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Promoting more socially responsible corporations through a corporate law regulatory framework

Published online by Cambridge University Press:  02 January 2018

Jingchen Zhao
Affiliation:
University of Leeds
Corresponding
E-mail address:

Abstract

This paper aims to lay the foundations for a more critical approach to the relationship between corporate social responsibility (CSR) and corporate law. Limitations on legislative approaches including directors’ duties, disclosure of information, sustainable decisions, direct promotion and corporate internal management structure are critically analysed, trying to find well thought-out and effectively implemented adjudication that provides meaningful instruction for regulating CSR. The paper explores the manner in which corporate law may contribute to accommodating CSR principles within corporate strategies, in order to establish a transformative legal regulatory framework within corporate law by using the authoritative legal mode to promote corporate regulatory mechanisms. The paper critically studies a few legislative measures supported by the relevant legislative experiences from various jurisdictions as examples of currently enforced CSR laws at national level, in order to offer comprehensive and potentially effective legislative suggestions for accommodating CSR elements. However, a ‘one size fits all’ approach is clearly not desirable, and these suggestions should be interpreted and implemented in a locally relevant manner, according to path dependence theory.

Type
Research Article
Copyright
Copyright © Society of Legal Scholars 2017

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Footnotes

*

I am immensely grateful to the anonymous referees for their constructive and insightful comments. I am greatly indebted to Professor Andrew Keay for providing me with valuable comments on the draft of this paper. I also want to thank Professor Blanaid Clarke for her encouragement and support.

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93. The term ‘CSR’ is not defined in the Act. Schedule VII of the Act lists CSR activities and suggests communities as the focal point.

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107. [2010] 320 Itr 546 (Sc).

108. [2010] 327 Itr (570).

109. Manu/Et/0150/2013.

110. Ibid.

111. Mohd. Ahmed (Minor) v Union of India & Ors., Wp (C) 7279/2013 (Del.).

112. Cs, No 35 of 2013, Ngt, 21 February 2014.

113. Ibid.

114. A provision that is similar to Esvp, also introduced in the new Companies Act, states that ‘a director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment’ (s 166 (2) of Indian Companies Act 2013).

115. Principle IV. D, Chinese Securities Regulatory Committee OECD–China Policy Dialogue on Corporate Governance: Corporate Governance of Listed Companies in China; Self-Assessment by the China Chinese Securities Regulatory Committee (Paris: OECD, 2011).Google Scholar

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117. Apart from jurisdictions discussed in section 2, the regulatory initiatives were made in Canada (Continuous Disclosure Obligation NI51-102), Norway (Accounting Act (Regnskapsloven) 1999), Denmark (Aarhus Convention on Access to Information, Public Participation in Decision-Making and Access to Justice in Environmental Matters 1998), South Africa (Code of Corporate Practice and Conduct/The King's Code 2002) and the USA (see Notice of SEC Registrants’ Duty to Disclose Legal Proceedings 2001); according a 2015 report by the Initiative for Responsible Investment at the Hauser Institute for Civil Society at the Kennedy School, 23 countries have enacted legislation requiring public companies to issue reports on social and environmental issues including, apart from the countries that have been mentioned here, Argentina, China, the EU, Ecuador, Finland, Germany, Greece, Hungary, Ireland, Italy, Japan, Malaysia, the Netherlands, Spain and Taiwan; see Initiative for Responsible Investment Corporate Social Responsibility Disclosure Efforts by National Government and Stock Exchanges (12 March 2015).

118. For example, KMPG believes, from a practical point of view, that corporate responsibility reporting has established its position as the de facto law for business, delivering a compelling insight into the expectations that companies face; see KPMG, above n 35, p 2.

119. Chen, S and Bouvain, PIs corporate responsibility converging? a comparison of corporate responsibility reporting in the Usa, Uk, Australia and Germany’ (2009) 87 J Bus Ethics 299 at 300.CrossRefGoogle Scholar

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121. See eg G20/Oecd, above n 17, ch 5.

