While some cheer the California Supreme Court ruling against Nike as a victory for truth in advertising, others consider it a potential defeat for CSR reporting and increased corporate transparency.
In the May 2002 decision of the Kasky v. Nike case, a majority of four California Supreme Court Justices ruled that the sportswear makers public statements constituted commercial speech. The other three justices dissented, saying that the statements amounted to free speech. The first amendment to the U.S. Constitution extends utmost protection to freedom of speech, but subsequent laws have placed tight restrictions on commercial speech. Companies must maintain truth in advertising.
The legal team representing self-described environmentalist Marc Kasky charged Nike (ticker: NKE) with negligent misrepresentation, fraud, and deceit in communicating its global labor practices. Nike contended that its press releases and letters to college presidents, athletic directors, and newspaper editors contributed to the public dialogue on globalization, and thereby did not represent advertising. The case, which began in 1998, now proceeds back to the lower court to determine the veracity of Nikes public statements.
On the one hand, the Courts decision against Nike sends corporations the message that they cannot greenwash, or represent their social and environmental practices as more responsible than they are in reality. One could reason that the decision will thus promote transparency and honesty in disclosure of social and environmental practices. However, some companies may react by becoming fiercely tight-lipped for fear that any statements could expose them to litigation risk. Many may come to view all public statements as commercial speech. Such statements would include corporate social responsibility (CSR) reports and communications with socially responsible investment (SRI) firms and shareowners.
The Kasky decision will have considerable adverse consequences for CSR reporting and the ability of SRI funds to secure accurate information, said Harvard Constitutional Law Professor Laurence Tribe, who is also Nikes Counsel of Record in its appeal to the U.S. Supreme Court. I regarded the decision of the California court as extremely dangerous to free speech as well as seriously wrong as a matter of constitutional law, and because of the importance of the issue I agreed to undertake the assignment for Nike, Prof. Tribe told SocialFunds.com.
Not all who are familiar with the case fear that companies will clam up in reaction to the decision.
The California statutes upon which Mr. Kaskys case rests have been on the books for some time, said Adam Kanzer, general counsel and director of shareholder activism at Domini Social Investments. Companies might become a little more cautious about their public statements. But they view CSR reporting and information disclosure in general as a means of building brand and engaging investors. This case doesnt change that. The only thing that may have changed is the perception of risk.
Currently, companies voluntarily follow CSR reporting guidelines such as the Global Reporting Initiative (GRI). In the wake of the Kasky v. Nike decision, companies may indeed decide that the risk of litigation in California, where almost all multinational corporations sell products and services, eclipses the benefits of voluntary reporting.
Fear of the possible consequences of disclosure is often a big factor for companies on the brink of reporting, said Mallen Baker, development director for UK-based Business in the Community, which advocates corporate social responsibility. So far, it has been more or less true to say that companies do not suffer negative consequences from honest disclosure–only from covering up. If everything that companies say is to be evaluated on different, more restrictive rules to what anyone else might say, then even honest disclosure becomes a risky business.
Mr. Baker suggests as a solution the development of a more robust, credible framework for CSR reporting.
There urgently needs to be consensus about what constitutes core data in social reporting, Mr. Baker told SocialFunds.com. [T]he current situation raises a big challenge for the GRI. The Global Reporting Initiative could not be reached for comments.
Despite this lack of consensus on what information the GRI should report, the GRI is elsewhere considered the best standard for holding companies accountable for social and environmental responsibility. For example, the Johannesburg Stock Exchange in South Africa requires listed companies to follow GRI guidelines. Similar regulation in the U.S. might solve the problems posed by the Kasky v. Nike dilemma. Indeed, both those who support the California Supreme Courts decision and those who question it point to the GRI as a potential solution.
The full impact of the case on CSR reporting and information disclosure is not known because the case is not over yet. It appears that Nike is going to continue pushing the argument that its statements about its global labor practices should be considered as free speech and therefore protected. Mr. Kanzer sees potentially grave consequences for investors if the U.S. Supreme Court overturns the California ruling in favor of Nike.
Lets say Nike is given free speech protection on statements made about its contracted overseas factories because the subject is considered a public dialogue, said Mr. Kanzer. What will the implications be, for example, for the environmental risk information that the SEC currently requires companies to disclose? How about discussions of a corporations executive compensation package? There is a risk that were headed down a very steep slippery slope. Nearly every corporate communication could be said to raise issues of public concern. Investors may find themselves with no means of obtaining accurate information about any topic that could be considered part of a public dialogue.