CSR And Codes Of Business Ethics In The USA, Austria (EU) And China And Their Enforcement In International Supply Chain Arbitrations [1st Edition] 9813360720, 9789813360723, 9789813360730

Table of contents :
Introduction......Page 5
Contents......Page 7
About the Author......Page 11
Abbreviations......Page 12
List of Figures......Page 16
1.1 Corporate Governance......Page 17
1.2 Shareholder Theory of Corporate Governance (Shareholder Primacy Model)......Page 18
1.4 CSR......Page 19
1.5 Corporate Code of Business Conduct and Ethics......Page 20
2.1 Hypothesis 1......Page 22
2.2 Hypothesis 2......Page 23
2.3 Hypothesis 3......Page 24
3.1 From Shareholder Value to Stakeholder Value?......Page 25
3.2.1 The U.S. Sarbanes-Oxley Act of 2002......Page 30
3.2.2 The U.S. Sentencing Guidelines......Page 37
3.2.3 Corporate Codes of Ethics Post-SOX......Page 38
3.2.4 The Audit Committee Pursuant to US Law and the Requirement for an Ethics and CSR Committee Comprised of an Ethics and CSR Expert and Independent Directors......Page 51
3.3 CSR Reporting in the USA......Page 54
3.3.1 Positive Financial Impact of CSR Policies on the Financial Performance of Companies......Page 55
3.3.2 Recent Sustainability Index Event Studies......Page 60
3.3.3 The Si2/IRRCI Report on the State of Sustainability and Integrated Reporting 2018......Page 62
3.3.4 KPMG Survey of Corporate Responsibility Reporting 2017......Page 64
3.3.5 Mandatory Reporting of Material CSR Aspects in Financial Reports of US Companies?......Page 65
3.3.6 The Requirement for an Independent CSR and Ethics Committee, Minimum CSR Reporting Standards and Mandatory External Evaluations of CSR Reports......Page 68
4.1.1 Section 70 of the Austrian Stock Corporation Act......Page 71
4.1.2 The Business Judgment Rule......Page 72
4.1.3 Compensation of Members of the Management Board......Page 73
4.2 The Austrian Code of Corporate Governance......Page 74
4.3 Mandatory Corporate Governance Reports......Page 78
4.3.1 OMV AG......Page 79
4.3.2 STRABAG SE......Page 80
4.3.4 Erste Group Bank AG......Page 81
4.4 Corporate Codes of Ethics or Conduct......Page 82
4.4.1 OMV AG......Page 83
4.4.2 STRABAG SE......Page 86
4.4.3 voestalpine Group......Page 90
4.4.4 Erste Group Bank AG......Page 92
4.4.5 Do Violations of a Code of Ethics/Conduct Trigger Criminal Consequences Pursuant to Section 163a of the Criminal Code?......Page 96
4.5.1 Directive 2014/95/EU and the Austrian Sustainability and Diversity Improvement Act......Page 98
4.5.2 Analysis of CSR Reports......Page 103
4.6 The GRI Sustainability Reporting Standards......Page 106
4.8 Mandatory Due Diligence as to Human Rights, Environmental and Governance Risks Along Supply Chains......Page 111
5.1 Mandatory Stakeholder Value in China?......Page 115
5.1.2 The Chinese Code of Corporate Governance......Page 116
5.1.3 Chinese Stock Exchange Rules......Page 118
5.1.4 SASAC Guidelines to the State-Owned Enterprises Directly Under the Central Government......Page 122
5.2 Corporate Governance in Chinese Companies......Page 123
5.2.1 The Particularities of the Chinese Two-Tier Board System......Page 124
5.2.2 Independent Directors and Supervisors in Chinese Companies?......Page 125
5.2.3 Board Committees in Chinese Companies......Page 127
5.2.4 The Party Committee......Page 128
5.3 Codes of Ethics/Conduct of Chinese Companies......Page 130
5.3.1 PetroChina Company Limited......Page 132
5.3.2 Huawei Investment & Holding Co., Ltd.......Page 136
5.3.3 Ping an Insurance (Group) Company of China, Ltd.......Page 139
5.4.1 Statistics......Page 141
5.4.2 Liability for Inaccurate or Incomplete CSR Reports Pursuant to the Chinese Securities Law......Page 145
5.4.3 The Impact of CSR Measures on Companies’ Performance......Page 146
6.1 Supply Chain Management......Page 150
6.2 Third Party Rights and Collateral Warranties......Page 155
6.3 Possible Contractual Claims for Damages Arising from the Violation of Codes of Business Conduct and Ethics in the Context of Supply Chain Disputes Involving Multiple Parties......Page 157
6.3.1 Fictitious Case Scenario......Page 158
6.3.2 The Significance of English Law for International Contracts......Page 159
6.3.3 Privity of Contract and Domestic, Nominated or Named Subcontractors......Page 160
6.3.4 Can a Breach of a Material or Core Violation of a Code of Conduct Be Qualified as a Repudiatory Breach of the Contract?......Page 162
6.3.5 Foreseeability, Causation and Mitigation......Page 163
6.3.6 Loss of Profits......Page 168
6.3.7 Contractual Penalties or Liquidated Damages......Page 170
6.3.8 Examples for Material Violations of a Code of Conduct Triggering Payment Under a Liquidated Damages Clause......Page 174
6.4 The New York Convention......Page 176
6.5 The Consolidation of Supply Chain Arbitrations......Page 177
6.5.1 Consolidation in Singapore......Page 180
6.5.2 ICC Arbitration Rules on the Consolidation of Arbitrations......Page 188
6.5.3 The AIAC Arbitration Rules......Page 190
6.5.4 Consolidation in the USA......Page 192
6.5.5 Consolidation in Austria......Page 194
6.5.6 Consolidation in Mainland China and Hong Kong......Page 195
6.6.1 SIAC, AIAC, CIETAC and HKIAC Rules......Page 200
6.6.2 ICC Rules......Page 201
6.6.3 ICDR Rules......Page 202
6.6.4 Vienna Rules......Page 204
6.7 Human Rights Arbitration......Page 208
7.1 Conclusion Regarding Hypothesis 1......Page 211
7.2 Conclusion Regarding Hypothesis 2......Page 215
7.3 Conclusion Regarding Hypothesis 3......Page 220
Bibliography......Page 223
Case Law......Page 237

Citation preview

Adolf Peter

CSR and Codes of Business Ethics in the USA, Austria (EU) and China and their Enforcement in International Supply Chain Arbitrations

CSR and Codes of Business Ethics in the USA, Austria (EU) and China and their Enforcement in International Supply Chain Arbitrations

Adolf Peter

CSR and Codes of Business Ethics in the USA, Austria (EU) and China and their Enforcement in International Supply Chain Arbitrations

Adolf Peter Shanghai University of Political Science and Law Shanghai, China

ISBN 978-981-33-6072-3 ISBN 978-981-33-6073-0 (eBook) https://doi.org/10.1007/978-981-33-6073-0 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Introduction

Companies are confronted with an ever-increasing pressure by their customers, investors, employees, non-governmental organizations and other stakeholders regarding the implementation of corporate ethics and corporate social responsibility (“CSR”) policies. In recent times, the undeniable climate change has given rise to worldwide in-depth media coverage, heated debates, demonstrations and environmental activism lead by personalities like Greta Thunberg. Conscious consumerism and responsible investing are further trends that will urge companies to adapt their business strategies by taking into consideration ethics and CSR aspects. Equally important, the listing requirements of major stock exchanges increasingly require listed companies to prepare codes of business conduct and ethics and disclose CSR reports. The EU Directive on the Disclosure of Non-Financial and Diversity Information introduced rules for mandatory non-financial reporting. This monograph focuses on corporate CSR reporting requirements and the implementation of codes of business conduct and ethics in the legal systems of the USA, Austria and China. In this context, the monograph will demonstrate whether the respective legal systems lean more towards the shareholder primacy model or the stakeholder theory of corporate governance. It will introduce and analyse the respective codes of business conduct and ethics of eleven major companies headquartered in the USA (Walmart Inc., ExxonMobil Corporation, Apple Inc. and Berkshire Hathaway Inc.), Austria (OMV AG, STRABAG SE, voestalpine AG and Erste Group Bank AG) and China (PetroChina Company Limited, Huawei Investment & Holding Co., Ltd. and Ping An Insurance (Group) Company of China, Ltd.). To prevent window-dressing and greenwashing, it is necessary for companies to ensure the implementation of their ethics and CSR policies along the entire supply chain. For this purpose, many companies involved in international supply chains issued supplier codes of conduct, contractually binding the chain members to adhere to the provisions contained therein. As ethics and CSR policies (in particular environmental policies) will gain more and more significance based on the ever-growing stakeholders’ pressure, disputes in relation to the contractually binding supplier codes of conduct will likely be on the rise as well. Due to the fact that English law (or law based on English law) is frequently the governing law of international supply chain contracts, potential contractual claims for damages arising from the violation of v

vi

Introduction

provisions of the supplier codes of conduct are addressed pursuant to English law. International arbitration will be the ideal means for the settlement of these disputes, as arbitration awards may be recognized and enforced in almost all parts of the world because of the New York Convention. A fictitious case scenario will demonstrate such a dispute involving multiple chain members. Supply chain disputes will in all likelihood involve multiple parties. For this reason, this monograph will also take a closer look at the respective rules of several international arbitration institutions in relation to joinders and consolidations of two or more pending arbitrations.

Contents

1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Shareholder Theory of Corporate Governance (Shareholder Primacy Model) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Stakeholder Theory of Corporate Governance . . . . . . . . . . . . . . . . . . 1.4 CSR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 Corporate Code of Business Conduct and Ethics . . . . . . . . . . . . . . . .

1 1 2 3 3 4

2 Hypotheses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Hypothesis 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Hypothesis 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Hypothesis 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7 7 8 9

3 Codes of Ethics and CSR in the USA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 From Shareholder Value to Stakeholder Value? . . . . . . . . . . . . . . . . . 3.2 Corporate Codes of Ethics in the USA . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 The U.S. Sarbanes-Oxley Act of 2002 . . . . . . . . . . . . . . . . . . . 3.2.2 The U.S. Sentencing Guidelines . . . . . . . . . . . . . . . . . . . . . . . . 3.2.3 Corporate Codes of Ethics Post-SOX . . . . . . . . . . . . . . . . . . . 3.2.4 The Audit Committee Pursuant to US Law and the Requirement for an Ethics and CSR Committee Comprised of an Ethics and CSR Expert and Independent Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 CSR Reporting in the USA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.1 Positive Financial Impact of CSR Policies on the Financial Performance of Companies . . . . . . . . . . . . . 3.3.2 Recent Sustainability Index Event Studies . . . . . . . . . . . . . . . 3.3.3 The Si2/IRRCI Report on the State of Sustainability and Integrated Reporting 2018 . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.4 KPMG Survey of Corporate Responsibility Reporting 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.5 Mandatory Reporting of Material CSR Aspects in Financial Reports of US Companies? . . . . . . . . . . . . . . . . .

11 11 16 16 23 24

37 40 41 46 48 50 51 vii

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3.3.6 The Requirement for an Independent CSR and Ethics Committee, Minimum CSR Reporting Standards and Mandatory External Evaluations of CSR Reports . . . . . . 4 Codes of Ethics and CSR in Austria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Shareholder or Stakeholder Value in Austria? . . . . . . . . . . . . . . . . . . . 4.1.1 Section 70 of the Austrian Stock Corporation Act . . . . . . . . . 4.1.2 The Business Judgment Rule . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.3 Compensation of Members of the Management Board . . . . . 4.2 The Austrian Code of Corporate Governance . . . . . . . . . . . . . . . . . . . 4.3 Mandatory Corporate Governance Reports . . . . . . . . . . . . . . . . . . . . . 4.3.1 OMV AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.2 STRABAG SE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.3 voestalpine AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.4 Erste Group Bank AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Corporate Codes of Ethics or Conduct . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.1 OMV AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.2 STRABAG SE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.3 voestalpine Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.4 Erste Group Bank AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.5 Do Violations of a Code of Ethics/Conduct Trigger Criminal Consequences Pursuant to Section 163a of the Criminal Code? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Mandatory CSR Reporting in Austria . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5.1 Directive 2014/95/EU and the Austrian Sustainability and Diversity Improvement Act . . . . . . . . . . . . . . . . . . . . . . . . 4.5.2 Analysis of CSR Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 The GRI Sustainability Reporting Standards . . . . . . . . . . . . . . . . . . . . 4.7 Profit-Oriented Motives for CSR in Austria? . . . . . . . . . . . . . . . . . . . . 4.8 Mandatory Due Diligence as to Human Rights, Environmental and Governance Risks Along Supply Chains . . . . . . . . . . . . . . . . . . . 5 Codes of Ethics and CSR in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 Mandatory Stakeholder Value in China? . . . . . . . . . . . . . . . . . . . . . . . 5.1.1 The Chinese Company Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.2 The Chinese Code of Corporate Governance . . . . . . . . . . . . . 5.1.3 Chinese Stock Exchange Rules . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.4 SASAC Guidelines to the State-Owned Enterprises Directly Under the Central Government . . . . . . . . . . . . . . . . . 5.2 Corporate Governance in Chinese Companies . . . . . . . . . . . . . . . . . . 5.2.1 The Particularities of the Chinese Two-Tier Board System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.2 Independent Directors and Supervisors in Chinese Companies? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.3 Board Committees in Chinese Companies . . . . . . . . . . . . . . . 5.2.4 The Party Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

54 57 57 57 58 59 60 64 65 66 67 67 68 69 72 76 78

82 84 84 89 92 97 97 101 101 102 102 104 108 109 110 111 113 114

Contents

ix

5.3 Codes of Ethics/Conduct of Chinese Companies . . . . . . . . . . . . . . . . 5.3.1 PetroChina Company Limited . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.2 Huawei Investment & Holding Co., Ltd. . . . . . . . . . . . . . . . . . 5.3.3 Ping an Insurance (Group) Company of China, Ltd. . . . . . . . 5.4 CSR Reporting in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.1 Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.2 Liability for Inaccurate or Incomplete CSR Reports Pursuant to the Chinese Securities Law . . . . . . . . . . . . . . . . . . 5.4.3 The Impact of CSR Measures on Companies’ Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

116 118 122 125 127 127

6 Supply Chain Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 Supply Chain Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Third Party Rights and Collateral Warranties . . . . . . . . . . . . . . . . . . . 6.3 Possible Contractual Claims for Damages Arising from the Violation of Codes of Business Conduct and Ethics in the Context of Supply Chain Disputes Involving Multiple Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.1 Fictitious Case Scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.2 The Significance of English Law for International Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.3 Privity of Contract and Domestic, Nominated or Named Subcontractors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.4 Can a Breach of a Material or Core Violation of a Code of Conduct Be Qualified as a Repudiatory Breach of the Contract? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.5 Foreseeability, Causation and Mitigation . . . . . . . . . . . . . . . . 6.3.6 Loss of Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.7 Contractual Penalties or Liquidated Damages . . . . . . . . . . . . 6.3.8 Examples for Material Violations of a Code of Conduct Triggering Payment Under a Liquidated Damages Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.9 Contractual Penalty Clause in Civil Law Jurisdictions . . . . . 6.4 The New York Convention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 The Consolidation of Supply Chain Arbitrations . . . . . . . . . . . . . . . . 6.5.1 Consolidation in Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5.2 ICC Arbitration Rules on the Consolidation of Arbitrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5.3 The AIAC Arbitration Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5.4 Consolidation in the USA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5.5 Consolidation in Austria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5.6 Consolidation in Mainland China and Hong Kong . . . . . . . . 6.6 Joinders of Additional Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6.1 SIAC, AIAC, CIETAC and HKIAC Rules . . . . . . . . . . . . . . . 6.6.2 ICC Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

137 137 142

131 132

144 145 146 147

149 150 155 157

161 163 163 164 167 175 177 179 181 182 187 187 188

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6.6.3 ICDR Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 6.6.4 Vienna Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 6.7 Human Rights Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 Conclusion Regarding Hypothesis 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 Conclusion Regarding Hypothesis 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 Conclusion Regarding Hypothesis 3 . . . . . . . . . . . . . . . . . . . . . . . . . . .

199 199 203 208

Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211 Case Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225

About the Author

Dr. iur. Dr. phil. Adolf Peter is Associate Professor at the Shanghai University of Political Science and Law (SHUPL), Independent Arbitrator, Certified Supervisory Expert (CSE) and President of the EuropeanChinese Belt and Road Initiative Association (ECBRIA) which is seated in Austria. He holds two Ph.D. and several master degrees in Law, Business Ethics and Religious Science and an LL.M. degree in South East European Law and European Integration (University of Graz, Austria). As a lawyer, Dr. Peter has gained extensive experience both in common (in particular English, US and Singapore law) and civil law (in particular Austrian, German, European and Chinese law) in international law firms in Singapore, Austria and the USA. Dr. Peter’s main areas of activity are International Arbitration, Business Ethics, Corporate Social Responsibility and Corporate Governance in China, Singapore, Austria (EU) and the USA. Moreover, Dr. Peter is Fellow of the Singapore Institute of Arbitrators (SIArb), Fellow of the AustrianChinese Legal Society, Fellow of the Asian Institute of Alternative Dispute Resolution (AIADR) and Fellow of the Bali International Arbitration and Mediation Center (BIAMC). He is a member of the Chartered Institute of Arbitrators (CIArb) and the Austrian Arbitration Association (ArbAut). Furthermore, he is a committee member of the SIArb Publications & Website Committee.

xi

Abbreviations

AAA ACCG AIAC AktG Am. U. L. Rev. AnwaltsBl Apple ASCA ATX BAC BCG Berkshire Hathaway CAR Case Scenario CCCG CCPC CEO CFR CGR CIAR CIETAC CIETAC Rules CLS CNPC Consolidation Protocol CPC CSOE CSR

American Arbitration Association Austrian Code of Corporate Governance Asian International Arbitration Centre Aktiengesetz (Austrian Stock Corporation Act) American University Law Review Anwaltsblatt (Journal) Apple Inc. Austrian Stock Corporation Act Austrian Traded Index Beijing Arbitration Commission Boston Consulting Group Berkshire Hathaway Inc. Cumulative abnormal return Fictitious case scenario Chinese Code of Corporate Governance for Listed Companies Constitution of the Communist Party of China Chief executive officer Code of Federal Regulations Corporate Governance Report Construction Industry Arbitration Rules China International Economic and Trade Arbitration Commission CIETAC Arbitration Rules Company limited by shares China National Petroleum Corporation SIAC Proposal on Cross-Institution Consolidation Protocol Chinese Communist Party State-owned enterprises controlled by the Chinese central government Corporate Social Responsibility xiii

xiv

CSRC CSRC Guidelines

dHGB DJA DJSI World Dodd-Frank Act Erste Group ESAP ESG EU ETS ExxonMobil EY EY Study FAA FIDIC Fla. L. Rev. GesRZ GHG GRI GRI Standards GSSB Hague Convention Hague Rules HKIAC HKIAC Rules HKSE HSE HSE Committee Huawei Huawei Partner Code Huawei Supplier Code ICC ICC Rules ICDR ICDR Rules IIRC

Abbreviations

China Securities Regulatory Commission CSRC Guidelines for Introducing Independent Directors to the Boards of Directors of a Listed Company Deutsches Handelsgesetzbuch (German Commercial Code) Der Jahresabschluss (Journal) Dow Jones Sustainability World Index Dodd-Frank Wall Street Reform and Consumer Protection Act Erste Group Bank AG External Sustainability Advisory Panel Environmental, social and governance EU Emissions Trading System ExxonMobil Corporation Ernst & Young Ernst & Young 2019 Study on CSR Reporting in Austria Federal Arbitration Act Fédération International des Ingénieurs Conseils Florida Law Review Der Gesellschafter (Journal) Greenhouse gas emissions Global Reporting Initiative GRI Sustainability Reporting Standards Global Sustainability Standards Board Hague Convention of 30 June 2005 on Choice of Court Agreements Hague Rules on Business and Human Rights Arbitration Hong Kong International Arbitration Centre HKIAC Administered Arbitration Rules 2018 Hong Kong Stock Exchange Health, safety and environmental Health, Safety and Environmental Protection Committee Huawei Investment & Holding Co., Ltd. Huawei Code of Conduct for Partners Huawei Supplier Social Responsibility Code of Conduct International Chamber of Commerce ICC Arbitration Rules International Centre for Dispute Resolution International Arbitration Rules International Integrated Reporting Council

Abbreviations

Iowa J. Corp. L. IRRCI LLC MD&A NaDiVeG

NFI Directive

NGO NPC NYSE Ohio N.U.L. Rev OMV Para. PCA PetroChina Ping An PwC PwC Study ROSI RWZ S&P 500 SASAC SASAC Guidelines SASB SCIA SCVPS SEC Shanghai Court SHIAC Si2 SIAC SIAC Rules SMEs SOE

xv

Iowa Journal of Corporation Law Investor Responsibility Research Center Institute Limited liability company Management’s Discussion and Analysis of Financial Condition and Results of Operations Nachhaltigkeits -und Diversitätsverbesserungsgesetz (Austrian Sustainability and Diversity Improvement Act) Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of nonfinancial and diversity information by certain large undertakings and groups Non-governmental organization National People’s Congress New York Stock Exchange Ohio Northern University Law Review OMV AG Paragraph International Bureau of the Permanent Court of Arbitration PetroChina Company Limited Ping An Insurance (Group) Company of China, Ltd. PricewaterhouseCoopers PwC 2018 Study on CSR reporting in Austria Return on Sustainability Investment Zeitschrift für Recht und Rechnungswesen (Journal) Standard & Poor’s 500 State-Owned Assets Supervision and Administration Commission of the State Council Guidelines to the State-Owned Enterprises Directly under the Central Government Sustainability Accounting Standards Board Shenzhen Court of International Arbitration Social contribution value per share U.S. Securities and Exchange Commission Shanghai First Intermediate People’s Court Shanghai International Arbitration Centre Sustainable Investments Institute Singapore International Arbitration Centre SIAC Arbitration Rules Small and medium-sized enterprises State-owned enterprise

xvi

SOX SSCM SSE SSE Guidelines SSE Notice StGB STRABAG StRÄG Strat. Mgmt. J. SZSE SZSE CSR Instructions UGB UNCITRAL Arbitration Rules USSG VIAC Vienna Rules voestalpine Vt. L. Rev. Walmart WKO

Abbreviations

Sarbanes-Oxley Act of 2002 Sustainable Supply Chain Management Shanghai Stock Exchange SSE Guidelines for Environmental Information Disclosure of Listed Companies SSE Notice on Strengthening the Social Responsibility of Listed Companies Strafgesetzbuch (Austrian Criminal Code) STRABAG SE Strafrechtsänderungsgesetz (Criminal Law Amendment Act) Strategic Management Journal Shenzhen Stock Exchange SZSE Social Responsibility Instructions to Listed Companies Unternehmensgesetzbuch (Austrian Business Code) Arbitration Rules of the United Nations Commission on International Trade Law United States Sentencing Guidelines Vienna International Arbitral Centre VIAC Rules of Arbitration voestalpine Group Vermont Law Review Walmart Inc. Austrian Economic Chambers (Wirtschaftskammer Österreich)

List of Figures

Fig. 5.1 Fig. 5.2 Fig. 6.1 Fig. 7.1

Number of released corporate CSR reports in Mainland China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CSR issues impact on share prices (%) . . . . . . . . . . . . . . . . . . . . . . Sample supply chain structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The “Perfect” ethics and CSR system . . . . . . . . . . . . . . . . . . . . . . .

128 134 138 208

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Chapter 1

Definitions

First, some of the relevant terms of this monograph have to be defined:

1.1 Corporate Governance Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community. Since corporate governance also provides the framework for attaining a company’s objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.1

Pursuant to the latest edition of the G20/OECD’s Principles of Corporate Governance2 the purpose of corporate governance is to help build an environment of trust, transparency and accountability necessary for fostering long-term investment, financial stability and business integrity, thereby supporting stronger growth and more inclusive societies […] Corporate Governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.

Corporate governance requirements can be based on 1 Chen/James,

Corporate Governance Definition (12 April 2020), https://www.investopedia.com/ terms/c/corporategovernance.asp (last accessed on 21 May 2020). 2 OECD, G20/OECD Principles of Corporate Governance (2015) p. 7 et sq., https://www.oecdilibrary.org/docserver/9789264236882-en.pdf?expires=1577023116&id=id&accname=guest&che cksum=86BF3C29DAADE21C6BA5D0ACD0D9F164 (last accessed on 22 December 2019). © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 A. Peter, CSR and Codes of Business Ethics in the USA, Austria (EU) and China and their Enforcement in International Supply Chain Arbitrations, https://doi.org/10.1007/978-981-33-6073-0_1

1

2

1 Definitions

(a) hard law (statutory law or mandatory stock exchange requirements; it should be noted that in the USA the implementation of a code of ethics is a legal requirement pursuant to the Sarbanes-Oxley Act); or (b) soft law such as codes of corporate governance which adhere to the so-called comply-or-explain model (prime market-listed companies in Austria are obliged to disclose a declaration of commitment to comply with the rules of the Austrian Code of Corporate Governance); or elements of self-regulation and voluntary standards such as companies’ voluntary codes of ethics and conduct which are not based on any legal requirements).3 Raith4 distinguishes between two concepts of corporate governance: Mainstream corporate governance primarily focuses on the management’s responsibility towards the shareholders. The idea behind this concept is that the sole focus on the shareholder interests ultimately and indirectly best serves the interests of the other stakeholders of a company as well. Thus, the concept of mainstream corporate governance is closely related to the theories of Adam Smith (the invisible hand) and Milton Friedman (the social responsibility of business is to increase its profits). The concept of extended corporate governance extends the management’s responsibility to all of the company’s stakeholders. Freeman5 defined a company’s stakeholder as “any group or individual who can affect, or is affected by, the achievement of a corporation’s purpose.” As a consequence such stakeholders can be employees, consumers, suppliers, creditors, the local community, the society in general, etc.

1.2 Shareholder Theory of Corporate Governance (Shareholder Primacy Model) The concept of mainstream corporate governance is equivalent to the dominant normative theory for corporate governance in the USA: the Shareholder Primacy Model. This model sets forth that a company’s management and directors must solely serve the interests of its shareholders and thus shall maximize the profits of the company. The Shareholder Primacy Model is best described in Milton Friedman’s book “Capitalism and Freedom” and in his article “The Social Responsibility Of

3 OECD, G20/OECD Principles of Corporate Governance, p. 13, https://www.oecd-ilibrary.org/doc

server/9789264236882-en.pdf?expires=1577023116&id=id&accname=guest&checksum=86B F3C29DAADE21C6BA5D0ACD0D9F164. 4 Raith, Praxisnahe Konzepte der Unternehmensethik (2013) p. 12 et sq., http://www.imzuwi.org/ skripten/theorie_335215/IV_2.pdf (last accessed on 23 December 2019). 5 Freeman, Strategic Management: A Stakeholder Approach (1984) p. 46.

1.2 Shareholder Theory of Corporate Governance (Shareholder Primacy Model)

3

Business Is to Increase Its Profits”6 which was published in 1970 in the New York Times.7

1.3 Stakeholder Theory of Corporate Governance The Stakeholder Theory of Corporate Governance corresponds to the concept of extended corporate governance and is thus supported by most business ethicists. Pursuant to the stakeholder theory, managers and directors of a company have to not only consider the interests of the shareholders but of all stakeholders of the company. It should be emphasized that for the supporters of the stakeholder theory the managers’ and directors’ responsibility goes beyond the pure maximization of shareholder returns.8

1.4 CSR There are numerous definitions for CSR. For the purpose of this monograph CSR shall have the following meaning: A company’s responsibility does not only include the maximization of profits for its shareholders but is extended to encompass economic, social, ecological/environmental and ethical aspects, which shall be pursued by (i) exceeding legal obligations and (ii) being directed towards the interest of all of the companies’ stakeholders.9 The European Commission defined CSR as “the responsibility of enterprises for their impacts on society”.10

6 Friedman,

Capitalism and Freedom, 40th anniversary ed. (2002) p. 133; Friedman, The Social Responsibility of Business Is to Increase Its Profits (13 September 1970), https://www.nytimes. com/1970/09/13/archives/article-15-no-title.html (last accessed on 26 December 2020). 7 Rodrigues, From Loyalty to Conflict: Addressing Fiduciary Duty at the Officer Level, 61 Fla. L. Rev. (January 2009) p. 1 (p. 8 et sq.). 8 Rodrigues, 61 Fla. L. Rev. (January 2009) p. 9. 9 Lewis, Corporate Social Responsibility/Sustainability Reporting Among Fortune Global 250: Greenwashing or Green Supply Chain? (2016). Faculty and Staff—Articles & Papers. Paper 56, https://digitalcommons.salve.edu/cgi/viewcontent.cgi?article=1056&context=fac_staff_pub (last accessed on 26 December 2019); Cecil, Corporate Social Responsibility Reporting in the United States, McNair Scholars Research Journal, Vol. 1, Iss. 1, Article 6 (2008) p. 43 (p. 43 et sq.), http://commons.emich.edu/cgi/viewcontent.cgi?article=1006&context=mcnair (last accessed on 26 December 2019); Raith, Praxisnahe Konzepte der Unternehmensethik, p. 15, http://www.imzuwi. org/skripten/theorie_335215/IV_2.pdf. 10 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. A renewed EU strategy 201114 for Corporate Social Responsibility/* COM/2011/0681 final */, p. 6, https://eur-lex.europa.eu/ legal-content/EN/TXT/?uri=CELEX:52011DC0681 (last accessed on 26 December 2019).

4

1 Definitions

Furthermore, pursuant to the European Commission, a prerequisite for meeting that responsibility is the respect for applicable legislation, and for collective agreements between social partners. To fully meet their corporate social responsibility, enterprises should have in place a process to integrate social, environmental, ethical, human rights and consumer concerns into their business operations and core strategy in close collaboration with their stakeholders, with the aim of: – maximising the creation of shared value for their owners/shareholders and for their other stakeholders and society at large; – identifying, preventing and mitigating their possible adverse impacts.”11

The main difference between CSR and corporate governance is that CSR involves both social and ecological/environmental elements.12 CSR achievements are communicated to the public and existing and potential investors by means of disclosure. The Global Reporting Initiative (“GRI”) is worldwide the most widely used CSR reporting framework and will be covered in more detail below in Sect. 4.6.13

1.5 Corporate Code of Business Conduct and Ethics Corporate codes of business conduct and ethics are corporate governance rules which are drafted and complied with by companies on a voluntary basis.14 The codes may be brief statements of principles and values statements or more extensive documents which can best be described as “compliance”-type codes, including detailed rules and procedures. Large public companies usually have codes which combine these two types of codes of business conduct and ethics. Thus, these codes contain both general principles and statements and detailed lists of requirements and prohibitions.15 A code of business conduct and ethics is typically directed at the companies’ management, directors and employees and focuses on topics such as conflicts 11 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. A renewed EU strategy 2011– 14 for Corporate Social Responsibility/* COM/2011/0681 final */, p. 6, https://eur-lex.europa.eu/ legal-content/EN/TXT/?uri=CELEX:52011DC0681. 12 Raith, Praxisnahe Konzepte der Unternehmensethik, p. 18, http://www.imzuwi.org/skripten/the orie_335215/IV_2.pdf. 13 Cecil, Corporate Social Responsibility Reporting in the United States, McNair Scholars Research Journal, Vol. 1, Iss. 1, Article 6, p. 44 et sq, http://commons.emich.edu/cgi/viewcontent.cgi?article= 1006&context=mcnair. 14 Rodrigues, 61 Fla. L. Rev. (January 2009) p. 19. 15 Newberg, Corporate Codes of Ethics, Mandatory Disclosure, and the Market for Ethical Conduct, 29 Vt. L. Rev. (2005) p. 253 (p. 256 et sq.).

1.5 Corporate Code of Business Conduct and Ethics

5

of interest, employee rights, human rights, consumer protection, anti-corruption, business conduct, health, safety and environmental concerns.16 As a consequence, codes of business conduct and ethics provide a platform for the companies to commit themselves to an extended corporate governance.17 A code may contain social and environmental principles and guidelines, too. Thus, a companies’ code of business conduct and ethics can and in the author’s opinion should also serve as means of self-commitment regarding CSR.18

16 Rodrigues, 61 Fla. L. Rev. (January 2009) p. 20 et sqq; Nieweler, Corporate Social Responsibility:

Is It in Your Code of Conduct? (22 April 2015), https://www.whistleblowersecurity.com/corporatesocial-responsibility-is-it-in-your-code-of-conduct/ (last accessed on 26 December 2019). 17 Raith, Praxisnahe Konzepte der Unternehmensethik, p. 14, http://www.imzuwi.org/skripten/the orie_335215/IV_2.pdf. 18 Nieweler, Corporate Social Responsibility: Is It in Your Code of Conduct? https://www.whistlebl owersecurity.com/corporate-social-responsibility-is-it-in-your-code-of-conduct/; InnoTrain CSR, http://www.csr-kompetenz.de/fileadmin/dokumente/CSR_TRAINING_DE.pdf.

Chapter 2

Hypotheses

2.1 Hypothesis 1 Milton Friedman is the most famous representative of the Shareholder Primacy Model. Pursuant to Friedman, a company does not owe any duty to anyone besides its shareholders. In his book “Capitalism and Freedom”, Friedman clearly expressed that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud.”1 In his famous article in the New York Times Friedman substantiated his view and explicitly denied a social responsibility for enterprises: What does it mean to say that the corporate executive has a “social responsibility” in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers. For example, that he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price increase would be in the best interests of the corporation. Or that he is to make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or that is required by law in order to contribute to the social objective of improving the environment. Or that, at the expense of corporate profits, he is to hire “hardcore” unemployed instead of better qualified available workmen to contribute to the social objective of reducing poverty.2

Furthermore, Friedman supported and quoted Adam Smith’s (1732–1790) famous theory about the “invisible hand”: It is the responsibility of the rest of us to establish a framework of law such that an individual in pursuing his own interest is, to quote Adam Smith again, “led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society 1 Friedman,

Capitalism and Freedom, p. 133. The Social Responsibility of Business Is to Increase Its Profits, https://www.nytimes. com/1970/09/13/archives/article-15-no-title.html.

2 Friedman,

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 A. Peter, CSR and Codes of Business Ethics in the USA, Austria (EU) and China and their Enforcement in International Supply Chain Arbitrations, https://doi.org/10.1007/978-981-33-6073-0_2

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8

2 Hypotheses that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.” Few trends could so thoroughly undermine the very foundation of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible […] The corporation is an instrument of the stockholders who own it. If the corporation makes a contribution, it prevents the individual stockholder from himself deciding how he should dispose of his funds.3

Keeping in mind the theories of Friedman and Smith, the first hypothesis of this monograph is that the implementation of corporate codes of business conduct and ethics, including in particular the social and environmental aspects of CSR, increasingly becomes an essential element for a long-term profit maximization. It becomes more and more evident that CSR is not sufficiently achieved by the invisible hand of the market, as nowadays, corporate profits can no longer be maximized by strictly adhering to the Shareholder Primacy Model due to critical, reasonable and well-informed investors, consumers and other stakeholders. In contrast to Adam Smith’s view, it is required that companies actively represent the interests of their stakeholders as well.

2.2 Hypothesis 2 Pursuant to Jellinek, the law is the ethical minimum. The law of a society can be compared to the foundation of a building. It is the minimum of the norms of a certain state of society and it secures the continued existence of such state of society: Wenn wir nun bei einem historisch bestimmten Gesellschaftszustand nach den Normen fragen, deren Befolgung die fortdauernde Existenz eines solchen Zustandes möglich macht, so erhalten wir das Recht dieser Gesellschaft. Das Recht ist nichts anderes als das ethische Minimum. Objektiv sind es die Erhaltungsbedingungen der Gesellschaft, soweit sie vom menschlichen Willen abhängig sind, also das Existenzminimum ethischer Normen, subjektiv ist es das Minimum sittlicher Lebensbetätigung und Gesinnung, welches von den Gesellschaftsgliedern gefordert wird. Das Recht verhält sich nach dieser Auffassung wie der Teil zum Ganzen, wie das Fundament zum Gebäude. Das Recht wird also, als das erhaltende Moment, das Minimum der Normen eines bestimmten Gesellschaftszustandes bilden, das heißt, diejenigen Normen umfassen, welche die unveränderte Existenz eines solchen sichern.4

Keeping in mind that the law (the legal system) of a society should only be the ethical minimum of the society’s norms, Neuhold justifiably concludes that not everything that is ethically imperative should be part of the legal system: Legally codified virtue (Tugend) would inevitably lead to a state of “virtue terror” (Tugendterror).5 3 Friedman,

Capitalism and Freedom, p. 133 et sqq. Die sozialethische Bedeutung von Recht, Unrecht und Strafe, 2nd ed. (1908) p. 45. 5 Neuhold, Ethik und Ethikkommissionen/Ethikkomitees mit Blick auf die Wissenschaft und Forschung – ein einfaches und doch komplexes Thema, in Neuhold/Pelzl (Ed.), Ethik in Forschung und Technik (2011) p. 51 (p. 65). 4 Jellinek,

2.2 Hypothesis 2

9

Based on the theories of Jellinek and Neuhold, it is the second hypothesis of this monograph that the ethical and CSR commitments should be voluntary, but the implementation of corporate ethics and CSR programs has to be monitored/assessed by CSR-focused governmental agencies or other independent third parties. Due to window-dressing and greenwashing practices and based on the fact that CSR is often primarily used as advertising tool containing boilerplate language, CSR is not sufficiently provided for by the invisible hand of the market. Breaches of corporate codes of business conduct and ethics and CSR guidelines must have legal consequences. The ratio behind this reasoning is that no company is forced to introduce such codes or commit itself to CSR, but if a company does, it must have a legal consequence if the company does not adhere to its own ethical standards. The misleading of investors and stakeholders must have legal implications.

2.3 Hypothesis 3 The third hypothesis of this monograph is based on the assumption that violations of core provisions of a supplier code of conduct may give rise to claims of damages for loss of profits caused by a loss of reputation. Under certain circumstances, English law allows the successful pursuit of such claims and international arbitration serves as the ideal means of dispute resolution in the context of international supply chains. Taking into account that supply chain disputes will in all likelihood involve multiple parties (e.g. employer, main contractor, subcontractors, lower-tier subcontractors, suppliers, sub-suppliers, etc.), it is the third hypothesis of this monograph that in the context of violations of core provisions of a supplier code of conduct, the rules of several international arbitration institutions provide the necessary tools for both joinders and consolidations of two or more pending arbitrations to assure procedural efficiency and the prevention of inconsistent arbitral awards, even though not all of the parties involved consent to such joinders or consolidations.

Chapter 3

Codes of Ethics and CSR in the USA

3.1 From Shareholder Value to Stakeholder Value? The flagship case for the Shareholder Primacy Model in the USA was the 1919 Michigan Supreme Court case Dodge v. Ford Motor Co.1 : The Michigan Supreme Court held that a business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end and does not extend to a change in the end itself, to the reduction of profits or to the nondistribution of profits among stockholders in order to devote them to other purposes.

The real breakthrough of the Shareholder Primacy Model in the USA occurred in the 1970s when the famous Chicago School of Economists (lead by Milton Friedman) emerged representing this theory.2 It is important to note that the USA do not have one single corporate law regime. Instead, every state has its own corporate code and jurisprudence which produces a wealth of case law. Nevertheless, there are some significant federal laws which provide legal minimum standards and, to a certain extent, legal harmonization. The most important uniform federal laws are the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 (“SOX”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).3 1 Supreme Court of Michigan, Feb. 7, 1919, 170 N.W. 668 (Mich. 1919), https://casetext.com/case/

dodge-v-ford-motor-co (last accessed on 29 December 2019). So Long to Shareholder Primacy, Harvard Law School Forum on Corporate Governance and Financial Regulation (22 August 2019), https://corpgov.law.harvard.edu/2019/08/22/so-longto-shareholder-primacy/ (last accessed on 29 December 2019). 3 Peter, Die Verwaltungsstruktur der Aktiengesellschaft in Bulgarien, den USA und Österreich. Mit den Schwerpunkten Beratungsverträge, Arbeitnehmermitbestimmung und Unabhängigkeit der Aufsichtsratsmitglieder bzw. outside directors (2010) p. 27 et sqq. 2 Posner,

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 A. Peter, CSR and Codes of Business Ethics in the USA, Austria (EU) and China and their Enforcement in International Supply Chain Arbitrations, https://doi.org/10.1007/978-981-33-6073-0_3

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3 Codes of Ethics and CSR in the USA

Corporations can only be incorporated in a state. A federal incorporation is legally not available. Corporations are subject to the law of the state in which they are incorporated, but they do not have to have their seat or headquarters in the state of incorporation. As a consequence, most of the corporations are incorporated in the state of Delaware, as the codified General Delaware Corporation Law and the case law of the Delaware Supreme Court provide a very liberal corporate law regime.4 Owing to the fact that most of the US corporations are incorporated in Delaware, the role of the Delaware Supreme Court is crucial for the development of US corporate law. Therefore, it is important to note that the above mentioned decision of the Michigan Supreme Court was reaffirmed by the Delaware Supreme Court in the case Revlon, Inc. v. MacAndrews & Forbes Holdings in 1986.5 In this case, the Delaware Supreme Court addressed “for the first time the extent to which a corporation may consider the impact of a takeover threat on constituencies other than shareholders.” The Delaware Supreme Court held that “while concern for various corporate constituencies is proper when addressing a takeover threat, that principle is limited by the requirement that there be some rationally related benefit accruing to the stockholders.”6 Leo E. Strine, Jr. (Chief Justice of the Delaware Supreme Court from 2014 until 2019) emphasized the dominance of the Shareholder Primacy Model in Delaware corporate law by quoting this case in his article “The Dangers of Denial” in 2015: The understanding in Delaware is that Revlon could not have been more clear that directors of a for-profit corporation must at all times pursue the best interests of the corporation’s stockholders, and that it highlighted the instrumental nature of other constituencies and interests. Non-stockholder constituencies and interests can be considered, but only instrumentally, in other words, when giving consideration to them can be justified as benefiting the stockholders. In fact, after the Revlon decision was issued, there was vocal criticism of the Delaware Supreme Court for its ruling, and a movement for the adoption of constituency statutes accelerated. These statutes, which were eventually adopted by a majority of U.S. states, gave directors the discretion to consider interests other than stockholder welfare in responding to a takeover. But Delaware did not adopt a statute of this kind.7

Nevertheless, it should be noted that nowadays, the USA are slowly but surely moving from the absolute dominance of the Shareholder Primacy Model towards a regime which is getting somewhat closer to the Stakeholder Theory of Corporate Governance. First, even in this context, the Delaware Supreme Court explicitly recognized the interests of other constituencies (stakeholders) as long as there are some rationally related benefits for the shareholders. This evidently implies that a business 4 Peter,

Die Verwaltungsstruktur der Aktiengesellschaft, p. 27 et sq. Inc. v. MacAndrews & Forbes Holdings, 506 A.2d 173 (1986), https://law.justia.com/ cases/delaware/supreme-court/1986/506-a-2d-173-1.html (last accessed on 29 December 2019). 6 Revlon, Inc. v. MacAndrews & Forbes Holdings, 506 A.2d 173, 176 (1986), https://law.justia.com/ cases/delaware/supreme-court/1986/506-a-2d-173-1.html. 7 Strine, Jr., The Dangers of Denial: The Need for a Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law, Wake Forest Law Review, Vol. 50 (2015) p. 761; University of Pennsylvania, Inst. for Law & Econ. Research Paper No. 15-08. Available at SSRN: https://ssrn.com/abstract=2576389 (last accessed on 21 May 2020). 5 Revlon,

3.1 From Shareholder Value to Stakeholder Value?

13

decision may be in favor of the stakeholders if it can be argued that it will likely enhance the company’s standing and reputation and thus has positive implications for the company’s owners. Considering today’s business environment and political climate, there is a good chance that addressing concerns of actual and potential stakeholders will give companies a competitive advantage or prevent loss of a competitive advantage.8 Second, outside of Delaware, the majority of states have adopted so-called permissive constituency statutes which recognize the interests of stakeholders.9 Third, US federal law acknowledges the significance of corporate ethics (e.g. the SOX requires a corporation’s disclosure whether it has adopted a corporate code of ethics). The legal requirement regarding the corporate code of ethics has encouraged companies to implement extensive codes of ethics which also focus on their responsibility to stakeholders.10 Forth, the New York Stock Exchange (“NYSE”) requires in its NYSE Listed Company Manual that corporations may only be listed on the NYSE if they adopt and disclose a corporate code of ethics. As will be shown in Sect. 3.2.1.2, the minimum content for such codes of ethics even includes some stakeholder rhetoric. Fifth, although CSR is not prescribed by law in the USA, most of the large companies disclose CSR reports on a regular basis.11 Sixth, more and more business schools have introduced CSR and business ethics into their curricula.12 Seventh, the strongest indication that the Stakeholder Theory of Corporate Governance is on the rise in the USA is the latest statement of the Business Roundtable which was published in August 2019. In the Statement of the Purpose of a Corporation, 181 chief executive officers (“CEOs”)13 moved away from the strict application of the Shareholder Primacy Model and committed themselves to lead their companies for the benefit of all stakeholders. The Business Roundtable is an association of CEOs of America’s leading companies. It has periodically issued principles

8 Newberg,

29 Vt. L. Rev. (2005) p. 269 et sq. Symposium: Robert Clark’s Corporate Law: Twenty Years of Change: The Rhetoric of Corporate Law: The Impact of Stakeholder Rhetoric on Corporate Norms, 31 Iowa J. Corp. L. (Spring 2006) p. 675 (p. 686). 10 Fairfax, 31 Iowa J. Corp. L. (Spring 2006) p. 694. 11 See below in Sect. 3.3.4. 12 Fairfax, 31 Iowa J. Corp. L. (Spring 2006), p. 695. 13 The Statement on the Purpose of a Corporation contains the signature of CEOs from major corporations and multinationals such as American Airlines, American Express, Amazon, Bank of America, Boing, Apple, BP, Coca Cola, Deloitte, ExxonMobil, Ford, Fox, Goldman Sachs, IBM, JPMorgan, KPMG, Mastercard, Morgan Stanley, Pepsi, PwC, Philips, Siemens, United Airlines, UPS, Walmart, etc. 9 Fairfax,

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3 Codes of Ethics and CSR in the USA

of corporate governance since 1978 and has regularly supported the Shareholder Primacy Model.14 Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all. Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications and other services that underpin economic growth. While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to: – Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations. – Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect. – Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions. – Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses. – Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders. Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.15

It is to be expected that the CEOs approximation to the Stakeholder Theory of Corporate Governance will lead to more legal disputes concerning the purpose of a corporation and the conflict between shareholder and stakeholder value. As a majority of the US corporations is incorporated in Delaware, sooner or later, these disputes will reach the Delaware Supreme Court. It should be noted that in the USA every business decision by management must be based on the so-called business judgement rule. Under the business judgement rule, managers and directors of corporations are shielded from liability as long as they (i) make a business decision in the corporation’s

14 Business

Roundtable, Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans’ (19 August 2019), https://www.businessroundtable.org/ business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-servesall-americans (last accessed on 29 December 2019). 15 Business Roundtable, Statement on the Purpose of a Corporation (August 2019), https://opport unity.businessroundtable.org/wp-content/uploads/2019/08/BRT-Statement-on-the-Purpose-of-aCorporation-with-Signatures.pdf (last accessed on 29 December 2019).

3.1 From Shareholder Value to Stakeholder Value?

15

interest, (ii) act in good faith on a fully informed basis and (iii) do not act grossly negligently.16 What impact will the Business Roundtable’s Statement on the Purpose of a Corporation have on future decisions of the Delaware Supreme Court and the business judgement rule? Will the Delaware Supreme Court accept business decisions which are prompted by rationales other than maximizing profits? It is undeniable that pursuant to Delaware corporate law, the managers and directors owe their fiduciary duties to the corporation and its shareholders, but it should be emphasized that this legal requirement does not preclude a board of directors from considering stakeholder interests as long as the recognition of these stakeholder interests creates a long-term value for the corporation and its shareholders. The Business Roundtable’s Statement of the Purpose of a Corporation will not change this requirement: If a business decision in favor of stakeholder interests does not at least provide a long-term value for the corporation and its shareholders, it will still not pass the test of the business judgement rule and will consequently render the decision makers liable. This is no surprise. Even the Business Roundtable’s Statement of the Purpose of a Corporation expressly contains the requirement of generating long-term value for the shareholders. Thus, it will still not be possible (and it is also not intended by the CEOs of the Business Roundtable) to (i) attend to the stakeholder interests at the expense of the shareholders or (ii) completely ignore the shareholder interests for the benefit of the stakeholders.17 Still, the Business Roundtable’s Statement on the Purpose of a Corporation is of highest significance because the leaders of the largest multinationals for the first time expressly committed themselves to stakeholder interests and implicitly accepted the fact that attending to the interests of various stakeholders may have a positive impact on the value of the corporation. It may even be interpreted as a confirmation of the first hypothesis of this monograph that in today’s business environment and political climate corporate profits can no longer be maximized by strictly adhering to the Shareholder Primacy Model. This understanding is also confirmed by research results of the NYU Stern Center for Sustainable Business: “Managing for multiple stakeholders and related environmental and social issues leads to innovation, operational efficiency, lower risk, employee retention and other benefits that translate into improved corporate financials.”18 16 Engler, Court battles may loom after U.S. business heads widen corporate objectives (4 September 2019), https://www.reuters.com/article/bc-finreg-court-battles-corporate-object/court-battles-mayloom-after-us-business-heads-widen-corporate-objectives-idUSKCN1VP27J (last accessed on 30 December 2019); Frankel, If corporations don’t put shareholders first, what happens to business judgment rule? (22 August 2019), https://www.reuters.com/article/us-otc-bizroundtable/if-corpor ations-dont-put-shareholders-first-what-happens-to-business-judgment-rule-idUSKCN1VC2FS (last accessed on 30 December 2019). 17 Sullivan & Cromwell LLP, Corporation Purpose. Business Roundtable “Statement on the Purpose of a Corporation” Proposes New Paradigm (20 August 2019), https://mailings.sullivanandcromwell. com/28/1855/uploads/gpm7865.pdf (last accessed on 30 December 2019). 18 Whelan, The Business of Business is Creating Value (Which Leads to Profits) (22 August 2019), https://www.worth.com/contributor/the-business-of-business-is-creating-valuewhich-leads-to-profits/ (last accessed on 30 December 2019).

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The NYU Stern Center for Sustainable Business uses its so-called Return on Sustainability Investment (“ROSI”) methodology to first identify material sustainability strategies for the specific industry/sector/company (by using the Sustainability Accounting Standards Board or the GRI as guides). In a next step, the changed practices resulting from those strategies (e.g. using renewable energy sources instead of fossil fuels) need to be detected. In a further step, ROSI quantifies and monetizes the benefits of sustainable practices through the ROSI mediating factors such as innovation, operational efficiency, supplier loyalty, etc. “ROSI can be applied to practices throughout an organization that have already been implemented, are currently in development, or for future projects.” Focusing on sustainability may create a greater profitability, increase the corporation’s value and reputation, improve the relationships with various stakeholder groups and lead to more innovation.19

3.2 Corporate Codes of Ethics in the USA Historically, in the USA the first corporate codes of ethics emerged early in the 20th century,20 although their breakthrough and widespread acceptance is mainly due to the adoption of the SOX in 2002 and the amendments of the U.S. Sentencing Guidelines (“USSG”) in 2004.21

3.2.1 The U.S. Sarbanes-Oxley Act of 2002 The SOX came into force in 2002 and was the federal legislator’s response to major accounting scandals, such as Enron and WorldCom. The SOX is a framework law (Rahmengesetz) which requires the U.S. Security and Exchange Commission (“SEC”) to implement detailed rules and regulations (Durchführungsverordnungen). The SOX deals with various issues, such as auditor independence, corporate responsibility, financial disclosure, etc.22 Section 406 of the SOX sets forth that the SEC shall issue rules to require companies which are listed on a stock exchange to disclose periodically whether they have 19 NYU

Stern Center for Sustainable Business, CSB ROSI™ Methodology, https://www.stern.nyu. edu/experience-stern/about/departments-centers-initiatives/centers-of-research/center-sustainablebusiness/research/csb-monetization-methodology (last accessed on 30 December 2019). 20 Newberg, 29 Vt. L. Rev. (2005) p. 255. 21 Babri/Davidson/Helin, An Updated Inquiry into the Study of Corporate Codes of Ethics: 2005– 2016, Journal of Business Ethics (2019) p. 2, https://link.springer.com/article/10.1007/s10551-01904192-x (last accessed on 30 December 2019); Bucklin, More Preaching, Fewer Rules: A Process for the Corporate Lawyer’s Maintenance of Corporate Ethics, 35 Ohio N.U.L. Rev. (2009) p. 887 (p. 938). 22 Peter, Der US-amerikanische “Sarbanes-Oxley Act of 2002”. Seine Auswirkungen auf die an der New York Stock Exchange notierenden österreichischen Aktiengesellschaften (2008) p. 38 et sqq.

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adopted a corporate code of ethics for senior financial officers. In the event of not having adopted such corporate code of ethics, the companies would have to disclose the reason for not having a code of ethics. The SOX defines the term “code of ethics” as such standards as reasonably necessary to promote (1) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (2) full fair, accurate, timely, and understandable disclosure in the periodic reports required to be filed by the issuer; and (3) compliance with applicable governmental rules and regulations.

3.2.1.1

SEC Final Rule Regarding Disclosure Required by Sections 406 and 407 of the SOX

On 24 January 2003, based on Sect. 406 of the SOX, the SEC released a Final Rule23 (Durchführungsverordnung) requiring listed companies to disclose in their annual reports whether they have adopted a corporate code of ethics (if not, companies have to explain the reason for not adopting a code of ethics). The SEC Final Rule covers not only senior financial officers (such as principal financial officers, principal accounting officers or controllers) but extends its scope to the companies’ CEOs.24 Furthermore, the SEC extended the definition of “code of ethics” as follows: For purposes of this Item 406, the term code of ethics means written standards that are reasonably designed to deter wrongdoing and to promote: (1) Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (2) Full, fair, accurate, timely, and understandable disclosure in reports and documents that a registrant files with, or submits to, the Commission and in other public communications made by the registrant: (3) Compliance with applicable governmental laws, rules and regulations; (4) The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and (5) Accountability for adherence to the code.25

It is noticeable that prongs 4 and 5 are additional requirements in comparison to Sect. 406 of the SOX: The SEC prescribed the installation of (i) an internal whistleblower system by reporting violations of the code of ethics to an appropriate 23 SEC

Final Rule: Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002, 17 CFR Parts 228, 229 and 249 (release nos. 33-8177; 34-47235; file no. S7-40-02). 24 § 229.406 (a) (Item 406) Code of Ethics. 25 § 229.406 (b) (Item 406) Code of Ethics.

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person (prong 4) and (ii) a system to hold persons accountable for ethical breaches (compliance procedures and disciplinary measures). It should be pointed out that the SEC decided not to specify additional ethical principles, the compliance procedures, the whistleblower system or the types of sanctions. The SEC Final Rule does also not require the installation of (independent) ethics officers or (independent) ethics committees. Moreover, it is striking that violations of the code of ethics should internally be reported to an appropriate person. Thus, the SEC did not prescribe any independence criteria for the internally responsible persons to uphold the code of ethics. The reason for the SEC’s approach is that the SEC believes that ethics codes do, and should, vary from company to company and that decisions as to the specific provisions of the code, compliance procedures and disciplinary measures for ethical breaches are best left to the company. Such an approach is consistent with our disclosurebased regulatory scheme. Therefore, the rules do not specify every detail that the company must address in its code of ethics, or prescribe any specific language that the code of ethics must include. They further do not specify the procedures that the company should develop, or the types of sanctions that the company should impose, to ensure compliance with its code of ethics.26

It is noteworthy that both the SOX’s and the SEC’s definition of the code of ethics do not contain any express references to CSR or stakeholders. Instead, the SEC strongly encourages companies to adopt codes of ethics which are broader and more detailed than prescribed by law.27 Thus, the SEC agrees that ethical commitments should be voluntary but evidently does not share the author’s view that the implementation of corporate ethics and CSR programs should be monitored by governmental agencies or other independent and competent third parties. Instead, the SEC firmly believes in the sufficiency of the mandatory legal disclosure instruments: The corporate code of ethics must either be filed as an exhibit to the company’s annual report, or the text of the code of ethics must be posted on the company’s homepage (in such case the company must disclose (i) its internet address and (ii) indicate that it has posted its code of ethics on its homepage in its annual report), or provide, on request, a copy of its code of ethics to any person without charge (the annual report must contain information about this mechanism).28 Furthermore, material amendments to or material waivers from a provision contained in the code of ethics must be disclosed as well.29 Implicit waivers ought to be disclosed, too, and are defined as the company’s “failure to take action within a reasonable

26 SEC Final Rule: Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002, 17 CFR Parts 228, 229 and 249 (release nos. 33-8177; 34-47235; file no. S7-40-02), II. B. 2. c. 27 SEC Final Rule: Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002, 17 CFR Parts 228, 229 and 249 (release nos. 33-8177; 34-47235; file no. S7-40-02), II. B. 2. c. 28 § 229.406 (c) (Item 406) Code of Ethics. 29 § 229.406 (d) (Item 406) Code of Ethics.

3.2 Corporate Codes of Ethics in the USA

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period of time regarding a material departure from a provision of the code of ethics that has been made known to an executive officer” of the company.30 It must not remain unmentioned that although the adoption and the contents of a corporate code of ethics are voluntary (relying on the principle “comply or explain”), a breach of the corporate code of ethics may have legal implications: Due to the disclosure requirements in the company’s annual reports, material misstatements regarding the code of ethics or omissions of material facts (such as the failure to report a material waiver) may lead to litigations based on SEC Rule 10b-5 as “it shall be unlawful for any person […] to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statement made, in the light of the circumstances under which they are made, not misleading.”31 Section 406 of the SOX (in connection with the applicable SEC Final Rule) certainly facilitates the actual and potential investors’ and stakeholders’ access to the companies’ codes of ethics. It also makes it easier for these groups to scrutinize and compare the various codes of ethics. Based on the mandatory disclosure mechanism, US law mainly leaves it to the public to assess the ethical engagement of a company and its adherence to its own code of ethics.32 As companies are under pressure by the market and today’s competitive environment to commit themselves to ethical guidelines,33 a generalized fear exists that codes of ethics are nothing more than window-dressing or greenwashing. There is unfortunately a great likelihood that despite possible legal consequences based on SEC Rule 10b-5, waivers (especially implicit waivers) are not being disclosed by the companies.34 That is why in the author’s opinion the implementation of corporate codes of ethics should be monitored and reviewed by independent bodies within the company (e.g. independent ethics committees) and by independent third parties (such as auditors, governmental agencies or by independent bodies of international organizations or NGOs).

3.2.1.2

US Stock Exchange Requirements

This monograph focuses on the corporate governance rules of the NYSE and Nasdaq. The NYSE and Nasdaq are not only the largest stock exchanges in the USA but worldwide based on their market capitalization (NYSE market capitalization: USD 13.4 trillion;35 Nasdaq market capitalization: USD 3.9 trillion36 ). 30 SEC Final Rule: Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002, 17 CFR Parts 228, 229 and 249 (release nos. 33-8177; 34-47235; file no. S7-40-02), II. B. 5. 31 17 CFR Sec. 240.10b-5; Peter, Der US-amerikanische Sarbanes-Oxley Act of 2002, p. 286 et sqq; Newberg, 29 Vt. L. Rev. (2005) p. 281. 32 Newberg, 29 Vt. L. Rev. (2005) p. 286 et sq. 33 Newberg, 29 Vt. L. Rev. (2005) p. 287. 34 Rodrigues, 61 Fla. L. Rev. (January 2009) p. 31 et sqq. 35 See https://www.forbes.com/pictures/eddk45iglh/new-york-stock-exchange/#36fc451744bb (last accessed on 4 January 2020). 36 See https://www.forbes.com/pictures/eddk45iglh/nasdaq/#396d944a1640 (last accessed on 4 January 2020).

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The listing requirements of both NYSE and Nasdaq contain detailed corporate governance provisions. Listed companies must comply with these corporate governance provisions.37 Both stock exchanges implemented listing requirements pursuant to which the listed companies must adopt a corporate code of ethics or conduct.

The NYSE Listed Company Manual Concerning the NYSE this requirement is set forth by Sect. 303A.10 of the Corporate Governance Standards of the NYSE Listed Company Manual.38 The NYSE expressly requires the adoption and the disclosure of a code of business conduct and ethics. It should be emphasized that unlike the SOX and SEC requirements, the NYSE (i) does not provide the listed companies with the choice to not adopt a code of ethics and explain the reason for it (it is a mandatory requirement for listed companies to adopt a code of ethics) and (ii) extends the scope of such code of ethics to all directors, officers and employees of a company. Furthermore, the NYSE imposed minimum contents for the business codes of conduct and ethics of listed companies. The codes must contain provisions which (i)

incorporate a policy prohibiting conflicts of interest between a company and its directors, officers and employees;39 (ii) prohibit directors, officers and employees from taking personal advantage of corporate opportunities which arise from use of corporate property, information or position, etc.;40 (iii) guarantee confidentiality by directors, officers and employees regarding nonpublic information entrusted to them by the company or its customers;41 37 Section 303A.00

of the NYSE Listed Company Manual; Rule 5601 Nasdaq Stock Market Rules. NYSE Listed Company Manual is available at https://nyseguide.srorules.com/listed-com pany-manual (last accessed on 4 January 2020). 39 Section 303A.10 of the NYSE Listed Company Manual: “Conflicts of interest. A "conflict of interest" occurs when an individual’s private interest interferes in any way – or even appears to interfere – with the interests of the corporation as a whole. A conflict situation can arise when an employee, officer or director takes actions or has interests that may make it difficult to perform his or her company work objectively and effectively. Conflicts of interest also arise when an employee, officer or director, or a member of his or her family, receives improper personal benefits as a result of his or her position in the company. Loans to, or guarantees of obligations of, such persons are of special concern. The listed company should have a policy prohibiting such conflicts of interest, and providing a means for employees, officers and directors to communicate potential conflicts to the listed company.” 40 Section 303A.10 of the NYSE Listed Company Manual: “Corporate opportunities. Employees, officers and directors should be prohibited from (a) taking for themselves personally opportunities that are discovered through the use of corporate property, information or position; (b) using corporate property, information, or position for personal gain; and (c) competing with the company. Employees, officers and directors owe a duty to the company to advance its legitimate interests when the opportunity to do so arises.” 41 Section 303A.10 of the NYSE Listed Company Manual: “Confidentiality. Employees, officers and directors should maintain the confidentiality of information entrusted to them by the listed 38 The

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(iv) ensure that directors, officers and employees deal fairly with the company’s stakeholders (customers, suppliers, competitors and employees);42 (v) serve the protection and proper use of the company’s assets;43 (vi) assure the compliance with laws, rules and regulations;44 (vii) encourage the reporting of any illegal or unethical behavior and assure the company’s proactive promotion of ethical behavior by its directors, officers and employees. In addition, reports by employees to appropriate personnel about violations of the business code of conduct and ethics should not have negative repercussions on them.45 Moreover, listed companies are encouraged to determine in their codes of business conduct and ethics their own policies in addition to the above mentioned minimum topics provided by Sect. 303A.10 of the NYSE Listed Company Manual. The NYSE, like the SOX and die SEC, remains unspecific as to the compliance mechanism in relation to the business code of conduct and ethics. It does not expressly require the installation of an independent ethics committee to monitor the implementation of the code. Waivers of the code concerning the ethical conduct of directors and officers (i) must be disclosed to the shareholders within four business days and (ii) require a resolution by the board of directors or a committee of the board of directors. It should be noted that pursuant to Sect. 303A.01 of the NYSE Listed Company Manual, listed

company or its customers, except when disclosure is authorized or legally mandated. Confidential information includes all non-public information that might be of use to competitors, or harmful to the company or its customers, if disclosed.” 42 Section 303A.10 of the NYSE Listed Company Manual: “Fair dealing. Each employee, officer and director should endeavor to deal fairly with the listed company’s customers, suppliers, competitors and employees. None should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other unfairdealing practice. Listed companies may write their codes in a manner that does not alter existing legal rights and obligations of companies and their employees, such as "at will" employment arrangements.” 43 Section 303A.10 of the NYSE Listed Company Manual: “Protection and proper use of listed company assets. All employees, officers and directors should protect the listed company’s assets and ensure their efficient use. Theft, carelessness and waste have a direct impact on the listed company’s profitability. All listed company assets should be used for legitimate business purposes.” 44 Section 303A.10 of the NYSE Listed Company Manual: “Compliance with laws, rules and regulations (including insider trading laws). The listed company should proactively promote compliance with laws, rules and regulations, including insider trading laws. Insider trading is both unethical and illegal, and should be dealt with decisively.” 45 Section 303A.10 of the NYSE Listed Company Manual: “Encouraging the reporting of any illegal or unethical behavior. The listed company should proactively promote ethical behavior. The listed company should encourage employees to talk to supervisors, managers or other appropriate personnel when in doubt about the best course of action in a particular situation. Additionally, employees should report violations of laws, rules, regulations or the code of business conduct to appropriate personnel. To encourage employees to report such violations, the listed company must ensure that employees know that the listed company will not allow retaliation for reports made in good faith.”

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companies must have a majority of independent directors. Thus, waivers can only be made with the consent of a majority of independent directors. Section 303A.02 of the NYSE Listed Company Manual provides independence criteria: The focus is on independence from the management of the listed company. As a consequence, the NYSE does not view the holding of a significant amount of the listed company’s shares as a bar to an independence finding. As will be explained in Sect. 3.2.4, in the context of corporate codes of ethics, independence from substantial owners of the company is important as well. Taking into consideration that both the mandatory SOX and SEC provisions do not expressly require a company to include CSR provisions and ethical commitments towards stakeholders in the code of ethics and bearing in mind the prevalence of the Shareholder Primacy Model in the USA, it is striking that the NYSE Listed Company Manual imposes the requirement for fair dealings with the listed company’s stakeholders. This, of course, does not mean that stakeholder interests may supersede shareholder interests (business decisions must still pursue at least a long-term strategy in the interest of the shareholders), but it is a strong message that stakeholder interests are no longer taken lightly in the USA, and their acceptance and pursuit represents a significant ethical value which is also (at least) in the long-term interest of the listed company’s shareholders.

The Nasdaq Stock Market Rules Similarly to the NYSE Listed Company Manual, Rules 5610 and IM-5610 of the Nasdaq Stock Market Rules46 prescribe that a listed company must adopt a code of conduct applicable to all directors, officers and employees. In contrast to the NYSE Listed Company Manual, the Nasdaq Rules did not introduce any new or additional topics for the code of conduct. Instead, Rule IM-5610 refers to the existing definition for a code of ethics provided by the SOX and the SEC. Waivers from the code of conduct must be granted by the board of directors of a listed company and must be disclosed within four business days. Pursuant to Rule IM-5605-1, the majority of the board of directors of a Nasdaq-listed company must, like in the case of an NYSE-listed company, qualify as independent. The Nasdaq independence criteria also focus on independence from management. Thus, ownership of shares of the listed company does not preclude the qualification as independent director.47 Furthermore, Rule IM-5610 determines that a code of conduct must contain an enforcement mechanism but remains silent as to organizational specifics. The enforcement mechanism shall ensure (i) prompt and consistent enforcement of the code of conduct, (ii) protection for whistleblowers, (iii) clear and objective standards 46 The Nasdaq Stock Market Rules are available at http://nasdaq.cchwallstreet.com/NASDAQTools/ PlatformViewer.asp?selectednode=chp%5F1%5F1%5F3%5F1&manual=%2Fnasdaq%2Fmain% 2Fnasdaq%2Dequityrules%2F (last accessed on 4 January 2020). 47 Rule IM-5605 of the Nasdaq Stock Market Rules.

