Contract (as) Social Responsibility (Part 2): Defined Terms

An earlier post set up the month’s agenda:  explore theoretical, doctrinal, and empirical opportunities presented by “contract (as) social responsibility” (KSR).  Before going further, it may be useful to provide some examples and define what I mean by KSR.

Examples

Labor-related terms in supply chain contracts, discussed in the prior post, are a well-known example of KSR, but not the only ones.  Michael Vandenbergh, for example, has argued that supply chain agreements can also be used to advance environmental goals.

But there is a world of KSR beyond supply chain contracts.  Frances McDormand’s speech at the Academy Awards, for example, implored the A-listers in the audience to negotiate for “inclusion riders,” contract terms that would require movie productions to have a certain level of social diversity (e.g., race, gender).  “Impact investing,” according to one enthusiast, “could be one of the most important social innovations in our lifetimes, leveraging the massive power of the capital markets to a higher purpose than maximizing returns for shareholders.” The oldest example I have found so far—and I suspect there are still older ones—is the Beatles’ early performance agreement, which apparently required venues to integrate racially.

Don’t let it be.

KSR can be seen as part of a longer arc of social activism through market action.  From the contested notion that African Americans could use market power to counter the pernicious effects of racism, to Cesar Chavez’s lettuce boycotts of the 1960s, to the South African divestment campaigns of the 1980s, the socially active have long believed that money can do more than talk: it may compel others to walk.  Sometimes, as in apartheid, they may have been right. In other cases, such as black banking, they may not.

Still, we (want to believe that we) can achieve social justice through the beer and coffee we choose to purchase.  Who we see in the media may affect what we believe to be possible in reality, in terms of gender and racial diversity.  Eric Posner and Glen Weyl argue that the “emancipatory force” of “radical markets” “can reawaken the dormant nineteenth-century spirit of liberal reform and lead to greater equality, prosperity, and cooperation.”  Whether or not that is true, there is little doubt that there is demand for social change through market participation.

Because contracting is an important mechanism in market function, the rise of KSR seems, from this perspective, inevitable.  Yet, not all market participation involves contract in any formal sense, and of course most contracting probably does not purport to be socially responsible in the sense that interests me.  So, KSR is at most a (small?) (very small?) subset of contract-based market activity.

Business lawyers love their defined terms–and I am at heart a business lawyer–so what might a definition of KSR look like?

Definition

A contract for social responsibility would stipulatively be: (i) one or more written terms; (ii) in an instrument that purports to be an enforceable contract; (iii) that seeks to govern the behavior of one or more of the parties to the instrument; (iv) in order to produce a socially-oriented outcome; (v) in which direct economic benefit to the parties is not the primary function of the term.

A few words about the definition, and then a discussion of what KSR is not—namely “corporate social responsibility.”

At the outset, I recognize that the definition is imperfect.  What, for example, could “enforceable” possibly mean in this context?  I return to this question in a coming installment.  But, the fighting words will likely involve “socially-oriented outcome,” “direct economic benefit,” and “primary function.”

Socially-Oriented Outcome

If you are a relationalist, you might say that every term in a written contract is “socially-oriented” in the vague and tautological sense that all contract terms are products of, and reflect, social relations.  Even the lowly “headings” clause (“The captions and headings of this Agreement are included for ease of reference only and will be disregarded in interpreting or construing this Agreement”) is social in the sense that it is a signal to someone reading the contract that the parties wish the agreement to be read in a certain way.

But, what is distinctive about KSR is that the goals themselves seem aimed more self-consciously at benefitting others who may not be identified (or identifiable) at the time of contracting—that is, society at large.  GM is unlikely to know the identities of the employees of its sub-sub-contractors, even though its model terms may try to regulate their treatment.  An inclusion rider is presumably intended to benefit minorities through preferential hiring, but it is not clear that the rider would identify particular minority talent.  A climate-change term would seem intended to benefit the planet as a whole, and not specific persons at all.  (I will discuss in a later post how third-party beneficiary doctrines might play here).

KSR terms are socially-oriented because the goal is overtly to improve society in addition to, or perhaps even instead of, the material welfare of the parties to the contract or specific others that the parties have designated in the contract.

Direct Economic Benefit

Part of what appears to make KSR terms distinctive is the fact that they may not be in the direct or immediate economic interests of the parties.  For example, it is not difficult to imagine that paying workers a living wage will increase costs for General Motors’ suppliers.  To the extent this is true—that is, suppliers comply and compliance is costly—one of two things is likely to happen: (i) the suppliers absorb these costs, or (ii) they pass them up through the supply chain to General Motors.  General Motors may, in turn, pass these costs on to its customers, although pricing pressures in global trade may make this difficult.

This is not a problem unique to KSR—it is a problem of introducing human rights into the supply chain. There have been two general arguments for this.  One has been to claim that compliance is ethically compelling for reasons apart from economic gain.  For example, the World Economic Forum says that “a commitment to ethical principles should outweigh financial justification.”  Second, ethics may be economically rewarding.  The WEF would also have us believe that compliance may be profitable under some circumstances, or reduce the risk of liability, or both.

