The Future of Social Reporting Is on the Line

Imagine if corporations were permitted to ?plead the First
Amendment,? making it virtually impossible to use litigation to
test the truth of company statements about their social and
environmental records. This could be the impact of the position
taken by Nike in a case to be decided soon by the Supreme Court,
Nike v. Kasky. Nike argues that in defending itself against charges
of using sweatshop labor, its statements were ?political speech,?
subject to full First Amendment protections. But if this view
prevails, it could invalidate many consumer protection laws and
securities regulations. And it could permanently undermine the
reliability of corporate reporting?both financial and social.

The case concerns statements made by Nike in the late 1990s:
that it paid ?on average, double the minimum wage? in overseas
countries, for example, and that its workers ?are protected from
physical and sexual abuse.? Marc Kasky sued Nike in 1998 for making
false statements, using California consumer protection laws. The
case hinges on whether Nike?s statements are commercial or
political speech, because the former is subject to greater
regulation. Nike maintains its statements were political because
they touched on matters of public concern. The California Supreme
Court disagreed, reasoning that when a commercial entity states
facts about its products or operations to influence consumer
decisions, that is commercial speech.

Even Nike concedes that social issues have financial
impact?since labor controversies affected Nike?s stock price and
financial performance in the late 1990s. Yet Nike defines any
commercial speech that also touches upon matters of public concern
as ?political speech,? which makes it more difficult to regulate.
That definition is alarmingly broad, affecting nearly every aspect
of a corporation’s business. After all, the financial performance
of a publicly traded corporation can be considered a matter of
?public concern.? Stock options expensing, auditor independence,
and executive compensation are matters of public concern. Should
corporate disclosures on these issues be immunized from litigation
or SEC enforcement?

In an amicus brief to the Supreme Court in support of Kasky, we
argue that social disclosure should be subject to the same legal
requirements as financial disclosure. Securities regulation in the
U.S. is premised upon compelled disclosure of specified
information. The Supreme Court has struck down compelled disclosure
of political speech, however, arguing that the right to speak also
implies the right to remain silent. It is vitally important that
government regulators retain the authority to compel accurate and
timely disclosure of all material corporate
information?particularly information that is also a matter of broad
public concern. Moreover, misleading social and environmental
statements about a company?s operations should be subject to
anti-fraud liability, just as misleading financial reports are.

Some believe that the California ruling will have a ?chilling
effect? on corporate social responsibility reporting. If companies
are not required to produce this information, why take the risk of
a ?Kasky-like? claim? We believe the larger lesson of this case is
the fragility of the voluntary social reporting scheme we now rely
on. Corporate communications can be ?chilled? only if they remain
voluntary. This is the reason social investors, labor, and
environmentalists have formed the Corporate Sunshine Working Group,
to persuade the SEC to make comprehensive social and environmental
reporting mandatory.

Granting full First Amendment protection to corporate speech may
also threaten social investors? ability to file shareholder
resolutions on social or environmental matters?because the SEC
might not have the authority to compel corporations to include such
?political? speech in their proxy statements.

Nike argues that both sides of a debate should be permitted to
speak freely, without fear of government intervention or liability.
But while the government has no role to play in winnowing false
from true political ideas, it plays a critical role in ensuring
that commercial facts are accurate. There is a significant
difference between saying ?free trade is good for the developing
world? and ?we pay double the minimum wage.? Nike?s statements on
factory conditions were not part of a debate about globalization.
They were aimed at deflecting consumer boycotts and boosting its
stock price. Nike concedes this in its own brief, stating that
?virtually everything a company does is ultimately intended to
improve its financial bottom line.?

Thus virtually everything a company says is commercial speech,
and must be accurate. If Nike succeeds in enlarging corporate
political speech, it could permanently undermine the most effective
tool we have for holding corporations accountable?timely, accurate
information. This would be a huge step backwards at a time when
investors need greater corporate transparency.

Adam M. Kanzer is general counsel and director of
shareholder advocacy for Domini Social Investments. Cynthia A.
Williams is associate professor of law at the University of
Illinois College of Law, and the principal author of Domini?s
Supreme Court brief. The brief, also signed by KLD Research &
Analytics and Harrington Investments, is available at Information on
the Corporate Sunshine Working Group is available at

This article appears in the Summer 2003 issue of Business
Ethics magazine. To request a free sample copy e-mail your postal
address to

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