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for compliance and (iv) a fair process by which to determine violations of the code of conduct. It is particularly noticeable that unlike Sect. 303A.10 of the NYSE Listed Company Manual, the Nasdaq Stock Market Rules do not provide a provision pursuant to which a code of ethics shall ensure that directors, officers and employees deal fairly with the company’s stakeholders (customers, suppliers, competitors and employees). Instead, the Nasdaq Stock Market Rules leave the inclusion of additional contents and topics to the code of conduct (such as CSR commitments) solely to the listed companies themselves.

3.2.2 The U.S. Sentencing Guidelines The USSG were first issued in 1987 and are promulgated by the United States Sentencing Commission which is an independent agency of the judicial branch. The USSG are issued pursuant to Sect. 994(a) of Title 28, United States Code. The USSG contain detailed provisions prescribing the appropriate sentences for offenders convicted of federal crimes.48 An amendment to the USSG in 2004 introduced a new guideline at § 8B2.1 requiring an Effective Compliance and Ethics Program.49 § 8B2.1 (a) (2) of the USSG sets forth that an organization shall promote “an organizational culture that encourages ethical conduct and a commitment to compliance with the law. Such compliance and ethics program shall be reasonably designed, implemented, and enforced so that the program is generally effective in preventing and detecting criminal conduct.” Pursuant to § 8B2.1 (b) of the USSG the promotion of an organizational culture that encourages ethical conduct, inter alia, minimally requires that (i) (ii) (iii) (iv) (v)

the board of directors of a corporation shall exercise reasonable oversight with respect to the ethics program; specific individuals within the corporation shall be delegated day-to-day operational responsibility for the ethics program; effective training programs are conducted for all of the corporation’s employees and members of the board of directors; the effectiveness of the ethics program is periodically evaluated; an internal whistleblower system is installed (“to have and publicize a system, which may include mechanisms that allow for anonymity or confidentiality, whereby the organization’s employees and agents may report or seek guidance regarding potential or actual criminal conduct without fear of retaliation”);

48 United States Sentencing Commission, Guidelines Manual 2018, p. 1, https://www.ussc.gov/sites/

default/files/pdf/guidelines-manual/2018/GLMFull.pdf (last accessed on 30 December 2019). to the Sentencing Guidelines (10 May 2004) p. 109, https://www.ussc.gov/sites/ default/files/pdf/amendment-process/reader-friendly-amendments/20040430_RF_Amendments. pdf (last accessed on 30 December 2019). 49 Amendments

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(vi) the ethics program is enforced consistently through appropriate incentives and appropriate disciplinary measures.

3.2.3 Corporate Codes of Ethics Post-SOX Babri/Davidson/Helin reviewed empirical papers studying corporate codes of ethics in companies from the time period mid-2005 until mid-2016, thus examining the corporate codes of ethics in the post-SOX environment50 : The researchers found that corporate codes of ethics are heavily influenced by corporate legal departments, are predominantly inward-looking with little regard for external stakeholders, and the primary purpose of such codes is self-defense (protection) and window-dressing attempting to pass responsibility down to the suppliers while maintaining and maximizing profits. To a large extent, the various codes contain a generic language which is the rational symbolic response to regulation. It is striking that post-SOX codes of US companies are prescriptive in nature, include an increased emphasis on legal and regulatory aspects and rather concentrate on the protection of the company than focus on (external) stakeholder aspects and CSR. Consequently, it is noticeable that the codes “exhibit a greater concern about actions against the firm than actions by the corporation”. Furthermore, topics like confidential information, conflicts of interest, employee discrimination, sexual harassment or gifts and entertainment are universally covered in the codes. While most researchers painted a rather negative picture, some researchers arrived at a more optimistic conclusion: Although they confirmed the inward-looking, protectionist and window-dressing aspects of the codes, they pointed out recent developments and emphasized that larger corporations are indeed beginning to expand the focus of their codes to topics relating to external stakeholders and include so-called third generation ethics (overall social good) in their codes of ethics.51 In the author’s view, it is no surprise that corporate codes of ethics of US companies are perceived as mainly inward-looking and self-protective with little regard for external stakeholders. The SOX and SEC provisions, which were introduced in 2002 and 2003, are a direct reaction to the accounting scandals, such as Enron and WorldCom. As a consequence, post-SOX codes of ethics typically cover topics such as conflict of interests, whistleblowing and compliance, etc. and focus on the correct and ethical behavior of companies’ directors, officers and employees. Still, it is evident that more and more large companies in the USA commit themselves to represent the interests of their stakeholders (as long as it serves the long-term interest of the company, too). As mentioned in Sect. 3.2.1.2, the NYSE 50 Babri/Davidson/Helin,

An Updated Inquiry into the Study of Corporate Codes of Ethics: 2005– 2016, Journal of Business Ethics, p. 1, https://link.springer.com/article/10.1007/s10551-019-041 92-x. 51 Babri/Davidson/Helin, An Updated Inquiry into the Study of Corporate Codes of Ethics: 2005– 2016, Journal of Business Ethics, p. 4 et sqq., https://link.springer.com/article/10.1007/s10551-01904192-x.

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requires their listed companies to adopt a corporate code of ethics which has to include a provision pursuant to which directors, officers and employees shall deal fairly with the company’s stakeholders (including external stakeholders such as customers, suppliers and competitors). Moreover, as shown in Sect. 3.3.1, the Business Roundtable’s Statement on the Purpose of a Corporation confirmed that the 181 signatories share a fundamental commitment to all of their stakeholders. John F. Kennedy once said, “ask not what your country can do for you, ask what you can do for your country”. He intended to challenge every American to contribute in some way to the public good.52 In today’s business and political environment, companies’ representatives are increasingly required to ask themselves a similar question in order to stay competitive: Ask not what the stakeholders can do for the company and its shareholders, but ask what the company and shareholders can do for the stakeholders. Just like Kennedy’s statement did not mean that the American people have to sacrifice their own interests for the public interests, it of course does not mean that companies should put the stakeholder interests above the shareholder interests at any cost (this would be against the law), but stakeholder interests should be supported, actively promoted and respected as long as they serve the long-term interest of the company and its shareholders. Considering today’s business environment and the emergence of more and more responsible and knowledgeable citizens and investors, disrespecting stakeholder interests does no longer lead to (long-term or even mid-term) profit maximization. This message (i) has been clearly spread by the signatories of the Business Roundtable’s Statement on the Purpose of a Corporation by committing to deliver value to all of the stakeholders, for the future success of the signatories’ companies53 (this evidently implies that the success, and thus the profit of a company is connected with the companies’ treatment of their stakeholders), their communities and their country and (ii) is also evidenced by the corporate codes of ethics of the four largest US companies: According to Fortune 500, the four largest US companies by revenue in 2019 were Walmart, ExxonMobil, Apple and Berkshire Hathaway.54

3.2.3.1

Walmart Inc.

Walmart Inc. (“Walmart”) is engaged in global operations of retail, wholesale and other units, as well as eCommerce websites.55 52 See https://www.jfklibrary.org/learn/education/teachers/curricular-resources/elementary-schoolcurricular-resources/ask-not-what-your-country-can-do-for-you (last accessed on 6 January 2020). 53 Business Roundtable, Statement on the Purpose of a Corporation, https://opportunity.busine ssroundtable.org/wp-content/uploads/2019/08/BRT-Statement-on-the-Purpose-of-a-Corporationwith-Signatures.pdf. 54 Fortune 500, The Top 10, https://fortune.com/fortune500/ (last accessed on 6 January 2020). 55 Walmart 2019 Annual Report. Defining the Future of Retail, p. 7, https://s2.q4cdn.com/056 532643/files/doc_financials/2019/annual/Walmart-2019-AR-Final.pdf (last accessed on 14 March 2020).

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Walmart’s Vision Statement, which is included in Walmart’s Global Statement of Ethics, expressly states that the “vision of Global Ethics is to promote ownership of Walmart’s ethical culture to all stakeholders globally.” Furthermore, it is confirmed in Walmart’s Global Statement of Ethics that “we believe in everyday low cost and everyday low prices, but only if accomplished through our everyday integrity.” Walmart also expects all of its suppliers, consultants and contractors to act ethically and in a manner consistent with Walmart’s Global Statement of Ethics. Moreover, Walmart also committed itself to conduct business in a socially responsible and ethical manner that protects the environment: “We must all act ethically in regards to environmental issues to further our goal of helping people live better and to ensure a better world for generations to come.”56 Walmart’s ethics and compliance program covers 14 subject matters, including but not limited to consumer protection, environment, labour and employment and trade. Hence, it is in particular positive that Walmart’s ethics policy contains CSR aspects. Walmart’s very comprehensive Global Statement of Ethics (37 pages!) focuses on three main topics: Under the heading “Leading with Integrity in Our Workplace”, Walmart covers topics such as conflicts of interest, wage & hour, inappropriate conduct, discrimination and harassment prevention, personal relationships with suppliers, etc. “Leading with Integrity in Our Marketplace” deals with fair competition & fair dealing, intentional dishonesty, insider trading, etc. “Leading with Integrity in Our Communities” touches upon topics like anti-corruption, antimoney laundering, environmental responsibility, health and safety in the workplace, governmental & political activities, etc. At the top of Walmart’s ethics and compliance program is the global chief ethics & compliance officer. In addition, all of Walmart’s retail businesses have their own full-time local chief ethics & compliance officers who lead teams of ethics and compliance personnel and report back to Walmart’s home office in Bentonville. The global chief ethics & compliance officer has to report to the executive vice president of global governance, the chief legal officer, the corporate secretary and the audit committee. The audit committee, which is comprised of independent members of the board of directors, plays a significant role in overseeing Walmart’s ethics and compliance program. It meets directly and regularly with the leaders of Walmart’s ethics and compliance program and sets annual high-level compliance objectives. Furthermore, the audit committee assigns each of these objectives to one or more senior executives and then monitors the company’s progress. Waivers for directors or executive officers also have to be considered and approved by Walmart’s audit committee or the full board of directors. It should also be mentioned that Walmart installed a global ethics, compliance and risk committee in order to discuss regularly (more than four times a year) current issues related to ethics. Walmart’s most senior executives, including Walmart’s CEO, are members of this committee. In addition, each of Walmart’s retail markets has its own ethics,

56 Walmart Global Statement of Ethics, p. 2 et sqq., https://www.walmartethics.com/content/dam/ walmartethics/documents/statement_of_ethics/Walmart_Statement_of_Ethics_English.pdf (last accessed on 7 January 2020).

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compliance and risk committee comprising of senior management and ethics and compliance leaders.57 Walmart’s employees may raise ethics concerns by contacting the Walmart global ethics office. Walmart guarantees no retaliations to employees and also enables employees to keep anonymous by providing a helpline which is available around the world 24 h a day and is staffed by an organization which is not affiliated to Walmart.58 Walmart’s Standards for Suppliers apply to any entity that supplies products to Walmart for resale and any agents of the entities’ agents. “Suppliers are responsible for compliance with these Standards throughout their operations and throughout the entire product supply chain. A signed supplier agreement, acceptance of a purchase order, and/or provision of merchandise to Walmart constitutes acceptance of these Standards and serves as the Supplier’s continuing affirmation of compliance. Walmart reserves the right to audit or inspect Suppliers’ books and records, and any facilities they use, at any time.” Non-compliance of suppliers with Walmart’s Standards for Suppliers may lead to the termination of business. The Standards for Suppliers include topics such as transparency (suppliers have to (i) respond to inquiries and requests for information, (ii) make their facilities available for inspection, (iii) obtain and participate in required audits and (iv) designate a representative responsible for compliance with Walmart’s Standards for Suppliers), involuntary and underage labour, compliance with all applicable laws and agreements regarding compensation and working hours, fair process for making employment decisions, provision of safe work environments and compliance with law (e.g. maintenance of and compliance with licenses and permits) and Walmart policies and acting ethically (avoidance of conflicts of interest, etc.).59 Furthermore, Walmart has its own Audit and Assessment Policy & Guidance. Any of Walmart’s suppliers’ production facilities may be audited at any time. However, the suppliers’ production facilities are placed into one of three country risk categories. Production facilities located in category 160 countries will not be required to complete 57 Walmart

Ethics and Compliance Program Fact Sheet, https://corporate.walmart.com/medialibrary/document/walmart-ethics-and-compliance-program-fact-sheet/_proxyDocument?id=000 0016b-7182-d34a-a77b-798a8adc0001 (last accessed on 7 January 2020); Walmart 2017 Global Ethics & Compliance Program Report, https://cdn.corporate.walmart.com/b0/91/87adea36485a a5e2054c46b84873/2017-global-ethics-compliance-program-report-layout-final-soraya.pdf (last accessed on 7 January 2020); Jay Jorgensen On Walmart’s Enhanced Ethics & Compliance Program (24 October 2017), http://fcpaprofessor.com/jay-jorgensen-walmarts-enhanced-ethicscompliance-program/ (last accessed on 7 January 2020); Walmart Global Statement of Ethics, p. 1 et sqq., https://www.walmartethics.com/content/dam/walmartethics/documents/statement_of_eth ics/Walmart_Statement_of_Ethics_English.pdf. 58 Walmart Global Statement of Ethics, p. 6 et sqq., https://www.walmartethics.com/content/dam/ walmartethics/documents/statement_of_ethics/Walmart_Statement_of_Ethics_English.pdf. 59 Walmart’s Standards for Suppliers, https://cdn.corporate.walmart.com/bc/8c/97ac8c9b43229f1 7480057fd684e/standards-for-suppliers-english-updated-6-30.pdf (last accessed on 8 February 2020). 60 Examples for category 1 countries are Austria, Germany, France, USA, UK, Switzerland, Singapore, South Korea, China (only Hong Kong), Uruguay, etc.

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an audit on a regular basis. Walmart will only select a sample of category 1 production facilities to perform an audit. All of the production facilities in category 261 and 362 will be required to participate in regular audits. In addition, facilities in category 3 must also accept a prequalification audit prior to receiving orders.63 Walmart uses third-party social, safety and environmental compliance audits to assess suppliers’ production facilities along the entire supply chain. The suppliers have to choose an appropriate third-party audit program from a list of Walmartapproved audit programs. They also have to arrange and pay for the audit and cooperate (e.g. inspections) with the audit firm. The results of the audit have to be sent to Walmart. After the audit, the third-party facility audit reports are reviewed by Walmart. Each facility receives a colour rating (green,64 yellow,65 orange66 and red67 ). If Walmart assessors find higher-risk issues, they may change an audit firm’s original colour rating down to orange or red. Negative suppliers’ facility assessments (a red rating or three consecutive orange ratings) may have the consequence that the suppliers’ ability to use these facilities to produce merchandise for Walmart will be suspended or terminated. Walmart reserves the right to take these severe measures even absent a red rating or three consecutive orange ratings. Bad ratings may also lead to the suspension or termination of business with a supplier if those ratings are based on the supplier’s own conduct or in cases where the facility’s conduct is reflective of the supplier’s overall compliance with Walmart’s Standards for Suppliers. Noncooperation with the audit firms or preventing auditors from inspecting a facility may also result in suspension or termination (either with regard to the facility concerned or the business relationship between Walmart and the violating supplier).68 61 Examples for category 2 countries are China (except Hong Kong, Heilongjiang, Jilin, Liaoning and Xinjiang), Brazil, Croatia, Hungary, Indonesia, Argentina, Greece, India, Mexico, Qatar, Thailand, Turkey, etc. 62 Examples for category 3 countries are China (only the provinces Heilongjiang, Jilin, Liaoning and Xinjiang), Bangladesh, Russia, Egypt, Cambodia, Algeria, Afghanistan, Ethiopia, Iraq, Myanmar, Pakistan, etc. 63 Walmart Audit and Assessment Policy & Guidance, p. 4, https://one.walmart.com/content/ dam/responsiblesourcing/guidancedocuments/audit_assessment_policy_and_guidance/Resource_ AuditAssessmentPolicy_ENG.pdf; Walmart Responsible Sourcing Compliance, Country-Based Requirements (June 27, 2019), https://one.walmart.com/content/dam/responsiblesourcing/sup plier-resources/countries_by_risk_category/Resource_CountriesbyRiskLevel_ENG.pdf (last accessed on 8 February 2020). 64 High level of compliance with Walmart’s Standards for Suppliers. 65 General compliance with Walmart’s Standards for Suppliers. 66 More serious violations of Walmart’s Standards for Suppliers. Walmart will continue to allow sourcing while the violations are remediated. Three consecutive orange ratings may result in a red rating. Suppliers which receive an orange rating are not allowed to change the audit firm until they receive a yellow or green rating. 67 Violations of Walmart’s Standards for Suppliers which may make it appropriate to temporarily or permanently terminate the business relationship between the violating supplier and Walmart. 68 Walmart Audit and Assessment Policy & Guidance, p. 5 et sqq., https://one.walmart.com/con tent/dam/responsiblesourcing/guidancedocuments/audit_assessment_policy_and_guidance/Res ource_AuditAssessmentPolicy_ENG.pdf.

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Moreover, Walmart’s compliance department (Responsible Sourcing Compliance) receives allegations and complaints throughout several sources, such as the Walmart ethics hotline and inbox, anonymous tips and NGO reports, etc. Walmart or a designated representative may investigate or visit the suppliers’ production facilities at any time.69 Paying for and organizing audits on a regular basis can be heavy burdens for small suppliers. This is recognized by Walmart. That is why small suppliers may choose to participate in the more cost-conscious and annually approved capacity building program through Intertek. This program is applicable for suppliers with (i) a global sales revenue of under USD 2.5 million per year or (ii) total global sales to Walmart amounting to under USD 100,000 per year. The program requires the completion of a self-assessment questionnaire. The questionnaire will be reviewed and verified by Intertek staff which may contact relevant licensing and certification organizations.70 As of the end of financial year 2019, Walmart reviewed and assessed more than 14,700 audits conducted by third-party audit programs. 23.7% of the audits were rated green, 63.1% yellow, 10.8% orange and 0.3% red. 2.1% of Walmart’s suppliers participated in Walmart’s approved capacity building program for small suppliers. As a result of serious violations of the Standards for Suppliers, Walmart has stopped doing business with more than 30 companies since 2012.71 It is applaudable that Walmart’s CSR report (2019) contains (among other CSR data) quantitative sustainable supply chain performance indicators. In 2018, more than 380 suppliers reported avoided CO2 e emissions totaling more than 58 million metric tons. The statistics also expressly state Walmart’s goals to reduce or avoid, by 2030, 1 billion metric tons of greenhouse gases from the global value chain and 50 million metric tons from Walmart’s Chinese value chain. However, the statistics do not include a year-by-year comparison.72 Less positive is the fact that Walmart’s CSR report was not subject to an external assurance by an independent third party.73

69 Walmart Audit and Assessment Policy & Guidance, p. 8, https://one.walmart.com/content/dam/ responsiblesourcing/guidancedocuments/audit_assessment_policy_and_guidance/Resource_Aud itAssessmentPolicy_ENG.pdf. 70 Walmart Responsible Sourcing Compliance, Getting Started with an Approved Audit Program: Capacity-Building Program, https://one.walmart.com/content/dam/responsiblesourcing/sup plier-resources/audit_program_guides/its_smallsupplier/Resource_IntertekGuide_ENG.pdf (last accessed on 8 February 2020). 71 Walmart 2019 Environmental, Social & Governance Report, p. 88, https://corporate.walmart. com/media-library/document/2019-environmental-social-governance-report/_proxyDocument? id=0000016c-20b5-d46a-afff-f5bdafd30000 (last accessed on 8 February 2020). 72 Walmart 2019 Environmental, Social & Governance Report, p. 81, https://corporate.walmart. com/media-library/document/2019-environmental-social-governance-report/_proxyDocument? id=0000016c-20b5-d46a-afff-f5bdafd30000. 73 “Walmart has been reporting on a wide range of ESG topics since 2005. We did not seek, nor was there, external assurance from third parties with respect to most of the information in this report; exceptions are noted. Frameworks such as the Global Reporting Initiative (GRI) Standards, the United Nations (U.N.) Sustainable Development Goals (SDGs), the Sustainability

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3.2.3.2

ExxonMobil Corporation

ExxonMobil Corporation (“ExxonMobil”) is a multinational oil and natural gas giant. ExxonMobil has a Code of Ethics and Business Conduct which consists of ExxonMobil’s ethics policy, the conflicts of interest policy, the corporate assets policy, the directorships policy and the “procedures and open door communication” section from the Standards of Business Conduct. The Ethics Policy, which can also be found in the Standards of Business Conduct, stresses that compliance with all governmental laws, rules and regulations is not sufficient. The fair dealing with internal and external stakeholders is expressly mentioned:74 The Corporation’s Ethics policy does not stop there. Even where the law is permissive, the Corporation chooses the course of highest integrity. Local customs, traditions and mores differ from place to place, and this must be recognized. But honesty is not subject to criticism in any culture. Shades of dishonesty simply invite demoralizing and reprehensible judgments. A well-founded reputation for scrupulous dealing is itself a priceless corporate asset. The Corporation cares how results are obtained, not just that they are obtained. Directors, officers and employees should deal fairly with each other and with the Corporation’s suppliers, customers, competitors and other third parties.75

The Standards of Business Conduct are directed at ExxonMobil’s directors, officers and employees and define the global ethical conduct of ExxonMobil and its majority-owned subsidiaries. They “uphold the values of human rights, labor, the environment and anti-corruption.”76 The extensive Standards of Business Conduct recognize that running a business profitably and responsibly is no contradiction and will even lead to superior returns for the shareholders: We are committed to enhancing the long-term value of the investment dollars entrusted to us by our shareholders. By running the business profitably and responsibly, we expect our shareholders to be rewarded with superior returns. This commitment drives the management of our corporation.77

Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD) inspire our reporting.” See Walmart 2019 Environmental, Social & Governance Report, p. 8, https://corporate.walmart.com/media-library/document/2019-environmental-socialgovernance-report/_proxyDocument?id=0000016c-20b5-d46a-afff-f5bdafd30000. 74 ExxonMobil Code of Ethics and Business Conduct, https://corporate.exxonmobil.com/Company/ Who-we-are/Corporate-governance/Code-of-ethics#overview (last accessed on 8 January 2020). 75 ExxonMobil Code of Ethics and Business Conduct, https://corporate.exxonmobil.com/Company/ Who-we-are/Corporate-governance/Code-of-ethics#overview; ExxonMobil Standards of Business Conduct (April 2017) p. 3, https://corporate.exxonmobil.com/-/media/Global/Files/who-we-are/Sta ndards-of-Business-Conduct_apr.pdf (last accessed on 14 March 2020). 76 ExxonMobil Code of Ethics and Business Conduct, https://corporate.exxonmobil.com/Company/ Who-we-are/Corporate-governance/Code-of-ethics#overview. 77 ExxonMobil Standards of Business Conduct, p. 2, https://corporate.exxonmobil.com/-/media/Glo bal/Files/who-we-are/Standards-of-Business-Conduct_apr.pdf.

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The Standards of Business Conduct contain 19 foundation policies, such as the ethics policy, the conflicts of interest policy, the corporate assets policy, the anticorruption policy, the health policy, the environment policy, the safety policy, the equal employment opportunity policy, the harassment in the workplace policy, etc.78 Among other internal complaint channels, ExxonMobil set up a 24-hour hotline phone number and an email address for the anonymous reporting of policy violations. The complaints received by this method are first reviewed by a hotline steering committee comprising of security, audit, law and human resources personnel. This committee reports quarterly to the independent audit committee. Among other issues, the report by the hotline steering committee contains any policy violations. Confirmed policy violations may lead to disciplinary actions or termination. It is expressly prohibited to penalize or threaten an employee for filing a report. It is in particular positive that ExxonMobil does not allow any waivers regarding the foundation policies contained in the Standards of Business Conduct.79 Commendably, ExxonMobil installed a board committee focusing on CSR aspects: The Public Issues and Contributions Committee is comprised of independent directors and, among other things, reviews and makes recommendations to the board of directors regarding ExxonMobil’s policies, programs and practices on public issues of significance and safety, security, health, environment and social issues. Furthermore, the Public Issues and Contributions Committee also conducts an annual visit to one of ExxonMobil’s operating sites to review aspects like safety, security, health, environment and community relations programs and practices.80 ExxonMobil’s supply chain management includes due diligence procedures with suppliers and a certain set of expectations which have to be met by ExxonMobil’s suppliers, vendors and contractors. Among other things, these expectations encompass the (i) compliance with laws, rules, regulations and contractual obligations, (ii) balancing of economic growth, social development and environmental protection, (iii) avoidance of conflicts of interest, (iv) rejection of bribery and corrupt practices, (v) promotion of a safe, secure and healthy workplace, (vi) application of

78 ExxonMobil Standards of Business Conduct, p. 3 et sqq., https://corporate.exxonmobil.com/-/ media/Global/Files/who-we-are/Standards-of-Business-Conduct_apr.pdf. 79 ExxonMobil Code of Ethics and Business Conduct, https://corporate.exxonmobil.com/Com pany/Who-we-are/Corporate-governance/Code-of-ethics#overview; ExxonMobil Standards of Business Conduct, p. 1 et sqq., https://corporate.exxonmobil.com/-/media/Global/Files/whowe-are/Standards-of-Business-Conduct_apr.pdf; ExxonMobil 2018 Sustainability Report Highlights, p. 27, https://corporate.exxonmobil.com/-/media/Global/Files/sustainability-report/public ation/2018-Sustainability-Report.pdf (last accessed on 14 March 2020). 80 ExxonMobil 2018 Sustainability Report Highlights, p. 28 et sq., https://corporate.exxonm obil.com/-/media/Global/Files/sustainability-report/publication/2018-Sustainability-Report.pdf; ExxonMobil Public Issues and Contributions Committee Charter, https://corporate.exxonmobil. com/Company/Who-we-are/Corporate-governance/ExxonMobil-board-of-directors/Public-iss ues-and-contributions-committee-charter (last accessed on 14 March 2020).

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continuous efforts to improve safety, security, health and environmental performance and (vii) provision of positive, productive and supportive work environments.81 With respect to disclosed quantitative performance indicators, it is very impressive that ExxonMobil reported CSR data over a 10-year period (!) to demonstrate trends over time.82 It should be emphasized that ExxonMobil’s sustainability report 2018 was prepared in accordance with the reporting guidelines and indicators of IPIECA, the global oil and gas industry association for environmental and social issues, the International Association of Oil and Gas Producers and the American Petroleum Institute.83 It was reviewed by the External Sustainability Advisory Panel (“ESAP”). The independent ESAP is composed of academics, nongovernmental organization representatives and former government officials with expertise in environmental, social and governance issues. With regard to ESAP’s review statement, it is notable that not only positive aspects are mentioned. For example, the EASP would have required additional context and data to assess whether the level of R&D investments in lowercarbon technologies is at an adequate scale. According to the ESAP, ExxonMobil should also “further develop quantifiable goals that reflect current economic realities about energy demand, but also demonstrate the company’s R&D, operational, and public policy commitments to address the enormous global climate challenge. The goals may not be simple and may change over time. We believe ExxonMobil made progress in 2018 and is positioned to play a leadership role in setting bolder goals and engaging the broader public through more transparency and dialogue about the most pressing challenges we all face.”84

3.2.3.3

Apple Inc.

The multinational company Apple Inc. (“Apple”) designs, manufactures and markets smartphones, personal computers, tablets, wearables and accessories.85 Apple’s comprehensive Business Conduct Policy addresses the interests of key stakeholders, such as customers, employees and governments. It also expressly 81 ExxonMobil supply chain management (20 December 2019), https://corporate.exxonmobil.com/ Community-engagement/Sustainability-Report/Social/Supply-chain-management#procurementP rocessAndSupplierQualification (last accessed on 14 March 2020); ExxonMobil supplier vendor and contractor expectations (20 December 2019), https://corporate.exxonmobil.com/Commun ity-engagement/Sustainability-Report/Social/supplier-vendor-and-contractor-expectations (last accessed on 14 March 2020). 82 ExxonMobil 2018 Sustainability Report Highlights, p. 36 et sq., https://corporate.exxonmobil. com/-/media/Global/Files/sustainability-report/publication/2018-Sustainability-Report.pdf. 83 ExxonMobil 2018 Sustainability Report Highlights, p. 35, https://corporate.exxonmobil.com/-/ media/Global/Files/sustainability-report/publication/2018-Sustainability-Report.pdf. 84 ExxonMobil 2018 Sustainability Report Highlights, p. 7, https://corporate.exxonmobil.com/-/ media/Global/Files/sustainability-report/publication/2018-Sustainability-Report.pdf. 85 Apple Annual Report 2019 on Form 10-K, p. 1, https://s2.q4cdn.com/470004039/files/doc_fin ancials/2019/ar/_10-K-2019-(As-Filed).pdf (last accessed on 14 March 2020).

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confirms that Apple operates in a manner that conserves the environment. Therefore, Apple serves as another positive example for the implementation of CSR issues into the corporate ethics policy. The Business Conduct Policy is divided into four main sections: individual conduct (e.g. conflicts of interest, harassment and discrimination, confidential employee information, workplace privacy, etc.), responsibilities to Apple (e.g. protection of Apple’s assets and information, accuracy of records and reports, money laundering, etc.), customer and business relationship (e.g. customer focus, customer and third-party information, giving and receiving business gifts, etc.) and governments and communities (e.g. no bribery and corruption, environment, health and safety, charitable donations, etc.). It is important to note that Apple’s employees must report violations of Apple’s Business Conduct Policy to management, human resources, legal, internal audit, finance or to a business conduct helpline. Apple’s business conduct helpline, which may be contacted anonymously, is available 24/7 to all employees worldwide. The information may only be shared with the audit committee if it is required by law and the information involves accounting, finance or auditing issues. Apple does not tolerate any retaliations against whistleblowers who report in good faith86 Apple’s independent audit committee has been assigned with the task to “review and discuss with management the program that management has established to monitor compliance with the Corporation’s Business Conduct Policy.”87 It is noticeable that Apple adopted its own Supplier Code of Conduct.88 This is very important and commendable, as it is no secret that multinationals often compromise their CSR policy by pressuring their suppliers to cut costs, manufacture products on shorter deadlines and frequently change their product lines and specifications. This has the negative consequence that suppliers are frequently forced to pay low wages, provide little or no benefits, demand excessively long hours and unpaid overtime and ignore environmental and ethical concerns. Many multinationals have a policy of ethics, conduct and sustainability which fails to extend the same policy to their suppliers. Ignoring the impact of the companies’ business conduct on their supply chain inevitably leads to greenwashing and window-dressing as well.89 In its Supplier Code of Conduct, Apple commits itself to “the highest standards of social and environmental responsibility and ethical conduct. Apple’s suppliers are required to provide safe working conditions, treat workers with dignity and respect, act fairly and ethically, and use environmentally responsible practices wherever they make products or perform services for Apple […] This Code goes beyond mere compliance with the law by drawing upon internationally recognized standards to 86 Apple Business Conduct Policy, p. 1 et sqq., https://s2.q4cdn.com/470004039/files/doc_downlo ads/gov_docs/business_conduct_policy.pdf (last accessed on 8 January 2020). 87 Apple Audit and Finance Committee Charter, E. 27., https://s2.q4cdn.com/470004039/files/doc_ downloads/charters/2018.02.12_AFC_Charter.pdf (last accessed on 8 January 2020). 88 Apple Supplier Code of Conduct, https://www.apple.com/supplier-responsibility/pdf/Apple-Sup plier-Code-of-Conduct-January.pdf (last accessed on 8 January 2020). 89 Lewis, Corporate Social Responsibility/Sustainability Reporting Among Fortune Global 250: Greenwashing or Green Supply Chain? https://digitalcommons.salve.edu/cgi/viewcontent.cgi?art icle=1056&context=fac_staff_pub.

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advance social and environmental responsibility.” It should be noted that Apple assures to assess the suppliers’ compliance with the code and remarks that suppliers’ violations of the code may jeopardize their business relationship (Apple expressly mentions the term “termination”) with Apple.90 In Apple’s 2019 Supplier Responsibility Progress Report, it is stated that suppliers are required to report, assess and mitigate risks. They have to perform annual assessments. In addition, independent third-party audits are carried out. Apple distinguishes between violations and core violations of its Supplier Code of Conduct. Core violations are the most serious violations (e.g. underage or involuntary labour, document falsification, intimidation or retaliation against an employee or immediate environmental and safety threats, etc.) which must immediately be remediated by the supplier concerned. In the event of a supplier’s unwillingness or inability to correct a core violation, Apple will remove such supplier from the supply chain. To date, Apple had to remove 20 suppliers on the basis of a core violation. In the case of violations, which are not qualified as “core violations” (e.g. insufficient provision of benefits or inadequate environmental permits, etc.), suppliers are provided with tools and training to correct the non-conformity with Apple’s Supplier Code of Conduct. An environmental permits violation by a supplier in 2018 lead to Apple requiring the violator to (i) seek approval through the proper channels and obtain the necessary permits and (ii) establish a management system for managing future permit issues.91 Apple’s Supplier Code of Conduct meets international standards for such codes. For example, a “workweek shall be restricted to 60 h, including overtime, and workers shall take at least one day off every seven days except in emergencies or unusual situations. Regular work week shall not exceed 48 h.” Concerning wages and benefits, suppliers have to “ensure that all workers receive at least the legally mandated minimum wages and benefits.”92 Apple’s 2019 supplier responsibility progress report contains, among other things, a year-over-year Supplier Code of Conduct performance analysis. The assessment process managed by Apple includes multi-day on-site visits, the development of corrective action plans, the implementation of necessary improvements together with Apple’s subject matter experts and on-site verifications of improvements by Apple’s staff.93 It should be pointed out as well that Apple’s 2019 progress report includes statistics for smelter and refiner third party audit participations. In 2010, only 2% of the smelters and refiners (slightly more than 100 sites) participated in independent third

90 Apple

Supplier Code of Conduct, https://www.apple.com/supplier-responsibility/pdf/Apple-Sup plier-Code-of-Conduct-January.pdf. 91 Apple, Supplier Responsibility. 2019 Progress Report, p. 49 et sqq., https://www.apple.com/sup plier-responsibility/pdf/Apple_SR_2019_Progress_Report.pdf (last accessed on 5 February 2020). 92 Apple Supplier Code of Conduct, https://www.apple.com/supplier-responsibility/pdf/Apple-Sup plier-Code-of-Conduct-January.pdf. 93 Apple, Supplier Responsibility. 2019 Progress Report, p. 45, https://www.apple.com/supplier-res ponsibility/pdf/Apple_SR_2019_Progress_Report.pdf.

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party audits. In 2018, all of the smelters and refiners (279 sites) took part in such audits.94 Apple also adopted a Channel Member Code of Conduct which is directed at Apple’s authorized resellers, distributors, carriers and service providers. In order to ensure compliance with the code, Apple conducts due diligence and periodic monitoring of channel members. Violations of the code by channel members provide the basis for the immediate termination of the business relationship with Apple.95 Apple’s separate 2019 environmental responsibility report contains detailed quantitative environmental data, including global facilities and product environmental performance indicators, a carbon emissions breakdown and the natural gas and electricity use. For example, the quantitative global facilities (including Apple’s data centers, corporate offices and 500 retail stores) environmental performance indicators compare figures from 2012 until 2018 for greenhouse gas emissions, energy use, energy efficiency, renewable energy, water use and waste generation.96 Apple’s 2019 environmental responsibility report provides several limited and reasonable97 assurance and review statements and plausibility checks from the independent professional services company Bureau Veritas North America and Fraunhofer Institute, a leading organization for applied research and development services.98 It should not remain unmentioned that Apple’s rating on CSRHub99 is 91%.100 This is extraordinarily high.

94 Apple, Supplier Responsibility. 2019 Progress Report, p. 50, https://www.apple.com/supplier-res

ponsibility/pdf/Apple_SR_2019_Progress_Report.pdf. Channel Member Code of Conduct, https://s2.q4cdn.com/470004039/files/doc_downlo ads/gov_docs/Channel_Member_Code_of_Conduct_March_2017_-_PDF.pdf (last accessed on 8 January 2020). 96 Apple Environmental Responsibility Report. 2019 Progress Report, covering fiscal year 2018, p. 55 et sqq., https://www.apple.com/environment/pdf/Apple_Environmental_Responsibility_R eport_2019.pdf (last accessed on 12 May 2020). 97 Bureau Veritas North America provided a reasonable assurance regarding select environmental data such as greenhouse gas emissions, etc. See Apple Environmental Responsibility Report. 2019 Progress Report, covering fiscal year 2018, p. 67 et sq., https://www.apple.com/environment/pdf/ Apple_Environmental_Responsibility_Report_2019.pdf. 98 Apple Environmental Responsibility Report. 2019 Progress Report, covering fiscal year 2018, p. 68 et sqq., https://www.apple.com/environment/pdf/Apple_Environmental_Responsibility_R eport_2019.pdf. 99 CSRHub rates and ranks 18,958 companies from 143 countries and uses 658 industry-leading CSR data sources. See CSRHub homepage, https://www.csrhub.com/ (last accessed on 14 March 2020). 100 Apple Inc. CSR/ESG Ranking, https://www.csrhub.com/CSR_and_sustainability_information/ Apple-Inc (last accessed on 14 March 2020). 95 Apple

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3.2.3.4

3 Codes of Ethics and CSR in the USA

Berkshire Hathaway Inc.

Berkshire Hathaway Inc. (“Berkshire Hathaway”) “is a holding company owning subsidiaries engaged in a number of diverse business activities. The most important of these are insurance businesses conducted on both a primary basis and a reinsurance basis, a freight rail transportation business and a group of utility and energy generation and distribution businesses.”101 Berkshire Hathaway’s Code of Business Conduct and Ethics sets forth that Berkshire Hathaway “has and will continue to uphold the highest levels of business ethics and personal integrity in all types of transactions and interactions” and “Covered Parties shall behave honestly and ethically at all times and with all people. They shall act in good faith, with due care, and shall engage only in fair and open competition, by treating ethically competitors, suppliers, customers, and colleagues.” The Code of Business Conduct and Ethics covers nine major topics and fulfils the minimum requirements of the NYSE. (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix)

Conflicts of interest; corporate opportunities; fair dealing; insider trading; confidentiality; protection and proper use of company assets; compliance with laws, rules and regulations; timely and truthful public disclosure; and significant accounting deficiencies.102

It is noticeable that social and environmental aspects are not included. Similarly to Walmart, the independent audit committee (or the entire board of directors) is responsible for granting waivers from the code. Violations of the code have to be reported to the audit committee by the company’s directors, CEO, senior financial officers and chief legal officer. This means that employees, who are not serving in leading functions, may not directly approach the audit committee but have to report violations of the code to supervisors, managers or other appropriate personnel. Employees may also report any violations anonymously to a third party organization called NAVEX Global by calling a toll-free number. Berkshire Hathaway does not condone any retaliatory action against employees who are reporting violations of the code.103 It is striking that Berkshire Hathaway has not published any CSR reports. CSR reports of Berkshire Hathaway’s numerous subsidiaries are not examined in this 101 Berkshire Hathaway Annual Report 2019 on Form 10-K, p. K-1, https://www.berkshirehathaway.

com/2019ar/201910-k.pdf (last accessed on 14 March 2020). 102 Berkshire Hathaway Code of Business Conduct and Ethics, p. 1 et sqq. https://www.berkshire hathaway.com/govern/ethics.pdf (last accessed on 8 January 2020). 103 Berkshire Hathaway Code of Business Conduct and Ethics, p. 4, https://www.berkshirehathaway. com/govern/ethics.pdf.

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monograph. Berkshire Hathaway’s rating on CSRHub is alarmingly low: it is only 5%.104 A further strong indication for the assumption that Berkshire Hathaway strictly follows the Shareholder Primacy Model is Warren Buffet’s special message for Berkshire Hathaway’s investors on the homepage under “Investor Relations”. The two “rules” about never losing money are emphasized: “Rule No. I: Never lose money. Rule No. 2: Never forget Rule No. I.”105 It should also be pointed out that Berkshire Hathaway did not sign the Business Roundtable’s Statement of the Purpose of a Corporation.106 This is no surprise, given that Warren Buffet is an ardent supporter of the Shareholder Primacy Model. Recently, he stated in the Financial Times that it would be wrong to invest on the basis of doing good for society. Management members would just be the agents of the shareholders. “This is the shareholders’ money,” he reiterated following into the footsteps of Milton Friedman. Even charitable contributions would be ruled out on principle by Warren Buffet: “Many corporate managers deplore governmental allocation of the taxpayer’s dollar, but embrace enthusiastically their own allocation of the shareholder’s dollar.”107

3.2.4 The Audit Committee Pursuant to US Law and the Requirement for an Ethics and CSR Committee Comprised of an Ethics and CSR Expert and Independent Directors By analysing the corporate codes of ethics of Walmart, ExxonMobil, Apple and Berkshire Hathaway the function of the audit committee as (i) monitoring body with regard to the corporate ethics policy, (ii) recipient of reports containing alleged violations of the codes of ethics and (iii) competent authority for granting waivers from the code of ethics becomes evident. Section 2 (3) (A) of the SOX defines an audit committee as a “committee (or equivalent body) established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and financial reporting processes of the issuer and audits of the financial statements of the issuer”. Section 301 of the SOX 104 Berkshire Hathaway Inc. CSR/ESG Ranking, https://www.csrhub.com/CSR_and_sustainab ility_information/Berkshire-Hathaway-Inc (last accessed on 14 March 2020). 105 Berkshire Hathaway, Investor Relations, http://berkshirehathaway340.weebly.com/investor-rel ations.html (last accessed on 14 March 2020). 106 Business Roundtable, Statement on the Purpose of a Corporation, https://opportunity.busine ssroundtable.org/wp-content/uploads/2019/08/BRT-Statement-on-the-Purpose-of-a-Corporationwith-Signatures.pdf. 107 Armstrong, Warren Buffett on why Companies cannot be Moral Arbiters (29 December 2019), Financial Times, https://www.ft.com/content/ebbc9b46-1754-11ea-9ee4-11f260415385 (last accessed on 11 May 2020).

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and the SEC’s Final Rule regarding “Standards Relating to Listed Company Audit Committees”108 provide the audit committee with a vast array of responsibilities relating to registered public accounting firms and determine the audit committee’s responsibility for establishing procedures in connection with complaints regarding accounting, internal accounting controls or auditing matters.109 Members of the audit committee have to fulfil certain independence criteria: They are prohibited from accepting “directly or indirectly any consulting, advisory, or other compensatory fee” from the listed company or its subsidiaries.110 In addition, members of the audit committee shall not be affiliated persons of the listed company or its subsidiaries.111 For this monograph, it is important to note that persons, who directly or indirectly control the listed company, cannot be qualified as independent. As a consequence, controlling shareholders112 and executive officers and directors (who are also employed by the controlling shareholder) of a controlling shareholder of the listed company may not be members of the audit committee.113 If a company is listed on the NYSE or Nasdaq, it has to fulfil additional requirements regarding the audit committee: Sect. 303A.07 of the NYSE Listed Company Manual prescribes that each listed company’s audit committee must have a minimum of three members satisfying the NYSE’s independence criteria for members of the board of directors pursuant to Sect. 303A.02 of the NYSE Listed Company Manual. As mentioned above in Section 3.2.1.2, the NYSE independence criteria focus on the directors’ independence from the management of the listed company. In combination with the SEC Final Rule regarding “Standards Relating to Listed Company Audit Committees” (these are mandatory federal requirements) members of audit committees of NYSE-listed companies must therefore both be independent from management and controlling shareholders. In addition, the NYSE imposes further tasks on the audit committee. The Nasdaq Stock Market Rules contain in Rule IM5605-4 similar requirements as to the composition (minimum of three members) and the independence (audit committee members have to meet the independence criteria contained in Rule 5605 (a) (2)). Hence, Nasdaq-listed companies must also have an audit committee which is solely comprised of members who are independent from both management and the controlling shareholders of the listed company.

108 SEC Final Rule: Standards Relating to Listed Company Audit Committees, 17 CFR PARTS 228,

229, 240, 249 and 274 (release nos. 33-8220; 34-47654; IC-26001; file no. S7-02-03). CFR Sec. 240.10A-3 (b) (2) and (3). 110 17 CFR Sec. 240.10A-3 (b) (1) (ii) (A). 111 17 CFR Sec. 240.10A-3 (b) (1) (ii) (B). 112 Pursuant to 17 CFR Sec. 240.10A-3 (e) (1) (ii) (A) (1) a “person will be deemed not to be in control of a specified person for purposes of this section if the person is not the beneficial owner, directly or indirectly, of more than 10% of any class of voting equity securities of the specified person.” 17 CFR Sec. 240.10A-3 (e) (4) defines the term control as “the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.”. 113 17 CFR Sec. 240.10A-3 (e) (1). 109 17

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In the author’s view, independence from management is required as conflicts of interests can have a detrimental impact on both the shareholders’ and the stakeholders’ interests. This was especially evidenced by the major accounting scandals in the USA. This view is also confirmed by the European Commission which declared that “the presence of independent representatives on the board, capable of challenging the decisions of management, is widely considered as a means of protecting the interests of shareholders and other stakeholders.”114 Independence from the controlling shareholders is necessary because the interests of shareholders can of course differ from the interests of the stakeholders. Some controlling institutional investors, such as banks, investment funds or finance and insurance companies might especially be interested in short-term profits with the consequence of disregarding the interests of stakeholders. Hence, from a business ethics point of view, recognizing the interests of the various internal and external stakeholders, including the environment and the overall social good, the monitoring of a company’s ethics policy by a body which is independent from the controlling shareholders is crucial as well. Although it has to be appreciated that audit committees of US stock exchangelisted companies must have independent members, it should be emphasized that the main function of US audit committees is overseeing the accounting and financial reporting processes and audits of the financial statements of the listed companies. In this respect, the audit committee has been provided with a wide array of responsibilities by the SOX, the SEC and the US stock exchanges.115 Considering the audit committee’s clear focus on financial topics and taking into account the audit committee’s great number of responsibilities in this respect, it is the author’s opinion that companies should not overload the audit committee and thus should not use the audit committee for the oversight of the company’s ethics policy but instead install an Ethics and CSR Committee, which is solely comprised of independent (both from management and controlling shareholders) outside directors, to concentrate on (i) monitoring the company’s corporate ethics, CSR and non-financial disclosure (ii) the implementation and further development of the company’s ethics and CSR policy and (iii) receiving and processing employees’ complaints regarding violations of the companies’ ethics rules. Similarly to the audit committee, the installation of an Ethics and CSR Committee should be a mandatory legal requirement for listed companies. Furthermore, as a minimum requirement, the chairman of the Ethics and CSR Committee should have, through education and experience, a deep understanding of ethics and CSR issues (“ethics and CSR expert”). For this purpose, the adoption of a new law or the introduction of a new listing requirement is suggested. This is in analogy to the audit committee’s financial expert

114 Recital 7 of the Commission Recommendation of 15 February 2005 on the role of non-executive

or supervisory directors of listed companies and on the committees of the (supervisory) board (2005/162/EC). 115 Peter, Der US-amerikanische “Sarbanes-Oxley Act of 2002”, p. 73 et sqq.

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pursuant to Sect. 407 of the SOX.116 However, in contrast to the audit committee’s financial expert, a company should not be given an opportunity to disclose whether or not (and if not the reasons therefor) an “ethics and CSR expert” is a member of the Ethics and CSR Committee. Furthermore, as audit committees do not meet on a weekly or even a monthly basis (the average number of in-person meetings per year is 5.5),117 the ongoing and day-to-day implementation of the corporate ethics policy cannot be provided by the audit committee or even an Ethics and CSR Committee comprised of independent members of the company’s board of directors. Instead, the day-to-day implementation of the corporate ethics policy should be handled by ethics officers who are full-time employees of the company and thus have sufficient insights into the company. Ideally, these ethics officers will regularly be monitored by an independent ethics committee as described above.

3.3 CSR Reporting in the USA CSR reports contain non-financial information (qualitative and quantitative data) for a company’s shareholders and stakeholders. Unlike in the EU, in the USA CSR reporting is not mandatorily required by law.118 Nevertheless, more and more US companies disclose CSR reports on a regular basis. The motivation for the voluntary disclosure of CSR reports is manifest. Companies are under the pressure of investors and other stakeholders.119 Even institutional investors increasingly demand the disclosure of CSR reports.120

116 For

further details on the audit committee’s financial expert see Peter, Der US-amerikanische “Sarbanes-Oxley Act of 2002”, p. 77 et sq. 117 Deloitte, Audit committee requirements and governance topics (April 2018), https://www2.del oitte.com/content/dam/Deloitte/us/Documents/center-for-board-effectiveness/us-audit-committeeresource-guide-section-1.pdf (last accessed on 10 January 2020). 118 Cecil, Corporate Social Responsibility Reporting in the United States, McNair Scholars Research Journal 2008, Vol. 1, Issue 1, Article 6, p. 2, http://commons.emich.edu/cgi/viewcontent.cgi?art icle=1006&context=mcnair (last accessed on 13 January 2020); Lewis, Corporate Social Responsibility/Sustainability Reporting Among Fortune Global 250: Greenwashing or Green Supply Chain? https://digitalcommons.salve.edu/cgi/viewcontent.cgi?article=1056&context=fac_staff_pub. 119 Singer, Large U.S. companies are among the most active in sustainability reporting (23 January 2019), https://www.conference-board.org/blog/postdetail.cfm?post=6965 (last accessed on 13 January 2020). 120 Disclosure Requirements Do Not Always Translate Into Better Corporate Sustainability Performance (19 December 2018), https://www.sustainability-reports.com/disclosure-requirements-donot-always-translate-into-better-corporate-sustainability-performance/ (last accessed on 13 January 2020).

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3.3.1 Positive Financial Impact of CSR Policies on the Financial Performance of Companies According to a global survey conducted by Eccles/Kastrapeli121 with 582 institutional investors (including US companies) and 750 individual investors, only 35% of institutional and individual investors believe that CSR investments would lead to less profits. Moreover, only 10% of the institutional investors (fund fiduciaries) believe that CSR issues may not be taken into account due to possible violations of the fiduciary duty by not maximizing the returns of the beneficiaries. In addition, 75% of the institutional investors believe in a positive impact of CSR integration on investment performance as they expect to achieve an outperformance from CSR in three or more years. An increasing number of empirical studies show the positive impacts of CSR policies on the financial performance of companies: Clark/Feiner/Viehs122 conclude that (i) sustainability standards lower the cost of capital, (ii) the implementation of CSR programs leads to better operational performance, and (iii) stock price performances are positively influenced by CSR practices: Thus, it would be in the best interest of investors and corporate managers to incorporate CSR policies into their business decisions. The meta-study investigated over 200 academic studies and sources on CSR. Researchers suggest that “by focusing on profit maximization over the medium to longer term, i.e., shareholder value maximization, and by taking into account the needs and demands of major stakeholders can a company create financial and societal value.” It was found that corporate reputation is an important factor for persistent value maximization. Job satisfaction is likely to improve a company’s value through employee motivation. Researchers were also able to show that a company’s environmental (risk) management has a positive impact on the cost of equity capital. Importantly, studies demonstrated that good corporate environmental practices (in particular high corporate environmental ratings, the reduction of pollution levels and the implementation of waste prevention measures) ultimately result into competitive advantages and better corporate performance. Moreover, research established that positive environmental news trigger positive stock price movements. In contrast, stock prices decrease for firms which engage in irresponsible environmental activities. In particular, environmental disasters in the chemical industry served as evidence for significantly decreasing stock prices. Empirical studies also demonstrated a positive relationship between employee satisfaction and stock returns. Last but not least, a majority of the studies found a positive impact of CSR scores on stock prices: “Despite several studies showing no relationship, or a negative relationship, between 121 Eccles/Kastrapeli,

The Investing Enlightenment. How Principle and Pragmatism Can Create Sustainable Value through ESG, p. 5 et sqq, http://www.statestreet.com/content/dam/statestreet/ documents/Articles/The_Investing_Enlightenment.pdf (last accessed on 13 January 2020). 122 Clark/Feiner/Viehs, From the Stockholder to the Stakeholder. How Sustainability Can Drive Financial Outperformance, p. 10 et sqq. (March 2015), https://arabesque.com/research/From_the_ stockholder_to_the_stakeholder_web.pdf (last accessed on 13 January 2020).

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sustainability scores (both aggregated and disaggregated) and stock price performance, the majority of studies find a positive relationship where superior ESG quality translates into superior stock price performance relative to firms with lower ESG quality.”123 Khan/Serafeim/Yoon124 found that companies with superior performance on material sustainability aspects outperform companies with inferior performance on material sustainability aspects in the future. The study used MSCI KLD as source of sustainability data. This database comprises the largest US stock exchange-listed companies: 650 US companies between 1991 and 2000, 1,100 US companies between 2001 and 2002 and 3,000 US companies between 2003 and 2012. KLD researchers regularly monitor media sources and review publicly available companies’ documents such as annual reports, websites, CSR reports, etc. The 400 US companies with the best CSR ratings are included in the MSCI KLD 400 Social Index. Based on the KLD data, the sample for the study of Khan/Serafeim/Yoon considered 2,307 US companies from the financial, healthcare, non-renewable sources, services, technologies and communication and transportation sectors. The study presented results for value-weighted125 and equalweighted126 portfolios. Furthermore, the study used three different asset pricing models: the Fama and French three-factor model considers market risk, size risk and value risk, the Cahart four-factor model adds momentum (assets’ tendency to continue on a given path, rising or falling) as a fourth factor, and the Pastor-Stambaugh five-factor model expands the other two models by including liquidity as a fifth factor.127 Using the five-factor model the study found that value-weighted portfolios of companies scoring high on material CSR issues outperform their counterparts scoring low on material CSR issues. The outperformance in terms of abnormal stock return128 123 Clark/Feiner/Viehs,

From the Stockholder to the Stakeholder. How Sustainability Can Drive Financial Outperformance, p. 9 (March 2015), https://arabesque.com/research/From_the_stockh older_to_the_stakeholder_web.pdf. 124 Khan/Serafeim/Yoon, Corporate Sustainability: First Evidence on Materiality, p. 16, https:// www.sustainablefinance.ch/upload/cms/user/CorporateSustainability_Firstevidenceonmateri ality_Khan_Serafeim_Yoon_February2015.pdf (last accessed on 13 January 2020). 125 Larger companies (based on their market capitalization) are given more weight than smaller companies. 126 Small and large companies are given equal weight. 127 Khan/Serafeim/Yoon, Corporate Sustainability: First Evidence on Materiality, p. 7 et sqq., https://www.sustainablefinance.ch/upload/cms/user/CorporateSustainability_Firstevidenc eonmateriality_Khan_Serafeim_Yoon_February2015.pdf; MSCI KLD 400 Social Index (USD), https://www.msci.com/documents/10199/904492e6-527e-4d64-9904-c710bf1533c6 (last accessed on 13 February 2020); Chen, MSCI KLD 400 Social Index (27 November 2019), https://www.invest opedia.com/terms/d/domini_400.asp (last accessed on 13 February 2020); Hayes, Fama and French Three Factor Model (13 December 2020), https://www.investopedia.com/terms/f/famaandfrenchth reefactormodel.asp (last accessed on 13 February 2020); Carhart four-factor model, https://capital. com/carhart-four-factor-model-definition (last accessed on 13 February 2020). 128 Difference between actual and expected (stock exchange indexes may serve as benchmarks, e.g. S&P 500) stock return.

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ranges between 3% (quartile) and 8.85% (decile) annually. Equal-weighted portfolios using the five-factor model range between 3.38% (quartile) and 3.64% (decile). Given the difference between value-weighted and equal-weighted portfolios, material CSR issues have a greater impact on larger companies due to being more visible and thereby more vulnerable to reputation risks, etc. Both the four-factor and threefactor models confirm the positive impact of material CSR issues on the annual abnormal stock returns. The four-factor model results in an increase of abnormal stock returns by 4.68% (value-weighted) and 2.84% (equal-weighted). The threefactor model shows higher abnormal stock returns as well: 4.70% on the basis of value-weighted portfolios and 3.67% with regard to equal-weighted portfolios. The study also shows that CSR issues only have a significant positive impact on the annual abnormal stock returns if they are material: On an equal-weighted base, portfolios consisting of companies that score high on immaterial CSR issues even underperform (-1.49%) against companies with low scores on immaterial CSR issues. Using a value-weighted base results only in an outperformance amounting to 0.71%. Both figures are statistically irrelevant which proves that immaterial CSR issues do not have an impact on the annual abnormal stock returns. As a consequence, it is crucial for companies to assess the material CSR issues. Material CSR issues vary depending on what industry a company belongs to. Regarding materiality, the study followed guidance from the Sustainability Accounting Standards Board (“SASB”) for each of the 45 industries included in the study’s sample.129 The SASB identified 26 broadly relevant sustainability issues organized under five sustainability dimensions: Environment, social capital, human capital, business model & innovation and leadership and governance.130 With regard to CSR reporting, it is crucial to identify which information is significant for making business and investment decisions. Which CSR aspects have the most financial impact? According to SASB, each industry has its own unique sustainability profile. Hence, different CSR components are more or less relevant for certain industries. The SASB has created a so-called materiality map131 which serves as guidance for conducting materiality assessments.132 Eccles/Ioannou/Serafeim133 used a matched sample of 180 US companies and came to the conclusion that companies with a high degree of sustainability (thereby on the one hand potentially having higher labour costs by providing more benefits to employees, missing business opportunities due to their strict environmental policy, 129 Khan/Serafeim/Yoon,

Corporate Sustainability: First Evidence on Materiality, p. 12 et sqq., https://www.sustainablefinance.ch/upload/cms/user/CorporateSustainability_Firstevidenc eonmateriality_Khan_Serafeim_Yoon_February2015.pdf. 130 SASB, https://www.sasb.org/standards-overview/materiality-map/ (last accessed on 13 January 2020). 131 SASB Materiality Map, https://materiality.sasb.org/ (last accessed on 13 January 2020). 132 SASB, Why is Financial Materiality important? https://www.sasb.org/standards-overview/materi ality-map/ (last accessed on 13 January 2020). 133 Eccles/Ioannou/Serafeim, The Impact of Corporate Sustainability on Organizational Processes and Performance (2016) p. 17 et sqq., http://www.hbs.edu/faculty/publication%20files/ssrn-id1964 011_6791edac-7daa-4603-a220-4a0c6c7a3f7a.pdf (last accessed on 13 January 2020).

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etc., on the other hand potentially attracting better human capital, establishing more reliable supply chains, avoiding costly conflicts with nearby communities, engaging in more product and process innovations in order to stay competitive, etc.) significantly outperform companies with a low degree of sustainability. In the investigated time period between 1993 and 2010, the first group also generated significantly higher stock returns which implies that the implementation of CSR aspects gave those companies a competitive advantage in the long term: “A more secure license to operate, a more loyal and satisfied customer base, better relationships with stakeholders, greater transparency, a more collaborative community, and a better ability to innovate may all be contributing factors to this potentially persistent superior performance in the long-term.”134 Eccles/Ioannou/Serafeim relied on the Thomson Reuters ASSET4 database comprising of 775 companies. Based on this database, the study constructed an equalweighted index of all of these companies’ CSR policies. Eventually, 90 companies with a substantial number of CSR policies were identified as high sustainability firms. 90 comparable companies that adopted almost no CSR policies were selected by means of propensity score matching (low sustainability firms). The study found that “investing $1 in the beginning of 1993 in a value-weighted (equal-weighted) portfolio of High Sustainability firms would have grown to $22.6 ($14.3) by the end of 2010. In contrast, investing $1 in the beginning of 1993 in a value-weighted (equal-weighted) portfolio of control firms would have only grown to $15.4 ($11.7) by the end of 2010.” Moreover, the study showed that on a value-weighted base, the annual abnormal performance of high sustainability firms was 4.8% higher compared to such performance of low sustainability firms. On an equal-weighted base, the difference was still 2.3%. Thus, this study seems to confirm as well that CSR has more impact on larger companies. The study concludes that one potential explanation for higher stock returns of high sustainability firms could be price pressure from the emergence of social responsible investing: “According to the Social Investment Forum, institutional investors that claim to incorporate ESG data into their investment decisions had $162 billion in assets under management in 1995 and $2.5 trillion in 2010.”135 The Boston Consulting Group (“BCG”)136 confirms as well that investors are increasingly focused on CSR topics: “In 2016, global assets in the category of

134 Eccles/Ioannou/Serafeim,

The Impact of Corporate Sustainability on Organizational Processes and Performance, p. 19, http://www.hbs.edu/faculty/publication%20files/ssrn-id1964011_679 1edac-7daa-4603-a220-4a0c6c7a3f7a.pdf. 135 Eccles/Ioannou/Serafeim, The Impact of Corporate Sustainability on Organizational Processes and Performance, p. 3 et sqq., http://www.hbs.edu/faculty/publication%20files/ssrn-id1964011_ 6791edac-7daa-4603-a220-4a0c6c7a3f7a.pdf. 136 The Boston Consulting Group is a global management consulting firm and a leading adviser on business strategy.

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socially responsible investing hit nearly $23 trillion, up from $18 trillion in 2014, accounting for more than one-quarter of total managed assets.”137 BCG conducted a study of the impact of environmental, social and governance (“ESG”) issues on company performance. BCG analysed 343 global companies for the time period from 2013 through 2015. The quantitative study focused on four industries: consumer packaged goods, biopharmaceuticals, oil and gas, and retail and business banking. Financial data was gathered from the S&P Capital IQ, and ESG data was collected from the data vendors MSCI and Oekom Research. The study found that top CSR performers outperformed median CSR performers. They achieved both higher valuations and higher margins. In terms of company valuation, the premium in relation to the median CSR performers was 11% for consumer packaged goods, 12% for pharmaceuticals, 19% for oil and gas and 3% for retail and business banking. It must be stressed that the higher valuations are linked to a strong CSR performance in certain areas which seem to be key for the respective industry. The majority of material CSR topics having a positive effect on the company valuation was related to minimizing risks and other negative impacts.138 Depending on the respective material CSR topic, EBITDA margins,139 gross margins140 and net income margins (in relation to the retail and business banking sector) of top performers are higher than those of median performers. For example, limiting the negative effects on biodiversity and ecology lead to an EBITDA margin premium of 3% in the consumer packaged goods industry. In the oil and gas industry, maintaining a process-oriented health and safety program resulted in median performers having an EBITDA margin amounting to 30%, whereas top performers achieved 33.4% (premium amounting to 3.4%). It is notable that in the oil and gas industry addressing climate change does not have a significant impact on the financial performance of companies.141 BCG’s study confirms as well that companies should focus on material CSR topics. The materiality of CSR topics varies from industry to industry. To identify material CSR topics, BCG also used information provided by SASB. It is crucial as well for having a positive impact on companies’ financial performance that the companies are in direct contact with their key stakeholders and investors and communicate their CSR activities and their effect on the financial performance. According

137 Boston

Consulting Group, Total Societal Impact. A New Lens for Strategy (October 2017) p. 7, https://media-publications.bcg.com/BCG-Total-Societal-Impact-Oct-2017.pdf (last accessed on 17 May 2020). 138 Boston Consulting Group, Total Societal Impact. A New Lens for Strategy, p. 5 et sqq., https:// media-publications.bcg.com/BCG-Total-Societal-Impact-Oct-2017.pdf. 139 The EBITDA is a company’s earnings before interest, taxes, depreciation, and amortization. EBITDA margin is EBITDA divided by revenue. 140 Gross margin is gross income divided by revenue. 141 Boston Consulting Group, Total Societal Impact. A New Lens for Strategy, p. 22 et sqq., https:// media-publications.bcg.com/BCG-Total-Societal-Impact-Oct-2017.pdf.

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to BCG, it is evident that top CSR performers reduce the risk of particularly negative events (e.g. manufacturing accidents or sales practice scandals) and increase corporate longevity.142 In the author’s view, the fact that a great majority of US companies voluntarily discloses CSR reports proves already in itself that these companies expect a higher financial output, and thus long-term profit maximization, by implementing CSR aspects and considering sustainability matters when making their business decisions. In other words, the majority of US companies recognizes that long-term profit maximization is impossible to achieve without the implementation of a CSR policy which satisfies shareholders and internal and external stakeholders. The fact that even institutional investors begin to accept this reality is a further strong indication which supports the author’s view. Even companies which perform windowdressing/greenwashing accept the significance of CSR: if CSR was irrelevant for the companies’ profits, they would not try to deceive investors and stakeholders and risk getting caught.

3.3.2 Recent Sustainability Index Event Studies Listings on sustainability indices gain more and more significance for companies as they certainly have a positive impact on the companies’ reputation and send a strong message to investors and stakeholders about the quality of the companies’ CSR policies. The Dow Jones Sustainability World Index (“DJSI World”) is one of the most high profile sustainability indices worldwide. The DJSI World is part of the Dow Jones Sustainability Index family (including indices such as DJSI Europe, DJSI North America, DJSI Asia Pacific, etc.) which was launched in 1999 as the first global sustainability benchmark. It tracks the stock performance of the world’s leading companies in terms of CSR criteria. The DJSI World lists the top 10% of the largest 2,500 companies in the S&P Global Broad Market Index143 based on longterm economic, environmental and social criteria. OMV AG is the only Austrian company listed on the DJSI World.144

142 Boston

Consulting Group, Total Societal Impact. A New Lens for Strategy, p. 7 et sqq., https:// media-publications.bcg.com/BCG-Total-Societal-Impact-Oct-2017.pdf. 143 The S&P Global Broad Market Index includes more than 11,000 stocks from 25 developed and 25 emerging markets. See S&P Global BMI, https://eu.spindices.com/indices/equity/sp-glo bal-bmi-usd (last accessed on 14 February 2020). 144 Dow Jones Sustainability Indices 20th Anniversary, https://www.robecosam.com/csa/indices/ djsi-index-family.html (last accessed on 14 February 2020); Dow Jones Sustainability World Index, https://eu.spindices.com/indices/equity/dow-jones-sustainability-world-index (last accessed on 14 February 2020); OMV again listed in the Dow Jones Sustainability Index, https://www.omv. com/en/news/190923-omv-again-listed-in-the-dow-jones-sustainability-index (last accessed on 14 February 2020).

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In 2019, Durand/Paugam/Stolowy published an index event study showing the impact of DJSI World-related additions, continuations and deletions on the companies’ stock prices and returns, trading volume, visibility among analysts and the percentage of shares held by long-term investors. The composition of the DJSI World changes every year. The index event study was performed for the period from 2005 through 2015. Given (i) that companies put a considerable effort (including the mobilization of considerable financial resources) into the marketing of their CSR activities to be included on a high profile sustainability index (such as the DJSI World) and (ii) the rapidly increasing significance of sustainable investment funds managing assets, the index event study compared companies listed on the DJSI World with top CSR performing companies that are not listed on the DJSI (CSR-equivalent companies rated by the CSR rating agency Thomson Reuters Asset4). The researchers used short time windows (such as three days) surrounding the annual index-related events (additions, continuations and deletions). The study found insignificant impacts on both the companies’ stock prices and trading volume. Interestingly, the study revealed a positive effect of additions to the DJSI World regarding financial analyst following over time. Companies added to the DJSI World “have 4.47% more financial analysts per additional year elapsed relative to CSR-equivalent firms.” Another slightly positive effect was discovered for DJSI World continuations in relation to shareholdings of long-term investors: “[…] in 2015, firms that continued in the DJSI had on average +0.41% […] more equity held by long-term investors relative to CSRequivalent firms. This incremental effect of continuation is statistically significant and equivalent to $112 million of market value […].”145 All in all, for this monograph it must be considered most relevant that the study findings indicate no major impact of sustainability index-related events on stock prices and returns. Does this implicitly mean that CSR activities do not have an impact on the companies’ profits, the financial performance and the stock price? Not at all, because index event studies only examine the impact of additions, continuations and deletions surrounding a very short time frame of several days surrounding these events. CSR policies are not only communicated to the investors and stakeholders by means of these events (announcements). It seems that investors and stakeholders rely much more on the CSR reports which are annually disclosed by the companies concerned and other publicly available information and positive or negative news on CSR activities. Another index event study published by Hawn/Chatterji/Mitchell in 2018 focusing on DJSI World-related additions, continuations and deletions confirmed that for investors sustainability index announcements are rather insignificant. The study examined investor reactions to DJSI World events concerning thousands of companies from 27 countries over a period of 17 years (1999 to 2015). In contrast to the study of Durand/Paugam/Stolowy, which compared high profile CSR firms 145 Durand/Paugam/Stolowy, Do investors actually value sustainability indices? Replication, devel-

opment, and new evidence on CSR visibility, Strat. Mgmt. J. 2019, 40, 1471 (1472 et sqq.); Sustainability Indices: Do Investors Actually Care? (1 August 2019), https://www.robecosam.com/csa/ insights/2019/sustainability-indices-do-investors-actually-care.html (last accessed on 15 February 2020).

