counterparts. For example, see: Lizet Quaak, Theo Aalbers & John Goedee, “Transparency of Corporate Social Responsibility in Dutch Breweries” (2007) 76:3 J Bus Ethics 293. 58 culture, and motivating key individuals inside the companies to be more CSR-conscious.141 Focusing unilaterally on corporate transparency can lead to “transparency for its own sake rather than actual improvements in [corporate] behaviour”.142 Consequently, as the literature notes, disclosure for the aim of corporate transparency “is only a part of the story—though a very important part—and not the whole story”.143 With respect to the descriptive defense, it is necessary to distinguish information availability from corporate transparency.144 A natural gap between information disclosure and corporate transparency is that “simply placing information in the public domain does not guarantee that it will be used or used wisely”.145 According to the literature, transparency policies are effective only when the information they produce becomes embedded in the everyday decision-making routines of information users and information disclosers.146 Successful corporate transparency programs thus incorporate a sequence of events to ensure that both information users and information disclosers actually take into account the information disclosed and respond accordingly. However, these institutional 141 The literature adopts various expressions to describe the purposes of CSR reporting beyond corporate transparency. For instance, MacLean and Rebernak suggest that CSR reporting process should “serve a dual role: It should communicate externally with the company’s stakeholders while also informing the company’s internal management processes”. See: Richard MacLean & Kathee Rebernak, “Closing the Credibility Gap: The Challenges of Corporate Responsibility Reporting” (2007) 16:4 Environ Qual Manag 1 at 3. Furthermore, Sulkowski & White argue that CSR reporting serves “a valuable function in the marketplace and ultimately relates to companies behaving in a manner that is desired by society”. See: Sulkowski & White, supra note 36, at 512. More explicitly, Eccles & Serafeim posit that in addition to providing information to counterparties, corporate reporting serves another function, which they term as the “transformation function”. According to them, CSR disclosure may influence corporations to bring performance changes either actively or under the pressure of counterparties. See: Robert G Eccles & George Serafeim, "Corporate and Integrated Reporting: A Functional Perspective" (2014) [unpublished], online: SSRN <http://papers.ssrn.com/abstract=2388716> (last visited June 12, 2016). 142 Sarfaty, supra note 131, at 608. 143 Hess, 1999, supra note 86 at 43. 144 Fung, Graham & Weil, supra note 7, at xiv (suggesting that "[e]ffective [transparency] policies did not simply increase information. They increased knowledge that informed choice"). 145 Ibid at 51. 146 David Weil et al, “The effectiveness of regulatory disclosure policies” (2006) 25:1 J Policy Anal Manage 155 at 155 (describing the process as “double-sided embeddedness”). 59 arrangements are currently lacking in CSR reporting. To make things worse, corporations are increasingly engaging in “strategic ambiguity” in their CSR reporting, which hurts the credibility of information and undermines corporate transparency.147 As a result, CSR reporting may not be conducive to corporate transparency and could even be counter-productive to it. For these above-mentioned reasons, the present research studies CSR reporting beyond the theme of corporate transparency. By paying attention to an important research thesis that has been underemphasized in the literature, i.e. the deviation of CSR reporting from corporate actual performance, it makes the research of CSR reporting more comprehensive and more concrete. 2.2 CSR Reporting as an Organizational Learning Process What sets this study apart from the previous legal research on CSR reporting and makes it uniquely significant is that the present research considers CSR reporting from organizational learning prospects. This view is implicit throughout this entire dissertation, from the description of the empirical findings to the theoretical remodeling of reflexive law. This section explains the reasons of working from such a perspective and how it gives the present study a vintage point in pinpointing the research thesis. 147 Michael R Siebecker, “Trust & Transparency: Promoting Efficient Corporate Disclosure through Fiduciary-Based Discourse” (2009) 87 Wash Univ Law Rev 115, at 115 (noting that the existing disclosure regime are not trusted by consumers and investors because it fails to provide reliable CSR information). 60 2.2.1 The Links between CSR Reporting & Organizational Learning The study of corporate performance as it relates to CSR reporting is grounded in the exploration of how corporations learn and put learning into practice.148 While the literature has yet to provide a theoretical definition of organizational learning, the existing research tends to agree on that organizational learning is inseparable from the handling and processing of information—“knowledge” in many scholars’ writing.149 The research of organizational learning thus primarily concerns the process of how information is shared and assimilated within the organizations. One pivotal point that combines organizational learning with the present research of CSR reporting is the contention that “[a]n entity learns if, through its processing of information, the range of its potential behaviours is changed”.150 A further observation is that “the type of change that leads to an improved fit between an organization and environmental or other 148 Jean-Pascal Gond & Olivier Herrbach, “Social Reporting as an Organisational Learning Tool? A Theoretical Framework” (2006) 65:4 J Bus Ethics 359 (proposing the use of the organizational learning literature to explain CSR reporting-induced performance changes); Michael Mitchell, Allan Curtis & Penny Davidson, “Can Triple Bottom Line Reporting Become A Cycle for ‘Double Loop’ Learning and Radical Change?” (2012) 25:6 Account Audit Account J 1048, at 1052-54 (arguing that CSR reporting can be used and promoted as a process of organizational learning). While the current thinking of organizational learning is dispersed in multiple disciplines, scholars attribute the origin of research on organizational learning to behavioural studies of organizations. See: Antal et al, “Introduction”, in Meinolf Dierkes et al eds, Handbook of Organizational Learning and Knowledge (Oxford University Press, 2001), at 3 (citing several behavioural psychologists as “the founding fathers” of organizational learning); Barbara Levitt & James G March, “Organizational Learning” (1988) 14:1 Annu Rev Sociol 319, at 320 (noting behavioural studies of organizations as the building blocks of organizational learning). Many debates in the present research area are inherited from Argyris & Schon, who distinguish two types of organizational learning, which they name as “single loop learning” and “double loop learning” respectively. They argue that most organizations have limited learning systems that allow them to only work on single loop learning, which is the learning process that addresses errors in corporate strategies rather than the underlying norms of the corporations. See: Chris Argyris & Donald A Schön, Organizational learning: a theory of action perspective (Addison-Wesley Pub. Co., 1978). 149 In the literature, the term “information” and “knowledge” are often used interchangeably. According to the literature, “information is a necessary medium or material for eliciting and constructing knowledge”. Ikujiro Nonaka et.al., “A Theory of Organizational Knowledge Creation: Understanding the Dynamic Process of Creating Knowledge”, in Meinolf Dierkes et al, eds, Handbook of Organizational Learning and Knowledge (Oxford University Press, 2001), at 492. 150 George P Huber, “Organizational Learning: The Contributing Processes and the Literatures” (1991) 2:1 Organ Sci 88, at 89. Huber further refines this contention in three aspects: first, learning can be either conscious or unconscious; second, learning can be either correct or incorrect; third, the behavioural changes induced by learning can be either observable or in the form of insights and awareness (at 88-89). 61 contingencies”, the so-called “beneficial change”, “involves a degree of learning”.151 To relate these understandings with the research thesis of the present study, when the CSR reporting-performance inconsistency is questioned, what is explicit in the phenomenon is that corporations fail to align their reporting with their performance, while what is implicit is that corporations learn insufficiently from their process of CSR reporting. Corporate learning is thus a nexus that bridges CSR reporting and corporate actual performance in CSR aspects. In this sense, it makes great sense to study CSR reporting from an organizational learning prospect and to refer to the organizational learning literature to obtain insights into how to develop the CSR reporting process into a corporate learning practice. 2.2.2 The Advantages of Viewing CSR Reporting from the Prospects of Organizational Learning According to the present research, studying CSR reporting from the prospects of organizational learning is meaningful in at least three aspects. First, as the discussion in the previous paragraph vividly shows, studying CSR reporting from the perspective of organizational learning expands the research horizon of the present research and provides a more nuanced look into the research problem. It helps the present research identify that the lack of corporate learning could be an important factor underlying the CSR reporting-performance inconsistency, as the examination of where 151 John Child & Sally J. Heavens, “The Social Constitution of Organizations and its Implications for Organizational Learning”, in Meinolf Dierkes et al, eds, Handbook of Organizational Learning and Knowledge (Oxford University Press, 2001), at 308-09. 62 the problems lie with respect to the CSR reporting practice resonates with what the organizational learning literature identifies as “barriers to organizational learning”.152 Second, organizational learning leads the way to which the theoretical framework of the present research is identified and refined. According to the organizational learning literature, “conscious and systematic” organizational learning processes “involve a critical and reflective attitude toward the information being processed, and that lead to actions to which organizational actors feel internally committed”.153 This stance corroborates the adoption of the reflexive law approach in addressing the CSR reporting-performance gap, as both organizational learning and reflexive law emphasize the role of corporate self-reference in promoting corporate behavioural changes.154 Furthermore, the “reflexive law plus” model proposed by the present research, which is built upon reflexive law yet involves additional institutions to reinforce corporate self-reference, is also significantly inspired by the notion of organizational learning.155 Third, the research of organizational learning is firmly grounded in practice. The literature on how companies treat or fail to treat CSR reporting as a process of learning provides important empirical-based observations that enrich the present research inquiry 152 Ariane Berthoin Antal, et. al., “Barriers to Organizational Learning”, in Meinolf Dierkes et al, eds, Handbook of Organizational Learning and Knowledge (Oxford University Press, 2001), at 865. See Section 4.3 for further analyses. 153 Victor J. Friedman, et. al., “Creating Conditions for Organizational Learning”, in Meinolf Dierkes et al, eds, Handbook of Organizational Learning and Knowledge (Oxford University Press, 2001), at 757. 154 The thesis will come back to this point at Section 5.1. 155 The present research inherits from the organizational learning literature the overarching thesis that it is not enough to impose external requirements on companies to report on CSR, because companies vary in the extent to which they learn, i.e. they assimilate and internalize the requirements differently. As a result, external triggers and internal thrusts should be both considered in policy development regarding CSR reporting with the purpose of stimulating corporate learning. Based on this understanding, the present research advocates for additional institutions as they relate to the reflexive law approach, since these aspects are targeted at promoting and deepening corporate self-reference, an indispensable component of corporate learning, within the reporting firms. See Section 5.1 for an analysis of the corporate self-reference function and see Section 5.2 for a discussion of the additional institutions proposed by the “reflexive law plus” model. 63 and corroborate the empirical findings of the present research.156 In particular, the present research gains insights from the organizational learning literature in explaining what underlying factors shape companies the way they are.157 In addition, organizational learning enlightens the current study in terms of organizing and presenting the empirical data.158 2.3 The Canadian CSR Reporting Context The present research is rooted in the Canadian context. Since the cultural and institutional background underpinning CSR reporting varies so much on a global scale, it is almost impossible to precisely describe the CSR reporting context unless the geographic area is identified. In particular, owing to the regulatory complexity, the literature criticizes that the conceptual framework of CSR reporting lacks a clear regulatory regime.159 This complexity necessitates a local perspective for a precise and in-depth research. In line with this understanding, the empirical work that bolsters the thesis argument of the present research was conducted surrounding a few Canadian companies and with Canadian practitioners. In addition, the policy implication that the present research proposes is Canadian-based. Under such a setting, it is necessary to provide the necessary 156 One of the most authoritative and comprehensive publications of organizational learning is from Dierkes, et al.. See: Meinolf Dierkes et al, eds, Handbook of Organizational Learning and Knowledge (Oxford University Press, 2001). 157 A key problem underlying the CSR reporting-performance inconsistency identified by the empirical research of this study is the lack of learning practices within certain firms. See: Section 4.4.1 for the description. 158 According to the organizational learning literature, the adoption of learning ultimately depends on “the specific culture, leadership styles, and structural features” of the companies. See: Dierkes et al, supra note 156, at 756. This literature provides a roadmap for the empirical exploration of the potential opportunities for realigning CSR reporting with corporate performance. See Section 4.4 for the discussion. 159 Nadia B Ahmad, “Meta-Regulation for Sustainability Reporting”, in Lez Rayman-Bacchus & Philip R. Walsh, eds., Corporate Responsibility & Sustainable Development: The Nexus of Private & Public Interests (Routledge, forthcoming 2015). 64 details with respect to the Canadian CSR reporting context, especially the regulatory context, in this overview chapter. 2.3.1 The Uniqueness of Canada in CSR Reporting Viewed by the present research, in Canada, the impetus for companies to disclose CSR information is derived primarily from societal expectations and industrial pressure, rather than from regulatory agencies and laws. Both the literature and the empirical research have corroborated this point. In terms of societal expectations, stakeholders, in particular investors, have played a decisive role.160 According to the data provided by Bloomberg Inc., Canadian investors show an extremely high interest in CSR performance metrics compared to investors in other countries.161 A possible reason is that the mainstream institutional investors in Canada, particularly pension funds, have become more receptive to socially responsible investment (SRI).162 For instance, a record number of shareholder proposals were filed by pension and mutual funds in recent years calling on companies to publish CSR reports 160 See: CGA, Measuring Up: A Study on Sustainability Reporting in Canada (2005), online: CGA < http://www.cga-canada.org/en-ca/ResearchReports/ca_rep_2005-06_sustainability.pdf >, at 68-71 (last visited June 12, 2016). However, while some may argue that the number of ethical investors is growing, the literature has potently shown that the influence of socially responsible investment (SRI) in the financial market is rather limited and it is misleading to claim that SRI has gained a large audience. See: Benjamin J Richardson, “Are Social Investors Influential?” (2012) 9:2 Eur Co Law 133. 161 Robert Eccles & George Serafeim, “Accelerating the Adoption of Integrated Reporting”, in Francesco de Leo & Matthias Vollbracht, eds, CSR Index 2011 (InnoVatio Publishing Ltd, 2011) at 80–82. The Bloomberg data was provided to the authors and not publicly available. 162 According to a study of the Boston Consulting Group, public pension fund investing in Canada encompasses a combined asset of more than C$ 1.1 trillion, which equals to 45% of Canada’s gross domestic product. See: The Boston Consulting Group, Measuring Impact of Canadian Pension Funds (October, 2015), online: <http://toronto.bcg.com/images/file202972.pdf> (last visited June 12, 2016). 65 using the GRI guidelines or to make improved disclosure on climate change and supply chain management.163 Moreover, in Canada, non-state actors, such as non-governmental organizations (NGOs) and private standard-setting bodies, are deeply involved in defining the CSR reporting territory. For one thing, the NGOs, such as Shareholder Association for Research and Education (SHARE), provide a major SRI research and advocacy forum in Canada.164 By actively involved in proxy voting and engagement on behalf of large institutional investors, SHARE helps to shape the investment environment surrounding publicly-traded companies and therefore uplift the importance of CSR and CSR reporting in the business practice. For another, the UN Global Compact (UNGC) and the GRI, two worldwide standard-setting bodies for CSR, both have a strong local reach in Canada.165 While promoting the adoption of their protocols respectively, these organizations perform important educational roles to popularize CSR reporting in Canada. The industrial pressure in Canada for CSR reporting comes largely from peer companies and industry associations. In particular, among the three industries that the present research is focused on, mining has the most developed and robust industry association 163 This point was corroborated in the empirical research. For instance, the front-line CSR reporting manager of M2 mentioned during the interview that “our company started reporting against the GRI out of a shareholder resolution by institutional investors”. For more detailed information about shareholder proposals on this topic, see the shareholder proposal database provided by the Shareholder Association for Research & Education (SHARE), online: SHARE <http://www.share.ca/shareholderdb> (last visited June 12, 2016). 164 Among other things, SHARE maintains a database of shareholder proposals filed with Canadian companies. 165 It has been noted that SHARE has included the UNGC as an international benchmark to guide Canadian pension funds in voting their shares. See: Benjamin J Richardson, Socially Responsible Investment Law : Regulating the Unseen Polluters: Regulating the Unseen Polluters (Oxford University Press, USA, 2008) at 410. The Global Compact Network Canada was launched in 2013 to further strengthen its local tie in Canada. The GRI has organized regional events and set up multi-stakeholder working groups in Canada since 1999. It has also endorsed a number of GRI Certified Training Partners to provide Certified Training courses for CSR reporting managers and specialists in Canada. 66 code for companies to abide by.166 One prominent example is the Toward Sustainable Mining (TSM) program developed by the Mining Association of Canada (MAC). Since 2004, MAC requires facilities with operations in Canada to participate in the TSM as a condition of membership in MAC.167 While the TSM is in essence a principles-based management framework for CSR at the site level, it has a direct bearing on CSR reporting as member companies are asked to report on an annual basis their adherence to the TSM indicators and to have their reported results externally verified every three years.168 A further discussion of the TSM will be made in Section 22.214.171.124. 2.3.2 The Canadian Regulatory Regimes that Address CSR Reporting at the Periphery The regulatory field of CSR reporting in Canada is a mixture of corporate self-regulation, private regulation and governmental regulation. In line with the pro-self-regulation approach toward CSR reporting, Canada has not set particular legal or regulatory requirements for CSR reporting as it relates to publicly-traded companies. Although the existing legal and regulatory structure in terms of securities regulation, pension funds 166 In comparison, some industry associations, such as the Retail Council of Canada (RCC), are more protectionist. As one RCC manager notes during the interview: “I think the role of an industry association is always to fend the interest of the industry and provide companies with different resources. At the moment, because [CSR reporting] is not mandatory, I see our role as providing the resources for companies and connecting them to the right people”. (Interview transcripts on file with the author, June 23, 2014.) A plausible reason for mining to accommodate the most stringent industry association code could be that the social license to operate weighs extremely heavy in the mining industry and any infringement of the social license by a particular company tarnishes the reputation of the industry as a whole. As one senior officer of MAC puts: The value of TSM is not only for the companies but for the industry. Since we started reporting with verified data in 2006, the adoption [rate] of community engagement systems in the reporting mines has gone up from 50% to 90% — that is pretty powerful statement for us to make. When it comes to advocating on the effort of the industry, the credibility that comes along, the industry-wide performance improvement, is very significant. (Interview transcripts on file with the author, June 9, 2014.) 167 MAC, Understanding the TSM Assessment Protocols, online: MAC, <http://mining.ca/sites/default/files/documents/Understanding-the-TSM-Protocols.pdf> (last visited June 12, 2016). 168 MAC, Components of TSM, online: MAC, <http://mining.ca/toward-sustainable-mining/how-tsm-works/components-tsm> (last visited June 12, 2016). 67 regulation, and banking regulation may influence CSR reporting to various extent, in general the Canadian regulatory regimes merely address CSR reporting at the periphery. 126.96.36.199 Securities Regulation Securities regulation is the most salient and most frequently cited regulatory regime that has a connection with CSR reporting in Canada.169 Pursuant to the securities laws of the major jurisdictions in Canada, if a publicly-listed company releases a document containing a misrepresentation, it gives rise to a cause of action for civil liability.170 The misrepresentation of certain information in publicly-listed companies’ CSR reports may incur civil liability, if the information is deemed as material fact.171 Since “materiality is an inherently ambiguous and fact-dependent concept”,172 there long exists a debate in both academia and practice regarding whether certain CSR information is material and therefore should be regulated pursuant to securities laws and regulations.173 169 The current Canadian securities regulatory framework is provincial-based. Each of the 10 provinces and the three territories has its own securities acts, despite substantial harmonization efforts and initiatives for creating a national regulator over the past years. Some parts of the securities acts have been coordinated nationwide under National Instruments (NI) and National Policies (NP). For a complete introduction of the Canadian securities system and reform initiatives, see: David L Johnston, Kathleen Doyle Rockwell & Cristie Ford, Canadian Securities Regulation, 5th ed (LexisNexis, 2014), Chapter 17. In terms of securities laws in Canada, given that the Toronto Stock Exchange (TSX) is the major venue for publicly-traded companies to be listed on, the present thesis centres on introducing the Securities Act promulgated in the province of Ontario, where the TSX is located, as well as rules and policies implemented on a national basis. 170 For example, see: Ontario Securities Act, R.S.O.1990, s.138.3 (1). 171 Material fact is defined as “a fact that would reasonably be expected to have a significant effect on the market price or value of the securities”. Ontario Securities Act, R.S.O.1990, s.1 (1). See infra note 309 for an introduction of the Canadian market impact test for materiality. 172 Johnston, Rockwell & Ford, supra note 169 at 187. 173 For instance, see: David Monsma & John Buckley, “Non-Financial Corporate Performance: The Material Edges of Social and Environmental Disclosure” (2003) 11 Univ Baltim J Environ Law 151; Mitchell F Crusto, “Endangered Green Reports: Cumulative Materiality in Corporate Environmental Disclosure after Sarbanes-Oxley” (2005) 42 Harv J Legis 483; David Monsma & Timothy Olson, “Muddling through Counterfactual Materiality and Divergent Disclosure: The Necessary Search for a Duty to Disclose Material Non-Financial Information” (2007) 26 Stanf Environ Law J 137. 