122. Section 414C(7)(b) Companies Act 2006.

123. Section 414C(7)(b) Companies Act 2006 (Strategic Report and Directors’ Report) Regulation 2013.

124. The Business Review was the previous legal requirement before the enforcement of the Companies Act 2006 (Strategic Report and Directors’ Report) Regulation 2013. Legislatively, under s 417 of the Companies Act 2006, directors are obliged to include in the Business Review ‘a fair review of the company's business and a description of the principal risks and uncertainties facing the company’. The purpose of the Business Review was ‘to inform members of the company and help them assess how the directors have performed their duty under Section 172’. The obligations imposed on quoted companies are more onerous in comparison. Their Business Review must ‘to the extent necessary for an understanding of the development, performance or position of the company's business’, include ‘the main trends and factors likely to affect the future development, performance and position of the company's business and information about environmental matter, the company's employees, social and community issues’.

125. Section 414C (1) Companies Act 2006.

126. Ibid, at 442.

127. See Art 5 of Chinese Company Law 2006 (Ccl 2006); ss 134–135 of the Indian Companies Act 2013.

128. This implies that the controlling bodies of companies, when pursuing the interests of their shareholders, have to be socially responsible, and responsible to internal and external stakeholders.

129. The abstract provision could act as a guidance principle for future provisions, such as: detailed corporate responsibilities at different levels; enforcement measures for these responsibilities; directors' duties towards stakeholders in realising these responsibilities; and corporate liability and directors' liability in breach of these responsibilities.

130. Typical primary stakeholders are employees or creditors who input human capital and loan capital to companies, while shareholders inject equity capital.

131. Darling, AA political perspective’ in Kelly, G, Kelly, D and Gamble, A (eds) Stakeholder Capitalism (Basingstoke: Palgrave, 1996) p 17.Google Scholar

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133. Companies in an insolvent condition, near or in the vicinity of insolvency, doubtfully solvent, or at risk of insolvency or financial instability; the common law discussion in this area is vast. See s 172 (3) Companies Act 2006; Re New World Alliance Pty Ltd [1994] 51 FCR; Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258; Re MDA Investment Management Ltd [2004] BPIR 75 at 102; [2003] EWHC 227 (Ch) at [70]; Nicholson v Permakraft (NZ) Ltd [1985] 3 ACLC 453; Re Horsley & Weight Ltd [1982] 1 Ch 442 at 455; Geyer v Ingersoll Publications Co 621 A 2d 784; Facia Footwear Ltd (in administration) v Hinchliffe [1998] 1 BCLC 218; Re HLC Environmental Projects Ltd [2013] EWHC 2876 (Ch) (Ch D (Companies Ct)); Moulin Global Eyecare Holdings Ltd v Lee [2012] HKCFI 989 (CFI (HK)). For academic discussion of the field, see Keay, ADirectors' duties and creditors' interests’ (2014) 130 Law Q Rev 443 Google Scholar; Keay, A Company Directors’ Responsibilities to Creditors (London: Routledge-Cavendish, 2007)Google Scholar; Milman, D Governance of Distressed Firms (Cheltenham: Edward Elgar, 2013)CrossRefGoogle Scholar; J Zhao and S Wen ‘Improving the disadvantaged position of unsecured creditors through law and corporate social responsibility’ (2013) J Bus Law 868.

134. Kay, J and Silberston, ACorporate governance’ (1995) 153 Nat'l Inst Econ Rev 84 CrossRefGoogle Scholar; see also Pillay, above n 104, pp 88–91; the Aktiengesetz mandates a two-tier board with a supervisory board (Aufsichtsrat in §100 AktG) and a management board (Vorstand in §76 (3) AktG); see also §1, 7, 27, 31 MitbestG; three co-determination regimes are currently enforced under German law, including co-determination pursuant to the Montan Co-Determination Act, co-determination pursuant to the DrittelbG 2004, and co-determination under the Co-Determination Act 1976. Historically, there has been voluntary formation of labour councils at the factory level by an amendment to the Business Practice Act in 1890 (Gewerbeordnung or GewO); Art 165 of the Weimar Constitution of 1919 guaranteed employees the right to cooperate with employers on an equal basis in the regulation of wages and working conditions; and the Labour Management Relationship Act 1952 (Betriebsverfassungsegesetz 1952, or BetrVG 1952) introduced the principle of one third representation of the management board for all other industries. See also Cromme, GCorporate governance in Germany and the German Corporate Governance Code’ (2005) 13 Corp Govern: Int'l Rev 362 CrossRefGoogle Scholar; Goergen, M, Manjoin, MC and Renneboog, LCorporate governance in Germany’ in Keasey, K, Thompson, S and Wright, M (eds) Corporate Governance: Accountability, Enterprise and International Comparisons (Chichester: Wiley, 2005) p 285 Google Scholar.