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listed on the DJSI World with CSR-equivalent firms not listed on this index, the study of Hawn/Chatterji/Mitchell included firms that were part of a DJSI Worldrelated annual announcement (addition, continuation or deletion) with comparable firms (based on the four-digit code of the Standard Industrial Classification, the EBITDA and the total assets, but not based on CSR criteria) that were not involved in any DJSI World-related events. Hawn/Chatterji/Mitchell also used very short time windows surrounding the index events. The study found that “over time, additions and continuations shift from negative to zero or weakly positive, while deletion remains insignificant.” For example, for continuation the average cumulative abnormal return (“CAR”) in a two-day event window (-1, 0) was -0.51% for the period 1999 to 2004 and -0.21% for the period 2005 to 2009. The average CAR turned to a positive percentage amounting to 0.14% in the period from 2010 to 2015. Although the figures are anything but overwhelming, there seems to be a slightly positive time trend in terms of the impact of DJSI World-related continuation announcements on the CAR. Consequently, Hawn/Chatterji/Mitchell conclude that there appears to be a moderate benefit for firms continuing on the index. This may indicate that investors increasingly value CSR activities with demonstrated reliability. Simply being added to the index may not indicate sufficient ongoing attention to sustainability to warrant a market response, while being retained on the index may indicate more serious engagement […] The positive time trend in the continuation result may reflect the idea that evaluating sustainability has become increasingly relevant for market valuation […] owing to growing demands from multiple stakeholders.146

3.3.3 The Si2/IRRCI Report on the State of Sustainability and Integrated Reporting 2018 The Sustainable Investments Institute (“Si2”) and the Investor Responsibility Research Center Institute (“IRRCI”) found that in 2018, 78% of the largest US companies (395 companies), which are tracked on the stock market index Standard & Poor’s 500 (“S&P 500”), disclosed sustainability reports. CSR reports containing both environmental and social data were disclosed by 320 companies (64%). 87% of the 395 sustainability reporters disclose the information annually (6% report biannually, and two companies have disclosures every three years).147 More specifically, 90% of the sustainability reports offered environmental performance metrics (quantified measures which are comparable year-over-year), and 81% included social performance metrics. It should be noted that a lower number of reports also contained goals regarding the environment (67%) and social aspects 146 Hawn/Chatterji/Mitchell, Do investors actually value sustainability? New evidence from investor

reactions to the Dow Jones Sustainability Index (DJSI), Strat. Mgmt. J. 2019, 39, 949 (949 et sqq.). Investment Institute/Investor Responsibility Research Center Institute, State of Sustainability and Integrated Reporting 2018, p. 27, https://www.weinberg.udel.edu/IIRCiRese archDocuments/2018/11/2018-SP-500-Integrated-Reporting-FINAL-November-2018-1.pdf (last accessed on 13 January 2020).

147 Sustainable

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(40%). Greenhouse gas emissions (“GHG”) were disclosed in 79% of the reports (56% contained GHG goals):148 It is rather alarming that most of the CSR reports lack external assurance. Only 3% of the CSR reports are fully externally verified. 38% of the reports contain at least some external assurance which relates in most cases (90%) to GHG. In combination with the fact that companies rely on different CSR frameworks and standards (60% of the CSR reports referenced or followed the GRI, although 97% of the reports chose a customization and a unique style over following one reporting framework closely), the current unregulated state of CSR reporting in the USA makes it unfortunately very difficult for investors and stakeholders to correctly assess the various CSR reports.149 It should also not remain unmentioned that comprehensive “integrated reporting” has not yet achieved a breakthrough in the USA as only 14 companies issued an integrated report according to the research provided by Si2/IRRCI. Widely used frameworks for integrated reporting are the International Integrated Reporting Framework of the International Integrated Reporting Council (“IIRC”) and SASB’s framework.150 Integrated reports combine financial and sustainability information within a periodic report: Integrated reporting seeks to minimize informational risk-return gaps so that investors can make better informed decisions about their investment needs. The central principle is value creation, that corporate disclosure should accurately reflect how well a company manages various types of assets’ value – such as physical resources, reputation and stakeholder relationships – over time, recognizing that its ability to create value in the future is affected by its past and present activities. Advocates of integrated reporting say this can be communicated through their approach to disclosure, which should reflect how sustainability issues have been integrated into a firm’s business and management strategy. These advocates assert that sustainability is a necessary step before integrated reporting, since the sustainability reporting process is a fundamental precursor to integration, and the two types of reports should serve the different information needs of different audiences. Integrated reports target the needs of investors, while sustainability reports can serve the needs of the general public, civil society, organizations and consumers.151

148 Sustainable

Investment Institute/Investor Responsibility Research Center Institute, p. 28 et sq., https://www.weinberg.udel.edu/IIRCiResearchDocuments/2018/11/2018-SP-500-IntegratedReporting-FINAL-November-2018-1.pdf. 149 Sustainable Investment Institute/Investor Responsibility Research Center Institute, p. 29 et sqq., https://www.weinberg.udel.edu/IIRCiResearchDocuments/2018/11/2018-SP-500-IntegratedReporting-FINAL-November-2018-1.pdf. 150 Sustainable Investment Institute/Investor Responsibility Research Center Institute, p. 21 et sqq., https://www.weinberg.udel.edu/IIRCiResearchDocuments/2018/11/2018-SP-500-IntegratedReporting-FINAL-November-2018-1.pdf. 151 Sustainable Investment Institute/Investor Responsibility Research Center Institute, p. 14 et sq., https://www.weinberg.udel.edu/IIRCiResearchDocuments/2018/11/2018-SP-500-IntegratedReporting-FINAL-November-2018-1.pdf.

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Although the number of integrated reports152 is very low, it should not be overlooked that around 40% of the S&P companies voluntarily address some aspects of sustainability in their annual financial reports153 which serves as clear evidence that CSR aspects may have a material financial impact, and both existing and potential investors need to be informed about such impact.

3.3.4 KPMG Survey of Corporate Responsibility Reporting 2017 The KPMG Survey of Corporate Responsibility Reporting 2017 includes a research sample called “N100”. This is a sample of 4,900 companies, comprising the top 100 companies by revenue in each of the 49 countries (including the USA), researched in the KPMG study. Based on the “N100” research sample, KPMG found that in 2017, US companies had a CSR reporting rate of 92% (compared to 87% in 2015).154 In comparison with the Si2/IRRCI research results (in 2018, 78% of the 500 largest US companies disclosed sustainability reports, and 64% disclosed CSR reports containing both environmental and social data), the KPMG researchers, who focused on the 100 largest US companies, arrived at a significantly higher number which indicates that the larger the companies are the more they are inclined (or under pressure of investors and stakeholders) to disclose CSR reports. It is very striking that according to the KPMG survey in 2017, 81 (compared to just 30 in 2015) of the top 100 US companies integrate at least some non-financial CSR information into their financial reporting.155 This is in stark contrast to the finding of Si2/IRRCI which arrived at a figure of 40% for the largest 500 US companies. Again, it seems that the largest companies (the top 100 US companies) are under increasing pressure by shareholders and internal and external stakeholders and thus have to make this information available in their annual financial reports. Consequently, KPMG confirmed that the most significant factor, which drives US companies to include CSR information in their annual financial reports, is investor 152 Si2/IRRCI

mainly counted as integrated reports those that were self-declared as such. See Sustainable Investment Institute/Investor Responsibility Research Center Institute, p. 4, footnote 3, https://www.weinberg.udel.edu/IIRCiResearchDocuments/2018/11/2018-SP-500-Int egrated-Reporting-FINAL-November-2018-1.pdf. 153 Sustainable Investment Institute/Investor Responsibility Research Center Institute, p. 32, https:// www.weinberg.udel.edu/IIRCiResearchDocuments/2018/11/2018-SP-500-Integrated-ReportingFINAL-November-2018-1.pdf. 154 KPMG, The road ahead. The KPMG Survey of Corporate Responsibility Reporting 2017, p. 3 et sqq., https://assets.kpmg/content/dam/kpmg/xx/pdf/2017/10/kpmg-survey-of-corporate-res ponsibility-reporting-2017.pdf (last accessed on 14 January 2020). 155 KPMG, The road ahead. The KPMG Survey of Corporate Responsibility Reporting 2017, p. 21, https://assets.kpmg/content/dam/kpmg/xx/pdf/2017/10/kpmg-survey-of-corporate-responsib ility-reporting-2017.pdf (last accessed on 14 January 2020).

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and shareholder interest in sustainability.156 This is another strong piece of evidence for the author’s hypothesis that corporate profits can no longer be maximized by strictly adhering to the Shareholder Primacy Model and ignoring stakeholder and CSR interests.

3.3.5 Mandatory Reporting of Material CSR Aspects in Financial Reports of US Companies? It should be emphasized that the SEC confirmed that certain sustainability and CSR information can be qualified as “material” in terms of the existing comprehensive disclosure requirements under the US federal securities laws:157 Both the Securities Act of 1933158 and the Securities Exchange Act of 1934159 require registered companies to disclose, in addition to the information required by SEC regulation, “such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.” The SEC expressly considers non-financial information regarding climate change matters as potential further material information which has to be disclosed in order not to mislead existing and potential investors pursuant to the US federal securities laws.160 The US Supreme Court held that information may be qualified as material if there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”161 The omitted facts could be material sustainability or CSR information. It is uncertain if US courts in the future will deem a socially responsible investor as a reasonable investor,162 but if the sustainability and CSR information may have a material impact on the company’s finances, such information will certainly alter the total mix of information made available, and it is evidently in 156 KPMG,

The road ahead. The KPMG Survey of Corporate Responsibility Reporting 2017, p. 23, https://assets.kpmg/content/dam/kpmg/xx/pdf/2017/10/kpmg-survey-of-corporate-responsib ility-reporting-2017.pdf (last accessed on 14 January 2020). 157 See SEC Commission Guidance Regarding Disclosure Related to Climate Change, 17 CFR Parts 211, 231 and 241 (release nos. 33-9106; 34-61469; FR-82) p. 12, https://www.sec.gov/rules/interp/ 2010/33-9106.pdf (last accessed on 14 January 2020); SASB, Legal Roundtable on Emerging Issues Related to Sustainable Disclosure (November 2017) p. 11, https://www.sasb.org/wp-content/upl oads/2019/08/LegalRoundtable-Paper-11132017.pdf (last accessed on 14 January 2020). 158 17 CFR 230.408. 159 17 CFR 240.12b-20. 160 SEC Commission Guidance Regarding Disclosure Related to Climate Change, 17 CFR Parts 211, 231 and 241 (release nos. 33-9106; 34-61469; FR-82) p. 12. 161 TSC Industries v. Northway, Inc., 426 U.S. 438, 449 (1976), https://supreme.justia.com/cases/ federal/us/426/438/ (last accessed on 14 January 2020). 162 SASB, Legal Roundtable, p. 3, https://www.sasb.org/wp-content/uploads/2019/08/LegalRoundta ble-Paper-11132017.pdf.

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the interest of a reasonable investor that such non-financial information gets disclosed in the company’s financial reports. It was already shown in Sect. 3.3.1. that CSR policies may have a positive impact on the financial performance of companies. As a consequence, CSR information may be material to a certain extent and can influence investment decisions of existing or potential shareholders. Hence, the inclusion of certain CSR information in the company’s annual financial reports may also be relevant to investors who are solely economically motivated. Furthermore, a duty to disclose sustainability and CSR information may also arise from Item 3 of Regulation S-K163 which requires a disclosure known as the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).164 Unfortunately, most sustainability and CSR disclosures in the companies’ periodic financial reports contain a boilerplate language and are largely useless to investors and stakeholders. It is rather rare that companies disclose comparable sustainability performance metrics which are useful for an investment analysis. Moreover, critics complain that SEC enforcement regarding material sustainability and CSR disclosure is lacking.165 The fact that the disclosure of certain sustainability and CSR information might be relevant in terms of the disclosure requirements under the US federal securities laws is important for whistleblowers as well. The SEC’s whistleblower program is administered by the Office of the Whistleblower.166 Pursuant to 17 CFR § 240.21F-2 (a) (1), [y]ou are a whistleblower if, alone or jointly with others, you provide the Commission [SEC] with information pursuant to the procedures set forth in § 240.21F-9(a) of this chapter, and the information relates to a possible violation of the Federal securities laws [emphasis added] (including any rules or regulations thereunder) that has occurred, is ongoing, or is about to occur. A whistleblower must be an individual. A company or another entity is not eligible to be a whistleblower.

Section 922 of the Dodd-Frank Act added Sect. 21F in the Securities Exchange Act of 1934,167 titled “Securities Whistleblower Incentives and Protection.” Pursuant

163 17

CFR 229.303. State of disclosure 2017. An analysis of the effectiveness of sustainability disclosure in SEC filings (December 2017) p. 5, https://www.sasb.org/wp-content/uploads/2017/12/2017Stateof-Disclosure-Report-web.pdf (last accessed on 14 January 2020); SEC Commission Guidance Regarding Disclosure Related to Climate Change, 17 CFR Parts 211, 231 and 241 (release nos. 33-9106; 34-61469; FR-82) p. 15. 165 SASB, State of disclosure 2017, p. 2 et sqq., https://www.sasb.org/wp-content/uploads/2017/12/ 2017State-of-Disclosure-Report-web.pdf. 166 The homepage of the Office of the Whistleblower can be accessed at https://www.sec.gov/whi stleblower (last accessed on 11 May 2020). 167 15 U.S.C. §78u-6(h)(1). 164 SASB,

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to this provision, whistleblowers may receive monetary incentives for their whistleblower activities.168 In concreto, the SEC is authorized to provide monetary awards to eligible whistleblowers if the information provided leads to monetary sanctions exceeding USD 1 million. The monetary awards may range between 10 and 30% of the collected monetary sanctions and depend on the significance of the information provided, the degree of assistance provided by the whistleblower, the SEC’s programmatic interest in deterring violations of the securities laws and additional relevant factors established by the SEC. Needless to say, prior to the payment of an award, a whistleblower must disclose his identity. No employer may discharge, demote, suspend, threaten, harass, directly or indirectly or in any other manner discriminate against a whistleblower. If an employer retaliates against a whistleblower, he may bring an action in the appropriate US district court for relief which includes reinstatement with the same seniority status, two times the amount of back pay otherwise owed to the individual, with interest, and compensation for litigation costs, expert witness fees and reasonable attorneys’ fees. Under the SEC’s interpretation,169 “an individual who reports internally and suffers employment retaliation will be no less protected than an individual who comes immediately to the Commission. Providing equivalent employment retaliation protection for both situations removes a potentially serious disincentive to internal reporting by employees in appropriate circumstances.” However, the US Supreme Court held that employees are only protected by Sect. 922 of the Dodd-Frank Act if they report a suspected securities violation to the SEC.170 In addition, Sect. 806 of the SOX171 protects employees of stock exchange-listed companies from retaliations related to whistleblower activities. Employees may file a complaint with the Secretary of Labour claiming compensatory damages, including reinstatement with the same seniority status, the amount of back pay (with interest) and compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees and reasonable attorney fees.

168 Monetary

incentives for whistleblowing activities are also supported by European-based commentators such as Teichmann/Falker, Ausgewählte Compliance-Risiken bei Anreizsystemen aus der Perspektive des Aufsichtsrats, Aufsichtsrat aktuell 1/2020, p. 18 (p. 21). 169 17 CFR Part 241 [Release No. 34-75592], Interpretation of the SEC’s Whistleblower Rules under Section 21F of the Securities Exchange Act of 1934, p. 8, https://www.sec.gov/rules/interp/2015/ 34-75592.pdf (last accessed on 11 May 2020). 170 “In sum, Dodd-Frank’s text and purpose leave no doubt that the term “whistleblower” in §78u– 6(h) carries the meaning set forth in the section’s definitional provision. The disposition of this case is therefore evident: Somers did not provide information “to the Commission” before his termination, §78u–6(a)(6), so he did not qualify as a “whistleblower” at the time of the alleged retaliation. He is therefore ineligible to seek relief under §78u–6(h).” See Digital Realty Trust, Inc. v. Somers, 583 U.S.___(2018), https://www.supremecourt.gov/opinions/17pdf/16-1276_b0nd.pdf (last accessed on 17 May 2020). 171 18 U.S.C. §1514A.

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3.3.6 The Requirement for an Independent CSR and Ethics Committee, Minimum CSR Reporting Standards and Mandatory External Evaluations of CSR Reports US stock exchange-listed companies must have a minimum of three key board committees to oversee the board responsibilities of audit and financial reporting, executive compensation and director nominations:172 (i) Nominating/Corporate Governance Committee173 (ii) Compensation Committee174 (iii) Audit Committee175 In the USA there has been a trend to voluntarily establish additional committees with different functions. In 2016, around 75% of S&P companies had at least one additional board committee (compared to 61% in 2013). Most of the additional committees deal with executive (37%), finance (31%), compliance (12%) and risk (11%) matters. For this monograph, it is relevant that 7% of the S&P companies have their own CSR committees comprised of independent board members.176 Companies which do not have their own CSR committee frequently handle CSR/ethics oversight in other board committees, such as the audit committee, the nominating/corporate governance committee or the compliance committee. For example, Walmart’s nominating and governance committee, which met five times in 2019, has been assigned with the task of reviewing Walmart’s CSR initiatives and consequently receives reports from Walmart’s chief sustainability officer.177 One more piece of evidence supporting a positive impact of CSR on a company’s business figures is the fact that some companies use CSR reporting for the purpose of greenwashing and window-dressing: Such companies deceptively promote the perception that their policies successfully implement CSR and are in particular environmentally friendly. Unfortunately, as mentioned above in Sect. 3.2.3.3, it is a frequent practice, too, that multinationals do not demand the same high CSR standards from their suppliers, transporters, warehousers, retailers or customers. Instead, 172 EY

Center for Board Members, Board Committees Evolve to Address New Challenges (1 February 2017), https://corpgov.law.harvard.edu/2017/02/01/board-committees-evolve-to-addressnew-challenges/ (last accessed on 16 January 2020). 173 Sect.ion 303A.04 of the NYSE Listed Company Manual; Rule IM-5605-6 of the Nasdaq Stock Market Rules. 174 Section 303A.05 of the NYSE Listed Company Manual; Rule IM-5605-5 of the Nasdaq Stock Market Rules. 175 Section 303A.06 of the NYSE Listed Company Manual; Rule IM-5605-4 of the Nasdaq Stock Market Rules. 176 EY Center for Board Members, https://corpgov.law.harvard.edu/2017/02/01/board-committeesevolve-to-address-new-challenges/. 177 Walmart 2019 Environmental, Social & Governance Report, p. 70, https://corporate.walmart. com/media-library/document/2019-environmental-social-governance-report/_proxyDocument? id=0000016a-9485-d766-abfb-fd8d84300000 (last accessed on 16 January 2020).

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they put a lot of economic pressure on their business partners which forces them to ignore CSR aspects. Passing the responsibility to companies down the supply chain must be qualified as greenwashing as well.178 Taking into account that (i) most of the CSR reports lack external assurance,179 and (ii) greenwashing/window-dressing is still a major issue, it is crucial, as justifiably demanded by Neuhold,180 that corporate ethics and CSR policies are made verifiable and get evaluated on a regular basis. In Sect. 3.2.4, the author suggested the installation of an Ethics and CSR Committee (thus combining ethics and CSR matters) which is solely comprised of independent (both from management and controlling shareholders) members. Nowadays, corporate ethics, sustainability and CSR have reached a significance which justifies the installation of such an Ethics and CSR Committee. As these matters also have an impact on a company’s financials, they can and should no longer be taken lightly. Consequently, these matters should ideally not be handled by other independent board committees, such as the audit or nominating/corporate governance committee because this inevitably leads to an overload for these committees. Overseeing a company’s ethics and CSR policy, receiving reports from the company’s ethics officers, and receiving and handling complaints for violations of this policy will keep the Ethics and CSR Committee certainly busy enough if the task is taken seriously. In particular, assessing the materiality of CSR aspects for the company’s financial reporting is a major task to accomplish. Furthermore, such committee should at least meet every two months or more times, if necessary (in particular in the event of complaints). Ideally, the installation of an Ethics and CSR Committee will be prescribed by law or the various stock exchange rules. In order to make CSR information verifiable, it is necessary that companies shall not be allowed to use boilerplate language. Instead, legislators or stock exchange rules have to force companies to disclose comparable sustainability performance metrics which can be (i) assessed by the Ethics and CSR Committee and the company’s stakeholders and (ii) used by investors for an in-depth investment analysis. As the percentages of externally verified CSR reports (by auditors) are shockingly low, it is also recommended by the author that external verifications (ideally conducted by a government agency) of CSR reports are either mandated by law or by the stock exchange listing requirements. To clarify, no company shall be forced to accept an ethics or CSR policy with a certain content, but if a company decides to have an ethics and CSR program, certain laws or rules by stock exchanges are required to guarantee its implementation in order to avoid boilerplate language, greenwashing, window-dressing and thus the deception of (i) existing and potential shareholders and (ii) both internal and external stakeholders. 178 Lewis,

Corporate Social Responsibility/Sustainability Reporting Among Fortune Global 250: Greenwashing or Green Supply Chain? https://digitalcommons.salve.edu/cgi/viewcontent.cgi?art icle=1056&context=fac_staff_pub. 179 See Sect. 3.3.3. 180 Neuhold in Neuhold/Pelzl, Ethik in Forschung und Technik, p. 72.

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In order to assess whether CSR reporting is made in a sufficient manner, it needs to be classified into three areas: vision and goals, management approach and performance indicators. According to Lewis181 [r]eporting on vision and goals includes information on disclosures related to values, aims and future plans. In general, this information could be classified as general rhetoric or greenwashing. The MNC makes various claims about their commitment to only doing business with sustainable suppliers. MNCs that provide information on management approach are going a step further by describing specific actions or processes. This could include certifications required of suppliers and codes of conduct that suppliers must follow. Performance indicators are actual quantitative measures of supplier environmental impacts. This would include statements of greenhouse gas emissions, environmental accidents, water and energy use, and amount of waste generated.

181 See Lewis, Corporate Social Responsibility/Sustainability Reporting Among Fortune Global 250:

Greenwashing or Green Supply Chain? https://digitalcommons.salve.edu/cgi/viewcontent.cgi?art icle=1056&context=fac_staff_pub.

Chapter 4

Codes of Ethics and CSR in Austria

4.1 Shareholder or Stakeholder Value in Austria? 4.1.1 Section 70 of the Austrian Stock Corporation Act Pursuant to Sect. 70 (1) of the Austrian Stock Corporation Act (Aktiengesetz, “AktG”),1 it shall be the responsibility of the management board (Vorstand) to manage the company in the best interest of the company considering the interests of the shareholders and the employees as well as the interests of the public. It is noticeable that the management board of an Austrian stock corporation has to manage the company in the best interest of the company. This is a major difference to the understanding in the USA according to which a company shall be managed in the best interest of the shareholders. In Austria, the interests of the shareholders, employees and the public are hierarchically on the same level below the interests of the company. Being ranked below the interests of the company means that the interests of the shareholders, employees and the public only have to be considered when making business decisions.2 The management board’s responsibility to act in the bests interest of the company aims at the company’s continued viability, existence and welfare. Moreover, the management board of an Austrian stock corporation has to increase the company’s profits by taking into account its sustainable further development, i.e. measures have to be taken to ensure the long-term profitability of the company or at least the preservation of the capital. Such approach makes sure that the interests of the other stakeholders (including the shareholders) are always satisfied in the long term. As a

1 Section 70 of the AktG: “Der Vorstand hat unter eigener Verantwortung die Gesellschaft so zu leiten, wie das Wohl des Unternehmens unter Berücksichtigung der Interessen der Aktionäre und der Arbeitnehmer sowie des öffentlichen Interesses es erfordert.” 2 Nowotny in Doralt/Nowotny/Kalss, AktG2 § 70 (April 2012, rdb.at) para. 15.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 A. Peter, CSR and Codes of Business Ethics in the USA, Austria (EU) and China and their Enforcement in International Supply Chain Arbitrations, https://doi.org/10.1007/978-981-33-6073-0_4

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result of Sect. 70 of the AktG, the management board acts within its discretionary powers as long as the company’s long-term viability is guaranteed.3 What impact does the management board’s responsibility pursuant to Sect. 70 of the AktG have on ethics and CSR policies in Austrian stock corporations? As Sect. 70 of the AktG does not demand a strict profit maximization but instead is focused on the company’s long-term viability and existence, the implementation of ethics and CSR policies is even possible if these policies lead to less profitability and productivity and higher costs by (i) favouring local over foreign production, (ii) exceeding the lower standards found in certain foreign countries with respect to wages and employees’ health and safety, (iii) promoting environmental protection beyond minimum statutory requirements, or (iv) overseeing ethical and CSR standards along the supply chain. To be clear, ethics and CSR measures which may endanger the company’s long-term viability and existence—hence, being clearly disadvantageous for the company—are, of course, (i) against the best interests of the company and consequently (ii) not even permitted by promoting the interests of the public pursuant to Sect. 70 (1) of the AktG.4

4.1.2 The Business Judgment Rule The liability and duty of care of management board members of a stock corporation is regulated by Sect. 84 of the AktG. Pursuant to Sect. 84 (1) of the AktG,5 the members of the management board shall perform their duties in the management of the company with the diligence of prudent and conscientious managers. In addition, Austria introduced the business judgment rule in 2015 as part of the Criminal Law Amendment Act (Strafrechtsänderungsgesetz, “StRÄG”) in order to create a safe harbour rule for business decisions which fulfil certain requirements:6 With regard to business decisions, Sect. 84 (1a) of the AktG7 sets forth that in order to perform their duties with the diligence of prudent and conscientious managers, management board members shall not be guided by inappropriate or undue interests (sachfremde Interessen) and may only assume on the basis of adequate information that their business decisions are in the best interest of the company. 3 Nowotny

in Doralt/Nowotny/Kalss, AktG2 § 70, para. 11. in Artmann/Karollus, AktG II6 § 70 (1 October 2018, rdb.at) para. 105; Nowotny in Doralt/Nowotny/Kalss, AktG2 § 70 (April 2012, rdb.at) para. 14. 5 Section 84 (1) of the AktG: “Die Vorstandsmitglieder haben bei ihrer Geschäftsführung die Sorgfalt eines ordentlichen und gewissenhaften Geschäftsleiters anzuwenden.” 6 BGBl I 2015/112. 7 Section 84 (1a) of the AktG: “Ein Vorstandsmitglied handelt jedenfalls im Einklang mit der Sorgfalt eines ordentlichen und gewissenhaften Geschäftsleiters, wenn er sich bei einer unternehmerischen Entscheidung nicht von sachfremden Interessen leiten lässt und auf der Grundlage angemessener Information annehmen darf, zum Wohle der Gesellschaft zu handeln.” 4 Reich-Rohrwig

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For the purpose of this monograph, it is mostly relevant that management board members shall not be guided by inappropriate or undue interests, i.e. interests that are not covered by Sect. 70 (1) of the AktG.8 Regarding the business judgment rule, the Austrian Supreme Court9 held that a business decision must evidently (offenkundig) be in the interest of the company. With respect to CSR, this has the consequence that only those CSR measures are privileged by the business judgment rule which are, ex ante, evidently in favour of the company’s interest (“Die Entscheidung muss ex ante betrachtet offenkundig dem Wohl der juristischen Person dienen.”). Those business decisions on CSR measures, which are not expected, ex ante, to have such a clear positive impact on the company, will not be privileged by the business judgment rule but may still be in compliance with the duty of care pursuant to Sect. 84 (1) of the AktG.10 In summary, ethics or CSR measures, which, ex ante, may have a positive impact on the company’s finances, are covered by the Austrian business judgement rule. As described in Sect. 3.3.1, a positive impact of CSR policies on the financial performance of companies is shown by an increasing number of empirical studies. Hence, in the author’s opinion, most of the business decisions regarding CSR will be in compliance with the business judgment rule.

4.1.3 Compensation of Members of the Management Board Pursuant to the newly adopted Sect. 78a of the AktG, the remuneration policy of a listed company must be supportive of the business strategy and the long-term development of the company and explain how it does so. The relevant criteria for the variable remuneration components must be clearly and exhaustively defined in the remuneration policy, and the financial and non-financial performance criteria (including possibly social and environmental aspects)11 have to be explained. Furthermore, the policy must explain how the criteria are supportive of the long-term development of the company and which methods are used to determine whether the criteria have been met. In the author’s view, making the variable remuneration criteria dependent on non-financial performance criteria, too, is commendable. If management members are provided with financial incentives, it can be expected that they will take CSR matters seriously. In practice, the variable remuneration components could be made dependent on the fulfilment of environmentally-related percentage objectives in relation to the reduction of greenhouse gas emissions, etc. C-Rule 27 8 Reich-Rohrwig/Grossmayer/Grossmayer/Zimmermann

in Artmann/Karollus, AktG II6 § 84, para. 194. 9 Austrian Supreme Court (OGH) 23 February 2016, 6 Ob 160/15w. 10 Reich-Rohrwig/Grossmayer/Grossmayer/Zimmermann in Artmann/Karollus, AktG II6 § 84, para. 204. 11 Bydlinski/Potyka in Artmann/Karollus, AktG6 , Ergänzungsheft § 78a AktRÄG 2019 (1 September 2019, rdb.at); Gregory/Deutsch, Praktische Überlegungen zur Erstellung der Vergütungspolitik für den Vorstand und für den Aufsichtsrat, GesRZ 1/2020, p. 26 (p. 32).

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of the Austrian Code of Corporate Governance prescribes that the remuneration of the management board members has to consist of fixed and variable components. The variable part of the remuneration should be linked to sustainable and long-term criteria.

4.2 The Austrian Code of Corporate Governance In contrast to the USA, Austria does not have mandatory statutory requirements with regard to corporate codes of ethics/conduct. Instead, in 2002, the Austrian Code of Corporate Governance (“ACCG”) was introduced in Austria by the Austrian Working Group of Corporate Governance. The ACCG offers Austrian stock corporations a framework for the management and control of enterprises.12 The ACCG is mainly directed at Austrian exchange-listed stock corporations, but it is expressly recommended to non-exchange-listed companies as well. The ACCG is a self-regulatory standard and consists of three different categories of rules: The L-Rules refer to mandatory legal requirements. Mostly significant are the C-Rules which are based on the principle “comply-or-explain”: a company which declares its commitment to the ACCG has to follow the C-Rules. In order to comply with the ACCG, the reasons for any deviation from those C-Rules must be stated and explained. The R-Rules are a set of recommendations. Companies do not need to disclose or explain non-compliance with the R-Rules.13 In principle, a declaration of commitment to the ACCG is voluntary for Austrian stock corporations, but it is important to note that such declaration of commitment is mandatory for those stock corporations which are or wish to be admitted to the Prime Market of the Vienna Stock Exchange:14 A requirement for the admission of stocks to the prime market is a declaration of commitment to comply with the rules of the Austrian Code of Corporate Governance. The Issuer shall disclose the declaration of commitment to comply with the Austrian Code of Corporate Governance including the explanations on any deviations on its website […]15

The Prime Market is a market segment of the Vienna Stock Exchange which contains the most liquid stocks. Around twenty of these stocks constitute the Austrian Traded Index (“ATX”) which is the leading index of the Vienna Stock Exchange. Currently, there are 38 companies listed on the Prime Market. Companies listed on the Prime Market have to comply with admission criteria that go beyond the legal 12 Austrian Code of Corporate Governance (January 2021), Preamble, p. 9, https://www.corporategovernance.at/uploads/u/corpgov/files/code/corporate-governance-code-012021.pdf (last accessed on 11 February 2021). 13 Austrian Code of Corporate Governance, Preamble; Notes to the Code, p. 9 et sqq. 14 Austrian Code of Corporate Governance, Preamble, p. 10. 15 Rules Prime Market, Wiener Börse AG (20 February 2019), Admission Criteria, p. 8, https:// www.wienerborse.at/uploads/u/cms/files/issuers/shares/rules-prime-market.pdf (last accessed on 21 January 2020).

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admission criteria for the Official Market of the Vienna Stock Exchange: Prime Market-listed companies have to meet higher transparency, quality and disclosure requirements.16 The ACCG contains rules on the (i) (ii) (iii) (iv) (v)

shareholders and the general meeting (II.); cooperation between the supervisory board and the management board (III.); management board (IV.); supervisory board (V.); and transparency and auditing (VI.).

As shown above in Sect. 4.1, Austrian law expressly makes reference to stakeholder interests. Hence, it is no surprise that the ACCG puts even more emphasis on sustainability and stakeholder interests by expressly stating in its preamble that the ACCG aims to establish a system of management and control of companies that is geared to creating sustainable, long-term value. Moreover, the ACCG is designed to increase transparency for all stakeholders.17 The ACCG contains detailed guidelines for explanations and reasons for departures from the ACCG under Annex 2b: The company shall give information from which C-Rules of the Code it deviates and for each deviation (a) explain how it deviates; (b) present the reasons for the deviation; (c) describe how the decision on a deviation was reached within the company; (d) if the deviation is limited in time, explain when the company plans to comply with the rule concerned; (e) if applicable, describe the measures taken instead of compliance with the rule and explain how this will contribute to the achievement of the underlying objective of the rule concerned or of the Code in general or clarify how these measures contribute to good corporate governance.

It is remarkable that the ACCG expressly mentions that these detailed guidelines should enable—next to shareholders and investors—stakeholders to assess the consequences of any departure from a C-Rule of the ACCG. Furthermore, the explanations and reasons for departure have to be disclosed in the corporate governance report18 and have to be presented in a manner so that this information is easy to find for shareholders, investors and other stakeholders.19 16 Rules

Prime Market, Wiener Börse AG, General, p. 4; Österreichisches Gesellschafts- und Wirtschaftsmuseum, The Austrian Capital Market (2013) p. 9, https://www.wirtschaftsmuseum. at/media/publikationen/wanderausstellungen/WBAG_2013_englisch_Web.pdf (last accessed on 21 January 2020). 17 Austrian Code of Corporate Governance, Preamble, p. 9. 18 Section 243c of the Austrian Business Code (Unternehmensgesetzbuch, “UGB”). 19 Austrian Code of Corporate Governance, Annex 2b, p. 59 et sq.

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The ACCG also contains a set of independence criteria for members of the supervisory board of an Austrian stock corporation. C-Rule 53 stipulates that a supervisory board member is deemed independent if “said member does not have any business or personal relations to the company or its management board that constitute a material conflict of interests and therefore suited to influence the behaviour of the member.” C-Rule 53 clearly aims at independence from the management of an Austrian stock corporation. Annex 1 of the ACCG includes more detailed guidelines for independence which also mainly focus on independence from management and business relations with the company or its subsidiaries. As mentioned above in Sect. 3.2.4, independence from controlling shareholders can be crucial for stakeholders as well. This is acknowledged by C-Rule 54: if the free float (high degree of ownership dispersion, Streubesitz)20 in companies is more than 20%, at least one independent (fulfilling the requirements of C-Rule 53) supervisory board member shall not be “a shareholder with a stake of more than 10% or who represents such a shareholder’s interests.” If the free float amounts to more than 50%, at least two independent supervisory members must also be independent from the controlling shareholders (stake of more than 10%). The corporate governance report pursuant to Sect. 243c of the UGB must indicate which supervisory board members meet these particular independence criteria. In companies with a high level of free float it is absolutely necessary in the interest of the shareholders (and other stakeholders) to have members either in the board of directors (in one-tier systems like in the USA)21 or in the supervisory board (in two-tier systems like in Austria)22 who are independent from the “inside” directors (in one-tier systems, inside directors are simultaneously members of the board of directors and executive officers of the company, i.e. members of the management of the company) or the management board (in two-tier systems). A high level of free float means a high number of non-controlling shareholders with rather small stakes.

20 The free float “refers to the number of a company’s outstanding shares owned by public investors, excluding locked-in shares held by company managers and officers, controlling-interest investors, governments and other private parties.” See Free float, https://capital.com/free-float-definition (last accessed on 21 January 2020). 21 One-tier structures (board of a directors composed of executive and non-executive directors) are usually characterized by a market-based finance model and a high degree of ownership dispersion. See Ernst & Young, A view on the current and future role of audit committees— impact for Germany, Switzerland and Austria. European Corporate Governance 2019 analysis, p. 11, https://www.ey.com/Publication/vwLUAssets/ey-european-corporate-governance-2019-ana lysis/$FILE/ey-european-corporate-governance-2019-analysis.pdf (last accessed on 24 January 2020). 22 Two-tier structures (management board and supervisory board) are usually characterized by bank-based finance and a high degree of ownership concentration (controlling shareholders). See Ernst & Young, A view on the current and future role of audit committees— impact for Germany, Switzerland and Austria. European Corporate Governance 2019 analysis, p. 11, https://www.ey.com/Publication/vwLUAssets/ey-european-corporate-governance-2019-ana lysis/$FILE/ey-european-corporate-governance-2019-analysis.pdf.

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In contrast to controlling shareholders, shareholders who are part of the free float are incapable of effectively controlling and influencing the company’s management.23 Companies with a small free float are controlled by one or a small number of shareholders. These controlling shareholders may, for example, dispatch their own delegates to the supervisory board (delegated members pursuant to Sect. 88 (1) of the AktG), arrange informal meetings with management members or threaten management members with the selling of their shares if management does not act in the company’s, controlling shareholders’ or other stakeholders’ interest.24 It is only logical that C-Rule 53 requires the majority of the supervisory board to be independent from the company and its management board, as this requirement is essential for companies with a high level of free float, and at the same time does not limit the rights of controlling shareholders as described in the previous paragraph in companies with a small free float. In this context, it should also be mentioned that the supervisory board members may still be affiliated with the controlling shareholders, as C-Rule 53 does not suggest independence from the controlling shareholders. By any means, a supervisory board comprised of a majority of members who are independent from the company and its management board is positive for minority shareholders and the company’s various internal and external stakeholders, as these groups do not possess the same controlling power of controlling shareholders. It is only logical as well that C-Rule 54 does not provide for a majority of supervisory board members who are independent from the controlling shareholders, as such a requirement would undermine the controlling shareholders’ influence on the company’s oversight. C-Rule 39 determines that the supervisory board shall set up expert committees comprised of supervisory board members to deal with complex issues and improve the efficiency of the supervisory board’s work. In the author’s opinion, it would be ideal to set up an Ethics and CSR Committee comprised of an ethics and CSR expert and supervisory board members who are independent from the management board, the company and the controlling shareholders. As mentioned in Sect. 3.2.4, independence from controlling shareholders can be in the interest of both internal and external stakeholders. The interests of controlling shareholders and stakeholders might differ drastically in certain scenarios, such as ethics and CSR matters. Taking into account both the positive effects of a controlling shareholder’s oversight over the company’s management and a possible collision of interests between controlling shareholders and stakeholders, it is the author’s view to have a supervisory board as suggested by Rules 53 and 54 but at the same time to install an Ethics and CSR Committee comprised of fully independent (also from the controlling shareholders) members. The most popular expert committees of Austrian stock corporations are the (i) audit committee; (ii) compensation committee; 23 Peter, 24 Peter,

Die Verwaltungsstruktur der Aktiengesellschaft, p. 164 et sqq. Die Verwaltungsstruktur der Aktiengesellschaft, p. 164 et sqq.

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nomination committee; strategy committee; risk committee; and presidential committee.25

Unfortunately, ethics and CSR committees are not yet installed on a regular basis. C-Rule 62 provides that the compliance with the C-Rules shall be evaluated by an external institution at least every three years. The results of such external evaluation shall be disclosed in the corporate governance report pursuant to Sect. 243c of the UGB. In the author’s view, annual external evaluations by auditors (just like in the case of the companies’ financial statements), or ideally by a new CSR-focused governmental agency, should be the rule in the interest of potential investors, existing shareholders and both internal and external stakeholders. C-Rule 62 is one of the least favourite rules of Austrian stock corporations. A majority of the companies, which does not comply with C-Rule 62, explains noncompliance by stating that their internal control is sufficient or the costs for an external evaluation are simply too high.26 Considering that the ACCG is mainly directed at large stock exchange-listed companies, the additional costs for an annual external evaluation cannot be accepted as argument against such a requirement.

4.3 Mandatory Corporate Governance Reports Pursuant to Sect. 243c (1) of the AktG, stock exchange-listed companies must disclose a Corporate Governance Report (“CGR”). Companies shall refer to a corporate governance code that is generally recognized in Austria or on the respective stock exchange abroad. The ACCG is the generally recognized corporate governance code in Austria. As mentioned in Sect. 4.2, Prime Market-listed companies must declare their commitment to the ACCG. Other listed companies may choose to refer to other recognized corporate governance codes. Section 243c of the AktG only obliges companies to disclose a CGR and refer to a recognized corporate governance code but does not require companies to comply with the rules of a corporate governance code: By applying the comply-or-explain principle, companies may state reasons for not complying with selected rules or the entire corporate governance code. It is important to note that the CGR has to be prepared by the management board of a company and must be internally audited by the company’s audit committee (Prüfungsausschuss)27 which is comprised of members of the company’s supervisory board. As part of the extensive internal examination, the audit committee must verify 25 Aschauer/Rohatschek,

Corporate Governance Monitor 2019, p. 15, http://asa.jku.at/wp-content/ uploads/2019/07/Coroporate-Governance-Monitor_online.pdf (last accessed on 28 January 2020). 26 Aschauer/Rohatschek, Corporate Governance Monitor 2019, p. 52 et sqq., http://asa.jku.at/wpcontent/uploads/2019/07/Coroporate-Governance-Monitor_online.pdf. 27 Section 92 (4a) (4.) (f.) of the AktG.

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the information concerning compliance with the C-Rules and R-Rules and report to the company’s supervisory board.28 In general, an audit committee in Austrian companies is responsible for monitoring the accounting process and monitoring the efficacy of the internal control and risk management system, the independence and the activities of the auditor of the financial statements as well as for the approval of non-audit services.29 In the course of the annual company’s audit, external auditors do not have to state whether the CGR contains correct information. Instead, they only have to perform an existence check, i.e. whether the company’s obligation to prepare a CGR pursuant to Sect. 243c of the AktG has been fulfilled.30 It should be emphasized that intentionally (vorsätzlich) incorrect or incomplete information contained in the CGR report may result in criminal sanctions pursuant to Sect. 163a of the Austrian Criminal Code (Strafgesetzbuch, “StGB”).31 In the context of corporate governance reports, it is particularly of interest for this monograph whether companies comply with the ACCG’s C-Rules 39 (installation of expert committees), 53, 54 (independence criteria for members of the supervisory board and its expert committees) and 62 (external evaluation of the corporate governance report). That is why a closer look will be taken at the corporate governance reports of four of the largest Austrian stock corporations which declared their commitment to the ACCG:

4.3.1 OMV AG OMV AG (“OMV”), headquartered in Vienna, Austria, produces and markets oil and gas, innovative energy and high-end petrochemical solutions. With group sales of EUR 23 billion and a workforce of more than 20,000 employees in 2018, OMV is one of Austria’s largest listed industrial companies.32 OMV’s supervisory board consists of ten shareholder representatives elected by the general meeting and five members delegated by the group works council.33 It is striking that all but two shareholder representatives fulfil the independence criteria 28 Nowotny

in Straube/Ratka/Rauter, UGB II/RLG3 § 243c (1 February 2018, rdb.at) para. 14. 40 ACCG; Sect. 92 (4a) (4.) AktG. 30 Nowotny in Straube/Ratka/Rauter, UGB II/RLG3 § 243c, para. 13. 31 Nowotny in Straube/Ratka/Rauter, UGB II/RLG3 § 243c, para. 16; Rohregger in Höpfel/Ratz, WK2 StGB § 163a (1 December 2018, rdb.at) para. 59. 32 OMV AG, Our Business, https://www.omv.com/en/our-business (last accessed on 15 May 2020). 33 “The co-determination rights of employees’ representatives on the supervisory board form part of the statutory Austrian system of corporate governance in addition to the codetermination rights at the operational level in the form of works councils. The employees’ representatives are entitled to appoint to the supervisory board of a stock corporation one member from among their ranks for every two members appointed by the general meeting (but not external members from the trade union).” See L-Rule 59 of the ACCG. 29 L-Rule

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pursuant to C-Rule 53, i.e. that they are independent from the management board and the company. It is even more remarkable that seven (out of ten) members elected by the general meeting qualify as independent in terms of C-Rule 54, i.e. they are independent from the controlling shareholders (stake of more than 10%) and their affiliates. OMV installed several expert committees (presidential and nomination committee, audit committee, portfolio and project committee and remuneration committee) but does not have an ethics and/or CSR committee. The CGR is externally evaluated every two years. In 2018, the CGR was evaluated by the Viennese law firm Berger Ettel.34

4.3.2 STRABAG SE STRABAG SE (“STRABAG”) is a European-based technology group for construction services, seated in Vienna, Austria. STRABAG’s services span all areas of the construction industry and cover the entire construction value chain.35 STRABAG has a supervisory board composed of eleven members. Six members are shareholder representatives, and five members are delegated by the works council. In STRABAG, all members of the supervisory board are independent in terms of C-Rules 53 and 54 (not shareholders with a share of more than 10% or persons representing such shareholders’ interests). Although STRABAG has three expert committees (executive committee, presidential and nomination committee and audit committee), it does not have an ethics and/or CSR committee comprised of independent supervisory board members. STRABAG’s compliance with the ACCG is evaluated every three years (minimum requirement of C-Rule 62 of the ACCG). The last external evaluation took place for the financial year 2019 and was performed by the Viennese law firm Schindler in 2020.36

34 OMV Annual Report 2019/Consolidated Corporate Governance Report, p. 100 et sqq., https:// reports.omv.com/en/annual-report/2019/servicepages/downloads/files/entire_omv_ar19.pdf (last accessed on 16 May 2020). 35 STRABAG SE, On the Safe Side. Annual Report 2019, https://www.strabag.com/databases/int ernet/_public/files.nsf/SearchView/0372881BB65FB800C12585580054309F/$File/STRABAG% 20SE_Geschäftsbericht%202019_E_Website.pdf?OpenElement (last accessed on 14 May 2020). 36 STRABAG Consolidated Corporate Governance Report 2019, p. 6 et sqq., https://www.str abag.com/databases/internet/_public/files.nsf/SearchView/BE5E6B7CEAF423F7C1258559001 E3F2D/$File/STRABAG_SE_Konsolidierter%20Corporate%20Governance-Bericht%202019_ E_mit%20Unterschriften.pdf (last accessed on 16 May 2020).

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4.3.3 voestalpine AG voestalpine Group (“voestalpine”), headquartered in Linz, Austria, is a leading steel and technology group. It focuses on product and system solutions based on steel and other metals of the highest quality in technology-intensive industries and niches.37 voestalpine’s supervisory board consists of eight shareholder representatives and five members delegated by the works council. It is exceptional that all supervisory board members (elected by the annual general meeting) meet the independence criteria pursuant to C-Rule 53 of the ACCG, and all but two shareholder representatives are independent from the controlling shareholders (stake of more than 10%) in terms of C-Rule 54 of the ACCG. voestalpine has two expert committees: an audit committee and a general committee which functions as both the nomination and compensation committee. Like OMV AG and STRABAG, voestalpine does not have an ethics and/or CSR committee comprised of independent members of the supervisory board. Remarkably, voestalpine’s compliance with the ACCG was externally evaluated by both a law firm and an auditor: In order to avoid any conflicts of interest, the law firm had to evaluate the compliance with the C-Rules regarding the audit (C-Rules 77–83).38

4.3.4 Erste Group Bank AG Erste Group Bank AG (“Erste Group”) was founded in 1819 as the first Austrian savings bank. It became a publicly-listed company in 1997, with a strategy to expand its retail business into Central and Eastern Europe. Today, Erste Group is one of the largest financial services providers in the eastern part of the EU, in terms of clients and total assets.39 Erste Group’s supervisory board is composed of 12 shareholder representatives and six employees’ council delegates. Erste Group confirmed that all but two shareholder representatives fulfil the C-Rule 53 independence criteria, and all but two of those individuals are also considered as independent from the controlling shareholders (stake of more than 10%) pursuant to C-Rule 54. In 2019, Erste Group had six expert committees composed of members of the supervisory board: the risk committee, the executive committee, the audit committee, the nomination committee, the IT committee and the remuneration committee. Once again, there is no ethics and/or CSR committee (composed of members of the supervisory board). Erste Group 37 voestalpine, Overview, https://www.voestalpine.com/group/en/group/overview/ (last accessed on

15 May 2020). Consolidated Corporate Governance Report 2018/2019, https://www.voestalpine. com/group/static/sites/group/.downloads/en/share/agm/agm2019/2019-agm-consolidated-corpor ate-governance-report.pdf (last accessed on 16 May 2020). 39 Erste Group Ethical and Environmental Code of Conduct for Suppliers of Goods and Services, p. 2, https://www.erstegroup.com/en/about-us/sustainability (last accessed on 15 May 2020). 38 voestalpine

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conducts an external evaluation of its compliance with the ACCG every three years (most recently for the 2017 fiscal year). It is not mentioned if the external evaluation is carried out by a law firm or an auditing firm.40

4.4 Corporate Codes of Ethics or Conduct Unlike Austrian law, German law obliges companies to provide in their corporate governance reports details about corporate governance practices which go beyond mandatory statutory provisions. Consequently, German companies must include information about voluntary corporate codes of ethics/conduct in the corporate governance reports.41 In contrast to US law, corporate codes of ethics or conduct are not regulated by law in Austria. Nevertheless, the preparation of corporate codes of conduct or business ethics is common in Austria’s corporate landscape. Most of the large Austrian stock corporations prepare such codes on a voluntary basis. According to a study by PwC Austria in which 58 of the top Austrian enterprises with a yearly turnover of at least EUR 50 million participated in 2013, 58% of the participants had a code of conduct.42 It is no surprise that the central motivation for companies to introduce corporate codes of conduct or business ethics is to gain a competitive advantage.43 According to Neuhold,44 codes of ethics mainly serve marketing purposes and thus are supposed to pursue corporate success. Hence, corporate ethics are used as a tool for long-term profit maximization. Due to the lack of a legal basis in Austria, the contents of corporate codes of conduct or ethics are inhomogeneous, but it is notable that the drafting, the further development and the implementation of the corporate code of conduct/ethics is predominantly carried out by a company’s compliance department.45 As seen above in Sect. 3.2.4, in the USA audit committees play a significant role in the oversight and the implementation of corporate ethics policies. In comparison, Austrian companies rather use their audit committees for traditional tasks such as

40 Erste Group Bank AG (Consolidated) Corporate Governance Report 2019, p. 84 et sqq., https:// www.erstegroup.com/en/about-us/corporate-governance (last accessed on 16 May 2020). 41 Nowotny in Straube/Ratka/Rauter, UGB II/RLG3 § 243c, para. 27. 42 PwC, Compliance-Kompass. Unternehmen bleiben weiter auf Kurs (October 2013) p. 9 et sqq., http://files.pwc.at/publications/branchen-und-wirtschaftsstudien/compliance-kompass.pdf (last accessed on 24 January 2020). 43 Gewerkschaft der Privatangestellten, Verhaltenskodizes (September 2003) p. 14, https:// www.nesove.at/wp-content/uploads/2018/05/soz-audit-teil-4-Verhaltenskodizes.pdf (last accessed on 24 January 2020). 44 Neuhold in Neuhold/Pelzl, Ethik in Forschung und Technik, p. 51 et sqq. 45 Alvarez & Marsal/Schneider | Minar | Jenewein Consulting, Compliance Report Österreich (2013) p. 9 et sqq., https://www.smj.at/wp-content/uploads/2015/07/compliance_studie.pdf (last accessed on 24 January 2020).

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the monitoring of financial accounts, the oversight of the external audit process and the review of the company’s internal controls and risk management.46 This monograph will introduce and analyse the codes of conduct/ethics of four of the largest Austrian stock corporations. The analysis will in particular concentrate on (i) the implementation and enforcement of the codes in order to avoid greenwashing and window-dressing, (ii) stakeholder interests, (iii) the involvement of the supply chain and (iv) the possible installation of an independent ethics and CSR committee.

4.4.1 OMV AG According to OMV’s sustainability report 2019, “[t]he regulatory instruments at OMV that establish ethics principles and standards and guide our approach to ethical conduct are our Code of Business Ethics, an internal policy applicable to OMV employees, and our Code of Conduct, an external policy governing the work with our business partners and stakeholders.”47 OMV’s Code of Conduct recognizes that “business success can only be achieved and maintained over the long term by acting responsibly and sustainably. Specifically, we take into account safety, health, security, the environment, employees’ and consumers’ interests, as well as the conditions of the people living in our areas of activity.”48 This is remarkable, as OMV seems to acknowledge the author’s first hypothesis pursuant to which the implementation of corporate codes of ethics/conduct and CSR policies are essential elements for a long-term profit maximization. The centre of OMV’s activities is directed at society, the environment and OMV’s stakeholders. OMV focuses on the following five areas: (i) (ii) (iii) (iv) (v)

Health, safety, security and environment; carbon efficiency; innovation; employees; and business principles and social responsibility.49

46 Ernst & Young, A view on the current and future role of audit committees—impact for Germany, Switzerland and Austria. European Corporate Governance 2019 analysis, p. 12 et sq., https://www.ey.com/Publication/vwLUAssets/ey-european-corporate-governance-2019-ana lysis/$FILE/ey-european-corporate-governance-2019-analysis.pdf. 47 OMV AG, Sustainability Report 2019. Non-financial report, p. 95, https://www.omv.com/services/ downloads/00/omv.com/1522184656391/dload_sustainabilityreport2019_EN (last accessed on 15 May 2020). 48 OMV Code of Conduct—Our Values (April 2018) p. 4, https://www.omv.com/services/ downloads/00/omv.com/1522177201471/dload_Code%20of%20Conduct_EN (last accessed on 26 January 2020). 49 OMV Code of Conduct—Our Values, p. 4, https://www.omv.com/services/downloads/00/omv. com/1522177201471/dload_Code%20of%20Conduct_EN.

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For each of these areas, OMV’s sustainability report 2019 provides OMV’s qualitative and quantitative commitments, targets 2025, status 2019 and milestones 2020.50 According to OMV’s Code of Conduct, OMV is committed to a genuine stakeholder management. The Code of Conduct recognizes the following groups expressly as stakeholders: employees and their representations, business partners, customers, government authorities, media, society and NGOs. The Code of Conduct also deals with the supply chain issue by stating that OMV only enters into partnerships with suppliers and contractors who subscribe to OMV’s values: “We use our collaboration with partners, suppliers and contractors to embed key human rights in their business practices and increase their awareness of ethical and ecological standards.”51 OMV’s supply chain partners have to sign OMV’s Code of Conduct as part of their contractual relationship with OMV. Non-compliance by OMV’s supply chain partners with OMV’s Code of Conduct may result in the termination of the contractual relationship.52 Supplier compliance is assessed and monitored by tools like employees’ feedback, supplier evaluations and audits. OMV developed a consolidated yearly supplier audit plan covering CSR areas like health, safety, security and environment, business ethics, human rights, etc. In 2019, OMV conducted six assessments of strategic suppliers in the areas of environmental (among other things, GHG emissions reduction programs), social and governance performance and carried out eleven supplier audits covering sustainability topics, such as environmental management and certification (including energy management and therefore the impact of a supplier activity on GHG emissions), business ethics and human rights. OMV’s target is to perform ten audits per year by 2020 and more than 20 audits per year by 2025.53 In the author’s view, supplier sustainability audits and assessments are appreciated. However, the numbers of such audits and assessments are still very low. OMV’s sustainability report 2019 was prepared in accordance with the core option54 of the GRI Sustainability Reporting Standards (“GRI Standards”) and contains extraordinarily comprehensive lists (20 pages) of quantitative performance indicators in the areas of value creation and distribution to stakeholders (e.g. financial assistance received from governments or governmental organizations and 50 OMV

AG, Sustainability Report 2019. Non-financial report, p. 14 et sqq, https://www.omv.com/ services/downloads/00/omv.com/1522184656391/dload_sustainabilityreport2019_EN. 51 OMV Code of Conduct—Our Values, p. 9 et sqq., https://www.omv.com/services/downloads/00/ omv.com/1522177201471/dload_Code%20of%20Conduct_EN. 52 OMV Code of Conduct—Our Values, p. 20, https://www.omv.com/services/downloads/00/omv. com/1522177201471/dload_Code%20of%20Conduct_EN. 53 OMV AG, Sustainability Report 2019. Non-financial report, p. 103 et sq., https://www.omv.com/ services/downloads/00/omv.com/1522184656391/dload_sustainabilityreport2019_EN; OMV, Stepping on the gas toward our energy future. Sustainability Report 2018, p. 84, https://www. omv.com/services/downloads/00/omv.com/1522167571398/dwl_Sustainability%20Report%202 018_EN (last accessed on 5 February 2020). 54 OMV AG, Sustainability Report 2019. Non-financial report, p. 2, https://www.omv.com/services/ downloads/00/omv.com/1522184656391/dload_sustainabilityreport2019_EN.

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significant monetary fines), safety (e.g. fatalities and injuries statistics, including the contractors’ figures), environment (e.g. energy consumption, GHG emissions, total waste and environmental expenditures,) and workforce (e.g. diversity statistics). Most of the statistics cover the years from 2015 until 2019 which makes a year-by-year comparison possible.55 It should be pointed out as well that OMV’s sustainability report 2019 includes a limited assurance56 provided by the auditing firm Ernst & Young. OMV installed an internal compliance organization which is supposed to implement OMV’s standards on a groupwide basis. OMV’s compliance consists of a compliance department with group-wide responsibility. The compliance department is supported by local compliance officers in all countries where OMV group companies are active.57 It is notable that OMV’s chief compliance officer has to report to the executive board and the supervisory board58 which is composed of a majority of members who are independent from the company, the management board and the controlling shareholders. Taking into account that (i) a majority of supervisory board members meets the extensive independence criteria, and (ii) the chief compliance officer must report to the supervisory board, it is a missed opportunity that OMV has not yet installed an expert committee (comprised of independent supervisory board members) to solely focus on and monitor ethics and CSR aspects. The compliance organization also manages OMV’s business ethics program. OMV’s separate Code of Business Ethics59 which is applicable to all OMV employees covers (i)

conflicts of interest;

55 OMV AG, Sustainability Report 2019. Non-financial report, p. 121 et sqq., https://www.omv.com/ services/downloads/00/omv.com/1522184656391/dload_sustainabilityreport2019_EN. 56 “Our procedures have been designed to obtain a limited level of assurance on which to base our conclusions. The extent of evidence gathering procedures performed is less than for that of a reasonable assurance engagement (such as a financial audit) and therefore a lower level of assurance is provided […] The objective of our engagement was neither a financial audit nor a financial audit review of past-oriented financial information. We did not perform any further assurance procedures on data, which were subject of the annual financial audit, the corporate governance report and the risk reporting. We merely checked this data was presented in accordance with the GRI Guidelines. Neither the detection and investigation of criminal offenses, such as embezzlement or other fraudulent actions, nor the assessment of effectiveness and efficiency of management were subject to our engagement. We did not test data derived from external surveys or prospective information. Our assurance engagement solely covers references directly specified in the GRI Content Index. It does not cover any further web references.” See OMV AG, Sustainability Report 2019. Non-financial report, p. 168 et sq., https://www.omv.com/services/downloads/00/omv. com/1522184656391/dload_sustainabilityreport2019_EN. 57 OMV Code of Conduct—Our Values, p. 28, https://www.omv.com/services/downloads/00/omv. com/1522177201471/dload_Code%20of%20Conduct_EN. 58 OMV Code of Conduct—Our Values, p. 28, https://www.omv.com/services/downloads/00/omv. com/1522177201471/dload_Code%20of%20Conduct_EN. 59 OMV Code of Business Ethics (2017), https://www.omv.com/services/downloads/00/omv.com/ 1522138416551/Business%20Ethics%20brochure_EN (last accessed on 26 January 2020).

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(ii) (iii) (iv) (v) (vi) (vii)

bribes and facilitation payments; intermediaries and lobbyists; gifts and hospitality; donations; competition and anti-trust law; and trade sanctions and embargoes.60

Employees may report violations of OMV’s ethics policy to the internal compliance department. The compliance department may be contacted anonymously by using a web-based form which is available on OMV’s intranet. The Code of Business Ethics guarantees no reprisals to employees who report in good faith.61

4.4.2 STRABAG SE In 2008, STRABAG introduced its compliance management system which consists of the (i) (ii) (iii) (iv)

Code of Conduct; Business Compliance Guidelines; Business Compliance Guidelines for Business Partners; and Personnel Structure of the STRABAG Ethics-Business Compliance System.62

The Code of Conduct establishes the fundamental ethical values of the company and contributes to the development of a common value system. The Business Compliance Guidelines for employees and the Business Compliance Guidelines for Business Partners specify the rules to follow to avoid corruption and anti-competitive violations.63

The central point of contact for all business compliance matters is the group business compliance coordinator who reports directly to the CEO and is supported by regional business compliance representatives.64 Like in the case of OMV, STRABAG’s ethics policy is part of the internal compliance system as well. STRABAG’s Code of Conduct states that STRABAG’s “success in business depends on the trust all our stakeholders place in us—our customers, our 60 OMV Code of Conduct—Our Values, p. 28, https://www.omv.com/services/downloads/00/omv. com/1522177201471/dload_Code%20of%20Conduct_EN. 61 OMV Code of Business Ethics, p. 32 et sq., https://www.omv.com/services/downloads/00/omv. com/1522138416551/Business%20Ethics%20brochure_EN. 62 STRABAG Business Compliance, https://www.strabag.com/databases/internet/_public/content. nsf/web/EN-STRABAG.COM-business_compliance.html (last accessed on 26 January 2020). 63 STRABAG SE, On the Safe Side. Annual Report 2019, p. 123, https://www.strabag.com/databa ses/internet/_public/files.nsf/SearchView/0372881BB65FB800C12585580054309F/$File/STR ABAG%20SE_Geschäftsbericht%202019_E_Website.pdf?OpenElement. 64 STRABAG SE, On the Safe Side. Annual Report 2019, p. 123, https://www.strabag.com/databa ses/internet/_public/files.nsf/SearchView/0372881BB65FB800C12585580054309F/$File/STR ABAG%20SE_Geschäftsbericht%202019_E_Website.pdf?OpenElement.

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stockholders, our employees, our vendors, our contractors, governmental and regulatory authorities, competitors, the media and society as a whole.”65 This statement is remarkable and confirms that without the active representation of the company’s internal and external stakeholders’ interests it is not possible to maximize profits and be successful in business in the long term. Accordingly, STRABAG strives to ensure its long-term existence by “considering the needs of people, the environment and society in strategic decisions.”66 The STRABAG Code of Conduct is directed at all companies and divisions of STRABAG and contains the fundamental ethical principles:67 • Integrity (flawless behaviour vis-à-vis stakeholders and the society) • Responsibility (fulfilment of all obligations and the promise not to mislead stakeholders) • Fairness (representation of stakeholder interests and fostering of equal opportunities and fair and free environment) • Compliance (with laws and internal and external policies, guidelines and standards) • Transparency (open dialogue with the stakeholders). The Code of Conduct expressly mentions sustainability and confirms that in “our business decisions, we consider the environment and social issues, as we do in managing our resources and our infrastructure.” Among other things, principles of a human resource policy are part of the Code of Conduct, too. The Code of Conduct also contains specific principles of conduct in essential matters of business policy regarding compliance, the avoidance of conflicts of interests, donations and sponsoring and the rejection of illegal employment.68 Via STRABAG’s group-wide whistleblower system, relevant information may be passed on anonymously either by using STRABAG’s online whistleblowing platform or by phone or email. STRABAG’s business partners and their employees may contact the group business compliance coordinator and the regional business compliance officers. The system is also characterized by the installation of internal and external ombudspersons. The external ombudsperson is the financial consultant, Dr. Erhard. F. Grossnigg. Violations of the Code of Conduct may be reported both by employees and third parties (such as contractors and subcontractors) to the regional ombudspersons 65 STRABAG Code of Conduct (January 2015) p. 3, https://www.strabag.com/databases/internet/_ public/files.nsf/SearchView/F803C6C9603DA4B6C1257F940040D874/$File/Code_of_Cond uct_en-01-01-2015.pdf (last accessed on 26 January 2020). 66 STRABAG SE, On the Safe Side. Annual Report 2019, p. 79, https://www.strabag.com/databa ses/internet/_public/files.nsf/SearchView/0372881BB65FB800C12585580054309F/$File/STR ABAG%20SE_Geschäftsbericht%202019_E_Website.pdf?OpenElement. 67 STRABAG Code of Conduct, p. 5, https://www.strabag.com/databases/internet/_public/files.nsf/ SearchView/F803C6C9603DA4B6C1257F940040D874/$File/Code_of_Conduct_en-01-01-2015. pdf. 68 STRABAG Code of Conduct, p. 9 et sqq., https://www.strabag.com/databases/internet/_public/ files.nsf/SearchView/F803C6C9603DA4B6C1257F940040D874/$File/Code_of_Conduct_en-0101-2015.pdf.

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of STRABAG. Any information received by the ombudspersons must be treated confidentially. The ombudspersons are authorized to pass the information received to the compliance coordinator or other persons who are equally bound to secrecy.69 STRABAG did not set up an ethics and CSR committee composed of independent members of the supervisory board. STRABAG’s Health, Safety and Environment Committee is comprised of members of management, staff departments for occupational safety and employee representatives.70 It should be pointed out that STRABAG’s Code of Conduct sets forth that STRABAG expects “customers, vendors, subcontractors and their employees, as well as all other parties doing business with us to act in accordance with this Code of Conduct and the Business Compliance Policy, which is why we also adopted a Business Compliance Policy for Business Partners.”71 The Code of Conduct makes reference to STRABAG’s Business Compliance Guidelines for Business Partners which contains principles of conduct relating to general law abidance, bribery and corruption, violations in fairness of trade, and money laundering and terrorism. STRABAG’s business partners have to sign a declaration of compliance and commit to abide by these principles of conduct. STRABAG’s business partners are also obliged to choose their subcontractors carefully and make sure that the principles of conduct are adhered to further down the supply chain. In the event of a breach of the principles of conduct, STRABAG reserves the right to take appropriate steps, such as the immediate termination of contractual relations and/or claims for damages.72 However, it is unclear if the declaration of compliance also refers to the Code of Conduct as STRABAG’s Business Compliance Guidelines for Business Partners 69 STRABAG

Code of Conduct, p.16, https://www.strabag.com/databases/internet/_public/files. nsf/SearchView/F803C6C9603DA4B6C1257F940040D874/$File/Code_of_Conduct_en-01-012015.pdf; STRABAG SE, Personnel Structure of the STRABAG Ethics-Business Compliance System (1 June 2019) p. 2, https://www.strabag.com/databases/internet/_public/files30.nsf/Sea rchView/9866FB3218AC9546C1258315003E558D/$File/Personelle%20Struktur_en.pdf (last accessed on 14 May 2020); STRABAG SE, On the Safe Side. Annual Report 2019, p. 123, https://www.strabag.com/databases/internet/_public/files.nsf/SearchView/0372881BB65FB80 0C12585580054309F/$File/STRABAG%20SE_Geschäftsbericht%202019_E_Website.pdf?Ope nElement; STRABAG Business Compliance Guidelines for Business Partners (January 2015) p. 4, https://www.strabag.com/databases/internet/_public/files.nsf/SearchView/083A855D71E7 EC7BC1257F94004248A6/$File/Leitfaden_BC_f_Geschäftspartnerinnen%20und%20Geschäftsp artner_en-01012015.pdf (last accessed on 26 January 2020). 70 STRABAG SE, On the Safe Side. Annual Report 2019, p. 106, https://www.strabag.com/databa ses/internet/_public/files.nsf/SearchView/0372881BB65FB800C12585580054309F/$File/STR ABAG%20SE_Geschäftsbericht%202019_E_Website.pdf?OpenElement. 71 STRABAG Code of Conduct, p. 3, https://www.strabag.com/databases/internet/_public/files. nsf/SearchView/F803C6C9603DA4B6C1257F940040D874/$File/Code_of_Conduct_en-01-012015.pdf; STRABAG Personnel Structure of the STRABAG Ethics-Business Compliance System, https://www.strabag.com/databases/internet/_public/files30.nsf/SearchView/9866FB3218AC954 6C1258315003E558D/$File/Personelle%20Struktur_en.pdf. 72 STRABAG Business Compliance Guidelines for Business Partners, p. 2 et sqq., https://www. strabag.com/databases/internet/_public/files.nsf/SearchView/083A855D71E7EC7BC1257F94 004248A6/$File/Leitfaden_BC_f_Geschäftspartnerinnen%20und%20Geschäftspartner_en-010 12015.pdf.

