From ‘Corporate Social Responsibility’ to ‘Corporate Social Liability’?

The debate about Corporate Social Responsibility has recently started to move into new territory: the establishment of what can be called ‘Corporate Social Liability’ or ‘CSL’. The new CSL goes beyond classical tort and company law and may result in vicarious liability of parent companies for subsidiaries and third-party business partners. Its main focus has been on human rights and the environment.

Various legislative developments and court cases, particularly in Europe, have contributed to the emergence of CSL:

• The EU Council and Parliament as co-legislators agreed in February 2022 on a draft for a ‘Directive on Corporate Sustainability Due Diligence’. The Directive provides for an obligation of parent companies of large international groups to operate human rights and environmental due diligence across their group structures and value chains. The Directive currently awaits its final approval.
• In Switzerland, a law entered into force on January 1, 2022, in the aftermath of the rejection of a constitutional initiative on multinational group liability. The law provides for a duty of care of Swiss parent companies covering their subsidiaries as well as their global supply chain towards preventing ‘child labor’ and trade with ‘conflict minerals’. Violations of the new duties of care give victims from around the world a potential cause of action against Swiss companies in Switzerland.
• In the Netherlands, the Hague District Court in 2021 ordered the parent company of the Shell group to reduce its carbon dioxide emissions to 45% of its 2019 levels by 2030. The decision was based on Art 162 of the Dutch Civil Code which makes it a tort to violate ‘a rule of unwritten law pertaining to proper social conduct’. Shell appealed the decision.
• The Shell parent company was also the defendant in a landmark decision by the UK Supreme Court in 2021. It involved a civil action for damages by victims of an oil spill in Nigeria. The case touched, among other things, on the question of whether the parent owed the plaintiffs a direct duty of care. The Supreme Court affirmed the existence of such a duty under common law. It found that group management had a responsibility for ‘the safe condition and environmentally responsible operation of Shell’s facilities and assets’.

Differences among jurisdictions notwithstanding, the recent rise of CSL seems to develop along three axes:

• New Duties of Care of Companies for Human Rights and the Environment: The new forms of CSL focus mainly on human rights and the environment. Both are hot topics in the current political discourse of Western democracies and both are broadly recognized as crucial to the global value system and the future of our societies.
• Potential Parent Company Liability for Subsidiaries and Business Partners: Typically, the newly emerging corporate duties arise at the parent company level. They require overseeing subsidiaries, but may also extend to monitoring third-party business partners. The corollary of these new obligations is a liability risk in the form of negligence or even strict liability.
• Expanded Jurisdiction of Home Countries: By creating specific parent company obligations to monitor events in host countries, the territorial jurisdiction of the host country is at least partially substituted by the laws of the home country. In addition, the creation of direct parent company obligations vis-à-vis potential victims in host countries opens up home country courts to them.

In a recent paper, I assess the novel elements seen in these international developments with a particular emphasis on their social efficiency implications. My conclusions are that:

• Imposing strict liability exclusively on companies for any environmental damages and human rights violations in the context of their activities in host countries—without any defense reflecting the limits of their relative monitoring advantages—would create massive moral hazard. A negligence liability rule, on the other hand, that imposes realistic and tractable monitoring duties on corporations, including their parents, would not be subject to the same moral hazard risks.
• Any monitoring advantages of parents depend on the degree of their involvement with the subsidiary. A parent limiting itself to a mere shareholder role is less able to control the events at a subsidiary than a parent that takes charge of subsidiary operations through group management. Any standard of care should reflect such differences. If this were not the case, the efficiency potentials of decentralized international group management techniques might be wasted.
• Parent companies, in setting up subsidiary corporations, are typically granted limited liability for the subsidiary’s debt. This arrangement between the parent, as foreign direct investor, and the host country, as recipient thereof, should not be lightly thrown overboard. It reflects a widespread and efficient contractual allocation of political and business risks tested by world markets: the parent puts down a (sufficient) bond in the form of the subsidiary’s equity to cover business risks while the host country, in return, grants the subsidiary limited liability to shield the parent from political risks. Any parent company liability in the context of CSL should therefore be limited in scope and only cover the parent’s own negligence outside its shareholder role.
• Host country operations by corporate groups should, in principle, be subject to host country tort laws. That includes all parent activities going beyond their  capacity as shareholders of their subsidiaries. Only narrow exceptions established by home country law can be justified. Most importantly, they should not undercut the liability arrangement between the corporate parent and the host country. To be sure, given the potential dysfunctionalities of host country legislation and courts, there is a legitimate case for default rules in home country law, eg a ‘public policy exception’, if relevant host country laws are in violation of basic principles of the rule of law.

In sum, the recent international attempts to shape new forms of CSL should not be dismissed entirely. If crafted diligently, CSL could contribute to the worthy causes of human rights and a sustainable environment. However, if rushed with idealistic fervor by either legislators or courts and without a view to social efficiency, they might produce too many counterproductive effects, incl. excessive liability, inefficient corporate structures or stymied corporate investment in third world countries.

Karl Hofstetter is a Professor at Zurich University.