Social Reporting: A Reflexive Law Approach to Corporate Social Responsiveness

1. INTRODUCTION We will soon be upon the twenty-fifth anniversary of the publication of Christopher D. Stone's Where the Law Ends: The Social Control of Corporate Behavior.3 This book cogently presents the many problems traditional legal mechanisms have in controlling the irresponsible behavior of corporations.4 The problems Stone identified, however, still have not been adequately addressed by our current regulatory system. 5 Before we can correct this regulatory failure, the debate over how to control corporate behavior must move beyond the dichotomous choice between omnipresent state regulation and a laissezfaire system.6 As shown by arguments for "responsive regulation" and "collaborative governance," among others,7 there is a need for, and an increasing movement towards, being more experimental and flexible in finding what regulatory system works best to achieve the desired outcome. This Article argues for the use of a reflexive law approach to govern the behavior of corporations. Recent advances in legal theory have developed the idea of reflexive law as a viable alternative to the traditional choices of regulation.8 Professor Eric Orts describes reflexive law as a regulatory system that recognizes the limited ability of the law in a complex society to direct social change in an effective manner.9 Instead of trying to suppress the complexity and diversity in society through extensive regulation, reflexive law aims to guide behavior and promote self-regulation. 10 The law is "reflexive" in that it encourages corporations to constantly re-examine their practices and reform those practices based on the most current information.11 To control corporate behavior, the necessary reflexive law approach is social accounting, auditing, and reporting, collectively referred to here as social reporting. A social report is, in brief, "[a] means of assessing the social impact and ethical behavior of an organization in relation to its aims and those of its stakeholders. Stakeholders include all individuals and groups who are affected by, or can affect, the organization." 12 In many ways, a social report is similar to a corporate financial audit, but concerns a company's social performance. However, disclosure is only a part of the story-though a very important part-and not the whole story. A reflexive law approach to social reporting focuses on institutionalizing responsible decision-making within an organization and thereby sharing the regulation of corporate behavior with the regulated entity. An issue avoided until now is why should government regulations require corporations to care about their social performance? The simple answer to this question is that society, and in particular the marketplace, expects and demands it. 13 A recent survey found that ninety-five percent of Americans disagreed with the view that the only responsibility of business is to increase profits.14 Other evidence that society cares about a company's social performance is abundant. In any bookstore you can find books on the best companies to work for in America15 and guides to socially responsible shopping. 16 Popular magazines and newspapers regularly report on socially responsible and irresponsible corporations. 17 Shareholders frequently submit proposals on a wide variety of social issues, and recent rule changes by the SEC have broadened the range of proposals that shareholders may submit.18 Perhaps most striking is the success of "socially screened" investment portfolios.19 Approximately nine percent of all professionally managed investments in the United States ($1.2 trillion) are screened for certain social factors.20 Society has also shown its concern for corporate behavior through numerous consumer boycotts of certain companies' products and services due to those companies' records on matters such as the environment, animal rights, and human rights.21 Nike and others have recently come under enormous pressure to rethink their treatment of labor in several Asian countries. …