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136. Since the Sixth Plenary Session of the Sixteenth Central Committee of the Chinese Communist Party in 2006, the policy has been adopted as the long-term goal of Chinese socialism; see Long, G, Zadek, S and Wickerham, JAdvancing sustainable competitiveness of China's transnational corporations’ (2009) AccountAbility (London) 35 Google Scholar.

137. Lin, LWCorporate social responsibility in China: window dressing or structural change?’ (2010) Berkeley J Int'l L 64 at 88.Google ScholarPubMed

138. Blount, J and Offei-Danso, KThe Benefit Corporation: a questionable solution to a non-existent problem’ (2013) 44 St Mary's L J 617.Google Scholar

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140. The State-owned Assets Supervision and Administration Commission of the State Council (SASAC) issued the ‘Guidelines to the state-owned enterprises directly under the central government on fulfilling corporate social responsibilities’; the Chinese Academy of International Trade and Economic Cooperation, a subsidiary of the Ministry of Commerce, issued ‘Guidelines on corporate social responsibility compliance by foreign invested enterprises’; and the Shanghai Stock Exchange issued ‘Notice on strengthening listed companies’ assumption of social responsibility and guidelines on Shanghai Stock Exchange listed companies' environmental information disclosure'; see also Zhao, J Corporate Social Responsibility in Contemporary China (Cheltenham: Edward Elgar, 2014) pp 136141 Google Scholar; Sarkis, J, Li, N and Zhu, QWinds of change: corporate social responsibility in China’ (2011 January–February) Ivey Bus J 1 Google Scholar.

141. On the basis of empirical research, human rights issues have been largely ignored by corporations in their corporate reports: see Li, Z and Cui, XN Corporate Social Responsibility in China (Beijing: China Economic Publishing House, 2011)Google Scholar. This may be a useful opportunity for the UN to introduce human rights law and jurisprudence developed by the UN treaty bodies to the Chinese legal and constitutional system. See Subedi, SPChina's approach to human rights and the Un human rights agenda’ (2015) 14 Chinese J Int'l L 437 CrossRefGoogle Scholar.

142. Human Rights Watch World Report 2014: China Events of 2013; for example, Zhao Lianhai, a Chinese activist who campaigned for better compensation for victims of the Sanlu baby milk scandal, was jailed for two and a half years on charge of ‘causing a serious disturbance’ under s 293, Chinese Criminal Law 1997.

143. See eg O Lui ‘Mining companies explain their operations abroad – and so do their problems’ CSR Asia, 7 October 2008. However, it is argued that the settlement of human rights related issues still has a long way to go in China: see H Zhang and C Qian ‘Merging business and human rights in China: still a long way to go’ (2014) 76 Focus, available at http://www.hurights.or.jp/archives/focus/section3/2014/06/merging-business-and-human-rights-in-china-still-a-long-way-to-go.html (accessed 22 February 2016); see also Hanlon, RJ Corporate Social Responsibility and Human Rights in Asia (Abingdon: Routledge, 2014) pp 91116 Google Scholar.

144. According to path dependence theory, an outcome or decision is shaped in specific and systematic ways by the historical path leading to it, as well as by other factors within the socio-economic context; see Hathaway, OAThe course and pattern of legal change in a common law system’ (2001) 1 Iowa L Rev 103104 Google Scholar.

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147. Of course, taking into account a nation's corporate law, enforcement processes, shareholder structure, civil procedures, stage of economic development, and other aspects including the culture, history and traditions that are embedded within a particular jurisdiction. See Bell, JPath dependence and legal development’ (2013) 87 Tulane L Rev 787 at 787Google Scholar.

148. La Porta, R, Lopez-de-Silanes, F and Sheifer, AThe economic consequences of legal origins’ (2008) 46 J Econ Lit 285 CrossRefGoogle Scholar; see also Bendall, above n 33.