68 Specifically, so far, two policy statements concerning environmental reporting has been released. First, Ontario Securities Commission (OSC) issued a Staff Notice, outlining the result of a targeted review of compliance with the disclosure requirements pursuant to National Instrument 51-102 Continuous Disclosure Obligations and concluding that material environmental information is currently underprovided.174 It further emphasizes the importance of environmental reporting in public companies’ continuous disclosure documents.175 Furthermore, Canadian Securities Administrators (CSA) published Staff Notice 51-333 Environmental Reporting Guidance, which, according to CSA, clarifies the existing environmental disclosure obligations in continuous disclosure (CD) documents, emphasizes that only material environmental information needs to be included in CD documents, and cautions that voluntary disclosure may incur secondary market liability.176 Although in the document, CSA backs up publicly-listed companies’ disclosure of material environmental information in their continuous disclosure documents, the guidance explicitly acknowledges that it does not mean to expand the reporting obligation beyond what was required by securities law, nor change the regulatory landscape of corporate reporting.177 174 See: OSC Staff Notice 51-716, Environmental Reporting (February 29, 2008). 175 According to the OSC, the environmental matters that may become material facts include: financial liabilities related to the environment, asset retirement obligations, financial and operational effects of environmental protection requirements, environmental policies fundamental to operations, and environmental risk. See: ibid. 176 See: Canadian Securities Administrators (CSA) Staff Notice 51-333, Environmental Reporting Guidance (October 27, 2010). CSA is a non-regulatory body that issues National Policies to coordinate policies across the country. However, it lacks enforcement powers and each jurisdiction remains free to take its own approach. So it is fair to take the CSA release as a policy suggestion rather than a binding regulatory document. 177 As CSA puts: “this notice clarifies existing disclosure requirements relating to environmental matters and does not create any new legal requirements or modify existing ones”. Ibid, at 3. 69 Viewed by the present research, both documents are limited in their capacity in dealing with CSR reporting, which is growing in its complexity. For one thing, the discussion they made is narrowly confined to environmental reporting, leaving other aspects of CSR untouched. For another, they both are reluctant to take additional implementation or enforcement efforts to fortify their stances, making themselves pretty weak in practical adoption. 188.8.131.52 Pension Funds Regulation Pension funds regulation is connected with the public regulation of CSR reporting in the sense that dictating investors rather than the companies is an indirect and subtle way of promoting CSR reporting on the part of publicly-traded firms. Currently, pension ESG disclosure was supported by many countries around the world.178 Ontario has become the first Canadian province to require pension plans to disclose whether they incorporate ESG factors in the funds’ investment policies and procedures.179 Effective on January 1, 2016, pension plan administrators must file an annual Statement of Investment Policies and Procedures (SIPPs) disclosing, among other things, “information as to whether environmental, social and governance factors are incorporated into the plan’s investment policies and procedures and, if so, how those factors are incorporated”.180 178 Richardson, supra note 165, at 304-07 (introducing the internationally expanded trend for pension ESG disclosure in the UK, Australia, and several EU countries). Also see Section 184.108.40.206 for a discussion of the relationship between CSR and ESG. 179 Currently other provinces have not followed suit. 180 Pension Benefits Act, R.R.O. 1990, Regulation 909, s. 40.1 (1) (v) (ii). 70 This new piece of requirement ends a 14-year discussion on the issue in Canada. The advocate for ESG disclosure as it relates to pension funds was firstly introduced in 2002 as a Private Member’s Bill to the parliament, yet failed to pass.181 It was introduced again in 2009, which scored a partial success in 2011 when the Ontario government announced plans for adoption.182 Because pension funds represent an important branch of institutional investors, who fuel the publicly-listed companies with investment, the pension ESG disclosure mandate is going to increase the portfolio managers’ demand for corporate CSR information and therefore will stimulate public companies’ supply of CSR reporting. However, as the literature notes, the pension funds regulation has key weaknesses. First, the regulatory focus is on the investment policies, not practices, so it is difficult to know the actual steps that pension funds take to assimilate the CSR information. Second, the regulatory authority has not provided any guidance on what the ESG factors in the circumstance of pension funds investing are, leaving room for the funds to determine their own notions.183 Besides, researcher has found that in practice, the pension ESG disclosure is boiler-plated and vacuous and therefore has not incurred any significant impact on the regulatory structure of CSR reporting.184 181 Bill S-3, An Act to Amend the Pension Benefits Standards Act, 1985. 182 Bill C-441, An Act to Amend the Pension Benefits Standards Act, 1985 (disclosure of environmental, social and governance investment factors). 183 Richardson, supra note 165, at 308. 184 Ibid, at 309-311. 71 220.127.116.11 Public Accountability Statements Regulations (PASs) The only sector-specific regulatory requirement that slightly addresses CSR reporting is in the banking section.185 Since 2002, for banks, trust and loan companies and domestic insurance companies with equity of one billion dollars or more, annual public accountability statements (PASs) describing their contribution /investment to the Canadian economy, society, and the environment have been legally mandated.186 In its promulgation, a PAS was recommended as a tool for “dialogue and discussion about ways to enrich and strengthen the relationship between [financial] institutions and the communities they serve”.187 It provides a convenient venue for banks to show the progress they have made in serving the communities in terms of economic, social and environmental. As a result, large Canadian banks started to develop their CSR reporting based on the PASs and many of them still keep PASs as a component of their annual CSR reports.188 In fact, the PASs regulation largely is focused on the community impact of the banks, so not necessarily the entire spectrum of CSR issues. The only reference to CSR in the PASs regulation is in the definition of “community development”, which means “the social, 185 This requirement is particularly for companies in the financial industry, including banks, trust and loan companies, and insurance companies. The discussion of this section is concentrated on banks. As far as the present research knows, in Canada, there are no other sector-specific laws or public regulation that deal with CSR reporting, although the industrial self-regulatory efforts are commonly seen. 186 Public Accountability Statements (Banks, Insurance Companies, Trust and Loan Companies) Regulations (SOR/2002-133, March 21, 2002); Bank Act, S.C. 1991, s. 459.3(1); Canada Gazette Part II, Vol. 136, No. 8, Ottawa, Queen's Printer, at 810-813. This requirement is not applicable to credit unions. 187 Harold Mackay, “Change, Challenge and Opportunity: The Report of the Task Force on the Future of the Canadian Financial Services Sector” (1998). 188 The empirical research of the present study corroborates this view. The three banks in the empirical research universally incorporate PAS elements, sometimes the entire PAS report, in their CSR reports, although some interviewees mention that their banks have realized the differences in PASs and CSR reporting and are seeking separation for future reporting. 72 cultural, economic or environmental enrichment of a community”.189 Although the PASs regulation was helpful for banks to consciously think about CSR at an early date compared to most companies in other business industries and it gives banks solid things to put in their CSR reports, the reporting tradition started by PASs has to some extent misled banks to equate CSR to charitable causes and frame their CSR reports as public relations (PR) documents.190 It is disappointing to see that the CSR reports of many large banks are full of information on community initiatives, philanthropy, employee diversity, and even the setting up of automated teller machines, but are short of reporting on the environmental and social risks that the banks are exposed to in their lending practices. By reviewing the current legal and regulatory setting in Canada with respect to CSR reporting, the present research finds that the legal and regulatory structure surrounding CSR reporting is very loosely-framed. In fact, neither the general nor the sector-specific legal and regulatory requirements have explicitly mandated CSR reporting. Therefore, it is arguably true that the legal status of CSR reporting in Canada is ambiguous, even uncertain. 2.3.3 The Policy-Making Debate surrounding Mandatory CSR Reporting Owing to the regulatory uncertainty, the policy attempts to introduce public law and regulation to the area of CSR reporting have never stopped.191 CBSR is the leading actor in this effort. It made its stance explicitly in a 2001 report, in which it suggests that the 189 Bank Act, S.C. 1991, s. 459.3(1). 190 The PASs requirements centre on charitable donations and philanthropic activities that banks have provided to communities. For instance, in the PASs regulation, the phrase “charitable donations” is used four times while the words social and environmental are used only once each. See: supra note 186. 191 See supra note 20 for an introduction of CBSR. 73 Canadian government should “assume a leadership role rather than a facilitative role in encouraging CSR practices”.192 Another important figure that has played a key role in the research and advocacy of CSR reporting is the Chartered Professional Accountant (CPA Canada), formerly Certified General Accountants of Canada (CGA-Canada).193 It is noteworthy pointing out that there was a dramatic transition in CGA’s view regarding CSR reporting. In its 2005 publication, CGA emphasized that “it is too early to render reporting mandatory”.194 However, realizing the problems of reporting quality and comparability in the CSR reporting practices, while encouraging companies to self-regulate, CGA later advocated for the establishment of firmer minimum regulatory requirements to CSR reporting.195 In addition, there also have been sector-specific initiatives that seek to introduce mandatory CSR reporting into the field of public regulation. In 2005, upon the report of a subcommittee of the Standing Committee on Foreign Affairs and International Trade (SCFAIT), the Canadian government sponsored a series of national roundtables to review the actions of Canadian petroleum and mining companies overseas. In March 2007, the final Advisory Group Report arising from the roundtables was released. It made explicit recommendations surrounding the establishment of a Canadian CSR Framework (the “Framework”). According to the report, one main component of the Framework incorporates “CSR reporting obligations based on the Global Reporting Initiative, or its 192 See: CBSR, supra note 20, at 6. 193 CGA-Canada has united with CPA Canada since October 2014. 194 See: CGA, Measuring Up: A Study on Sustainability Reporting in Canada (2005), online: CGA < http://www.cga-canada.org/en-ca/ResearchReports/ca_rep_2005-06_sustainability.pdf >, at 84, 87-88. 195 See: CGA, Regulating Sustainability Reporting: Is a Mandatory Approach Better than a Voluntary One? (2011), online: CGA <http://www.cga-canada.org/en-ca/ResearchReports/ca_rep_2011-12_informed-view.pdf>, at 2. 74 equivalent during an initial phase-in period, at a level that reflects the size of the operation”.196 The key argument, according to the advocators for governmental regulation, posits that mandatory CSR reporting is beneficial for the improvement of reporting quality, standardization and peer-to-peer comparisons.197 The formalized effort, however, encounters both political and practical barriers. Politically, both the government and the business sectors seem comfortable with the status quo. For one thing, the government sees its role as a facilitator rather than a supervisor of CSR reporting.198 For another, companies as well as the industry associations expect the government to “provide relief from regulatory burden” as many companies already have CSR reporting programs in place.199 Showing concern about the unwarranted success of existing mandatory disclosure programs in other regulatory domains, they hold that the voluntary approach does better in encouraging creativity and fostering competition, while the mandatory rules will add regulatory burden and result in boilerplate reports.200 Practically, the 196 See: National Roundtables on Corporate Social Responsibility and the Canadian Extractive Industry in Developing Countries, Advisory Group Report (March 2007), online: <http://www.pdac.ca/pdf-viewer?doc=/docs/default-source/public-affairs/csr-national-roundtables-advisory-group-report.pdf>, at iii (last visited June 12, 2016). Also see Dhir, 2009, supra note 19, at 49-50 for a description of the consultation process. 197 CGA, 2011, supra note 195. 198 Department of Foreign Affairs and International Trade (DFAIT), Building the Canadian Advantage: A Corporate Social Responsibility (CSR) Strategy for the Canadian International Extractive Sector (March 2009), online: <http://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/other-autre/csr-strat-rse-2009.aspx?lang=eng#3> (noting that “[t]he Government of Canada has facilitated efforts to increase the quantity and quality of voluntary CSR reporting by Canadian companies”) (last visited June 12, 2016). 199 Five Winds International & Strandberg Consulting, The Role of Industry Associations in the Promotion of Sustainability and Corporate Social Responsibility: Study Findings (March, 2007), at 25. Viewed by Haufler, promoting corporate voluntary initiatives is a defensive mechanism on the part of the private sectors to slow down or prevent governmental regulation. See: Virginia Haufler, A Public Role for the Private Sector: Industry Self-Regulation in A Global Economy (Washington DC: Carnegie Endowment for International Peace, 2001), at 20-23. Although the regulatory burden arguments are less common in the academic literature nowadays, the industry still frequently refers to it. For instance, during the research interviews, when asked about whether they sided with the view of making CSR disclosure a mandate through law, the majority of the industry interviewees showed their concerns of regulatory burden. As Senior Manager 2 mentioned: “Because the companies are facing so much regulation and so 75 mandatory attempt faces hurdles in implementation and compliance. In terms of implementation, since many CSR information is qualitative in nature and does not have a clear unit of measure, it is difficult for the regulators to verify its accuracy.201 This poses questions as to how the regulators can effectively identify noncompliance and consequently take enforcement measures. As noted by the formerly Certified General Accountants of Canada (CGA), “Sustainability issues are qualitative in nature and vary depending on a company’s size, industry, and location. Given the complexity and variability, not only is it difficult to establish standards, it is also difficult for governments to monitor and enforce compliance. Furthermore, as governments often find themselves having to develop regulations that accommodate all interests, there is a fear that a mandatory standard would be diluted, and as a result, would likely have little impact in driving CSR and corporate sustainability reporting”.202 Moreover, there exists another important factor that may complicate compliance. According to most mandatory reporting proposals, companies would be punished for not reporting, not for reporting inadequately and selectively.203 This stance, together with the practical difficulty in measuring reporting adequacy, leaves room for cosmetic many reporting obligations now, I would be hesitant to impose a requirement that isn’t clear what it’s going to do for investors or the community at large”. (Interview transcripts on file with the author, November 13, 2013). 200 CGA, 2011, supra note 195. The distrust of the public toward governmental regulation of disclosure programs is witnessed by the literature as well. According to Graham, “[a] disconnect has developed between broad claims by politicians that such systems reduce risks, promote informed choice, and further public participation in government and specific requirements that are limited in design, flawed in execution, and uncertain in effect”. See: Mary Graham, Democracy by Disclosure: The Rise of Technopopulism (Brookings Institution Press, 2002), at 157. 201 CGA, 2005, supra note 194, at 85 (noting that CSR information “is more qualitative in nature and, therefore, more difficult to interpret, verify, and audit”). 202 CGA, ibid, at 88. 203 See supra note 112 and the accompanying texts for an introduction of representative mandatory CSR reporting proposals. 76 compliance. For instance, it would be highly likely that “[t]he companies hand-picked information they wanted the public to know rather than picking information the public actually wanted companies to provide”.204 It seems that the policy-making debate surrounding mandatory CSR reporting has quietened in Canada as new disclosure themes have emerged to occupied the public’s attention. In recent years, policymakers and advocacy groups have worked hard on disclosure themes such as gender diversity on board,205 conflict minerals reporting206 and pension ESG disclosure.207 This shift of attention observes the “issue-attention cycle” as Anthony Downs describes.208 However, while the public’s attention to CSR reporting may have declined owing to the ambiguity of CSR issues, the strong corporate opposition, the scapegoating of new disclosure targets and the lack of an immediate threat, the problems with CSR reporting practices remain severe. As the ensuing chapter will cogently show, the CSR reporting-performance gap is ubiquitous and it greatly challenges the fundamentals of CSR. 204 Allison M Snyder, “Holding Multinational Corporations Accountable: Is Non-Financial Disclosure the Answer?” (2007) Columbia Bus Law Rev 565, at 605 (discussing the limits of non-financial disclosure in regulating multinational corporations). 205 On October 15, 2014, the OSC and eight other securities regulatory authorities issued notice of amendments to National Instrument 58-101, requiring disclosure with respect to the representation of women on boards and in senior management. See: CSA, Multilateral CSA Notice of Amendments to National Instrument 58-101, Disclosure of Corporate Governance Practices (October 15, 2014), online: <http://www.osc.gov.on.ca/documents/en/Securities-Category5/csa_20141014_58-101_noa-national-instrument.pdf> (last visited June 12, 2016). 206 Bill C-486 Conflict Minerals Act was introduced to the parliament yet defeated on September 24, 2014. 207 Pension ESG disclosure has become a legal mandate in Ontario since January 1, 2016. See Section 18.104.22.168 for the introduction. 208 Downs, supra note 1. 77 Summary of Chapter 2 This chapter examines the notion of CSR reporting on both conceptual and theoretical grounds, providing important background information concerning the research thesis. This present research is rooted in the Canadian context. The scope of the research is limited to the environmental and social aspects of CSR in order to facilitate an in-depth examination of the topic of CSR reporting. The chapter is organized as follows. Firstly, it discusses CSR and CSR reporting conceptually. The present research agrees with the literature that defines CSR as “activities that companies undertake to directly benefit society”. From a legal perspective, the theoretical discussion of CSR sources from the shareholder versus stakeholder debate concerning the purpose and the best interests of the corporation. Fueled by case law, this debate has a direct bearing on interpreting the law of fiduciary duty and the legitimacy of practicing CSR within the corporate context. As to this matter, the present study notes that the shareholder-centric model is the norm, despite the existence of some liberal interpretation of the model. However, it argues that the shareholder-centric model should not become a barrier that prevents companies from practicing CSR. From a practical perspective, the present study is aware that the business case scenarios are commonly used to explain CSR, but contends that the increased usage of the business case justification for CSR may not linearly translate into more CSR-conscious performance. To address this concern, the present chapter analyzes two contrasting 78 stances toward the regulation of CSR: one that favours corporate self-regulation and one that advocates for governmental intervention. The present study takes the view that corporate self-regulation can be a useful supplement to governmental regulation, but it cannot replace governmental regulation because corporate self-regulation is ultimately restricted by its purpose of serving the corporations’ own interests. In terms of CSR reporting, this chapter makes a series of distinctions in order to advance a profound illustration of the meaning of CSR reporting. First, it draws a distinction between the descriptive and normative dimensions of CSR reporting. While normatively CSR reporting is intended to be a governance instrument that functions by measuring and comparing corporate performance in CSR aspects, in practice, CSR reporting has become a strategic corporate communication tool that falls short of providing a complete and balanced picture of the companies. This theory-practice gap not only shows that the issue of the CSR reporting-performance inconsistency is current and necessitates a thorough investigation, but also inspires the present research to combine theoretical analysis with empirical findings in order to more precisely describe the CSR reporting field. Second, the present study differentiates CSR reporting from CSR reports and other synonymous terms and notes that it prefers the term CSR reporting, which conveys more nuanced meaning than CSR reports and is the generic and unambiguous name of reporting of this kind. Based on the above understanding, the present research defines CSR reporting as the corporate-dominated processes of developing plans and procedures for gathering information, disseminating a CSR report, and addressing post-reporting issues such as stakeholder feedback. Third, the present chapter distinguishes CSR reporting from 79 corporate transparency, arguing that corporate transparency only explains one dimension of CSR reporting while under-addressing the role of CSR reporting in inducing changes in corporate performance. Secondly, this chapter explains why the present research examines CSR reporting from an organizational learning perspective. Organizational learning research explores how organizations learn and put learning into practice. Organizational learning has a direct bearing on the present research thesis in that it explains why companies are capable of changing their performance as a result of the processing of information—CSR reporting within the present context. When the CSR reporting-performance inconsistency is questioned, what is explicit in the phenomenon is that corporations fail to align their reporting with their performance, while what is implicit is that corporations learn insufficiently from their process of CSR reporting. Therefore, it makes great sense to utilize the organizational learning perspective in the present research. In addition, studying CSR reporting from the perspective of organizational learning is beneficial because: 1) it expands the research horizon of the present research and provides a more nuanced look at the research problem; 2) it is the basis for elaborating on why corporate self-reference, which is in essence an organizational learning tool, ought to be reinforced in the proposed “reflexive law plus” model; and 3) it generates insights into how to stimulate corporate learning as it relates to CSR reporting, because the organizational learning literature is firmly grounded in practice and provides important empirical observations that enrich the present research inquiry. 80 Thirdly, the chapter references the literature and other secondary data to provide necessary details regarding the Canadian context of CSR reporting. It notes that CSR reporting in Canada is unique because the impetus for companies to disclose CSR information is derived primarily from societal expectations and industrial pressure, rather than from regulatory agencies and laws. In line with the pro-self-regulation approach toward CSR reporting, Canada has not set particular legal or regulatory requirements for CSR reporting and the existing regulatory regime only addresses CSR reporting at the periphery. Because of this regulatory uncertainty, the policy attempts to introduce public law and regulation to the area of CSR reporting have been ongoing in Canada. Although various initiatives and advocacies have called for mandatory CSR reporting, the policy-making debate regarding this subject has quietened in Canada as new disclosure themes have emerged to occupied the public’s attention. However, while the public’s attention to CSR reporting may have declined, the problems with CSR reporting practices remain ubiquitous and severe. 