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do not make any reference to the Code of Conduct. Therefore, it is uncertain if a breach of the Code of Conduct may also result in an immediate termination of the contractual relations. This would be very relevant for the avoidance of greenwashing and window-dressing along the supply chain. In this context, it is of interest that STRABAG added an annex to the Code of Conduct dealing with principles of employment conditions and human rights: “In the event that infringements of these principles by companies in the supply chain are identified, the management of STRABAG will apply corresponding sanctions to the company concerned, up to and including termination of contracts.” STRABAG’s whistleblower system concerning the ombudspersons is available for companies along the supply chain as well.73 According to STRABAG’s annual report 2019, a new certifiable Business Compliance Management System in line with ISO 19600 would be introduced in two phases74 in 2020. It was adopted by the management board in December 2019 and is intended to replace the Business Compliance Guidelines and the Business Compliance Guidelines for Business Partners of the compliance management system mentioned above. It is particularly noteworthy that the new system will introduce a supplier code of conduct. As of May 2020, STRABAG’s Supplier Code of Conduct was unfortunately not available on the homepage. Hence, an analysis of this document was not possible. However, the adoption of a supplier code of conduct is applaudable because the implementation of ethics and CSR policies along the entire supply chain is crucial for the reduction or avoidance of window-dressing and greenwashing.75 STRABAG’s consolidated non-financial report was based on (not in accordance with the core option) the GRI Standards and audited by KPMG under a limited assurance76 audit regime.77

73 STRABAG Principles of Employment Conditions and Human Rights—Complementary Annex to the Code of Conduct, https://www.strabag.com/databases/internet/_public/files.nsf/Search View/AAD9DA0241B194FBC1258176005AB820/$File/Grundsätze%20zu%20BB%20und% 20MR_EN_final.pdf (last accessed on 26 January 2020). 74 Phase 1: Germany, Austria, Switzerland; phase 2: remaining countries. 75 STRABAG SE, On the Safe Side. Annual Report 2019, p. 125, https://www.strabag.com/databa ses/internet/_public/files.nsf/SearchView/0372881BB65FB800C12585580054309F/$File/STR ABAG%20SE_Geschäftsbericht%202019_E_Website.pdf?OpenElement. 76 “An independent assurance engagement with the purpose of expressing a conclusion with limited assurance is substantially less in scope than an independent assurance engagement with the purpose of expressing a conclusion with reasonable assurance, thus providing reduced assurance. In spite of conscientious planning and execution of the engagement it cannot be ruled out that material mistakes, unlawful acts or irregularities within the non-financial reporting will remain undetected.” See STRABAG SE, On the Safe Side. Annual Report 2019, p. 19/p. 134 et sq., https://www.strabag.com/databases/internet/_public/files.nsf/SearchView/0372881BB65FB80 0C12585580054309F/$File/STRABAG%20SE_Geschäftsbericht%202019_E_Website.pdf?Ope nElement. 77 STRABAG SE, On the Safe Side. Annual Report 2019, p. 134, https://www.strabag.com/databa ses/internet/_public/files.nsf/SearchView/0372881BB65FB800C12585580054309F/$File/STR ABAG%20SE_Geschäftsbericht%202019_E_Website.pdf?OpenElement.

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4.4.3 voestalpine Group voestalpine’s Code of Conduct78 is part of the company’s compliance system and is directed at all employees of the voestalpine group. It covers the following areas:79 • • • • • • • • • •

Compliance with laws and other external and internal regulations Fair competition Corruption/bribery/acceptance of gifts Money laundering Respect and integrity Conflicts of interest Handling of corporate information/confidentiality Corporate communications Use of the internet and IT Insider information.

With regard to the stakeholders, the Code of Conduct specifies that as “a reliable partner, we also feel responsible for how we conduct ourselves in our dealings with customers, suppliers, employees and other business partners.”80 It is notable that in contrast to the codes of conduct of OMV and STRABAG, the voestalpine Code of Conduct does not contain an express statement that connects the business success with the recognition/representation of the stakeholder interests and sustainability aspects. However, voestalpine’s corporate responsibility report 2019 recognizes the longterm value of a responsible and sustainable corporate governance: Ethical corporate management means responsible corporate governance of the Group that is geared to creating sustainable value in the long term and to ensuring that the conduct of all Group employees complies with statutory requirements and internal guidelines as well as fundamental moral and ethical values.81

Suppliers and consultants of voestalpine have to comply with voestalpine’s Code of Conduct as well. voestalpine’s business partners are requested to promote compliance with the Code of Conduct along the entire supply chain.82 In the context of supply chains, it must be particularly emphasized that the Code of Conduct is an

78 voestalpine Code of Conduct, https://www.voestalpine.com/group/static/sites/group/.downloads/ de/konzern/compliance/Code-of-Conduct_EN.pdf (last accessed on 27 January 2020). 79 voestalpine Corporate Responsibility Report 2019, p. 44, https://reports.voestalpine.com/2019/ cr-report/servicepages/downloads/files/ethical_corporate_management_va_cr19.pdf (last accessed on 27 January 2020). 80 voestalpine Code of Conduct, p. 3, https://www.voestalpine.com/group/static/sites/group/.dow nloads/de/konzern/compliance/Code-of-Conduct_EN.pdf. 81 voestalpine Corporate Responsibility Report 2019, p. 42, https://reports.voestalpine.com/2019/ cr-report/servicepages/downloads/files/ethical_corporate_management_va_cr19.pdf. 82 voestalpine Corporate Responsibility Report 2019, p. 44, https://reports.voestalpine.com/2019/ cr-report/servicepages/downloads/files/ethical_corporate_management_va_cr19.pdf.

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integral part of the purchasing terms and conditions that are binding on all suppliers.83 voestalpine’s supply chain management systematically collects data on and evaluates the social and environmental effects and risks of suppliers’ activities as well as considers them in the development of supplier relationships.84 voestalpine applies its Sustainable Supply Chain Management (“SSCM”) project to analyse raw materials procurement along the supply chains (voestalpine’s most important area of purchasing) in terms of compliance with voestalpine’s CSR policies. The basis for supplier evaluations are on-site visits at suppliers’ facilities. The evaluation scheme groups suppliers into three categories (A, B, C). Suppliers in category A receive the best evaluation. voestalpine intends that all of its suppliers are A-graded: “Where a supplier fails to achieve, or no longer achieves, grade A, then voestalpine works together with the supplier to determine the reasons and to develop measures to restore their previous status. Where the supplier development measures fail to have the desired effect, or suppliers are not willing to implement the measures, then the business relationship is brought to a structured end, and a new supplier chosen.” voestalpine intends to expand the SSCM to cover other supply chains within the group over the medium term.85 Moreover, voestalpine adopted a Code of Conduct for voestalpine Business Partners which is directed at voestalpine’s suppliers of goods and services, business intermediaries, advisors, consultants and other business partners. This code requires the business partners to comply with certain principles regarding compliance with legal regulations, fair competition, corruption, respect and integrity (e.g. prohibitions on child labour, forced labour and any form of human trafficking, equal treatment of all employees, and health and safety requirements), compliance with human rights, and the supply chain (voestalpine’s business partners should promote compliance with the substance of the code by its own business partners). The code does not specify the consequences (such as a possible contractual termination) of a breach of the code by a business partner of voestalpine.86 Employees are provided with different options for reporting violations of the voestalpine Code of Conduct: They may report to the (i) direct superior, (ii) competent legal or HR department, (iii) management of the respective voestalpine group company, 83 voestalpine Corporate Responsibility Report 2019, p. 38, https://reports.voestalpine.com/2019/ cr-report/servicepages/downloads/files/ethical_corporate_management_va_cr19.pdf. 84 voestalpine Corporate Responsibility Report 2019, p. 36, https://reports.voestalpine.com/2019/ cr-report/servicepages/downloads/files/ethical_corporate_management_va_cr19.pdf. 85 voestalpine Corporate Responsibility Report 2018, Transparency in the supply chain, p. 42 et sqq. https://reports.voestalpine.com/2018/cr-report/servicepages/downloads/files/supply_chain_ transparency_va_cr18.pdf (last accessed on 8 February 2020). 86 Code of Conduct for voestalpine Business Partners, https://www.voestalpine.com/group/sta tic/sites/group/.downloads/de/konzern/compliance/2019-CoC-for-Business-Partners_EN.pdf (last accessed on 27 January 2020).

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(iv) audit department or (v) group compliance department.87 Employees and external whistleblowers are also given the opportunity for anonymous reports by using a central, web-based whistleblower system (reports using this system are limited to the areas of antitrust law, corruption, fraud and conflicts of interest), although voestalpine recommends that reports should be primarily made openly by providing the whistleblower’s name in order to simplify investigations. voestalpine guarantees the confidential treatment of reports upon a whistleblower’s request. Reports shall not result in adverse consequences.88 voestalpine did not set up an independent ethics and CSR committee consisting of independent supervisory board members. The voestalpine supervisory board would have a sufficient number of potential candidates for such committee because all supervisory board members meet the independence criteria pursuant to C-Rule 53 of the ACCG, and a vast majority of them is independent from the controlling shareholders in terms of C-Rule 54 of the ACCG, too.89 Regarding quantitative performance indicators, voestalpine’s corporate responsibility report 2019 provides a number of statistics from 2014 to 2018. Environmental statistics include, but are not limited to expenditures, investments, air emissions, water management, waste and recycling management, and energy consumption. Human resources figures focus on the employee structure and the equality and diversity, etc.90 It should not stay unmentioned that the Austrian auditing and tax consulting firm Grant Thornton provided a limited assurance91 for voestalpine’s corporate responsibility report 2019 which was prepared in accordance with the GRI Standards (core option).92

4.4.4 Erste Group Bank AG Erste Group’s Code of Conduct is part of the compliance structure and confirms the need for acting responsibly, respectfully and sustainably in all aspects of Erste 87 Code of Conduct for voestalpine Business Partners, p. 15, https://www.voestalpine.com/group/ static/sites/group/.downloads/de/konzern/compliance/2019-CoC-for-Business-Partners_EN.pdf. 88 voestalpine Code of Conduct, p. 15, https://www.voestalpine.com/group/static/sites/group/.dow nloads/de/konzern/compliance/Code-of-Conduct_EN.pdf; voestalpine Corporate Responsibility Report 2019, p. 48, https://reports.voestalpine.com/2019/cr-report/servicepages/downloads/files/ ethical_corporate_management_va_cr19.pdf. 89 See above Sect. 4.3.3. 90 voestalpine Corporate Responsibility Report 2019, p. 56 et sqq., https://reports.voestalpine.com/ 2019/cr-report/servicepages/downloads/files/ethical_corporate_management_va_cr19.pdf. 91 voestalpine Corporate Responsibility Report 2019, p. 108, https://reports.voestalpine.com/2019/ cr-report/servicepages/downloads/files/ethical_corporate_management_va_cr19.pdf. 92 voestalpine Corporate Responsibility Report 2019, p. 8, https://reports.voestalpine.com/2019/crreport/servicepages/downloads/files/ethical_corporate_management_va_cr19.pdf.

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Group’s operations. Erste Group puts a very strong focus on stakeholder relations and CSR in its Code of Conduct, even at the expense of the company’s profits: What we do also has an impact on our external stakeholders: our investors, governmental authorities, society as a whole, our suppliers and, in particular, our customers. For this reason, we always need to ask ourselves if we are acting responsibly – the pursuit of profit does not justify any breach of the law or of our commitments set out in this Code.93

It is notable that the Erste Group Code of Conduct defines corporate governance as a tool for managing and controlling businesses “in such a way as to guide them towards responsible, sustainable and long-term value creation.”94 Consequently, Erste Group’s management and control system serves two objectives: On the one hand, the aim is to keep our organisation running smoothly, and on the other, to safeguard the interests of all of our stakeholders. The various elements of governance are thus important tools for implementing the Code of Conduct. Therefore, all the employees, management staff and representatives of the corporate bodies of Erste Group are committed to the highest standards of corporate governance.95

Furthermore, Erste Group’s Code of Conduct goes into detail in areas such as dialogue with stakeholders (e.g. cooperation with NGOs and regular communication with all stakeholders), responsible financing (e.g. consideration of social, ecological and ethical criteria by drafting and implementing Principles for Responsible Financing and assessing the environmental, social and governance criteria for the entire spectrum of corporate financing), responsible investment (e.g. integration of environmental, social and governance factors into all portfolio decisions), risk management (e.g. sustainable optimization of financial performance and earnings position) and respect for human rights and non-discrimination. The code also contains extensive sections dealing with customers, employees, investors, the society and the environment. It is notable that in these sections the Code of Conduct is not only limited to boilerplate terminology but gives concrete examples for ensuring the achievement of objectives. Regarding the environment, the Code of Conduct states that Erste Group places “great importance on a responsible and sustainable approach to managing natural resources. It is our firm conviction that commercial activities and environmental responsibility are not mutually exclusive.” To ensure environmental awareness, among other things, Erste Group develops an environmental policy and management system and incorporates environmental criteria into its banking products and services. To ensure climate change governance, Erste Group annually measures and reports its greenhouse gas emissions and carbon footprint and strives to substantially reduce its greenhouse gas emissions over the next years. 93 What we value: The Code of Conduct of Erste Group, p. 3, https://www.erstegroup.com/en/about-

us/sustainability (last accessed on 27 January 2020). 94 What we value: The Code of Conduct of Erste Group, p. 14, https://www.erstegroup.com/en/ about-us/sustainability. 95 What we value: The Code of Conduct of Erste Group, p. 5, https://www.erstegroup.com/en/aboutus/sustainability.

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While respecting and protecting individual rights, employees may call an externally hosted hotline allowing to report violations of the Code of Conduct anonymously.96 Concerning the supply chain management, the Code of Conduct makes clear that any suspicions of possible violations of Erste Group’s Ethical and Environmental Code of Conduct for Suppliers of Goods and Services97 are investigated, and any cooperation with suppliers will be terminated if the suppliers’ environmental, social and governance practices are unacceptable.98 The Ethical and Environmental Code of Conduct for Suppliers of Goods and Services defines the non-negotiable minimum standards which suppliers and subsuppliers of Erste Group have to comply with. The code covers the entire supply chain and even more: “The EG Supplier Code of Conduct sets forth our expectations of the Supplier, including its parent, subsidiary or affiliate entities, as well as all others with whom the Supplier does business, including all employees (including permanent, temporary, contract agency and migrant workers), upstream suppliers and other third parties.” Erste Group’s suppliers must in particular adhere to the four pillars contained in this code: human rights, safety and health, environmental sustainability and business integrity. The four pillars are described in detail (not just boilerplate language) and are verifiable so that assessments can be carried out easily. For example, employees are not allowed to work longer than 60 h and six days per week, overtime work shall be voluntary and compensated at a premium rate, and the supplier “shall document and implement a relevant environmental management system (based on international standards such as ISO 14001), designed to identify, control and mitigate significant environmental impacts.” It is a very interesting approach that Erste Group reserves the right to verify supplier compliance with this code through internal or external assessment mechanisms and to require implementation of progress towards audit requirements. Erste Group requests from its suppliers to complete audit questionnaires (for any purchase of more than EUR 100,000), and supplier business reviews are regularly performed. The audit questionnaire is IT-based. The result of the audit forms the basis for the supplier evaluation in procurement before entering into a contract. In respect of the most important suppliers or those having the most significant risk profile, the initial evaluation is followed by regular reviews.99

96 What we value: The Code of Conduct of Erste Group, p. 5, https://www.erstegroup.com/en/aboutus/sustainability. 97 Erste Group Ethical and Environmental Code of Conduct for Suppliers of Goods and Services, https://www.erstegroup.com/en/about-us/sustainability. 98 What we value: The Code of Conduct of Erste Group, p. 7, https://www.erstegroup.com/en/aboutus/sustainability. 99 Erste Group Ethical and Environmental Code of Conduct for Suppliers of Goods and Services, p. 2 et sqq., https://www.erstegroup.com/en/about-us/sustainability; Erste Group (Consolidated) Non-Financial Report as part of the Annual Report 2019, p. 65, https://www.erstegroup.com/en/inv estors/reports/financial-reports (last accessed on 15 May 2020).

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In terms of environmental aspects, the supplier audit questionnaire includes the following topics:100 • • • • • •

Existence of an environmental management system Existence of a written environmental policy Method for measuring CO2 -emissions Existence of environmental targets Information on fines or charges for environmental infringements Description of the supplier’s supply chain The following social aspects are included in the supplier audit questionnaire:101

• • • • • • • • • • •

Effective abolition of child labour Elimination of all forms of forced or compulsory labour Elimination of discrimination with respect to employment Freedom of association and the right to collective bargaining Reasonable working hours and fair remuneration Health protection Occupational health and safety Job restructuring Remuneration Fair working conditions Other social criteria in the supply chain

It should be noted that in 2019, Erste Group concluded or renewed contracts with 847 suppliers and co-operated with 22,904 suppliers. However, only eleven suppliers were screened according to environmental standards. 338 suppliers were screened according to both labour practice standards and human rights criteria. No supplier contracts had to be terminated based on significant actual or potentially negative impacts on the environment, labour practices or human rights.102 Erste Group’s consolidated non-financial report 2019 contains quantitative performance indicators as well. In this respect, the detailed (divided in countries) environmental statistics are particularly noteworthy, although they are only available for the years 2018 and 2019. Important for the purpose of verification is the fact that Erste Group also provided the environmental targets for 2021. Medium and long-term targets are not included.103

100 Erste

Group (Consolidated) Non-Financial Report as part of the Annual Report 2019, p. 65, https://www.erstegroup.com/en/investors/reports/financial-reports. 101 Erste Group (Consolidated) Non-Financial Report as part of the Annual Report 2019, p. 65, https://www.erstegroup.com/en/investors/reports/financial-reports. 102 Erste Group (Consolidated) Non-Financial Report as part of the Annual Report 2019, p. 65, https://www.erstegroup.com/en/investors/reports/financial-reports. 103 Erste Group (Consolidated) Non-Financial Report as part of the Annual Report 2019, p. 73 et sq., https://www.erstegroup.com/en/investors/reports/financial-reports.

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Erste Group’s consolidated non-financial report was prepared in accordance with the core option of the GRI Standards.104 The auditing firm Deloitte provided a limited assurance.105 Erste Group’s lack of an independent ethics and CSR committee serves as further evidence for the fact that in Austrian stock corporations the installation of an ethics and CSR committee composed of independent supervisory board members is very unusual and uncommon.

4.4.5 Do Violations of a Code of Ethics/Conduct Trigger Criminal Consequences Pursuant to Section 163a of the Criminal Code? The STRABAG Code of Conduct expressly states that it is not legally binding: Although this Code of Conduct neither creates any legally binding obligations for STRABAG nor grants legal entitlements to employees or other persons, we regularly review it and our behaviour in the past, analysing our experiences so as to be able to improve the way in which we adhere to the values and principles set forth in the Code of Conduct.106

Section 163a (1) (1.) of the StGB stipulates that decision-makers (Entscheidungsträger) of companies shall be punished by imprisonment for up to two years if they state incorrect or incomplete material information concerning the current or future financial position and performance of the company in (among other things) financial statements, management reports or any other reports directed to the public, the shareholders or the supervisory board members. Codes of ethics or conduct are not reports in terms of Sect. 163a of the StGB, but if ethics policies contained in corporate codes of ethics or conduct are part of reports directed to the public, shareholders or supervisory board members, these ethics policies may result in the application of Sect. 163a (1) (1.) of the StGB. However, it is required that the incorrect or incomplete information is material for the current or future financial position or performance of the company. It is undeniable that some ethics or CSR aspects may be material (see above Sect. 3.3.1) and therefore can (i) have a positive or negative impact on the company’s financial situation and (ii) influence investment decisions of both individual and institutional investors. 104 Erste

Group (Consolidated) Non-Financial Report as part of the Annual Report 2019, p. 76, https://www.erstegroup.com/en/investors/reports/financial-reports. 105 “In a limited assurance engagement, the evidence-gathering procedures are more limited than in a reasonable assurance engagement, and therefore less assurance can be obtained. The choice of audit procedures lies in the due discretion of the auditor.” See Erste Group (Consolidated) NonFinancial Report as part of the Annual Report 2019, p. 79 et sq., https://www.erstegroup.com/en/ investors/reports/financial-reports. 106 STRABAG Code of Conduct, p. 17, https://www.strabag.com/databases/internet/_public/files. nsf/SearchView/F803C6C9603DA4B6C1257F940040D874/$File/Code_of_Conduct_en-01-012015.pdf.

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Determining materiality does not only involve quantitative criteria. Information on business areas or segments that are of particular importance for the future business activities of the company may be material, even if their quantitative effects on the financial statements are currently still small. Regarding materiality Sect. 163a (1) of the StGB refers to Sect. 189a (10) of the UGB which provides that information is material if it can reasonably be expected that its omission or incorrect disclosure influences decisions that users (e.g. investors) make on the basis of the annual or consolidated financial statements. It is more than evident that omitting information which has a negative impact on the company’s ethics or CSR policy or providing incorrect information concerning the company’s ethics and/or CSR program (greenwashing and window-dressing) is likely to influence the investment decisions of existing shareholders or potential investors. Therefore, there is a high probability that such information is material in terms of Sect. 163a (1) of the StGB. Moreover, there are good arguments for treating an information as material if the incorrect or incomplete information is deliberately107 (absichtlich) disclosed, as acting deliberately may by itself lead to the conclusion that the information provider considers such information as material for investment decisions or customer behaviour if the report is directed to the shareholders and/or the public.108 In addition, the disclosed material information must likely lead to a considerable damage for the company, the shareholders, the investors or the creditors. It is not necessary that such damage materializes in reality.109 For example, if an investor bases his decision to buy the company’s shares on an incorrect or incomplete information contained in a publicly available report, it may lead to such a considerable damage for the investor if the greenwashing becomes public and has a negative impact on the company’s reputation, the company’s financial position (e.g. due to payment of heavy fines) and its share price. As mentioned above in Sect. 4.4, German law (Sect. 289f (2) (2.) of the German Commercial Code, “dHGB”) obliges companies to provide in their corporate governance reports details about corporate governance practices which go beyond mandatory statutory provisions, such as reports on the company’s corporate ethics policies contained in their voluntary codes of conduct/ethics. Neither Austrian law (Sect. 243c of the UGB) nor the ACCG contain a similar requirement. As a consequence, violations of provisions of the company’s codes of ethics which are not based on legal requirements will not have any legal consequences if they are not disclosed in a report such as the corporate governance report (inapplicability of Sect. 163a (1) of the StGB). That is why in the author’s opinion, the German model should be implemented into Austrian law (or at least as a C-Rule in the ACCG) so that details about the corporate codes of ethics/conduct must be included in the corporate governance reports.

107 Section

5 (2) of the StGB. Der Grundsatz der Wesentlichkeit im UGB, DJA 4/2018, p. 122 (p. 123); Dokalik in U. Torggler, UGB3 § 189a (1 January 2019, rdb.at) para. 37 et sqq. 109 Dokalik in U. Torggler, UGB3 § 189a, para. 43 et sqq. 108 Eiter/Berger,

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It should not remain unmentioned that this weak spot of Austrian law is tackled to a certain extent by the mandatory CSR reports in Austria (see below in Sect. 4.5). Incorrect or incomplete information contained in these CSR reports may, of course, trigger the criminal consequences of Sect. 163a (1) of the StGB. The violation of Sect. 163a of the StGB may also give rise to civil claims and actions because the provision is a so-called protective law (Schutzgesetz) in terms of Sect. 1311 of the Austrian Civil Code. Subject to protection are those persons who rely on the reports mentioned and thereby suffer pecuniary loss. Shareholders, potential investors and creditors are therefore protected and may proceed with civil actions. They may assert claims for damages, inter alia, against the decision-makers, other persons responsible for the reports and the company itself. It is notable that the company may also assert claims for damages against the decision-makers and other persons responsible for the reports.110

4.5 Mandatory CSR Reporting in Austria 4.5.1 Directive 2014/95/EU and the Austrian Sustainability and Diversity Improvement Act The EU Directive on the Disclosure of Non-Financial and Diversity Information (“NFI Directive”) imposed on large stock exchange-listed companies a duty to disclose certain CSR information in their management reports and thus responded to the need to improve the disclosure of social and environmental information to investors, consumers and other stakeholders. The NFI Directive acknowledges that “disclosure of non-financial information is vital for managing change towards a sustainable global economy by combining long-term profitability with social justice and environmental protection.” This means that the NFI Directive accepts the fact that (i) investors are increasingly interested in a company’s sustainable long-term profits, and (ii) consumers and stakeholders more and more demand a company’s social and environmental engagement. This has put a lot of pressure on companies to disclose non-financial information. Before the adoption of the NFI Directive, there had been (i) a major diversity of CSR policies implemented by companies, (ii) a lack of consistent and comparable information, (iii) significant differences in the quality of the information disclosed, (iv) large companies which did not regularly disclose non-financial information and (v) no EU-wide legal minimum requirements regarding the extent of the disclosed non-financial information.111 in Artmann/Karollus, AktG III6 § 163a StGB (1 April 2019) para. 93 et sq. 2, 3, 5 and 21 of Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri = CELEX:32014L0095&from = EN

110 Kert

111 Recitals

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In Austria, the NFI Directive was implemented by the Sustainability and Diversity Improvement Act (Nachhaltigkeits- und Diversitätsverbesserungsgesetz, “NaDiVeG”)112 which added Sect. 243b in the UGB. Pursuant to Sect. 243b (1) of the UGB, large undertakings which are public-interest entities (stock exchange-listed companies, banks and insurance companies), exceeding on their balance sheet dates the criterion of the average number of 500 employees during the financial year, shall include in their management report a non-financial statement. Pursuant to Recital 14 of the NFI Directive, small and medium-sized enterprises (“SMEs”) should be exempted from the disclosure requirements. The Austrian Economic Chambers (“WKO”) reject an extension of the disclosure requirement to Austrian SMEs based on the plausible argument that additional report obligations create higher costs which would lead to competitive disadvantages in relation to companies located in member states which do not have such requirement. However, SMEs are indirectly covered by the NFI Directive and the NaDiVeG because the reporting companies (pursuant to Sect. 243b (1) of the UGB) have to approach and retrieve information from SMEs along the supply chain if their activities have a negative impact on CSR aspects. The reporting companies have to disclose the information received by the SMEs if it is material. Disclosures along the supply chain can best be guaranteed by contractual arrangements between the reporting companies and the SMUs along the supply chain.113 Section 243b (2) of the UGB sets forth that the non-financial statement has to contain information to the extent necessary for an understanding of the undertaking’s development, performance, position and impact of its activity, relating to, as a minimum, environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters. The analysis of the nonfinancial statement shall include an explanation of the non-financial key performance indicators referring to amounts and details reported in the annual financial statements. In order to avoid window-dressing and greenwashing, it is crucial to assess the risks along the entire supply chain and to perform a supplier due diligence. Consequently, Sect. 243b (3) (2.) of the UGB requires the reporting companies to include the due diligence processes implemented with regard to the five CSR matters (environmental, social, employee, human rights, anti-corruption/bribery matters) mentioned in para. 2. Furthermore, Sect. 243b (3) (5.) of the UGB prescribes the disclosure of the principle risks likely causing adverse impacts on those CSR matters and the company’s management of those risks. It should be emphasized that the five non-financial matters mentioned in Sect. 243b (2) of the UGB are to be understood as minimum requirements. Depending on the industry and company characteristics, other non-financial aspects may be material and have to be included in the report. For this purpose, a materiality analysis has to (last accessed on 29 January 2020); Nowotny/Ziskovsky in Straube/Ratka/Rauter, UGB II/RLG3 § 243b, para. 5. 112 BGBl I 2017/20. 113 Nowotny/Ziskovsky in Straube/Ratka/Rauter, UGB II/RLG3 § 243b, para. 7.

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be performed in order to assess which non-financial aspects are material in terms of the impact on the company’s development, performance and position. In this context, the Austrian legislator refers to the materiality analysis contained in the G4 Standards of the GRI.114 A detailed materiality analysis is crucial for the avoidance of greenwashing and window-dressing and to prevent that the information disclosed in the management report does not become a mere advertising tool for the marketing department.115 Section 243b (2) of the UGB makes reference to non-financial key performance indicators (key figures or qualitative data). Such indicators may be carbon emission levels, customer satisfaction, employee motivation, key suppliers and customers, etc. These non-financial key performance indicators cannot be recognized in the balance sheet. Nevertheless, it is undeniable that these indicators can be important value drivers by having a major impact on the long-term profits of a company.116 A survey conducted by Ernst & Young confirmed this already in 1997: When non-financial factors were taken into account, earnings forecasts were more accurate, thus reducing the risk to investors. If a firm’s non-financial data are strong, this could facilitate its ability to raise capital. The message is clear: non-financial factors can be used as leading indicators of future financial performance.117

Thus, it is a welcome step by the legislator to require the companies to connect material non-financial information with the annual financial statements. It should be mentioned as well that from 2022/2023, Article 8 of the Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment will oblige undertakings to provide in their non-financial statements, in particular, disclosures on the proportion of their turnover (derived from products or services) and capital/operating expenditure associated with economic activities that qualify as environmentally sustainable (e.g. climate change mitigation, climate change adaptation, pollution prevention and control, etc.). The non-financial information has to be included either in the company’s management report (Lagebericht) or in a separate non-financial report.118 In the event of the

in Straube/Ratka/Rauter, UGB II/RLG3 § 243b, para. 27; Explanatory remarks to the government bill regarding the NaDiVeG (ErläutRV 1355 BlgNR 25. GP 3) p. 3, https://www.parlament.gv.at/PAKT/VHG/XXV/I/I_01355/fname_573318.pdf (last accessed on 30 January 2020). 115 Aschauer/Fuhrmann, Das Potenzial nichtfinanzieller Leistungsindikatoren im Lagebericht, RWZ 6/2009, p. 190 (p. 192). 116 Aschauer/Fuhrmann, RWZ 6/2009, p. 191; Baumüller, Nichtfinanzielle Berichterstattung und Bilanzstrafrecht. Strafrechtlicher Nachdruck hinter der Übernahme gesellschaftlicher Verantwortung durch Unternehmer, GesRZ 4/2017, p. 243 (p. 245). 117 Ernst & Young (1997) p. 7, cited in Aschauer/Fuhrmann, RWZ 6/2009, p. 191, and Cleary, Human Resource Accounting, in McGuire/Molberg Jorgensen (Ed.), Human Resource Development: Theory and Practice (2011) p. 49. 118 Section 243b (6) of the UGB. 114 Nowotny/Ziskovsky

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disclosure in a separate report, the company must indicate such separate disclosure in the management report.119 The management report or the separate report containing the non-financial information are directed to the company’s shareholders, investors, suppliers, customers, employees and other stakeholders and the public.120 As material non-financial information is considered a value driver, which may have an impact on the company’s current or future financial position and performance (thus on the profits, in particular the long-term profits) in terms of Sect. 163a (1) of the StGB,121 the intentional disclosure of incorrect or incomplete non-financial information in reports pursuant to Sect. 243b of the UGB may have criminal consequences. This is very important for the deterrence of potential greenwashing and window-dressing.122 However, it is important to note that similarly to the ACCG, the obligation to disclose non-financial information is based on the comply-or-explain principle. Hence, companies are presented with the opportunity to explain the reasons if they decide not to pursue certain CSR aspects pursuant to Sect. 243b (2) UGB. No company is forced to pursue certain CSR policies.123 Section 243b (5) of the UGB provides that in performing the disclosure obligations companies may rely on national, EU-based or international frameworks, and if they do so, they shall specify which frameworks they have relied upon. The GRI Standards meet these requirements. GRI even published a linkage document124 which shows how the disclosures from the GRI Standards can be used to comply with the NFI Directive disclosure requirement.125 The sustainability report (within the management report) or the separate report containing the required non-financial information pursuant to Sect. 243b of the UGB must be prepared by the company’s management board. The supervisory board has to perform the internal content-related audit (inhaltliche Prüfung). If the non-financial information is disclosed in the management report, the audit committee must perform an audit prior to the supervisory board’s audit because the audit of the management report is one of the express tasks of the audit committee pursuant to Sect. 92 (4a) (4.) (f) of the AktG. In the event that the non-financial information is presented in a 119 Geirhofer

in U. Torggler, UGB3 § 243b, para. 12. in Straube/Ratka/Rauter, UGB II/RLG3 § 243b, para. 3. 121 For an analysis of Sect. 163a StGB see below Sect. 4.4.5. 122 Baumüller, GesRZ 4/2017, p. 244 et sq.; Nowotny/Ziskovsky in Straube/Ratka/Rauter, UGB II/RLG3 § 243b, para. 10. 123 Explanatory remarks to the government bill regarding the NaDiVeG (ErläutRV 1355 BlgNR 25. GP 3) p. 3, https://www.parlament.gv.at/PAKT/VHG/XXV/I/I_01355/fname_573318.pdf; Nowotny/Ziskovsky in Straube/Ratka/Rauter, UGB II/RLG3 § 243b, para. 29; Feltl, UGB § 243b (7 June 2017, rdb.at), remark 2); Frey/Braumüller, Nachhaltigkeitsberichterstattung rückt in die Verantwortung von Vorstand und Aufsichtsrat, Aufsichtsrat aktuell 1/2017, p. 7 (p. 10). 124 GRI, Linking the GRI Standards and the European Directive on non-financial and diversity disclosure, https://www.globalreporting.org/standards/resource-download-center/linking-gri-standardsand-european-directive-on-non-financial-and-diversity-disclosure/ (last accessed on 30 January 2020). 125 Feltl, UGB § 243b, remark 3). 120 Nowotny/Ziskovsky

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separate report, the audit committee does not have the legal duty to audit this report. In order to avoid an unequal treatment in terms of audit intensity, Nowotny/Ziskovsky suggest that companies voluntarily require their audit committees to perform such internal audit in cases where separate reports containing the non-financial information are prepared.126 Baumüller/Niklas/Wieser 127 criticize that Austrian supervisory boards still do not pay sufficient attention to ethics and CSR matters and frequently do not possess the necessary experience and knowledge to assess a non-financial report. That is why they commendably suggest the installation of a sustainability expert (among the supervisory board members), in analogy to the Austrian audit committee’s financial expert pursuant to Sect. 92 (4a) (1.) of the AktG. As mentioned above in Sect. 3.2.4, in the author’s view, it is recommended installing an Ethics and CSR Committee (at the minimum, the chairman should have sufficient education and experience in ethics and CSR matters) composed of independent supervisory board members for the oversight of the companies’ CSR policies and reports. Concerning external reviews or verifications of the NaDiVeG non-financial reports, it should be mentioned that auditors only have to perform an existence check. The NFI Directive left it to the member states to legally impose on companies the requirement of an external verification (content-related review) provided by independent assurance services providers (e.g. auditing or law firms). The Austrian legislator did not execute this right.128 Unsurprisingly, most of the Austrian reporting companies have not yet opted for a voluntary external evaluation of their non-financial reports. If such an assessment is performed voluntarily, the assurance by the third party service provider (usually auditing firms) is in all likelihood only limited. Furthermore, the limited assurances have a very low value for the stakeholders, as they usually do not provide a necessary in-depth analysis. There is no legitimate reason (the cost argument cannot be accepted in relation to listed companies) why audits of non-financial reports should not be conducted in the same in-depth manner, in terms of scope and intensity, as the audits of financial reports.129 As auditors typically do not have sufficient knowledge and experience concerning ethics and CSR matters, it is suggested setting up an official governmental agency comprised of certified ethics and CSR experts to assess the reporting companies’ non-financial reports in detail. This should not be an insurmountable task for the governmental agency, given that the number of reporting companies in Austria is quite low (see Sect. 4.5.2.1).

126 Nowotny/Ziskovsky

in Straube/Ratka/Rauter, UGB II/RLG3 § 243b, para. 11. Befunde zur zweiten NaDiVeG-Berichtssaison—Implikationen zur Weiterentwicklung der Governance österreichischer Unternehmen, Aufsichtsrat aktuell 1/2020, p. 8 (p. 11 et sq.). 128 Nowotny/Ziskovsky in Straube/Ratka/Rauter, UGB II/RLG3 § 243b, para. 13 et sqq. 129 Baumüller/Niklas/Wieser, Aufsichtsrat aktuell 1/2020, p. 11 et sqq. 127 Baumüller/Niklas/Wieser,

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4.5.2 Analysis of CSR Reports 4.5.2.1

Ernst & Young 2019 Study on CSR Reporting in Austria

Ernst & Young published a study (“EY Study”) involving the CSR reports of the largest Austrian companies for the fiscal year 2017. The EY Study confirms the relevance of CSR policies on the long-term standing, development, financial performance and value of companies by stating that the public’s confidence in companies and financial markets is crucial for the economic growth, and nowadays, a company’s value is reflected not only in its short-term financial performance, but also in intangible assets, such as intellectual property, talent, brand and innovation, and in the impact on society and the environment. Most of these assets are not or not fully recognized in traditional annual financial statements.130 The EY Study found that 76 Austrian companies are subject to the CSR reporting obligations contained in the NaDiVeG. 70 out of these companies (92%) disclosed their non-financial information based on the requirements of the NFI Directive and the NaDiVeG. The six companies which did not disclose the information were either entitled to a waiver pursuant to Sect. 243b (7) of the UGB131 or were not yet required to report on the deadline of the EY Study132 due to having a fiscal year which differs from the calendar year. 69% of the reporting companies preferred to disclose their non-financial information outside of the management report. It is no surprise that, like in the USA, the GRI is in Austria the most popular CSR reporting framework as well: 49% of the 70 reporting companies disclosed their CSR information in accordance with a GRI framework. 7% decided to refer to a GRI framework in selected areas. The GRI Standards are the most popular GRI framework (only six companies used the GRI Standards’ predecessor version, the GRI G4). It is rather disappointing that only 18 reporting companies (26%) opted in favour of a voluntary external evaluation of their CSR report. Even worse, only 12 reporting companies were fully externally evaluated, and all of the external audits were based on a “limited assurance” (focus on plausibility)133 only. Like in the USA, the lack of a sufficient 130 Ernst

& Young, Nachhaltigkeitsberichterstattung österreichischer Top-Unternehmen. Studie 2019. Themenschwerpunk: Nachhaltigkeits- und Diversitätsverbesserungsgesetz, p. 14, https:// www.ey.com/Publication/vwLUAssets/ey-analyse-zur-nachhaltigkeitsberichterstattung-in-oester reich/$FILE/EY%20Analyse%20Nachhaltigkeitsberichterstattung%202019.pdf (last accessed on 3 February 2020). 131 Section 243b (7) of the UGB sets forth that subsidiaries of parent companies seated in the EU shall be exempted from the disclosure obligation if they are included in the consolidated management report of their parent company. 132 The deadline was on 22 November 2018. 133 “Limited assurance is intended to evaluate that no significant errors have been found and that the report was drafted in line with the reporting criteria. The result of an audit with limited assurance is a declaration that no significant errors were found that could lead to believe that the report was not drafted in line with the reporting criteria.” See Ernst and Young, Sustainability Reporting Assurance, https://www.ey.com/ch/en/services/specialty-services/climate-change-and-sustainability-ser vices/ey-sustainability-reporting-assurance (last accessed on 3 February 2020).

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number of external verifications of Austrian CSR reports is alarming and not ideal for confidence-building. In comparison, the situation in Germany and Italy is much more satisfying: 65% of the German companies’ CSR reports were externally assessed with limited assurance and further 9% with “reasonable assurance”.134 In Italy the external assessment is a legal requirement.135 Concerning the 38 Prime Market-listed companies, the EY Study found that 95% of the companies are subject to the legal requirements of the NFI Directive and the NaDiVeG. 69% of the reporting companies prepared their CSR reports on the basis of a GRI framework. Most of the Prime Market-listed companies used the GRI Standards (58%). 11% applied the GRI G4 framework. In all of the CSR reports, which applied the GRI framework, the core option136 was chosen over the more detailed comprehensive137 reporting option. It is notable that the 36 Prime Market-listed companies, which disclosed non-financial information pursuant to the NaDiVeG, were more inclined towards voluntary external assessments of their CSR reports. 42% (in comparison to 26% of the total of 70 companies which disclosed nonfinancial information based on the NaDiVeG until the EY Study’s deadline on 22 November 2018) of the Prime-Market listed companies had their CSR reports externally evaluated. This is a clear confirmation of the fact that Prime Market-listed companies are the most transparent companies in Austria (even if there is no legal requirement for such transparency).138 Still, the number of external assessments and verifications is not satisfactory. Cost arguments and (in connection with the high costs for an external evaluation) competitive disadvantages regarding external evaluations cannot be accepted, as the companies subject to the NaDiVeG and the Prime Market-listed companies are the 134 “Reasonable

assurance aims at verifying the completeness and accuracy of the information supplied. The result of the audit is meant to give sufficient assurance that the sustainability information has been compiled in accordance with the reporting criteria.” See Ernst and Young, Sustainability Reporting Assurance, https://www.ey.com/ch/en/services/specialty-services/ climate-change-and-sustainability-services/ey-sustainability-reporting-assurance. 135 Ernst & Young, Nachhaltigkeitsberichterstattung österreichischer Top-Unternehmen. Studie 2019. Themenschwerpunk: Nachhaltigkeits- und Diversitätsverbesserungsgesetz, p. 38 et sqq., https://www.ey.com/Publication/vwLUAssets/ey-analyse-zur-nachhaltigkeitsberichterstattung-inoesterreich/$FILE/EY%20Analyse%20Nachhaltigkeitsberichterstattung%202019.pdf. 136 “This option indicates that a report contains the minimum information needed to understand the nature of the organization, its material topics and related impacts, and how these are managed.” See GRI 101: Foundation 2016, p. 21, https://www.globalreporting.org/standards/media/1036/gri101-foundation-2016.pdf (last accessed on 3 February 2020). 137 The comprehensive option “builds on the Core option by requiring additional disclosures on the organization’s strategy, ethics and integrity, and governance. In addition, the organization is required to report more extensively on its impacts by reporting all the topic-specific disclosures for each material topic covered by the GRI Standards.” See GRI 101: Foundation 2016, p. 21, https:// www.globalreporting.org/standards/media/1036/gri-101-foundation-2016.pdf. 138 Ernst & Young, Nachhaltigkeitsberichterstattung österreichischer Top-Unternehmen. Studie 2019. Themenschwerpunk: Nachhaltigkeits- und Diversitätsverbesserungsgesetz, p. 22 et sqq., https://www.ey.com/Publication/vwLUAssets/ey-analyse-zur-nachhaltigkeitsberichterstattung-inoesterreich/$FILE/EY%20Analyse%20Nachhaltigkeitsberichterstattung%202019.pdf.

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largest in Austria. In the author’s view, the Austrian legislator should consider making external evaluations of CSR reports a legal requirement.

4.5.2.2

PwC 2018 Study on CSR Reporting in Austria

The PwC 2018 Study on CSR reporting in Austria (“PwC Study”) focused on 40 companies (including 33 Prime Market-listed companies) which were subject to the NaDiVeG disclosure requirements. The deadline of the study was 30 August 2018. It is striking that 90% of the companies analysed considered the interests of their stakeholders in order to identify the material impacts of the company’s activities and the relevant social and environmental aspects. As mentioned above in Sect. 4.5.1, the NFI Directive and the NaDiVeG in particular require the disclosure of information with regard to five minimum non-financial matters (environmental, social, employee, human rights and anti-corruption/bribery matters). It should be mentioned again that this disclosure obligation is of course based on the comply-or-explain principle. It is impressive that 85% of the companies analysed in the PwC Study report on all of these non-financial matters (63% of the Prime Market-listed companies even in detail). This serves as evidence that the comply-or-explain principle seems to work fine in Austria. The legal pressure to explain non-compliance to the investors and stakeholders seems to have a major deterrent effect on companies.139 Although, a great majority of the companies analysed in the PwC Study discloses information on all five non-financial aspects, it is rather disappointing that less than a fifth of the companies included quantified non-financial targets with regard to social, human rights and anti-corruption aspects. Less than 40% disclosed such targets in employment and 50% in environmental matters. These figures should definitely be improved as quantified non-financial targets are important for the investors’ and stakeholders’ assessment of a company’s CSR policies. In particular, it makes the CSR information verifiable and enables them to perform a year-by-year comparison of the figures. However, it is positive that 93% of the companies reported on nonfinancial key performance indicators regarding to environmental (in particular energy consumption and greenhouse gas emissions) and employment (in particular accidents at work and diversity matters) aspects. 75% reported such indicators concerning social matters. It is noticeable that in comparison, only about a half of the reporting companies explained non-financial key performance indicators with respect to human rights and anti-corruption issues. Again, presenting key figures or qualitative data on material CSR aspects is crucial for investors and stakeholders to assess the long-term company’s development, performance and position, as material CSR aspects can be major value drivers (either in positive or negative terms).140 139 PwC,

Das erste Jahr NaDiVeG. Ergebnisse, Erfahrungen, Empfehlungen (2018) p. 5 et sqq., https://www.pwc.at/de/publikationen/klimawandel-nachhaltigkeit/pwc_wu_das_erste_jahr_n adiveg_web.pdf (last accessed on 3 February 2020). 140 PwC, Das erste Jahr NaDiVeG. Ergebnisse, Erfahrungen, Empfehlungen, p. 20 et sqq., https://www.pwc.at/de/publikationen/klimawandel-nachhaltigkeit/pwc_wu_das_erste_jahr_n adiveg_web.pdf.

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In terms of supply chain sustainability, companies tend to report risks less frequently and in less detail than risks from their own business activities. In the supply chain, companies most often address human rights (60%) and environmental concerns (58%) followed by social risks (50%) or risks for employees (45%). Corruption risks in connection with the supply chain are reported by 30% of companies.141

4.6 The GRI Sustainability Reporting Standards Based on the facts that the GRI (i) is the most widely used CSR reporting framework in the world and (ii) is recognized as international framework in terms of Sect. 243b (5) of the UGB and the NFI Directive,142 the GRI Standards shall be covered in more detail. The GRI is an independent international organization which has been offering a framework for CSR reporting since 1997. The GRI Standards were developed by the Global Sustainability Standards Board (“GSSB”) and published in October 2016. They are the latest evolution of the GRI CSR reporting framework. The GRI Standards are a set of modular reporting standards. It should be emphasized that all of the disclosure obligations contained in the NFI Directive and the NaDiVeG are covered by the GRI Standards which include three universal standards (GRI 101: Foundation, GRI 102: General Disclosures and GRI 103: Management Approach) and 33 topic-specific standards organized into economic, environmental and social topics. The GRI document “Linking the GRI Standards and the European Directive on non-financial and diversity disclosure” contains an overview in tabular form (linkage tables) connecting the five minimum non-financial matters of the NFI Directive (environmental, social, employee, human rights and anti-corruption/bribery matters) with GRI’s universal and topic-specific standards.143 If a CSR report of a company is in accordance with the GRI Standards, it “provides a full and balanced picture of an organization’s material topics and related impacts, as well as how these impacts are managed.” A company may also refer in its CSR report to selected GRI Standards (or parts of selected GRI Standards) if it only intends to report specific information (referenced report). If a company chooses the second approach, it is not allowed to claim that its CSR report is in accordance with the GRI Standards. Instead, this company may include in its CSR report and 141 PwC, Das erste Jahr NaDiVeG. Ergebnisse, Erfahrungen, Empfehlungen, p. 24, https://www. pwc.at/de/publikationen/klimawandel-nachhaltigkeit/pwc_wu_das_erste_jahr_nadiveg_web.pdf. 142 Recital 9 of Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups, https://eur-lex.europa.eu/legal-content/EN/TXT/ PDF/?uri=CELEX:32014L0095&from=EN. 143 GRI, Linking the GRI Standards and the European Directive on non-financial and diversity disclosure, p. 3 et sqq., https://www.globalreporting.org/standards/resource-download-center/linking-gristandards-and-european-directive-on-non-financial-and-diversity-disclosure/.

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any other published materials a “GRI-referenced claim” only, because it does not provide a full picture of its material CSR issues and impacts.144 To be in accordance with the GRI Standards requires to (i) apply the GRI Reporting Principles; (ii) report the required disclosures from GRI 102: General Disclosures; and (iii) identify and report on every material topic.145 The GRI Reporting Principles are divided into reporting principles for defining report content and report quality.146 The GRI Reporting Principles for defining report content deal with stakeholder inclusiveness (identification of stakeholders147 and implementation of stakeholders’ reasonable expectations and interests); (ii) sustainability context (company’s performance in the CSR context in terms of the company’s contribution to the improvement or deterioration of economic, environmental or social conditions at a local, regional or global level); (iii) materiality (report on positive or negative significant economic, environmental and social impacts and on topics which substantially influence the assessments and decisions of the stakeholders); and (iv) completeness (list of all material CSR topics; material impacts along the entire supply chain have to be taken into account and reported on; selected information must be complete for the time period covered in the CSR report; no omittance of relevant information).148 (i)

The GRI Reporting Principles for defining report quality cover (i)

accuracy (CSR reports shall be sufficiently accurate and detailed so that stakeholders are able to assess the reporting company’s performance); (ii) balance (inclusion of both positive and negative aspects and trends on a yearto-year basis); 144 GRI 101: Foundation 2016, p. 4 et sqq., https://www.globalreporting.org/standards/media/1036/

gri-101-foundation-2016.pdf. 101: Foundation 2016, p. 17, https://www.globalreporting.org/standards/media/1036/gri101-foundation-2016.pdf. 146 GRI 101: Foundation 2016, p. 7, https://www.globalreporting.org/standards/media/1036/gri101-foundation-2016.pdf. 147 The GRI Standards define the term “stakeholder” as follows: “Stakeholders are defined as entities or individuals that can reasonably be expected to be significantly affected by the reporting organization’s activities, products, or services; or whose actions can reasonably be expected to affect the ability of the organization to implement its strategies or achieve its objectives. This includes, but is not limited to, entities or individuals whose rights under law or international conventions provide them with legitimate claims vis-à-vis the organization. Stakeholders can include employees and other workers, shareholders, suppliers, vulnerable groups, local communities, and NGOs or other civil society organizations, among others.” See GRI 101: Foundation 2016, p. 8, https://www. globalreporting.org/standards/media/1036/gri-101-foundation-2016.pdf. 148 GRI 101: Foundation 2016, p. 8 et sqq., https://www.globalreporting.org/standards/media/1036/ gri-101-foundation-2016.pdf. 145 GRI

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(iii) clarity (CSR information must be presented to stakeholders in an understandable and accessible manner); (iv) comparability (CSR information must be presented in a manner for stakeholders to be able to analyse the company’s objectives and changes of the company’s performance over time; the CSR report should include total numbers and/or ratios to enable analytic comparisons; it should be possible to compare the CSR information an a year-by-year basis and to compare the absolute data, such as tons of waste, and normalized data, such as waste per unit of production, with appropriate benchmarks); (v) reliability (identification of scope and extent of external assurance; inclusion of reliable evidence to support assumptions or complex calculations; identification of original sources of information contained in the CSR report); and (vi) timeliness (CSR information should be made available regularly and in time so that stakeholders can make informed decisions).149 The required disclosures from “GRI 102: General Disclosures” relate to the (i) (ii) (iii) (iv) (v) (vi)

organizational profile (Disclosures 102-1–102-13); strategy (Disclosures 102-14–102-15); ethics and integrity (Disclosures 102-16–102-17); governance (Disclosures 102-18–102-39); stakeholder engagement (Disclosures 102-40–102-44); and reporting practice (Disclosures 102-45–102-56).150

Being in accordance with the GRI Standards also involves the identification of and the reporting on material topics: The material topics should be identified by using the GRI Reporting Principles for defining report content (stakeholder inclusiveness, sustainability context, materiality and completeness). It is also emphasized by the GRI Standards that a reporting company should identify “the Boundaries for each material topic” as well. This means that the material topics have to be identified along the entire supply and value chain. Disclosure 102-47 (GRI 102: General Disclosures) requires the reporting companies to disclose in their CSR report a “list of the material topics identified in the process for defining report content.” An explanation of why each topic is material must be reported under Disclosure 103-1 (GRI 103: Management Approach). Reporting companies are also obliged to report their management approach disclosures for each material topic using the GRI 103: Management Approach. The management approach disclosures provide a “narrative information about how the organization identifies, analyzes, and responds to its actual and potential impacts.” This includes a description of the reporting company’s policies, commitments, goals and targets, responsibilities, resources, grievance mechanisms, and specific actions such as processes, projects, programs and initiatives (Disclosure 103-2 of the GRI 103: Management Approach). CSR reports must also 149 GRI 101: Foundation 2016, p. 13 et sqq., https://www.globalreporting.org/standards/media/ 1036/gri-101-foundation-2016.pdf. 150 GRI 102: General Disclosures 2016, https://www.globalreporting.org/standards/media/1037/gri102-general-disclosures-2016.pdf (last accessed on 4 February 2020).

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contain explanations of how a company evaluates its management approach: Mechanisms for monitoring the effectiveness of a company’s management approach may include internal or external auditing or verification, measurement systems, external performance ratings, benchmarking, stakeholder feedback and grievance mechanisms (Disclosure 103-3 of the GRI 103: Management Approach). Furthermore, for each material topic CSR reports shall also contain topic-specific disclosures using the GRI Standards series 200 (economic topics), 300 (environmental topics) or 400 (social topics).151 Finally, it is important to note that there are two options available for reporting companies to claim to be in accordance with the GRI Standards: the core option and the comprehensive option.152 It should be reiterated that in all of the Austrian companies’ CSR reports, which applied the GRI Standards, the core option was chosen.153 Does this mean that core option reporters may produce much less detailed CSR reports? Are core option reports substantially less useful for investors and stakeholders to assess a company’s CSR policies and achievements? The short answer is no. Core option reporters still have to comply with all of the GRI Reporting Principles defining report content and report quality contained in the GRI 101: Foundation. They also have to identify and report on every material CSR topic. Moreover, core option reporters must for each material topic comply with all reporting requirements from the GRI 103: Management Approach as well.154 The two most significant differences between core and comprehensive option reporters are as follows: Core reporters only have to comply with the reporting requirements for selected disclosures contained in the GRI 102: General Disclosures. Comprehensive reporters must comply with all of these disclosures. The softening of the GRI disclosure requirements for core reporters mainly concerns the governance-related disclosures. Core reporters only have to disclose their governance structure (Disclosure 102-18) but may choose to not report on the other governance-related disclosures (Disclosures 102-19–102-39). This is rather neglectable as Austrian stock exchange-listed companies must anyway prepare and disclose a mandatory corporate governance report based on Sect. 243c (1) of the AktG. For this monograph, it is relevant that core reporters do not have to disclose their mechanisms for advice and concerns abouts ethics (Disclosure 102-17), but such mechanisms are usually part of the various compliance systems of Austrian stock corporations. It must be stressed that, like comprehensive reporters, core reporters must comply with all disclosures relating 151 GRI 101: Foundation 2016, p. 18 et sq., https://www.globalreporting.org/standards/media/1036/

gri-101-foundation-2016.pdf; GRI 103: Management Approach 2016, p. 4 et sqq., https://www.glo balreporting.org/standards/media/1038/gri-103-management-approach-2016.pdf (last accessed on 5 February 2020). 152 GRI 101: Foundation 2016, p. 21, https://www.globalreporting.org/standards/media/1036/gri101-foundation-2016.pdf. 153 See above Sect. 4.5.2.1. 154 GRI 101: Foundation 2016, p. 23, https://www.globalreporting.org/standards/media/1036/gri101-foundation-2016.pdf.

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to the organizational profile 102-1–102-13), stakeholder engagement (Disclosures 102-40–102-44) and reporting practice (Disclosures 102-45–102-56).155 Differences are unfortunately more severe regarding the use of the 33 topicspecific GRI Standards (series 200, 300 and 400). Comprehensive reporters must comply with all reporting requirements for all topic-specific disclosures. Core reporters only have to comply with all reporting requirements for at least one topicspecific disclosure. Each of the GRI Standards of the series 200, 300 and 400 contain several topic-specific disclosures. For example, GRI 305: Emissions lists seven topicspecific disclosures (Disclosures 305-1–305-7) such as direct emissions (Disclosure 305-1), indirect emissions (Disclosure 305-2), GHG emissions (Disclosure 305-4), etc. Even if a core reporter identifies its emissions as a material topic, it is allowed to report on only one topic-specific disclosure listed under GRI 305: Emissions. Comprehensive reporters would have to report on all seven topic-specific disclosures. This can have the consequence that important topic-specific disclosures are not made by core reporters. Hence, it is quite unsatisfactory that not even one Austrian company chose the comprehensive option.156 The importance of implementing CSR policies throughout a company’s supply and value chain has been highlighted several times in this monograph. GRI 308: Supplier Environmental Assessment157 and GRI 414: Supplier Social Assessment158 address environmental and social issues along the supply chain. Each of these GRI Standards includes the following two topic-specific disclosures: GRI 308: Supplier Environmental Assessment: (i) Disclosure 308-1: New suppliers that were screened using environmental criteria. (ii) Disclosure 308-2: Negative environmental impacts in the supply chain and actions taken. GRI 414: Supplier Social Assessment: (i) Disclosure 414-1 New suppliers that were screened using social criteria. (ii) Disclosure 414-2 Negative social impacts in the supply chain and actions taken. Core reporters may only select one topic-specific disclosure which means that, for example, it would be possible not to report on the negative environmental or social impacts in the supply chain and actions taken. This cannot be acceptable for investors and stakeholders. 155 GRI 101: Foundation 2016, p. 23, https://www.globalreporting.org/standards/media/1036/gri101-foundation-2016.pdf. 156 GRI 101: Foundation 2016, p. 23, https://www.globalreporting.org/standards/media/1036/gri101-foundation-2016.pdf; GRI 305: Emissions 2016, https://www.globalreporting.org/standards/ media/1012/gri-305-emissions-2016.pdf (last accessed on 5 February 2020). 157 GRI 308: Supplier Environmental Assessment 2016, https://www.globalreporting.org/standa rds/media/1015/gri-308-supplier-environmental-assessment-2016.pdf (last accessed on 5 February 2020). 158 GRI 414: Supplier Social Assessment 2016, https://www.globalreporting.org/standards/media/ 1029/gri-414-supplier-social-assessment-2016.pdf (last accessed on 5 February 2020).

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It should also not remain unmentioned that the GRI Standards recommend external assurance, but do not require it for both core and comprehensive reporters to be in accordance with the GRI Standards.159 This is an evident weakness of the GRI Standards.

4.7 Profit-Oriented Motives for CSR in Austria? In 2008, Raith/Ungericht/Korenjak (University of Graz, Austria) conducted interviews with more than 600 Austrian companies. The study distinguishes between CSR leaders and the national average. Most of the interviewees agreed on the fact that CSR can pay off at least in the long-term. Among other questions, the interviewees were asked about very important motives for their CSR activities. In terms of profit-oriented motives, it is particularly interesting that 67% of the CSR leaders (54% of the national average) mentioned securing the business location (Standortsicherung) in the long-term as very important motive for CSR. Customer acquisition and customer retention was a very important motive for 55% of the CSR leaders (58% of the national average). Moreover, 54% of the CSR leaders (45% of the national average) considered the company’s reputation, and 47% of the CSR leaders (41% of the national average) pointed out cost advantages by energy and resource savings as very important motives for CSR. However, high competitive and cost pressure (43% of the CSR leaders; 40% of the national average) and too high costs in comparison with the benefits of CSR (33% of the CSR leaders; 48% of the national average) are mentioned most frequently when asked about motives for not being more engaged in CSR activities. It is striking that 76% of the CSR leaders (71% of the national average) believed in CSR as a competitive advantage for the business location Austria.160

4.8 Mandatory Due Diligence as to Human Rights, Environmental and Governance Risks Along Supply Chains On 11 September 2020, the European Parliament’s Committee on Legal Affairs released a draft report161 including the text of a proposal for a Directive of the European Parliament and of the Council on Corporate Due Diligence and Corporate 159 GRI,

Linking the GRI Standards and the European Directive on non-financial and diversity disclosure, p. 4, https://www.globalreporting.org/standards/resource-download-center/linking-gristandards-and-european-directive-on-non-financial-and-diversity-disclosure/. 160 Raith/Ungericht/Korenjak, Corporate Social Responsibility in Österreich. Studie im Auftrag des Netwerks Soziale Verantwortung (NeSoVe) (March 2009) p. 7, https://www.nesove.at/wp-content/ uploads/2018/05/Studie_CSR_in-_Oestereich_final.pdf (last accessed on 17 May 2020). 161 European Parliament, Committee on Legal Affairs, Draft Report with Recommendations to the Commission on Corporate Due Diligence and Corporate Accountability (2020/2129

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Accountability (“Proposed Directive”). In this document, the European Parliament’s Committee on Legal Affairs requests the European Commission to submit without undue delay a legislative proposal on mandatory supply chain due diligence taking into consideration its Proposed Directive. The European Commission is expected to present a legislative proposal in early 2021.162 It remains to be seen to what extent the European Commission will accept the recommendations of the European Parliament’s Committee on Legal Affairs. Considering the ongoing heated climate change debates, it is in particular positive that unlike other current national proposals (e.g. in Germany),163 the Proposed Directive expressly encompasses environmental risks as well. They are defined as any potential or actual adverse impact that may impair the right to a healthy environment, whether temporarily or permanently, and of whatever magnitude, duration or frequency. These include, but are not limited to, adverse impacts on the climate, the sustainable use of natural resources, and biodiversity and ecosystems. These risks include climate change, air and water pollution, deforestation, loss in biodiversity, and greenhouse emissions.164

The Proposed Directive shall apply to all undertakings governed by the law of an EU member state, regardless of their size, sector, and whether they are private or state-owned. However, Article 17 (2) of the Proposed Directive provides that small, medium-sized and microundertakings shall be eligible for financial support to perform their due diligence obligation. The Proposed Directive shall apply as well to limited liability undertakings seated outside of the EU if they operate within the EU selling goods or providing services. EU member states may exempt microundertakings from the application of the Proposed Directive.165 Article 4 (1) requires undertakings to “carry out due diligence with respect to human rights, environmental and governance risks in their operations and business relationships.” The Proposed Directive defines due diligence as follows: ‘due diligence’ means the process put in place by an undertaking aimed at identifying, ceasing, preventing, mitigating, monitoring, disclosing, accounting for, addressing, and remediating the risks posed to human rights, including social and labour rights, the environment, including through climate change, and to governance, both by its own operations and by those of its business relationships.166

Human rights, environmental or governance risks have to be identified and assessed by the undertakings in an ongoing manner.167 The undertakings have to (INL)), https://www.europarl.europa.eu/doceo/document/JURI-PR-657191_EN.pdf (last accessed on 6 December 2020). 162 Vesper-Gräske/Hammerschmid (Freshfields Bruckhaus Deringer), EU mandatory supply chain due diligence—European Parliament publishes draft directive, https://www.lexology.com/library/detail.aspx?g = 6789ecd3-e98a-42e7-857a-00dbc369a098 (last accessed on 6 December 2020). 163 Vesper-Gräske/Hammerschmid (Freshfields Bruckhaus Deringer), https://www.lexology.com/library/detail.aspx?g = 6789ecd3-e98a-42e7-857a-00dbc369a098. 164 Article 3 of the Proposed Directive. 165 Article 2 of the Proposed Directive. 166 Article 3 of the Proposed Directive. 167 Article 4 (2) of the Proposed Directive.

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make reasonable efforts to identify subcontractors and suppliers,168 are obliged to conduct a due diligence along the entire value or supply chain169 and must ensure and regularly verify that their business partners put in place and comply with the undertakings’ human rights, environmental and governance policies by implementing contractual clauses and adopting codes of conduct.170 The definition of value chains by Article 3 is very broad and covers all activities, operations, business relationships and investment chains of an undertaking inside or outside the EU. Value chain includes entities with which the undertaking has a direct or indirect business relationship, upstream and downstream, and which either (a) supply products or services that contribute to the undertaking’s own products or services, or (b) receive products or services from the undertaking.

The undertakings should involve their stakeholders when establishing and implementing their due diligence strategy. Stakeholders shall be entitled to request from the undertaking that they are consulted.171 Large undertakings should be mandated to establish an advisory committee including stakeholders and experts.172 Article 5 (6) of the Proposed Directive clarifies that if undertakings refuse consultations, the stakeholders may refer the matter to the competent national authority. Article 3 defines the term “stakeholders” as follows: ‘stakeholders’ means individuals and groups of individuals whose rights or interests may be affected by the human rights, environmental and good governance risks posed by an undertaking or its business relationships, as well as organisations whose statutory purpose is the defence of human rights, including social and labour rights, the environment and good governance, and includes but is not limited to workers and their representatives, local communities, indigenous peoples, citizens’ associations, trade unions, civil society organisations and the undertakings’ shareholders.

Pursuant to Article 9 (1), the undertakings have to set up a grievance mechanism allowing any stakeholder to voice concerns regarding the existence of human rights, environmental or governance risks. Moreover, the undertakings have to “publish concerns raised via such grievance mechanisms as well as remediation efforts and regularly report on progress made in those instances.”173 Articles 14 (1) and 15 (1) set forth that competent national authorities shall be vested with the power to supervise the application of the Proposed Directive and conduct investigations to ensure the undertakings’ compliance with the Proposed Directive. The competent national authorities shall be able to grant interim measures if an undertaking fails to comply with the Proposed Directive, and the danger of irreparable harm exists.174 The members of the undertakings’ administrative, 168 Article

4 (5) of the Proposed Directive. 4 (8) of the Proposed Directive. 170 Article 4 (9) and (10) of the Proposed Directive. 171 Article 5 (1) and (2) of the Proposed Directive. 172 Article 12 (2) of the Proposed Directive. 173 Article 5 (4) of the Proposed Directive. 174 Article 15 (6) of the Proposed Directive. 169 Article

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management and supervisory bodies shall be collectively responsible “for ensuring that the due diligence process and an the undertaking’s business decisions, including remuneration policies, are consistent with this Directive.”175 The Proposed Directive obliges the member states to introduce a penalty regime applicable to infringements of the national provisions adopted in accordance with the Proposed Directive. Repeated infringements that are committed intentionally or with serious negligence shall constitute a criminal offence.176 Article 20 confirms that “[t]he fact that an undertaking has carried out due diligence in compliance with the requirements set out in this Directive shall not absolve the undertaking of any civil liability which it may incur pursuant to national law.” In comparison with the NFI Directive, the Proposed Directive is not only directed at large stock corporations but to SMEs as well. Unlike the mandatory minimum due diligence requirements along the value chain contained in the Proposed Directive, the NFI Directive’s disclosure obligations are only based on the comply-or-explain principle. In contrast to the NFI Directive, the Proposed Directive expressly refers to the adoption of codes of conduct and stipulates the undertakings’ obligation to make contractually binding their human rights, environmental and governance policies along the entire value chain. Another major difference to the NFI Directive is the requirement for setting up national authorities which shall be authorized to supervise the undertakings’ compliance. All in all, the Proposed Directive is very far-reaching. Thus, it is highly questionable whether the European Commission’s upcoming legislative proposal will indeed fully adopt the Proposed Directive.

