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December 03, 2004
Bhopal, Climate Change Require Shift From Legal Liability to Moral Accountability
    by William Baue

A report by SustainAbility examines how increasing legal liabilities are blending into moral liabilities, forcing companies to face social and environmental accountability.


It was twenty years ago today that an accident at a Union Carbide pesticide production plant in Bhopal, India released 27 tons of toxic methyl isocyanate (MIC) gas, killing thousands in the immediate aftermath and exposing millions to long-term health risks. After conducting exhaustive due diligence that determined it would not inherit any legal liability from the Bhopal legacy, Dow Chemical (ticker: DOW) bought Union Carbide in 2001. What Dow failed to gauge accurately was the fact that, regardless of whether Dow escaped legal liability (and it remains unclear if Dow's legal arguments are airtight), victims and their supporters hold the company morally responsible.

"The event of the twentieth anniversary and the news surrounding it does not enhance Dow's legal liability--if it has any, which is still a huge question mark--but it does heighten the pressure from activists and nongovernmental organizations for Dow to meet a perceived moral obligation," said Phil Rudolph, a partner in the corporate social responsibility (CSR) practice of Boston-based law firm Foley Hoag.

The Bhopal example serves as a case study in a report issued earlier this week by SustainAbility, a London-based sustainable development consultancy, along with insurer Swiss Re, asset manager Insight Investment, and Foley Hoag. The report posits that companies face increasing legal liability on social and environmental issues, but the risk does not end there. Extending beyond the bounds of the law are a host of moral liabilities that are increasingly becoming material financial risks for corporations.

Not only is the law being used more and more by activist lawyers against companies, but also the law is shielding companies less and less from societal expectations of ethical corporate conduct.

"In other words, technical compliance may no longer be an adequate defense against social and environmental activists in the court of public opinion and even in the court of law," state report authors Geoff Lye and Francesca Müller of SustainAbility. "Technical innocence or escaping accountability through legal expertise and subtle arguments on points of legal interpretation and precedent are becoming increasingly unacceptable in a society which expects real world performance and behavior standards."

The report cites a perfect example illustrating this effect: recently, 39 pharmaceutical companies filed suit to prevent generic HIV/AIDS drugs from being produced in South Africa. While the bulwark of their intellectual property arguments was legally sound, the morality of their line of reasoning failed to pass the sniff test. The notion that profitable corporations would seek to deprive the HIV-infected masses in South Africa access to cheaper medicines smelled afoul to the public, and the companies wisely decided to drop the case.

"The pharmas recognized the reality that litigation, whether it's meritorious or not, may not be the best approach from a brand standpoint," Mr. Rudolph told SocialFunds.com.

And companies can no longer count on courts to remain aloof to extralegal issues such as social and environmental impacts, which have traditionally been considered "soft" issues by companies and courts alike.

"Given the evolution of the judicial system, which progressively embeds changing societal values in laws and regulations, we can expect the softer moral liabilities to progressively harden and ultimately be converted to carry the force of law," the report states.

To examine The Changing Landscape of Liability, as the report is entitled, it considers three other case studies: climate change, human rights, and obesity. The case of climate change in particular brings into clear focus this shifting terrain.

"The issues implicated by global warming include what is and isn't considered material for purposes of US securities laws," Mr. Rudolph explains. "Now that there's been more focus on carbon-based industries and their impact on the global climate, do those companies face potential legal risks or extralegal obligations that are going to cost them an amount of money that impacts the value of their company?"

In business, it often takes a hit to the bottom line (or the threat of one) to compel corporate management and directors to address emergent risks. The report urges companies to respond more proactively as prudent risk management. Specifically, it recommends that companies abandon the use of the law as a fig leaf to hide moral transgressions, and instead to embrace CSR strategies that identify and mitigate both legal and moral liabilities.

 

 
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