81 Chapter 3: The Research Thesis: The CSR Reporting-Performance Inconsistency Introduction While CSR reporting has been steadily practiced by a considerable number of publicly-traded companies in North America for more than a decade, only recently has CSR scholarship sporadically acknowledged that the issue of the CSR reporting-performance inconsistency as it relates to publicly-listed enterprises needs an urgent and immediate fix.209 This chapter opens with a brief description of three real-life examples that arouse attentions to companies’ multi-faceted and paradoxical CSR profile. They suggest the inconsistencies between the corporate image projected through CSR reporting and the corporate actual practices in CSR. On top of that, this chapter builds on the literature to explain the phenomenon of the CSR reporting-performance inconsistency. To make a stronger case for the necessity of the present research and to prepare for the framing of the research question, the present chapter also examines the empirical portion of the research to gain a more vivid picture of how the problem of the CSR reporting-performance discrepancy is manifested in the field. 209 See infra note 237-243 for the representative literature that addresses the CSR reporting-performance inconsistency. 82 Based on the aforementioned three segments of illustration, the present research poses the following research question of the entire doctoral dissertation: from a law and regulation perspective, how can the ubiquitous CSR reporting-performance discrepancy be alleviated? As the ensuing chapter will elaborate on, the present research advocates for a two-step solution to address the problem. First, it calls for the imposition of governmental regulation on CSR reporting. Second, it proposes shaping the regulatory requirements into a form of reflexive law. The purpose of the present chapter is twofold. First, it strives to show that the CSR reporting-performance decoupling is a problem that should be carefully considered and academically valued. Second, it seeks to provide a thorough explanation of why the present study focuses on the legal and regulatory dimension of the problem. 3.1 Three Examples This section presents a series of real-life examples that offer a unique perspective to the issue of CSR reporting. They inspire the current research to put focus on how CSR reporting has been diverged from corporate actual performance and how to alleviate the inconsistency. Although the present study sets the research focus on publicly-traded Canadian companies so as to balance the research width and depth, since the CSR reporting-performance inconsistency is indeed a worldwide phenomenon, the examples provided here are not limited to Canadian firms. They nevertheless represent companies in mining, retail and banking—a spectrum of industries that the empirical research centers on. 83 Barrick Gold Corp. (Barrick), a Canadian mining company headquartered in Toronto, is the largest gold mining company in the world. At first sight, Barrick has an impressive, award-winning CSR profile.210 It is one of the few publicly-listed companies in North America that has established a CSR Advisory Board, which has John Ruggie, author of the United Nations Guiding Principles on Business and Human Rights, serve as a special consultant. It has laid down comprehensive CSR codes and policies, and published externally-assured annual CSR reports for more than a decade.211 On the other hand, however, other evidence in the public domain tells a different story. Online sources reveal that the company has long been a target of local and international community protests and not-for-profit organizations’ accusations in terms of environmental damage and human rights abuses.212 Records show that one major Chilean project of the company was fined and later halted for failure to meet local environmental 210 For instance, Corporate Knights awarded Barrick the 4th of best 50 corporate citizens in Canada in 2013. Corporate Knights, “2013 Best 50”, online: Corporate Knights <http://www.corporateknights.com/reports/2013-best-50> (last visited June 12, 2016). Corporate Knights Inc. is an independent Canadian-based media company that publishes the world’s largest circulation magazine with an explicit focus on CSR. It also publishes the annual Best 50 Corporate Citizens in Canada and the annual Global 100 Most Sustainable Corporations in the world. Nevertheless, Corporate Knights was challenged in terms of the metrics it uses for measurement. See: Chris MacDonald, “Corporate Knights Gets Sustainability Wrong” (23 January, 2013), online: Canadian business <http://www.canadianbusiness.com/companies-and-industries/corporate-knights-gets-sustainability-wrong> (last visited June 12, 2016). Barrick was also praised for its efforts to “raise industry standards” in developing countries. 211 On Barrick’s company website, there is a section titled Responsibility, under which the company makes very detailed documentation of its policies in different key CSR areas. The website also exhibits archived data of its environmental, community, safety and health performance since 2010 in addition to its annual CSR reports since 2002. See: online: Barrick <http://www.barrick.com/responsibility/default.aspx> (last visited June 12, 2016). 212 Every year at the time of Barrick’s annual general meeting in Toronto, protesters and support campaigns gathered outside of the company building to “confront” Barrick. Pictures of the campaign see: Protest Barrick, “Confront Barrick 2015: In Pictures”, online: Protest Barrick <http:://protestbarrick.net/article.php?id=1020> (last visited June 12, 2016). For accusations against Barrick from not-for-profit organizations see: online: MiningWatch Canada <http://www.miningwatch.ca/home/company/barrick-gold>, Protest Barrick <http://www.protestbarrick.net/index.php> and Peter Munk OUT of UofT <https://munkoutofuoft.wordpress.com/about-barrick-gold> (last visited June 12, 2016). In addition, “Debunking Barrick” is a detailed report produced by Protest Barrick that lists the wrong-doings of the company at the mine sites in some developing countries, see: online: Protest Barrick <http://www.protestbarrick.net/downloads/DebunkBarrick-Report_fnl_web_single.pdf> (last visited June 12, 2016). 84 standards in 2013.213 Furthermore, the company has a solid record of lobbying against bill C-300, a private members bill introduced to “promote environmental best practices and to ensure the protection and promotion of international human rights standards in respect of the mining, oil or gas activities of Canadian corporations in developing countries”.214 Barrick is not an exception. Another cogent example, the Body Shop, a well-known global retailer of beauty products, also has a mixed public image. Although the Body Shop has positioned itself as a socially responsible company and was a pioneer in CSR reporting in the 1990s,215 findings and allegations from various sources against the Body 213 The water contamination of Barrick’s Pascua-Lama mine was referred by the administrative authority as “very serious violations”. See: Brent Jang, “Chile Freezes Barrick’s Pascua-Lama, Orders ‘Urgent Measures’”, online: the Globe and Mail <http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/chile-blocks-pascua-lama-mine-fines-barrick-for-environmental-violations/article12129034> (last visited June 12, 2016). The latest update of the Chilean court decision regarding the fine see: Cecilia Jamasmie, “Chile’s Supreme Court Won’t Hear Barrick Appeal on Pascua Lama Fine”, online, Mining.com <http://www.barrick.com/investors/news/news-details/2014/Chilean-Supreme-Court-Ruling-on-Pascua-Lama/default.aspx> (last visited June 12, 2016). Also see: “Chilean Supreme Court Ruling on Pascua-Lama”, online, Barrick <http://www.barrick.com/investors/news/news-details/2014/Chilean-Supreme-Court-Ruling-on-Pascua-Lama/default.aspx> (last visited June 12, 2016). In addition, see Section 4.1.3 of the present thesis for a discussion of a case concerning Barrick’s misrepresentation with respect to the Pascua-Lama mine project. 214 Bill C-300 was tabled in the House of Commons in 2009 and passed its second reading. However, the bill was eventually defeated by a loss of just six votes (140 to 134) in the chamber. For a detailed documentation of the voting and house debate, see: online: open parliament <https://openparliament.ca/bills/40-2/C-300/?page=1> (last visited June 12, 2016). According to the lobbyist registry, a Hill and Knowlton lobbyist, Mr. Don Boudria, who was working on behalf of Barrick, had 22 communications with Liberal MPs before the voting. It has been reported that he lobbied those MPs to vote against the bill. For media coverage on Barrick and other mining companies’ lobbying see: Steve Rennie, “Mining Industry Lobbied Nine of 24 MPs Who Helped Kill Ethics Bill”, online: The Globe and Mail <http://www.theglobeandmail.com/news/politics/mining-industry-lobbied-nine-of-24-mps-who-helped-kill-ethics-bill/article1241708> (last visited June 12, 2016). 215 The Body Shop labels its products as “natural products inspired by nature”. It has long championed the advocacy against animal testing on cosmetic products and on fair trade. It claims on its website and elsewhere that the Body Shop “was the first cosmetics company to develop direct relationships with communities in return for natural ingredients and accessories”. Online: The Body Shop <http://www.thebodyshop.com/services/aboutus_anita-roddick.aspx> (last visited June 12, 2016). For a summary of the history of CSR reporting made by the Body Shop, see: Hess, 1999, supra note 86, at 72. The author reports that (citations omitted): Beginning in 1992, The Body Shop began publishing independently verified environmental statements. In 1995, The Body Shop published its first social report, entitled The Values Report 1995. … In 1997, The Body Shop expanded its auditing approach and produced Values Report 1997, a 200-page report detailing the company's performance in nine stakeholder categories. 85 Shop have raised a red flag regarding the company’s CSR-friendly image.216 In particular, the Body Shop was criticized for not being truthful with the public on animal testing and the ingredients of its products.217 In addition, commentators argue that the Body Shop’s community fair trade program is a marketing ploy and its benefits to the local communities are in question.218 One more illustration comes from the Australia and New Zealand Banking Group (ANZ), the third largest bank by market capitalization in Australia. On the upside, ANZ is a signatory to the Equator Principles,219 and was frequently ranked the most sustainable bank globally in Dow Jones Sustainability Indices (DJSI).220 On the downside, however, ANZ is not only the largest financier of coal mining projects in Australia,221 but also fails 216 See: Bryan Dennis, Christopher P Neck & Michael Goldsby, “Body Shop International: An Exploration of Corporate Social Responsibility” (1998) 36:10 Manag Decis 649, at 650-652; Joan Bavaria, Eric Becker & Simon Billenness, “Body Shop Scrutinized”, Franklin’s Insight (September 15, 1994); Jon Entine, “Shattered Image: Is the Body Shop Too Good to Be True”, Bus Ethics Magazine (October 1994) 23. 217 Becker & Billenness, ibid, at 4. 218 It has been argued that the Body Shop had unilaterally broken the condition of fair trade when it addressed the Kayapo Indians in Brazil. See: Saulo Petean, “Broken Promises”, BRAZZIL (1996) 16. Online: BRAZZIL <http://www.brazzil.com/p16dec96.htm> (last visited June 12, 2016). Terrence Turner, an anthropologist from the University of Chicago who speaks fluent Kayapo, comments that the Body Shop's work with the Kayapo is a public relations ploy, which aids the company in promoting its image while offering the Kayapo little trade in exchange. Terence Turner, “Neoliberal Ecopolitics and Indigenous Peoples: The Kayapo, the ‘Rainforest Harvest’, and The Body Shop”, 98 Yale F&ES Bulletin 113, online:<http://environment.yale.edu/publication-series/documents/downloads/0-9/98turner.pdf> (last visited June 12, 2016). Also see: McSpotlight, “What’s Wrong with the Body Shop?”, online: <http://www.mcspotlight.org/beyond/companies/bs_ref.html#46> (last visited June 12, 2016). 219 The Equator Principles (EP) are a set of standards crafted to help banks perform due diligence and manage risks in financing projects that have a negative social or environmental impact. See: online: EP <http://www.equator-principles.com/index.php/about-ep> (last visited June 12, 2016). For an explicit summary of views concerning the EP initiative, see: John M Conley & Cynthia A Williams, “Global Banks as Global Sustainability Regulators?: The Equator Principles”, (2011) 33:4 Law & Policy 542. For additional comments, see: Benjamin Richardson, “The Equator Principles: The Voluntary Approach to Environmentally Sustainable Finance” (2005) 14:11 Eur Energy Environ Law Rev 280. 220 See: News release, “ANZ Again Ranked Lead Bank Globally in Dow Jones Sustainability Index” (September 13, 2013), online: <http://www.media.anz.com/phoenix.zhtml?c=248677&p=irol-news_pf> (last visited June 12, 2016). Launched in 1999, the Dow Jones Sustainability Indices (DJSI) are a family of indices tracking the stock performance of the leading CSR-driven companies worldwide. It is a key reference point among investors who integrate environmental and social considerations into their portfolios. See: online: DJSI <http://www.sustainability-indices.com/about-us/dow-jones-sustainability-indices.jsp> (last visited June 12, 2016). 221 For instance, ANZ’s lending to Whitehaven’s Maules Creek mine was twice as large as any other contemporary coal mine under construction in Australia. After many attempts and protests that tried to convince ANZ to pull its funds out of the Whitehaven project failed to work, ironically, on January 7 2013, a media release, purportedly from the bank, announced the bank had withdrawn its $ 1.2bn loan from the Whitehaven coal mine project on environmental and 86 to publicly acknowledge its continued funding to the projects.222 Greenpeace therefore named ANZ Australia’s dirtiest bank.223 The list can go on and on.224 The present research does not attempt to reach a definitive conclusion about whether the companies mentioned here are indeed socially responsible performers. Rather, it discusses these examples because they each represents a company with a mixed and even paradoxical CSR profile. Collectively, they are indicative of a popular phenomenon among business enterprises that challenges the credibility of the current CSR practices. ethical grounds. The stock price of Whitehaven then plummeted on the Australian Stock Exchange from $3.52 to $3.21 per share before the company was put into a trading halt. However, the announcement was proved to be a hoax made by a coal activist, Jonathon Moylan, who was trying to generate publicity surrounding ANZ’s support for mining projects and was later sentenced to one year and eight months’ jail for market manipulation offences. For comments of the case, see: Mark Tighe, “Coal in Court: Whitehaven, Climate Change and Civil Disobedience”, online: The Conversation <https://theconversation.com/coal-in-court-whitehaven-climate-change-and-civil-disobedience-15991> (last visited June 12, 2016). 222 Shamima Haque, “Corporate Climate Change-Related Auditing and Disclosure Practices: Are Companies Doing Enough?” in Mia Mahmudur Rahim & Samuel Idowu, eds, Social Audit Regulation: Development, Challenges & Opportunities (Springer International Publishing, 2015) 169, at 178-181. 223 Greenpeace, “ANZ—the Dirtiest Bank”, online: Greenpeace <http://www.greenpeace.org/australia/en/what-we-do/climate/Polluting-our-future/How-Australias-big-four-banks-use-your-money-to-fund-polluting-power/ANZ---The-diritest-bank> (last visited June 12, 2016). 224 For instance, it was noted that “[t]he Enron statement on Corporate Social Responsibility was one of the best published by any company but it turned out to have little connection with reality”. See: Henry Bosch, “Corporate Social Responsibility”, submission to the Australian Corporations & Markets Advisory Committee (2006), at 4, online: CAMAC <http://www.camac.gov.au/camac/camac.nsf/byheadline/pdfsubmissions_2/$file/hbosch_csr.pdf> (last visited June 12, 2016). Other prominent examples acknowledged by scholars include Ford, Toyota, General Motors, PG&E and BP. See: Miriam A Cherry, “The Law and Economics of Corporate Social Responsibility and Greenwashing” (2013) 14 UC Davis Bus Law J 281 (noting that the BP portrayed itself as being environmentally responsible and championing the use of clean energy while its internal record shows continuing safety and environmental violations). Jacob Vos, “Actions Speak Louder than Words: Greenwashing in Corporate America” (2009) 23 Notre Dame J Law Ethics & Public Policy 673, at 675-678 (illustrating the phenomenon of corporate greenwashing and proposing counter-measures to address the problem). Also see: Janet Luft Mobus, “Corporate Social Responsibility (CSR) Reporting by BP: Revealing or Obscuring Risks?” (2012) 15:2 J Leg Ethical Regul Issues 35 (showing that companies under the voluntary CSR reporting regime has strong incentives to exaggerate positive performance and understate unflattering information). While agreeing that the above-mentioned examples are to different extents associated with greenwashing, the present thesis views the issue from a neutral perspective and identifies the problem as corporate reporting-performance decoupling, which has been largely underexplored by prior research. 87 They suggest that companies use CSR reporting as a tool to establish positive CSR images and diverge public attention from corporate actual performance. In particular, these examples have raised hard and universal questions about the inconsistencies between the corporate image projected through CSR reporting and the corporate actual practices in CSR. As such, they reveal that what corporations report in terms of CSR does not necessarily translate into their practices. This divergence mirrors the current debate surrounding CSR: while some literature holds that practicing CSR is of mutual benefits to both the industry and the society225, more and more scholars become skeptical of or even cynical about the value of CSR in inducing real corporate behavioural changes. To serve as a catalyst for further investigation into the issue, the following section is going to examine the scholarly debate in more detail. 3.2 The Literature226 A review of the literature unpacks general concerns regarding the current practice of CSR for its emptiness and vagueness. For instance, in pondering what CSR has really accomplished in the past years, Moskowitz comments that the history of CSR “has 225 See supra note 91 for a list of the representative literature. See Section 22.214.171.124 for a full elaboration on this viewpoint. The literature is also filled with abundant case studies exemplifying how generating CSR reporting facilitates communications with stakeholders and attains corporate transparency. For example, See: Hess, supra note 86 (analyzing the Body Shop and Ben & Jerry’s cases); Charles J Fombrun & Violina Rindova, “The Road to Transparency: Reputation Management at Royal Dutch/Shell” in Majken Schultz, Mary Jo Hatch & Mogens Holten Larsen, eds, Expressive Organ Link Identity Reput Corp Brand Link Identity Reput Corp Brand (Oxford University Press, 2000) 77 (demonstrating the Royal Dutch Shell case). 226 Although the present research is a Canadian based one, to overcome the insufficiency of Canadian academic literature on the topic of CSR reporting gaps, this section borrows extensively from U.S. literature that addresses the identical topic. While acknowledging the limitation, the present research believes that the analysis still holds and is not jeopardized by the US-dominant literature review, in that the problem of the CSR reporting-performance discrepancy is a worldwide phenomenon and the research of this question is supposed to have a wider application beyond national boundaries. 88 consisted of 95 percent rhetoric and 5 percent action”.227 In his discussion of the transnational implication of the Alien Tort Claims Act in terms of human rights protection, Collingsworth concludes that “any progress made in ‘corporate social responsibility’ is simply on paper”.228 Bakan, a pioneer legal scholar, posits CSR being “business as usual”.229 More vocal is Rosenthal, who points out that “being superb at disclosing, not controlling” is a fundamental problem with the current CSR regime.230 The literature also provides thoughts surrounding mandatory CSR reporting. Firstly, a consensus has been reached among researchers that there are significant limits of purely relying on voluntary CSR reporting.231 Secondly, the literature interprets mandatory CSR reporting in a very broad sense. In the literature, not only has legislative and regulatory methods been discussed, but also stock exchange rules that prescribe CSR reporting as part of the listing requirements are viewed by many as being mandatory in nature.232 Thirdly, while earlier scholarly work concentrated on whether CSR reporting should be officially regulated, the emphasis has recently shifted toward whether we need a more structured legal regime to regulate it, and if so, what kind of legal regime would work. As to this matter, despite some controversies, the literature shows a strong tendency toward 227 Milton Moskowitz, “What Has CSR Really Accomplished?”, Bus Ethics Mag Corp Responsib (2002) 4 at 4. 228 Terry Collingsworth, “Corporate Social Responsibility, Unmasked” (2003) 16 St Thomas Law Rev 669, at 264. 229 Bakan, supra note 59, at 28. 230 Elisabeth Rosenthal, “I Disclose ... Nothing”, N Y Times Late Ed East Coast (22 January 2012) SR.1 231 For instance, see: Sarfaty, supra note 131; Snyder, supra note 204; Thomas McInerney, “Putting Regulation before Responsibility: Toward Binding Norms of Corporate Social Responsibility”, (2007) 40 Cornell Int Law J 171. 232 For example, see: Ioannou & Serafeim, supra note 112; Dhir, 2008, supra note 116; Galit A Sarfaty, “Human Rights Meets Securities Regulation” (2013) 54 Va J Int Law 97, at 104-105 (putting stock exchanges regulation of CSR reporting under the theme of "mandatory regulations"). However, as will be further illustrated in the ensuing subsection, the present research sides with the view that in order to align CSR reporting with corporate actual performance in CSR, it is not enough for stock exchanges to require CSR reporting as part of their listing rules. 89 taking use of the existing securities disclosure system to regulate CSR reporting.233 In addition, a growing body of literature frames CSR reporting as a corporate governance matter.234 Finally, the literature disagrees on the functional orientation of CSR reporting. As earlier mentioned, some scholars take corporate transparency and “right to know” as the main purpose of CSR disclosure.235 In contrast, other researchers note that one pivotal objective of CSR reporting is to transform corporate irresponsible performance and to align corporate behaviour with broader public goals.236 In particular, digging into CSR reporting and the regulation of it in the private sphere, scholarly work notices the existence of the corporate reporting-performance gap in CSR and further argues that voluntary regulation is insufficient to bridge such a gap. For instance, Adams phrases the problem as the CSR reporting-performance “portrayal gap” and cautions that private regulatory forms, such as the GRI standards and the industry-led 233 For instance, see: Williams, supra note 140; Hess, supra note 86; Monsma & Buckley, supra note 173; Dhir, supra note 116. However, this dissertation disagrees with using expanded securities disclosure system to fully replace the regulation of CSR reporting, since securities disclosure and CSR disclosure should serve different audience and have different purposes. Securities disclosure focuses narrowly on CSR information that is financially material, while CSR reporting exhibits a fuller picture of corporate performance in CSR aspects. Also see: Harry Hummels & Diederik Timmer, “Investors in Need of Social, Ethical, and Environmental Information” (2004) 52:1 J Bus Ethics 73 (arguing that investors with a financial orientation and ethical investors have different information needs for CSR information). 234 See: Gill, supra note 93; Douglas M Branson, "Corporate Governance Reform and the 'New' Corporate Social Responsibility" (2001) 61 Univ Pittsburgh Law Rev 605 (noting that the contemporary CSR movement is an element of good corporate governance). 235 See: Section 126.96.36.199 for a discussion of the relationship between CSR reporting and corporate transparency. 