175 Article 176 Article

11 (1) of the Proposed Directive. 19 (1) and (2) of the Proposed Directive.

Chapter 5

Codes of Ethics and CSR in China

5.1 Mandatory Stakeholder Value in China? This section covers China with the exception of Hong Kong. In comparison with Austrian and in particular with US law, Chinese law leans the most towards the Stakeholder Theory of Corporate Governance. According to the OECD “[r]especting the legal rights and interests of stakeholders, protecting the environment and delivering social responsibility have become a code of conduct for businesses in China […] CSR is both an obligation that businesses undertake to account for social communities and stakeholders and a right that social communities and stakeholders are entitled to assert to businesses.” Furthermore, the OECD confirmed that China has a wide range of standards for environmental protection, product quality, minimum wages and workplace safety. Violations of CSR obligations may lead to forced closure, revocation of business licenses, compensation for economic loss under civil law and even criminal liability.1 Chinese income tax law provides tax reductions and deductions for certain CSR activities. For example, certain environmental protection projects and energy/water conservation projects2 are entitled to a 3+3 years tax holiday, i.e. the first three years, companies are exempt from corporate income tax, and the following three years the corporate income tax is reduced by 50%.3

1 OECD,

Corporate Governance of Listed Companies in China. Self-Assessment by the China Securities Regulatory Commission (2011) p. 95, https://www.oecd.org/corporate/ca/corporategov ernanceprinciples/48444985.pdf (last accessed on 21 February 2020). 2 Examples for such projects are public sewage treatment, public refuse treatment, comprehensive development and utilization of methane, technologies alteration for energy-saving and emission reduction, seawater desalination projects, etc. 3 PwC, The People’s Republic of China Tax Fact and Figures 2019, p. 7, https://www.pwccn.com/en/ tax/publications/people-republic-of-china-tax-facts-2019.pdf (last accessed on 21 February 2020). © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 A. Peter, CSR and Codes of Business Ethics in the USA, Austria (EU) and China and their Enforcement in International Supply Chain Arbitrations, https://doi.org/10.1007/978-981-33-6073-0_5

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5.1.1 The Chinese Company Law The Chinese Company Law4 came into effect in March 1994. In the course of a major revision of the Chinese Company Law by the National People’s Congress (“NPC”) in 2006, business ethics and CSR were explicitly recognized for the first time as legislative purposes of the Chinese Company Law.5 Article 5 of the Chinese Company Law expressly mentions the conforming to business ethics and the undertaking of social responsibility in connection with a company’s business activities: “In the course of doing business, a company must comply with laws and administrative regulations, conform to social morality and business ethics, act in good faith, subject itself to the government and the public supervision, and undertake social responsibility.” The legal effect of this unique provision is unfortunately unclear. Chinese corporate law scholars offer different interpretations. Some understand it as mandatory being part of the directors’ fiduciary duties, and others view it as exhortatory given that Chinese Company Law does not contain a specification of the terms “business ethics” and “social responsibility”.6 The Chinese Company Law also contains substantial provisions providing for employee representation in a company’s board of supervisors: Articles 51 and 117 stipulate that the board of supervisors in limited liability companies (“LLCs”) and companies limited by shares (“CLSs”) shall include shareholders’ and employees’ representatives. The number of the latter group shall not be less than one third of the members of the board of supervisors. Moreover, Article 18 of the Chinese Company Law requires the employees to organize a labour union which shall sign on behalf of the company’s employees collective agreements with the company with respect to wages, working hours, welfare, insurance, labour safety and health of the employees.7

5.1.2 The Chinese Code of Corporate Governance The Chinese Code of Corporate Governance for Listed Companies (“CCCG”)8 was issued by the China Securities Regulatory Commission (“CSRC”) in 2002 and

4 Company

Law of the People‘s Republic of China (last revised in 2018).

5 Li-Wen Lin, Corporate Social Responsibility in China: Window Dressing or Structural Change, 28

Berkeley J. Int’l. Law (2010) p. 64 (p. 70). 6 Li-Wen Lin, 28 Berkeley J. Int’l. Law (2010) p. 96; Sui/Yang/Zhang, Is Corporate Social Responsi-

bility Used to Mask Corporate Speculation? Evidence from Emerging China, Sustainability 2019, 11, 3375. 7 Li-Wen Lin, 28 Berkeley J. Int’l. Law (2010) p. 68 et sqq. 8 The Chinese Code of Corporate Governance for Listed Companies can be accessed at http://www. csrc.gov.cn/pub/csrc_en/laws/rfdm/DepartmentRules/201904/P020190415336431477120.pdf.

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revised in June 2018.9 The CCCG is applicable to companies listed on a Chinese stock exchange10 : The Code is applicable to companies limited by shares that are incorporated according to the Company Law and whose stocks are listed and traded on domestic stock exchanges in the People’s Republic of China. Listed companies should act in the spirit of the Code in their efforts to improve corporate governance. Companies’ articles of association and other policies on corporate governance should satisfy the requirements of the Code. Listed companies are encouraged to explore and enrich good practices based on their respective characteristics in order to improve corporate governance.11

Unlike the ACCG, the CCCG does not follow the comply-or-explain principle but is based on the principle of mandatory regulation. In the event of non-compliance with the CCCG, the CSRC can order rectification. However, compliance with the CCCG cannot be enforced by the courts.12 Accordingly, Articles 6 and 7 of the CCCG confirm the CSRC’s power to assess, supervise and regulate the corporate governance of stock exchange-listed companies. The CSRC may urge the companies to take effective measures to improve their corporate governance if significant problems are detected. If stock exchange-listed companies refuse to rectify relevant corporate governance issues, “[t]he CSRC should impose supervision measures on the companies and the personnel responsible for rectification, such as ordering them to rectify, recording them in credit record, public criticism, recognizing them as ineligible and banning of market entry.”13 In terms of CSR and the Stakeholder Theory of Corporate Governance, the CCCG sets forth that companies listed on a Chinese stock exchange “should deliver on the vision of innovative, coordinated, green and open development for all, promote entrepreneurship, fulfill social responsibilities, and develop good corporate governance practices. Listed companies should […] safeguard shareholders’ legitimate rights and ensure fair treatment of shareholders, respect basic rights and interests of stakeholders and effectively improve the overall value of the company.” It is striking that the CCCG combines the pursuit of both the shareholders’ and stakeholders’ interests with the improvement of the overall value of the company. Therefore, the CCCG does not find a contradiction in a simultaneous long-term profit maximization and the representation and the pursuit of the interests of the stakeholders. In addition, it is notable that Chap. 8 of the CCCG (titled “Stakeholders, Environmental Protection and Social Responsibility”) solely covers CSR matters. Article 83 9 See Asian Corporate Governance Association, Awakening Governance. The evolution of corporate

governance in China (2018) p. 25, https://www.acga-asia.org/specialist-research.php (last accessed on 20 February 2020). 10 Article 2 of the CCCG. 11 Article 2 of the CCCG. 12 Lin Lin, Code of Corporate Governance: Lessons from Singapore to China (July 2019) p. 5; https://www.researchgate.net/publication/335965311_Code_of_Corporate_Governance_Less ons_from_Singapore_to_China (last accessed on 23 February 2020). 13 Item 5 of CSRC Announcement [2008] No. 27, http://www.csrc.gov.cn/pub/csrc_en/laws/ove rRule/Announcement/200807/t20080724_71014.html (last accessed on 23 February 2020).

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of the CCCG mentions examples of stakeholders and emphasizes the significance of communication and cooperation between a company and its stakeholders: “A listed company should respect the legitimate rights of stakeholders including banks and other creditors, employees, customers, suppliers, communities, and maintain effective communication and cooperation with stakeholders to jointly promote the sustainable and healthy development of the company.” Article 85 requires a company to strengthen the protection of employees’ rights and interests and to support the congress of workers and trade union organizations. Given that the 13th Five-Year Plan (2016–2020) strongly focuses on green finance and environmental improvements,14 it is not surprising that Article 86 of the CCCG demands from listed companies to “actively implement the concept of green development, integrate ecological and environmental protection requirements into the development strategy and corporate governance process, actively participate in the construction of ecological civilization, and play an exemplary role in pollution prevention, resource conservation, and ecological protection.” It should be pointed out as well that Article 62 of the CCCG instructs companies to connect the incentives for the directors and supervisors of a company with the achievement of certain CSR targets: “The incentive mechanism of a listed company should be structured in a way that is conducive to enhancing the company’s innovation capability and promoting the company’s sustainable development, and should not impair the legitimate rights and interests of the listed company and its shareholders.” In the author’s view, creating such incentives for the members of the board of directors and board of supervisors can be very effective, but at the same time, measures have to be taken to avoid greenwashing.

5.1.3 Chinese Stock Exchange Rules Both the listing requirements of the Shenzhen Stock Exchange (“SZSE”) and the Shanghai Stock Exchange (“SSE”) mandatorily require for certain listed companies to disclose CSR information. The SZSE mandated CSR reporting for companies listed on the Shenzhen 100 Index.15 The SSE obliged three types of listed companies to issue annual CSR reports: companies listed on the SSE Corporate Governance

14 Asian

Corporate Governance Association, Awakening Governance. The evolution of corporate governance in China, p. 25, https://www.acga-asia.org/specialist-research.php. 15 The Shenzhen 100 Index comprises the 100 largest and most liquid A-share stocks listed and trading on the Shenzhen Stock Exchange. See Shenzhen 100 Index, http://www.cnindex.com.cn/ docs/jj_399330_e.pdf (last accessed on 22 May 2020).

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Index,16 companies that also have overseas listings and companies in the financial sector.17

5.1.3.1

The Shenzhen Stock Exchange Social Responsibility Instructions to Listed Companies

The SZSE adopted the Social Responsibility Instructions to Listed Companies (“SZSE CSR Instructions”) in 2006.18 The SZSE CSR Instructions consist of eight chapters. Chapter I includes some general provisions: Article 3 emphasizes the compatibility of pursuing economic targets and the protection of shareholders’ interests with the representation of the interests of a variety of stakeholders and the protection of the environment: While pursuing economic results and protecting shareholders’ interests, listed companies […] should proactively protect the legitimate rights and interests of their creditors and employees, be honest and trustworthy towards their suppliers, customers and consumers, and commit themselves to social welfare services like environmental protection and community development in order to achieve social harmony.

Article 4 demands that companies should observe moral and business ethics. Chapters II–IV provide specific rules for the protection of the interests of shareholders and creditors (Chapter II), employees (Chapter III) and suppliers, customers and consumers (Chapter IV). Chapter V covers environmental protection and sustainable development, and Chapter VI deals with public relations and social welfare services. As it is crucial for the avoidance of greenwashing and window-dressing that ethical and CSR policies are guaranteed along the entire supply chain, it is in particular notable that Article 23 specifies that “[c]ompanies shall urge their customers and suppliers to comply with business code of conduct and moral ethics or stop partnership with customers or suppliers who refuse to make improvement in this regard.” Article 35 underlines the importance of disclosing CSR information by requiring 16 All stocks from the SSE Corporate Governance board compose the constituents of the SSE Corporate Governance Index. Ping An Insurance (Group) Company of China Ltd. (for further details on this company see below Sect. 5.3.3) is the top constituent of the SSE Corporate Governance Index. PetroChina Company Limited (see below in Sect. 5.3.1) is a constituent of this index as well. See SSE Corporate Governance Index, http://www.csindex.com.cn/en/indices/index-detail/000019 (last accessed on 22 May 2020). 17 Ioannou/Serafeim, The Consequences of Mandatory Corporate Sustainability Reporting (2017) p. 9 et sq., https://pdfs.semanticscholar.org/f44a/77e9799017edb8a2a90e00b2c2ba742ea2f2.pdf (last accessed on 21 February 2020); Li-Wen Lin, 28 Berkeley J. Int’l. Law (2010) p. 77; Rezaee/Tsui/Cheng/Zhou, Business Sustainability in Asia. Compliance, Performance, and Integrated Reporting & Assurance (2019) p. 94; BSD Consulting, Sustainability Reporting Standards in China (19 April 2016), http://www.bsdconsulting.com/de/insights/article/sustainability-reportingstandards-in-china (last accessed on 28 February 2020). 18 Shenzhen Stock Exchange Social Responsibility Instructions to Listed Companies (25 September 2006), https://sseinitiative.org/wp-content/uploads/2019/12/en-SZSE-Rules.pdf (last accessed on 21 February 2020).

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companies to “work out social responsibility reports on a regular basis based on their review and evaluation of the status quo.”

5.1.3.2

Notice on Strengthening the Social Responsibility of Listed Companies and the Guidelines for Environmental Information Disclosure of Listed Companies on the Shanghai Stock Exchange

In 2008, the SSE promulgated both the Notice on Strengthening the Social Responsibility of Listed Companies (“SSE Notice”) and the Guidelines for Environmental Information Disclosure of Listed Companies (“SSE Guidelines”).19 The SSE Notice stresses under Item 1 both the significance of CSR and profit maximization: All listed companies should enhance their sense of responsibility as members of society, while paying attention to their non-commercial contributions to stakeholders, society, environmental protection, and resource utilization while pursuing their own economic benefits and protecting the interests of shareholders. The company should consciously combine shortterm interests with long-term interests, combine its own development with the comprehensive and balanced development of society, and strive to surpass its business goals.

Item 2 of the SSE Notice demands that companies should form a social responsibility strategic plan and working mechanism. The former ought to, among other things, contain the company’s code of business ethics. Item 5 lets a company formulate the specific content of the annual CSR report according to its own characteristics. However, the CSR report must at least contain information on the employees’ health and safety, product quality control, the reduction of environmental pollution, and the conservation of water resources, biodiversity and energy, etc. It is striking that a CSR report should also inform about how to generate high economic returns to a company’s shareholders. This clearly implies that for the SSE a long-term profit maximization is not in conflict with material CSR measures. The most interesting innovation is provided by Item 4 of the SSE Notice which introduced the so-called social contribution value per share (“SCVPS”). Companies are encouraged to include the SCVPS in their CSR reports. It is a ratio that describes the value creation of a company on CSR performance. The SCVPS should lead to a better understanding of the real value that a company creates not only for its shareholders but also for its stakeholders. The SCVPS is calculated by adding to the profits per share (i) annual taxes to the country, (ii) salaries/wages paid to the employees, (iii) loan interests paid to banks and creditors, (iv) external donations and other values for stakeholders and deducting environmental pollution costs and other forms of social costs.20 19 The

SSE Notice and the SSE Guidelines can be accessed at http://www.sse.com.cn/lawandrules/ sserules/listing/stock/c/c_20150912_3985851.shtml. 20 Lu, Corporate Social and Environmental Responsibility. Another Road to China’s Sustainable Development (2019) p. 261; OECD, Corporate Governance of Listed Companies in China. SelfAssessment by the China Securities Regulatory Commission, p. 100, https://www.oecd.org/corpor ate/ca/corporategovernanceprinciples/48444985.pdf.

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For example, the 2018 CSR report of the China Railway Group Limited contains detailed information on the SCVPS. China Railway Group Limited uses the following calculation method to find out the social contribution value: Corporate social contribution value = profit contribution + tax contribution + debt interest contribution + employee contribution + the public welfare contribution + other contributions – negative contribution to the environment – negative contribution to the safety and quality – other negative contributions.21

The social contribution value per share is calculated by dividing the social contribution value by the company’s total equity. In 2016, the social contribution value was RMB 145.4 billion, and the SCVPS was RMB 6.37. In 2017, the social contribution value reached RMB 158.8 billion, and the SCVPS increased to RMB 6.95. In 2018, the numbers rose again: the social contribution value amounted to RMB 169.8, and the SCVPS went up to RMB 7.43.22 These are excellent figures given that researchers found that between 2008 and 2011, the SCVPS of companies varied from RMB 1.90 to RMB 5.3.23 In 2009, the SSE in cooperation with the China Securities Index Company launched a sustainability index called the SSE Social Responsibility Index. This index selects the 100 corporate stocks with the highest SCVPS.24 The China Railway Group Limited is listed on the SSE Responsibility Index.25 The SSE Guidelines introduced three different forms of CSR disclosure: realtime disclosure of significant environmental events, special disclosure by blacklisted companies and annual CSR reports. The first two disclosure forms are mandatory for all SSE-listed companies, as they are based on environmental regulation. The realtime disclosure requires listed companies within two days to disclose the possible impact of significant environmental events (such as significant investments in projects which have a material impact on the environment, significant governmental investigations or punishments due to violations of the environmental law, material litigations regarding environmental issues, etc.) on the companies’ operations and stakeholders. Companies that are blacklisted by environmental agencies have to disclose within two days information on the kinds, density and quality of pollutants, the conditions of environmental protection facilities, environmental emergency plans and preventive 21 China Railway Group Limited 2018 ESG Report, p. 23, http://www.crecg.com/english/resource/ cms/article/4051/10070723/2019052417220772882.pdf (last accessed on 21 February 2020). 22 China Railway Group Limited 2018 ESG Report, p. 23, http://www.crecg.com/english/resource/ cms/article/4051/10070723/2019052417220772882.pdf. 23 Noronha, Corporate Social Disclosure. Critical Perspectives in China and Japan (2015) p. 37 et sq. 24 China Securities Index Company, Methodology of SSE Social Responsibility Index, http://english. sse.com.cn/indices/indices/list/indexmethods/c/000048_000048hbooken_EN.pdf (last accessed on 21 February 2020); OECD, Corporate Governance of Listed Companies in China. Self-Assessment by the China Securities Regulatory Commission, p. 100, https://www.oecd.org/corporate/ca/corpor ategovernanceprinciples/48444985.pdf. 25 Responsibility Index (Index Information, Constituents List), http://www.csindex.com.cn/en/ind ices/index-detail/0?indx_sname=%E8%B4%A3%E4%BB%BB%E6%8C%87%E6%95%B0 (last accessed on 21 February 2020).

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measures regarding emission reduction. All SSE-listed companies are encouraged to publish annual CSR reports (along with their annual financial reports) on the SSE website. CSR reports should contain information on environmental protection policies, annual goals and performance (this should make the information provided verifiable and comparable), annual consumption of resources and energy, etc.26

5.1.4 SASAC Guidelines to the State-Owned Enterprises Directly Under the Central Government The State-Owned Assets Supervision and Administration Commission of the State Council (“SASAC”) released the Guidelines to the State-Owned Enterprises Directly under the Central Government (“SASAC Guidelines”).27 The SASAC Guidelines are applicable to around 150 state-owned enterprises (“SOEs”) which are controlled by the Chinese central government (“CSOEs”). The CSOEs are highly relevant in China, as they are very large and highly visible. A great majority of the CSOEs (or their subsidiaries) are listed on the SSE and the SHZE. Some of them are even listed in Hong Kong or abroad on overseas stock exchanges. Consequently, SASAC considers the CSOEs as the backbone of China’s economy. SOEs should become the leading examples for all Chinese companies. CSR is intended to be a measure for promoting social harmony. Moreover, the SASAC Guidelines describe CSR as a necessity for the CSOEs to participate in the international market. Fulfilling CSR requirements will be helpful in establishing a responsible public image of Chinese enterprises. SASAC believes that the implementation of CSR will eventually enhance the companies’ competitiveness. Further positive implications of CSR measures expected by SASAC include an increased level of innovations, vitality and creativity among the participating enterprises, added value to corporate brands and images and improvement of staff qualifications. SASAC suggests the integration of CSR into the companies’ corporate governance and business strategy.28 The SASAC Guidelines contain the following major CSR issues: (i) (ii) (iii) (iv)

Compliance with the law and honest business conduct; improvement of the companies’ ability to make sustainable profits; improvement of product quality and service; strengthening resources conservation and environmental protection (CSOEs should be the role models in energy saving and emission reduction); (v) promotion of independent innovation and technology advancement; (vi) ensuring production safety; (vii) protection of employees’ legal rights; and 26 Li-Wen

Lin, 28 Berkeley J. Int’l. Law (2010) p. 77. SASAC Guidelines can be accessed at http://en.sasac.gov.cn/2011/12/06/c_313.htm (last accessed on 28 February 2020). 28 SASAC, Guidelines to the State-Owned Enterprises Directly under the Central Government, http:// en.sasac.gov.cn/2011/12/06/c_313.htm; Li-Wen Lin, 28 Berkeley J. Int’l. Law (2010) p. 72 et sq. 27 The

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(viii) participation in social public welfare programs.29 Furthermore, CSOEs are encouraged to publish regular CSR reports and to set up CSR management, auditing and assessment systems. According to SASAC, CSEOs should benchmark with the best CSR practices, conduct more dialogues and communications with stakeholders, take part in international CSR standard formulation, establish departments coping with CSR matters, introduce statistical CSR indexes and install CSR assessment systems.30 In a separate press release, SASAC recognized the proliferation of CSR initiatives, such as UN Global Compact and ISO 26000 and codes of conducts/ethics and CSR reports of multinational companies.31 Major SOEs, such as China National Petroleum Corporation, State Grid, China Mobile, China Ocean Shipping Group, China Huaneng, China Datang, Sinochem Corporation, Sinopec, SinoSteel, Aluminum Corporation of China and Bao Steel have issued CSR reports.32 This is no surprise, as SASAC mandated in 2009 that all central government-controlled SOEs shall issue CSR reports within three years (by 2012).33

5.2 Corporate Governance in Chinese Companies The Chinese Company Law regulates the two main forms of corporate entities: LLCs and CLSs.34 As this monograph’s focus is on stock exchange-listed corporations, the corporate governance of LLCs will not be outlined.

29 SASAC, Guidelines to the State-Owned Enterprises Directly under the Central Government, http:// en.sasac.gov.cn/2011/12/06/c_313.htm. 30 SASAC, Guidelines to the State-Owned Enterprises Directly under the Central Government, http:// en.sasac.gov.cn/2011/12/06/c_313.htm; Li-Wen Lin, 28 Berkeley J. Int’l. Law (2010) p. 73. 31 Li-Wen Lin, 28 Berkeley J. Int’l. Law (2010) p. 73 et sq. 32 Li-Wen Lin, Legal Transplants through Private Contracting: Codes of Vendor Conduct in Global Supply Chains as an Example, in Tomasic/Wolff (Ed.), Commercial Law in East Asia (2016) p. 187 (p. 215). 33 Rezaee/Tsui/Cheng/Zhou, Business Sustainability in Asia. Compliance, Performance, and Integrated Reporting & Assurance, p. 92; Asian Corporate Governance Association, Awakening Governance. The evolution of corporate governance in China, p. 131, https://www.acga-asia.org/specia list-research.php; Meng Liu, Is Corporate social responsibility China’s secret weapon? (17 March 2015), https://www.weforum.org/agenda/2015/03/is-corporate-social-responsibility-chinas-secretweapon/ (last accessed on 28 February 2020). 34 Ribeiro/Hui, Corporate governance and directors‘ duties in China: overview (1 June 2019) p. 3, https://uk.practicallaw.thomsonreuters.com/4-502-3042?transitionType=Default&con textData=(sc.Default)&firstPage=true&bhcp=1 (last accessed on 29 February 2020).

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5.2.1 The Particularities of the Chinese Two-Tier Board System Although Chinese companies must have a two-tier board structure, there are some differences to two-tier structured Austrian companies and some similarities with one-tier structured US companies. As a matter of fact, the Chinese Company Law takes certain aspects from both corporate governance models and blends them. In addition, the Chinese corporate governance model includes aspects that are foreign to both the one-tier system in the USA and the two-tier system in Austria. Chinese companies have to install a board of directors (not a management board like in Austrian stock corporations!) and a board of supervisors (supervisory board). Hence, the Chinese system takes the board of directors of the one-tier board system and combines it with the supervisory board of the two-tier board system. Like in one-tier structured US corporations, although not explicitly mentioned in the Chinese Company Law,35 the board of directors of a CLS consists of executive (inside directors; employed by the company and involved in the day-to-day management) and non-executive directors (outside directors; not employed by the company and not involved in the day-to-day management).36 The non-executive directors may be considered as independent if they fulfil certain independence criteria. Moreover, the board of directors of a CLS makes key business decisions, such as business plans and investment schemes and decides on the appointment, removal and remuneration of senior officers, such as the CEO, Vice-CEO and officers in charge of the company’s financial affairs.37 Similarly to the supervisory board of an Austrian stock corporation, a Chinese company’s board of supervisors consists of at least three members,38 exercises oversight over the company’s operations and management (including the supervision of the board of directors),39 inspects the company’s finances,40 and one third of the company’s board of supervisors must comprise of employee representatives.41 In stark contrast to the supervisory board of an Austrian stock corporation, the board of supervisors of a Chinese company is considered as the weakest link in

35 Asian Corporate Governance Association, Awakening Governance. The evolution of corporate governance in China, p. 57, https://www.acga-asia.org/specialist-research.php. 36 For more detailed information on the difference between executive and non-executive directors see Deloitte, The different types of directors (2014), https://www2.deloitte.com/za/en/pages/ governance-risk-and-compliance/articles/the-different-types-of-directors.html (last accessed on 29 February 2020). 37 Articles 46, 109 and 113 of the Chinese Company Law; Asian Corporate Governance Association, Awakening Governance. The evolution of corporate governance in China, p. 55, https://www.acgaasia.org/specialist-research.php. 38 Article 117 of the Chinese Company Law. 39 Article 53 of the Chinese Company Law. 40 Article 53 of the Chinese Company Law. 41 Article 117 of the Chinese Company Law.

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China’s corporate governance system.42 The supervisory board is the most powerful and influential body of an Austrian stock corporation because it decides on the appointment and removal of the management board members (including the CEO), and Sect. 95 (5) of the AktG requires the supervisory board’s approval to major transactions, such as the acquisition and sale of participations, enterprises and real estate, investments that exceed certain acquisition costs, the stipulation of general principles of business policy and the granting of a power of procuration, etc. Consequently, the supervisory board of an Austrian stock corporation is not only responsible for ex post supervision but has a very important ex ante supervision function as well. In comparison, the board of supervisors of a Chinese CLS mainly fulfils an ex post supervision role43 (inter alia, by supervising the execution of company duties by the directors and senior officers) and may only propose/recommend (not decide on) the removal of directors and senior officers.44

5.2.2 Independent Directors and Supervisors in Chinese Companies? Most Chinese companies are characterized by a concentrated ownership structure (small free float). It is notable that most of the stock exchange-listed companies have only one controlling shareholder. As a consequence, there are potential conflicts of interest between the controlling shareholder(s) and the minority shareholders and other stakeholders.45 That is why independent directors are crucial. Pursuant to Article 122 of the Chinese Company Law, a listed company shall have independent directors.46 The Chinese Company Law remains silent as to the number of independent directors. However, in 2001, the CSRC released the Guidelines for Introducing Independent Directors to the Boards of Directors of a Listed Company (“CSRC Guidelines”).47 42 Asian Corporate Governance Association, Awakening Governance. The evolution of corporate governance in China, p. 71, https://www.acga-asia.org/specialist-research.php. 43 OECD, Corporate Governance of Listed Companies in China. Self-Assessment by the China Securities Regulatory Commission, p. 79, https://www.oecd.org/corporate/ca/corporategovernanc eprinciples/48444985.pdf. 44 Article 53 of the Chinese Company Law. 45 OECD, Corporate Governance of Listed Companies in China. Self-Assessment by the China Securities Regulatory Commission, p. 3, https://www.oecd.org/corporate/ca/corporategovernanc eprinciples/48444985.pdf; Asian Corporate Governance Association, Awakening Governance. The evolution of corporate governance in China, p. 88, https://www.acga-asia.org/specialist-resear ch.php. 46 Article 34 of the CCCG provides that “[a] listed company should introduce independent directors to its board in accordance with relevant regulations. An independent director should not hold any concurrent position other than a member of a board committee in the listed company.” 47 The CSRC Guidelines can be accessed at http://www.csrc.gov.cn/pub/csrc_en/newsfacts/release/ 200708/t20070810_69191.html (last accessed on 29 February 2020).

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Part I, para. 3 of the CSRC Guidelines mandates that one third of the members of the board of directors of a listed company must be independent. It is noticeable that the CSRC Guidelines intent to make directors independent from management and the controlling shareholders: In particular, directors are only considered as independent if they (i) do not hold a position in the listed company (or its affiliated companies), (ii) do not provide to the listed company (or its subsidiaries) financial, legal or consulting services, (iii) do not hold directly or indirectly more than one 1% of the listed company’s shares or (iv) do not hold a position in an entity holding directly or indirectly more than 5% of the listed company’s shares.48 Furthermore, Article 35 of the CCCG prescribes that “[a]n independent director is prohibited to have any relationship with the listed company or its major shareholders that may prevent him/her from making independent and objective judgments.” Article 36 of the CCCG mandates that independent directors should not be influenced by the controlling shareholders. Since the vast majority of Chinese companies are characterized by a concentrated ownership structure (this is in stark contrast to US companies), it is coherent that the CSRC Guidelines do not mandate that the majority of the directors shall be independent. As mentioned above in Sect. 4.2, a majority of directors who are independent from the controlling shareholder(s) could undermine the controlling shareholders’ oversight over management. At the same time, the CSRC Guidelines make sure that one third of the directors are independent from the controlling shareholder(s) which can be crucial for the stakeholders in the event that the interests of the controlling shareholder(s) collide with the stakeholders’ interests. In the author’s opinion, it is sufficient for the representation of the stakeholders’ interests if one third of the directors is independent from the controlling shareholder(s), as this composition of the board of directors allows the installation of an Ethics and CSR Committee (as will be seen below, like in the USA and Austria, it is unfortunately also not mandatory for Chinese companies to install such a board committee) which is at least comprised of a majority of directors that are independent from the controlling shareholder(s). Pursuant to Article 108 of the Chinese Company Law, a Chinese CLS must have a board of directors of five to 19 members. Thus, boards of directors with five members must have two members which are independent both from management and the controlling shareholder(s). As a board committee ideally has at least three members, it is also possible for companies with small boards to set up an Ethics and CSR Committee comprised of a majority of directors that are independent from the controlling shareholder(s). The establishment of such a committee is highly recommended by the author. In addition, the CSRC Guidelines should be improved in the future by mandating a majority of independent directors for boards of companies having a high level of free float, as in such scenario independent directors’ oversight over the company’s management is critical for the “non-controlling” shareholders.

48 Part

III of the CSRC Guidelines.

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Neither the Chinese Company Law nor the CSRC or the CCCG49 require to apply the CSRC Guidelines or at least a similar set of independence criteria50 to the members of the board of supervisors (supervisors). This confirms that the more effective supervisors of a Chinese CLS are not the members of the board of supervisors but the independent outside directors. However, in practice (although not required by law) the mainstream model of a board of supervisors of a Chinese CLS utilizes so-called “external supervisors”.51 The external supervisors may be either shareholder representatives who are usually employees of the controlling shareholder(s), or independent supervisors who are both independent from the company’s management and the controlling shareholder(s). In practice, companies often decide for a mixed approach: Hence, next to the employee representatives both types of external supervisors (shareholder representatives) are included in the board of supervisors. Companies with a high level of free float often support the so-called outsider model: In this model, all of the shareholder representatives are outsiders (i.e. independent supervisors). Other less effective and in practice less used models are the insider model (all of the shareholder representatives are employees of the company) and the no-shareholder-supervisor model (apart from the employee representatives, all of the supervisors are independent experts coming from different fields).52 In the author’s opinion, the mixed model is ideal for companies with a small free float because it makes sure that the interests of the controlling shareholder(s), the employees and the other stakeholders are represented. For companies with a high level of free float, the outsider model may be recommended, as it enables the best representation for the interests of the non-controlling shareholders and the stakeholders.

5.2.3 Board Committees in Chinese Companies Article 38 of the CCCG prescribes that listed companies should establish an audit committee and may set up other specialized board committees for corporate strategy, nomination, remuneration and assessment. It is important to note that these companies must be solely composed of members of the listed company’s board of directors. 49 Article 45 of the CCCG sets forth that “[t]he supervisory board should be composed of such members and be structured in such a way that enables the board of supervisors to perform its duties independently and effectively.” However, the CCCG does not require a certain number of independent supervisors and does not prescribe independence criteria for supervisors (apart from the requirement that supervisors should not be directors or senior executives of the listed company). 50 Article 117 of the Chinese Company Law only sets forth that directors and senior officers may not serve as supervisors. 51 Pursuant to Article 45 of the CCCG, a listed company may (not shall) introduce external supervisors. 52 Asian Corporate Governance Association, Awakening Governance. The evolution of corporate governance in China, p. 74, https://www.acga-asia.org/specialist-research.php.

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Members of the board of supervisors are not eligible to join such board committees. This is further evidence for the fact that in terms of function and powers, members of an Austrian supervisory board share more similarities with the outside directors of a Chinese board of directors than with the members of a Chinese supervisory board. Moreover, Article 38 of the CCCG mandates that more than half of the members of board committees should be qualified as independent. Chinese law does not prescribe the establishment of an Ethics and CSR Committee as recommended by the author in Sect. 3.3.6 of this monograph. However, Article 40 of the CCCG describes the duties of the corporate strategy committee. This committee should in particular make recommendations on the long-term development strategies and major investment decisions of the listed company. As material ethics and CSR aspects can have a major impact on a company’s strategy, business policy and finances, it is more than evident that as long as a company does not install an Ethics and CSR Committee, such issues should be brought up in detail in the corporate strategy committee.

5.2.4 The Party Committee The Chinese corporate governance system contains a very distinctive feature: the Party committee (or Party organization) which is composed of senior members of the Chinese Communist Party (“CPC”). The Party committee is established by and must report to the CPC.53 Article 33 of the Constitution of the Communist Party of China (“CCPC”)54 prescribes that Party committees of SOEs “shall play a leadership role, set the right direction, keep in mind the big picture, ensure the implementation of Party policies and principles, and discuss and decide on major issues of their enterprise in accordance with regulations.” In addition, the Party committees have to guarantee and oversee the implementation of CPC principles and policies in SOEs. The Party committees are not only relevant for SOEs but also for privately owned enterprises such as CLSs and LLCs. In privately owned enterprises Party committees mainly serve as supervising bodies55 that in particular “shall implement the Party’s principles and policies, guide and oversee their enterprises’ observance of state laws and regulations.”

53 Asian

Corporate Governance Association, Awakening Governance. The evolution of corporate governance in China, p. 39, https://www.acga-asia.org/specialist-research.php. 54 Revised and adopted at the19th National Congress of the Communist Party of China on October 24, 2017. The CCPC can be accessed at http://www.xinhuanet.com/english/special/2017-11/03/c_1 36725945.htm (last accessed on 2 March 2020). 55 Laband, Fact Sheet: Communist Party Groups in Foreign Companies in China, China Business Review (31 May 2018), https://www.chinabusinessreview.com/fact-sheet-communist-partygroups-in-foreign-companies-in-china/ (last accessed on 2 March 2020).

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Article 19 of the Chinese Company Law stipulates that organizations of the CPC (Party committees) shall be established in companies to carry out CPC activities. Each company has to provide the necessary conditions for the Party committee’s activities. Article 5 of the CCCG reiterates the Party committees’ significant role in the Chinese corporate governance system of listed companies (both SOEs and privately owned enterprises): “Organizations of the Communist Party of China (the Party) should be established in a listed company in accordance with the Company Law to conduct the Party’s activities. Listed companies should provide necessary conditions for the activities of the Party organizations.” It is important to note that Party committees primarily have a major impact on SOEs in terms of influencing or making major decisions. In 2015, the CPC Central Committee and State Council issued the Guiding Opinions on Deepening SOE Reform and suggested that Party committee members should simultaneously hold positions in SOEs’ boards of directors and supervisors. In 2016, SASAC proposed an ex ante decision-making process pursuant to which Party committees have to preapprove major decisions of boards of directors of SOEs. Furthermore, it is today’s best practice in SOEs that the chairman of the Party Committee simultaneously serves as the chairman of the SOE’s board of directors. Consequently, the true power in an SOE does not lie in the board of directors but in the Party committee.56 Foreign-funded companies (enterprises that are incorporated under the Chinese laws within the territory of China and are wholly or partly invested by a foreign investor) must also set up Party committees because Article 31 of the Chinese Foreign Investment Law57 determines that foreign-funded enterprises are subject to the Chinese Company Law (as mentioned above, Article 19 requires the establishment of a Party committee). By the end of 2016, around 91% of the SOEs and almost 68% of the privately owned enterprises had established Party committees. Interestingly enough, around 70% of the foreign-funded enterprises had a Party committee as well.58 However, due to concerns about a potential CPC interference in important business decisions, the installation of Party committees in foreign-funded companies (in particular in joint ventures and wholly foreign-owned companies) was criticized by the European Union Chamber of Commerce in China, the German Chamber of Commerce in China and the Delegations of German Industry & Commerce in China.59 56 Asian Corporate Governance Association, Awakening Governance. The evolution of corporate governance in China, p. 41 et sqq., https://www.acga-asia.org/specialist-research.php. 57 Foreign Investment Law of the People’s Republic of China (adopted at the Second Session of the 13th National People’s Congress on 15 March 2019), http://www.fdi.gov.cn/1800000121_39_4 872_0_7.html (last accessed on 2 March 2020). 58 Asian Corporate Governance Association, Awakening Governance. The evolution of corporate governance in China, p. 40 et sqq., https://www.acga-asia.org/specialist-research.php. 59 Asian Corporate Governance Association, Awakening Governance. The evolution of corporate governance in China, p. 45 et sq., https://www.acga-asia.org/specialist-research.php; European Union Chamber of Commerce in China, Chamber Stance on the Governance of Joint Ventures and

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Taking into consideration in particular (i) the explicit legal requirement for companies to consider business ethics and CSR aspects in the course of doing business, (ii) the comprehensive coverage of CSR aspects in the CCCG, which is compulsory for all listed companies, (iii) the 13th Five-Year Plan’s strong focus on green finance and environmental improvements, (iv) the Chinese stock exchanges’ approach to mandate the issuance of CSR reports by certain large and significant companies, (v) SASAC’s initiative to urge SOEs to publish CSR reports containing certain CSR topics and (vi) the ensuring of the compliance with the Chinese laws and regulations as the main purpose of the Party committee in foreign-funded enterprises, it is the author’s view that a Party committee, which implements the CPC’s comprehensive CSR policy regarding both SOEs and privately owned enterprises, can be an asset in terms of the fight against greenwashing and window-dressing.

5.3 Codes of Ethics/Conduct of Chinese Companies Wu/Patel state that “[t]here is no regulatory requirement for a listed company to establish a corporate code of conduct” and express their concern about ethical issues not receiving adequate attention in China and the CCCG not containing ethical components.60 It is correct that neither the Chinese Company Law nor the CCCG expressly contain provisions regarding a corporate code of conduct/ethics that can be compared in terms of equivalence to the SOX, SEC, NYSE and Nasdaq regulatory requirements in the USA. It is incorrect that ethical issues have not received adequate attention in China, as the express reference to business ethics and CSR has already been in the Chinese Company Law (Article 5) since 2006. Moreover, the CCCG, which is mandatory for listed companies, incorporates detailed provisions dealing with (i) CSR aspects (e.g. the entire Chap. 8 is dedicated to stakeholders, environmental protection and social responsibility), (ii) incentives for directors which are connected to successful CSR measures, (iii) compliance by directors and senior executives with laws, regulations and the company’s articles of association, (iv) related party transactions, (v) transparency and disclosure obligations (information should be disclosed in a truthful, accurate, complete, timely and fair manner) and procedures, (vi) directors’ independence and (vii) employees’ rights and interests, etc. It is important to note that unlike in the USA, both Austria and China installed a comprehensive corporate governance code that is applicable to listed companies. The existence of such detailed codes of corporate governance makes the introduction of

the Role of Party Organisations (3 November 2017), https://www.europeanchamber.com.cn/en/ press-releases/2583/chamber_stance_on_the_governance_of_joint_ventures_and_the_role_of_p arty_organisations (last accessed on 2 March 2020). 60 Wu/Patel, Adoption of Anglo-American Models of Corporate Governance and Financial Reporting in China (2015) p. 193.

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legal requirements mandating the adoption of corporate codes of ethics that contain a minimum set of certain ethical topics much less necessary. Nevertheless, the CCCG includes a detailed code of conduct for the controlling shareholders and their related parties (Chap. 6) ensuring that their controlling power is not used to pursue illicit interests or to impair the legitimate rights and interests of the company and other shareholders. Article 68 of the CCCG mandates that “[a] listed company should be separated from its controlling shareholders and actual controllers in terms of personnel, assets and financial affairs, independent in institution and business, practice independent accounting, and independently bear risks and liabilities.” Apart from being director or supervisor in the listed company, a senior executive of the controlling shareholder should not hold an executive position in the listed company. Chapter 9 of the CCCG covers information disclosure and transparency and obliges listed companies to “formulate a code of conduct [emphasis added] for information release by directors, supervisors and senior executives [emphasis added], and clarify the circumstances where relevant information cannot be released without prior permission of the board of directors.”61 As mentioned above in Sect. 5.1.3.2, Item 2 of the SSE Notice mandates SSElisted companies to include in the social responsibility strategic plan their code of business ethics. It should be noted that the SSE did not outline a minimum content of such code of business ethics. In addition, Sect. 2.11 of the Rules Governing the Listing of Stocks on Shanghai Stock Exchange62 confirms the CCCG’s requirement for the adoption of a code of conduct (directed at the directors, supervisors and senior managers) relating to disclosures: “Listed companies shall establish a code of conduct for directors, supervisors and senior managers in respect of information disclosure, and shall make clear the circumstances in which they may not disclose information without the permission of the Board of Directors of the company.” As stated above in Sect. 5.1.3.2, Article 23 of the SZSE CSR Instructions expressly mandates an SZSE-listed company to urge its customers and suppliers to comply with its business code of conduct (and moral ethics). Refusal of such compliance should lead to the termination of the contractual relationship. Similarly to the SSE, the SZSE does also not provide minimum content for the required business code of conduct. It should be pointed out as well that large Chinese CLSs often have multiple listings both in China and abroad. For example, PetroChina Company Limited is listed on the SSE, the Hong Kong Stock Exchange (“HKSE”) and the NYSE. Hence, Chinese companies can also be subject to foreign corporate governance rules, such as the NYSE Listed Company Manual. This has the consequence that they also have to comply with Rule 303A.10 of the NYSE Listed Company Manual (mandatory code of business conduct and ethics for directors, officers and employees, see above Sect. 3.2.1.2). 61 Article

89 of the CCCG.

62 The Rules Governing the Listing of Stocks on Shanghai Stock Exchange (revised in 2019) can be

accessed at http://english.sse.com.cn/start/rules/sse/public/c/4938268.pdf (last accessed on 3 March 2020).

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Last but not least, Chinese companies that wish to compete worldwide are pushed by the market forces to adopt a corporate code of ethics/conduct, as this is an international standard for multinational companies. Hereafter, the codes of ethics/conduct of three Chinese companies of major significance will be examined in terms of implementation and enforcement of such codes, CSR/stakeholder interests, supply chain management and installations of independent ethics/CSR committees.

5.3.1 PetroChina Company Limited PetroChina Company Limited (“PetroChina”) is the largest Chinese oil and gas producer and distributor and is listed on the SSE, the NYSE and the HKSE. PetroChina is an SOE and its controlling shareholder is the China National Petroleum Corporation (“CNPC”).63 PetroChina adopted both a Code of Ethics for Senior Management64 and a Code of Ethics of Employees of PetroChina Company Limited.65 Both codes of ethics cover topics which are international standard. Both codes also apply to PetroChina’s branches and wholly-owned subsidiaries. Controlled subsidiaries shall use the code as reference. The Code of Ethics for Senior Management includes the following eight major topics: (i) (ii)

Honest and diligent conduct; avoidance of conflicts of interest (this topic also covers the maintenance of confidential information); (iii) compliance with PetroChina’s disclosure controls and procedures policy; (iv) compliance with the laws, regulations and rules; (v) fair dealing with employees, customers and suppliers; (vi) accounting controls; (vii) protection and efficient use of PetroChina’s assets; and (viii) requirement to report breaches of the Code of Ethics for Senior Management. The Code of Ethics of Employees of PetroChina Company Limited deals with the following issues: (i)

Adherence to PetroChina’s corporate philosophy (being patriotic, progressive, realistic and dedicatory) and corporate guideline (harmonizing energy and the environment);

63 PetroChina,

Company Profile, http://www.petrochina.com.cn/ptr/gsjj/gsjs_common.shtml (last accessed on 7 March 2020). 64 PetroChina’s Code of Ethics for Senior Management, http://www.petrochina.com.cn/ptr/gszljg/ 201404/5c428c2ae85a41d5b0cab72a2c720e29.shtml (last accessed on 7 March 2020). 65 The Code of Ethics of Employees of PetroChina Company Limited can be accessed at http://www. petrochina.com.cn/ptr/gszljg/201404/292b63834ea44c23a31424cddc676ad4.shtml (last accessed on 7 March 2020).

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(ii)

avoidance of conflicts of interest (this topic also covers the maintenance of confidential information); (iii) loyal, honest and trustworthy conduct; (iv) inheritance and carrying forward of PetroChina’s professional and ethical styles; (v) compliance with the laws, regulations and rules; (vi) fair dealing with customers, suppliers and subordinates; (vii) keeping PetroChina’s business records correct and clear; (viii) protection and effective use of PetroChina’s assets; and (ix) entitlement and obligation to report breaches of the Code of Ethics of Employees of PetroChina Company Limited. It is noticeable that both codes are comprehensive and would also fulfil the NYSE criteria for a code of business conduct and ethics. Although PetroChina is listed on the NYSE, it is not required to adhere to Sect. 303A.10 (Code of Business Conduct and Ethics) of the NYSE Listed Company Manual due to being a foreign private issuer. Pursuant to Sect. 303A.11 of the NYSE Listed Company Manual, foreign private issuers must disclose significant differences of their corporate governance practices in comparison to those followed by the domestic companies under the NYSE listing standards. Consequently, regarding the corporate ethics topic PetroChina disclosed that it does not have a code of ethics for its (outside) directors.66 Members of the senior management shall report violations of the Code of Ethics for Senior Management to the management and the disclosure committee (it should be noted that this is not a committee comprised of members of the board of directors). PetroChina’s board of directors has the right to (i) supervise the compliance of the Code of Ethics for Senior Management, and (ii) authorize PetroChina’s President with the implementation of the code. Reports of violations shall be treated confidentially and may not result in retaliations. Violations of the Code of Ethics for Senior Management may lead to disciplinary action or termination of employment. Waivers of the code may be granted by the board of directors and must be disclosed to the shareholders.67 Breaches of the Code of Ethics of Employees of PetroChina Company Limited shall be reported to PetroChina’s supervisory department (not to be confused with the supervisory board) which is responsible for the supervision of the employees’ compliance with the code. PetroChina’s enterprise culture department is responsible for the execution and interpretation of the code. Retaliations are not allowed against reporters, and information will be treated confidentially. Violations may lead to disciplinary actions by the supervisory department (or the HR department) or to the termination of the employment. It is noticeable that in contrast to the Code of 66 PetroChina,

Significant Differences in Corporate Governance Practices for Purposes of Sect. 303A.11 of the New York Stock Exchange Listed Company Manual, http://www.petrochina. com.cn/ptr/gszljg/201404/3838e392900c42ebb3205885c5f7ea0f.shtml (last accessed on 7 March 2020). 67 PetroChina’s Code of Ethics for Senior Management, http://www.petrochina.com.cn/ptr/gszljg/ 201404/5c428c2ae85a41d5b0cab72a2c720e29.shtml.

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Ethics for Senior Management, the board of directors (or one of its committees) plays no role in the supervision of the compliance with the Code of Ethics of Employees of PetroChina Company Limited.68 The board’s involvement should be considered in the future as PetroChina’s board of directors is comprised of eleven directors of which five are independent.69 The involvement of independent directors (especially by means of a board committee) is to be recommended for the supervision of both the code of ethics for senior management and the code of ethics for employees. It should be mentioned as well that PetroChina installed a whistleblowing hotline and an email address which allows the reporting of irregularities anonymously.70 It is particularly positive that unlike the US and Austrian companies presented above, PetroChina has a CSR committee, comprised of members of the board of directors, which is called Health, Safety and Environmental Protection Committee (“HSE Committee”). The HSE Committee is mainly responsible for the supervision of PetroChina’s health, safety and environmental protection program. In this regard, the HSE Committee also makes recommendations to the board of directors on major decisions. Moreover, the HSE Committee is responsible for questioning PetroChina’s “production operations, property assets, employees or other facilities for major accidents and responsibilities, and inspecting and supervising the handling of such accidents; relevant laws, regulations and listing rules of jurisdictions where Company’s shares are listed and other matters authorized by the Board.” The HSE Committee is comprised of three directors (two non-executive directors who are not qualified as independent and one executive director who also serves as PetroChina’s President), and it convened one meeting in 2018.71 For the reasons mentioned above in Sect. 5.2.2, it would be ideal if the two non-executive members of the HSE Committee were independent. It should also be considered that the HSE Committee meets more than once a year. Regarding supply chain management, it is mentioned in PetroChina’s CSR report 2018 that on-site supplier inspections were carried out. Unqualified products and suppliers are dealt with by “immediately ceasing purchase, suspending supply qualifications, timely returning and replacing of unqualified products, and lodging claims, thus avoiding the use of unqualified materials.”72 PetroChina’s CSR report 2019 mentions that transactions had to be suspended with suppliers failing to pass enterprise system certification in terms of quality, safety and

68 PetroChina’s

Code of Ethics of Employees of PetroChina Company Limited, http://www.petroc hina.com.cn/ptr/gszljg/201404/292b63834ea44c23a31424cddc676ad4.shtml. 69 PetroChina 2019 Annual Report, p. 57 et sq., http://www.petrochina.com.cn/ptr/ndbg/202004/a11 e316ca2bd49bab9e2a55a58c02add/files/3a74f5fb90284053ac786919340f41b0.pdf (last accessed on 16 May 2020). 70 PetroChina 2019 Environmental, Social and Governance Report, p. 15, http://www.petrochina. com.cn/ptr/xhtml/images/2019kcxfzbgen.pdf (last accessed on 16 May 2020). 71 PetroChina 2019 Annual Report p. 57 et sqq., http://www.petrochina.com.cn/ptr/ndbg/202004/ a11e316ca2bd49bab9e2a55a58c02add/files/3a74f5fb90284053ac786919340f41b0.pdf. 72 PetroChina 2018 Environmental, Social and Governance Report, p. 12, http://www.petrochina. com.cn/ptr/xhtml/images/2018kcxfzbgen.pdf (last accessed on 16 May 2020).

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environment. Suppliers who incurred material incidents (in terms of quality, safety and environment) were debarred.73 The Chairman’s message contained in PetroChina’s CSR report 2018 points out the intensification of the health, safety and environmental protection audits. Furthermore, comprehensive audits were performed on PetroChina’s contractors for the first time.74 PetroChina’s CSR policy intents “to maximize returns to our shareholders and value for our stakeholders, and to achieve our common goal of harmonious development and maximizing mutual benefits.” The CSR report emphasizes in particular the relevance of communication with the stakeholders, stakeholder participation and consultation and disclosure of information to the stakeholders.75 This approach clearly implements Article 5 of the Chinese Company Law and recognizes that the long-term profits of shareholders can be maximized while providing the stakeholders with a long-term maximum value. It should be stressed as well that PetroChina’s CSR report includes comprehensive quantitative performance indicators in the areas of safety and quality (e.g. fatal and total accident rate, fatalities), environment (e.g. total energy and raw coal consumption, fresh water consumption, land saved, pollutants and wastes, such as nitrogen oxide and sulphur dioxide emissions), GHG emissions, employees (e.g. local hiring and diversity, workforce by profession and education) and communities (e.g. contributions to poverty alleviation, educational donations, environmental protection, donations to disaster relief). Comparable statistics are included for the years 2017, 2018 and 2019.76 In order to achieve green and low-carbon development, PetroChina charted a roadmap: By 2020, reduce CO2 equivalent emissions per unit of operating revenue by 25% compared with 2015. By 2030, further increase the supply of natural gas and other clean energy, enable natural gas, new energy and renewable energy to take higher proportions of the Company’s domestic primary energy output. By 2050, raise the proportion of natural gas, new energy and renewable energy in the Company’s domestic primary energy output to a new high.77

73 PetroChina 2019 Environmental, Social and Governance Report, p. 16, http://www.petrochina. com.cn/ptr/xhtml/images/2019kcxfzbgen.pdf. 74 PetroChina 2018 Environmental, Social and Governance Report, p. 5, http://www.petrochina. com.cn/ptr/xhtml/images/2018kcxfzbgen.pdf. 75 PetroChina 2019 Environmental, Social and Governance Report, p. 17, http://www.petrochina. com.cn/ptr/xhtml/images/2019kcxfzbgen.pdf. 76 PetroChina 2019 Environmental, Social and Governance Report, p. 77 et sq., http://www.petroc hina.com.cn/ptr/xhtml/images/2019kcxfzbgen.pdf. 77 PetroChina 2019 Environmental, Social and Governance Report, p. 32 et sq., http://www.petroc hina.com.cn/ptr/xhtml/images/2019kcxfzbgen.pdf.

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5.3.2 Huawei Investment & Holding Co., Ltd. Huawei Investment & Holding Co., Ltd. (“Huawei”) is a leading global provider of information and communications technology infrastructure and smart devices.78 Although Huawei is not listed on a stock exchange, Huawei’s ethics and CSR policy will be analysed in this monograph due to its recent strong media presence in connection with the US-China trade war. Huawei has a unique corporate governance and ownership structure. It is a private company (almost) wholly owned by its employees. As of 31 December 2019, 104,572 employees were involved in Huawei’s employee shareholding scheme. However, the employees do not directly hold Huawei’s shares. Instead, the Union of Huawei Investment & Holding Co., Ltd. holds almost 99% of Huawei’s shares. 1.04% of the shares are held by Mr. Ren Zhengfei. The shareholder rights of Huawei’s employees are exercised by the Representatives Commission which consists of 115 members that are elected by the active shareholding employees with a term of five years. Needless to say, following the Chinese Company Law, Huawei has a board of directors and a supervisory board.79 Huawei issued Business Conduct Guidelines that are directed to its employees (including senior executives). Among other things, the Business Conduct Guidelines include anti-corruption and anti-bribery principles and require the employees to adhere to the laws and regulations of the countries and regions in which Huawei operates.80 Whistleblowing is encouraged by Huawei. Employees may file complaints to Huawei’s committee of ethics & compliance, the Business Conduct Guidelines violation hotline, the HR services complaint and suggestion hotline, the grievance mailbox regarding performance appraisal, etc.81 Interestingly enough, Huawei’s audit committee is not solely comprised of members of the board of directors. It also includes members of the supervisory board (the chairman of the audit committee is also the chairman of the supervisory board) and experts.82 Like in many US companies, Huawei’s audit committee plays a significant role in monitoring the adherence of the Business Conduct Guidelines and in the evaluation of the effectiveness of the ethics & compliance function. The 78 Huawei,

Corporate Introduction, https://www.huawei.com/us/about-huawei/corporate-inform ation (last accessed on 9 March 2020). 79 Huawei Investment & Holding Co., Ltd. 2019 Annual Report, p. 145 et sqq., https://www-file. huawei.com/-/media/corporate/pdf/annual-report/annual_report_2019_en.pdf?la=en (last accessed on 16 May 2020). 80 Huawei, Business Ethics, https://www.huawei.com/en/about-huawei/sustainability/win-win-dev elopment/develop_honesty (last accessed on 9 March 2020). The Huawei Business Conduct Guidelines are unfortunately not available on Huawei’s homepage. 81 Huawei Statement on Modern Slavery, https://huawei.eu/sites/default/files/docs/Huawei_MSAStatement_Signed_June2018.pdf (last accessed on 9 March 2020). 82 Huang, Built on Value. The Huawei Philosophy of Finance Management (2019) p. 374; Huawei Investment & Holding Co., Ltd. 2019 Annual Report, p. 153, https://www-file.huawei.com/-/media/ corporate/pdf/annual-report/annual_report_2019_en.pdf?la=en.

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chief ethics & compliance officer is simultaneously the director of the corporate committee of ethics & compliance and a member of Huawei’s supervisory board.83 It is very important to note that Huawei’s committee of ethics & compliance is in fact the Party committee which is required by Article 19 of the Chinese Company Law. As such, it plays a significant role in governing morality and social responsibility among Huawei’s business leaders.84 This confirms the author’s understanding that the Party committee can have a key function in the implementation of corporate ethics and CSR since Article 5 of the Chinese Company Law makes it necessary to consider business ethics and CSR when making business decisions. Moreover, Huawei’s internal audit department investigates violations of the Business Conduct Guidelines and reports to the audit committee and senior management.85 It should be particularly emphasized that Huawei adopted a Supplier Social Responsibility Code of Conduct (“Huawei Supplier Code”) and a Code of Conduct for Partners (“Huawei Partner Code”). The Huawei Supplier Code applies to all suppliers that provide products and/or services to Huawei. The Huawei Supplier Code consists of five main sections: labour, health and safety, environment, business ethics, and management systems. For example, the Huawei Supplier Code stipulates that suppliers must ensure that workers are employed on a voluntary basis, child labour is not used, the standard working week should not exceed 48 h per week, and total working hours in any week should not exceed 60 h. Employees should at least have one day off per week. Suppliers shall obtain, maintain and keep up to date required health and safety certificates and necessary environmental permits, approval and registrations. Under the heading of “business ethics”, suppliers may, among other things, not engage in bribery or unethical conduct, intellectual property rights must be respected, standards of fair business, advertising and competition must be upheld, whistleblowers must be guaranteed non-retaliation, confidentiality and anonymity. The section “management systems” requires suppliers to endorse a CSR policy statement, identify a senior executive responsible for CSR, identify CSR risks and potential impacts of their operations, set up a CSR management system in their procurement process which also requires their upstream suppliers to make a written commitment (such commitment along the supply chain shall be a condition for supplier qualification), and undertake periodic self-evaluations and assessments of their upstream suppliers’ factories. It is important to note that Huawei regularly audits its suppliers. Pursuant to the Huawei Supplier Code, Huawei has the right to conduct on-site visits if the suppliers concerned are given reasonable notice.86 83 Huawei

Investment & Holding Co., Ltd. 2019 Annual Report, p. 151 et sqq., https://www-file. huawei.com/-/media/corporate/pdf/annual-report/annual_report_2019_en.pdf?la=en. 84 Tian Tao/De Cremer/Wu Chunbo, Huawei Leadership, Culture, and Connectivity (2016). 85 Huawei Investment & Holding Co., Ltd. 2019 Annual Report, p. 157, https://www-file.huawei. com/-/media/corporate/pdf/annual-report/annual_report_2019_en.pdf?la=en. 86 Huawei Supplier Social Responsibility Code of Conduct, https://www.huawei.com/en/abouthuawei/sustainability/win-win-development/develop_supplychain/huawei-supplier-social-respon sibility-code-of-conduct (last accessed on 9 March 2020).

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In the author’s opinion, on-site visits can be a very valuable instrument of the supply chain management but they should be conducted without prior notice in order to be effective. This ought to be made part of the contracts with the suppliers. A prior notice gives a possible violator the opportunity to prepare and hide violations (e.g. in cases of child labour, children are not present on the day of the on-site visit). In 2018, 194 on-site audits were conducted of which 130 were carried out by a third party. In addition, 93 potential suppliers were audited in terms of their CSR performance. 16 suppliers failed this audit and were unable to start a business relationship with Huawei. Moreover, Huawei classifies its suppliers into four grades (A, B, C and D) based on their CSR performance. In 2018, the CSR performance of 1,321 suppliers was assessed. Suppliers with a good CSR performance are given a larger share of procurement and more business opportunities with Huawei. Suppliers with a low CSR performance are instructed to fix existing issues within a certain timeframe. In extreme cases the business relationship is terminated.87 The Huawei Partner Code applies to Huawei’s partners (parties that sell products and/or services or provide products and/or services to Huawei’s Enterprise Business Group88 ) and their employees, agents, subcontractors, etc. The Huawei Partner Code covers three major topics: legal compliance, business ethics and compliance management. Among other things, partners have to comply with applicable laws and regulations, must provide their employees with a healthy work environment, must conduct their operations in an environmentally responsible way, shall not be involved in briberies, must disclose complete and truthful materials, shall not allow conflict-of-interest relationships or disclose confidential information, have to establish a compliance system and communicate Huawei’s principles to their business partners, etc. Violations of the Huawei Partner Code may lead to a reduction of incentives or the immediate termination of the business relationship between Huawei and the respective violating business partner.89 It should be emphasized as well that Huawei’s CSR report (2018) provides a detailed overview on Huawei’s sustainability strategies in the fields of digital inclusion, security and trustworthiness, environmental protection and a healthy and harmonious ecosystem. The overview displays Huawei’s specific quantitative and qualitative goals and initiatives and reveals whether these goals and initiatives were achieved, partially achieved or not achieved.90

87 Huawei

2018 Sustainability Report, p. 86 et sqq., https://www-file.huawei.com/-/media/corpor ate/pdf/sustainability/2018/2018-csr-report-en.pdf?la=en (last accessed on 9 March 2020). 88 Huawei’s Enterprise Business Group is one of Huawei’s three primary business units (operating segments). The other two operating segments are the Carrier Network Business Group and the Consumer Business Group. See Huawei Investment & Holding Co., Ltd. 2019 Annual Report, p. 104, https://www-file.huawei.com/-/media/corporate/pdf/annual-report/annual_report_2019_en. pdf?la=en. 89 Huawei Code of Conduct for Partners, https://e.huawei.com/at/partner/partner-program/code-ofconduct-for-partners (last accessed on 9 March 2020). 90 Huawei 2018 Sustainability Report, p. 94 et sq., https://www-file.huawei.com/-/media/corporate/ pdf/sustainability/2018/2018-csr-report-en.pdf?la=en.

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5.3.3 Ping an Insurance (Group) Company of China, Ltd. Ping An Insurance (Group) Company of China, Ltd. (“Ping An”) is a personal financial services group that provides services in the areas of insurance, banking and investment.91 Ping An is currently listed on the SSE and HKSE92 and is the leading company in the top 10 constituents list (by weight) of the SSE Social Responsibility Index.93 Ping An is a privately owned enterprise with a dispersed ownership and no controlling shareholder(s).94 It is in particular positive that Ping An’s Business Code of Conduct serves as a prime example for the incorporation of a commitment to CSR into a company’s code of business conduct/ethics. As mentioned in Sect. 1.5 of this monograph, it is the author’s opinion that codes of business ethics and conduct should include CSR components as means of self-commitment. Ping An’s Business Code of Conduct stresses that beyond compliance with laws, rules and regulations, Ping An pays “attention to the effect of our ethical business conduct to our shareholders, customers, employees, partners and community and environment.” The management of CSR issues shall be standardized by strict regulations and policies of the company. Ping An organized shareholder surveys to identify material CSR topics. Ping An’s commitment to ethical conduct and CSR shall be evidenced by an enhanced disclosure transparency.95 Furthermore, Ping An’s Business Code of Conduct deals with issues such as tax policies (compliance with tax laws and regulations, prevention of illegal tax avoidance and tax evasion practices, etc.), anti-trust and anti-monopoly (maximum benefits to customers, partners and the society by means of a fair, justified and open competition), anti-money laundering, anti-terrorist financing, sanctions compliance (active fulfilment of social responsibility by safeguarding of customers, the society and the national financial security) and fairness and individual rights protection (recognition that the employees are the foundation of Ping An; consequently, Ping An respects and defends all lawfully protected employees’ rights, prevents discrimination against the employees in terms of gender, region and age96 and opposes child and forced labour).97 91 About

Ping An, https://www.pingan.cn/en/about/index.shtml (last accessed on 11 March 2020).

92 To Be an Active Global Influencer. Ping An 2019 Sustainability Report, p. 9, http://www.pingan.

com/app_upload/images/info/upload/2a9a2d56-88f3-451f-af2e-e3e6c19d2483.pdf (last accessed on 11 March 2020). 93 Factsheet of the SSE Social Responsibility Index, http://www.csindex.com.cn/uploads/indices/ detail/files/en/000048factsheeten.pdf?t=1583931991 (last accessed on 11 March 2020). 94 Ping An Annual Report 2019, p. 100, https://www.pingan.cn/en/ir/financial-report.shtml (last accessed on 16 May 2020). 95 Ping An Business Code of Conduct, http://download.pingan.com.cn/pingancn/ESG/CodeofCon duct.pdf (last accessed on 11 March 2020). 96 It should be mentioned that religion, race or politics are not expressly mentioned. 97 Ping An Business Code of Conduct, http://download.pingan.com.cn/pingancn/ESG/CodeofCon duct.pdf.

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Under the heading of “fairness and individual rights protection”, the Business Code of Conduct covers supply chain management as well: Suppliers are urged to commit to employee welfare and protection by preventing any forms of child and forced labour, discrimination and other individual rights violations. The Business Code of Conduct also refers to Ping An’s internal Supplier On-site Examination Standards, Procurement Supplier Management Policies and Supplier Management Regulations. Moreover, “Ping An welcomes supplier and customer monitoring [emphasis added] for the mutual benefit of all parties. We encourage suppliers and partners to establish fair environmental, social and corporate strategies for a sustainable future [emphasis added].”98 Ping An’s 2019 CSR report states in connection with the supply chain management that it focuses on the suppliers’ CSR performance and includes CSR requirements into the supplier contracts. Provisions in the supplier contracts cover in particular topics such as “anti-bribery, information security and privacy protection, labor rights protection, low-carbon and green technology transformation and development, and employee development.”99 Ping An’s Sustainable Supply Chain Policy is very detailed. The selection procedure of new suppliers involves a due diligence focusing on CSR matters. Before suppliers may render services to Ping An they need to sign a code of conduct. Ping An’s supplier management includes a reward and punishment system that commends outstanding suppliers and may result in the termination of a business relationship with suppliers that have low CSR ratings and a record of violations. “Suppliers who have received regulatory penalties for causing severe environmental damages and mishandling employee disputes, are given the minimum rating and banned from cooperation.” Suppliers will be annually assessed by Ping An in terms of fulfilment of the CSR requirements.100 The Business Code of Conduct emphasizes the importance of a whistleblowing system and makes reference to Ping An’s Public Complaints Management System. The Petition handling department shall take on cases in a timely, objective manner in order to enable a fair hearing and effective procedure. The Business Code of Conduct does not mention if anonymous complaints are accepted. It seems that whistleblowers could also get rewarded. “For those who have made outstanding contributions to the improvement of the company’s operations and management shall be awarded according to the Rewarding Award Policy.” Additionally, the Business Code of Conduct stipulates principles regarding information management and social media management, conflicts of interests and non-public information management, and anti-bribery, corruption and fraud.101 It should also be mentioned that 98 Ping

An Business Code of Conduct, http://download.pingan.com.cn/pingancn/ESG/CodeofCon duct.pdf. 99 To Be an Active Global Influencer. Ping An 2019 Sustainability Report, p. 53, http://www.pin gan.com/app_upload/images/info/upload/2a9a2d56-88f3-451f-af2e-e3e6c19d2483.pdf. 100 Ping An’s Sustainable Supply Chain Policy, http://download.pingan.com.cn/pingancn/ESG/Sus tainableSupplyChain.pdf (last accessed on 11 March 2020). 101 Ping An Business Code of Conduct, http://download.pingan.com.cn/pingancn/ESG/CodeofCon duct.pdf.