149. See Roe, MCommentary, chaos and evolution in law and economics’ (1996) 109 Harv L Rev 641.CrossRefGoogle Scholar

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151. Abbott, KW and Snidal, DHard and soft law in international governance’ (2000) 54 Int'l Org 421 at 421.CrossRefGoogle Scholar

152. Ibid, at 422.

153. KPMG's Global Sustainability Services and UN Environment Programme Carrots and Sticks for Starters: Current Trends and Approaches in Voluntary and Mandatory Stands for Sustainability Reporting (South Africa: UNEP, 2006) p 9.Google Scholar

154. A ‘comply or explain’ approach reduces reporting costs for companies by not requiring companies to report on matters which are not relevant in practice; see European Commission The EU Corporate Governance Framework COM(2011) 164 final 5.4.2011 at 18.

155. This concept of ‘comply or explain’ originated in the UK with the Cadbury Report in 1992, which provided the first serious code, and states that a company should comply with a set code of practice, but if it does not then it must state this in the annual directors' report and explain why; see Keay, AComply or explain in corporate governance code: in need of greater regulatory oversight’ (2014) 34 Legal Stud 279 CrossRefGoogle Scholar; MacNeil, I and Li, X“Comply or explain”: market discipline and non-compliance with the combined code’ (2006) 14 Corp Govern: Int'l Rev 486 CrossRefGoogle Scholar; Andres, C and Theissen, ESetting a fox to keep the geese – does the comply-or-explain principle work?’ (2008) 14 J Corp Fin 289 CrossRefGoogle Scholar; Arcota, S, Brunob, V and Faure-Grimaud, ACorporate governance in the Uk: is the comply or explain approach working?’ (2010) 30 Int'l Rev L & Econ 193 CrossRefGoogle Scholar; Seidl, D, Sanderson, P and Roberts, JApplying the “comply-or-explain” principle: discursive legitimacy tactics with regard to code of corporate governance’ (2012) 17 J Mgmt & Govern 791 CrossRefGoogle Scholar.

156. For example, it is suggested by Horrigan that new rules are needed, with governments, companies and the community all playing a part and proposing a framework of international agreement focusing on CSR; see Horrigan, above n 19, pp 269–270.

157. Kerr et al, above n 150, p 100; see also BE Olsen and KE Sorensen ‘Strengthening the enforcement of CSR guidelines: finding a new balance between hard law and soft law’ (2014) 41 Legal Issues Econ Integ 9.

158. For example, corporate codes of governance to which listed companies should adhere could be one of the legal documents that help to promote CSR. They are useful in the context of voluntary principles that acquire recognition by companies, international financial institutions and civil societies as the result of an industry drive towards self-regulation, globally re-enforcing norms that have received multilateral and international acceptance; see B Nwete ‘Corporate social responsibility and transparency in the development of energy and mining projects in emerging markets: is soft law the answer?’ (2007) 8 German L J 311 at 327. As another example, stock exchanges require social and environmental disclosure as part of their listing requirements: Australia's ASX, Brazil's Bovespa, India's Securities and Exchange Board, and the London Stock Exchange; see Initiative for Responsible Investment Corporate Social Responsibility Disclosure Efforts by National Government and Stock Exchange (12 March 2015).

159. Pillay, above n 104, p 136.

160. Ireland and Pillay, above n 41, p 91; Aguilera, RV et al ‘An organizational approach to comparative corporate governance: costs, contingencies, and complementarities’ (2008) 19 Org Sci 475 at 488CrossRefGoogle Scholar; see also Esser, ICorporate social responsibility: a company law perspective’ (2011) 232 S Afr Mercant L J 317 Google Scholar.

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169. RK Sithanen ‘Riding out the global crisis: saving jobs, protecting people, preparing for recovery’ (2009) 4 para 16, cited by Pillay, above n 104, p 227; see also Ragodoo, NJFCsr as a tool to fight against poverty: the case of Mauritius’ (2009) 5 Soc Respons J 19 CrossRefGoogle Scholar.