236 For instance, Graham views CSR reporting as part of the “new disclosure systems”, “those that aim to reduce health, safety, and environmental risks”. She contends that the new disclosure systems differ from conventional information disclosure programs in that in terms of the new systems, “information was viewed as a way to change behaviour, not simply as a public right”. See: Graham, supra note 200 at 15-16. For the literature that sides with this view, also see: Sharon M Livesey & Kate Kearins, “Transparent and Caring Corporations? A Study of Sustainability Reports by the Body Shop and Royal Dutch/Shell” (2002) 15:3 Organ Environ 233, at 250-51 (arguing that CSR reporting “fosters systematic management practice” to take place); Norman & MacDonald, supra note 123, at 257 (holding that CSR reporting "can play a critical role in a firm's serious strategy to improve its ethical and social performance and to integrate this goal into its corporate culture"); Larry Cata Backer, “From Moral Obligation to International Law: Disclosure Systems, Markets and the Regulation of Multinational Corporations” (2007) 39 Georget J Int Law 591, at 593 (positing that a mandatory disclosure system “serves a more subtle purpose—to create a framework for private governance consistent with the overarching objectives that form the essence of the system of disclosure itself”). 90 “responsible care” initiative, have yet to reduce the gap.237 In a similar vein, Sulkowshi and White argue that voluntary CSR reporting may function as a misleading indicator to the marketplace that a firm is relatively environmentally efficient and benign compared to non-reporters.238 In discussing the practice of the Global Reporting Initiative (GRI), one of the most influential standard provider of voluntary CSR reporting worldwide, Sarfaty finds that the GRI is ignorant of whether the companies’ CSR reports credibly reflect their good or bad performance. She therefore argues that indicators should not be treated “as ends in and of themselves, but rather as a means toward evaluating performance and ultimately improving behaviour”.239 In a separate yet related endeavour, a growing body of literature has begun to describe the situation of the CSR reporting-performance discrepancy as corporate greenwashing, corporate hypocrisy and corporate dissembling. For example, Vos argues that corporate greenwashing occurs when “a company’s practices don’t match up to the image they would like to have” and based on his observation, he notes that large corporations publicize CSR stance without “putting [their] rhetoric into practice”.240 To embed their argument under a real-life example, Cherry & Sneirson trace BP’s CSR reporting as it relates to the disaster of BP oil spill and note the disconnect between BP’s self-portrait and its actual behaviour as a problem of corporate greenwashing and “faux CSR”.241 On a 237 Carol A Adams, “The Ethical, Social and Environmental Reporting-Performance Portrayal Gap” (2004) 17:5 Account Audit Account J 731. 238 Adam Sulkowski & Steven White, “Financial Performance, Pollution Measures, and the Propensity to Use Corporate Responsibility Reporting: Implications for Business and Legal Scholarship” (2010) 21 Colo J Int Environ Law Policy 491. 239 Sarfaty, supra note 131, at 621. 240 Vos, supra note 224, at 673-74. 241 Miriam A Cherry & Judd F Sneirson, “Beyond Profit: Rethinking Corporate Social Responsibility and Greenwashing After the BP Oil Disaster” (2011) 85:4 Tulane Law Rev 983. 91 separate note, Wagner et. al. mention that when firms’ CSR behaviour contradict with their stated standards of CSR, they are perceived as performing corporate hypocrisy by consumers.242 Moreover, in his evaluation of the three pillars of CSR reporting, Hess challenges the overwhelmingly positive information provided by companies in their CSR reporting and posits that “corporations dissemble when they disclose favourable information but hide unfavourable information, fail to put their disclosures into the appropriate context, or simply provide false disclosures”.243 Although organized around different themes, the literature mentioned in this section collectively points to the decoupling of “what is represented publicly and what actually transpires behaviourally” in the practical world.244 While it is only a small portion among the vast CSR scholarly work, the literature should be highly valued and seriously considered, because the debates engaged by these pieces provide helpful thoughts on whether the CSR movement underpinned by CSR reporting is heading on the path of meaningful social changes or encompasses merely symbolic, cosmetic business exercises.245As the following texts show, the present research theme is further elaborated on and refined by the empirical research of the present study. 242 Tillmann Wagner, Richard J Lutz & Barton A Weitz, “Corporate Hypocrisy: Overcoming the Threat of Inconsistent Corporate Social Responsibility Perceptions” (2009) 73:6 J Mark 77. 243 David Hess, “The Three Pillars of Corporate Social Reporting as New Governance Regulation: Disclosure, Dialogue, and Development” (2008) 18:04 Bus Ethics Q 447 at 462. Hess describes the three pillars of CSR reporting as disclosure, dialogue and development. 244 Mobus, supra note 224, at 35. 245 David Hess, “The Future of Sustainability Reporting as a Regulatory Mechanism” in Daniel R Cahoy & Jamison E Colburn, eds, Law and the Transition to Business Sustainability (Springer International Publishing, 2014) 125, at 130 (analyzing the CSR reporting system and its actors). A related concern has been expressed by Tansey when he commented on the notion of industrial ecology (IE). Hypothetically, IE describes the industrial system that optimizes the utilization of useful energy. It asks industries to learn from natural systems for industrial design, so that the industrial systems can function like ecosystems and become more resource-productive. However, according to Tansey, “the majority of recent research publications under the umbrella of IE have focused on specific techniques and processes rather than on the promise of a paradigm shift”. See: 92 3.3 The Empirical Based on the real-life examples and the literature presented in the preceding sections, this section provides a more vivid picture of the research thesis through the empirical study. It examines how the CSR reporting-performance inconsistency is manifested in practice by soliciting views from interview participants, who reflect more broadly on their day-to-day experiences with CSR reporting. In addition, it compares corporate CSR reports with other documentary data, noting the delay in reporting timeline and the absence of key negative information in the reports. It further explains why the present research studies the problem of inconsistency from a law and regulation perspective. The description of the empirical data in this section strives to contextualize the subject of the CSR reporting-performance discrepancy within the present thesis and to stimulate further thoughts in terms of how to address the discrepancy. More detailed empirical findings of where the problems lie and how they can be alleviated will be displayed and discussed in the ensuing chapter. 3.3.1 An Unsatisfying Portrayal of the Reality In general, the interviewees comment on the practice of CSR reporting as being decorative and primarily in public relations terms. For instance, when asked about his impression of the CSR reports he has encountered, Lawyer 1, who is specialized in aboriginal issues and mining, notes: “It just becomes a decorative piece as part of the PR James Tansey, “Between Beckett’s Trousers and Ecotopia: The Future of Industrial Ecology” in Ray Cote, James Tansey & Ann Dale, eds, Linking Industry and Ecology: A Question of Design (UBC Press, 2007) 176-77. As Tansey puts, the danger is that “the rhetorical attraction of IE will provide false comfort for policy makers” and therefore may replace serious industrial transformation. 93 strategy”.246 He continues, “CSR reporting in Canada is very much on the voluntary side and it is very much uneven. You see very glossy CSR reports, which do not talk about company-wide performance and do not provide comprehensive review but only put lots of focuses on things that have been done. There are significant gaps”.247 On a separate note, Consultant 2, formerly a public relation manager in a mining company, posits: “The CSR reports done are presented more in public relations terms—they shed positive, image-building stories and they do not call upfront all of the issues. They report all the positives but gloss over the negatives. … CSR reporting is more of a PR-based exercise”.248 Besides, interviewees express additional concerns toward CSR reporting that they feel may undermine its credibility. For one thing, the practitioners note that the information provided by many companies is generic and boiler-plated. For another, the interviewees identify that a number of CSR reports cover only the CSR impacts on the companies and not the other way around. As one fund manager puts, We would like to see what companies do is acknowledge environmental risks to the company, and also acknowledge how the company is posing environmental risks to the environment or the society. So we would like them to be concerned about both—[not only] how changes in the environmental regulation impact them but also to acknowledge their own footprint and demonstrate they are taking measures to reduce their impacts as well.249 246 Interview transcripts on file with the author, June 3, 2014. 247 Ibid. 248 Interview transcripts on file with the author, June 3, 2014. 249 Interview transcripts on file with the author, July 17, 2013. 94 The documentary analysis reveals the existence of the CSR reporting-performance gap in a more nuanced way. First, by comparing the available data regarding the release time of companies’ financial reports and that of their CSR reports, the current study finds in general a serious delay in the publication of firms’ CSR reports. The CSR reports of the companies that the present study covers do not come up until five to six months after the fiscal year-end. The backlogging of information is problematic, viewed by both the interviewees and the current research, since it not only discourages financial investors from incorporating CSR consideration into their investment decisions as the data lacks real-time value, but also dissuade stakeholders from engaging in meaningful dialogue with management and contributing their knowledge timely.250 Second, a major issue identified by the empirical research, primarily the documentary data, is the absence of key negative information in companies’ CSR reports. For instance, during 2011 and 2012, there were a series of social conflicts occurred in M1’s mine sites. The mounting local tensions surrounding the sites received a wide coverage in the media release and the amount of fund the company put aside for the closure of one of its mines was viewed as extremely insufficient by NGOs. As a result, the company was delisted from the Dow Jones Sustainability Index (“DGSI index”) in 2012. However, neither the company’s 2011 nor 2012 CSR report speaks of such an issue. Besides, in all of its CSR reports, there is not much coverage of the challenges that the company is facing or the problems and issues that need to be addressed. When asked about the absence of negative 250 Three of the interviewees, who are senior fund manager, fund manager and lawyer respectively, resonate with this concern. Interview transcripts on file with the author. 95 information, the front-line CSR manager of M1 paused, but then she quickly responded: “I think there are definitely issues that we were quite open about”.251 The avoidance of reporting negative information is also menisfested in R3’s CSR reports, despite that R3 is a recognized leader in CSR reporting in the industry. Its CSR reports discuss performance according to a three-tier evaluation system: target met, target almost met or on track, target not met or at initial stages. Although it seems R3 reports on both positive and negative results, a closer look of the targets suggests otherwise. Some of the unmet targets were simply removed from the CSR report in the ensuing year without further explanation. For example, the target “increase the number of women in leadership roles in the organization” was not met in 2013, but it was taken away from the company’s CSR report in 2014. It is not to say that the inconsistency exists in each and every company at all times and this study does not position itself as a critic of the companies, some of which are actually CSR leaders in their industry. However, it is worrying that the tendency of overstating accomplishments and understating risks and concerns remains pervasive and unchanged. While the CSR reports generated by some firms are indeed informative and comprehensive and a lot can be told in terms of the improvement in reporting quality, when viewing the CSR reporting practice entirely to explore the gap between corporate reporting and their actual performance, the present research sees a picture that is more of a negative one than of a mixture of good and bad. Despite that the landscape of CSR reporting has dramatically changed in the past two decades, the effort taken has barely 251 Interview transcripts on file with the author, June 20, 2014. 96 remedied the hollowness and vagueness of the reporting content and the prevalence of using CSR reporting to sing one’s own praises. 3.3.2 The Lack of a Regulatory “License to Operate”252 In their seminal work, Gunningham et. al. point out that corporations are subject to three “licenses to operate” whose terms include economic, social and regulatory categories.253 The present research is particularly interested in the condition of regulatory license: while a review of the regulatory context in Canada shows that Canada has not set particular legal or regulatory requirements for CSR reporting and the Canadian regulatory regime in general only addresses CSR reporting at the very periphery,254 the empirical research is concerned about whether this position is equally shared by the interviewees. Moreover, it seeks to understand how the interviewees sense the CSR reporting-performance gap and whether, in the practitioners’ perceptions, the inconsistency of CSR reporting with corporate actual performance has something to do with the lack of the regulatory license. As to the first matter, the views expressed by the practitioners strongly resonate with the discussion in Chapter 2. During the interviews, many respondents explicitly note that it is voluntary for the industry to do CSR reporting in Canada. As one respondent puts: “In 252 The concept “the regulatory license to operate”, along with two other concepts, namely the social license and the economic license, was coined and meticulously discussed by Gunningham et al.. See: Gunningham et al., supra note 12. In the literature, the notion of “license to operate” was adopted to represent the socially constructed external factors that influence firms’ performance in an interactive way. Among the three licenses, the regulatory license has established a floor for corporations to comply with. The present research considers primarily the condition of the regulatory license as it is directly related to the current research thesis. While the social and the economic licenses are both important considerations for companies when they produce their CSR reporting, limited by the scope of the research inquiry, the present research will leave them to future studies. 253 Gunningham, Kagan & Thornton, ibid at 35–38. 254 See Section 2.3.2 for a review of the Canadian law and regulation that have a link with CSR reporting. 97 terms of regulation in Canada, it’s very minimal. It really is the voluntary initiatives that require [CSR] reporting”.255 While the interviewees do not feel they are bound by a regulatory “license to operate” in terms of CSR reporting, a handful of them refer to industry association policies as a source of compulsion for mining companies to report on CSR. 256 This observation is in line with the contention of the literature. As Gunningham posits in a later work, “industry-specific, collective and voluntary initiatives” that aim at protecting the collective social license of the industry constitute a fourth license to operate, which he calls “collective license”.257 Collective license is in use when an industry sector seeks to improve the reputation of the entire industry tarnished by individual companies within the industry.258 While the practitioners agree that in the mining industry, the collective license plays an important role in pushing for more stringent conditions in CSR reporting, they also mention that with respect to the other two industries, there is not such an equivalence. With respect to the second question, in fact, some industry practitioners interviewed by the present research have to various extent already sensed the problem of the CSR reporting-performance inconsistency, as Manager 3 notes: “I think there needs to be some rigor around [CSR] reporting because it is getting out of hand right now”.259 Manager 5, 255 Interview transcripts on file with the author, June 17, 2014. 256 The two most cited industry-wide codes of conduct that have a great influence on Canadian mining companies’ CSR reporting are the Toward Sustainable Mining (TSM) program developed by Mining Association of Canada (MAC) and the 10 Sustainable Development Principles required by the International Council on Mining and Metals (ICMM). In both situations, the interviewees note that the industry initiative has been substantially abided by as it is a precondition for companies to gain membership in the association. 257 Neil Gunningham, “Corporate Environmental Responsibility: Law and the Limits of Voluntarism” in Doreen McBarnet, Aurora Voiculescu & Tom Campbell, eds, New Corporate Accountability: Corporate Social Responsibility and the Law (Cambridge: Cambridge University Press, 2007) 476, at 488-491. 258 Ibid, at 489. 259 Interview transcripts on file with the author, July 14, 2014. 98 who is the front-line CSR reporting manager of M2, echoes to this sentiment and adds: “If there are legal requirements on [CSR] reporting, there is a lot more rigor and the company will allocate more budget on it”.260 The response of Manager 5 deserves a further elaboration since other interviewees have expressed similar views. For instance, Senior Manager 6 posits: “I think [companies] will be taking it a lot more seriously if CSR reporting is mandated. If it’s regulated, that would open the door to more attention and more resources”.261 When asked about “What, in your opinion, are the key factors that drive publicly-traded companies to better align their CSR reporting with CSR performance”? Senior Manager 4 responds without hesitation: “Regulatory requirements”.262 These overlapping viewpoints expressed by the practitioners strongly suggest that the regulatory condition is a major concern of corporate decision making in terms of what information companies would put in their CSR reports and how rigorous the information would be. As a result, the present research posits that a sound remedial method for the CSR reporting-performance inconsistency should work toward building and strengthening the regulatory license.263 This stance is well supported in the literature. When discussing the “licenses to operate”, Gunningham et. al. argue that regulatory license serves as the floor of corporate environmental performance and may reinforce social license in significant ways.264 They posit, “regulation does matter—and matters a 260 Interview transcripts on file with the author, December 9, 2013. 261 Interview transcripts on file with the author, October 29, 2013. 262 Interview transcripts on file with the author, June 18, 2014. 263 This point is further illustrated in Section 4.2.2. 264 Gunningham, Kagan & Thornton, supra note 12, at 37, 45-46. Also see: Gunningham, 2007, supra note 257, at 483–485. 99 lot”.265 Gunningham further argues that collective voluntary initiatives are much more likely to succeed “if they operate in the shadow of rules and sanctions” of governmental regulation.266 For the above-mentioned consideration, the present research strives to explore the research thesis from the perspective of law and regulation. 3.4 The Research Question As the previous texts show, the divergence of CSR images built by companies in CSR reporting and their actual performance poses a serious challenge to the pursuit of CSR. As noted by Cherry & Sneirson: We posit that the accuracy of CSR information is important for efficient securities markets and informed consumer choice. Further, if faux CSR is allowed to flourish, it will ultimately undermine any attempts at substantive CSR, which will only be met with cynicism.267 This issue deserves a heightened and urgent concern, especially at a time when CSR reporting keeps gaining significant growth and “much of our collective knowledge about companies and their actions is predicated on what a particular firm chooses to tell the public”.268 It would primarily serve corporate interests rather than promote social progress if a firm claims that it is committed to CSR while undertaking changes only at a surface level. Consequently, CSR will become groundless when it “[degenerates] into costly exercises in paper pushing or excuses for avoiding real action”.269 More seriously, 265 Gunningham, Kagan & Thornton, ibid, at 45. 266 Gunningham, 2007, supra note 257, at 497. 267 Cherry & Sneirson, supra note 241, at 986. 268 Cherry & Sneirson, ibid, at 1026. 269 Fung, Graham & Weil, supra note 7, at 106 (explaining why certain government-mandated disclosure policies are effective and why others are not). 100 the current public and media obsession on CSR reporting has misled policy making as well, because it directs legislators and regulators to eye predominantly on the content of the information disclosed by the organizations, i.e. whether it is exhaustive enough to cover all the items on the regulatory checklist, rather than on the progress the companies have actually made in terms of CSR.270 Built upon the literature and the empirical evidence, the present study poses the research question as: from a law and regulation perspective, how can the ubiquitous CSR reporting-performance discrepancy be alleviated? Based on a review of practical endeavours that have been made, which primarily are in the form of private actions, the current research argues that instead of relying on episodic and case-by-case attempts, a more fundamental and systemic solution should be required to bridge the CSR reporting-performance gap. In particular, it calls for the repair of the missing link of governmental regulation in the process of CSR reporting. Besides, it posits that the focus of scholarly work needs to move away from generating greater paperwork compliance to stimulating substantive corporate performance improvements in CSR and tightening its connection with CSR reporting in terms of how CSR reporting is evaluated. Following this line of thinking, the present research proposes the use of the reflexive law approach to fix the disagreement between CSR reporting and corporate actual 270 For instance, the France’s Grenelle II law includes mandatory disclosure requirements of social and environmental issues by publicly-traded companies against a set of indicators. According to the law and the implementing decree, there are 42 topics that companies much report on, divided into four themes—human resources, labour standards, community interests, environmental impact, management and protection. The only measurement of obedience is whether companies have made disclosure in all these required areas. See: Lucien J Dhooge, “Beyond Voluntarism: Social Disclosure and France’s Nouvelles Regulations Economiques” (2004) 21 Ariz J Int Comp Law 441 (examining the strengths and weaknesses of Grenelle II law from a human rights perspective). 101 performance on CSR dimensions. Consequently, the research purpose is to justify why imposing governmental regulation on CSR reporting and shaping the regulatory requirements into a form of reflexive law is a sound solution to remediate the decoupling of CSR reporting and corporate actual performance. To support its argument, the present research combines doctrinal and theoretical legal analysis with empirical qualitative research. It only not defends the thesis argument from a theoretical perspective, but also pulls industry experience to further refine the theory of reflexive law. On that basis, it puts forward a working model of “reflexive law plus” as it relates to CSR reporting, which, argued by the present research, is more pertinent than both traditional regulation and other contemporary forms of governmental regulation in addressing the CSR reporting-performance inconsistency. The present research is one of the first endeavours that systemically analyze and respond to the problem of the CSR reporting-performance inconsistency. The research significance of the present study manifests in at least three aspects. First, the present research contributes to the broader regulation and governance scholarship in terms of theory building. Second, the research result will inform policy making and CSR advocacy practice in Canada and beyond. Third, the research acts as a wake-up call for the CSR research. An expanded discussion of the research significance will be made in Section 6.3.1. 102 Summary of Chapter 3 This Chapter starts with three examples—Barrick Gold, the Body Shop, and the ANZ bank—all of which are recognized CSR reporting leaders or award winners. These companies promote themselves as green and socially responsible, but their actual social and environmental performance fails to match their CSR commitments and reported profiles. These examples have raised hard and universal questions about the inconsistencies between the image projected by the companies and their actual CSR practices. As such, they reveal that what corporations report in terms of CSR does not necessarily translate into their practices. This divergence mirrors the current CSR debate, as more and more scholars have become skeptical of or even cynical about the value of CSR as a means to induce real changes in corporate performance. First, the literature expresses a general concern about the empty and vague nature of current CSR practices. Second, scholarly work argues that voluntary actions are insufficient for bridging the CSR reporting-performance gap. Despite that the literature uses various labels to describe the CSR reporting-performance inconsistency, such as corporate greenwashing, corporate hypocrisy, and corporate dissemble, they collectively support the major thesis of the present research, which is the decoupling of CSR reporting with corporate CSR performance. The presentation of the scholarly opinions has potently exhibited the academic value of the present research. The latter part of the chapter examines the empirical evidence in order to contextualize the issue of the CSR reporting-performance inconsistency within the present research. 