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Ping An formulated a Whistle-blowing Management Procedure and established a whistleblowing email and hotline.102 Ping An’s board of directors is the main corporate body for CSR oversight. Under the board of director’s executive committee (comprised of management members) the Investor Relations and ESG Committee (management committee) identifies CSR risks, formulates CSR plans and policies, sets CSR objectives and appraises CSR performance.103 Slightly more than one third (5 out of 13) of Ping An’s board of directors may be qualified as independent,104 but the management committees mentioned in the last paragraph do not have independent directors as members. Given that Ping An is a company with a dispersed shareholder structure without controlling shareholder(s), independence from management becomes more important. Hence, it is recommended both in the interest of the shareholders and stakeholders involving independent directors or supervisors in the committees’ CSR-related activities and responsibilities. Ideally, the establishment of an independent Ethics and CSR Committee should be considered. In terms of quantitative performance indicators, it is particularly noteworthy that Ping An’s 2019 CSR report includes resource consumption and emissions (including greenhouse gases emissions) statistics for the years 2017, 2018 and 2019 and also provides a rating for the CSR performance of its suppliers and the total amount of suppliers’ eliminations from the supply chain.105

5.4 CSR Reporting in China 5.4.1 Statistics CSR reporting in China took off in the last decade and hit a plateau in 2017 with the release of 2027 corporate CSR reports. 2018 witnessed a small decline in CSR reports (1926 corporate CSR reports) (Fig. 5.1): It is positive that 60–70% of the CSR reports are prepared in accordance with standard CSR guidelines.106 Statistics between 2010 and 2017 show that in 2010 only 12.93% of the CSR reports were compiled in accordance with international CSR 102 To Be an Active Global Influencer. Ping An 2019 Sustainability Report, p. 52, http://www.pin gan.com/app_upload/images/info/upload/2a9a2d56-88f3-451f-af2e-e3e6c19d2483.pdf. 103 To Be an Active Global Influencer. Ping An 2019 Sustainability Report, p. 17, http://www.pin gan.com/app_upload/images/info/upload/2a9a2d56-88f3-451f-af2e-e3e6c19d2483.pdf. 104 To Be an Active Global Influencer. Ping An 2019 Sustainability Report, p. 47, http://www.pin gan.com/app_upload/images/info/upload/2a9a2d56-88f3-451f-af2e-e3e6c19d2483.pdf. 105 To Be an Active Global Influencer. Ping An 2019 Sustainability Report, p. 81 et sqq., http:// www.pingan.com/app_upload/images/info/upload/2a9a2d56-88f3-451f-af2e-e3e6c19d2483.pdf. 106 Asian Corporate Governance Association, Awakening Governance. The evolution of corporate governance in China, p. 136, https://www.acga-asia.org/specialist-research.php.

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Fig. 5.1 Number of released corporate CSR reports in Mainland China. Source GoldenBee Corporate Social Responsibility Consulting, Analysis on CSR reports of Fortune Global 500 companies in China (29 September 2019) http://en.goldenbeechina.com/Insights/show/id/101 (last accessed on 18 March 2020)

standards. The highest percentage of CSR reports on the basis of international CSR standards was achieved in 2016 with 40.06%. In 2017, a slight decrease to 33.22% was noticed.107 The CSR standards of the GRI were the most common international standards used by reporting companies. The Chinese Academy of Social Sciences’ Guidelines on Corporate Social Responsibility Reporting for Chinese Enterprises were the most popular domestic CSR standards in the corporate sector in China.108 The Fortune Global 500 is an annual ranking of the largest 500 corporations worldwide as measured by total revenue for the fiscal years ended on or before 31 March of the respective year.109 129 Chinese companies were included in the 2019 Fortune Global 500 ranking. 79 (61.24%) out of these 129 Chinese companies issued a CSR report. “Among them, there are 47 enterprises that have issued reports 10 times or more, 21 enterprises have issued reports 5–9 times, and 11 have issued reports 4 times or less.”110 On the one hand, there is still room for improvement in terms of a necessary increase of CSR reports among Chinese companies listed on 107 GoldenBee Corporate Social Responsibility Consulting, GoldenBee Research on CSR Reporting

in China 2017 released (19 December 2017), http://en.goldenbeechina.com/index.php/Home/Ins ights/show/id/68 (last accessed on 18 March 2020). 108 BSD Consulting, Sustainability Reporting Standards in China, http://www.bsdconsulting.com/ de/insights/article/sustainability-reporting-standards-in-china. 109 Methodology for Global 500, https://fortune.com/global500/2019/methodology/ (last accessed on 19 March 2020). 110 GoldenBee Corporate Social Responsibility Consulting, Analysis on CSR reports of Fortune Global 500 companies in China, http://en.goldenbeechina.com/Insights/show/id/101.

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the Fortune Global 500, on the other hand, it is very positive that a vast majority of those companies that issue CSR reports have been doing that on a regular basis for years. The quality of CSR reports varies heavily. Many reports focus on non-material issues like charitable work. A lot of reports contain qualitative descriptions of CSR work but at the same time lack a sufficient analysis of an adequate amount of historical and comparable quantitative data in order to allow comparisons of CSR performances over time. Some companies only disclose one or two years’ worth of data. An evaluation in July 2017 concerning companies listed on the CSI 100 Index (this index tracks the top 100 SSE-listed and SZSE-listed companies by market cap) confirmed the problem of data paucity: The average disclosure on 20 key quantitative indicators was only 41%. In addition, it can also be observed that companies tend to not disclose negative CSR information. In 2017, only 24.27% of the CSR reports contained negative information. It is not surprising that the quality of leading companies’ CSR reports is higher than that of growing companies. Last but not least, the CSR reports are usually drafted by marketing or investor relations departments which have a limited influence on the management.111 The total number of CSR reports in English is still low but has been increasing from 28 reports in 2010 to 118 reports in 2017.112 It should not remain unmentioned that PetroChina and Ping An are among the best CSR reporters in China which have published CSR reports for ten years or more,113 and Huawei received an outstanding rating on CSRHub amounting to 95% (!).114 Like in the USA and Austria, it holds also true for the vast majority of CSR reports of Chinese companies that they are not assured by an independent third party. In 2016, less than 5% of the CSR reports were assured by an independent third party. The main reason for the non-assurance by third parties is the lack of statutory requirements mandating such assurance combined with the rather high costs associated with a third party assurance.115 According to a study conducted by GoldenBee Corporate Social Responsibility Consulting, only 10.53% of the Chinese CSR reporters disclosed a CSR expert opinion or a third party evaluation in 2017.116 111 Asian

Corporate Governance Association, Awakening Governance. The evolution of corporate governance in China, p. 137 et sq., https://www.acga-asia.org/specialist-research.php; GoldenBee Corporate Social Responsibility Consulting, GoldenBee Research on CSR Reporting in China 2017 released, http://en.goldenbeechina.com/index.php/Home/Insights/show/id/68; CFA Institute/Principles for Responsible Investment Initiative, ESG Integration in China: Guidance and Case Studies (2019) p. 39, https://www.cfainstitute.org/-/media/documents/survey/esg-integrationchina.ashx (last accessed on 19 May 2020). 112 GoldenBee Corporate Social Responsibility Consulting, GoldenBee Research on CSR Reporting in China 2017 released, http://en.goldenbeechina.com/index.php/Home/Insights/show/id/68. 113 Asian Corporate Governance Association, Awakening Governance. The evolution of corporate governance in China, p. 137, https://www.acga-asia.org/specialist-research.php. 114 Huawei Technologies CSR/ESG Ranking, https://www.csrhub.com/CSR_and_sustainability_inf ormation/Huawei-Technologies (last accessed on 19 March 2020). 115 Asian Corporate Governance Association, Awakening Governance. The evolution of corporate governance in China, p. 136, https://www.acga-asia.org/specialist-research.php. 116 GoldenBee Corporate Social Responsibility Consulting, GoldenBee Research on CSR Reporting in China 2017 released, http://en.goldenbeechina.com/index.php/Home/Insights/show/id/68.

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As mentioned above, the cost argument is a very weak argument for the largest Chinese companies and may only be accepted for SMEs. It is the author’s opinion that a thorough examination of CSR reports by independent third parties (e.g. auditing firms that do not simultaneously act as the companies’ auditors) is a necessary means for the reduction of greenwashing and window-dressing. In an exemplary manner, Huawei’s 2018 CSR report was reasonably assured (no absolute assurance) by the independent professional services company Bureau Veritas which conducted interviews with relevant personnel of Huawei, reviewed documentary evidence provided by Huawei, audited sampled CSR performance data and assessed data and information systems for collection, aggregation, analysis and review. Bureau Veritas assured the completeness (core option of the GRI Standards) and materiality of the report’s content and confirmed that in accordance with the GRI Standards, Huawei identified relative key sustainability issues in a rational manner and disclosed its strategy, management actions and performance data. Huawei’s financial statements of the year 2018 were audited by KPMG.117 Deloitte provided an independent assurance report in relation to Ping An’s 2018 CSR report. The limited level of assurance was obtained on (i) the compliance of Ping An’s CSR disclosure with the principles of materiality and inclusiveness in accordance with the GRI Standards and (ii) selected data and performance claims contained in Ping An’s CSR report. Among other things, Deloitte interviewed relevant staff of Ping An, reviewed data and supporting documents, and based on limited sampling, evaluated information or explanations about selected data and statements and assertions in Ping An’s CSR report. Ping An’s financial statements were not audited by Deloitte. The audit was conducted by PricewaterhouseCoopers. Ping An’s 2019 CSR report was assured by Deloitte as well. In contrast to the 2018 CSR report, the 2019 version was prepared in accordance with the Environmental, Social and Governance Reporting Guide of the HKSE and by reference to the GRI Standards. The limited level assurance was based on a very comprehensive data set comprised of 43 different key indicators, such as greenhouse gas emissions, anti-corruption events, workplace electricity consumption, total water and natural gas consumption, solid waste produced, amount of philanthropy investments, green investment of equities, financial products and mutual funds, number of female senior management, total employee training hours, etc.118

117 Huawei 2018 Sustainability Report, p. 105 et sqq., https://www-file.huawei.com/-/media/corpor

ate/pdf/sustainability/2018/2018-csr-report-en.pdf?la=en; Huawei Investment & Holding Co., Ltd. 2018 Annual Report, p. 69, https://www-file.huawei.com/-/media/corporate/pdf/annual-report/ann ual_report2018_en.pdf?la=zh. 118 Smarter Life, Better Future. Ping An 2018 Sustainability Report, p. 100 et sq., http://www.pin gan.cn/app_upload/file/official/2018ESGReport_EN.pdf (last accessed on 19 March 2020; Ping An Annual Report 2018, p. 150 et sqq., http://www.pingan.com/app_upload/images/info/upload/ 31d203a3-cf6d-4335-8d52-146a0f2a4235.pdf; To Be an Active Global Influencer. Ping An 2019 Sustainability Report, p. 98, http://www.pingan.com/app_upload/images/info/upload/2a9a2d5688f3-451f-af2e-e3e6c19d2483.pdf.

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5.4.2 Liability for Inaccurate or Incomplete CSR Reports Pursuant to the Chinese Securities Law Pursuant to Article 68 of the Law of the People’s Republic of China on Securities (“Chinese Securities Law”),119 directors, supervisors and senior managers of a listed company have to ensure the truthfulness, accuracy and completeness of information disclosed by the company.120 Article 69 of the Chinese Securities Law prescribes the following: Where there are false entries, misleading statements or major omissions [emphasis added] in the prospectus of share offering, the method for raising funds through issuance of corporate bonds, the financial statements, the listing submission documents, the annual reports, the interim reports, the provisional reports and other materials for information disclosure released by an issuer or a listed company, thus causing losses to investors in securities trading [emphasis added], the issuer or listed company shall be liable for compensation; the directors, supervisors, senior managers and other directly accountable persons of the issuer or listed company as well as the sponsors and securities companies engaged for underwriting shall be jointly and severally liable for compensation [emphasis added] together with the issuer or listed company, unless one can establish a lack of fault on one’s part; the controlling shareholders [emphasis added] or persons in practical control of the issuer or listed company at fault shall be jointly and severally liable for compensation together with the issuer or listed company.

Although CSR reports are not explicitly mentioned by Article 69, CSR reports should be covered by the term “other materials for information disclosure”. CSR reports of listed companies containing false, misleading or incomplete information that causes losses to investors may lead in particular to a joint liability for directors, supervisors, senior managers and the controlling shareholder(s). Holding a controlling shareholder responsible and liable is quite unique and makes perfect sense considering the controlling shareholders’ extensive influence on a company’s management. Therefore, this provision is likely to contribute to the reduction of greenwashing and window-dressing. The downside of a stricter liability law could be that companies might decide to issue CSR reports which contain information that is less verifiable.

119 The

Chinese Securities Law can be accessed on the CSRC homepage at http://www.csrc.gov. cn/pub/csrc_en/laws/rfdm/statelaws/201205/t20120525_210597.html (last accessed on 19 March 2020). 120 Ribeiro/Hui, Corporate governance and directors‘ duties in China: overview, p. 16, https://uk. practicallaw.thomsonreuters.com/4-502-3042?transitionType=Default&contextData=(sc.Defaul t)&firstPage=true&bhcp=1.

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5.4.3 The Impact of CSR Measures on Companies’ Performance Although in 2013 survey results showed that only 12.5% of the Chinese companies thought that CSR would bring economic benefits,121 there is an increasing trend pursuant to which Chinese companies (both listed and unlisted) consider corporate governance and CSR as tools for enhancing organizational effectiveness and longterm corporate performance. Chinese institutional investors increasingly recognize that corporate governance and CSR are instruments for increasing the value of existing investments through active dialogue with the investee companies. Furthermore, pension funds and investment managers are encouraged by the government to take into consideration CSR risks and opportunities. Last but not least, green finance gains more and more traction in China with the increasing emergence of green bonds.122 According to a study conducted by Li123 /Khalili124 /Cheng,125 it was proven that the investors’ revenues would increase as CSR practices increase. The study used CSR data from 34,000 projects released by 839 Chinese companies from 2006 to 2016. The researchers investigated the impact on the earnings per share. The number of CSR projects displayed a positive relationship to the earnings per share by a coefficient 0.13. In comparison to the four control variables (i) total assets of company (coefficient 0.15), (ii) annual revenue (coefficient 0.36), (iii) effective tax rate (coefficient -0.05) and (iv) number of employees (coefficient -0.43), CSR initiatives have quite a strong impact on the earnings per share. Hence, the researchers conclude that a “greater initiative in CSR will enhance the enterprise value of a company.”126 Another study conducted by Sui127 /Yang128 /Zhang129 used data from the 2014 Chinese national survey130 of privately owned firms in China. The study’s final sample consists of 2404 observations. The study confirmed that 121 Asian

Corporate Governance Association, Awakening Governance. The evolution of corporate governance in China, p. 133, https://www.acga-asia.org/specialist-research.php. 122 Allen/Li Rui, Awakening Governance: ACGA China Corporate Governance Report 2018, Harvard Law School Forum on Corporate Governance (25 August 2018) https://corpgov.law.har vard.edu/2018/08/25/awakening-governance-acga-china-corporate-governance-report-2018/ (last accessed on 20 March 2020). 123 Business School, Beijing Normal University. 124 Stuart School of Business, Illinois Institute of Technology, Chicago. 125 Business School, Beijing Normal University. 126 Li/Khalili/Cheng, Corporate Social Responsibility Practices in China: Trends, Context, and Impact on Company Performance, Sustainability 2019, 11, 354. 127 Institute of City Strategy Studies, Guangdong University of Foreign Studies, Guangzhou, China. 128 China International Engineering Consulting Corporation, Beijing, China. 129 School of International Studies, Zhejiang University, Hangzhou, China. 130 The 2014 Chinese national survey was conducted by the United Front Work Department of the CPC Central Committee, ACFIC and the Private Economy Research Institutes of China.

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[…] engaging in continuous and long-term social activities may reduce potential negative impact on firm performance, such as market value, stock price and bond price, especially in the face of certain negative events. Hence, CSR engagement helps private firms generate a heap of positive appraisal to mask their speculative orientation and divert public attention from their self-serving activities. In other words, firms use CSR to share their profits, especially those from speculative activities, with stakeholders and other people in society, and thus mitigate the negative image of speculation or myopia. Such seemingly generous ‘profit-sharing’ models may lead to favorable public responses, bringing firms social recognition and positive reputations.131

The study connects CSR activities with speculative behaviour and asserts that Chinese companies cover their speculative activities with corporate philanthropy. Yet, it should be pointed out that only 12.4% of the study’s sample firms engaged in speculative behaviour.132 As seen above in Sect. 5.4.1, many more Chinese companies are engaged in CSR activities and have issued CSR reports on a regular basis since the beginning of the last decade. Hence, it is questionable to conclude that CSR in China is mainly used to mitigate image damages and to reduce negative impacts on the financial performance resulting from speculations. It is unquestionable and certainly not reprehensible that Chinese companies’ CSR initiatives are mainly instrumentally motivated to serve a business case that provides valuable benefits and monetary returns. This is also confirmed by Li/Khalili/Cheng: Results highlight the effect of state of economies on the level of acceptance and configuration of CSR projects, suggesting that companies in China are slightly shifting focus on their CSR impact from macro-social effects to organizational-level effects on the profit, and less on ethics-oriented practices. The observed pattern of performance-oriented, business-focused CSR design and practice may overcome those that focus on ethics or that offer a broader societal perspective.133

In the author’s opinion, ethics and CSR should and can pay off. Particularly, when taking the view that CSR increasingly becomes an essential element for a long-term profit maximization, CSR initiatives will increase both in quality and quantity in the future. An increasing number of scholars and practitioners have already accepted that CSR activities have at least a mild positive effect on a company’s financial performance.134 Still, according to Zhang135 /Morse136 /Ma137 “it could be construed that CSR is largely defensive in nature [emphasis added]. It is used by the company 131 See

Sui/Yang/Zhang, Is Corporate Social Responsibility Used to Mask Corporate Speculation? Evidence from Emerging China, Sustainability 2019, 11, 3375. 132 Sui/Yang/Zhang, Sustainability 2019, 11, 3375. 133 Li/Khalili/Cheng, Sustainability 2019, 11, 354. 134 Sui/Yang/Zhang, Sustainability 2019, 11, 3375. 135 College of Information and Management Science, Longzi Lake Campus, Zhengzhou East New District, Henan Agricultural University, Zhengzhou, China. 136 Centre for Environmental Strategy, University of Surrey, Guildford, Surrey, UK. 137 College of Information and Management Science, Longzi Lake Campus, Zhengzhou East New District, Henan Agricultural University, Zhengzhou, China.

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Fig. 5.2 CSR issues impact on share prices (%). Source CFA Institute/Principles for Responsible Investment Initiative, ESG Integration in China: Guidance and Case Studies, p. 34, https://www.cfa institute.org/-/media/documents/survey/esg-integration-china.ashx

owners (institution leaders) as defensive measures designed to head-off societal criticism of a company’s social, economic, and environmental irresponsible behaviour.”138 Undoubtedly, companies are much more inclined to adopt CSR strategies if they are under consumer and civil society pressure.139 In particular, companies want to avoid consumer boycotts. A global survey conducted by the public relations and marketing agency Cone Communications showed that 90% (!) of consumers would boycott a company if they found out about a company’s irresponsible behaviour.140 Hence, the more pressure companies face from the various stakeholders that might lead to a negative impact on the financial performance, the higher is the probability for CSR initiatives. A survey conducted by the CFA Institute and the Principles for Responsible Investment Initiative asked Chinese investors about the impact of CSR issues on the share prices in 2017 and five years later in 2022141 (Fig. 5.2): In 2017, Chinese investors believed that CSR issues will have a much stronger impact on share prices in 2022. In 2017, governance aspects of CSR were believed to have the strongest impact on share prices. By 2022, Chinese investors expect that 138 Zhang/Morse/Ma, Corporate Social Responsibility and Sustainable Development in China: Current Status and Future Perspectives, Sustainability 2019, 11, 4392. 139 Li/Khalili/Cheng, Sustainability 2019, 11, 354. 140 Zhang/Morse/Ma, Sustainability 2019, 11, 4392. 141 CFA Institute/Principles for Responsible Investment Initiative, ESG Integration in China: Guidance and Case Studies, p. 34, https://www.cfainstitute.org/-/media/documents/survey/esg-integr ation-china.ashx.

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environmental aspects of CSR will have a similarly strong impact on share prices as governance aspects. Furthermore, it is striking that Chinese investors anticipate all three CSR components (governance, environmental, social) to affect the share prices much more strongly by 2022.142

142 CFA

Institute/Principles for Responsible Investment Initiative, ESG Integration in China: Guidance and Case Studies, p. 34.

Chapter 6

Supply Chain Arbitration

6.1 Supply Chain Management Supply chains are characterized by numerous parties and multiple, mostly bilateral contractual relationships. Frequently, a multinational company is at the top of complex supply chains consisting of multiple tiers1 of contractors, suppliers, subcontractors, sub-suppliers, sub-subcontractors and lower-tier sub-suppliers. Usually, a direct contractual relationship only exists between the neighbouring tiers (i.e. contracts between the first and second tier, the second and third tier, the third and fourth tier, and so on). Hence, the supply chain leader (employer, owner, purchaser, developer, etc.)2 usually only concludes direct contracts with the main contractor/main supplier of the second tier. The main contractor enters into contracts with the subcontractors/sub-suppliers and the latter conclude agreements with sub-subcontractors/lower-tier sub-suppliers.3 In practice, construction projects may give rise to the most complex supply chain structures. They may involve the employer, the main contractor, engineers, architects, designers, subcontractors, sub-subcontractors, suppliers, sub-suppliers, lower-tier sub-suppliers, construction managers, project managers, commercial banks, insurers and reinsurers, etc.4 1 Complex

supply chains may be comprised of hundreds of companies. (Vinson & Elkins), Parties to Construction Contract, https://globalarbitrationreview.com/ chapter/1145207/parties-to-a-construction-contract (last accessed on 5 May 2020). 3 McCall-Smith/Rühmkorf , From International Law to National Law: The Opportunities and Limits of Contractual CSR Supply Chain Governance, in Ulfbeck/Andhov/Mitkidis (Ed.), Law and Responsible Supply Chain Management. Contract and Tort Interplay and Overlap (2019) p. 13 (p. 35); Rühmkorf , Corporate Social Responsibility im Supply Chain Management. Die Verrechtlichung der CSR im Lieferanten-Management, AnwBl 5/2016, p. 393 (p. 394). 4 Sheridan/Linhardt, Managing the Battlefield: Using a Uniform Multi-Party Construction Arbitration Agreement, Journal of the ACCL, Vol. 11, No. 1 (2016) p. 39 (p. 40), https://www.glaser weil.com/uploads/documents/Managing_the_Battlefield_-_ACCL_-_Sheridan_Linhardt.pdf (last 2 Stiegler

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 A. Peter, CSR and Codes of Business Ethics in the USA, Austria (EU) and China and their Enforcement in International Supply Chain Arbitrations, https://doi.org/10.1007/978-981-33-6073-0_6

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Fig. 6.1 Sample supply chain structure. Source Author

There is a wide variety of contractual structures in international construction projects. The most conventional contractual scheme is the so-called “build-only model”. Under this model, the employer enters into direct contracts with both the main contractor and the design team (comprised of architects and engineers) but usually does not have any contractual ties to suppliers, subcontractors or subsubcontractors. Nowadays, the most popular model is the “design-build model”. It is also referred to as “turnkey model”. Under this model, the employer only has a direct contractual relationship with the main contractor who concludes the necessary contracts with the design team, suppliers and subcontractors. Under the turnkey model, the main contractor not only is (like in the build-only model) responsible for the acts of the subcontractors and defective goods delivered by the suppliers but is, in contrast to the build-only model, also liable for the design team’s work.5 It is noteworthy that construction contracts are usually based on standard forms. The most widely used international standard forms are from the Fédération International des Ingénieurs Conseils (“FIDIC”). The FIDIC standard forms are contained in several “books”. For example, the Red Book (Conditions of Contract for Construction for Building and Engineering Works, Designed by the Employer) covers build-only contracts. The Yellow Book (Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Plant, and for Building and Engineering Works, Designed accessed on 5 April 2020); Kondev, Multi-Party and Multi-Contract Arbitration in the Construction Industry (2017) p. 32. 5 Kondev, Multi-Party and Multi-Contract Arbitration in the Construction Industry, p. 40 et sq. Other models used in the construction industry are the construction management model, management contracting, the design-build-operate model and alliance agreements. For more information on these models see Kondev, Multi-Party and Multi-Contract Arbitration in the Construction Industry, p. 43 et sqq., and Stiegler, Parties to Construction Contract, https://globalarbitrationreview.com/cha pter/1145207/parties-to-a-construction-contract.

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by the Contractor) and the Silver Book (Conditions of Contract for EPC/Turnkey Projects) relate to the design-build/turnkey model. The Silver Book burdens the main contractor with a higher degree of liability risk. There is also a FIDIC standard form for subcontracts (FIDIC Subcontract).6 The main contractor is the heart of a construction supply chain. For example, the main contract for a project involving the erection of a new plant may make the main contractor responsible for the design, construction, installation, provision of materials, supervision of the works, documentation, engagement of subcontractors and suppliers, commissioning, etc. The main contractor will have to conclude numerous contracts with subcontractors and suppliers for the main components, equipment, workshop assembly works, electrical works, mechanical works, etc. The subcontractors themselves may also have to conclude contracts with certain lower-tier sub-subcontractors or lower-tier sub-suppliers to accomplish their works. Business ethics and CSR measures have been increasingly gaining significance in the supply chain management of companies (in particular for multinational companies) as well. As described above, many multinationals at the top of supply chains issued supplier and channel member codes of conduct. Such codes can be given a legally binding effect by contractual agreements between members of the supply chain. According to Ulfbeck/Hansen/Andhov7 there are roughly four models for CSR obligations to gain contractual force: (i)

Under the express terms model, CSR provisions are directly written into the main contract or are part of the terms and conditions of the main contract. (ii) Under the reference model, the main contract or the terms and conditions of the main contract make a reference to the codes of conduct of a company or to international soft law instruments, such as the UN Global Compact or ISO 26000. (iii) Under the stand alone model, codes of conduct are directly signed by the contractors or subcontractors. (iv) Under the implied terms model, CSR provisions are not expressly mentioned or referred to in the main contract or in the terms of conditions of the main contract. Instead, certain CSR commitments are implied to be part of the main contract based on industry practice. The author does not recommend relying on the implied terms model, as an industry practice can be very difficult to prove. As the supply chain leaders usually do not have a direct contractional relationship with lower-tier supply chain members, the latter are not bound by the codes of conduct

6 For more information on the FIDIC standard forms, including other “books” see Frad in Czernich/Deixler-Hübner/Schauer, Schiedsrecht (1 May 2018) para. 34.2 et sqq.; Kondev, Multi-Party and Multi-Contract Arbitration in the Construction Industry, p. 33 et sqq. 7 Ulfbeck/Hansen/Andhov, Contractual Enforcement of CSR Clauses and the Protection of Weak Parties in the Supply Chain, in Ulfbeck/Andhov/Mitkidis (Ed.), Law and Responsible Supply Chain Management. Contract and Tort Interplay and Overlap, p. 46 (p. 48 et sqq).

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of supply chain leaders.8 In other words, a subcontractor or sub-supplier does not have to comply with CSR provisions which are part of the main contract between the employer and the contractor. Contract law does not allow to contractually burden third parties. In order to guarantee the enforcement of the supplier code of conduct of a supply chain’s leading company, it is necessary to oblige the direct contractual partner (the main contractor/main supplier) to mandate the compliance with the chain leader’s supplier code of conduct in its direct contracts with the lower-tier suppliers or subcontractors. This way, the chain leader’s supplier code of conduct will be made part of all the contracts along the entire supply chain. Tier 2 supply chain members contractually oblige tier 3 supply chain members. Third tier members do the same with fourth tier members, and so on. This means that each supply chain member has to make responsible its direct contractual supply chain partner. According to Ulfbeck/Hansen,9 subcontracts (including those with lower-tier subcontractors) often depend on the contents of the contract concluded between the employer (chain leader) and the main contractor. Furthermore, the chain leader frequently has the contractual right to make unilateral changes which must be transferred by the main contractor along the supply chain. According to the author’s experience in the area of construction supply chains, it is in particular interesting that there are subcontracts between the main contractor and its subcontractors that follow both the express terms and the reference model. Such subcontracts (or the underlying terms and conditions) make an explicit reference to both the employer’s and the main contractor’s codes of conduct and contain some express provisions, mostly regarding the avoidance of child labour, bribery and corruption and the prevention of conflicts of the subcontractor’s and its suppliers’ interests (lower-tier subcontractors) with the interests of the employer and the main contractor. In the event that an employer imposes upon the main contractor the responsibility for enforcing the employer’s code of conduct along the supply chain, the main contractor will place the requirement of compliance with the employer’s business ethics policy on all subcontractors. Furthermore, a main contractor usually has its own code of conduct which will be contractually imposed on the subcontractors and lower-tier sub-suppliers as well. Subcontractors are contractually forced by the main contractor to include the proper clauses and references in the lower-tier subcontracts. In particular, the author has seen comprehensive sections in subcontracts between the main contractors and their subcontractors covering health, safety and environmental (“HSE”) aspects. Among other things, clauses under these HSE sections would

8 McCall-Smith/Rühmkorf

in Ulfbeck/Andhov/Mitkidis (Ed.), Law and Responsible Supply Chain Management. Contract and Tort Interplay and Overlap, p. 35; Rühmkorf , AnwBl 5/2016, p. 394. 9 Ulfbeck/Hansen, Interplay Between Contract and Tort in the Supply Chain, in Ulfbeck/Andhov/Mitkidis (Ed.), Law and Responsible Supply Chain Management. Contract and Tort Interplay and Overlap, p. 132 (p. 139).

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(i)

mandate that the subcontractor shall abide by all requirements in compliance with the laws and with the contractor’s and the employer’s HSE provisions (e.g. contained in the supplier codes of business conduct and ethics) and make them available to subcontractor’s personnel and lower-tier subcontractors, instruct the subcontractor’s personnel and lower-tier subcontractors to observe and abide by them and include in the contracts with lower-tier subcontractors express provisions stating that the statutory, the contractor’s and the employer’s HSE requirements shall be complied with. Moreover, the subcontractor would have to indemnify and hold harmless the contractor against and from the consequences of any failure to do so; (ii) prescribe that the subcontractor shall appoint one or more full-time highly qualified on-site HSE representatives, approved by the contractor, who shall be given the authority and responsibility of ensuring that all activities at the work site are executed in compliance with the HSE procedures and applicable standards. The site representative would have to coordinate with the lower-tier subcontractors working at the work site; (iii) urge the subcontractor to maintain records and prepare periodic HSE reports in compliance with the laws and the contractor’s and employer’s HSE provisions. In addition, the subcontractor would have to immediately notify the contractor of any accidents or environmental incidents. Most importantly, the HSE reports would have to include the key performance indicators defined for the works by the contractor and the employer; (iv) entitle the contractor to serve notices to correct and in the case of persistent non-compliance with the HSE standards to terminate the subcontract. Subcontracts usually contain detailed requirements for contracts between the subcontractor and the lower-tier subcontractor/sub-suppliers. For example, such clauses would (i)

(ii) (iii) (iv) (v)

require the subcontractor to provide the contractor with a list of proposed lowertier subcontractors (including their qualifications). Any lower-tier subcontractors would have to be approved by the contractor. The author has also seen in his practice that employers provide contractors with lists from which the contractors and subcontractor may select their chain partners; oblige a subcontractor not to conclude subcontracts with lower-tier subcontractors without the contractor’s prior consent; call for a subcontractor to submit to the contractor copies of any contracts concluded with lower-tier subcontractors; make responsible the subcontractor for any defaults, acts and omissions of lower-tier subcontractors; demand the subcontractor’s immediate actions to terminate the lower-tier subcontracts and to remove the lower-tier subcontractors from the work site/supply chain if the contractor is of the opinion that the lower-tier subcontractors do not comply with their HSE duties.

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It is absolutely crucial to note that contracts can give a binding effect to otherwise non-binding provisions contained in (supplier) codes of business conduct and ethics but these provisions need to be (i)

incorporated into all the contracts being part of the supply chain (e.g. by means of the above mentioned express terms or reference model); (ii) drafted in a binding way (e.g. wordings such as “subcontractor shall comply with”, “the subcontractor warrants and guarantees that” or “the subcontractor has reviewed the contractor’s supplier code of conduct and agrees that all of the subcontractor’s activities shall be conducted in accordance with the contractor’s supplier code of conduct” would be considered legally binding); and (iii) phrased in a clear and unambiguous manner (the wording must have a minimum precision, and the implementation of a provision must be verifiable in order to be able to enforce it; a provision such as “neither the subcontractor nor any lower-tier subcontractor shall use child labour” would meet the minimum precision requirement).10

6.2 Third Party Rights and Collateral Warranties The employer may also directly pursue claims in relation to his supplier code of conduct if a third party rights clause in his favour is expressly included in the subcontracts and lower-tier subcontracts, or a collateral warranty is provided to the employer by the subcontractors and lower-tier subcontractors. Based on the major significance of English law for international contracts,11 it should be pointed out that the Contracts (Rights of Third Parties) Act 199912 enables third parties to enforce contractual terms if the contract expressly provides such right or the contractual terms purport to confer a benefit on the third party.13 The second limb “does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.”14 It is also stipulated that the third party must be expressly identified in the contract. Among other things, the identification requirements are fulfilled if the contract expressly mentions the third party’s name or a particular class of which the third party is a member.15 Pleading the second limb (“purport to confer a benefit on the third 10 McCall-Smith/Rühmkorf

in Ulfbeck/Andhov/Mitkidis (Ed.), Law and Responsible Supply Chain Management. Contract and Tort Interplay and Overlap, p. 32 et sqq. 11 See below in Sect. 6.3.2. 12 The Contracts (Rights of Third Parties) Act 1999 can be accessed at http://www.legislation.gov. uk/ukpga/1999/31/section/1 (last accessed on 5 May 2020). 13 Section 1 (1) (a) and (b) of the Contracts (Rights of Third Parties) Act 1999; McCallSmith/Rühmkorf in Ulfbeck/Andhov/Mitkidis (Ed.), Law and Responsible Supply Chain Management. Contract and Tort Interplay and Overlap, p. 35. 14 Section 1 (2) of the Contracts (Rights of Third Parties) Act 1999. 15 Section 1 (3) of the Contracts (Rights of Third Parties) Act 1999.

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party”) will be rather challenging, and decisions will be made on a case-by-case basis analysing carefully the parties’ intentions (e.g. the intentions of the parties to the subcontract in relation to the employer) which makes an outcome quite unpredictable. Moreover, third party rights are often expressly excluded in contracts.16 It must be brought to attention as well that in case where a third party is expressly provided with the enforcement of certain contractual terms, such substantive third party rights should also be taken into account by the contract’s dispute resolution clause by explicitly integrating the third party concerned into the dispute resolution clause: Where non-parties to a contract are granted rights thereunder it is important for the dispute resolution provisions (both their nature and their scope) to be carefully drafted to try to avoid fragmented resolution of disputes in multiple fora, if this is what the parties intend. The wording of many arbitration clauses which refers to disputes arising “between the parties” will not usually be sufficient for a third party with substantive rights under the contract to be treated as a party to the arbitration agreement, such as to be able to enforce its terms. Clear wording demonstrating the contracting parties’ intent to grant a procedural right to the third party will be required.17

In the context of the employer’s possible enforcement of his supplier code of conduct in relation to subcontractors, suppliers, lower-tier subcontractors and subsuppliers, the author suggests that arbitration clauses contained in subcontracts and sub-subcontracts should expressly add that the parties irrevocably consent that any dispute, controversy or claim arising out of or in relation to the employer’s supplier code of conduct may be submitted by the employer to arbitration in accordance with the parties’ arbitration agreement. Collateral warranties may be in particular vital for the pursuit of the employer’s claims if the main contractor is in financial difficulties or in cases where the employer nominates subcontractors resulting in the main contractor’s limitation of liability for acts of the nominated subcontractors.18 Collateral warranties create direct contractual relationships (usually executed as deeds requiring no consideration) between the employer and the subcontractors or other participants of the supply chain with whom the employer is usually not in a direct contractual relationship. This entitles the employer to directly sue the subcontractor or other members of the supply chain in the event of a breach of the collateral warranty.19 An employer may insist “upon the main contractor entering into a sub-contract with a particular sub-contractor after 16 McCall-Smith/Rühmkorf

in Ulfbeck/Andhov/Mitkidis (Ed.), Law and Responsible Supply Chain Management. Contract and Tort Interplay and Overlap, p. 35 et sq. 17 Peacock/Ambrose, Court of Appeal Grapples with the Relationship between an Arbitration Clause and the Rights of Third Parties: Decision in Fortress Value Case Upheld but on Different Reasons (2 May 2013), https://hsfnotes.com/arbitration/2013/05/02/court-of-appeal-grappleswith-the-relationship-between-an-arbitration-clause-and-the-rights-of-third-parties-decision-infortress-value-case-upheld-but-on-different-reasons/ (last accessed on 5 May 2020). 18 Kondev, Multi-Party and Multi-Contract Arbitration in the Construction Industry, p. 48 et sq. Domestic, nominated and named subcontractors are described in more detail below in Sect. 6.3.3. 19 Cooke (Penningtons Manches Cooper), Collateral Warranties: An Overview (4 January 2013), https://www.penningtonslaw.com/news-publications/latest-news/collateral-warranties-anoverview (last accessed on 5 May 2020); Gould (Fenwick Elliott), Subcontracts (February 2004,

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the warranty has been given by that sub-contractor to the employer. In that situation the employer can sue the sub-contractor or supplier for any loss caused by breach of the warranty.”20 The underlying contracts of collateral warranties may be subcontracts or lowertier subcontracts along the entire supply chain. It should be pointed out as well that not only the employer may be interested in collateral warranties. The main contractor may also try to obtain collateral warranties from the sub-subcontractors, given that he is usually fully liable for the acts of both the subcontractors and lowertier subcontractors but has no direct contractual relationship with the latter group. In the collateral warranty’s principle covenant the subcontractor warrants to comply with the terms of the subcontract, including ideally the employer’s supplier code of conduct. Therefore, it is of utmost importance for an employer wishing to obtain a collateral warranty from the subcontractor that the subcontract (the collateral warranty’s underlying contract) contains the main contract’s key terms (where applicable).21 In terms of the enforcement of an employer’s supplier code of conduct, this entails the clear and unambiguous incorporation of the supplier code of conduct in the subcontract. In other words, key terms of the main contract should be mirrored as back-to-back provisions, otherwise a collateral warranty will be of limited value to the employer. Collateral warranties are also allowed in Chinese law. Yet, it is not a common practice in Chinese construction and engineering projects to provide collateral warranties.22

6.3 Possible Contractual Claims for Damages Arising from the Violation of Codes of Business Conduct and Ethics in the Context of Supply Chain Disputes Involving Multiple Parties As the compliance with the chain leader’s code of business conduct and ethics (or supplier code of conduct) may be a contractually binding obligation along the entire supply chain, it is evident that violations of such code by lower-tier chain members might trigger the commencement of several arbitrations which carry the potential of being consolidated based on (i) the close connection of the various supply chain updated Mar 2011) p. 18, https://www.fenwickelliott.com/research-insight/articles-papers/subcon tracts (last accessed on 29 April 2020). 20 Gould, Subcontracts, p. 18, https://www.fenwickelliott.com/research-insight/articles-papers/sub contracts. 21 Cooke, Collateral Warranties: An Overview, https://www.penningtonslaw.com/news-publicati ons/latest-news/collateral-warranties-an-overview. 22 Li/Mok (Herbert Smith Freehills), China: Construction and Engineering Law 2019 (9 July 2019) para. 3.14, https://iclg.com/practice-areas/construction-and-engineering-law-laws-and-regulations/ china (last accessed on 5 May 2020).

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contracts and the related transactions along the supply chain, (ii) the supply chain serving one and the same project, (iii) the dependence of lower-tier chain contracts on the contents of higher chain contracts and (iv) the similar or identical legal and factual issues that need to be solved. In construction disputes employers’ claims for damages often relate to the late completion of a project (contractual delay damages), defective works or performance failures.23 In the context of corporate ethics policies, a breach of a core provision of the employer’s supplier code of conduct by a lower-tier subcontractor (subsubcontractor) may lead to a breach of the contract and the subsequent termination of the contract between the subcontractor and the lower-tier subcontractor. The obligation to terminate the contract with lower-tier subcontractors under certain circumstances is usually imposed on the subcontractor by the main contractor as part of the subcontract. The replacement procedure of the lower-tier subcontractor may cause a delay of the entire project. In civil law jurisdictions, the main contracts for major projects usually entitle the employer to claim a contractual penalty for the delayed performance of the works. Contractual penalties may (i) amount to certain percentages of the total contract price for each started day of delay and (ii) be capped with the total contract price. The delay may give rise to an arbitration initiated by the employer against the main contractor who will try to pass the responsibility down the supply chain to the subcontractor who in turn will try to be held harmless by the lower-tier subcontractor breaching the supplier code of conduct. Hence, three arbitrations are likely to be initiated which have the potential to be consolidated. The following fictitious case scenario (“Case Scenario”) ought to demonstrate in more detail possible claims for damages in the context of the violation of a code of business conduct and ethics by a subcontractor.

6.3.1 Fictitious Case Scenario An employer’s code of business conduct and ethics is legally binding throughout the entire supply chain by means of bilateral contracts between the neighbouring tiers. The contracts along the entire supply chain expressly emphasize the significance of particular provisions of the code by stipulating that a breach of certain listed core violations (including severe environmental violations) of the code is deemed as a repudiatory breach of contract. Moreover, all contracts along the supply chain contain a number of back-to-back provisions mirroring the terms of the main contract. The main contract between the employer and the main contractor obliges the latter to select subcontractors from a list contained in an annex of the main contract (named subcontractors). The main contract also stipulates that approvals of subcontractors by the employer do not reduce the main contractor’s responsibility for the performance of the subcontractors’ works. Furthermore, following the turnkey model, the 23 Kondev,

Multi-Party and Multi-Contract Arbitration in the Construction Industry, p. 46.

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main contractor is made responsible for any of the subcontractor’s defaults, acts and omissions. Every subcontractor is subject to a due diligence before entering into a subcontract and regular and unannounced on-site visits carried out by the employer’s and main contractor’s staff. The first of the regular on-site visits of the subcontractor’s premises and production facility takes place six months after the conclusion of the subcontract. No violations of the code of business conduct and ethics are discovered. Ten months after commencement of the works, the employer learns about material breaches (severe environmental violations) of his code of business conduct and ethics by the subcontractor. The subcontractor’s violations do not remain unnoticed by the public. News coverage, NGOs and social media sources spread the information about the severe environmental breaches worldwide. As there is no direct contractual relationship (no collateral warranties) between the employer and the subcontractor, the employer commences an arbitration against the main contractor. Subsequently, the main contractor initiates a second arbitration against the violating subcontractor. The arbitration clauses in the main contract and the subcontract are compatible. Both arbitration clauses do not contain any provision on the admissibility of multi-party proceedings. The employer and the subcontractor oppose both a joinder or a consolidation. The employer pleads a loss of profits resulting from a loss of reputation based on the following grounds: (i) boycotts of customers resulted in a sharp decline of turnover, and (ii) negotiations with regard to an exceptional (in terms of size and lucrativeness) project with a prospective business partner were abandoned by the latter. The main contractor and subsequently the subcontractor were not informed about this unique project. Under alternative 1, the main contract stipulates that neither party shall be liable for any consequential, indirect or special damages or loss of profits arising from or under this contract. Under alternative 2, the main contract contains a contractual penalty clause for certain core violations of the code of business conduct and ethics. It should be pointed out that damage clauses in international contracts often exclude the liability for indirect or consequential damages, including lost profits, but the latter may also be interpreted as direct damages under certain circumstances. Furthermore, in contrast to civil law jurisdictions, contractual penalties are not allowed in common law jurisdictions.

6.3.2 The Significance of English Law for International Contracts The parties of international contracts frequently select English law (or the law of a country which is based on English law) as the governing (substantive) law of the contract. This can be concluded from the statistics of the most important international arbitration institutions, such as the International Chamber of Commerce (“ICC”) and the Singapore International Arbitration Centre (“SIAC”). In 16% of all

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ICC arbitration cases filed in 2018 and 2019 the parties selected English law as the governing law. This made English law the most selected lex contractus, followed by the laws of 17 US states (12%) in 2018.24 In SIAC arbitrations filed in 2019, the most applied governing laws were Singaporean law (41%), Indian law (24%) and English law (16%).25 In newly filed arbitral proceedings administered by the Hong Kong International Arbitration Centre (“HKIAC”) in 2018, the top three governing laws were Hong Kong law, English law and Chinese law.26 The significance of English law can be confirmed by the author’s experience as well, as the author dealt with many contracts concluded between European and Asian parties where the applicable substantive law was English law.

6.3.3 Privity of Contract and Domestic, Nominated or Named Subcontractors It is crucial to reiterate that in English law [t]here is no direct contractual link between the employer and the sub-contractor by virtue of the main contract. In other words, the main contractor is not the agent of the employer and conversely the employer’s rights and obligations are in respect of the main contractor only. The employer therefore cannot sue the sub-contractor in the event that the subcontractor’s work is defective, is lacking in quality, or delays the works. On the other hand, the employer is only obliged to pay the main contractor and so sub-contractors cannot sue the employer for the sub-contract price even if the main contractor defaults or becomes insolvent. These simple concepts arise because of the general principle that there is no privity of contract ordinarily between the employer and a sub-contractor […] The contractor is therefore, and subject to any specific terms to the contrary liable to the employer for any default of the sub-contractor […] When a contractor engages a sub-contractor he is simply obtaining the vicarious performance of his own obligations to the employer.27

In practice, subcontractors may either be freely selected by the main contractor (domestic subcontractors) or the employer (nominated subcontractors). A third category is the so-called named subcontractor who is selected by the main contractor from

24 International Chamber of Commerce, ICC Dispute Resolution 2018 Statistics, p. 13, www.icc wbo.org/dr-stat2018 (last accessed on 7 May 2020); ICC Dispute Resolution 2019 Statistics, p. 15, https://iccwbo.org/publication/icc-dispute-resolution-statistics/. 25 Singapore International Arbitration Centre, Where the World Arbitrates, Annual Report 2019, p. 21 et sqq., https://www.siac.org.sg/images/stories/articles/annual_report/SIAC%20Annual%20R eport%202019%20(FINAL).pdf (last accessed on 7 May 2020). 26 Hong Kong Arbitration Centre, Annual Report 2018 Reflections, p. 9, https://www.hkiac.org/sites/ default/files/annual_report/annual%20report%203463-7390-6190%20v.4.pdf (last accessed on 3 May 2020). 27 Gould, Subcontracts, p. 1 et sq., https://www.fenwickelliott.com/research-insight/articles-papers/ subcontracts.

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a list provided by the employer. Domestic, named and nominated subcontractors are solely employed by the main contractor.28 Although in principle the main contractor is liable for any default of the subcontractor, employers usually retain some liability if they nominate the subcontractors themselves.29 With regard to both domestic and named subcontractors, English law is clear and stipulates the main contractor’s liability for any domestic or named subcontractor’s default (subject to any term in the main contract saying otherwise).30 Nowadays, employers prefer to include clauses pursuant to which main contractors have to engage employer-nominated subcontractors as the main contractor’s domestic subcontractors. This approach is also supported by most of the standard forms for contract in the construction industry.31 In this case, the main contractors need to be very careful, as they will be fully liable for any default of the employer-nominated subcontractors if they expressly assume strict liability for such nominated subcontractors (e.g. by accepting the contractual provision pursuant to which the main contractor is responsible for the acts or defaults of any subcontractors as if they were the acts or defaults of the contractor).32 In the Case Scenario, the main contractor has to select subcontractors from a list provided by the employer in the main contract’s annex. Hence, the subcontractors in the Case Scenario are named subcontractors which makes the main contractor liable for their defaults subject to any term in the main contract saying otherwise. There are no provisions in the main contract in the Case Scenario indicating a different intention of the parties. On the contrary, the main contract expressly stipulates that the main contractor remains responsible for any of the subcontractor’s defaults, acts and omissions, and the main contractor’s liability is not reduced by the employer’s approvals. This means that the main contractor will also be responsible for the breach of provisions of the employer’s code of business conduct and ethics if such breach qualifies as breach of the main contract. In this context, it should be pointed out that in the Case Scenario, core violations of the code are deemed as repudiatory breaches in the main contract and in all of the subcontracts and lower-tier subcontracts along the entire supply chain.

28 Gould, Subcontracts, p. 2 et sq., https://www.fenwickelliott.com/research-insight/articles-papers/

subcontracts. Subcontracts, p. 3, https://www.fenwickelliott.com/research-insight/articles-papers/sub contracts. 30 Herbert Smith Freehills, Construction Newsletter No. 65 (July 2014) p. 2, https://sites-herbertsm ithfreehills.vuturevx.com/20/6452/landing-pages/newsletter-65-july-2014-e-pdf (last accessed on 29 April 2020). 31 Gould, Subcontracts, p. 28, https://www.fenwickelliott.com/research-insight/articles-papers/sub contracts; Herbert Smith Freehills, Construction Newsletter No. 65 (July 2014) p. 3, https://sitesherbertsmithfreehills.vuturevx.com/20/6452/landing-pages/newsletter-65---july-2014--e-.pdf. 32 Herbert Smith Freehills, Construction Newsletter No. 65 (July 2014) p. 3, https://sites-herbertsm ithfreehills.vuturevx.com/20/6452/landing-pages/newsletter-65---july-2014--e-.pdf. 29 Gould,

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6.3.4 Can a Breach of a Material or Core Violation of a Code of Conduct Be Qualified as a Repudiatory Breach of the Contract? English law distinguishes between repudiatory breaches of contract and contractual breaches other than repudiatory breaches. The distinction is crucial for the claims of damages after the termination of a contract. Contracts frequently contain termination rights for material, substantial or repeated breaches. These breaches are nonrepudiatory breaches, but only repudiatory breaches allow for the recovery of loss of bargain after the termination of the contract. Loss of bargain damages are amounts to compensate for the lost opportunity to receive future performance of the contract.33 In other words, loss of bargain is the loss of profits that would have been made had the contract carried through to completion.34 As a consequence, parties that intend certain breaches to be repudiatory breaches should expressly identify the relevant provisions as conditions (vital for the contract). The breach of a warranty is not considered a repudiatory breach. In the event of a repudiatory breach, the innocent party may choose to either terminate or to continue the contract. In both cases, the innocent party may claim loss of bargain damages.35 In the Case Scenario, the qualification of certain material violations of the code of business conduct and ethics as a repudiatory breach of contract can be crucial, taking into account that a serious violation of the code (such as child labour or severe environmental violations) may require the immediate removal of the violating subcontractor in order to reduce financial loss arising from loss of reputation. In all likelihood, many customers, business partners, NGOs and other stakeholders may not condone the non-removal of a serious violator of the code. The employer may wish to continue the contract with the main contractor, urge the latter to terminate the subcontract and claim against the main contractor loss of profits caused by a loss of reputation arising from the breach of the code. In this case, the main contractor will of course be interested in a recourse claim against the violating subcontractor. After termination of the subcontract, the main contractor will only be able to claim loss of bargain damages if the breach of the code is a repudiatory breach of the subcontract. In the Case Scenario, this criterion is fulfilled, as material or core violations of the employer’s business code of conduct and ethics are repudiatory breaches.

33 Ashurst, Terminating Contracts under English Law (18 June 2019), https://www.ashurst.com/ en/news-and-insights/legal-updates/terminating-contracts-under-english-law/ (last accessed on 21 April 2020). 34 Kerry (Hardwicke), Losing Out on Loss of Bargain when Terminating in Reliance upon Contractual Rights, Thomson Reuters Practical Law Construction Blog (4 July 2018), http://constructionblog.practicallaw.com/losing-out-on-loss-of-bargain-when-terminatingin-reliance-upon-contractual-rights/ (last accessed on 29 April 2020). 35 Ashurst, Terminating Contracts under English Law, https://www.ashurst.com/en/news-and-ins ights/legal-updates/terminating-contracts-under-english-law/.

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6.3.5 Foreseeability, Causation and Mitigation Due to the significance of English law as the governing law in international contracts, English law may not be overlooked when assessing possible damage claims arising out of the Case Scenario. English law does not award damages for the loss of reputation, but if a breach of contract causes a loss of reputation which in turn causes a consequent financial loss, the damages for the latter may be recovered.36 This is exactly the case in the Case Scenario, as the reputational damages directly lead to financial losses (lost profits) due to the loss of business and customers. However, it should be pointed out that although, in principle, a recovery is possible, the requirements of remoteness, causation and mitigation must be satisfied. The House of Lords in Malik v Bank of Credit and Commerce International S.A.; Mahmud v Bank of Credit and Commerce International S.A. reiterated this principle: The principled position is as follows. Provided that a relevant breach of contract can be established, and the requirements of causation, remoteness and mitigation can be satisfied, there is no good reason why […] recovery of financial loss in respect of damage to reputation caused by breach of contract is necessarily excluded.37

Dealing with the principle of remoteness, it should be emphasized that a consequent financial loss based on a reputational damage caused by a contractual breach is only claimable if such financial loss is not unlikely or reasonably foreseeable at the time of contract conclusion.38 Otherwise, a claim for damages would be too remote. The classical statement describing the rules for remoteness of damages can be found in the judgment of the Court of Exchequer in the case Hadley v. Baxendale: Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. Now, if the special circumstances under which the contract was 36 Desai/Lusiji (JMiles & Co.), Reputational Loss Arising from Breach of a Settlement Agreement: Are Damages Recoverable? (29 July 2019), https://www.lexology.com/library/detail.aspx?g=693 9669c-f6c0-4652-b3f2-ad2c3d07b792 (last accessed on 15 April 2020); Malik v. Bank of Credit; Mahmud v. Bank of Credit [1997] UKHL 23; [1998] AC 20; [1997] 3 All ER 1; [1997] IRLR 462; [1997] 3 WLR 95; [1997] ICR 606 (12th June, 1997), https://www.bailii.org/uk/cases/UKHL/1997/ 23.html (last accessed on 7 May 2020); Johnson v. Unisys Limited [2001] UKHL 13; [2001] 2 All ER 801; [2001] 2 WLR 1076 (22nd March, 2001), https://www.bailii.org/uk/cases/UKHL/2001/ 13.html (last accessed on 7 May 2020); Johnson v. Gore Wood & Co. [2000] UKHL 65; [2001] 1 All ER 481; [2001] 2 WLR 72 (14th December, 2000), https://www.bailii.org/uk/cases/UKHL/ 2000/65.html (last accessed on 7 May 2020); O’Sullivan, O’Sullivan’s and Hilliard’s The Law of Contract, 9th ed. (2020) para. 16.51. 37 Malik v. Bank of Credit; Mahmud v. Bank of Credit [1997] UKHL 23; [1998] AC 20; [1997] 3 All ER 1; [1997] IRLR 462; [1997] 3 WLR 95; [1997] ICR 606 (12th June, 1997), https://www.bai lii.org/uk/cases/UKHL/1997/23.html. 38 Parris/Briskman, Contracts Refresher: Excluding Liability for Loss of Profits (28 January 2015), https://www.fieldfisher.com/en/insights/contracts-refresher-excluding-liability-for-loss-ofprofits (last accessed on 15 April 2020).

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actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case; and of this advantage it would be very unjust to deprive them.39

Since that judgment, losses that arise naturally in the usual (ordinary) course of things (usual consequences of a loss foreseen by a reasonable person) have been subsumed under the first limb of Hadley v. Baxendale as direct losses, and losses that give rise to a liability due to being contemplated by the parties (the parties’ knowledge of special circumstances leading to a loss) at the time of contract conclusion have fallen under the second limb of Hadley v. Baxendale as indirect losses.40 Hence, damages that fall under the second limb are too remote if the breaching party does not possess knowledge about the special circumstances leading to the loss.41 The two limbs of Hadley v. Baxendale were interpreted and restated in later cases such as Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd.42 and Koufos v. C. Czarnikow Ltd.43 “The combined effect of these cases may be summarized as follows: A type or kind of loss is not too remote a consequence of a breach of contract if, at the time of contracting (and on the assumption that the parties actually foresaw the breach in question), it was within their reasonable contemplation as a not unlikely result of that breach.”44 Applying the principles of remoteness on the Case Scenario, the question which will have to be answered is whether a reasonable person could have foreseen, at the time of contract conclusion, the loss of profits requested by the claimant (employer) arising out of the breach of the mandatory code of business conduct and ethics. In other words, is it conceivable for a reasonable person that material violations of a code of business conduct and ethics may lead to a loss of reputation causing (i) the loss of customers (resulting into a decrease of turnover) and (ii) abandoned negotiations in relation to a unique project? In principle, it is possible to answer this question affirmatively considering that English law recognizes the recovery of financial losses which are based on a loss 39 Hadley

v. Baxendale, Court of Exchequer, 156 Eng. Rep. 145 (1854), http://madisonian.net/dow nloads/contracts/hadley.pdf (last accessed on 7 May 2020). 40 Chitty on Contracts, Vol. 1, General Principles, 33rd ed., Damages, para. 26-120; See Parris/Briskman, Contracts Refresher: Excluding Liability for Loss of Profits, https://www.fieldf isher.com/en/insights/contracts-refresher-excluding-liability-for-loss-of-profits. 41 Chitty on Contracts, Vol. 1, General Principles, 33rd ed., Damages, para. 26-133. 42 Victoria Laundry (Windsor) v Newman Industries [1949] 2 K.B. 528 (12 April 1949). 43 C Czarnikow Ltd v Koufos (The Heron II) [1967] UKHL 4 (17 October 1967), https://www.bai lii.org/uk/cases/UKHL/1967/4.html (last accessed on 7 May 2020). 44 Chitty on Contracts, Vol. 1, General Principles, 33rd ed., Damages, para. 26-121.

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of reputation. Practically, it is a matter of fact in each individual case whether such claims will be considered as not too remote by courts or arbitral tribunals.45 If in the Case Scenario an arbitral tribunal comes to the conclusion that a breach of the code of business conduct and ethics may indeed give rise to loss of profits, the employer will not be able to recover all of the loss of profits claimed but only the normal (usual) loss of profits which can be reasonably expected in respect of his business. Hence, a loss of customers and business may reasonably be expected. Even future profits from repeat orders from previous customers may be recoverable. However, the main contractor may only be held liable for losses arising out of the abandoned negotiations regarding the particularly lucrative major project if the employer specifically informs the main contractor (special knowledge) about this circumstance at the time of contract conclusion. In other words, only if the main contractor had been told of the exceptional upcoming project, he would have realized as a reasonable person that he was about to take responsibility for a loss of profits which is higher than usual. With that knowledge, he would have had the choice either to accept such higher-than-usual liability in combination with a higher contract price or to demand an exemption from such liability.46 In the author’s view, assessing the foreseeability of reputational damages leading to loss of profits, could also give rise to different outcomes in terms of what specific provisions of the code of business conduct and ethics were breached. According to Martin47 “[i]t is well understood that business relationships that negatively impact human rights carry the potential consequences of reputational harm and lost sales across the business.” As a consequence, there is a great likelihood that arbitral tribunals will come to the conclusion that loss of profits, caused by a core violation of a code’s provision in relation to human rights or health and safety issues, will naturally arise in the usual course of things (first limb of Hadley v. Baxendale). However, it is questionable whether the same holds true for a core violation of environmental protection provisions of a code of conduct. Such breaches might only be subsumed under the second limb of Hadley v. Baxendale or, in the worst case, be considered too remote if the foreseeability of the reputational damages is not communicated to the contractual partner at the time of contract conclusion. Against this backdrop, it should be reiterated that the time of the contract conclusion is relevant for the assessment of the remoteness of damages. Thus, it is in particular likely in the environmental context that a reasonable person would arrive at a different conclusion depending on the time a contract was entered into between the parties. Breaches of codes of conduct relating to long-term agreements that were concluded more than a decade ago, would probably have to be treated differently in comparison with contracts concluded nowadays 45 Malik

v. Bank of Credit; Mahmud v. Bank of Credit [1997] UKHL 23; [1998] AC 20; [1997] 3 All ER 1; [1997] IRLR 462; [1997] 3 WLR 95; [1997] ICR 606 (12th June, 1997), https://www.bai lii.org/uk/cases/UKHL/1997/23.html. 46 Chitty on Contracts, Vol. 1, General Principles, 33rd ed., Damages, para. 26-146 et sqq. 47 Martin, Private Law Remedies, Human Rights, and Supply Contracts, 68 Am. U. L. Rev. (2019) p. 1781 (p. 1808).

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or in ten or twenty years. In the past, violations of codes of conducts and ethics had a much lower potential for reputational damages leading to a considerable loss of profits. In the near and mid-term future, the author expects an ever-increasing pressure by the stakeholders, in particular with regard to environmental issues due to the climate change (the climate change will even lead to a change of business models). Specifically, this pressure will most notably be applied by the consumers (conscious consumerism), NGOs, statutory CSR reporting requirements, stricter regulations of stock exchanges, the general public and business partners who adhere to their own ethical guidelines obliging them to do business with green and ethical companies only. Moreover, the climate change will sooner or later lead to a change of business models (in particular relevant for violations of environmental provisions of a code of conduct). This development will certainly have a significant and positive impact on the assessment (by arbitral tribunals and courts) of the foreseeability of loss of profits arising from a loss of reputation caused by a core violation of a code of conduct.48 In addition to meeting the foreseeability requirement, it needs to be stressed that the criteria for causation and mitigation must be fulfilled as well in order to recover financial losses resulting from reputational damages. In terms of causation, in the 48 It

should not go unmentioned that in Transfield Shipping Inc. v Mercator Shipping Inc. [2008] UKHL 48 (9 July 2008) para. 21 (“The Achilleas”), https://www.bailii.org/uk/cases/UKHL/2008/ 48.html (last accessed on 8 May 2020), the House of Lords introduced a new criterion focusing on the assumption of responsibility: “It is generally accepted that a contracting party will be liable for damages for losses which are unforeseeably large, if loss of that type or kind fell within one or other of the rules in Hadley v Baxendale […] That is generally an inclusive principle: if losses of that type are foreseeable, damages will include compensation for those losses, however large. But the South Australia and Mulvenna cases shows that it may also be an exclusive principle and that a party may not be liable for foreseeable losses because they are not of the type or kind for which he can be treated as having assumed responsibility [emphasis added].” Hence, it seems that a defendant/respondent may no longer be held “liable for losses, whether they were usual or unusual, merely because he knew or should have known that they were not unlikely to occur. A defendant will not be liable for losses in either category if he cannot reasonably be regarded as assuming responsibility for losses of the particular kind suffered.” See Chitty on Contracts, Vol. 1, General Principles, 33rd ed., Damages, para. 26-117. However, according to Chitty (Chitty on Contracts, Vol. 1, General Principles, 33rd ed., Damages, para. 26-117) judgements in the wake of The Achilleas indicate no major changes concerning the outcome of remoteness assessments. In most of the cases, a defendant was treated as having assumed responsibility where a particular kind of loss was not unusual. Still, Chitty (Chitty on Contracts, Volume 1, General Principles, 33rd Edition, Damages, para. 26-144) criticizes the introduction of a new vague criterion (assumption of responsibility) and hopes for its application in exceptional cases only. In the author’s view, the new criterion regarding focusing on the assumption of responsibility will certainly not make it easier to successfully claim financial loss caused by loss of reputation. The author agrees with Chitty (Chitty on Contracts, Vol. 1, General Principles, 33rd ed., Damages, para. 26-117) that it is sufficient to let a contracting party know about possible unusual consequences of a breach of contract: it is simply not required “for the courts to provide additional protection by holding that it was not reasonable to think that the party was assuming responsibility.” Being informed about unusual risks prior to contract conclusion, a party is given the chance to react properly, e.g. by insisting on a higher contract price to cover the additional risk, by the introduction of an express limitation of liability clause in the contract or by not entering into the contract, etc. However, given the judgment in The Achilleas, the author recommends the inclusion of a contractual clause stating expressly a party’s assumption of responsibility.

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Case Scenario, the employer must prove that but for the violation of the code of business conduct and ethics he would not have suffered the financial losses resulting from the loss of customers and the abandoned contract negotiations in relation to the lucrative project. Moreover, the breach of the code must be the effective or dominant cause for the financial losses claimed, i.e. it is not required by the employer to show that the breach of the code was the sole cause for the loss of profits, so long as it was an effective cause of the latter. Causation could not be established if the financial loss happened in any event (even without the breaching party’s conduct).49 The facts of the Case Scenario do not indicate a cause for the financial losses claimed other than the breach of the code of business conduct and ethics. As far as mitigation is concerned, it should be noted that the non-breaching party has the duty to prevent or reduce financial losses caused by a breach of contract. The breaching party carries the burden of proof if it asserts the claimant’s/plaintiff’s insufficient mitigation. Once the non-breaching party becomes aware or ought to have known of the breach, it must within reasonable time take the necessary steps for mitigation. Any costs, expenses or further loss, which are incurred in connection with a reasonable mitigation of losses, are recoverable.50 In the Case Scenario, a supplier due diligence and regular on-site visits (before discovery of the breach) would not be attributed to mitigation, as only steps taken after the discovery of the breach are mitigation measures. It can be assumed that in the supply chain context the employer will suffer increased damages if the violating subcontractor is not removed from the supply chain. It must not remain unmentioned that it is very difficult for the innocent party to prove loss of profits caused by a loss of reputation. Linking financial to reputational loss may be very challenging51 and will in all likelihood involve extensive and expensive expert reports and a number of expert witnesses on both sides assessing the amount and factual cause of damage. The House of Lords confirmed the evidential hurdles for the claimant/plaintiff but at the same time encouraged innocent parties to move forward with their claims: “The limiting principles of causation, remoteness and mitigation present formidable practical obstacles to such claims succeeding.

49 Hall

Ellis Solicitors, Causation of Loss: Law and Damages (Breaks in Causation: novus actus interveniens), https://hallellis.co.uk/causation-loss-damages/ (last accessed on 21 April 2020); Connellan (White & Case LLP), The Global Damages Review – Edition 2. United Kingdom (November 2019), https://thelawreviews.co.uk/edition/the-global-damages-review-edition-2/121 0421/united-kingdom (last accessed on 21 April 2020); Causation, https://uk.practicallaw.thomso nreuters.com/4-107-5865?transitionType=Default&contextData=(sc.Default) (last accessed on 21 April 2020). 50 Ashurst, Terminating Contracts under English Law, https://www.ashurst.com/en/news-and-ins ights/legal-updates/terminating-contracts-under-english-law/; Connellan, The Global Damages Review – Edition 2. United Kingdom, https://thelawreviews.co.uk/edition/the-global-damages-rev iew-edition-2/1210421/united-kingdom. 51 Desai/Lusiji, Reputational Loss Arising from Breach of a Settlement Agreement: Are Damages Recoverable? https://www.lexology.com/library/detail.aspx?g=6939669c-f6c0-4652-b3f2-ad2c3d 07b792.