170. Section 50 L (1)Income Tax Act 1995; ‘CSR programme’, according to 2 (iv) means ‘a programme having as its objects the alleviation of poverty, the relief of sickness or disability, the advancement of education of vulnerable persons or the promotion of any other public object beneficial to the Mauritian community’.

171. Section 135 Indian Companies Act 2013; the government shifted responsibility to corporate sectors, and it is estimated that the law will cover about 3,000 companies in India and about US$2 billion per annum of expenditure on CSR activities related to social welfare initiatives. See Ernst and Young ‘Understanding the Company Bill 2012’ (2013), available at http://www.ey.com/publication/vwluassets/ey_understanding_companies_bill_2012/$file/ey-understanding-companies-bill-2012.pdf (accessed 28 July 2016); Ernst and Young ‘Corporate social responsibility in India: potential to contribute towards inclusive social development: Global CSR Summit 2013, an agenda for inclusive growth’ (2013), available at http://www.ey.com/Publication/vwLUAssets/EY-Government-and-Public-Sector-Corporate-Social-Responsibility-in-India/$File/EY-Corporate-Social-Responsibility-in-India.pdf (accessed 20 February 2016).

172. It is argued that since time immemorial, CSR has had its origins in Dural, The Great Book of Tiru Valluvar’s Verses; see C Raja Gopalachari Kural, The Great Book of Tiru Valluvar (Hindu Books Universe, 2003), available at www.hindubooks.org/dynamic/modules.php?name¼Content&pa¼showpage&pid¼44 (accessed January 2016).

173. Pillay, above n 104, p 228.

174. Jain, AThe mandatory Csr in India: a boon or bane’ (2014) 4 Indian J Appl Res 301.CrossRefGoogle Scholar

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177. For example, the 2% requirement will result in a reluctance to comply for loss-making companies, and it is not clear whether the list of CSR activities provided in Sch VII is an inclusive or exhaustive list.

178. Comments of Venkateshwaran, partner and head of accounting advisory services at KMPG India ‘India now only country with legislated CSR’ Business Standard 3 April 2014); available at http://www.business-standard.com/article/companies/india-now-only-country-with-legislated-csr-114040300862_1.html (accessed 28 July 2016).

179. Gopalan, S and Kamalnath, AMandatory corporate social responsibility as a vehicle for reducing inequality: an Indian solution for Piketty and the millennials’ (2015) 10 Nw J L & Soc Pol'y 34 at 44.Google Scholar

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184. The approach does not lead to compulsory Csr-related corporate actions and decisions.

185. See Gimbel v Signal Cos. 316 A.2d 599, 608 (Del. Ch. 1974); In re The Walt Disney Co. Derivative Litigation 906 A.2d 27 (Del. 8 June 2006); Aronson v Lewis 473 A.2d 805, 812 (Del. 1984); Sinclair Oil Corp. v Levien 280 A.2d 717, 720 (Del. 1971); see also Davis, KBOnce more, the business judgment rule’ (2000) Wis L Rev 573 Google Scholar; Johnson, LThe modest business judgement rule’ (1999–2000) 44 Bus Law 625 Google Scholar.

186. See eg s 172 of the Companies Act 2006; see also Ghlm Trading Ltd v Maroo [2012] Ewhc 61 (Ch); Smith & Fawcell Ltd, Re [1942] Ch. 304.

187. Sjåfjell, BInternalizing externalities in Eu law: why neither corporate governance nor corporate social responsibility provides the answers’ (2008) 40 Geo Wash Int'l L Rev 977 Google Scholar; A Johnston ‘Governing externalities: the potential of reflexive corporate social responsibility’, Centre for Business Research, University of Cambridge, Working Paper No 436, 3, http://ssrn.com/abstract=2165616.

188. Mitchell, RK, Agle, BR and Wood, DJToward a theory of stakeholder identification and salience: defining the principle of who and what really counts’ (1997) 22 Acad Mgmt Rev 853 at 854–858Google Scholar; for more discussions on guidance related to enforcing directors' duties to make integrated decisions by giving directors legitimacy to have regard to stakeholders' interests, see section 4.