103 According to the research interviews, the current practice of CSR reporting is flawed because it is largely decorative and presented primarily in public relations terms. Addition concerns include generic and boiler-plated information as well as incomplete disclosure. According to the documentary analysis conducted by the present research, the companies have made serious delays in terms of the timeline for their CSR reporting. Besides, they tend to avoid reporting key negative information in their CSR reports. In terms of the legal and regulatory conditions for CSR reporting in Canada, the empirical research finds that the interviewees commonly share the opinion that practicing CSR reporting in Canada is voluntary and there generally lacks a regulatory “license to operate”. In the meantime, by soliciting views from the practitioners, the present research corroborates the stance of the literature in positing that a sound remedial method for the CSR reporting-performance inconsistency should work toward building and strengthening the legal and regulatory requirements for CSR reporting. Based on the above analysis, the present study poses the research question as: from a law and regulation perspective, how can the ubiquitous CSR reporting-performance discrepancy be alleviated? The research proposes that imposing governmental regulation on CSR reporting and shaping the regulatory requirements into a form of reflexive law would be a sound solution to remediate the discrepancy. 104 Chapter 4: Proposed Solutions & Analyses Introduction To further the discussion in prior chapters, this chapter focuses on proposing a plausible solution to the research thesis. In particular, it combines theory with practice and devotes a generous portion of the discussion to the empirical findings in terms of where the problems lie and what the opportunities are for the CSR reporting-performance realignment. While providing a comprehensive analysis of the proposed reflexive law solution, it leaves a more profound elaboration of the reflexive law approach to the ensuing chapter. This chapter is made up of four major sections. First, this chapter critically analyzes the existing attempts to address the CSR reporting-performance inconsistency. These include false advertising litigation, securities fraud litigation, and shareholder resolutions. The present research argues that they provide beneficial yet suboptimal remedies to the decoupling problem, in that the success of these solutions is episodic and on a case-by-case basis. Second, the present chapter digs deeply beneath the existing private actions to identify the fundamental regulatory gap as it relates to CSR reporting. From both historical and practical perspectives, it shows how the regulatory field with respect to CSR reporting is dominated by private and self-regulation. Analyzing the limitation of each regulatory 105 form pertaining to CSR reporting, the study concludes that governmental regulation of CSR reporting should be instituted. Third, the present chapter situates CSR reporting within the setting of governmental regulation and proposes that the reflexive law approach be used to alleviate the CSR reporting-performance inconsistency. To corroborate its argument theoretically, this chapter carefully reviews the literature concerning the reflexive law theory, drawing an analysis of what reflexive law is and how it has been applied by the literature. In addition, it extrapolates from the literature that the reflexive law approach within the context of CSR reporting encompasses two major steps: first, officially mandating CSR reporting through either legislation or regulatory rules; and second, requiring institutional conditions for CSR reporting that induce corporate self-referencing processes. Regarding the first step, the present chapter cogently discusses why the current regulatory structure of CSR reporting is flawed and why governmental regulation over CSR reporting should be called for. With respect to the second step, it notes that reflexive law as an abstract theory ought to be put in the practical context of CSR reporting so as to get its meaning precisely elaborated on. Finally, in order to meet the need to substantiate the reflexive law approach, this chapter closely examines the empirical evidence to identify the factors underpinning the CSR reporting-performance decoupling and the opportunities for realigning the two. This chapter contributes to both the literature and the regulatory practice of CSR reporting. For one thing, the discussion engaged in the present chapter is a continuation 106 and update of the literature, in particular, the CSR scholarship. The present chapter does not just simply adopt the reflexive law theory, but also develops and revives the theory in the contemporary regulatory setting of CSR reporting. It clarifies some significant issues surrounding reflexive law and makes observations on the pattern of the theory’s practical application. For another, the empirical findings documented in the present chapter fill an important research gap, since the practical circumstances around CSR reporting has not been thoroughly studied. In addition to contributing to a more comprehensive understanding of the CSR reporting phenomenon and the beliefs and assumptions underpinning it, the empirical findings shed light on the issue of regulatory design as it relates to CSR reporting. 4.1 Existing Private Actions271 So far, people who are unsatisfied with the CSR reporting practice have used three solutions to address the CSR reporting-performance decoupling.272 All of these approaches are in the form of private actions. The first reaction is litigation under false advertising, which is exemplified by Nike v. Kasky.273 The second is securities fraud 271 This section cites the US statutory provisions and regulatory arrangements as well as precedents, which may or may not have Canadian counterparts. This is because most of the private actions in terms of CSR reporting were taken shape in the US territory and later spread to Canada. In addition, the Canadian companies involved in some of the cases, e.g. Barrick Gold, were dual-listed in both the United States and Canada with the suits primarily filed in the United States. Moreover, the US and Canadian regulatory environment for CSR reporting resembles strikingly, since both countries favour the hands-off CSR regulatory policies and lean toward coordinating the disclosure of CSR issues along with the existing securities regulatory structure. That said, the Canadian variations will be noted and discussed separately in the texts as well as the footnotes. 272 In terms of the literature, there is not a single piece of scholarly work that enlists all these three solutions to address the CSR reporting-performance variation. Instead, they were proposed by the different literature under different subject matters concerning CSR reporting. See: infra notes 109 and 150 for the literature that has inspired the present research. It is therefore the contribution of the present thesis to coordinate the literature on different subject matters and link all the pieces together under the current theme. 273 Nike v. Kasky, 45 P.3d 243 (Cal. 2002), cert. dismissed, 539 U.S. 654 (2003). 107 litigation, as shown by In re Ford Motor and In re Barrick Gold Securities Litigations.274 The third one, a non-litigation fix, resorts to the mechanism of shareholder resolutions that compels companies to consider shareholder voice in the corporate decision making. This section introduces these three solutions in sequence. In addition, it provides a detailed discussion of existing statutory provisions and cases underpinning each attempt. 4.1.1 False Advertising Litigation One way to combat the decoupling problem is through false advertising law.275 In the United States, state laws are the principal legislations governing false and misleading advertising.276 At the federal level, the Lanham Act is probably the main source of false advertising litigation.277 In Canada, the federal Competition Act, which contains both civil and criminal misleading advertising provisions, is the major law applied to false or misleading claims.278 In both countries, the law prohibits “not only advertising which is false, but also advertising which[,] although true, is either actually misleading or which has a capacity, likelihood or tendency to deceive or confuse the public”.279 The first and foremost question asked when adopting the false advertising law is whether CSR reporting accounts for advertising. It does not seem so at first impression. However, 274 U.S. Dist. LEXIS 43053 (2015); Fed. Sec. L. Rep. (CCH) P98,433. 275 Cherry & Sneirson, supra note 241 at 1028–1030; Cherry, supra note 224 at 289–290. 276 For example, in the Kashy v. Nike case, the source of formal law is California’s false advertising law, which is incorporated in the California Business and Professions Code. 277 15 U.S.C. § 1125 (2006). Also see: Courtland L Reichman & M Melissa Cannady, “False Advertising under the Lanham Act” (2001) 21 Franch Law J 187. Another anti-fraud protection comes through Federal Trade Commission (FTC) suits. See: Wheeler-Lea Act, § 3, 52 Stat. 111 (1938). However, since the anti-deception standards created by these two regimes are basically the same, the present thesis only briefly introduce the claims under the Lanham Act. For a detailed discussion on elements of the Lanham Act and FTC claims, see: Ivan Preston, “The Definition of Deceptiveness in Advertising and Other Commercial Speech”, (1990) 39 CATH. U. L. REV. 1035, at 1040–41. 278 R.S.C., 1985, c. C-34, § 74.01(1). 279 Leoni v. State Bar, (1985) 39 Cal.3d 609, 626. 108 from a broad perspective, any statements made in a CSR dialogue or report may be deemed as advertising “seeking to protect core assets such as reputation or brand image”, unless “a corporation can show that they do not benefit either directly or indirectly” from the statements.280 In line with this thinking, the California Supreme Court defines advertising as “representations, operations, products of fact about the business, or services of the speaker”.281 This view is reinforced by the Canadian legislation, which expands advertising to cover claims made relating to both services and “any business interest”, including claims regarding corporate performance.282 Therefore, “[making] voluntary commitments to environmental and social objectives yet [failing] to meet those performance expectations” can be a cause of action in false advertising litigation.283 Another closely related issue is who are eligible complaints in the false advertising suits. Generally, the plaintiffs are consumers. Additionally, business competitors may have standing to sue.284 In terms of scienter, simply gross negligence can trigger a suit and the law does not require the plaintiff to prove fraudulent intent.285 280 Michele Sutton, “Between a Rock and a Judicial Hard Place: Corporate Social Responsibility Reporting and Potential Legal Liability under Kasky v. Nike”, (2003) 72 UMKC Law Rev 1159, at 1176 (discussing the implications of Kasky v. Nike on European countries in terms of CSR practices and legislations). 281 Kasky v. Nike, Inc., 45 P.3d (Cal. 2002), at 256. 282 In addition to the general misleading advertising provisions, the Competition Act encompasses a standalone civil provision that prohibits performance claims that are not based on an “adequate and proper test”. See: supra note 278, § 74.01(1)(b). 283 Monsma & Buckley, supra note 173, at 192 (commenting on the potential legal responsibilities that a publicly-traded companies may have for reporting its CSR matters). 284 Vos notes that “Section 43 (a) of the Lanham Act gives competitors a federal cause of action against rivals who engage in false advertising”. See: Vos, supra note 224, at 691. 285 In terms of the US state law, see: Sutton, supra note 280 at 1177. The elements required in the Lanham Act for a false or misleading claim include: “(1) a false or misleading statement of fact; (2) that is used in a commercial advertisement or promotion; (3) that is material, in that it deceives or is likely to deceive; (4) that is used in interstate commerce; and (5) that causes, or is likely to cause, the claimant competitive or commercial injury”. There is no requirement for scienter. See: Reichman & Cannady, supra note 149 at 188. In terms of the Canadian law, only criminal cases require that the claim be made “knowingly or recklessly”. For a civil claim, it must be proven that: (i) a representation has been made, (ii) to the public, (iii) to promote a product or business interest, (iv) that is literally false or misleading (or with a false or misleading general impression) and (v) that the claim is “material” (i.e., likely to 109 The most influential claim of false advertising that relates to CSR reporting comes from the case Kasky v. Nike (Nike v. Kasky at the US Supreme Court).286 The case is summarized as follows. Marc Kasky, a California resident, brought an action on behalf of the public against Nike, Inc. (Nike) and its directors and officers under California’s false advertising law, which is incorporated in the California Business and Professions Code.287 The plaintiff alleged that Nike had made false statements in press releases and elsewhere regarding the labour practices in the factories where Nike sourced its products from.288 The trial court dismissed the actions on the ground that Nike’s media releases constituted free speech and thus were subject to constitutional protection. The plaintiff then appealed. The appellate court again “concluded that Nike’s statements were noncommercial speech and influence a consumer into buying or using a product or otherwise altering their conduct). Again, there is no requirement for proof of intent. See: “An Overview of Canadian Misleading Advertising Law”, online: <http://www.ipvancouverblog.com/2010/05/canadiancompetitionlaw-misleadingadvertisingupdate> (last visited June 12, 2016). 286 Kasky v. Nike, Inc., supra note 281. The literature that has carefully documented this case in their discussion of CSR reporting and related issues include: Vos, supra note 224; Cherry & Sneirson, supra note 241; Cherry, supra note 224; Chiu, supra note 52; Monsma & Buckley, supra note 173; Sutton, supra note 280; Kerr, supra note 51. 287 WEST's ANN. CAL. Bus. & Prof. Code § 17500 (West 2009). Pursuant to the California’s false advertising law, as part of the unfair competition law (UCL), it is: “unlawful for any person, … corporation …, or any employee thereof with intent directly or indirectly … to make or disseminate … before the public in this state, … in any newspaper or other publication … or in any other manner or means whatever … any statement, concerning that real or personal property or those services … which is untrue or misleading, and which is known, or which by the exercise of reasonable care should be known, to be untrue or misleading …”. 288 Since October 1996, a television news report as well as many local and national newspapers published articles alleging that in the factories where Nike had its products manufactured, workers were paid less than the local minimum wage, required to work overtime, subjected to sexual abuse and forced to work in a unsafe environment. In reaction, Nike made a series of press releases and sent letters to newspapers, defending that its workers were protected from physical and sexual abuse, were paid double the local minimum wage, received free meals and health care and their working conditions complied with local laws. The complaint therefore alleged that Nike made six misrepresentations in the course of its public relations campaign. These include: (1) “that workers who make NIKE products are . . . not subjected to corporal punishment and/or sexual abuse;” (2) “that Nike products are made in accordance with applicable governmental laws and regulations governing wages and hours;” (3) “that Nike products are made in accordance with applicable laws and regulations governing health and safety conditions;” (4) “that Nike pays average line-workers double-the-minimum wage in Southeast Asia;” (5) “that workers who produce Nike products receive free meals and health care;” and (6) “that Nike guarantees a ‘living wage’ for all workers who make Nike products”. See: Kasky v. Nike, Inc., supra note 281, at 248. 110 therefore subject to the greatest measure of protection under the constitutional free speech provisions”.289 Kasky further appealed to the California Supreme Court. This time, the Court reversed the judgment of the lower courts, holding that Nike’s statements were commercial speech and so could be punished if they were false or misleading.290 However, the Court did not decide whether the speech was indeed false or misleading. Rather, the matter was remanded to the appellate court for further proceedings. Nike petitioned the US Supreme Court to challenge the ruling, yet the Supreme Court refused to further delve into the case.291 Both parties eventually reached out-of-court settlement, which forestalled any trial of the issue with respect to misleading statements in CSR reporting. As the Kasky v. Nike case reveals, the first challenge of using false advertising litigation to address the CSR reporting-performance divergence lies in the legal uncertainty engendered by the precedent. The solution of false advertising litigation is judicially doubtful not only because Kasky v. Nike is a case ultimately undecided at the court, but also since the court ruling in Kasky v. Nike highlighted the constitutional debate 289 Ibid, at 249. 290 Ibid, at 247. The California Supreme Court held: “[b]ecause the messages in question were directed by a commercial speaker to a commercial audience, and because they made representations of fact about the speaker's own business operations for the purpose of promoting sales of its products, we conclude that these messages are commercial speech for purposes of applying state laws barring false and misleading commercial messages”. Canadian law regarding free speech is different from the US one. According to Section 2 of the Canadian Charter, everyone has the fundamental freedoms of “thought, belief, opinion and expression, including freedom of the press and other media of communication”. See: Canadian Charter of Rights and Freedoms, Part I of the Constitution Act, 1982, Section 2(b). However, the right to free speech is subject to limits of Section 1 of the Charter, which allows the parliament or a provincial legislature to pass laws that limit free speech as long as the limits are reasonable and can be demonstrably justified (Section 33(1)). For a detailed comparison between the Canadian and the US systems, see: Kent Greenawalt, “Free Speech in the United States and Canada” (1992) 55:1 Law Contemp Probl 5 (discussing the variation in judicial approach between the two countries). 291 The US Supreme Court granted certiorari in the first place upon Nike’s petition, yet it dismissed the writ of certiorari as improvidently granted. Nike v. Kasky, 123 S. Ct. 817 (2002) cert. granted, 123 S. Ct. 2554 (2003) cert. dismissed. 111 surrounding free speech and commercial speech while downplayed the issue of legal liability for making untrue CSR statements. This imbalance increases the difficulty of adopting false advertising litigation to shrink the reporting-performance gap, because under the scenario of false advertising litigation, in order for the court to express opinion regarding false or misleading CSR statements, it is almost impossible to sidestep judicial discussion on the constitutional law issue of free speech, which is so controversial that the court is generally reluctant to adjudicate. A second concern is the puffery defense. The puffery doctrine is a major element in the law of fraud. According to the literature, puffery is “a defense to a charge of misleading purchasers of goods, investments, or services, or to a charge that a promisor has made a legally cognizable promise”.292 Puffery has been used against false advertising charges in many occasions.293 It insulates companies from liability on the ground that the accused statement is mere “sales talk” and harmless bragging rather than a material misstatement in connection with products or services. The most disturbing part of the puffery defense is that the courts have been inconsistent in applying this doctrine and distinguished puffery from deceptive advertising on a case-by-case basis.294 Although it is the defendants who usually bear this risk of uncertainty, overall, the specter of the puffery defense makes false advertising litigation an unfavourable choice for the plaintiffs. 292 David A Hoffman, “The Best Puffery Article Ever”, (2006) 91 Iowa Law Rev 1395 at 106 (arguing that “there is no core theme unifying applications of the puffery defense”). 293 Ibid, at 107-110. 294 Ibid. A vivid example given by Hoffman is that “[t]he claim that yogurt is ‘nature’s perfect food’ apparently may be falsified and is not puffery. See: In re Dannon Milk Prods., Inc., 61 F.T.C. 840, 840 (1962). But, to enthusiasts’ chagrin, Nestlé’s boast that it sells the ‘very best chocolate’ is a meaningless puff”. 112 Another shortfall of adopting this approach is that consumers, the major plaintiffs in false advertising litigations, may not have direct interests or enough bargain power in many CSR-sensitive industries, such as mining, oil and gas, to initiate and continue a false advertising suit. Therefore, the possibility of adopting false advertising litigation to address the decoupling of CSR reporting and performance is extremely limited. 4.1.2 Securities Fraud Litigation History has filled with literature that explores the feasibility of using securities disclosure as a venue for CSR reporting.295 Consistent with this proposal, scholarly work argues that securities fraud litigation pursuant to Section 10(b) of the US Securities Exchange Act and Rule l0b-5 (collectively referred to as “Rule 10b-5”) may be a powerful tool to address the CSR reporting-performance inconsistencies.296 295 Early discussion surrounding this topic focused only on corporate environmental reporting, yet more recent research has expanded the scope of corporate reporting to incorporate social and other CSR aspects. For example, see: Theodore Sonde & Harvey L Pitt, “Utililzing the Federal Securities Laws to Clear the Air - Clean the Sky - Wash the Wind” (1970) 16 Howard Law J 831 (positing that the securities regulatory body in the United States should take actions to provide specific guidelines as to when environmental disclosure will be required); John Oliver Cunningham, “Environmental Disclosure in Corporate Securities Reporting” (1979) 8 Boston Coll Environ Aff Law Rev 541(analyzing NRDC v. SEC, which is a landmark case that involved an attempt on the part of environmental advocacy groups to expand corporate securities disclosure to include reporting on corporate environmental conduct); Perry E Wallace, “Disclosure of Environmental Liabilities under the Securities Laws: The Potential of Securities-Market-Based Incentives for Pollution Control” (1993) 50 Wash Lee Law Rev 1093 (arguing that the required disclosure of corporate environmental liabilities and obligations "has created a powerful market dynamic that investors can use to promote environmental protection"); Robert H Feller, “Environmental Disclosure and the Securities Laws” (1994) 22 Boston Coll Environ Aff Law Rev 225 (proposing that the US Securities and Exchange Commission shall take an aggressive program to enforce existing environmental disclosure requirements); Williams, supra note 140; Rachel Cherington, “Securities Laws and Corporate Social Responsibility: Toward an Expanded Use of Rule 10B-5” (2004) 25 Univ Pa J Int Econ Law 1439 (suggesting that Section 10(b) and Rule 10b-5 of the US Securities Exchange Act could be used to hold transnational corporations responsible for their overseas operations); Monsma & Buckley, supra note 173; Dhir, 2008, supra note 116; Lin, supra note 61. Collectively, the literature debates on two issues: descriptively, whether or not certain CSR information falls within the mandatory disclosure realm pursuant to the current securities laws, especially in the United States; normatively, whether such disclosure shall be required by securities laws. 296 Cherry & Sneirson, supra note 241, at 1030-1032. Section 10(b) makes it unlawful for: 113 The literature comments Rule 10b-5 as “the broadest, most frequently asserted antifraud provision in the securities laws”297 of the United States and a “broad, catch-all” antifraud provision.298 It prohibits “fraudulent material misstatement or omissions in connection with the sale or purchase of a security”.299 In order to make a claim under Rule 10b-5, “a plaintiff must plead that: (1) the defendant made a materially false or misleading statement or omitted to state a material fact necessary to make a statement misleading; (2) with scienter; (3) in connection with the purchase or sale of securities; (4) upon which the plaintiff relied; and (5) the plaintiff's reliance was the proximate cause of its injury”.300 In practice, the US courts have relaxed the element of reliance in Rule 10b-5 litigation by “any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange ... [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors”. Securities Exchange Act of 1934 § 10, 15 U.S.C. § 78j(b) (2004). Rule 10b-5 provides: “It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security”. 