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But difficulties of proof cannot alter the legal principles which permit, in appropriate cases, such claims for financial loss caused by breach of contract being put forward for consideration.”52

6.3.6 Loss of Profits Under alternative 1 of the Case Scenario, the main contract sets forth that neither party shall be liable for any consequential, indirect or special damages or loss of profits arising from or under this contract. Does this clause exclude the liability for both direct and indirect or only indirect loss of profits? It must strongly be emphasized that in English law a loss of profits may either be a direct or an indirect loss. Hence, depending on the facts of a case, loss of profits will have to be subsumed under the first or the second limb of Hadley v. Baxendale. It should be stressed that especially in the construction industry contractual breaches may have severe consequences. For example, an employer may suffer extensive loss of profits, loss of business or loss of revenue. On the one hand, it is in particular in the interest of the employer that only consequential and/or indirect losses (second limb of Hadley v. Baxendale) but not direct losses are excluded from liability. On the other hand, potential employer’s loss of profits that might be considerable are a risk any main contractor intends to avoid. That is why in terms of the exclusion of loss of profits, the main contractor’s intention will be to exclude both direct and indirect loss of profits. Unclear wording of clauses often gives rise to disputes. Therefore, it is crucial to draft a clause excluding the loss of profits clearly and unambiguously by specifying if both direct and indirect or only indirect loss of profits are excluded from liability.53 It needs to be pointed out that in English law a court (or arbitral tribunal) will interpret an exclusion clause by assessing “what the words would mean to a reasonable person having all the relevant background knowledge including the contract itself as a whole. If the words are clear and fairly susceptible of one meaning only, the court should give effect to that meaning, even if the result seems commercially improbable. The court should not distort the bargain which the parties have made; but rather uphold the allocation of risk agreed by the parties. It is only if the words

52 Malik v. Bank of Credit; Mahmud v. Bank of Credit [1997] UKHL 23; [1998] AC 20; [1997] 3 All ER 1; [1997] IRLR 462; [1997] 3 WLR 95; [1997] ICR 606 (12th June, 1997), https://www.bai lii.org/uk/cases/UKHL/1997/23.html. 53 Parris/Briskman, Contracts Refresher: Excluding Liability for Loss of Profits, https:// www.fieldfisher.com/en/insights/contracts-refresher-excluding-liability-for-loss-of-profits; Gilmore/Roughton/Kratochvilova/Godwin, Excluding Liability for Consequential Loss and Loss of Profits, Construction dispute avoidance newsletter, no. 3, May 2009, https://www.lexology. com/library/detail.aspx?g=5a804c00-ea6a-4308-b927-6094d4f34ad3 (last accessed on 19 April 2020).

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are ambiguous, that the court will give effect to the more commercially probable interpretation.”54 The contract drafters in particular have to pay attention to the circumstance whether they intent to describe loss of profits as an example for consequential and indirect losses or as separate type or category of loss which is not subordinate to the consequential and indirect losses. For example, if a clause excludes “consequential and indirect damages, including loss of profits”, the word “including” will in all likelihood lead to the interpretation that only loss of profits of the indirect kind (second limb of Hadley v. Baxendale) are excluded from liability. Categories of losses might also be connected by the word “or”. In such cases, it is more than likely that judges and arbitrators will come to the conclusion that the clause excludes both direct and indirect loss of profits.55 An excellent example for such a clause can be found in the case Fujitsu Services Limited v. IBM United Kingdom Limited:56 “Neither Party shall be liable to the other under this Sub-Contract for loss of profits, revenue, business, goodwill, indirect or consequential loss or damage […].” The clause did not make “loss of profits” a sub-set of “indirect” or “consequential loss”.57 Moreover, the High Court ruled that the wording of the exclusion clause was clear and unambiguous58 and “one would expect it to be made clear if the intention was only to exclude indirect loss of profit.”59 An interpretation excluding only indirect loss of profits would “render otiose the words “loss of profits, revenue, business, goodwill.””60 In the Case Scenario (alternative 1), it can be argued as well that the wording is quite clear and loss of profits is not a sub-set of consequential, indirect or special damages. The use of “or” (neither party shall be liable for any consequential, indirect or special damages or loss of profits) indicates such an interpretation. The interpretation would arrive at a different outcome if, for example, the wording read “liable for any consequential, indirect or special damages including loss of profits”. As a result of the wording in alternative 1 of the Case Scenario, both direct and indirect loss of profits are excluded. The employer’s claim for the recovery of loss of profits, including the claim regarding the decline of turnover, which could be subsumed under the first limb of Hadley v. Baxendale, would have to be denied by an arbitral tribunal. This clearly shows how dangerous and expensive a sloppily worded liability 54 Lewis (Penningtons Manches Cooper LLP), What a Liability? Exclusion Clauses and Liability for

Loss of Profits (23 July 2014), https://www.lexology.com/library/detail.aspx?g=2780b4b6-a7d54dac-ae92-963a551c68f4 (last accessed on 19 April 2020). 55 Gilmore/Roughton/Kratochvilova/Godwin, Excluding Liability for Consequential Loss and Loss of Profits, Construction dispute avoidance newsletter, no. 3, May 2009, https://www.lexology.com/ library/detail.aspx?g=5a804c00-ea6a-4308-b927-6094d4f34ad3. 56 Fujitsu Services Limited v. IBM United Kingdom Limited [2014] EWHC 752 (TCC). 57 Parris/Briskman, Contracts Refresher: Excluding Liability for Loss of Profits, https://www.fieldf isher.com/en/insights/contracts-refresher-excluding-liability-for-loss-of-profits. 58 Fujitsu Services Limited v. IBM United Kingdom Limited [2014] EWHC 752 (TCC), para. 35. 59 Fujitsu Services Limited v. IBM United Kingdom Limited [2014] EWHC 752 (TCC), para. 77. 60 Fujitsu Services Limited v. IBM United Kingdom Limited [2014] EWHC 752 (TCC), para. 79.

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exclusion clause can become for a party that intends to claim at least direct loss of profits.

6.3.7 Contractual Penalties or Liquidated Damages Based on the fact that (i) the foreseeability is not always clear and evident at the time of contract conclusion, (ii) a claimant will be confronted with tremendous difficulties to prove his claims, (iii) many contracts contain exclusion clauses that either exclude the liability for all loss of profits or at least indirect loss of profits, and (iv) a claimant has the duty to mitigate the damages caused by the breaching party, it must be examined if it is advisable to include liquidated damages or contractual penalty clauses. Alternative 2 of the Case Scenario contains a contractual penalty clause for certain core violations of the code of business conduct and ethics. Pursuant to English law, contractual penalty clauses are not enforceable. However, the insertion of a liquidated damages clause may be agreed upon between the parties of a commercial contract. A liquidated damages clause obliges a breaching party to pay a fixed sum (fixed amount of damages) for the compensation of certain contractual breaches. The contract must clearly stipulate which contractual breaches give rise to a claim based on the liquidated damages clause. In the construction industry liquidated damages clauses are frequently used in connection with the delay of project completion or the delay of individual milestones of a project. For each day, week or month of delay a specified sum has to be paid by the breaching party. In the author’s experience, liquidated damages are usually capped with a certain percentage of the contract price. A liquidated damages clause provides a claimant/plaintiff with several advantages. In the Case Scenario, the employer would not have the duty to mitigate the damages and would not need to prove the foreseeability or causation of the financial losses claimed. The existence of a particular breach (specified in the liquidated damages clause) of the employer’s code of business conduct and ethics would be sufficient for triggering the liability of the breaching party. The crystallization of specific financial losses is not required. Hence, after the breach of the contract has been established, there is no need to wait for the occurrence of the specific damages (e.g. financial losses caused by a loss of reputation in the case at hand).61 It must be stressed that liquidated damages clauses will be rendered wholly unenforceable if the fixed amount of damages is held equivalent to a penalty. The leading case law is the judgment of the UK Supreme Court in the 2015 case Cavendish Square Holdings BV v. Talal El Makdessi.62 The Supreme Court re-formulated the English law principles regarding contractual penalty clauses. 61 Ashurst, Liquidated Damages (18 June 2019), https://www.ashurst.com/en/news-and-insights/ legal-updates/quickguides-liquidated-damages/ (last accessed on 22 April 2020);. 62 Cavendish Square Holding BV v. Talal El Makdessi [2015] UKSC 67, para. 87, https://www.sup remecourt.uk/cases/docs/uksc-2013-0280-judgment.pdf (last accessed on 24 April 2020); Summers, Unresolved Issues in the Law on Penalties (2017) p. 28, http://eprints.lse.ac.uk/67875/9/Unreso lved%20issues_2016.pdf (last accessed on 3 May 2020).

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According to the traditional understanding, four tests were applied to decide whether a contractual provision needs to be characterized as penal: “A provision will be penal if the sum provided for is “extravagant and unconscionable” in comparison to the greatest loss that could conceivably be shown to result from the breach. A provision will be penal if the breach consists solely of the non-payment of money and it stipulates a larger sum. A clause will be presumed to be penal if the same sum is payable for a number of breaches of varying degrees of seriousness. A clause will not be treated as penal solely because it is impossible to estimate in advance the true loss likely to be suffered.”63

Challenging the traditional understanding, the UK Supreme Court held: In our opinion, the law relating to penalties has become the prisoner of artificial categorisation, itself the result of unsatisfactory distinctions: between a penalty and genuine pre-estimate of loss, and between a genuine pre-estimate of loss and a deterrent.64

Establishing a new test, the UK Supreme Court determined: The real question when a contractual provision is challenged as a penalty is whether it is penal, not whether it is a pre-estimate of loss […] A damages clause may be neither or both. The fact that the clause is not a pre-estimate of loss does not therefore, at any rate without more, mean that it is penal. To describe it as a deterrent […] does not add anything. A deterrent provision in a contract is simply one species of provision designed to influence the conduct of the party potentially affected. It is no different in this respect from a contractual inducement. Neither is it inherently penal or contrary to the policy of the law. The question whether it is enforceable should depend on whether the means by which the contracting party’s conduct is to be influenced are ‘unconscionable’ or (which will usually amount to the same thing) ‘extravagant’ by reference to some norm. The true test is whether the impugned provision is a secondary obligation [emphasis added] which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest [emphasis added] of the innocent party in the enforcement of the primary obligation. The innocent party can have no proper interest in simply punishing the defaulter. His interest is in performance or in some appropriate alternative to performance. In the case of a straightforward damages clause, that interest will rarely extend beyond compensation for the breach […] But compensation is not necessarily the only legitimate interest that the innocent party may have in the performance of the defaulter’s primary obligations [emphasis added].65

The first step is to establish whether a clause is a primary or a secondary obligation. It should be reiterated that only secondary obligations are unenforceable in the event of being held as penal. In general terms, a primary obligation (e.g. a price adjustment clause) can be defined as a stand-alone contractual obligation, whereas a secondary obligation serves as a surety for the performance of a primary obligation. Therefore, as a contractual alternative to damages, a secondary obligation is a payment obligation 63 Ashurst, Liquidated Damages, https://www.ashurst.com/en/news-and-insights/legal-updates/qui ckguides-liquidated-damages/. The four tests were originally formulated in Dunlop Pneumatic Tyre Co Ltd v. New Garage and Motor Co Ltd [1915] AC 79. 64 Cavendish Square Holding BV v. Talal El Makdessi [2015] UKSC 67, para. 31, https://www.sup remecourt.uk/cases/docs/uksc-2013-0280-judgment.pdf. 65 Cavendish Square Holding BV v. Talal El Makdessi [2015] UKSC 67, para. 32, https://www.sup remecourt.uk/cases/docs/uksc-2013-0280-judgment.pdf.

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which is only triggered if a party breaches the contract. In other words, secondary obligations regulate primary obligations upon breach.66 Next, and most importantly, the legitimate interest of the innocent party needs to be assessed. A comparison between the fixed sum to be paid upon a contractual breach and the greatest possible loss will no longer be sufficient. Although in simple cases the legitimate interest will hardly go beyond the compensation for a breach, the UK Supreme Court made it clear that in more complex cases an innocent party may have a wider legitimate interest in enforcing the claim for a stipulated sum contained in a liquidated damages clause.67 In Cavendish Square Holdings BV v. Talal El Makdessi, the UK Supreme Court dealt with the purchase of a company’s shares held by Makdessi. The purchase agreement contained several restrictive covenants, including covenants by Makdessi not to compete with and not to solicit employees from the target company. In the event of the breach of the covenants, the purchase agreement stipulated that Makdessi would not receive any of the deferred consideration and the buyer would get the option to acquire the remaining shares of the target company at a net asset value (materially below the market value).68 Regarding the legitimate interest of Cavendish the UK Supreme Court found that Cavendish had a legitimate interest in the observance of the restrictive covenants which extended beyond the recovery of that loss. It had an interest in measuring the price of the business to its value. The goodwill of this business was critical to its value to Cavendish, and the loyalty of Mr Makdessi and Mr Ghossoub was critical to the goodwill.69

The restrictive covenants in question had been included specifically to protect the goodwill in the business being sold.70 This clearly confirms that goodwill and

66 Crosse

(Pinsent Masons), Practical Implications of Penalty Clauses in English Law (18 July 2018), https://www.pinsentmasons.com/out-law/guides/practical-implications-penalty-clausesenglish-law (last accessed on 23 April 2020); Ashurst, Liquidated Damages, https://www.ashurst. com/en/news-and-insights/legal-updates/quickguides-liquidated-damages/; Park/Holland (Squire Patton Boggs), English Law of Liquidated Damages and Penalty (April 2016), https://www.squ irepattonboggs.com/en/insights/publications/2016/04/english-law-of-liquidated-damages-and-pen alty (last accessed on 23 April 2020). 67 Park/Holland, English Law of Liquidated Damages and Penalty, https://www.squirepattonboggs. com/en/insights/publications/2016/04/english-law-of-liquidated-damages-and-penalty; Cleary Gottlieb, UK Supreme Court Substantially Re-formulates Contractual “Penalty” Principles, Holding they had Become an “Haphazardly Constructed Edifice” (17 December 2015), https:// www.clearygottlieb.com/-/media/organize-archive/cgsh/files/publication-pdfs/uk-supreme-courtsubstantially-re-formulates-contractual-penalty-principles.pdf (last accessed on 23 April 2020). 68 Cleary Gottlieb, UK Supreme Court Substantially Re-formulates Contractual “Penalty” Principles, Holding they had Become an “Haphazardly Constructed Edifice”, https://www.clearygot tlieb.com/-/media/organize-archive/cgsh/files/publication-pdfs/uk-supreme-court-substantially-reformulates-contractual-penalty-principles.pdf. 69 Cavendish Square Holding BV v. Talal El Makdessi [2015] UKSC 67, para. 75, https://www.sup remecourt.uk/cases/docs/uksc-2013-0280-judgment.pdf. 70 Ashurst, Liquidated Damages, https://www.ashurst.com/en/news-and-insights/legal-updates/qui ckguides-liquidated-damages/.

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reputation may be part of the legitimate interest of an innocent party. A liquidated damages clause may be a justified way of protecting the legitimate interest.71 Furthermore, the legitimate interests of non-contracting third parties (even the legitimate interest of the public at large) may be taken into consideration as well.72 It is undeniable that the violation of core provisions (child and slave labour, severe environmental breaches, etc.) of a legally binding supplier code of conduct will be against the legitimate interest of the stakeholders and the public at large. Applying the UK Supreme Court’s new interpretation of the penalty rule on the Case Scenario, it has to be pointed out that penalty clauses are still not enforceable in English law. Thus, alternative 2 of the Case Scenario will result in the unenforceability of the employer’s claims. However, if the parties included a liquidated damages clause (instead of a contractual penalty) in the Case Scenario, the outcome would in all likelihood change drastically. First, it has to be mentioned that a liquidated damages clause, which is triggered by certain breaches of the code of business conduct and ethics, is a secondary obligation as it serves as a surety for the compliance with the code’s core provisions. After Cavendish Square Holdings BV v. Talal El Makdessi, it is evident that the employer has a legitimate interest in the protection of his reputation. The employer would not sign a contract with a contractor not accepting his code of business conduct and ethics. The employer also would not accept subcontractors and sub-subcontractors not fulfilling the requirements of the code along the supply chain. It is obvious that the main purpose of including a liquidated damages clause triggered by breaches of certain material provisions (e.g. the prohibition of child labour) of the code of business conduct and ethics is to protect the employer’s reputation fearing that a breach may lead to extremely negative economic repercussions by customers, business partners and other stakeholders. In order to ensure that such purpose is recognized by all of the contractual parties along the supply chain, the author suggests the explicit inclusion of this purpose in the liquidated damages clause, as in Cavendish Square Holdings BV v. Talal El Makdessi the contract expressly recognized that the restrictive covenants had the main purpose of protecting the goodwill of the target company.73 As a consequence, in the Case Scenario, there is a good chance that a liquidated damages clause relating to breaches of the code will be enforceable even in the event that the fixed amount to be paid extends beyond the recovery of the financial losses claimed. Traditionally, this would have been interpreted as a penalty. Hence, the author agrees with Park/Holland 74 that “[i]n many situations, therefore, the new penalty rule means that it is now much more difficult to challenge the enforceability of liquidated damages clauses.” 71 O’Sullivan,

O’Sullivan’s and Hilliard’s The Law of Contract, 9th ed., para 17.28. Square Holding BV v. Talal El Makdessi [2015] UKSC 67, para. 99, https://www.sup remecourt.uk/cases/docs/uksc-2013-0280-judgment.pdf; Summers, Unresolved Issues in the Law on Penalties (2017) p. 21, http://eprints.lse.ac.uk/67875/9/Unresolved%20issues_2016.pdf. 73 Ashurst, Liquidated Damages, https://www.ashurst.com/en/news-and-insights/legal-updates/qui ckguides-liquidated-damages/. 74 Park/Holland, English Law of Liquidated Damages and Penalty, https://www.squirepattonboggs. com/en/insights/publications/2016/04/english-law-of-liquidated-damages-and-penalty. 72 Cavendish

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Taking into consideration the other advantages mentioned above (e.g. no proof of foreseeability and causation and no duty to mitigate the losses) and the recent developments in English case law regarding the interpretation of penalties, it is recommended including liquidated damages clauses dealing with breaches of core provisions of supplier codes of conduct and ethics. In connection with the implementation of corporate human rights policies (contained in corporate codes of conduct) along supply chains, Martin confirms that “[t]he availability of contractual remedies, though, turns not on whether there is a governmentally mandated obligation but, rather, on whether the buyer has a corporate policy that includes the protection of human rights and that the buyer has taken the steps to contractually implement the CHRP [corporate human rights policies] into practice through supply chain obligations that make the obligations answerable for breach.”75 Specifically, Martin76 suggests the liquidated damages approach in connection with consequential damages, such as lost sales caused by reputational damages arising from the breach of companies’ human rights policies contained in corporate codes of conduct.

6.3.8 Examples for Material Violations of a Code of Conduct Triggering Payment Under a Liquidated Damages Clause It is important to stress that a liquidated damages clause clearly stipulates which breaches trigger the liability. For the Case Scenario, this entails that the liquidated damages clause must clearly express what kind of breaches of provisions of the code of business conduct and ethics will give rise to the liquidated damages claim. Realistically, no contracting partner will accept liability for every breach of the code. Moreover, such a clause would in all likelihood be penal and unenforceable because it cannot be expected that every breach of the code will lead to a loss of reputation causing a loss of profits. Hence, it should be expressly stated that only a breach of certain core provisions will result into a payment obligation. Ideally, the code of business conduct and ethics contains a list of such critical violations. Otherwise, such list will have to be included in the liquidated damages clause. The Supplier Code of Conduct of Costco Wholesale serves as an excellent example for the classification of critical violations and other violations. It contains a list of six critical violations and clearly stipulates the actions required after and the consequences of a critical violation. Critical violations must cease immediately and

75 Martin, 76 Martin,

68 Am. U. L. Rev. (2019) p. 1788 et sq. 68 Am. U. L. Rev. (2019) p. 1808.

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may lead to immediate sanctions and contract termination.77 A liquidated damages clause could make reference to the critical violations contained in the list. It is noticeable that the critical violations contained in the Supplier Code of Conduct of Costco Wholesale do not list any environmental violations. Given the expected, undeniable and ever increasing negative impact of the climate change on both society and the world economy, the fact that the environmental movement has been gaining momentum worldwide and the ever-growing emergence of environmentally conscious consumerism, the author takes the view that reputational damages caused by severe environmental violations leading to loss of profits will be a very realistic scenario in the future for companies (in particular multinationals) to deal with. Therefore, it is suggested by the author including environmental topics in lists of core or critical violations contained in supplier codes of conduct. As stated above in Sect. 3.2.3.3, Apple defines inadequate environmental permits as core violations. It should be considered as well to include emissions-related violations in such lists. For instance, the supply chain members’ violations of emissions trading systems such as the EU Emissions Trading System (“EU ETS”) could be qualified as core breaches triggering payment based on a liquidated damages clause. It ought to be noted that the EU ETS works on the trade and cap principle. The total amount of certain greenhouse gases (e.g. carbon dioxide, nitrous oxide and perfluorocarbons), which may be emitted by entities covered by the system, is capped. The cap is reduced over time leading to a decrease of the total emissions allowed by the system. Companies buy and trade emission allowances. The total number of allowances is limited which ensures that they have a value. Each year, a company’s emissions must be fully covered by emission allowances owned by the company, otherwise heavy fines are imposed. Companies that reduce their emissions may sell their unused allowances to companies that require more of them due to their higher annual emissions. The EU ETS was set up in 2005 as the world’s first international emissions trading system. In 2030, the EU ETS aims to cut emissions from the sectors covered by 43% in comparison with the 2005 levels.78 In Austria, the EU ETS was implemented by the Austrian Emission Certificate Act.79 Pursuant to Sect. 28, companies, which do not submit a sufficient number of emission certificates to cover their emissions in the previous year, will have to pay a sanction payment amounting to EUR 100 for every ton of carbon dioxide equivalent for which the company has not issued any emission certificates. Furthermore, the names of the companies violating the requirement to submit a sufficient number of emission certificates are published on the homepage of the Federal Ministry of 77 Costco Wholesale Supplier Code of Conduct (November 2018), https://www.costco.com/ wcsstore/CostcoUSBCCatalogAssetStore/Attachment/16w0604-sustainability-conduct.pdf (last accessed on 23 April 2020). 78 EU Emissions Trading System (EU ETS), https://ec.europa.eu/clima/policies/ets_en (last accessed on 27 April 2020). 79 Bundesgesetz über ein System für den Handel mit Treibhausgasemissionszertifikaten (Emissionszertifikategesetz). The Austrian Emission Certificate Act can be accessed at https://www.ris.bka.gv.at/GeltendeFassung.wxe?Abfrage=Bundesnormen&Gesetzesnummer= 20003311&FassungVom=2009-08-18 (last accessed on 27 April 2020).

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Agriculture, Forestry, Environment and Water Management. Such publication could definitely have a negative impact on a company’s reputation. Moreover, if an infringer is part of a supply chain, the publication of the violation may entail very negative consequences (e.g. loss of profits) for the supply chain leader.

6.3.9 Contractual Penalty Clause in Civil Law Jurisdictions Contractual penalty clauses, which encourage performance of contractual obligations, are enforceable in civil law jurisdictions. Penalties may be reduced by the courts if they are excessive. If the suffered damages are higher than the contractual penalty, the innocent party may claim the excess amount.80 For example, Sect. 1336 of the Austrian Civil Code stipulates that the contracting parties may specifically agree that a certain monetary or other sum has to be paid if the contract has not been, not duly or performed with delay. The amount of the penalty would have to be mitigated by the judge, if the debtor evidenced it to be excessive. The creditor can, in addition to a contractual penalty, claim the compensation of damages in excess of such.81

6.4 The New York Convention Disputes in international supply chains will result in judgments or arbitral awards that will in all likelihood need to be recognized and enforced in a country different from the one in which the judgment was issued or the arbitral award was rendered. In this respect, arbitration is superior to litigation because of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (“New York Convention”). Arbitral awards, which are rendered in a signatory state, must be recognized and enforced in another signatory state. Currently, the New York Convention has 166 member states, including China, the USA and Austria. The latest addition was Sierra Leone on 28 October 2020. The grounds for refusing the recognition and enforcement of a foreign arbitral award are limited. In essence, Article V of the New York Convention stipulates that the recognition and enforcement may be refused if (i) the arbitration agreement is invalid; (ii) the right to be heard has not sufficiently been granted to one of the parties; (iii) the arbitral award falls outside the scope of the arbitration agreement, or the arbitral tribunal does not have jurisdiction; 80 McKenna (ReedSmith), Liquidated Damages and Penalty Clauses: A Civil Law versus Common Law Comparison, The Critical Path (Spring 2008) p. 3 et sqq., https://www.reedsmith.com/en/per spectives/2008/05/the-critical-path (last accessed on 23 April 2020). 81 Welser/Zöchling-Jud, Bürgerliches Recht, 14th ed. (2015) para. 89 et sqq.

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(iv) the composition of the arbitral tribunal or the arbitral procedure is not in accordance with the arbitration agreement or the law of the country of the seat of arbitration; (v) the arbitral award has not yet become binding or has been set aside; (vi) the dispute is not capable of being settled by arbitration under the law of the respective signatory state; or (vii) the recognition or enforcement of the arbitral award is contrary to the public policy of the respective signatory state.82 In terms of litigation, the Hague Convention of 30 June 2005 on Choice of Court Agreements (“Hague Convention”) entered into force between all EU member states and Mexico on 1 October 2015. However, the Hague Convention is not yet a true alternative for international supply chain disputes, as it currently has only 32 contracting parties. It must be stressed that China,83 the USA,84 the Ukraine85 and North Macedonia86 have not yet ratified the Hague Convention. Hence, the Hague Convention has not yet entered into force for these four nations. Article 8 (1) of the Hague Convention provides that a judgment given by a court of a contracting state shall be recognized and enforced in other contracting states. Similarly to the New York Convention, the grounds for refusal are limited.87

6.5 The Consolidation of Supply Chain Arbitrations In the event that a dispute in a supply chain occurs, the subject of the dispute is likely to be related to several contracts concluded along the supply chain. In the Case Scenario, the two disputes mainly concern the same facts (the breach of a core provision of the employer’s code of business conduct and ethics by the subcontractor). If the main contract and the subcontract contain arbitration clauses, it is conceivable to consolidate (combine) the two arbitral proceedings into a single arbitration heard by one and the same arbitral tribunal. The consolidation of multiple 82 Peter, Austria and the Chinese Belt and Road Initiative: Arbitration or Litigation as the Preferred Means for the Settlement of Potential Disputes between Austrian and Chinese Companies? In Kaminski (Ed.), Chinese Strategies in Politics, Foreign Policy, Security Policy Economy and Law (2019) p. 247 (p. 259 et sqq.); New York Convention Guide, New State Party to the New York Convention: Sierra Leone, http://newyorkconvention1958.org/index.php?lvl = cmspage&pageid = 8&opac_view = -1&menu = 715 (last accessed on 13 December 2020). 83 China signed the Hague Convention on 12 September 2017. 84 The United States signed the Hague Convention on 19 January 2009. 85 The Ukraine signed the Hague Convention on 21 March 2016. 86 North Macedonia signed the Hague Convention on 9 December 2019. 87 Peter in Kaminski (Ed.), Chinese Strategies in Politics, Foreign Policy, Security Policy Economy and Law, p. 269 et sq.; Hague Convention of 30 June 2005 on Choice of Court Agreements, Status Table, https://www.hcch.net/en/instruments/conventions/status-table/?cid = 98 (last accessed on 13 December 2020).

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pending arbitrations would have several advantages such as greater procedural efficiency (e.g. in relation to the taking of evidence; witnesses of fact and expert witnesses only have to be heard in one arbitration with regard to the same factual issues) and lower costs. Moreover, the consolidation of arbitrations prevents the rendering of inconsistent arbitral awards.88 If the two arbitrations in the Case Scenario are not consolidated into a single arbitration, two separate arbitral tribunals have to decide on the same issue. This could particularly lead to an unsatisfactory outcome for the main contractor.89 If the main contractor is held liable for the breach of the employer’s code of business conduct and ethics in the arbitration against the employer, he will try to place the liability on the subcontractor by asserting recourse claims. If the arbitral tribunal in this second arbitration establishes the facts of the case differently, assesses the evidence contrarily or interprets legal or contractual provisions in another way, the outcome of the final award in the second arbitration might not lead to any liability for the subcontractor, so that the main contractor will remain fully liable for the damages caused by the subcontractor. However, a possible consolidation of arbitral proceedings is threatened if the main contract and the subcontract contain incompatible arbitration clauses. For example, arbitration clauses are incompatible if they make reference to different arbitration institutions and rules, different seats of arbitration, different languages of arbitration or a different number of arbitrators.90 As the main contractor is responsible for the execution of the project, it is crucial that he ensures the conclusion of compatible contracts and arbitration clauses along the entire supply chain.91 Arbitration agreements may already expressly stipulate the consolidation of arbitral proceedings. However, such express provisions are rare in practice. Nonetheless, not all of the parties in a supply chain might be interested in a consolidation. Some parties may wish to keep certain details, such as contract prices, confidential.92 Under the Case Scenario mentioned above, the employer would in all likelihood not be interested in a consolidation based on the fact that the main 88 Baizeau/Moss,

The efficient resolution of construction disputes under the Swiss Rules of International Arbitration – The role of the Swiss Chambers’ Arbitration Institution, p. 6 et sq., https://www.lalive.law/data/publications/Baizeau_Moss_-_Construction_Disputes_under_ the_Swiss_Rules.pdf (last accessed on 5 April 2020); Sheridan/Linhardt, Managing the Battlefield: Using a Uniform Multi-Party Construction Arbitration Agreement, Journal of the ACCL, Vol. 11, No. 1 (2016) p. 40, https://www.glaserweil.com/uploads/documents/Managing_the_Battle field_-_ACCL_-_Sheridan_Linhardt.pdf. 89 Vlavianos/Pappas, Consolidation of International Commercial Arbitral Proceedings in the Energy Sector in Rowley/Bishop/Kaiser (Ed.), The Guide to Energy Arbitrations (2019) p. 243 (p. 256). 90 Sheridan/Linhardt, Managing the Battlefield: Using a Uniform Multi-Party Construction Arbitration Agreement, Journal of the ACCL, Vol. 11, No. 1 (2016), p. 47, https://www.glaserweil.com/upl oads/documents/Managing_the_Battlefield_-_ACCL_-_Sheridan_Linhardt.pdf; Vlavianos/Pappas in Rowley/Bishop/Kaiser (Ed.), The Guide to Energy Arbitrations, p. 256. 91 Vlavianos/Pappas in Rowley/Bishop/Kaiser (Ed.), The Guide to Energy Arbitrations, p. 256. 92 Baizeau/Moss, The efficient resolution of construction disputes under the Swiss Rules of International Arbitration – The role of the Swiss Chambers’ Arbitration Institution, p. 7, https://www.lal ive.law/data/publications/Baizeau_Moss_-_Construction_Disputes_under_the_Swiss_Rules.pdf.

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contractor is liable for the acts of his subcontractors. The subcontractor, too, would most likely oppose a consolidation. For the two opposing parties, two separate arbitrations would have the advantage to be only involved in one (less complex and less cost intensive) arbitration each (the employer against the main contractor and the subcontractor against the main contractor). Moreover, a consolidated arbitration would add to the procedural complexity and introduce factual and legal issues that may be irrelevant for the employer and the subcontractor and would lead to higher costs for them.93 Only the main contractor would truly benefit from a consolidation because the non-consolidation would inevitably lead to his involvement in two arbitrations (main contractor against employer and subcontractor). As mentioned above, multiple arbitrations would also bear the risk of inconsistent arbitral awards which could be detrimental for the main contractor: although being held liable by the arbitral tribunal in the first arbitration against the employer, his recourse claim could be denied in the second arbitration against the subcontractor. A subcontractor may be interested in a consolidation if he has recourse claims against his sub-subcontractor or supplier.94 In the event of no consolidation, recourse claims against a defaulting sub-subcontractor could be unsuccessful if the arbitral tribunal constituted to hear the third arbitration (between subcontractor and sub-subcontractor) does not hold the sub-subcontractor liable, although the arbitral tribunals constituted to hear the first (between employer and main contractor) and second arbitration (between main contractor and subcontractor) find that the main contract and the subcontract were breached by the main contractor (the main contractor is liable for the acts of the lower-tier chain members) and the subcontractor (the subcontractor is liable for the acts of the sub-subcontractor) based on a violation by the sub-subcontractor. A consolidation could be in the interest of the employer as well, if he nominates a subcontractor which limits the liability of the main contractor (for acts of the nominated subcontractor).95 Given that consolidations may be practical and advantageous for supply chain disputes involving multiple parties and multiple contractual relationships, questions about the applicable law and the specific statutory requirements for the consolidation of arbitral proceedings arise. The law governing an arbitration procedure (lex arbitri) depends on the seat of arbitration. If an arbitration clause provides for Vienna as the seat of arbitration, the lex arbitri will be the Austrian Arbitration Law. However, it is very rare that the lex arbitri contains provisions on the consolidation of arbitrations.96 Hence, the arbitration rules of international arbitration institutions become relevant. Contractual parties often agree to an arbitration administered by an arbitration institution in accordance with its institutional arbitration rules. It should be mentioned 93 Baizeau/Moss, The efficient resolution of construction disputes under the Swiss Rules of Interna-

tional Arbitration – The role of the Swiss Chambers’ Arbitration Institution, p. 7, https://www.lal ive.law/data/publications/Baizeau_Moss_-_Construction_Disputes_under_the_Swiss_Rules.pdf. 94 Kondev, Multi-Party and Multi-Contract Arbitration in the Construction Industry, p. 53. 95 See above Sect. 6.3.3. 96 Choong/Mangan/Lingard, A Guide to the SIAC Arbitration Rules, 2nd ed. (2018) para. 7.60.

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that the mandatory provisions of the lex arbitri (i) cannot be excluded or modified by the parties and (ii) supersede the institutional arbitration rules agreed upon by the parties. In the following, this monograph will deal with arbitration rules of some of the most significant arbitration institutions in the world. It should be noted that the analysis does not claim to be exhaustive.

6.5.1 Consolidation in Singapore Due to the author’s practical experience in Singapore-seated arbitrations administered by the SIAC and based on the fact that (i) Singapore is recognized worldwide as one of the most popular neutral seats for international dispute resolution, and (ii) the SIAC Arbitration Rules (“SIAC Rules”)97 offer one of the most advanced sets of institutional arbitration rules,98 the specific consolidation requirements of the said rules shall be introduced first. It should not remain unmentioned that in June 2018 the SIAC was ranked the third most preferred arbitral institution in the world by the Queen Mary University of London and White & Case International Arbitration Survey. Both in 2017 and 2018, the annual case filings exceeded the number of 400. In 2019, the SIAC set a new record with 479 new arbitrations handled by the SIAC. 87% (416) of the cases filed were international cases, and the total sum in dispute for all newly filed cases amounted to USD 8.09 billion. The average value for the new cases filed in 2019 was USD 30.99 million. The top foreign users were parties from India, the Philippines, China and the USA. Outside of Singapore, the SIAC established offices in (i) Shanghai, China, (ii) Mumbai, India, (iii) Seoul, South Korea and most recently in New York, USA.99 SIAC Rule 8 covers two scenarios for the consolidation of two or more pending arbitrations under the SIAC Rules into a single arbitration heard by the same arbitral tribunal: the consolidation prior to and after the constitution of the arbitral tribunal(s). SIAC Rule 8.1 stipulates three alternative criteria for the consolidation prior to the constitution of an arbitral tribunal: a. all parties agree to the consolidation; b. all the claims in the arbitrations are made under the same arbitration agreement; or c. the arbitration agreements are compatible, and: (i) the disputes arise out of the same legal relationship(s); (ii) the disputes arise out of contracts consisting of a principal contract and its ancillary contract(s); or (iii) the disputes arise out of the same transaction or series of transactions. 97 The SIAC Rules (6th ed., 1 August 2016) can be accessed at https://www.siac.org.sg/our-rules/ rules/siac-rules-2016 (last accessed on 8 April 2020). 98 Vlavianos/Pappas in Rowley/Bishop/Kaiser (Ed.), The Guide to Energy Arbitrations, p. 247. 99 Singapore International Arbitration Centre, Where the World Arbitrates, Annual Report 2019, p. 4 et sqq., https://www.siac.org.sg/images/stories/articles/annual_report/SIAC%20Annual%20R eport%202019%20(FINAL).pdf; SIAC Opens Office in New York and Announces New Record Caseload, https://www.siac.org.sg/business/69-siac-news/684-siac-opens-office-in-new-york-andannounces-new-record-caseload (last accessed on 12 December 2020).

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Once the parties are involved in a dispute, it will be very hard to come to an agreement on anything. As already indicated, supply chains are characterized by multiple parties and multiple contracts. Direct contractual relationships typically only exist between neighbouring tiers. What is more, supply chain members will usually not be parties to one and the same arbitration agreement. Hence, SIAC Rules 8.1 (a.) and (b.) will have a limited relevance in supply chain disputes. However, SIAC Rule 8.1 (c.) provides very effective tools for the consolidation of supply chain disputes. Most importantly, arbitration agreements have to be compatible. This implies that the arbitrations agreements do not have to be identical. The SIAC Rules remain silent as to the compatibility criteria but it is evident that arbitration agreements are incompatible if they refer to different seats of arbitration, different arbitration institutions, different institutional rules, different numbers of arbitrators, different languages of arbitration, etc.100 For this reason, it is in particular essential for the main contractor to ensure that compatible arbitration agreements are concluded along the entire supply chain. In the author’s opinion, supply chain arbitrations may in particular be subsumed either under Rule 8.1 (c.) (ii) or (iii). If lower-tier supply chain contracts are dependent on the contents of the main contract between employer and contractor (this is usually the case in the construction industry), it may be argued in the author’s opinion that the main contract is the principle contract and the lower-tier supply chain contracts (subcontracts and sub-subcontracts) are to be qualified as ancillary (subordinated) contracts. In the construction industry, it is common that subcontracts include back-to-back provisions to pass to the subcontractor specific obligations of the main contractor arising from the main contract with the employer (e.g. quality and standard of work, specified dates for the completion of individual milestones of the project, etc.) and key terms contained in the main contract (e.g. liabilities, dispute resolution clauses, etc.).101 In the author’s experience, subcontracts may contain provisions pursuant to which lower-tier subcontracts with sub-subcontractors and suppliers shall include clauses mirroring the suspension and termination provisions of the main contract between employer and contractor in order to enable the subcontractor to suspend or terminate such lower-tier subcontracts. Furthermore, subcontracts may give the main contractor the right to urge the subcontractor to terminate a lower-tier subcontract if the main contractor is of the opinion that the sub-subcontractor did not observe his duties or carry out the works in accordance with the subcontract. Consequently, there are valid arguments supporting the view that subcontracts and sub-subcontracts are subordinate contracts (in the sense of mirroring key terms of the main contract) that should be qualified as ancillary contracts in terms of SIAC Rule 8.1 (c.) (ii).102 Kondev103 100 Choong/Mangan/Lingard,

A Guide to the SIAC Arbitration Rules, 2nd ed., para. 7.68; Poudret/Besson, Comparative Law of International Arbitration (2007) p. 199. 101 Reynolds, What is a Back-to-Back Contract? (30 September 2016, updated 16 January 2020), https://legalvision.com.au/what-is-a-back-to-back-contract/ (last accessed on 1 May 2020). 102 Hök, The FIDIC Subcontract for Works (8 September 2014), https://www.dr-hoek.com/legal-inf ormation/commercial-law/the-fidic-subcontract-for-works (last accessed on 11 May 2020). 103 Kondev, Multi-Party and Multi-Contract Arbitration in the Construction Industry, p. 109.

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also supports the idea that it may be argued that in the construction supply chain multi-contract disputes arise out of contracts consisting of a principle contract and its ancillary contracts. In the context of the chain leader’s supplier code of conduct, the author takes the view that based on the fact that a code can legally bind all supply chain members, and violations of the code’s core provisions may lead to claims of damages against and the termination of contracts with chain members, (i) a substantial connection between all of the supply chain contracts exists, and (ii) a sufficient dependence (in terms of a subordinance but not an accessoriness) of the subcontract and the lower-tier subcontracts on the main contract is established. Choong/Mangan/Lingard 104 indicate that disputes arising out of a series of related or chain contracts could be subsumed under the “series of transactions” prong under SIAC Rule 8.1 (c.) (iii). To the author’s mind, it could in particular be argued that if the contracts along the entire supply chain serve one and the same project (e.g. in construction projects), the contracts are sufficiently linked so that the disputes arise out of a series of related transactions. Such a view is conceivable to Kondev105 as well. Nevertheless, it must be stressed that decisions on the consolidation106 will be made on a case-by-case basis assessing the individual circumstances. Hence, an uncertainty about the interpretation and application of the consolidation provisions will exist until the development of a stable track record in the supply chain context. SIAC Rule 8.7 deals with consolidations after the constitution of at least one arbitral tribunal. In addition to the three criteria indicated above, the consolidation requires that the same arbitral tribunal must have been constituted in all of the pending arbitrations. A consolidation is also possible if an arbitral tribunal has been constituted in the first case but not yet in the other pending proceedings. A consolidation is no longer possible, once different arbitral tribunals are constituted.107 This opens a chance for parties objecting to a consolidation. They just have to nominate different arbitrators. Consequently, parties requesting a consolidation should file the application as early as possible. Applications for the consolidation of arbitrations may be filed by one of the parties involved in the pending arbitrations. Prior to the constitution of an arbitral tribunal, applications may be filed with the SIAC registrar (SIAC Rule 8.1). SIAC Rule 8.4 stipulates that the SIAC Court of Arbitration, “after considering the views of all parties, and having regard to the circumstances of the case,” decides on the consolidation application. After the constitution of at least one arbitral tribunal, SIAC Rule 8.9 stipulates that a party’s application has to be directed to the arbitral tribunal

104 Choong/Mangan/Lingard,

A Guide to the SIAC Arbitration Rules, 2nd ed., para. 7.69. Multi-Party and Multi-Contract Arbitration in the Construction Industry, p. 109. 106 Prior to the constitution of any arbitral tribunal in the arbitrations sought to be consolidated, decisions on consolidation applications have to be made by the Court of Arbitration of SIAC pursuant to SIAC Rule 8.4. 107 Choong/Mangan/Lingard, A Guide to the SIAC Arbitration Rules, 2nd ed., para. 7.83. 105 Kondev,

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which decides on the application “after giving all parties the opportunity to be heard, and having regard to the circumstances of the case.” Under both scenarios, it is clear that each case will be individually assessed and decisions are made on a case-by-case basis. The parties’ views have to be considered prior to the constitution of an arbitral tribunal. After the constitution, all the parties are given the opportunity to be heard. According to Choong/Mangan/Lingard,108 “[t]he difference in wording reflects the recognition that the parties to the arbitration have the right to an opportunity to be heard by the tribunal on the important issue of consolidation, once the tribunal has been constituted.” A consolidation pursuant to the SIAC Rules may be granted even if some parties are against the consolidation. However, a consolidation without the parties’ consent may violate the principle of party autonomy in arbitration.109 As stated earlier, the New York Convention is crucial for the recognitions and enforcement of arbitration awards in international cases. Article V (1.) (d) of the New York Convention determines that the recognition and enforcement “may be refused […] if […] The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties […].” The parties’ consent to the application of the SIAC Rules in the arbitration agreement implies the parties’ advance consent110 to a consolidation pursuant to SIAC Rule 8 if one of the alternative criteria for the consolidation is met and the arbitration agreement does not contain any contrary terms. SIAC Rule 1.1 confirms this approach and expressly stipulates that “[w]here the parties have agreed to refer their disputes to SIAC for arbitration or to arbitration in accordance with the SIAC Rules, the parties shall be deemed to have agreed that the arbitration shall be conducted pursuant to and administered by SIAC in accordance with these Rules.” This is in particular relevant for supply chain arbitrations as it was indicated above in Sect. 6.5 that a consolidation might not be in the interest of every chain member involved in the dispute.111

108 Choong/Mangan/Lingard,

A Guide to the SIAC Arbitration Rules, 2nd ed., para. 7.69. (Mayer Brown), The Consolidation Dilemma: Is There Finally a Pragmatic Solution? p. 8, https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2016/ 04/the-consolidation-dilemma-is-there-finally-a-pragm/files/dri_10_1_apr_2016_howes_stowell/ fileattachment/dri_10_1_apr_2016_howes_stowell.pdf (last accessed on 11 April 2020). 110 Kondev, Multi-Party and Multi-Contract Arbitration in the Construction Industry, p. 315. 111 The principle of party autonomy could be violated as well, if the parties, due to a consolidation application being granted, do not have the opportunity to nominate an arbitrator or otherwise participate in the constitution of the arbitral tribunal. Having regard to this issue, SIAC Rule 8.12 determines that where an application for consolidation is granted, the parties are deemed to waive their rights to nominate an arbitrator or otherwise participate in the constitution of the arbitral tribunal. In multi-party proceedings, where three arbitrator have to be appointed, the claimant(s) shall jointly nominate one arbitrator and the respondent(s) shall do the same. In the absence of joint nominations, the president of the court of arbitration of SIAC shall appoint all three arbitrators (SIAC Rule 12.2). 109 Howes/Stowell

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Refusal by Shanghai First Intermediate Court to Recognize and Enforce an SIAC Arbitral Award Based on Article V (1.) (d) of the New York Convention

In connection with the advance consent of parties, a judgment from the Shanghai First Intermediate People’s Court (“Shanghai Court”) must be brought to attention. The Shanghai Court refused the recognition and enforcement of an SIAC arbitral award based on the grounds of Article V (1.) (d) of the New York Convention. The refusal was also confirmed by the Chinese Supreme People’s Court.112 The parties involved were Noble Resources International Pte. Ltd. (claimant seated in Singapore) and Shanghai Good Credit International Trade Co., Ltd. (respondent seated in Shanghai). The dispute had arisen from the sale and purchase of iron ore. The arbitration agreement between the parties required the appointment of a panel of three arbitrators. In the course of the arbitration, the claimant applied for the expedited procedure pursuant to SIAC Rule 5. In expedited proceedings, the case is usually decided by a single arbitrator unless the president of the Court of Arbitration of SIAC determines otherwise (SIAC Rule 5.2 (b.)). The respondent objected both to the expedited procedure and the appointment of a sole arbitrator. However, the claimant’s application for expedited procedure was granted, and a sole arbitrator was appointed who eventually rendered a final award. As the respondent was seated in Shanghai, he successfully challenged the recognition and enforcement of the final award in proceedings before the Shanghai Court. The Shanghai Court held that the composition of the arbitral tribunal was not in accordance with the arbitration agreement. The president of the Court of Arbitration of SIAC should have respected party autonomy and ought to have given full consideration to the arbitration agreement requiring the appointment of a panel of three arbitrators. For the Shanghai Court, the parties’ consent to the application of the SIAC Rules (including the expedited procedure pursuant to Rule 5) was insufficient to override the parties’ explicit agreement requiring a panel of three arbitrators. In other words, provisions of institutional arbitration rules may not supersede a parties’ express and contravening agreement contained in an arbitration clause.113 112 China

installed the so-called Prior Reporting System in 1995. “The winning party of an arbitration seated outside of China has to apply to an intermediate people’s court for recognition and enforcement. If the intermediate people’s court comes to the conclusion that there are grounds to refuse the award’s recognition and enforcement, the matter must be presented to the higher people’s court for review and approval. If the higher people’s court agrees with the intermediate people’s court’s decision, the higher people’s court must report to the SPC [Supreme People’s Court]. Only the SPC is authorized to finally refuse recognition and enforcement of a foreign arbitration award. The ruling on the refusal can then be rendered by the relevant intermediate people’s court based on the opinion of the SPC. The Prior Reporting System guarantees a certain degree of consistency and serves as a check-and-balances mechanism.” See Peter, The CIETAC European Arbitration Centre – Implications of a Vienna-seated CIETAC Arbitration, SchiedsVZ (German Arbitration Journal) 5/2019, p. 251 (p. 260 et sq.). 113 Peter, The Significance of Arbitration Clauses in Commercial Agreements with Indian Parties and the Possibility of Incorporating Arbitration Clauses by Means of a Previous Course of Dealing in SIAC Arbitration Proceedings, SchiedsVZ (German Arbitration Journal) 3/2018, p. 165 (p. 171).

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In the wake of the Shanghai Court’s judgement, the following provision was added to the SIAC Rules: By agreeing to arbitration under these Rules, the parties agree that, where arbitral proceedings are conducted in accordance with the Expedited Procedure under this Rule 5, the rules and procedures set forth in Rule 5.2 shall apply even in cases where the arbitration agreement contains contrary terms.114

It is noticeable that SIAC Rule 5.3 seeks the prevailing of its expedited procedure provisions over contrary terms in arbitration agreements. It remains to be seen how Chinese courts will deal with SIAC Rule 5.3, given that Chinese courts (including the Chinese Supreme People’s Court) seem to take the position that an agreement between parties shall prevail over any rules that are not mandatory lex arbitri, regardless of whether they are expressly incorporated.115 What does the judgement of the Shanghai Court mean in terms of the consolidation of two or more pending arbitrations? The express clarification contained in SIAC Rule 5.3 may only be applied in relation to expedited proceedings. However, usually parties do not include in their arbitration agreement any rules dealing with aspects of multi-party proceedings, such as joinders and consolidations (this is also the case in the Case Scenario). If no contravening agreement can be found in the arbitration clause expressly disallowing consolidations or stipulating different criteria for the consolidation (in other words, the arbitration clause remains silent on the consolidation issue), it is the author’s view that even the Shanghai Court would not refuse the recognition and enforcement of an arbitral award, provided that one of the alternative SIAC criteria for the consolidation was met.

6.5.1.2

The SIAC Proposal on Cross-Institution Consolidation Protocol

In December 2017, the SIAC announced its Proposal on Cross-Institution Consolidation Protocol (“Consolidation Protocol”).116 As mentioned above in Sect. 6.5.1, a consolidation cannot take place if the arbitration agreements are incompatible. It renders a consolidation of pending proceedings impossible if they are administered by different arbitration institutions applying their specific arbitration rules. The Consolidation Protocol tries to find a solution to this problem by means of institutional cooperation. It is suggested that the leading arbitration institutions adopt and incorporate the Consolidation Protocol in their sets of arbitration rules. The Consolidation Protocol proposes two options for a cross-institution consolidation mechanism. The first option entails that arbitration institutions would adopt a consolidation protocol containing a new, standalone mechanism for addressing the 114 SIAC

Rule 5.3. SchiedsVZ (German Arbitration Journal) 3/2018, p. 171. 116 Singapore International Arbitration Centre, Memorandum Regarding Proposal on CrossInstitution Consolidation Protocol (19 December 2017), https://siac.org.sg/images/stories/press_ release/2017/Memorandum%20on%20Cross-Institutional%20Consolidation%20(with%20%20a nnexes).pdf (last accessed on 30 April 2020). 115 Peter,

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cross-institution consolidation criteria (this would be quite a challenge as the consolidation criteria of the leading arbitration institutions are very diverse), the appropriate decision-makers (a joint committee comprised of members of the arbitration courts of the arbitration institutions involved) and the timing of cross-institution consolidation applications. The second option provides that the consolidation protocol would authorize one arbitration institution to determine any applications for a cross-institution consolidation pursuant to their own arbitration rules. For this approach, it is required that the consolidation protocol would have to contain objective criteria to determine which arbitration institution would be entitled to grant a cross-institution consolidation. Objective criteria could be based on the number of cases,117 the aggregate value of disputes,118 the time of commencement of arbitrations,119 the subject matter of the dispute120 or the nationality and domicile of the parties.121 After the cross-institution consolidation, the Consolidation Protocol suggests two alternative approaches for case administration: The arbitration institutions involved could bilaterally agree to new arbitration rules and jointly administer the consolidated arbitration. However, this approach is quite unrealistic as the drafting of new “joint” rules (solely applicable to consolidated arbitrations) is too complex, cumbersome and time-consuming. Alternatively, the case could be administered by one arbitration institution under its arbitration rules applying the objective criteria (mentioned above) for deciding which arbitration institution gets the case.122 In the author’s opinion, the SIAC’s proposal has to be appreciated because a cross-institution consolidation would in particular lead to more efficiency and avoid inconsistent arbitration awards. Nevertheless, given the Shanghai Court’s refusal of the recognition and enforcement of an SIAC arbitration award (see Sect. 6.5.1.1), specific regard must be had to the principle of party autonomy. The cross-institution consolidation scenario requires at least two arbitrations pending under the rules of two different arbitration institutions. Given that the parties of the cases to be consolidated 117 If,

for instance, two arbitrations are under the SIAC Rules and one arbitration is under the ICC Rules, the SIAC would be the arbitration institution administering the case after the consolidation of the three arbitrations. In the event that the number of cases is even (one SIAC and one ICC arbitration), other criteria would have to decide the applicable rules for granting the cross-institution consolidation. 118 If, for instance, the SIAC arbitration has a dispute value of USD 20 million, and the two ICC arbitrations have an aggregate dispute value amounting to USD 15 million, the cross-institution consolidation would have to be decided under the SIAC Rules. 119 The commencement of the first arbitration is decisive for the application of the applicable rules in relation to the cross-institution consolidation. For example, if the first arbitration is an arbitration administered by the ICC Rules, the consolidation rules of the ICC will apply. 120 The arbitrations institutions may divide the cases on the type of dispute (e.g. construction, international trade, energy, etc.). 121 One arbitration institution could focus on Asian and African parties, and the other arbitration institution could concentrate on European and American parties. 122 Singapore International Arbitration Centre, Memorandum Regarding Proposal on CrossInstitution Consolidation Protocol (19 December 2017) p. 1 et sqq., https://siac.org.sg/ima ges/stories/press_release/2017/Memorandum%20on%20Cross-Institutional%20Consolidation% 20(with%20%20annexes).pdf.

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expressly agree in their arbitration agreements on certain arbitration institutions and their arbitration rules, the cross-institution consolidation will inevitably lead (if the consolidated case is administered by one arbitration institution under its rules) to the case administration by an arbitration institution and the application of arbitration rules that the parties to one arbitration agreement had not agreed upon. In other words, the parties to one pending arbitration might have expressly stipulated in their arbitration clause an SIAC arbitration under the SIAC Rules, but the crossinstitution consolidation eventually results in an ICC-administered arbitration under the ICC Rules. It certainly may be argued that this approach is contrary to the agreed arbitration procedure pursuant to Article V (1.) (d) of the New York Convention. In the event of the application of joint rules, all of the parties would have to deal with arbitration rules (the joint new rules) that had not been expressly agreed upon in their arbitration agreements. As a consequence, a certain risk would remain (particularly in China) as to the recognition and enforcement of arbitral awards rendered in such cross-institution scenarios. The SIAC is of course aware of this risk and argues that [t]he arbitral institutions’ rules would be amended to incorporate the consolidation protocol, giving the protocol the same contractual force as other provisions of institutional rules. By expressly selecting the institutional rules, parties in turn consent to the application of the consolidation protocol, which would be applicable to any dispute arising out of or in relation to the arbitration agreement. As with other provisions of institutional rules, it would not be necessary for parties to expressly refer to the consolidation protocol in their arbitration agreement.123

In order to minimize the risk of non-recognition and non-enforcement of arbitral awards resulting from cross-institution consolidated proceedings, it has to be agreed with Loya that the Consolidation Protocol should definitely contain “express terms […] to the effect that parties waive their right to challenge the validity and enforcement of the resulting award on grounds emanating from decision to consolidate, on adoption of the Consolidation Protocol. This would sufficiently safeguard the resultant awards from challenge or objection to enforcement.”124 However, it will still be unclear (in particular in relation to the Chinese courts) if such a provision really safeguards the arbitral awards from challenges based on Article V (1.) (d) of the New York Convention. A tension with the principle of party autonomy is undeniable, taking into account that a general submission to the institutional rules of an arbitration institution (having adopted the Consolidation Protocol) would render obsolete an express parties’ agreement contained in the arbitration clause.125 123 Singapore

International Arbitration Centre, Memorandum Regarding Proposal on CrossInstitution Consolidation Protocol, p. 3, https://siac.org.sg/images/stories/press_release/2017/Mem orandum%20on%20Cross-Institutional%20Consolidation%20(with%20%20annexes).pdf. 124 Loya (Nishith Desai Associates), To what Extent does SIAC’s Proposal on Cross-Institution Consolidation Protocol Mitigate the Perceived Weakness of Arbitrations in Effectively Resolving Multi-Party, Multi-Contract Disputes? https://www.siac.org.sg/2013-09-18-01-57-20/2013-09-2200-27-02/articles/590-to-what-extent-does-siac-s-proposal-on (last accessed on 3 May 2020). 125 Peter, SchiedsVZ (German Arbitration Journal) 3/2018, p. 171.

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Given the Shanghai Court’s refusal of the recognition and enforcement of an SIAC arbitral award, it is interesting to note that on 12 October 2018, the CIETAC signed a memorandum of understanding with the SIAC pursuant to which the two arbitration institutions will set up a joint working group to discuss the adoption and incorporation of SIAC’s Consolidation Protocol.126 It should not be left unmentioned that the Consolidation Protocol still contains the requirement that the arbitration agreements must refer to the same seat of arbitration.127 For example, an SIAC arbitration seated in Singapore could be consolidated with an ICC arbitration seated in Singapore but not with any other arbitration seated outside of Singapore.

6.5.2 ICC Arbitration Rules on the Consolidation of Arbitrations In any analysis of institutional arbitration rules the ICC may not be overlooked. The ICC is headquartered in Paris, France, with offices in Singapore, Hong Kong, New York, USA and Sao Paolo, Brazil. It is the arbitration institution with the highest degree of international recognition and popularity. According to the 2018 Queen Mary University of London and White & Case International Arbitration Survey, the ICC is the most preferred arbitration institution.128 The ICC registered a total of 842 new cases in 2018 and 869 in 2019. In 2018, the newly registered cases represented an aggregate value of USD 36 billion, with an average amount of USD 45 million in dispute. At the end of 2019, the aggregate value of all pending cases amounted to USD 230 billion (average value: USD 140 billion).129

126 Skinner/Pelham/Ni

(Jones Day), SIAC Signs Memorandum of Understanding with CIETAC (October 2018), https://www.jonesday.com/en/insights/2018/10/siac-signs-memorandum-of-und erstanding-with-cietac (last accessed on 30 April 2020). 127 Singapore International Arbitration Centre, Memorandum Regarding Proposal on CrossInstitution Consolidation Protocol, p. 3, https://siac.org.sg/images/stories/press_release/2017/Mem orandum%20on%20Cross-Institutional%20Consolidation%20(with%20%20annexes).pdf. 128 Queen Mary University of London/White & Case LLP, 2018 International Arbitration Survey: The Evolution of International Arbitration, p. 13, http://www.arbitration.qmul.ac.uk/media/arb itration/docs/2018-International-Arbitration-Survey-The-Evolution-of-International-Arbitration(2).PDF (last accessed on 8 April 2020). 129 ICC Arbitration figures reveal new record for awards in 2018 (11 June 2019), https://iccwbo. org/media-wall/news-speeches/icc-arbitration-figures-reveal-new-record-cases-awards-2018/ (last accessed on 8 April 2020); ICC Court case management team begins operations in Singapore (23 April 2018), https://iccwbo.org/media-wall/news-speeches/icc-court-case-management-teambegins-operations-singapore/ (last accessed on 8 April 2020); ICC Dispute Resolution 2019 Statistics, p. 15, https://iccwbo.org/publication/icc-dispute-resolution-statistics/ (last accessed on 14 December 2020).

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Pursuant to Article 10 of the 2021 ICC Arbitration Rules (“ICC Rules”),130 the consolidation of two or more pending arbitrations into a single arbitration may be requested by a party on the basis of the following alternative criteria: (a) the parties have agreed to consolidation; or (b) all of the claims in the arbitrations are made under the same arbitration agreement or agreements; or (c) the claims in the arbitrations are not made under the same arbitration agreement or agreements, but the arbitrations are between the same parties, the disputes in the arbitrations arise in connection with the same legal relationship, and the Court finds the arbitration agreements to be compatible.

Paras. (a) and (b) of Article 10 of the ICC Rules almost mirror the criteria stipulated by SIAC Rule 8.1 (a.) and (b.) As already stated, these criteria will not lead to many consolidations in supply chain disputes, as the probability of parties agreeing after a dispute arises is quite low, and supply chains are usually not connected by one and the same arbitration agreement. However, there is a slight but decisive difference to SIAC Rule 8.1 (b.): Article 10 (b) of the ICC Rules refers to the same arbitration agreement or agreements. The multiple arbitration agreements must be identical (mirror arbitration clauses).131 Hence, a consolidation cannot be granted by the ICC International Court of Arbitration if the arbitration agreements are compatible but not identical. If the arbitration clauses are identical, a consolidation may be granted in spite of the fact that there are multiple (different) parties and multiple contracts.132 Hence, arbitrations may be consolidated if they involve back-to-back contracts.133 As mentioned above in Sect. 6.5.1, it is common that subcontracts include backto-back provisions. Therefore, it is possible under the new ICC 2021 Arbitration Rules to consolidate pending arbitrations involving a main contract, subcontracts and contracts with lower-tier subcontractors and sub-suppliers, as long as the arbitration agreements are identical. If an employer or main contractor is interested in the consolidation of several arbitrations along the supply chain, it is crucial that all the supply chain contracts include the same arbitration clause. An implicit advance consent (see above in Sect. 6.5.1) to a consolidation should be sufficient (an explicit

130 The ICC Rules (in force as from 1 January 2021) can be accessed at https://iccwbo.org/disputeresolution-services/arbitration/rules-of-arbitration/ (last accessed on 2 January 2021). 131 Herbert Smith Freehills, The new ICC Rules 2021: What you need to know (9 October 2020), https://hsfnotes.com/arbitration/2020/10/09/the-new-icc-rules-2021-what-you-need-to-know/ (last accessed on 7 December 2020). 132 Wong/Ryan/de Aguiar (Shearman & Sterling), Newly Revised ICC Arbitration Rules (12 November 2020), https://www.shearman.com/perspectives/2020/11/newly-revised-icc-arbitr ation-rules (last accessed on 7 December 2020); Cleary Gottlieb, 2021 ICC Arbitration Rules Unveiled (12 November 2020), https://www.clearygottlieb.com/news-and-insights/publication-lis ting/2021-icc-rules-of-arbitration-unveiled (last accessed on 7 December 2020). 133 Masser/van Hooijdonk (Allen & Overy), The ICC’s 2021 Arbitration Rules bring new focus on efficiencies and streamlined processes, including through the use of technology (November 2020) p. 4, https://www.allenovery.com/en-gb/global/news-and-insights/publications/the-iccs-2021-arb itration-rules (last accessed on 7 December 2020).

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consent is only required by Article 10 (a) of the ICC Rules) so that the ICC International Court of Arbitration may grant a consolidation over a party’s objection after the commencement of the arbitral proceedings, if the arbitration clause does not expressly bar consolidations. It is striking that the third criterion stands in stark contrast with the consolidationfriendly SIAC Rule 8.1 (c.). On the one hand, Article 10 (c) of the ICC Rules allows a consolidation in the event of multiple compatible arbitration agreements (identical arbitration clauses are not necessary), but on the other hand, this provision requires party identity, as the arbitrations must be between the same parties. This criterion renders the consolidation of supply chain disputes virtually impossible, as the involvement of the different supply chain tiers results in the participation of multiple and different parties. In other words, the multiple arbitration agreements are not always concluded between exactly the same parties. Vlavianos/Pappas134 criticize this deficiency as well. The consequence of the new ICC Rules is that supply chain arbitrations may only be consolidated if (i) all the parties involved expressly agree to such consolidation (an objection by one party will render a consolidation impossible), or (ii) the arbitration agreements along the supply chain are identical. In the latter case, an implicit advance consent is sufficient.

6.5.3 The AIAC Arbitration Rules The Asian International Arbitration Centre (“AIAC”), which is seated in Kuala Lumpur, Malaysia, has a very strong focus on construction disputes (in particular domestic adjudication matters; 772 new cases in 2018). In 2018, AIAC registered 90 new arbitration cases. 80 of these cases were domestic arbitrations, and ten had an international character. 50% of these new arbitration cases related to the construction industry.135 AIAC’s focus on the construction industry makes it interesting how AIAC deals with consolidations. Section 40 of the Malaysian Arbitration Act 2005 stipulates that the parties may agree to the consolidation of arbitrations. Para. 2 sets forth the requirement of the parties’ consent: “Unless the parties agree to confer such power to the arbitral tribunal, the tribunal has no power to order consolidation of arbitration proceedings or concurrent hearings.”

134 Vlavianos/Pappas

in Rowley/Bishop/Kaiser (Ed.), The Guide to Energy Arbitrations, p. 247. International Arbitration Centre, Committed to the Road Ahead. Annual Report 2018, p. 18 et sqq., https://admin.aiac.world/uploads/ckupload/ckupload_20191023032658_26.pdf (last accessed on 3 May 2020). 135 Asian

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For the parties’ consent pursuant to Sect. 40 (2) of the AIAC Arbitration Rules, it is sufficient to incorporate the agreement by reference standard forms of contract or by adopting rules of arbitration institutions.136 Rule 10 of the AIAC Arbitration Rules137 sets forth three alternative criteria for the consolidation of two or more pending arbitrations: 1. Upon the request of any Party, or if the Director deems it appropriate, the Director may consolidate two or more arbitrations into one arbitration, if: (a) the Parties have agreed to consolidation: (b) all claims in the arbitrations are made under the same arbitration agreement; or (c) the claims are made under more than one arbitration agreement, the dispute arises in connection with the same legal relationships, and the Director deems the arbitration agreements to be compatible.

The third criterion is the practically most relevant one for supply chain disputes. In comparison with SIAC Rule 8.1, it is notable that the criterion does not make reference to “principal and ancillary contract(s)” and “the same transaction or a series of transactions”. This makes it more challenging but certainly not impossible to plead for a consolidation if (i) the parties are not identical, (ii) they are not parties to the same arbitration agreement, and (iii) not all of the parties expressly consent to the consolidation. The key for a successful consolidation application is the interpretation of the term “the same legal relationships”. Baskaran takes the liberal view that [i]t is unclear whether the words ‘same legal relationships’ is broad enough to capture a situation where disputes have arisen between different parties in the same chain of contracts, like disputes between an employer and a contractor on the one hand and between a contractor and a subcontractor on the other. It is submitted that Rule 10 should be given a broad purposive interpretation that allows for this.138

The author takes the following view: If the employer has a claim against the main contractor, the latter will be interested in the consolidation because of potential recourse claims against the subcontractor. Hence, there is a good chance that the main contractor will apply for a consolidation. Provided that the two arbitration agreements are compatible and do not contain provisions expressly disallowing a consolidation, all the parties, by agreeing to the application of the AIAC Arbitration Rules, give their implicit advance consent to a possible consolidation if the AIAC criteria are met. Rule 10 allows the director of AIAC to consolidate even if no party requests it (such an approach is quite unique). Therefore, taking into consideration the parties’ advance consent in the arbitration agreements, it is possible that the director may consolidate the proceedings even if all the parties are against such a consolidation. However, in practice this would not be a reasonable thing to do. Given the strong focus of AIAC 136 Baskaran,

Arbitration in Malaysia: A Commentary on the Malaysian Arbitration Act (2019) §40.02. 137 Arbitration Rules of the Asian International Arbitration Centre (Malaysia) (AIAC) in force as of 9th March 2018. 138 Baskaran, Arbitration in Malaysia: A Commentary on the Malaysian Arbitration Act, §40.02[B].

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on construction disputes, in the context of a construction project, the term “same legal relationships” should be interpreted broadly as a series of bilateral contracts that (i) are related to one and the same project and (ii) usually contain back-to-back provisions (this makes all the contracts along the supply chain dependent on the main contract). Disputes in this scenario should (based on efficiency considerations) ideally be consolidated if the legal and factual issues in the two pending arbitrations are basically the same. In order not to jeopardize the recognition and enforcement of an arbitral award stemming from consolidated proceedings (in particular if there are disputes in relation to the interpretation of the term “the same legal relationships” or the composition of the arbitral tribunal), Rule 10 (5) of the AIAC Arbitration Rules stipulates that [t]he Parties irrevocably waive their rights to any form of appeal, review or recourse to any court or other judicial authority, on the basis of any decision to consolidate or not to consolidate arbitrations, to the validity and/or enforcement of any award made by the arbitral tribunal, insofar as such waiver can validly be made.

