Managing Legal and Reputational Risks in an Era of Enhanced Transparency

HiRes (2)Companies face a range of new requirements and expectations calling for enhanced transparency regarding human rights-related risks in connection with their operations. Responsible compliance with both mandatory requirements and voluntary standards requires a coordinated internal approach that seeks to address the concerns of key stakeholders while mitigating potential legal risks.

Examples of new transparency requirements include:

A traditional compliance approach to these new requirements may lead companies to minimize responsive disclosures to such a degree that the company will face reputational challenges. It is important to remember that these requirements have emerged in a context in which investors, civil society organizations, and consumers have all been engaged in effort to mandate increased corporate reporting on social impacts. These efforts are bolstered by the transparency expectations reflected in the U.N. Guiding Principles on Business and Human Rights and the reality that these expectations are increasingly being incorporated into national-level legal and regulatory provisions. Notably, the upcoming U.S. Government’s National Action Plan on Responsible Business Conduct is expected to focus on how the government can promote and encourage responsible business conduct through enhanced transparency.

In this context, corporate compliance personnel would benefit from consultations with colleagues who are more directly engaged in assessing the expectations of key stakeholders regarding corporate social performance and reporting. The lines are blurring between voluntary social responsibility reporting and mandated disclosures. Companies therefore need to adopt a multi-disciplinary approach as they develop public reports and policy statements.

Just as corporate compliance personnel will benefit from consultations with colleagues whose expertise is grounded in social responsibility and stakeholder engagement, companies must also ensure that their public social responsibility reports are prepared with an eye to limiting traditional legal risks.

The legal risks associated with public reports on complex human rights challenges have been highlighted in a wave of recent lawsuits filed in California.  As previously discussed, these suits have all alleged that corporate disclosures regarding human rights concerns in their supply chains are misleading and harmful to corporate consumers.

It remains to be seen whether the suits, which were filed pursuant to the California Business and Professions Code §§ 17200 and 17500, will survive motions to dismiss. That said, it is important that companies ensure that their public disclosures, which may construed as commercial speech, are both true, capable of being verified, and not likely to deceive the public. As companies seek to address complex human rights challenges, it can be easy to make statements in public disclosures that are factually accurate but potentially misleading. For example, a corporate statement about regular audits of suppliers may be true, but a consumer might believe that the company audits all tiers of its supply chain, while the company only engages directly with first-tier suppliers.

Ultimately, companies should be certain that they have cultivated the internal communications channels and expertise to attend to both the legal and the reputational risks associated with new transparency and disclosure requirements and expectations.

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