17 C.F.R. § 240.10b-5 (2004). In addition to securities fraud litigation in the secondary market, Rule10b-5 is also widely applied to cases in terms of insider trading as well as securities fraud litigation with respect to prospectus or registration statement in the primary market. However, in the context of the present research, Rule 10b-5 is only discussed within the realm of secondary market liability, unless indicated otherwise. Different from the US counterpart, the current Canadian securities regulatory framework is provincial-based. In Canada, the securities laws prescribe statutory liability for secondary market disclosure. For example, see: Ontario Securities Act, R.S.O.1990, s.138.3. While they share certain similarities, the statutory civil liability in Canada is not “Rule 10b-5 North” because the scope and application of the two regimes are fundamentally different. For a comparison of the two regimes, see: Davies Ward Phillips & Vineberg LLP, “The Ontario Civil Liability Regime, Not Quite 10b-5 North” (May 30, 2006), online: <http://www.dwpv.com/images/Perspective_The_Ontario_Civil_Liability_Regime__Note_Quite_10b-5_North.pdf> (last visited June 12, 2016). In theory, with respect to the decoupling issue that is the thesis of the present research, a suit under the Canadian statutory liability provisions could also be workable. However, considering that the US Rule 10b-5 action is more thoroughly mentioned in the literature themed on CSR reporting and has been more maturely tested in practice on CSR-related matters, this section only concentrates on the US approach. 297 Wallace, supra note 295 at FN 90. 298 Ibid at 1115 (quoting Charles R. O'Kelley, Jr. & Robert B. Thompson, Corporations and Other Business Associations (1992), at 839). 299 In re Ford Motor Co. Sec. Litig., 381 F.3d 563 (6th Cir. 2004), at 567 FN.2. 300 Wilson v. Bernstock, 195 F. Supp. 2d 619, 624 (D.N.J. 2001). Also see: Monsma & Buckley, supra note 173 at 183. 114 developing a theory of “fraud on the market”. According to the theory, because ordinary investors rely on the price of a security as an accurate reflection of the value of the stock, those investors have a “rebuttable presumption of reliance on the defrauded market” when the price of a company’s stock has been manipulated by false or misleading statements.301 The court accepted this doctrine in landmark cases such as Basic, Inc. v. Levinson, which has become a precedent that many courts chose to follow.302 So far, two cases, one resolved and the other undecided, involve the use of Rule 10b-5 in addressing the CSR reporting-performance gap. In the first case, In re Ford Motor Co. Securities Litigation (In re Ford), investors sued Ford Motor, alleging that Ford made false or misleading statements or omissions about the dangerousness of Ford Explorer vehicles equipped with ATX tires, which was in contradiction with Ford’s social commitment.303 Among the allegedly false or misleading statements were Ford’s 301 Bruce D. Cohen, “Dredging the Shores Doctrine: Trends in the Fraud-on-the-Market Theory in the New Issues Context”, (1989) 23 GA. L. REV. 731, at 732 (discussing the theoretical basis of the fraud-on-the-market theory). For a critical comment of the Fraud-on-the-Market doctrine from a law and economics perspective, see: S. Michael Sirkin, “The Deterrence Paradox: How Making Securities Fraud Class Actions More Difficult for Plaintiffs Will More Strongly Deter Corporate Fraud”, (2009) 82 Temple Law Rev 307 (arguing that adopting the Fraud-on-the-Market theory dilutes the legal regime’s deterrence effects because the doctrine blesses both strong and weak securities fraud claims with settlement value). 302 Basic Inc. v. Levinson, 485 U.S. 224, 247 (1988). In its decision, the US Supreme Court held that “[b]ecause most publicly available information is reflected in market price, an investor's reliance on any public material misrepresentations, therefore, may be presumed for purposes of a Rule 10b-5 action”. In Canada, attempts to apply the “fraud on the market” doctrine have not met with success. See: Carom v Bre-X Minerals Ltd (1998) 41 OR (3d) 780. In this decision, the court concluded that “there is no support in the common law for the plaintiffs’ assertion that a presumption of reliance may arise as a matter of law”. Ibid, at 793. Nevertheless, the court conceded that a presumption of reliance might arise as an inference of fact. Later, in CC&L Dedicated Enterprise Fund (Trustee of) v. Fisherman (“Fisherman”), the court agreed that whether a plaintiff has actually relied on a misrepresentation was an issue of fact and may be inferred from all the circumstances. See: CC&L Dedicated Enterprise Fund (Trustee of) v Fisherman (2001), 8 CCLT (3d) 240, at 256-57. According to the literature, these cases suggested that the Canadian courts may accept “a softer version of presumed reliance based on inferences of fact that may be drawn in particular cases”. See: Michael Duffy, “Fraud on the Market: Judicial Approaches to Causation and Loss from Securities Nondisclosure in the United States, Canada and Australia” (2005) 29 Melb Univ Law Rev 621 at 643. But currently, the “fraud on the market” doctrine is no longer an issue in Canada, since the Securities Act of major provinces, such as Ontario and British Columbia, all have freed the plaintiffs from proving reliance in the secondary market civil liability suits, which creates better protection for the investors than the doctrine. See: Securities Act, R.S.O.1990, c. S.5, s.138.3(1); Securities Act, R.S.B.C. 1996, s.140.3(1). 303 In re Ford, supra note 299, at 563. 115 statements in its public disclosure “regarding its commitment to quality, safety, and corporate citizenship”.304 Despite the fact that the court eventually dismissed the complaint on the basis that the statements Ford Motor made were immaterial, the literature views the case remarkable since In re Ford “demonstrates that investors have already used a statement about CSR as a foundation for allegations of Rule 10b-5 violations to take aim at a public company”.305 The second case, In re Barrick Gold Securities Litigation (In re Barrick), is closely associated with the Barrick example mentioned at the beginning of Chapter 3. The plaintiffs alleged that Barrick made misleading statements with respect to the Pascua-Lama mine project, which constitutes securities fraud under Rule 10b-5.306 The defendants filed a motion to dismiss the case. The court denied the defendants’ motion in part, holding that the plaintiffs had sufficiently proved material misstatements regarding Barrick’s compliance with environmental commitments, internal controls and 304 Ibid, at 570. As the court noted: In their complaint, plaintiffs allege that Ford made many misleading statements regarding its commitment to quality, safety, and corporate citizenship, such as: 1) “[Alt Ford quality comes first”.; 2) “We aim to be the quality leader”; 3) “Ford has its best quality ever”; 4) Ford is “taking across-the-board actions to improve ... [its] quality”.; 5) Ford has made “quality a top priority”; 6) "Ford is a worldwide leader in automotive safety"; 7) Ford has made "quality a top priority"; 8) Ford is "designing safety into ... [its] cars and trucks" because it wants its "customers to feel safe and secure in their vehicles at all times"; 9) Ford "want[s] to make customers' lives ... safer"; 10) Ford has "dedicated ... [itself] to finding even better ways of delivering ... safer vehicles to [the] consumer"; 11) Ford "want[s] to be clear leaders in corporate citizenship"; 12) Ford's "greatest asset is the trust and confidence ... [it] has earned from ... [its] customers"; 13) Ford "is going to lead in corporate social responsibility”. Ibid. 305 Kerr, supra note 51 at 842. According to Kerr, by only discussing three statements related to safety of Ford Explorer, “the court did not analyze the statements about corporate citizenship or corporate responsibility independently of the other statements that the plaintiffs alleged to be misleading”. Therefore, Ford Motor was able to avoid liability “not because the court unequivocally found statements about CSR to be per se immaterial”. 306 In re Barrick Gold Sec. Litig., Fed. Sec. L. Rep. (CCH) P98, 433; 2015 U.S. Dist. LEXIS 43053, at 21. Plaintiffs alleged four main categories of actionable misstatements pursuant to Rule 10b-5: “statements regarding cost and schedule (including statements that Pascua-Lama was a "low-cost project"), statements regarding compliance with environmental regulations, statements regarding internal controls and accounting for capital costs, and statements concerning accounting for the project”. 116 accounting.307 Although In re Barrick has not yet reached the trial stage and may not do so because of the high possibility on the part of the defendants to pay settlement to end the case, the court’s stance in granting the class certification evidently shows that adopting securities fraud litigation to tackle the incompatible CSR disclosure and performance is judicially acceptable. However, a number of factors limit the use of securities fraud litigation in addressing the problem of CSR reporting and performance inconsistencies. Like the barrier in false advertising litigation, one major obstacle is the defense of puffery. Once a court determines that a corporate statement on CSR matters constitutes puffery, “it is deemed to be immaterial as a matter of law” and therefore “the company will be shielded from liability arising from that statement”.308 For instance, in In re Ford, the court based its ruling of dismissal on that: 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 307 Ibid. Particularly, the court ruled, “Plaintiffs provide detailed allegations supporting a strong inference that defendants had access to information that directly contradicted their public statements that Barrick was complying with all environmental commitments. … This raises a strong inference that is at least as compelling as any opposing inference of nonfraudulent intent that Barrick either knew that its statements were false, or was recklessly indifferent to that possibility”. The court rejected the claim that Barrick made misstatement with respect to the mine’s projected cost and construction schedule. 308 Jennifer O’Hare, “The Resurrection of the Dodo: The Unfortunate Re-emergence of the Puffery Defense in Private Securities Fraud Actions”, (1998) 59 Ohio St LJ 1697 at 1698 (arguing that "the courts have misused the puffery defense and have improperly insulated companies from liability for their misrepresentations"). 117 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”.309 It has been reported that more recently, the courts have increased the use of the puffery defense to dismiss private securities fraud actions as well as extended the protection of the defense to corporate defendants.310 However, in most cases, the courts merely cited puffery with little or no reference to what the standards they actually used in distinguishing puffery from misstatement. Given this vagueness, the expansion may in the future lead to growing uncertainties in CSR reporting-related securities fraud litigation. The second restriction lies in the willingness of investors and shareholders to make securities fraud suits. What Rule 10b-5 provides is a private right of action to injured investors and shareholders who either purchase or sell securities within the period when the misrepresentation happens while relying on the fraud or misleading information. In 309 In re Ford, supra note 299, at 570-71 (quoting Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1217 (1st Cir. 1996)). It is generally accepted that the US securities regime defines materiality as “a substantial likelihood” that a reasonable investor would view the disclosure of the information as “having significantly altering the ‘total mix’ of information made available” See: TSC Industries, Inc. v. Northway, Inc., (1976) 426 U.S. 438. Different from the US approach, the Canadian securities law adopts the market impact test and it differentiates material fact from material change. According to the securities legislation, a “material fact” is “a fact that would reasonably be expected to have a significant effect on the market price or value of the securities”, while a “material change” is defined as “a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer”. See: Securities Act, R.S.O. 1990, c. S.5, s. 1(1); Securities Act, R.S.B.C. 1996, c. 418, s. 1(1). In Cornish v. Ontario (Securities Commission), the Ontario court noted that “the reasonable investor test sets a lower threshold for materiality than does the market impact test”, holding that “the market impact test subsumes the perspective of the reasonable investor”. Cornish v. Ontario (Securities Commission),  O.J. No. 1233, 2013 ONSC 1310 (Ont. Div. Ct.), at para.73 & 79. However, these two tests are reported to be converging in most cases and scholars argue that there is barely a practical benefit from adopting the market impact test in Canada for the statutory definitions of materiality. See: Johnston, Rockwell & Ford, supra note 169 at 201. 310 O’Hare, supra note 308, at 1698-99. 118 terms of social and environmental misstatements, although lawyers have enough incentive to persuade affected investors to get involved and form a class, given the overwhelming expenses, the timeliness of proceedings and the lack of deterrence value owing to the high tendency of settlement instead of trial, securities fraud litigation may not be the optimal choice for addressing the problem. Thirdly, seeking redress of the CSR reporting-performance inconsistencies from securities fraud litigation may on the contrary discourage companies from releasing CSR reports, since corporations can simply refuse to disclose CSR-related information in order to avoid liability.311 According to the US securities laws, there is generally no duty for corporations to disclose “soft information”, which characterizes the majority of CSR-related information in corporate filings.312 Under Rule 10b-5, companies cannot be held liable for omission of “soft information”. However, if a company chooses to disclose CSR issues, it has to do so fully and truthfully, even in the absence of the duty to disclose.313 Therefore, companies will have a greater incentive to abstain from the CSR communication if more firms are sued for securities fraud in terms of their CSR disclosure. 311 Similarly, after announcing the settlement with Kasky, Nike stated that it would not release its 2002 CSR report as well as limit its work in CSR. See: William Baue, The Implications of the Nike and Kasky Settlement on CSR Reporting (September 23, 2003), online: Ethical Corp.<http://www.ethicalcorp.com/content-print.asp?ContentlD= 1130> (last visited June 12, 2016). 312 Kerr, supra note 44, at 840. 313 Ibid. 119 4.1.3 Shareholder Resolutions A third method to remediate the CSR reporting-performance contradiction is rooted in the instrument of shareholder advocacy, in particular shareholder resolutions.314 CSR-conscious shareholder resolutions provide an important source for communication between proposing shareholders and management on CSR matters. More importantly, they have the potential to positively influence corporate management and policy making pertaining to CSR reporting and performance of the firms.315 In addition to being a venue for shareholder-management dialogues and a check of management decision making, shareholder resolutions also play an educative role by arousing the awareness of passive and uncritical shareholders on CSR issues. Consequently, it is theorized that shareholder proposals and resolutions may help to bridge the gap between CSR reporting and corporate actual performance.316 In the United States, shareholder resolutions are regulated under Rule 14a-8 at the federal level.317 Rule 14a-8 “affords shareholders in public corporations the right to have their 314 Shareholder advocacy, also called shareholder activism, is defined as a means “whereby investors seek to influence companies from within through shareholder resolutions and other tactics”. See: Benjamin Richardson, “Keeping Ethical Investment Ethical: Regulatory Issues for Investing for Sustainability” (2009) 87:4 J Bus Ethics 555, at 562 (arguing for a reformulation of fiduciary duties with respect to financial institutions to foster socially responsible investment). Instead of discussing other tactics of shareholder advocacy, such as holding dialogues with corporate management and campaigns, this section concentrates on the issue of shareholder proposals and resolutions, which is a major component of shareholder advocacy. 315 As Sarra notes, “today’s [shareholder] proposals may become tomorrow’s corporate policy”. Janis Sarra, "Shareholders as Winners and Losers under the Amended Canada Business Corporations Act" (2003) 39 Can. Bus. L.J. 52 at 74-75. 316 Eric Engle, “What You Don’t Know Can Hurt You: Human Rights, Shareholder Activism and SEC Reporting Requirements” (2006) 57 Syracuse Law Rev 63 (discussing shareholder activism as a governance tool to improve human rights and the limitation of it); Aaron A Dhir, “Realigning the Corporate Building Blocks: Shareholder Proposals as a Vehicle for Achieving Corporate Social and Human Rights Accountability” (2006) 43:2 Am Bus Law J 365 (noting that the Canadian arrangement of shareholder resolutions suffers from at least three shortfalls compared to the US pattern and suggesting that the Canadian system should learn from the US counterpart to remedy its deficiencies). 317 Securities Exchange Act of 1934 §14(a), 17 C.F.R. §240.14a-8 (2006). Predicated on the US system, Canada also sets up a similar regulatory regime for shareholder resolutions. See: Canada Business Corporations Act, R.S.C., c. C-120 proposals included … in the corporation’s proxy materials at corporate expense” and to be voted on in the next annual meeting of shareholders.318 Pursuant to Rule 14a-8(i), the management must circulate a shareholder proposal to shareholders unless certain exclusion criteria are met.319 If there is a controversy regarding whether a shareholder proposal is excludable, the corporation has the obligation to consult with and justify its decision in front of the SEC.320 Although the rise of socially responsible investing and institutional shareholding has dramatically increased the bargaining power of shareholders, there are a few obstacles in maneuvering the mechanism of shareholder resolutions to coordinate corporate reporting and performance in CSR aspects. Firstly, in terms of procedural hurdles, to be eligible to 44, s. 137 (2001). Owing to the substantial overlap of the two regimes, this section only introduces the US system. For a detailed comparison of the US and Canadian regulatory regimes with respect to shareholder resolutions, see: Dhir, ibid. 318 Dhir, ibid, at 375-76. 319 According to Rule 14a-8(i), a company may exclude a shareholder proposal for any of the following reasons: 1) Improper under state law: If the proposal is not a proper subject for action by shareholders under the laws of the jurisdiction of the company's organization; 2) Violation of law: If the proposal would, if implemented, cause the company to violate any state, federal, or foreign law to which it is subject; 3) Violation of proxy rules: If the proposal or supporting statement is contrary to any of the Commission's proxy rules, including Rule 14a-9, which prohibits materially false or misleading statements in proxy soliciting materials; 4) Personal grievance: special interest: If the proposal relates to the redress of a personal claim or grievance against the company or any other person, or if it is designed to result in a benefit to you, or to further a personal interest, which is not shared by the other shareholders at large; 5) Relevance: If the proposal relates to operations which account for less than 5 percent of the company's total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company's business; 6) Absence of power/authority: If the company would lack the power or authority to implement the proposal; 7) Management functions: If the proposal deals with a matter relating to the company's ordinary business operations; 8) Relates to election: If the proposal relates to an election for membership on the company's board of directors or analogous governing body; 9) Conflicts with company's proposal: If the proposal directly conflicts with one of the company's own proposals to be submitted to shareholders at the same meeting”. 17 C.F.R. §240.14a-8(i) (2006). For the SEC’s interpretation of the basis for exclusion, see: SEC, Division of Corporate Finance, Staff Legal Bulletin No. 14 (July 13, 2001), online: SEC <http://www.sec.gov/interps/legal/cfslb14.htm> (last visited June 12, 2016). 320 C.F.R. §240.14a-8(g) (2006). If the SEC agrees with the management, it usually issues a “no action” letter confirming that it will not take enforcement proceedings against the company if the proposal gets excluded from the company’s proxy statement. The unconvinced shareholder can then bring the matter before the courts. 121 submit a shareholder proposal, a shareholder should satisfy requirements on both the market value or percentage of shareholding and the holding period.321 A shareholder proposal is automatically invalid if the proposing shareholder does not meet the prerequisites. While this prescription is aimed at preventing the abuse of shareholder rights, it nevertheless sets an entrance barrier for CSR-conscious shareholders. Secondly, a shareholder resolution is “a non-binding suggestion to the board of directors as to how it ought to function”.322 It is non-binding in the sense that even if presented in proxy materials and won a majority of the shares voted at the annual meetings, “the board of directors is under no legal obligation to comply with a shareholders’ proposal”.323 The advisory nature of shareholder resolutions determines that “tinkering with corporate governance” is insufficient, because the management has the final say on whether the proposal will be eventually adopted.324 Lastly, the lack of a formal mechanism for post-adoption evaluation raises a big concern to the effectiveness of corporate actions toward the shareholder resolutions. Even in situations where the management agrees to accept the advice proposed by a shareholder, it does not ensure that the actions taken by the company will be compatible with what the shareholder has proposed. Moreover, in practice, between agreeing to include a shareholder proposal in the proxy statement and refusing to circulate a proposal, a midway outcome is that the proposing shareholder withdraws the proposal after 321 Rule 14a-8(b) requires the proposing shareholder to have continuously held shares worth $2,000 in market value or 1% of the total number of the company’s securities entitled to be voted at the annual meeting of shareholders for at least one year by the date of submitting the proposal. 17 C.F.R. § 240.14a-8(b) (2006). 322 Engle, supra note 316, at 67. 323 Ibid. In the United States, state and the SEC regulation may render a binding proposal invalid. 324 Bakan, supra note 59 at 159. 122 successful negotiations with the targeted company. Usually the management promised substantial adoption of the suggestion put forward by the shareholder proposal, and the shareholder agreed to withdraw the proposal. However, without a system for post-adoption monitoring, it is commonly seen that a promise made by the management fails to meet the shareholder’s expectations. For instance, as early as 2006, Les Soeurs de Sainte-Anne made a proposal to Barrick Gold, asking it to report on the environmental and financial risks associated with the Pascua-Lama mine project.325 The proposal was withdrawn after successful negotiation with the management of Barrick Gold, who agreed to hire independent environmental consultants to prepare an overview report with respect to the risk factors of the project.326 But it turned out that neither the sisters nor the CSR activists were satisfied with the report released.327 Being disappointed with the outcome, Les Soeurs de Sainte-Anne submitted a new resolution in 2008, which nevertheless failed to win the majority vote at the annual meeting.328 4.2 Identifying the Regulatory Gap 4.2.1 The Limits of Private Actions Although the above-mentioned attempts have been beneficial in raising public awareness and sparking scholarly debates surrounding CSR reporting, the success of these private 325 Shareholder Association for Research & Education (SHARE), "Report on Local Effects of Pascua-Lama Project", online: SHARE <http://www.share.ca/shareholderdb/proposal/Report-on-local-effects-of-Pascua-Lama-project/461> (last visited June 12, 2016). 326 Ibid. Also see: Michael Swan, “Sisters Take on Mining Giant”, The Catholic Register (February 21, 2008), online: <http://www.catholicregister.org/item/8363sisterstakeonmininggiant> (last visited June 12, 2016). 327 Ibid. 328 SHARE, “Ensure Best Practices at Pascua-Lama Project”, online: <http://www.share.ca/shareholderdb/proposal/Ensure-best-practices-at-Pascua-Lama-project/659> (last visited June 12, 2016). 