To be sure, KSR terms may be economically beneficial.  GM may do well by doing good.  But this merely means that the KSR terms are only indirectly economically beneficial to the parties.

Moreover, reducing risk of liability–while clearly an economic benefit to parties to KSR contracts–is not necessarily a characteristics of all KSR terms.  It is, for example, not clear that a movie production company would be exposed to liability for failing to be as inclusive as Frances McDormand’s rider would require.  Indeed, depending on one’s view of employment discrimination law—a topic above my paygrade—consciously hiring based on racial or other sociodemographic characteristics might be problematic.  In that case, KSR would not reduce risk of liability—it would increase it.

Primary Function 

We don’t have to resolve the question whether (or to what extent) KSR (or any) contract terms are in the economic self-interest of the parties to recognize that KSR terms create a greater possibility of contracting for purely ethical reasons independent of, or even in tension with, the apparent economic interests of the parties.  Thus, my definition stipulates that “direct economic benefit” is not the “primary function” of a KSR term.

But this leaves open a number of questions.  Would every contract to which a “benefit” corporation is a party be a “contract for social responsibility?”  Benefit corporations exist, in part, to support a social mission in addition to (or apart from) profit-maximization, so one might think that all of their agreements—inbound from investors and outbound to their contract counterparties—are contracts for social responsibility in some sense.

At this point, I would say no.  The interesting unit of analysis is neither the organization nor the contract as a whole (whatever that means), but instead specific terms within a given contract.  Supply chain contracts, for example, have many terms that would not, and should not, fulfill my stab at a definition.  Terms about the physical characteristics of goods, payment for them, or who bears risk of loss in delivery, for example, are not, intuitively, “socially-oriented” because their primary function is to effect the direct economic exchange between the parties, not to improve the living and working conditions of others.

What KSR is not: CSR

The purpose of the definitional exercise is not to cement the meaning of the term “contract (as) social responsibility,” but instead to create a mechanism by which we can talk about it.  This enables us to distinguish it from other things, one of the more important of which is its cousin, “corporate social responsibility” (CSR).

CSR holds that those in charge of a corporation may or must account for the interests of persons other than shareholders, such as employees, customers, or the communities in which they are based. Skeptics of CSR have claimed that such discretionary corporate contributions to society conflict with managerial duties to shareholders and may mask entrenchment strategies.  CSR advocates emphasize the moral obligations of corporations.

CSR literature is unsatisfying for at least three reasons.  First, it is not clear that corporate law in any recent era has credibly forbidden the use of corporate assets for social ends.  True, Dodge v. Ford said that a for-profit corporation is not an “eleemosynary institution.” But, unless corporate control is in play—e.g., Revlon—directors have long had broad discretion to use corporate resources for social good.

Second, the corporation is a poor unit of measurement.  Corporations can do nothing on their own, and that includes making others accountable for the social consequences of their actions.  Thus, CSR may at its best be so much jawboning.

Third, it seems to hinge on an unrealistic and somewhat silly dichotomy:  either corporate action is efficient and in the interests of shareholders or it is not.  But, this ignores an awful lot of moral complexity.  Reality is much messier than the binary choice which CSR literature seems to offer.

And, yet, demands that corporate stewards act in a socially responsible way persist.  Corporations adopt codes of conduct that are not costless to create or to comply with.  They have developed sometimes elaborate compliance programs that, while hardly perfect, are fairly concrete expressions of a kind of social responsibility.  Even if CSR is nothing more than good corporate PR, PR is neither costless nor irrelevant.  Consider, for example, Wal-Mart’s 199-page “global responsibility report”—sixteen megs of storage you will never get back.

At bottom, I think KSR has the potential to be somewhat more effective than CSR in a variety of ways.  It could be more effective because a contract term is, at least in principle, more plausibly enforceable than a statement of corporate policy.  Given the realistic operation of corporate governance law, it is hard to imagine a scenario in which a statement of policy on social responsibility was held to create a meaningful cause of action.  Contract terms, by contrast, would be enforceable against the parties subject to comparatively well-established principles of assumpsit.

There are certainly reasons to wonder how those principles would work in KSR terms—especially involving multinational corporations—but the default under contract is more obviously instrumental than under corporate law.  While I certainly accept expressive theories of law, the hortatory characteristics of CSR seem a (somewhat) weaker cup of tea than KSR.

And, of course, KSR is potentially broader than CSR.  To the extent CSR applies to entities other than corporations—a question that has received surprisingly little attention—it would not make much sense applied to individual contracting parties, such as Frances McDormand or individual investors in “green bonds.”

In short, KSR seems to describe something discrete and distinct from other mechanisms that might effect social change.  KSR would complement and perhaps implement CSR.  But it is not CSR, and for good reason.

My next installment will explore perhaps the most well-developed example of KSR, Model Terms being developed by the Working Group to Draft Human Rights Protections in Supply Contracts of the Business Law Section of the American Bar Association.

You may also like...

Leave a Reply

Your email address will not be published. Required fields are marked *

*
To prove you're a person (not a spam script), type the security word shown in the picture. Click on the picture to hear an audio file of the word.
Anti-spam image