189. This legislative approach may be traced not only to the ESVP in the UK Companies Act 2006, as discussed in the last section, but also to Art 1174 of the Italian Civil Code, which provides that performance can also correspond to non-monetary interests of the creditors, and Art 1141 of the Code, whereby an agreement in favour of a third party may be considered admissible if it is relevant to the interests of the stipulans (the contracting party).

190. 134 S Ct 2751 (2014).

191. Ibid, at 2771.

192. People's Department Store Inc. (Trustee of) v Wise [2004] SCJ No 64, 2004 SCC 68, 2004 3 SCR 461 (SCC) at paras 42 (SCC); see also BCE Inc v 1976 Debentureholders 2008 SCC 69 (CanLII), [2008] 3 SCR 560. For discussion of the case and integrated decision-making, see Francis, C People's Department Stores Inc. v Wise: the expanded scope of directors’ and officers’ fiduciary duties and duties of care’ (2005) 41 Can Bus L J 175 Google Scholar; Rousseau, SDirector's duties of care after people's: would it be wise to start worrying about liability?’ (2005) 41 Can Bus L J 236 Google Scholar; Gray, WDA solicitor's perspective on People's v Wise (2005) 41 Can Bus L J 184Google Scholar; Lee, IB People's Department Stores v. Wise and the “best interests of the corporation”’ (2005) 41 Can Bus L J 212 Google Scholar; Waitzer, E and Jaswal, JPeople's, Bce, and the good corporate “citizen”’ (2009) 47 Osgoode Hall L J 439 Google Scholar; MacIntosh, JGBce and the People's Corporate Law: learning to live on quicksand’ (2009) 48 Can Bus L J 255 Google Scholar.

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194. It was found in a 2010 report by Calvert Asset Management and the Corporate Library that 65% of S&P 100 companies have board committees at varying levels for the oversight of corporate social and environmental responsibility concerns; see Calvert Asset Management and the Corporate Library ‘Board oversight of environmental and social issues: an analysis of current North American practice’ (2010) at 14–16. This implies that having a CSR committee is possible, necessary and fits with practice, and could be beneficial if it was made mandatory.

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200. Such as the Un Global Compact, the Ruggie Principle, the Oecd Guidelines or international standards such as Iso 26000.

201. Buhmann, above n 15, at 192.

202. For example, the strategic report from the Uk Companies Act could be helpful for other jurisdictions (s 414C (7)(b) Companies Act 2006 (Strategic Report and Directors’ Report) Regulation 2013).

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206. Tan, above n 9.

207. See also Esser, above n 161, at 334.

208. P Utting and Jc Marques ‘Introduction: the intellectual crisis of Csr’, in Utting and Marques, above n 41, pp 5–6.

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221. This is particularly important in Anglo-American jurisdictions, where the quasi-legal shareholder primacy norm is regarded as unchallengeable. See Stout, above n 51; Stout, LAKilling conscience: the unintended behavioural consequences of pay for performance’ (2014) 39 J Corp L 525 Google Scholar; Stout, LAThe toxic side effects of shareholder primacy’ (2013) 161 U Pa L Rev 2003 Google Scholar; Stout, LAWhy we should stop teaching Dodge v Ford ’ (2008) 3 Va L & Bus Rev 163 Google Scholar.

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226. This is particularly the case after the introduction of the Ruggie Principle; see s 414 (C)(7)(b)(iii). See also Buhmann, KPublic regulators and Csr: the “social licence to operate” in recent Un instruments on business and human rights and the juridification of Csr’ (2016) J Bus Ethics 699 CrossRefGoogle Scholar; Ramasatry, ACorporate social responsibility versus business and human rights: bridging the gap between responsibility and accountability’ (2015) Bus & Hum Rts 237 Google Scholar; for a historical review, see Santoro, MABusiness and human rights in historical perspective’ (2015) 14 Bus & Hum Rts 155 Google Scholar; Ruggie, JG and Nelson, THuman rights and the Oecd Guidelines for Multinational Enterprises: normative innovations and implementation challenges’, Corporate Social Responsibility Initiative Working Paper No 66 (Cambridge, MA: John F. Kennedy School of Government, Harvard University, 2015)Google Scholar; McCorquodale, RCorporate social responsibility and international human rights law’ (2009) 87 J Bus Ethics 385 CrossRefGoogle Scholar.

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