123 actions in triggering the CSR reporting-performance alignment is episodic and on a case-by-case basis. Besides, as the previous texts show, the use of each solution is bound by various restraints and qualifications. For instance, the use of false advertising litigation in addressing CSR reporting dissembling is judicially doubtful and challenged by a constitutional barrier that the precedent has yet to overcome. Likewise, the securities fraud litigation approach is made uncertain by the expanded judicial application of the puffery defense, which is decided through case-by-case application.329 In terms of shareholder resolutions, the voting results of shareholders as well as the management’s stance toward the proposals are both unpredictable. In addition, the remedial plan reached between the advocacy groups and companies may not proceed as expected. The sporadic wins achieved so far are not enough to lead to meaningful changes over time. Additionally, the private actions provide only contingent rather than permanent responses and cannot fundamentally address the problem of the CSR reporting-performance inconsistency. By interpreting the discrepancy between CSR reporting and corporate actual performance into an issue of omission and misrepresentation in CSR reporting, these three solutions support a one-sided account of the decoupling problem. This account over-emphasizes what is reported from the companies’ source and under-emphasizes reporting’s linkage with corporate actual performance in CSR. As a result, these attempts would contribute more to the generation of greater paperwork than the stimulation of substantive corporate performance improvements on CSR dimensions. 329 Hoffman, supra note 292 at 143. 124 Therefore, the present research posits that the private actions are helpful but not enough to repair the broken link between CSR reporting and corporate actual performance in CSR aspects. Rather, a more profound and systemic approach is required if the CSR reporting-performance gap is to be bridged. 4.2.2 A Call for Governmental Regulation On a separate note, the present research considers a fundamental issue as it relates to the current remedial regime of the CSR reporting-performance gap that is dominated by private actions. While both the literature and the empirical work point to the necessity of having governmental regulation on CSR reporting,330 the present research finds that in the current regulatory field with respect to CSR reporting, corporate self-regulation and private third-party regulation, both weigh business interests at a higher level than public interests, are in charge. Based on an analysis of their weaknesses, this section concludes by arguing that the prospective solutions to the CSR reporting-performance gap should take governmental regulation of CSR reporting as its first step. 188.8.131.52 The Peril of the Current Regulatory Infrastructure At first sight, the global regulatory architecture for the implementation of CSR reporting is featured for being plural and multilayered. It is plural in the sense that law, public policies, stock exchange rules, universally-accepted guidance and corporate codes of conduct all play a role in directing and disciplining CSR reporting.331 It is multilayered 330 See supra note 231 and the accompanying texts for the literature that suggests the necessity of having governmental regulation on CSR reporting. Also see Section 3.3.2 for the empirical work on this topic. 331 Although these regulatory tools coexist, the weight that each regulatory instrument exerts in a provided jurisdiction may differ. For instance, in countries and jurisdictions that have explicit statutory requirements for publicly-traded 125 because the partnership between various regulatory bodies has already become a norm in the regulation of CSR reporting.332 That said, a close examination of the regulatory practice of CSR nevertheless brings to light a different perspective: despite the proliferation of regulatory actors and the various networks they have built, the regulatory field with respect to CSR reporting in fact reveals a supremacy of self-regulation and private regulation.333 The dominance of corporate self-regulation and private third-party regulation manifests in at least two aspects. First, from a historical perspective, it is the private and self-regulatory bodies that take the lead in setting the agendas for CSR disclosure.334 CSR reporting came into companies to make CSR reporting, the role that governmental regulation plays significantly increases in its importance. Likewise, in countries where the GRI reporting principles have been officially endorsed, the private regulatory form becomes more influential than otherwise. See supra note 112 for an introduction of the regulatory modes adopted by selected countries. 332 For instance, the informal forms of regulation, such as regulation by stock exchanges and regulation by standard setting bodies, are frequently in partnership with governmental regulation to gain authority and legitimacy. In addition, in a few countries, private reporting standards are officially endorsed by the government. Also it is commonplace that self-regulated companies voluntarily adopt a widely-accepted reporting framework produced by a private standard setting body, such as the GRI. For the literature regarding the layering of rules in general, see: David Trubek & Louise Trubek, “New Governance and Legal Regulation: Complementarity, Rivalry and Transformation” (2007) 13 Columbia J Eur Law 539 (mapping the relationships of domestic law with different national and international governance mechanisms as rivalry, complementarity or hybridity and arguing that new governance is transforming law in certain circumstances); Tim Bartley, “Transnational Governance as the Layering of Rules: Intersections of Public and Private Standards” (2011) 12 Theor Inq L 517 (using the cases of forestry regulation and labour regulation to illustrate the relationships between governmental law and transnational private standards). 333 This view is consistent with Shamir, supra note 105. Shamir posits that the field of CSR “strongly tilts in the direction of voluntary and self-reliant models”. In the present research, private regulation refers particularly to commonly-accepted and adopted regulatory standards, principles, indicators and protocols that are produced by private regulatory bodies, such as non-governmental and transnational organizations. The most-cited forms of private regulation in the field of CSR are the GRI reporting protocols and the UN Global Compact principles. With respect to the interactions between private and governmental regulation, there are contradicting views as to whether private regulation may in fact forestall or even undermine governmental regulation. One group of scholars are concerned that private regulation could crowd out governmental regulation. For instance, according to Seidman, state regulation is “thinned” by stateless regulatory schemes, such as consumer boycotts and independent labour monitoring programs, because of the distrust of international advocacy groups toward local governments in protecting labour rights. See: Gay W Seidman, Beyond the Boycott: Labor Rights, Human Rights, and Transnational Activism (Russell Sage Foundation, 2007), at 23-28. In contrast, other scholarly work argues that the displacement hypothesis is over-simplistic as the contestation of private regulation may add more nuance to the situation. See: Tim Bartley, “Corporate Accountability and the Privatization of Labor Standards: Struggles over Codes of Conduct in the Apparel Industry”, (2005) 12 Res. Pol. Soc. 211. 334 For a thorough discussion of the increased use of self-disclosure policies by the regulatory agencies, see: Fung, Graham & Weil, supra note 7. 126 existence as a pragmatic response to areas where governmental regulation has been weak or inadequate.335 In particular, CSR reporting responded to the bottom-up call to hold multinational corporations accountable for their irresponsible actions in foreign countries in cases where local regulation for such actions was absent.336 Second, from a practical view, private standard-setting bodies have become the de facto leaders in CSR reporting. Although it appears that there are more and more government-sponsored legislations on CSR reporting, these legislations are largely silent in terms of specifying what reporting standards or guidelines reporters should adhere to and encourage the utilization of existing reporting frameworks, principles and protocols to produce CSR reports.337 The official endorsement of private regulation facilitates a regulatory mode that positions 335 Conley & Williams, supra note 14, at 36 (auguring that "[t]he inadequacy of traditional regulation at the national level has provided the stimulus for the collection of actions that comprise the movement"). However, this might not be the case in some emerging markets, such as China, where the CSR movement was arguably driven by the government in the first place. See: Virginia Harper Ho, “Beyond Regulation: A Comparative Look at State-Centric Corporate Social Responsibility and the Law in China” (2013) 46 Vand J Transnatl L 375 (suggestng that CSR in China follows a state-centric path). 336 For representative views surrounding this topic, see: David J Doorey, “Who Made that?: Influencing Foreign Labour Practices Through Reflexive Domestic Disclosure Regulation” (2005) 43 Osgoode Hall Law J 353; Snyder, supra note 204; Backer, supra note 236 (proposing the establishment of an international system of disclosure to address the problem with substandard working conditions of indirect employees). Viewed by the literature, in terms of CSR reporting, the affinity that governmental regulation has with private and self-regulation is an outcome of political struggle. See: Shamir, supra note 105; Shamir, supra note 95; Maja Savevska, “Corporate Social Responsibility: A Promising Social Innovation or a Neoliberal Strategy in Disguise?” (2014) 14 Romanian J Eur Aff 80 (positing that CSR has an affinity with minimal government regulation and is a product of the neoliberal epistemology). 337 Dhooge, supra note 270, at 483-86 (criticizing the absence of disclosure protocol in the France's social disclosure legislation); Sarfaty, supra note 131, at 597-606 (noting that the GRI has been working closely with major economies to successfully popularize the use of the GRI guidelines while encouraging regulation on CSR reporting). In addition, there is a proliferation of literature that interprets the phenomenon as “outsourcing regulation”. For example, see: Dara O’Rourke, “Outsourcing Regulation: Analyzing Nongovernmental Systems of Labor Standards and Monitoring”, (2003) 31 Pol’y Stud. J. 1 (evaluating the role of nongovernmental systems such as codes of conduct and monitoring in advancing labor standards) ; Sidney A. Shapiro, “Outsourcing Government Regulation”, (2003) 53 Duke L.J. 389 (arguing that the transaction costs could be high in certain circumstances if the government relies on private means to achieve public goals); Galit A. Sarfaty, “Shining Light on Global Supply Chains”, (2015) 56 Harvard International Law Journal 419, at 434-37 (positing global supply chain regulation as a distinct model of outsourcing regulation and analyzing the accountability concerns surrounding this arrangement). 127 corporations, industry associations, private standard-setting bodies and assurance providers at the center of regulatory governance.338 The heavy reliance—actually the sole reliance in the case of Canada—on private and corporate self-regulation for CSR reporting is problematic.339 In terms of corporate self-regulation, the process of CSR reporting is seen by scholars as a strategy that serves firms’ own interests in reputation-building and reinforces their power “in subtle but effective ways”.340 As noted by the literature, the effort corporations are making to transform CSR into a business matter is an important approach that aims to resist governmental regulation.341 This effort, which is also called “marketization”,342 not only impedes governmental regulation on CSR reporting, but also encourages CSR reporting to become symbolic and cosmetic, which is a major factor that contributes to the CSR reporting-performance inconsistency. 338 Hess, 2014, supra note 245, at 129-35 (summarizing the major players in the CSR reporting field). 339 The heavy reliance on private and self-regulation is evident in the fact that various governments define CSR reporting as a voluntary action. For instance, the policy statements concerning CSR in Canada have been made by the Government of Canada in two CSR strategy releases. In both documents, CSR is defined as “the voluntary activities undertaken by a company, over and above legal requirements, to operate in an economically, socially and environmentally sustainable manner”. See: Department of Foreign Affairs and International Trade (DFAIT), supra note 198. Also See: DFAIT, Doing Business the Canadian Way: A Strategy to Advance Corporate Social Responsibility in Canada’s Extractive Sector Abroad (November 2014), online: <http://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/other-autre/csr-strat-rse.aspx?lang=eng#6> (last visited June 12, 2016). In its 2001 circulation, the European Commission defined CSR as “a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis”. Although it later endorsed a new definition that does away with the voluntary limitation, the EU report continuingly argues that “CSR remains primarily a voluntary policy” and therefore should be “driven primarily by businesses themselves”. See: European Parliament, Resolution on Corporate Social Responsibility: Accountable, Transparent and Responsible Business Behaviour and Sustainable Growth, 2012/2098 (INI), para.3.1. According to the literature, “[t]he fact that the notion of CSR eventually crystallized around ideas of voluntary compliance with private and self-regulation has been a product of an orchestrated corporate campaign, aided by business management models and an emergent industry of private regulatory instruments”. See: Shamir, 2010, supra note 95, at 538-39. 340 For the former view, see: Livesey & Kearins, supra note 230, at 250. For the latter view, see: John M Conley & Cynthia A Williams, 2005, supra note 14, at 37. 341 Shamir, 2010, supra note 95, at 544 (discussing the theoretical implications with respect to the marketization of CSR). Noted by Shamir, the proponents of the marketization approach argue that governmental regulation may stifle competition while free market facilitates the spread of CSR. 342 Shamir, ibid. 128 With respect to private regulation, the motivation and capacity of private regulatory bodies to monitor and enforce CSR reporting is questionable. This is because the private regulatory bodies involved in determining the condition of CSR reporting are primarily corporate-oriented private organizations that shape CSR reporting “in ways that are amenable to business and employer’ concerns”, rather than to societal needs.343 In addition, as suggested by the literature, private regulatory bodies such as the GRI form partnerships with governments and stock exchanges to seek legitimacy and regulatory authority, while these bodies also promote business interests at the expense of public interests.344 For instance, Sarfaty notes: the motivation behind the GRI is not whether the reports are credible to NGOs or whether they reflect a company’s good or bad performance, but that more and more companies participate which perpetuates the existence of the GRI and raises its status as the leading standard for corporate sustainability reporting.345 The empirical research of the present study exacerbates this worry. One interviewee, who is a senior manager of a mining company, vividly describes the problem in the field with respect to UN Global Compact, another influential private regulatory body in Canada and throughout the world: 343 Shamir, 2004, supra note 6, at 669 (calling the corporate-oriented private organizations as Market Non-Governmental Organizations). Shamir defines Market Non-Governmental Organizations (MaNGO) as NGOs that “are established in order to disseminate and actualize corporate-inspired versions of ‘social responsibility’ while enjoying the aura of disinterestedness often bestowed on non-profit ‘civil society’ entities” (p.680-81). According to the KPMG survey, the GRI guideline “remains the most popular voluntary reporting guideline worldwide”. See: KPMG, The KPMG Survey of Corporate Responsibility Reporting 2015, online: KPMG <https://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Documents/kpmg-survey-of-corporate-responsibility-reporting-2015-O-201511.pdf>, at 45. Shamir explicitly takes the GRI as an example of MaNGO (p.679). 344 Sarfaty, supra note 131, at 606-14. 345 Ibid, at 581. 129 I think there’s a real danger in the proliferation [of private standards]. For example, UN Global Compact does not look at the substance of what you report. They outsource and provide business opportunities for consultants. I think it is a bit of industry. The danger is when you create an industry like that, when times get tough like they are now in the mining industry, there is less and less goodwill predisposed to support CSR reporting. ... So when you hit that and you have people who are not knowledgeable [nor] immediately aware of what goes on in a particular sector and what matters to it, there will be a disconnect that can move to a backlash. As a result, the predominance of private and self-regulation attempts makes it unreliable and inadequate to address the CSR reporting-performance inconsistency and stimulate meaningful CSR changes. To tackle the problem, governmental regulation should be called for and strengthened, in order to form a more balanced regulatory combination of CSR reporting.346 In sum, while the discussion in this section covers various aspects of CSR reporting, they all target at one common thesis: the call for governmental regulation of CSR reporting. As the literature notes, when the private and public interests in being committed to CSR do not substantially align, “the state must take on more interventionist roles” in the regulation of CSR reporting.347 Within the context of the present research, this refers to CSR reporting gradually declining into an information dump and a marketing tool, rather 346 The literature has already made similar observations regarding the necessity of prescribing governmental actions to regulate CSR matters. For example, in his research about market-driven CSR, Vogel posits that “[t]he most effective strategy for reconciling private business goals and public social purposes remains what it has always been, namely effective government regulation”. See: Vogel, supra note 106. On a separate note, McInerney argues that “voluntary CSR measures should supplement not supplant state regulation”. See: McInerney, supra note 231, at 172. 347 Neil Gunningham, “The New Collaborative Environmental Governance: The Localization of Regulation” (2009) 36:1 J Law Soc 145, at 165 (discussing the importance of collaborative governance in "the shadow of hierarchy"). 130 than functioning as a regulatory instrument that facilitates benchmarking, dialogue and corporate performance improvement. 184.108.40.206 Additional Thoughts on the Design of Governmental Regulation Additionally, viewed by the present research, attention should be paid to two fundamental issues underpinning the vibrant debate with respect to governmental regulation of CSR reporting. One issue concerns the definition of mandatory reporting and the role of the stock exchanges in imposing CSR regulatory rules. To draw from Sarfaty, the notion of mandatory and voluntary may be viewed as a continuum rather than a rigid distinction.348 Thus, in a broad sense, the mandatory component does not exclusively come from governmental regulation, which only sits at one end of the regulatory spectrum. Rather, mandatory regulation may refer to a combination of governmental regulation and stock exchange regulation. This would explain why some policy document and scholarly work discuss stock exchange regulation under the heading of mandatory CSR reporting.349 This categorization is not in itself problematic. What is problematic, however, is the intention to rely entirely on stock exchange regulation to counterbalance the drawbacks of the current CSR reporting landscape. Although stock exchange regulation can be beneficial in certain aspects, stock exchanges are subject to significant incentive and enforcement problems.350 In particular, stock exchanges need to maintain a positive 348 Sarfaty, supra note 131, at 592. 349 United Nations Conference on Trade and Development (UNCTAD), Best Practice Guidance for Policymakers and Stock Exchanges on Sustainability Reporting Initiatives (2013), online: UNCTAD, <http://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=931>, at para.6-14. Also see supra note 233 for the representative academic literature. 350 Kahan, supra note 112; Kerry Shannon Burke, “Regulating Corporate Governance through the Market: Comparing the Approaches of the United States, Canada and the United Kingdom” (2001) 27 J Corp L 341, at 351-55. 131 public image to attract and retain companies, which refrains them from implementing CSR reporting rules that are more stringent than legally required. Besides, stock exchanges are limited in their regulatory power to impose fines or sanctions for violations of their rules.351 Suspension from trading or delisting is used in very rare occasions.352 In the present CSR reporting context, the most urgent issue, as identified by the present research, is to realign corporate reporting with companies’ actual performance. It takes governmental authority to conquer this problem, not only because governmental regulation can better ensure that necessary corporate internal resources would be allocated to address this issue, but also in that compared to stock exchange regulation, “governmental regulators are likely to have a competence advantage when it comes to enforcing regulations”.353 Therefore, although the present research explicitly adopts the term governmental regulation in its discussion, for the sake of language variety, it sometimes uses mandatory reporting or reporting mandate to express the same meaning as governmental regulation. To avoid misunderstanding, the present study nevertheless notes that the terms mandatory reporting and reporting mandate are used in a narrow sense in the current thesis, as they exclude the sole reliance on stock exchange rules for regulating CSR reporting.354 351 Kahan, ibid, at 1517. 352 Burke, supra note 350, at 353. 353 Kahan, supra note 112, at 1516. Kahan defines enforcing regulations to encompass three aspects, “the power to pass binding rules, the sanctioning of violations, and the policing for violations”. According to Kahan, while the power of exchanges in passing rules may vary, governmental regulation excels in the latter two aspects compared to stock exchange regulation. See: ibid, 1516-18. 354 To make sure the scope of the research was understood by the interviewees, the present research explained its notion of mandatory CSR reporting at the research interviews. 132 The second aspect underneath the call for governmental regulation of CSR reporting relates to the form and scope of the proposed CSR reporting mandates. In particular, among the proposals for governmental regulation, a significant group of scholars argues in favour of the incorporation of CSR reporting requirements into the existing securities regulatory regime as a solution to the underregulation of CSR reporting.355 This view has gained support especially in Canada from both regulators and the public, exemplified by the securities regulators’ promulgation of regulatory guidance for the disclosure of environmental information as well as the increasing presence of environmental and social information in corporate financial filings.356 Such a solution seems economical and politically feasible, as it requires little governmental effort beyond the existing enforcement function.357 On second thought, however, the method of building CSR reporting programs within the existing institutional structures of securities reporting bears questioning. Viewed by the present research, this approach could only be adopted ad hoc and provisionally. In the long run, it is problematic to use securities regulation as the 355 See supra note 233 for the representative literature that supports this view. Although the literature has not come up with a thorough discussion on what the alternatives are for mandating CSR reporting, a possible option is to promulgate a stand-alone requirement in the form of regulation for CSR disclosure, as exemplified by the practice in France and several other European countries. See: Dhooge, supra note 270 for an overview of the France decree. Also see supra note 105 for a general introduction of the European circumstance. 356 See: Canadian Securities Administrators (CSA) Staff Notice 51-333, Environmental Reporting Guidance (October 27, 2010). Different from the United States, securities regulation in Canada is provincial-based. CSA is a non-regulatory body that issues National Policies to coordinate policies across the country. However, it lacks enforcement powers and each jurisdiction remains free to take its own approach. A more binding document in Canada comes from Ontario Securities Commission (OSC), see: OSC Staff Notice 51-716, Environmental Reporting (February 29, 2008) (outlining the result of a targeted review of compliance with the disclosure requirements pursuant to National Instrument 51-102 Continuous Disclosure Obligations and concluding that material environmental information is currently underprovided). 357 Although the Canadian securities regulator has used official interpretative guidance to back up the disclosure of material environmental information by publicly-listed companies in their continuous disclosure documents, the guidance acknowledges that it does not mean to change the regulatory landscape of corporate reporting. Neither did the regulatory agency seek to expand the reporting obligation beyond what was required by securities law nor intend to take additional enforcement effort in this regard. See: ibid, CSA Staff Notice 51-333 (noting that “this notice clarifies existing disclosure requirements relating to environmental matters and does not create any new legal requirements or modify existing ones”). 133 single official regulatory venue for CSR reporting. First, only the disclosure of some CSR information can be justified as necessary for the protection of investors, one of the most often cited objectives of securities regulation.358 As a result, mandating the disclosure of CSR information based on the same benchmarks of financial reporting would yield to CSR disclosure that is fragmented and not comprehensive enough.359 Second, the rationales of CSR reporting regulation and securities disclosure regulation are fundamentally different, in that the aim of securities disclosure regulation is not to eliminate all the risks that investors are exposed to, but rather to ensure investors are aware of these risks, 360 while CSR reporting regulation is aimed to identify and correct the risks associated with corporate irresponsibility. Particularly, one significant difference between the CSR reporting system and the securities disclosure mechanism is that in terms of CSR reporting, “information was viewed as a way to change behaviour, not simply as a public right” of having access to information.361 This is not to claim that securities disclosure cannot encourage companies to rethink policies and make internal changes by arousing public attention to mismanagement.362 Nevertheless, because the two systems are subject to different regulatory philosophies, securities regulation is not 358 In Canada, investor protection was set by the 1965 Kimber Report as one of the twin goals for securities regulation (the other is efficient capital markets). See: Report of the Attorney General’s Committee on Securities Legislation in Ontario (Toronto: Queen’s Printer, 1965), Part I [Kimber Report]. This principle was also suggested by International Organization of Securities Commissions (IOSCO) as a key objective of securities regulation. See: IOSCO, Objectives and Principles of Securities Regulation (May 2003), online: <http://www.iosco.org/library/pubdocs/pdf/IOSCOPD154.pdf>, at para. 4.1. 359 See supra note 309 for a discussion of the material test for mandatory financial reporting in securities regulation. 360 Johnston, Rockwell & Ford, supra note 169 at 17. 361 Graham, supra note 200, at 15 (comparing the differences between “new disclosure systems” from the “right-to-know requirements”). 362 However, a review of the historical background of mandatory securities reporting in the United States cogently reveals that “[t]he SEC perceives its role as protecting the investors rather than acting as an instrument of corporate change”. See: Feller, supra note 295, at 248. 134 the appropriate mechanism for regulating CSR reporting officially and the regulatory architecture for CSR disclosure ought to be built independent of securities regulation. 4.3 The Reflexive Law Proposal Putting CSR reporting within the setting of governmental regulation, the present research advocates for the use of reflexive law to mitigate the CSR reporting-performance gap. Particularly, it proposes mandating CSR reporting and shaping the CSR reporting requirements into a form of reflexive law. This argument is enlightened by the theory of reflexive law, which puts forward an alternative approach to regulation. Different from traditional forms of regulation, reflexive law regulates by establishing a sequence of self-referential processes and arrangements within the regulated social institutions. Relying on the regulated organizations’ self-referential capacity, reflexive law leads them to proactively reflect on and react to the problems identified. 4.3.1 What Reflexive Law Is The theory of reflexive law was initially brought into being by Teubner, a German legal scholar and sociologist, to refer to a new evolutionary stage of law in addition to the formal and substantive types of law.363 In terms of the evolution of law, the first type of law emerged was formal law, which focuses on giving private rights to individuals and “establishing basic rules by which private parties orient their affairs and resolve 363 Eric W Orts, “Reflexive Environmental Law” (1994) 89 Northwest Univ Law Rev 1227, at 1254-57. Also see: Gunther Teubner, “Substantive and Reflexive Elements in Modern Law” (1983) 17:2 Law Soc Rev 239 at 251-55. Since Orts was among the first to contextualize the three types of law within the North American regulatory system, the present thesis finds it more persuasive and coherent to adopt Orts’ interpretation of the three regulatory patterns than following their original paths toward the notion of legal rationality. See Section 4.3.4 for a more detailed discussion of Orts’ work. 135 disputes”.364 When the social interactions became more complex, formal law was not enough to meet societal needs and thus substantive law was developed. Substantive law is “goal-oriented intervention” that regulates social processes in a more particularistic way than formal law and it does so “through statutes and delegation of legal authority to specialized agencies”.365 The increased expansion of substantive law in the modern society raised both cognitive operational difficulties as well as normative challenges.366 Meanwhile, law was gradually decentered by other institutions in the social system that makes it increasingly difficult for law to subjugate those spheres.367 These two conditions set the stage for the emergence of reflexive law. Reflexive law is a self-critical legal theory. Defined as law that “provides the structural premises for reflexive processes in other social subsystems”,368 reflexive law “recognizes limits on law imposed by increasing social complexity” and proposes a more modest role of law.369 Therein, it advocates for establishing self-referential processes within social institutions outside the legal system and enhancing the social institutions’ self-referential capacity to fulfill the task of public regulation.370 Instead of direct intervention, reflexive 364 Orts, ibid at 1255. According to Orts, the common law of property is a form of formal law, because it “recognizes certain legal ‘rights’ of individual owners” and allows individuals to bring any unsolved disputes to the courts. The common law of nuisance is also viewed as a kind of formal law. 365 Orts, ibid, at 1256-57. Orts posits that “[s]ubstantive law focuses on social regulation through public administration”. In this sense he finds that substantive law correlates to command-and-control regulation, while formal law is analogous to market-based regulation. 366 Orts, ibid, at 1258-59. Orts recognizes two normative problems associated with relying extensively on substantive law: one is the difficulty to oversee and coordinate a heavily detailed mass of statutes and the other is challenges toward democratic legitimacy because administrative delegation is a typical arrangement of substantive law. 367 Sociologists term this process as social differentiation. See: Teubner, supra note 363, at 263 (citing Luhmann's social theory). 368 Teubner, ibid at 275. According to Teubner, the role of the reflexive legal order is “to decide about decisions, regulate regulations, and establish structural premises for future decisions in terms of organization, procedure, and competencies”. 369 Orts, ibid, at 1262. 370 Orts, supra note 363 at 1265–66. 136 law shares the regulatory burden with other social entities and “restricts legal performance to more indirect, more abstract forms of social control”.371 It does so by setting up certain procedures and stimulating the self-referential capacity of the social institutions subject to regulation. Particularly, with respect to CSR, the reflexive law approach argues for a reflexive control of corporate behaviour. It is in favour of regulatory methods such as “disclosure, audit, justification, consultation, and organization of internal control processes” to address the CSR tensions and to promote CSR-conscious corporate behaviour.372 Despite its European origin, the theory of reflexive law has been meticulously developed by common law scholars to address issues related to CSR.373 These explorations are of precious normative value as they suggest plausible paths that reflexive law could take. A detailed discussion in terms of how the reflexive law theory has been applied to address practical CSR issues will be made in Section 4.3.4. 371 Teubner, supra note 363 at 274. 372 Gunther Teubner & Bremen Firenze, “Corporate Fiduciary Duties and Their Beneficiaries: A Functional Approach to the Legal Institutionalization of Corporate Responsibility” in Klaus J Hopt & Gunther Teubner, eds, Corporate Fiduciary Duties and Their Beneficiaries: A Functional Approach to the Legal Institutionalization of Corporate Responsibility (Walter de Gruyter, 1985), at 167 (arguing that the substantive standards of fiduciary duties need to be replaced by reflexive regulatory methods). 373 Among the common law literature that has elaborated on the theory of reflexive law from a CSR perspective are: Orts, supra note 363 (proposing reflexive law as an alternative regulatory approach in addition to command-and-control and market-based regulation and exploring its use in environmental regulation); Hess, 1999, supra note 86; Sanford E Gaines, “Reflexive Law as a Legal Paradigm for Sustainable Development” (2002) 10 Buffalo Environ Law J 1 (making a statement on “reflexive sustainable development law”); Dennis Hirsch, “Green Business and the Importance of Reflexive Law: What Michael Porter Didn’t Say” (2010) 62:4 Adm Law Rev 1063 (analyzing how the reflexive law approach can foster four types of green behaviour that outcome-based regulation cannot properly stimulate); Doorey, supra note 336 (proposing the use of domestic reflexive disclosure regulation to influence foreign labour practices); Warren A Braunig, “Reflexive Law Solutions for Factory Farm Pollution” (2005) 80 N Y Univ Law Rev 1505 (arguing that the reflexive law approach should be adopted to govern the environmental threats that factory farm poses); Delcianna J Winders, “Combining Reflexive Law and False Advertising Law to Standardize Cruelty-Free Labeling of Cosmetics” (2006) 81 N Y Univ Law Rev 454. 137 4.3.2 Reflexive Law and the New Governance Scholarship In recent years, a growing body of theories that has dominated the regulatory literature is the new governance paradigm. New governance is defined as “regulation that is informed and underpinned by a bottom-up, decentered, horizontal experimental process by private actors”.374 The new governance scholarship favours process-based, flexible, participatory and experimental regulation as an alternative to conventional models of regulation.375 To precisely position reflexive law in the regulatory landscape, it is indispensable to briefly examine the relationship between reflexive law and the new governance scholarship. While some scholars attribute reflexive law as an integral part of the new governance paradigm,376 others take a more cautious stance. For example, Karkkainen argues that “[m]any, and probably most, New Governance scholars have simply found it unnecessary to embrace Teubner’s controversial and far-reaching theories”.377 In the middle are intellectuals who agree that the two are not necessarily symbiotic but accept that they are strongly connected.378 374 Cristie Ford, “New Governance in the Teeth of Human Frailty: Lessons from Financial Regulation” (2010) 2010 Wis Law Rev 441 at 445. Prominently, Ford puts forward three related convictions that underlie new governance regulatory strategies. These are: the emphasis on “learning by doing”, the explicit recognition of contingency, and the recognition of bounded knowability. 375 Hess, 2007, supra note 115, at 454-55. 376 For example, see: Hess, ibid; Orly Lobel, “Renew Deal: The Fall of Regulation and the Rise of Governance in Contemporary Leal Thought, The” (2004) 89 Minn Law Rev 342 (arguing that there are "strikingly similar patterns of explanation" between the theory of democratic experimentalism and the theory of reflexive law); Grainne de Burca, “New Governance and Experimentalism: An Introduction” (2010) 2010 Wis Law Rev 227 (noting that the reflexive law theory provides a theoretical accounts of the rise of new governance in both the EU and the US). 377 Bradley C Karkkainen, “New Governance in Legal Thought and in the World: Some Splitting as Antidote to Overzealous Lumping” (2004) 89 Minn Law Rev 471 at 483 (responding to Lobel's comments on the new governance scholarship that is based on reflexive law). For counter-argument, see: Orly Lobel, “Setting the Agenda for New Governance Research” (2004) 89 Minn Law Rev 498 at 504 (arguing that Teubner himself has connected his theory to new governance). 378 See: Dhir, 2009, supra note 19 at 59; Ford, 2010, supra note 374, at 445. 138 The present thesis views new governance as an expanded continuation of reflexive law. On the one hand, a number of widely-acknowledged new governance literature explicitly draw from the theory of reflexive law and the two schools of thought overlap with each other to a great extent. On the other hand, however, the theory of reflexive law proposes an alternative regulatory method in the context of law rather than governance, which arguably is a broader concept than law.379 Consequently, owing to the above-mentioned considerations, the present research relies on the new governance literature to establish its arguments, but meanwhile, it draws an explicit divide between law and non-law. As will be examined in the ensuing section, reflexive law provides a viable solution to alleviate the CSR reporting-performance inconsistencies not only because this approach is reflexive, but also because it is law. In jurisdictions where voluntary CSR reporting is the norm, like the United States and Canada, quite a number of corporations nevertheless report on CSR perspectives and have certain processes in place for reporting. However, the frequently observed CSR reporting-performance gap, which has been evidently exhibited in the previous Chapter, forcefully demonstrates that the absence of law has dramatically hindered CSR reporting to fulfill its intended purpose in improving corporate performance on CSR dimensions.380 379 One wing of the new governance scholarship is research that explores the potential of private regulation in the absence of law. For instance, see: Conley & Williams, supra note 219. 380 This is not to assert that in European countries, where CSR reporting is made mandatory, the CSR reporting-performance gap does not exist or is negligible. Rather, the reflexive law has both the reflexive component and the law component. Depending on the institutional design, unless both conditions are met, there is still a possibility for the inconsistency to occur. This raises questions such as whether the mandatory CSR reporting requirements that are being practiced in the EU amount to reflexive law. However, owing to the limited scope of this study, these inquiries will be left to future research to deal with. 139 4.3.3 A Critical Analysis of the Reflexive Law Theory This section reflects on not only Teubner’s theory, but also the literature in the common law world that has elaborated on and applied the theory to address concrete social problems.381 In particular, it highlights and responds to two issues that are directly related to the thesis argument and have been heavily questioned by the literature. 220.127.116.11 Is the Law Component Indispensable?382 In his seminal piece that has aroused lasting debates regarding the role of law in regulating CSR matters, Stone makes a critique of the legal institution, suggesting that “trust in traditional legal machinery as a means of keeping corporations in bounds is misplaced”.383 In reaction, Teubner argues that reflexive law might be a solution, because “‘reflexive’ control of corporate behaviour”, is “not where the law ends, but where the law begins”.384 Although the jurisprudence debate is beyond the scope of the present thesis, it consolidates what the present thesis posits, i.e., reflexive law encompasses two components: the reflexive component and the law component. However, the law component has long been underemphasized in the literature. Since most of the literature discusses reflexive law within a legal or regulatory context, the research emphasis tends to be placed on the reflexive component with the law component 381 See supra note 373 for the representative literature that applies reflexive law to different regulatory settings. 382 The present thesis takes the stance that reflexive law, as a division of law, incorporates legislations and other official, written forms of regulatory methods, such as rules and regulations. 383 Christopher D Stone, Where the Law Ends: The Social Control of Corporate Behaviour (Harper & Row, 1975), at 110 (presenting problems traditional legal machinery has in regulating corporate irresponsible performance and proposing putting focus on the processes of corporate decision making as a solution). 384 Teubner & Firenze, supra note 372 at 166. 140 taken for granted and hardly mentioned.385 In addition, a growing number of scholars have broadened the research dimension of reflexive law from law to governance without evidently justifying what the differences between the two scopes are in applying the theory and why their contention is scalable.386 What adds to the complication is that even Teubner himself was hesitant clarifying the law-governance relationship in his theory. Advocating for a catalytic role of the law, Teubner has not yet expressed whether this function can be performed by institutions other than law.387 As a result, an unanswered question remains whether the law component in reflexive law is indispensable or can be substituted by informal, private regulatory instruments. Viewed by the present thesis, reflexive law should not be replaced by self-regulation or other non-governmental forms of regulation, such as regulation undertaken beyond the state or shared with non-state actors. Reflexive law provides a viable solution to mitigate the CSR reporting-performance inconsistencies not only because this approach is reflexive, but also because it is backed by authoritative power, which plays a critical role in facilitating and, in the case of non-obedience, enforcing the corporate self-regulation 385 For example, although arguing for a transition to a mandatory system at a later stage, Orts proposes setting up an environmental management and auditing system on a voluntary basis as a form of reflexive law. See: Orts, supra note 363. Moreover, some scholars view reflexive law as a form of self-regulation. See: supra note 221. Also see: Hirsch, supra note 373. 386 Doorey, supra note 336; Jan-Peter Voss & René Kemp, “Sustainability and Reflexive Governance: Introduction” in Jan-Peter Voss, Dierk Bauknecht & René Kemp, eds, Reflexive Governance for Sustainable Development (Edward Elgar Publishing, 2006), at 3 (arguing that reflexive governance is “about the self-steering of society” and the interaction of social actors); Colin Scott, “Reflexive Governance, Regulation and Meta-Regulation: Control or Learning?” in Olivier de Schutter & Jacques Lenoble, eds, Reflexive Governance: Redefining the Public Interest in a Pluralistic World (Oxford; Portland, Or.: Hart, 2010), at 43 (positing reflexive governance as a mutual learning process). Reversely, scholarship of legal pluralism argues for the broadening of the concept of “law” to incorporate non-state regulatory ordering. For views against the legal pluralist response to regulatory pluralism, see Christine Parker, “The pluralization of regulation” (2008) 9:2 Theor Inq Law 349, at 353-55 (identifying three main problems associated with an expanded definition of law). 387 Teubner & Firenze, supra note 372, at 159-60. 141 processes. The official law nature is essential for reflexive law to function properly, in that it ensures that valuable resources within organizations are allocated for internal self-reflection processes that otherwise will not necessarily be established or well-maintained.388 In the context of corporations, the structural precondition for corporate self-reference is indispensable, since “many problems owe not to failures of the corporation to have the information on hand (somewhere), but to failures to process it upward to the people who are in a position to do something about it”.389 Law can help create “the strands of social networks” that other social institutions fall short of on their own.390 This explains why the literature argues that in the case of reflexive law, “law might still play a universal normative role” in provoking coordination between subsystems.391 18.104.22.168 The Relationship between Reflexive Law and Public Goals In describing what reflexive law is, the literature typically contrasts reflexive law to substantive law,392 arguing that reflexive law does not command any predetermined outcome but rather guides the regulated entities in thinking critically and behaving responsively.393 As Teubner notes, “[i]nstead of taking over regulatory responsibility for 388 This echoes to Teubner & Firenze’s argument that “institutions and procedures should be designed to promote internal reflexion processes …. This reflexion cannot be voluntary, but needs to be stimulated by powerful external forces”. Teubner & Firenze, ibid, at 165. Also see Section 4.1 for a thorough analysis of why we need a more structured legal regime, compared to the current one, to regulate CSR reporting. 389 Stone, supra note 383, at 204. 390 Parker, 2008, supra note 386, at 358. 391 Parker, ibid. 392 Also called regulatory law by Teubner. It is the conventional form of law. Teubner defines regulatory law as law that “[defines] standards of business conduct and production results in all details and [enforces] those standards via negative or positive sanctions”. Teubner & Firenze, supra note 372, at 159. Also see Orts’ definition at supra note 363. 393 For instance, Hess argues that “[s]ocial report legislation may be termed a ‘reflexive law’ because the law will not command any particular outcome”. Hess, 1999, supra note 86, at 63. 142 the outcome of social processes, reflexive law restricts itself to the installation, correction, and redefinition of democratic self-regulatory mechanisms”.394 It is therefore generally believed that reflexive law is process-driven while substantive law is goal-driven. However, despite that reflexive law is about setting a process, argued by Parker, “it must be a process that is ‘going somewhere’”.395 So here comes the doubt: does setting public goals and promoting certain social values contradict with the spirit of reflexive law? Viewed more broadly, is reflexive law and substantive law mutually exclusive? This question is discussed not only because it is fundamentally important for a precise understanding of the concept of reflexive law, but also since it informs the analysis of the ensuing chapter and directly influences the research conclusion in terms of whether the CSR policy goals should be clearly identified and defined in order to repair the CSR reporting-performance gap. This inquiry also echoes to the concerns that the literature has raised over reflexive law being reduced to a purely reflexive, process-oriented law that does not set any substantive value. For instance, situating reflexive law within the setting of regulatory pluralism, Parker posits, 394 Teubner, supra note 363, at 239. 395 Parker, supra note 60 at 230. Parker uses this sentence to describe meta-regulation, which is usually understood as “the regulation of self-regulation”. According to Parker, the concept of meta-regulation “would be aimed toward similar ideals as those represented by Teubner’s idea of ‘reflexive law’” (p.212). 143 “We need to be cautious about advocating an ideal of law that takes no responsibility for promulgating substantive values and is only concerned with processes connecting with other processes—law should be about processes for articulating substantive outcomes”.396 The worry is not groundless. In most scholarly discussions, reflexive law has been positioned as an evolutionary stage of law that is more nuanced and context-sensitive than substantive law.397 Rather than complementing existing types of law, it seeks to replace them. It is under such a circumstance that the scholarly work argues that the deconstruction of substantive rights may result in “a system impervious to direction and leadership, incapable of setting priorities”.398 While sharing the above sentiment, the present research sides with the view that reflexive law does not mean to do without substantive law.399 Putting reflexive law within a regulatory pluralism setting resonates with the conception of Smart Regulation, which favours the use of multiple rather than single policy instruments to achieve public objectives.400 Taking one step further, the present thesis argues that setting normative goals that the regulated entities could reflect upon and react to does not necessarily 396 Parker, 2008, supra note 386, at 360. Parker herself is not against reflexive law. What she argues against is the misinterpretation of reflexive law into a process without adequate goals. See: Parker, 2007, supra note 60,
UBC Theses and Dissertations
Alleviating the corporate social responsibility reporting-performance inconsistency : a tentative proposal… Hao, Si 2016
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