6.5.4 Consolidation in the USA Arbitral proceedings seated in the USA are governed by the Federal Arbitration Act (“FAA”) and the respective law of the state of the seat (dual legal system of state and federal laws). The federal law overrides conflicting state law based on the supremacy clause of the US constitution. In practice, the interplay between the federal and state arbitration law allows the application of both legal regimes. Usually, the state arbitration laws provide more detailed procedures and provisions. Furthermore, the state law fills the gap if the FAA remains silent on an issue.139 Regarding the consolidation of arbitrations, the FAA does not contain any provisions. Consolidation rules in arbitration acts of the states vary from state to state. One of the most popular seats of arbitration in the USA is New York but its legislation also remains silent with regard to consolidations.140 139 Salomon/Sivachenko (Latham & Watkins LLP), Choosing an arbitral seat in the United States, LexisPSL Arbitration, https://www.lw.com/thoughtLeadership/choosing-an-arbitral-seat-in-the-us (last accessed on 9 April 2020). 140 Vlavianos/Pappas in Rowley/Bishop/Kaiser (Ed.), The Guide to Energy Arbitrations, p. 251 et sqq.; Salomon/Sivachenko (Latham & Watkins LLP), Choosing an arbitral seat in the United States, LexisPSL Arbitration, https://www.lw.com/thoughtLeadership/choosing-an-arbitral-seat-in-the-us. It should not stay unmentioned that in the USA, the issue whether a court or an arbitral tribunal is the competent authority to order a consolidation is controversial. However, several federal and state courts relied on the US Supreme Court decision Green Tree Financial Corp. v. Bazzle (02634) 539 U.S. 444 (2003) which acknowledged that it would be for the arbitral tribunal to decide whether an arbitration agreement allows for class arbitration. By analogy, the federal and state courts found that the admissibility of consolidations depended on the contractual interpretation and arbitration procedures and determined the arbitral tribunal to be the competent authority to decide on consolidation issues. See Kondev, Multi-Party and Multi-Contract Arbitration in the Construction Industry, p. 157.

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The most popular arbitration institution in the USA is the American Arbitration Association (“AAA”). The administration of international arbitrations is provided by the AAA’s international division, the International Centre for Dispute Resolution (“ICDR”).141 In 2018, 993 new cases were filed with the ICDR. The total amount of the claims amounted to USD 8.2 billion.142 Consolidations are covered by Article 8 of the International Arbitration Rules (“ICDR Rules”).143 The three alternative criteria are as follows: a. the parties have expressly agreed to consolidation; or b. all of the claims and counterclaims in the arbitrations are made under the same arbitration agreement; or c. the claims, counterclaims, or setoffs in the arbitrations are made under more than one arbitration agreement; the arbitrations involve the same parties; the disputes in the arbitrations arise in connection with the same legal relationship; and the consolidation arbitrator finds the arbitration agreements to be compatible.

Article 8 (a.) and (b.) corresponds with SIAC Rule 8.1 (a.) and (b.). Similarly to Article 10 (c) of the ICC Rules, it is noticeable that the ICDR Rules only allow consolidations of arbitrations involving multiple (compatible) arbitration agreements if the parties are identical. This is not the case in supply chains. Hence, in practice a rather unrealistic express consent from all parties will be required. As stated above, supply chain members are usually not bound by the one and the same arbitration agreement which renders Article 8 (b.) of the ICDR Rules rather useless in supply chain scenarios. Interestingly, the AAA issued a separate set of Construction Industry Arbitration Rules (“CIAR”).144 Although the CIAR are mainly designed for construction cases based on domestic US standard forms, the rules may be applied in international cases as well if parties consent to their application.145 The very liberal and quite unique consolidation provision contained in the CIAR is worth mentioning. Clause R–7 (a) of the CIAR enables the consolidation of multiple arbitrations without the parties’ express consent: If the parties are unable to agree to consolidate related arbitrations or to the joinder of parties to an ongoing arbitration, the AAA shall directly appoint a single arbitrator (hereinafter referred to as the R-7 arbitrator) for the limited purpose of deciding whether related arbitrations should be consolidated or parties joined […] 141 Kondev,

Multi-Party and Multi-Contract Arbitration in the Construction Industry, p. 92. Arbitration Association, A Mission to Improve Transparency, Efficiency and Innovation in Alternative Dispute Resolution. 2018 Annual Report & Financial Statements (9 May 2019) p. 11, https://adr.org/sites/default/files/document_repository/AAA_2018_Annual_Report_and_Fin ancial_Statements.pdf (last accessed on 9 April 2020). 143 International Centre for Dispute Resolution, International Dispute Resolution Procedures (rules amended and effective June 1, 2014), https://www.adr.org/sites/default/files/ICDR_Rules.pdf (last accessed on 9 April 2020). 144 The CIAR (rules amended and effective July 1, 2015) can be accessed at https://www.adr.org/ sites/default/files/ConstructionRules_Web.pdf (last accessed on 9 April 2020). 145 Kondev, Multi-Party and Multi-Contract Arbitration in the Construction Industry, p. 90. 142 American

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It is striking that the separate single arbitrator, who is only appointed by the AAA to decide on the consolidation matter, is not bound by any express criteria listed in the AAA. As a consequence, the so-called R-7 arbitrator is vested with a large degree of discretion. The parties’ agreement on the application of the CIAR (in the arbitration agreement) constitutes the parties’ implied advance consent to a possible consolidation.146 In the author’s view, absent express criteria for the consolidation may give rise to unpredictable and unexpected decisions. On the one hand, these liberal approach seems to enable consolidations more easily, on the other hand, some arbitrators might not be consolidation-friendly, and absent express criteria would make it more easy for them to refuse a consolidation. What is more, in the absence of any express criteria in the CIAR and in order to avoid arbitrary decisions, the R-7 arbitrator will have no choice but to be guided by federal and state case law when making his assessment. This would even give rise to more uncertainty, as the consolidation criteria vary between the states and on top of that, court decisions both on the state and federal level have been split.147

6.5.5 Consolidation in Austria The Austrian Arbitration Law can be found in the Austrian Code of Civil Procedure (Sects. 577 – 618). The Austrian Arbitration Law remains silent on the consolidation of pending arbitrations. Hence, a closer look must be taken at the institutional arbitration rules of the Vienna International Arbitral Centre (“VIAC”). The VIAC received 45 new domestic and international case filings in 2019. Around 90% of these new case filings were international in nature. As of 31 December 2019, 51 arbitrations were pending with an aggregate amount in dispute of around EUR 450 million. It should be mentioned that VIAC has a particular stronghold in Central and Eastern Europe, as one third of all parties comes from these regions.148 Article 15 of the VIAC Rules of Arbitration (“Vienna Rules”)149 contains a unique but for supply chain arbitrations rather inapplicable approach towards the consolidation topic: (1) Upon a party’s request, two or more arbitral proceedings may be consolidated if 1.1 the parties agree to the consolidation; or 1.2 the same arbitrator(s) was/were nominated or appointed

146 Kondev,

Multi-Party and Multi-Contract Arbitration in the Construction Industry, p. 91. in Rowley/Bishop/Kaiser (Ed.), The Guide to Energy Arbitrations, p. 251 et

147 Vlavianos/Pappas

sqq. 148 Vienna International Arbitral Centre, Annual Report 2019, p. 16, https://www.viac.eu/images/ documents/Jahresbericht_2019.pdf (last accessed on 10 April 2020). 149 The Vienna Rules (in force as from 1 January 2018) can be accessed at https://www.viac.eu/en/ arbitration/content/vienna-rules-2018-online#Consolidation (last accessed on 10 April 2020).

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(2) The Board shall decide on Requests for Consolidation after hearing the parties and the arbitrators already appointed. The Board shall consider all relevant circumstances in its decision, including the compatibility of the arbitration agreements and the respective stage of the arbitral proceedings.

Consolidations may be granted by the VIAC board150 if the parties agree. In the event of no agreement, the pending arbitrations must share the same arbitrator(s). The author agrees with Kondev151 that in the supply chain context (i) an agreement between the parties after a dispute has arisen is very rare, and (ii) “it is very unlikely that parties bound by different bilateral contracts would agree to submit their related disputes to one and the same arbitrator or tribunal.” This should best be illustrated with the following example: If the employer commences an arbitration against the main contractor based on the delay of the project due to a defaulting subcontractor, the main contractor will subsequently initiate an arbitration against the subcontractor. A consolidation of the two proceedings would only be in the interest of the main contractor. Therefore, in application of the Vienna Rules, the main contractor will try to have the same arbitral tribunal appointed in the second arbitration against the subcontractor. In the author’s experience, it will be virtually impossible for the main contractor to reach an agreement with the subcontractor regarding the composition of the arbitral tribunal because (i) after the initiation of arbitral proceedings, a party will generally be suspicious towards the suggestions of the opposing party, (ii) in the event of an arbitral tribunal consisting of three arbitrators, each party has the right to nominate a co-arbitrator, and most importantly, (iii) a consolidation would not be in the interest of the subcontractor (a consolidation would lead to more complex proceedings and higher costs for the subcontractor). Hence, the consolidation provision contained in the Vienna Rules will be of limited relevance in supply chain disputes.

6.5.6 Consolidation in Mainland China and Hong Kong The Chinese Arbitration Law does not contain any provisions on the consolidation of pending arbitrations but there is a multitude of competing arbitration institutions in China. The most significant and popular (Mainland) Chinese arbitration institutions with an established track record of international arbitration cases are the China International Economic and Trade Arbitration Commission (“CIETAC”), the Beijing Arbitration Commission (“BAC”), the Shanghai International Arbitration Centre (“SHIAC”) and the Shenzhen Court of International Arbitration (“SCIA”). 150 Pursuant

to Article 2 (1) Vienna Rules, the “Board of the VIAC shall consist of a minimum of five members. The members of the Board shall be appointed for a term of up to five years by the Extended Presiding Committee of the Austrian Federal Economic Chamber upon recommendation by the President of the VIAC. Members may be appointed for consecutive terms.” 151 Kondev, Multi-Party and Multi-Contract Arbitration in the Construction Industry, p. 98.

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The CIETAC Rules

This monograph will first focus on the CIETAC Arbitration Rules (“CIETAC Rules”).152 CIETAC’s headquarters are in Beijing, China. Outside of Mainland China, CIETAC has seats in Hong Kong (CIETAC Hong Kong Arbitration Centre), Vancouver, Canada (CIETAC North America Arbitration Centre) and Vienna, Austria (CIETAC European Arbitration Centre). CIETAC’s track record in 2018 is very impressive: In 2018, CIETAC accepted 2,962 new case filings. 522 of these arbitration cases were foreign-related and related to Hong Kong, Macao and Taiwan. In 36 cases both parties came from abroad. A total of 59 arbitrators from outside of Mainland China arbitrated 58 arbitrations filed in 2018. The aggregate amount of dispute of the cases accepted in 2018 was RMB 101.59 billion (around EUR 13.19 billion).153 Article 19 (1) of the CIETAC Rules sets the following alternative criteria for the consolidation of pending arbitrations into a single arbitration: (a) all of the claims in the arbitrations are made under the same arbitration agreement; (b) the claims in the arbitrations are made under multiple arbitration agreements that are identical or compatible and the arbitrations involve the same parties as well as legal relationships of the same nature; (c) the claims in the arbitrations are made under multiple arbitration agreements that are identical or compatible and the multiple contracts involved consist of a principle contract and its ancillary contract(s); or (d) all the parties to the arbitrations have agreed to consolidation.

For the consolidations in the supply chain context with multiple arbitration agreements and disputes involving different parties, subparagraph (c) becomes relevant if a party refuses the consolidation. Subparagraph (c) is similar to SIAC Rule 8.1 (c.) It does not require the express parties’ consent either in the arbitration agreement or after a dispute arises. Instead, the parties’ consent is anticipatorily implied by agreeing on the application of the CIETAC Rules and by meeting the criteria of Article 19 (1.) (c) of the CIETAC Rules. Similarly to SIAC Rule 1.1, Article 4 (2.) of the CIETAC Rules specifies that “[w]here the parties have agreed to refer their dispute to CIETAC for arbitration, they shall be deemed to have agreed to arbitration in accordance with these Rules.” Howes/Stowell154 support this view: Accordingly, if parties agree to CIETAC arbitration, the CIETAC Rules are effectively incorporated into their underlying arbitration agreement (except, of course, where the rules conflict with the agreement). There is no need for the parties to agree to consolidation again at the time of the dispute. The agreement to consolidation is part of their original contract. 152 The

CIETAC Rules (effective as of 1 January 2015) can be accessed at http://www.cietac.org/ index.php?m=Page&a=index&id=106&l=en (last accessed on 10 April 2020). 153 CIETAC, China Foreign-Related Arbitration Annual 2018, p. 3 et sqq. 154 Howes/Stowell, The Consolidation Dilemma: Is There Finally a Pragmatic Solution? p. 17, https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2016/04/the-con solidation-dilemma-is-there-finally-a-pragm/files/dri_10_1_apr_2016_howes_stowell/fileattac hment/dri_10_1_apr_2016_howes_stowell.pdf.

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It is sufficient if the pending arbitrations to be consolidated are based on compatible arbitration agreements. As already described in Sect. 6.5.1, the author considers it possible, particularly in supply chain disputes concerning the breach of the chain leader’s or main contractor’s supplier code of conduct that arbitrations may be consolidated on the basis of the principle and ancillary contract(s)-prong. Unlike the SIAC Rules, the CIETAC Rules did not introduce the additional “series of transactions” criterion. As stated earlier, chain contracts may be part of a series of transactions if they serve one and the same project. Sun Wei/Willems155 interpret the consolidation criterion under subparagraph (c) very strictly arguing that under Chinese law, ancillary contracts referred to in the CIETAC consolidation provision cannot independently exist in the absence of the principle contract. They give the example of a loan agreement (principle contract between parties A and B) and a guarantee for the repayment of the loan (ancillary contract between parties B and C). The guarantee cannot exist without the underlying contract. Such a strict interpretation would have the consequence that the bilateral contracts along the supply chain would not be eligible for a consolidation (under the principal and ancillary contract criterion), as the lower-tier contracts can independently exist in absence of the principal contract in the supply chain. Article 5 of the Guaranty Law of the People’s Republic of China156 provides the following definition of a guarantee: “A guaranty contract is an ancillary contract of the principal contract. If the principal contract is null and void, the guaranty contract shall be null and void, accordingly. Where it is otherwise agreed in the guaranty contract, such agreement shall prevail.”

This means that collateral warranties157 which are particularly used in international construction supply chains will definitely be subsumed under Article 19 (1.) (c) of the CIETAC Rules. Collateral warranties are characterized by their accessoriness (accessory contracts) in relation to the principal contract.158 For example, the employer in a supply chain may demand a collateral warranty from the subcontractor. In this scenario, the principle contract would be the subcontract between the main contractor and the subcontractor. The collateral warranty creates a contractual relationship between the employer and the subcontractor. If the subcontractor violates the subcontract, the main contractor may commence an arbitration against the subcontractor, and the employer may initiate a second arbitration against the subcontractor based on the collateral warranty. If both contracts contain compatible arbitration clauses, an application for a consolidation of the two pending proceedings may be granted. What is the consequence of this understanding for the enforcement of corporate codes of business conduct and ethics? If the chain leader or the main contractor wish 155 Sun

Wei/Willems, Arbitration in China. A Practitioner’s Guide (2015) Chapter 10.3.4, KindlePosition 5170. 156 The Guaranty Law of the People’s Republic of China can be accessed at http://www.npc.gov.cn/ zgrdw/englishnpc/Law/2007-12/12/content_1383719.htm (last accessed on 11 April 2020). 157 See above Sect. 6.2. 158 Arnold, Die Bürgschaft auf erstes Anfordern im deutschen und englischen Recht (2008) p. 23.

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to be able to enforce their codes themselves, they should consider demanding collateral warranties from all the lower-tier supply chain members, explicitly referring to the mandatory compliance with their codes. Employers could already include such requirement in the tender. On top of that, consolidations of pending proceedings would be possible in the event of compatible arbitration clauses. Contrary to the strict interpretation applied by Sun Wei/Willems, the author considers it very well possible that CIETAC may, taking particularly into consideration the ever-increasing significance of supply chain arbitrations in connection with the Belt and Road Initiative, interpret the relationship between principal and ancillary contracts more broadly. The CIETAC Rules do not define the term “ancillary contract”. They also do not make any reference to the definition contained in Article 5 of the Guaranty Law of the People’s Republic of China. A more efficiencyminded approach that is supported by the author could interpret an ancillary contract as subordinated contract (including back-to-back provisions mirroring key terms in relation to one and the same project) depending on the principle contract, comparable to the relationship of main contracts and their subcontracts (accessoriness not required). This way, it may definitely be argued that subcontracts of a supply chain are subordinate contracts159 which fulfil the CIETAC Rules’ ancillary contract requirement.

6.5.6.2

The Hong Kong Arbitration Ordinance and the HKIAC Rules

The HKIAC accepted 265 new arbitration cases in 2018. 80.7% of these new cases were international, 39.4% had no connection with Hong Kong, and 8.4% had no connection with Asia. The total amount in dispute was HKD 52.5 billion (approx. USD 6.3 billion). The top five users were parties from Hong Kong, Mainland China, the British Virgin Islands, the USA and Cayman Islands.160 Section 2 of Schedule 2 of the Hong Kong Arbitration Ordinance 2011 (Cap. 609)161 expressly allows for a court to consolidate two or more pending arbitrations on the basis (a) that a common question of law or fact arises in both or all of them; (b) that the rights to relief claimed in those arbitral proceedings are in respect of or arise out of the same transaction or series of transactions; or (c) that for any other reason it is desirable to make an order under this section. 159 De Wit, The Concept of Statutory Rights of Action in Carriage of Goods, in Hooydonk (Ed.), English and Continental Maritime Law. After 115 Years of Maritime Law Unification: a Search for Differences between Common Law and Civil Law (2003) p. 31 (p. 32). 160 Hong Kong Arbitration Centre, Annual Report 2018 Reflections, p. 9, https://www.hkiac.org/ sites/default/files/annual_report/annual%20report%203463-7390-6190%20v.4.pdf. 161 It should be mentioned that in relation to arbitration agreements entered into from 1 June 2017, Schedule 2 provisions only apply if the parties expressly opt in. See Ferguson/Starr, What to do with Schedule 2 of the Arbitration Ordinance from 1 June 2017? (22 May 2017), https://www.kwm.com/en/hk/knowledge/insights/arbitration-ordinance-schedule-2-applic ation-after-1-june-2017-20170523 (last accessed on 30 May 2020).

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In Chun Wo Building Construction Ltd. v. China Merchants Tower Co. Ltd. & ORS, the Court of First Instance had to decide a consolidation application of a main contractor in a case involving three arbitrations against the employer (construction contract) and two nominated subcontractors (an air-conditioning subcontract and a fire services installation subcontract). The employer and one of the subcontractors opposed the consolidation application. The Court of First Instance granted the main contractor’s application for consolidation and, among other things, held that the two subcontracts flowed from the main contract, all the three contracts involved would have to be regarded as one series of transactions, and “the terms as to payment in the sub-contracts were back to back with those in the main contract and the issues of delay, the consequential liability to pay liquidated damages and who should make indemnity were common to all three contracts.” Furthermore, the Court of First Instance pointed at the danger of inconsistent findings of law and fact in the event of no consolidation and emphasized the efficiency advantages with regard to the presentation of evidence and the time for hearing the references.162 Article 28.1 of the HKIAC Administered Arbitration Rules 2018 (“HKIAC Rules”) requires the following alternative criteria for the consolidation of two or more pending arbitrations: HKIAC shall have the power, at the request of a party and after consulting with the parties and any confirmed or appointed arbitrators, to consolidate two or more arbitrations pending under these Rules where: (a) The parties agree to consolidate; or (b) all of the claims in the arbitrations are made under the same arbitration agreement; or (c) the claims are made under more than one arbitration agreement, a common question of law or fact arises in all of the arbitrations, the rights to relief claimed are in respect of, or arise out of, the same transactions or a series of related transactions and the arbitration agreements are compatible.

Article 28.1 (c) of the HKIAC Rules is in practice the significant criterion in the context of supply chain arbitrations. It is equivalent to the consolidation criteria provided by the Hong Kong Arbitration Ordinance. That means that a consolidation application in the Case Scenario would in all likelihood be granted, even if the employer and subcontractor oppose the application by the main contractor. The arbitration agreements are compatible and based on the breach of a core provision of the employer’s code of business conduct and ethics by the subcontractor, both pending arbitrations deal with common questions of law and fact. It is undeniable that the subcontract flows from the main contract, contains a number of back-to-back provisions, and the claims in both arbitrations (the employer’s damage claims against the main contractor and the recourse claim of the latter against the subcontractor) arise out of one series of transactions.

162 Chun

Wo Building Construction Ltd v. China Merchants Tower Co. Ltd. & ORS, 2 Asian Disp. Rev., No. 1, 2000, p. 27, https://heinonline.org/HOL/LandingPage?handle=hein.kluwer/asidpurv0 002&div=24&id=&page= (last accessed on 3 May 2020).

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Article 32.2 of the HKIAC Rules (similarly to Rule 10 (5) of the AIAC Arbitration Rules) provides that the parties waive any objection to the validity and/or enforcement of any arbitral award, among other things, on the basis of the use of the consolidation procedure.

6.6 Joinders of Additional Parties In contrast to the consolidation of two pending arbitrations into one single arbitration, a joinder enables an additional party to join one single pending arbitration. The Case Scenario (illustrated above in Sect. 6.3.1) can also be used to illustrate the practicality of joinders in the context of the enforcement of codes of business conduct and ethics along the supply chain. Due to the subcontractor’s violation of the employer’s code of business conduct and ethics, the main contractor will try to place any liability on the subcontractor. Instead of initiating a second arbitration against the subcontractor, the main contractor may wish to apply for the joinder of the subcontractor in the pending arbitration against the employer. Unfortunately, most of the rules of the arbitration institutions examined in this monograph contain very strict criteria for the joinder of additional parties. Either all parties, including the additional party, must be bound by the same arbitration agreement, or all parties, including the additional party, have to expressly consent to the joinder (see below in Sect. 6.6.1).

6.6.1 SIAC, AIAC, CIETAC and HKIAC Rules SIAC Rule 7.1 prescribes that a. the additional party to be joined is prima facie bound by the arbitration agreement; or b. all parties, including the additional party to be joined, have consented to the joinder of the additional party.

Rule 9 of the AIAC Arbitration Rules sets forth that “[a]ny Party to an arbitration or any third party […] may request one or more Additional Parties to be joined as a party to the arbitration […] provided that all parties to the arbitration and the Additional Party give their consent in writing to the joinder, or provided that such Additional Party is prima facie bound by the arbitration agreement.” Article 18 (1.) of the CIETAC Rules stipulates that “[d]uring the arbitral proceedings, a party wishing to join an additional party to the arbitration may file the Request for Joinder with CIETAC, based on the arbitration agreement invoked in the arbitration that prima facie binds the additional party.”

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Article 27.1 of the HKIAC Rules allow for joinders if (a) prima facie, the additional party is bound by an arbitration agreement under the Rules giving rise to the arbitration, including any arbitration under Article 28 or 29; or (b) all parties, including the additional party expressly agree.

6.6.2 ICC Rules Article 7 (1) of the ICC Rules deals with the joinder of additional parties and refers to Articles 6 (3) – (7) ICC Rules for the substantive test for admitting the joinder.163 Article 6 (4) of the ICC Rules determines that (i)

where there are more than two parties to the arbitration, the arbitration shall proceed between those of the parties, including any additional parties joined pursuant to Article 7, with respect to which the Court is prima facie satisfied that an arbitration agreement under the Rules that binds them all may exist; and

(ii) where claims pursuant to Article 9 are made under more than one arbitration agreement, the arbitration shall proceed as to those claims with respect to which the Court is prima facie satisfied (a) that the arbitration agreements under which those claims are made may be compatible, and (b) that all parties to the arbitration may have agreed that those claims can be determined together in a single arbitration.

Voser confirms that the construction industry scenario involving employer, main contractor and subcontractor was discussed during the drafting process of the relevant provision. It became clear that even in the event of compatible arbitration agreements a joinder would not be granted in an ICC arbitration without the consent of all parties, including the additional party: A case which was repeatedly discussed during the drafting process, and where it was however unmistakable that the test of Article 6(4)(ii) would not be met, relates to disputes arising in the construction industry: an owner […] files claims against the general or main contractor who in turn wishes to file claims against its subcontractor. In such circumstances, even if the arbitration agreements are compatible, it could not be assumed that the parties “may have agreed that those claims can be determined together in a single arbitration” (Article 6(4)(ii)). Thus, the basic principle remains that if multiple parties want to join claims under several contracts in one arbitration they must themselves contractually provide for this possibility.164

These strict criteria will virtually render joinders impossible in the supply chain context.165 First, supply chains are characterized by bilateral contracts between the neighbouring tiers. Umbrella or framework arbitration agreements covering the entire supply chain are unusual. Therefore, it will be very rare in practice that the additional party will be bound by the same arbitration agreement giving rise to the pending arbitration. Second, achieving any consent after the emergence of a dispute or the 163 Voser,

Overview of the Most Important Changes in the Revised ICC Arbitration Rules, 29 ASA Bulletin 4/2011, p. 783 (p. 793). 164 Voser, 29 ASA Bulletin 4/2011, p. 792. 165 Kondev, Multi-Party and Multi-Contract Arbitration in the Construction Industry, p. 66.

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commencement of an arbitration is very unlikely considering that not all of the parties may be interested in a multi-party arbitration. In the Case Scenario, a multi-party arbitration would certainly not be in favour of the subcontractor. The preferred choice would be a less complicated, less cost-intensive and less time-consuming single arbitration against the main contractor only. An employer would only be interested in an arbitration against the main contractor, as the latter is liable for the contractual breaches of his subcontractors. Hence, only the main contractor would be interested in the joinder of the breaching subcontractor in order to pass on the liability to the latter in one single arbitration.

6.6.3 ICDR Rules Although the ICDR Rules are not very helpful regarding consolidations in the supply chain context,166 it seems that they provide a very flexible approach towards the joinders of additional parties: Article 7 (1) of the ICDR Rules determines that “[a] party wishing to join an additional party to the arbitration shall submit to the Administrator a Notice of Arbitration against the additional party. No additional party may be joined after the appointment of any arbitrator, unless all parties, including the additional party, otherwise agree.” Para. 4 provides that an “additional party may make claims, counterclaims, or assert setoffs against any other party in accordance with the provisions of Article 3.” Article 7 of the ICDR Rules does not mention whether a single arbitration agreement binding all parties (including the additional party) is required but stipulates that the express consent of all parties is necessary once an arbitrator is appointed. Does this mean in the Case Scenario that prior to the appointment of an arbitrator it would be possible, without the express consent of all parties, that the main contractor submits a notice of arbitration against the subcontractor, and the latter may file counterclaims against both the employer and the main contractor? As Article 7 (1) of the ICDR Rules refers to Article 19, it is evident that the arbitral tribunal has the final power to grant a joinder after its constitution. However, the ICDR Rules do not expressly state the criteria by which the arbitral tribunal is bound when deciding on the admissibility of the joinder. According to Kondev,167 the ICDR Rules are indeed flexible and do not require the parties’ express consent to the joinder (prior to the appointment of an arbitrator). Given that the consolidation provision of the ICDR Rules requires identical parties, which is not the case in the supply chain context,168 Kondev even suggests that if a party is willing to arbitrate its claims in a multi-party setup under the ICDR Rules but has not addressed multi-party arbitration in its contract, it should make sure to request the joinder of any additional parties against which it may have claims under Article 7 of the ICDR 166 See

above Sect. 6.5.4. Multi-Party and Multi-Contract Arbitration in the Construction Industry, p. 93. 168 See above Sect. 6.5.4. 167 Kondev,

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Rules. If the requesting party decides to start separate arbitrations against the respondents, the opportunity for multi-party arbitration will be lost because of the narrow scope of the consolidation clause.169

An article contained in a 2016 ICDR newsletter, drafted by del Rosal Carmona, at the time international case counsel and currently director of the ICDR, demonstrates a very different practical implementation of Article 7 of the ICDR Rules in connection with the joinder of subcontractors: Parties should be aware of certain clauses and provisions which may facilitate the multiparty arbitration. As an example, where subcontractors are involved, the arbitration clause in the subcontract may specifically provide that claims arising from the main contract and from the subcontract may be entertained in the same proceedings. This usually allows indemnification claims against the subcontractors to be decided together with the disputes between the main contractors, increasing the proceedings’ efficiency. Even if no such clause exists, regarding consolidation, parties may rely on Article 8 of the ICDR Rules, which describes in detail the requirements for the appointment of a consolidation arbitrator and the appointment process, as well as some of the elements the consolidation arbitrator may consider when deciding the matter.170

It seems that the practical implementation of Article 7 of the ICDR Rules is less flexible in comparison to its wording and demands that the arbitration clause in the subcontract specifies the possibility for a joinder in relation to disputes arising from the main contract between the employer and the main contractor. If no such clause can be found in the subcontract, it is still possible to file for a consolidation, once the second arbitration between the main contractor and the subcontractor is pending as well. However, given that the parties are not identical, the consent of all parties involved will be necessary. As already mentioned on several occasions above, such consent will in practice be difficult to achieve after the emergence of the dispute. In the author’s opinion, the wording of Article 7 of the ICDR Rules definitely allows for an interpretation pursuant to which neither an express consent of all parties involved nor a clause in the subcontract providing for the possibility of a joinder is required, in order for the joinder to be granted. For example, if the main contractor in the Case Scenario applies for a joinder, the latter may even be granted if both the employer and the subcontractor refuse such joinder. Article 7 expressly stipulates that the consent of all parties is only necessary after the appointment of any arbitrator. This makes perfect sense because the additional party should either have the opportunity to take part in the arbitral tribunal’s constitution phase or to consent to already appointed arbitrators. Otherwise, the recognition and enforcement of the arbitral award may be refused on the basis of Article V (1.) (d) of the New York Convention if the composition of the arbitral tribunal was not in accordance with the arbitration agreement of the parties. Prior to the appointment of any arbitrator, the advance consent of the parties to the joinder may be implied from the parties’ 169 Kondev,

Multi-Party and Multi-Contract Arbitration in the Construction Industry, p. 94.

170 del Rosal Carmona, ICDR Multiparty Arbitration: Guidance from the Case Counsel, The ICDR

International Arbitration Reporter, Fall 2016, Vol. 5, https://www.icdr.org/sites/default/files/doc ument_repository/ICDR_International_Arbitration_Reporter-Vol.5.pdf (last accessed on 24 April 2020).

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agreement to apply the ICDR Rules, including Article 7, and the additional party would be able to take part in the arbitral tribunal’s appointment procedure. Needless to say, the arbitration clauses contained in the main contract and in the subcontract would have to be compatible,171 in particular in terms of the application of the ICDR Rules. With respect to the CIAR, it must be noted that Clause R–7 (a) of the CIAR applies for joinders as well. Consequently, an R-7 arbitrator will decide on the application of a joinder. The express consent of all parties is not required.172

6.6.4 Vienna Rules Article 14 of the Vienna Rules provides that “[t]he joinder of a third party in an arbitration, as well as the manner of such joinder, shall be decided by the arbitral tribunal upon the request of a party or a third party after hearing all parties and the third party to be joined as well as after considering all relevant circumstances.” The Vienna Rules grant the arbitral tribunal broad discretion for decisions regarding joinder applications. It is in particular notable that the Vienna Rules do not provide a list of certain criteria that have to be met in order to grant a joinder application. Instead, the arbitral tribunal has to hear all parties involved, including the third party, and must consider all relevant circumstances. This approach allows the arbitral tribunal to be flexible and to take into account both the parties’ intentions and the circumstances of each individual case.173 Given the wide discretion of the arbitral tribunal, the question arises whether an implied advance consent is possible if one of the original parties or the third party refuse the joinder. Such a refusal is of particular interest if the third party is not bound by the arbitration agreement giving rise to the arbitration (like in the Case Scenario). Oberhammer/Koller support a joinder in this situation under certain circumstances: If the parties and third parties have concluded separate agreements which contain compatible VIAC arbitration agreements, often an additional connection between the parties involved and/or the underlying legal relationships, such as the existence of an economic unit or related arbitration agreements or legal relationships, will be required to show advance consent. Accordingly, reference to the Vienna Rules, and thus to Art 14, cannot be understood as a general advance consent to the joinder of third parties.174

Unsurprisingly, for Oberhammer/Koller the parties’ agreement on the application of the Vienna Rules, including Article 14, is not sufficient in itself for an implied

171 For

further compatibility requirements see above Sect. 6.5. more details on Clause R–7 (a) of the CIAR see Sect. 6.5.4. 173 Oberhammer/Koller in VIAC Handbook – Rules of Mediation and Arbitration. A Practitioner’s Guide (2019) Article 14, para. 4. 174 Oberhammer/Koller in VIAC Handbook – Rules of Mediation and Arbitration. A Practitioner’s Guide, Article 14, para. 18. 172 For

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advance consent. However, if the arbitration agreements are compatible and a connection can be established between the parties or the underlying legal relationships (Oberhammer/Koller mention group relationships or related arbitration agreements and legal relationships), an implied advance consent may be conceivable. For the Case Scenario, this interpretation of Article 14 of the Vienna Rules has the consequence that in the event of compatible arbitration agreements, there is definitely a strong possibility that an arbitral tribunal will grant a joinder on the basis of an implied advance consent, although the parties are not affiliated with each other (not part of a group of companies). A dependence of the subcontract on the main contract is undeniable, and both the factual and legal issues arise from the subcontractor’s breach of the employer’s code of business conduct and ethics. Consequently, it is the author’s view that a joinder without the express consent of the employer and the main contractor is admissible, and the arbitral award will bind the subcontractor based on the implied advance consent by agreeing on the application of the Vienna Rules which allow such joinder in the event of compatible arbitration agreements and related contracts. Kondev is also of the opinion that joinders pursuant to the Vienna Rules do not require the express consent of all parties, and that all parties, including the third party, must not be bound by the same arbitration agreement. Like the Swiss Rules and the ICDR Rules, the joinder provision is flexible. It does not demand the explicit consent of the parties to the joinder […] Furthermore, there is no explicit requirement that the main disputants and the third party to be joined should be bound by a single arbitration agreement and therefore it seems that the clause may be applied in a multi-contract context.175

Pitkowitz176 confirms that joinders are typically “sought by the respondent if he has a claim for recourse (e.g. against a sub-contractor or an insurance company).” He also emphasizes the practical relevance of third-party counterclaims. Indeed, a subcontractor may also be interested in a counterclaim against the main contractor if, for example, the latter urged the subcontractor to materially violate the employer’s code of business conduct and ethics to reduce or cut the costs in order to maximize profits. However, Pitkowitz interprets Article 14 of the Vienna Rules more conservatively and takes the view that full joinders (not third-party interventions) require the third party being bound by the same arbitration agreement: For a full joinder, the arbitration agreement must also be applicable to the third party. In other words, there must either be an arbitration agreement binding all parties or a submission of the third party to that arbitration agreement. However, in the case of a mere intervention, the third party does not need to be bound by the same arbitration agreement.177 175 Kondev,

Multi-Party and Multi-Contract Arbitration in the Construction Industry, p. 96. Multi-Party Arbitrations – Joinder and Consolidation Under the Vienna Rules 2013, in Klausegger/Klein/Kremslehner/Petsche/Pitkowitz/Power/Welser/Zeiler, Austrian Yearbook on International Arbitration 2015, p. 301 (p. 307). 177 Pitkowitz in Klausegger/Klein/Kremslehner/Petsche/Pitkowitz/Power/Welser/Zeiler, Austrian Yearbook on International Arbitration 2015, p. 311. 176 Pitkowitz,

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As it cannot be expected in the Case Scenario that the subcontractor will submit to the original arbitration agreement giving rise to the pending arbitration, a full joinder (third party as respondent) will not take place when applying the interpretation of Pitkowitz. Drude believes that no joinder should take place without the express consent of the third party (and the consent of the party applying for the joinder) if it is intended for the arbitral award to have prejudicial effect on any subsequent arbitrations:178 If there are multiple contracts containing arbitration clauses, it becomes more difficult. First of all, it will be necessary for any joinder to be even conceivable that the arbitration clauses in all contracts refer to the same set of rules and are compatible in all other respects as well: composition and constitution of arbitral tribunal, seat and language of arbitration, rules on the taking of evidence – to name just a few. In addition, there must be, as these more cautious authorities hold, some sort of nexus or interdependency between the various contracts or relationships. If these prerequisites are met, it will be possible to assume an implied consent. It follows that the consent of the requesting party and of the third person will then be sufficient for purposes of effecting the joinder.179

Consequently, there is no guarantee that a joinder would be granted by an arbitral tribunal in the Case Scenario but it is certainly a possibility. In practice, it will strongly depend on the arbitrators’ individual view. In terms of potential setting aside proceedings or the recognition and enforcement of the arbitral award, it must be stressed that the third party must be given the opportunity to participate in the constitution phase of the arbitral tribunal. If this opportunity is denied to the third party, issues with Article V (1.) (d) of the New York Convention may arise. Article 18 of the Vienna Rules sets forth the composition of the arbitral tribunal in multi-party proceedings. If the dispute is resolved by a panel of three arbitrators, the side of claimant and the side of respondent shall each jointly nominate a co-arbitrator. If the nomination of a joint co-arbitrator fails (no agreement reached either on the side of the claimant or respondent), the VIAC board shall appoint the co-arbitrator. The VIAC board also must decide in cases where the interests of the parties are so different that it is impossible for the third party to join either the claimant’s or the respondent’s side.180 It is important to note that the participation of the third party in the appointment procedure does not constitute consent to join the arbitration. The third party still has the opportunity to dispute the admissibility of the joinder. After its constitution, the arbitral tribunal decides on the admissibility of the joinder. A joinder is also possible after the constitution of the arbitral tribunal but it must be emphasized that the third party either has to expressly waive its right to participate in the constitution phase of the arbitral tribunal or takes part in the arbitration without raising any objection

178 Drude, Post-M&A Arbitration and Joinder: Process and Drafting Considerations for M&A Transactions, SchiedsVZ (German Arbitration Journal) 2017, p. 224 (p. 232). 179 Drude, SchiedsVZ (German Arbitration Journal) 2017, p. 232 et sq. 180 Oberhammer/Koller in VIAC Handbook – Rules of Mediation and Arbitration. A Practitioner’s Guide, Article 14, para. 31 et sq.

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(implicit waiver).181 In order not to create any issues with Article V (1.) (d) of the New York Convention, it is recommended attaining the explicit consent of the third party with regard to the composition of the arbitral tribunal. Needless to say, if the parties expressly exclude joinders in their contracts (e.g. based on confidentiality concerns), an implied advance consent cannot be established. The same holds true if the parties come to an agreement deviating from Article 14 of the Vienna Rules (e.g. establishment of different criteria for a joinder, etc.).182 In relation to the other rules of arbitration institutions described in this monograph, the Vienna Rules do not only allow the joinder of a third party as claimant or respondent but also authorize the arbitral tribunal to grant other types of third-party participation instruments, such as third-party notifications and third-party interventions.183 For the Case Scenario, this means that the subcontractor may join the main contractor’s side to defend against the employer’s claims based on the subcontractor’s breach of the code of business conduct and ethics. However, according to the Austrian Supreme Court184 and Austrian legal writing,185 the arbitral award would only have a binding effect on the subcontractor (third-party interventionist) if he was a party to the original arbitration agreement concluded between the employer and main contractor. As this is not the case in the Case Scenario, the arbitral award will not have a binding effect on the subcontractor if he joins the arbitration between the employer and the main contractor as third-party interventionist, and the applicable lex arbitri is Austrian law.

181 Oberhammer/Koller

in VIAC Handbook – Rules of Mediation and Arbitration. A Practitioner’s Guide, Article 14, para. 27. 182 Oberhammer/Koller in VIAC Handbook – Rules of Mediation and Arbitration. A Practitioner’s Guide, Article 14, para. 6. 183 Oberhammer/Koller in VIAC Handbook – Rules of Mediation and Arbitration. A Practitioner’s Guide, Article 14, para. 8; Drude, SchiedsVZ (German Arbitration Journal) 2017, p. 232. 184 Austrian Supreme Court (OGH), 1 October 2008, 6 Ob 170/08f, para. 2.3, https://www.ris. bka.gv.at/Dokument.wxe?Abfrage=Justiz&Dokumentnummer=JJT_20081001_OGH0002_0060 OB00170_08F0000_000 (last accessed on 26 April 2020): “In der Literatur […] wird die Streitverkündung im Schiedsverfahren grundsätzlich für zulässig angesehen, eine Bindungswirkung zumindest jedoch dann abgelehnt, wenn der Streitverkündungsempfänger nicht auch Partei der Schiedsvereinbarung war […] Dem ist zu folgen, weil einerseits die Zuständigkeitsbegründung eines Schiedsgerichts ein bewusstes und unzweideutiges Opting-out der Schiedsparteien aus der staatlichen Gerichtsbarkeit voraussetzt und andererseits den Schiedsparteien weitgehende Mitwirkungsrechte an der Gestaltung des Schiedsverfahrens und insbesondere auch an der Bestellung der Schiedsrichter zukommen […] Es wäre daher mit Art 6 EMRK schwer vereinbar, einen Dritten in ein derartiges Verfahren hineinzuzwingen bzw ihm dessen Ergebnis zu überbinden, ohne dass er die den Schiedsparteien zukommenden Rechte hätte wahrnehmen können. Damit kommt eine Bindung der Erstbeklagten an das (inhaltliche) Ergebnis des Schiedsspruchs bereits aus diesen grundsätzlichen Überlegungen nicht in Betracht.”. 185 Welser, M&A Post Closing Issues: Arbitration and Third Party Joinder (2011) p. 11, https://www. cerhahempel.com/fileadmin/docs/publications/Welser/Beitrag_Welser_2011.pdf (last accessed on 26 April 2020); Oberhammer/Koller in VIAC Handbook – Rules of Mediation and Arbitration. A Practitioner’s Guide, Article 14, para. 19.

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6.7 Human Rights Arbitration A new set of arbitration rules focusing on human rights-related disputes may not be overlooked. The final text of the Hague Rules on Business and Human Rights Arbitration (the “Hague Rules”) was officially launched on 12 December 2019. The Hague Rules were drafted and developed by the Human Rights Arbitration Working Group, a private group comprising of international practicing lawyers and academics. The group was assisted by the Centre for International Legal Cooperation. The Hague Rules are based on the Arbitration Rules of the United Nations Commission on International Trade Law (“UNCITRAL Arbitration Rules”) which were modified in order to specifically adapt the provisions to human rights-related disputes.186 Para. 2 of the Hague Rules’ Preamble stipulates the two major purposes of the Hague Rules. They shall serve as a possible remedy for those affected by the human rights impacts of business activities (claims by victims of human rights violations) and provide businesses with a mechanism for addressing adverse human rights impacts (disputes between companies, in particular in relation to human rights violations along a supply chain). The Commentary to para. 2 of the Hague Rules’ Preamble reiterates that the Hague Rules “intend to provide both a means for access to remedy for rights-holders affected by business activities and a human rights compliance and risk management strategy for businesses themselves.” Business-related human rights issues may include – Damage to people’s health through pollution, environmental accidents and health and safety failures – Use of forced labor or child labor, or underpayment of workers – Provision of unsafe or unhealthy working conditions – Forced or involuntary displacement of communities, including indigenous communities – Use of excessive force by security guards protecting assets – Discrimination against employees, for example by race, gender or sexuality – Depletion or contamination of water sources that local communities depend upon.187

Pursuant to Article 1 (5) of the Hague Rules, the International Bureau of the Permanent Court of Arbitration (“PCA”) serves as repository and may also provide registry and secretariat services. Para. 6 of the Commentary to Article 1 of the Hague Rules clarifies that an arbitration under the Hague Rules may also be administered by other arbitration institutions if they have the capacity and expertise to do so. 186 Hague Rules on Business and Human Rights Arbitration (December 2019) p. 1 et sqq., https:// www.cilc.nl/project/the-hague-rules-on-business-and-human-rights-arbitration/ (last accessed on 10 May 2020); Cleary Gottlieb, The Launch of the Hague Rules on Business and Human Rights Arbitration (29 January 2020) p. 1 et sq., https://www.clearygottlieb.com/-/media/files/alert-memos2020/the-launch-of-the-hague-rules-on-business-and-human-rights-arbitration.pdf (last accessed on 10 May 2020). 187 KPMG, Addressing Human Rights in Business. Executive Perspectives (December 2016) p. 2, https://assets.kpmg/content/dam/kpmg/xx/pdf/2016/11/addressing-human-rights-in-business. pdf (last accessed on 10 May 2020).

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Article 2 (2) of the Hague Rules describes the Hague Rules’ relationship with the New York Convention and expressly stipulates that “[t]he parties agree that any dispute that is submitted to arbitration under these Rules shall be deemed to have arisen out of a commercial relationship or transaction for the purposes of Article I of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards”. It is noteworthy that the presiding or sole arbitrator in arbitrations according to the Hague Rules must have demonstrated expertise in international dispute resolution and in areas relevant to the dispute (e.g., business and human rights law and practice).188 All of the arbitrators must comply with the Hague Rules’ own code of conduct.189 Article 19 (1) of the Hague Rules provides that the arbitral tribunal is authorized to “adopt special procedures appropriate to the number, character, amount and subject matter of the particular claims under consideration.” This provision empowers the arbitral tribunal to not only grant joinders and consolidations but to allow class arbitrations as well, “taking into account the particular facts and circumstances of the case, including the terms of the arbitration agreement and the context in which it was concluded.”190 Article 19 (2) and (3) of the Hague Rules deals with the joinder of third persons or third party beneficiaries. An arbitral tribunal may grant a joinder if the third person is a party or a third party beneficiary of the underlying contract that includes the relevant arbitration agreement. By agreeing to the Hague Rules, the parties consent to such potential joinder (implicit advance consent).191 Third parties or third party beneficiaries could be classes of victims, in particular employees and workers, that are directly affected by breaches of codes of conducts and ethics. Relating thereto, the Hague Rules contain a model clause allowing third party beneficiaries to bring an arbitration against one or more of the parties: Defined class of third party beneficiaries entitled to arbitrate: The parties irrevocably consent that any dispute, controversy or claim arising out of or in relation to the obligations undertaken by the parties under this [contract] [agreement] [treaty] [instrument] [rule] [decision] [relationship] for the benefit of: [insert defined class of third party beneficiaries] may be submitted by any such third person to arbitration in accordance with the Hague Rules on Business and Human Rights Arbitration. Defined scope of third party claims entitled to be arbitrated: The parties irrevocably consent that any dispute, controversy or claim arising out of or in relation to: [insert defined subject matter, which may include: (a) selected national laws; (b) selected international instruments;

188 Article

11 (1) (c) of the Hague Rules. 11 (2) of the Hague Rules. 190 Para. 2 of the Commentary to Article 19 of the Hague Rules. 191 Para. 4 of the Commentary to Article 19 of the Hague Rules. 189 Article

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(c) other industry or supply chain codes of conduct, statutory commitments or regulations from sports governing bodies, or any other relevant business and human rights norms or instruments] may be submitted by any third party beneficiary of such [law(s)] [instrument(s)] to arbitration in accordance with the Hague Rules on Business and Human Rights Arbitration.192

The arbitral tribunal may also grant a joinder of third persons if the underlying contract (not the arbitration clause contained in the contract) grants certain rights to third persons. “In that case, it will be for the arbitral tribunal to balance the interest of such third persons in joining the proceedings against the possible competing interests of the existing parties to the arbitral proceedings that such third persons should not be allowed to participate.”193 The arbitral tribunal may even invite or allow third persons (not parties) to file written submissions regarding a matter related to the dispute between the parties. Interested third persons may apply to the arbitral tribunal and have to provide, among other things, a description of the nature of their interest.194 This provision could in practice be very interesting for NGOs intending to intervene in the proceedings.195 As business-related human rights issues may encompass environmental and climate change-related violations, the Hague Rules should be considered as arbitration framework for environmental disputes as well. In this context, certain environmental NGOs could be included in the defined class of third party beneficiaries entitled to arbitrate.

192 Hague Rules on Business and Human Rights Arbitration, p. 106, https://www.cilc.nl/project/ the-hague-rules-on-business-and-human-rights-arbitration/. 193 Para. 3 ii. of the Commentary to Article 19 of the Hague Rules. 194 Article 28 (1) and (2) of the Hague Rules. Para. 3 determines that “[i]n determining whether to allow such a submission, the arbitral tribunal shall take into consideration, among other factors it determines to be relevant: (a) Whether the third person has a significant interest in the arbitral proceedings; and (b)The extent to which the submission would assist the arbitral tribunal in the determination of a factual or legal issue related to the arbitral proceedings by bringing a perspective, particular knowledge or insight that is different from that of the parties.”. 195 Cleary Gottlieb, The Launch of the Hague Rules on Business and Human Rights Arbitration, p. 4, https://www.clearygottlieb.com/-/media/files/alert-memos-2020/the-launch-of-thehague-rules-on-business-and-human-rights-arbitration.pdf.

Chapter 7

Conclusion

7.1 Conclusion Regarding Hypothesis 1 The Shareholder Primacy Model is still dominant in the USA. Although the management of a US corporation is legally required to primarily pursue the best interests of the shareholders, the pursuit of the stakeholders’ interests is legally possible if it also serves the shareholders’ interests. Taking into account conscious consumerism, climate change activism and the ever-increasing number of shareholders and investors demanding the implementation of stakeholder-related policies to generate a longterm value, it seems that in the future it will occur more frequently that the pursuit of stakeholder interests will be in the interest of the shareholders as well, due to impacts on the companies’ financials and competitive advantages. Recent developments, like the Business Roundtable’s Statement on the Purpose of a Corporation, indicate a change of mindset among the CEOs of the most influential US corporations by expressly acknowledging that the pursuit of stakeholder interests is interrelated with the future success of the companies. With respect to the four US companies analysed in this monograph, Walmart, ExxonMobil and Apple are signatories of the Business Roundtable’s Statement on the Purpose of a Corporation. Against this backdrop, it should be emphasized that ExxonMobil’s Standards of Business Conduct are committed to the creation of a long-term value and expect superior returns by acting profitably and responsibly. Hence, there seems to be no contradiction between acting profitably and responsibly. Although business codes of conduct and ethics are mandatory for listed companies on the basis of the SOX, SEC regulations and stock exchanges’ listing requirements, it must be pointed out that such codes are predominantly inward-looking and have little regard for stakeholders, the environment and supply chain issues. Some researchers even concluded that in many cases the codes serve the primary purpose of windowdressing. However, larger US corporations, such as Walmart, ExxonMobil and Apple, increasingly put serious effort into their ethics and CSR policies.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 A. Peter, CSR and Codes of Business Ethics in the USA, Austria (EU) and China and their Enforcement in International Supply Chain Arbitrations, https://doi.org/10.1007/978-981-33-6073-0_7

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It is striking that most of the top US corporations disclose annual CSR reports, although this is legally not mandatory. Such approach indicates that CSR reports serve the interests of the investors and shareholders. A KPMG study confirmed the investors’ and shareholders’ interest in sustainability. This may be interpreted as evidence for the impact of CSR on the companies’ finances. In terms of financial impacts of ethics and CSR policies on the financial performance of companies, several US studies and surveys arrived at positive conclusions. A global survey came to the result that a vast majority of investors expect to achieve an outperformance from CSR in three or more years. A meta-study found a positive impact of CSR measures on stock prices. The same meta-study established the positive effects of CSR activities on the companies’ reputation and job satisfaction leading to persistent value maximization. It was found as well that good corporate environmental practices would ultimately give rise to competitive advantages and better corporate performance. However, it should be stressed that companies have to focus on material sustainability aspects in order to achieve higher abnormal stock returns. Thus, it is absolutely crucial to analyse which CSR topics are material. This can vary widely depending on which industry the company belongs to. A long-term study from 1993 to 2010 demonstrated a substantially higher annual abnormal performance of high sustainability firms. A study conducted by BCG established that top CSR performers achieved both higher valuations and higher margins in comparison to median CSR performers. However, another study discovered no major impact of sustainability index-related events on stock prices and returns. Pursuant to Austrian law, the interests of shareholders, employees and the public are on the same level. The interests of the company itself are on top of the hierarchy. The interests of the company may in practice be very different from the interests of some investors/shareholders who may only be interested in speculations and shortterm profits. Section 70 of the AktG does not require a strict profit maximization. The management’s focus should be on the company’s long-term viability and existence. CSR measures are privileged by the business judgment rule as long as they are, ex ante, in favour of the company’s interest. The ACCG outlines the significance of stakeholder interests and sustainability and intends to establish a system of corporate governance which creates a sustainable long-term value. It is noteworthy that the four Austrian companies analysed in this monograph clearly connect long-term business success with the implementation of their ethics and CSR policies. OMV’s Code of Conduct acknowledges that “business success can only be achieved and maintained over the long term by acting responsibly and sustainably.” STRABAG’s Code of Conduct mentions that in “our business decisions, we consider the environment and social issues, as we do in managing our resources and our infrastructure.” Moreover, STRABAG aims to ensure its longterm existence by “considering the needs of people, the environment and society in strategic decisions.” voestalpine’s CSR report emphasizes the long-term value of a responsible and sustainable corporate governance. Erste Group’s Code of Conduct defines corporate governance as a tool for managing and controlling businesses “in such a way as to guide them towards responsible, sustainable and long-term value creation.”

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A survey with more than 600 companies conducted by members of the University of Graz, Austria, demonstrated that CSR can at least pay off in the long-term. Many interviewees mentioned profit-oriented motives (e.g. securing business and location in the long-term; customer acquisition and retention; the company’s reputation; cost advantages by energy and resource savings) for CSR measures. In the same survey, most of the Austrian CSR leaders believed in CSR as a competitive advantage for the business location Austria. Article 5 of the Chinese Company Law expressly stipulates that companies must conform to social morality, business ethics and undertake social responsibility. Compliance with the CCCG is mandatory for listed companies. Long-term profit maximization and the simultaneous pursuit of stakeholder interests are not contradictory in terms of the CCCG. The CCCG dedicates an entire chapter to CSR issues and expressly focuses on environmental aspects as well. This is no surprise as China’s 13th Five-Year Plan (2016–2020) strongly focuses on green finance and environmental improvements. Furthermore, the CCCG urges companies to connect directors’ and supervisors’ incentives with the achievement of certain CSR targets. It deserves to be mentioned as well that China grants tax incentives (3 + 3 years tax holiday) in relation to specific CSR activities such as certain environmental protection and energy/water conservation projects. Further proof for China’s focus on CSR is the unique key indicator developed by the SSE: the SCVPS (social contribution value per share) describes the value creation of a company on CSR performance. Listed companies are encouraged to include the SCVPS in their CSR reports. Moreover, the SSE Notice provides that CSR reports should demonstrate how to generate high economic returns for the shareholders. This makes it manifest that for the SSE there is not a conflicting relationship between long-term profit maximization and material CSR measures. SASAC takes the view that the implementation of CSR will eventually enhance the companies’ competitiveness. Hence, SASAC encourages companies to integrate CSR aspects in the companies’ corporate governance and business strategy. It is worth mentioning, too, that PetroChina’s CSR policy expressly reconciles profit maximization for the shareholders with value maximization for the stakeholders. PetroChina intents to create a win-win situation for both the shareholders and the stakeholders. A long-term study from 2006 to 2016 confirmed that investors’ revenues increase as CSR practices increase. The same study also confirmed a pattern of a performanceoriented and business-focused CSR design. Another study established that continuous and long-term CSR activities may reduce negative impacts on the companies’ performance resulting from certain negative events. An ever-increasing number of scholars and practitioners accepts that CSR measures have at least a mild positive effect on the financial performance of companies. Some researchers take the view that CSR measures are largely defensive in nature to cover other irresponsible ESG activities. A survey conducted by the CFA Institute and the Principles for Responsible Investment Initiative showed that by 2022, Chinese investors expect environmental aspects to have a similarly strong impact on share prices as governance aspects.

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The same survey also revealed that Chinese investors believe that all three ESG components would affect the share prices much more strongly by 2022. It is evident that the greater the impact of CSR measures is on a company’s financial performance, the more companies and their managers will be inclined to implement CSR projects. Therefore, legislators in all of the three countries analysed should consider creating new tax incentives such as a noticeable reduction of the corporate tax rate to 10% (the standard corporate tax rate in China and Austria is 25% and 21% in the USA) if the companies’ CSR reports fulfil certain quality criteria, such as (i) being in accordance with the comprehensive (not core) option of the GRI Standards, (ii) a year-by-year comparison (historical and current data) of a comprehensive list of industry-specific key quantitative indicators including shortterm, medium-term and long-term target figures and supply chain-related data, (iii) sufficient internal and external control mechanisms, and (iv) an independent third party assurance which covers the entire supply chain and is not just a limited assurance (like in so many cases). Instead, a substantially higher degree of assurance is required. In combination with one of the most important drivers for CSR, the increasing stakeholders’ pressure (in particular customers, consumers, NGO groups and green investors; the climate change will have a major impact on business models as well; media coverage of both positive and negative material CSR events is essential, too, as a good CSR performance needs to pay off, and a negative CSR performance ought to have a negative impact on a company’s finances), tax incentives could be decisive in forcing managers to implement high-quality CSR initiatives in all three CSR sectors (governance, environmental, social) in order to maximize the medium and long-term profits of the company. Moreover, managers need to be “motivated” to develop and implement CSR measures by making parts of their compensation or bonus payments dependent on the fulfilment of verifiable and quantified CSR targets, such as carbon emission reductions. As mentioned above in Sect. 5.1.2, Article 62 of the CCCG requires the installation of an incentive mechanism promoting sustainable development. The suggested incentive system for the directors in combination with comprehensive third party assurances and the disclosure of verifiable key quantitative indicators and target figures will avoid/reduce window-dressing/greenwashing and certainly enhance the quality and comparability of CSR reports. All things considered, both the implementation of codes of business conduct and ethics and CSR measures (in particular social and environmental CSR issues) increasingly becomes essential for a long-term profit maximization. Hence, the first hypothesis can be confirmed.

7.2 Conclusion Regarding Hypothesis 2

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7.2 Conclusion Regarding Hypothesis 2 Based on the SOX, SEC regulations and the listing requirements of the NYSE and Nasdaq, the adoption of corporate codes of ethics is mandatory for US-listed companies. However, due to being a direct answer to the US accounting scandals (Enron, WorldCom, etc.), the minimum requirements for such codes do not concentrate on social, environmental and supply chain-related issues. The SSE requires listed companies to include a code of business ethics in their social responsibility strategic plans. No details about the contents of such code are provided by the SSE. Unlike US law, both Chinese and Austrian law do not contain provisions mandating the adoption of a code of business conduct and ethics. Yet, it must be emphasized that both China and Austria provide corporate governance codes dealing in detail with topics covered by the mandatory US code of ethics. Moreover, these codes of corporate governance pay attention to stakeholder-related aspects as well. In this context, it should be highlighted that the CCCG dedicates an entire chapter to CSR aspects, such as stakeholders, environmental protection and social responsibility. C-Rule 62 of the ACCG even stipulates that an external institution shall evaluate the compliance with the rules of the ACCG at least every three years. In terms of CSR reporting, the EU has the strictest system. The NFI Directive was implemented in Austria by the NaDiVeG. Stock exchange-listed companies, banks and insurance companies employing more than 500 employees during the financial year shall issue a detailed non-financial statement explaining non-financial key performance indicators, assessing which non-financial aspects are material in relation to the company’s performance, and demonstrating supply chain-related due diligence processes. Companies may rely on the GRI Standards to fulfil the CSRrelated disclosure obligations. Although SMEs are not covered by the NFI Directive and the NaDiVeG, the reporting companies must assess whether the SMEs’ activities along the supply chain have a negative impact on CSR aspects. Material supply chain issues must be disclosed by the reporting companies. Chinese law does not stipulate mandatory reporting requirements. Nevertheless, the SZSE mandates CSR reporting for companies listed on the Shenzhen 100 Index. The SSE requires CSR reporting for companies listed on the SSE Corporate Governance Index, companies that have overseas listings as well and companies in the financial sector. In 2009, SASAC instructed all central government-controlled SOEs to issue CSR reports within three years. The situation in the USA is quite different. CSR reporting is neither stipulated by law nor by the listing requirements of the NYSE and Nasdaq. However, in the event that CSR information is material in terms of the disclosure requirements under the US federal securities laws, such information must be included in the listed companies’ annual financial reports. Window-dressing and greenwashing practices can best be avoided if companies not only disclose their qualitative and quantitative ethics and CSR targets and visions but also (i) describe specific implementation and review processes, (ii) show evidence for the implementation of their ethics and CSR policy, and (iii) provide verifiable key

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quantitative performance indicators on material ESG aspects using a year-by-year comparison covering the entire supply chain. With the exception of Berkshire Hathaway (no CSR report was prepared), all of the companies analysed, more or less, fulfil these criteria. The following analysis results are in particular worth pointing out: – In terms of development, oversight and implementation of the corporate ethics policies, some companies installed ethics and compliance officers. For example, Walmart has its own global chief ethics and compliance officer. In Austria, these functions are usually performed by the companies’ internal compliance departments. Supervisory boards of Austrian companies are also significantly involved. In particular, OMV’s chief compliance officer has to report to the supervisory board. Non-financial reports must be audited by the supervisory board. Audit committees of Austrian companies have to perform an audit as well if the nonfinancial information is disclosed in the company’s management report. In the USA, independent audit committees play a significant role in the monitoring of the companies’ ethics and compliance programs. Although this seems less common in China, Huawei’s audit committee is responsible for monitoring the adherence of its Business Conduct Guidelines and for evaluating the effectiveness of Huawei’s ethics & compliance function. – Specialized Ethics and CSR committees comprised of independent outside directors or supervisory board members are unfortunately not the rule in the companies analysed. Positive exceptions are PetroChina and ExxonMobil. PetroChina’s HSE Committee, among other things, issues recommendations to the board of directors in relation to major decisions. It is comprised of two non-executive (but non-independent) directors and PetroChina’s President. This clearly shows that HSE issues have a great relevance for PetroChina. ExxonMobil’s Public Issues and Contribution Committee, which is comprised of independent directors, is involved in Exxon Mobil’s policies, programs and practices on public issues of significance and safety, security, health, environmental and social issues. – In China, Party committees have a leadership role in SOEs and are crucial supervising bodies in privately owned enterprises monitoring the observance of state laws and regulations. Huawei’s Party committee is called committee of ethics & compliance. This clearly indicates that a Party committee can play a significant role in the implementation of ethics and CSR policies. Given that Article 5 of the Chinese Company Law makes it necessary to consider business ethics and CSR when making business decisions, the Party committee may be crucial for enforcing this law within a company. – Anonymous whistleblower mechanisms are the standard among the companies analysed. Usually, the whistleblower mechanisms are internal. However, it should be pointed out that Walmart offers a hotline staffed by an organization which is not affiliated to Walmart. Berkshire Hathaway’s employees may report violations of Berkshire Hathaway’s Code of Business Conduct and Ethics to a third party organization. STRABAG introduced an external ombudsperson, and Erste Group offers an externally hosted hotline to report violations of the Erste Group’s Code

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of Conduct. Applaudably, STRABAG’s whistleblower system may also be used by third parties, such as contractors and subcontractors and other supply chain members and their employees. – Most of the companies analysed implement their ethics and CSR policies along the supply chain. Business partners are contractually bound to adhere to the respective supplier codes of conduct: In particular, Walmart issued its Standards for Suppliers, Apple adopted a Supplier Code of Conduct and a Channel Member Code of Conduct, STRABAG has its Business Compliance Guidelines for Business Partners, and it is planned to adopt a new Supplier Code of Conduct, voestalpine relies on its SSCM and the Code of Conduct for voestalpine Business Partners, Erste Group approved its Ethical and Environmental Code of Conduct for Suppliers of Goods and Services, Huawei introduced both its Supplier Code and Partner Code, and Ping An follows its Sustainable Supply Chain Policy. – The implementation of ethics and CSR policies along the supply chain is usually achieved by means of contract, supplier due diligences prior to the commencement of a business relationship, regular on-site visits to production facilities or construction sites, regular supplier third party audits and assessments, and comprehensive questionnaires. Walmart expects its suppliers to pay for the audits but makes an exception for small suppliers who are only required to complete a self-assessment questionnaire. Apple performs multi-day on-site visits, develops corrective action plans and carries out on-site verifications of improvements. Ping An set up an innovative rewards and punishment system pursuant to which outstanding suppliers are commended, and business relations with suppliers that have low CSR ratings and a record of policy violations may be terminated. With regard to a vast majority of the companies analysed, core policy violations may lead as far as to contractual terminations and the removal of the violating parties from a supply chain. It is worthwhile to mention that Article 23 of the SZSE CSR Instructions stipulates that companies shall urge their customers and suppliers to comply with the company’s code of business conduct and ethics or discontinue business relations with them. This is a very strong signal against window-dressing and greenwashing along the supply chain. – Quantitative performance indicators relating to key ESG figures are disclosed by almost all of the companies analysed satisfactorily. It is commendable that ExxonMobil disclosed CSR data over a 10-year period to demonstrate trends over time. It is also praiseworthy that OMV’s sustainability report 2019 contains extraordinarily comprehensive lists of quantitative performance indicators on 20 pages. Usually, quantitative performance indicators of supply chain members are not disclosed. However, Walmart provided key figures (e.g. GHG emissions) in relation to the supply chain as well, although a year-by-year comparison was not disclosed. Interestingly, Ping An presented a rating for the CSR performance of its suppliers and the total amount of suppliers’ eliminations from the supply chain in the year 2019. The average score of supplier assessment was 68.8 (100-point scale), and 113 suppliers were eliminated. The average score, which is not too high, indicates a realistic rating, and the elimination of such a high number of suppliers demonstrates that Ping An takes CSR very seriously.

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In general, it is notable that in the USA, Austria and China a vast majority of CSR reports do either only contain a limited assurance or no assurance from an independent third party at all. The NFI Directive left it to the EU member states to introduce legal provisions obliging the reporting companies to externally and independently verify the contents of their CSR statements. Unfortunately, Austria did not introduce such a legal requirement for an assurance provided by an external institution. Furthermore, CSR reports tend to not disclose negative information, avoid displaying supply chain-related risks and quantitative performance indicators, and reporting companies do rather not include non-financial targets. It is unfortunate as well that most of the reporting companies that decide to prepare a CSR report in accordance with the GRI Standards do not select the comprehensive option. With regard to the mandatory US code of ethics, material misstatements or omissions of material facts in a listed company’s annual report may give rise to litigations based on SEC Rule 10b-5. In Austria, incorrect or incomplete information about ethics and CSR policies may lead to criminal consequences (Sect. 163a (1) (1.) of the StGB) and civil claims in terms of Sect. 1311 of the Austrian Civil Code, if the information is material and contained in a report directed at the public, shareholders or supervisory board members. However, the requirements for a liability are very high. In China, CSR reports of listed companies containing false, misleading or incomplete information that causes losses to investors may result in a joint liability for directors, supervisors, senior managers and the controlling shareholder(s) (Article 69 of the Chinese Securities Law). In the author’s view, it should be imposed by law that in relation to CSR reports the reporting companies have to provide comprehensive assurances by an independent and external third party which may be compared to assurances of financial reports (not just a limited assurance). The assurance may be provided by auditing firms. However, there is the risk that auditing firms may not have enough expertise in ethics and CSR matters. Hence, CSR-focused governmental agencies (comprised of certified CSR experts) should be established to carry out an independent, comprehensive and competent evaluation. Internally, ethics officers (on a daily basis) and a special Ethics and CSR Committee comprised of independent non-executive directors or supervisory board members, including an ethics and CSR expert (in analogy to the financial experts in audit committees), should be responsible for the implementation, review and further development of a company’s ethics and CSR policy. Moreover, the Ethics and CSR Committee ought to be the final recipient for serious and credible whistleblowers’ complaints as well. An overload of responsibilities for audit committees should be avoided. Ethics officers would ideally be first in line to process such complaints and forward the serious and credible ones to the Ethics and CSR Committee. Anonymous whistleblowing hotlines and online platforms (preferably run by external and independent third parties) are crucial for identifying violations of a company’s ethics and CSR policy. They ought to be installed along the entire supply chain. Stakeholders and employees of suppliers, contractors, subcontractors and lower-tier supply chain members should also be given the opportunity to report policy violations using the chain leader’s whistleblower mechanism. Section 922 of

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the Frank-Dodd Act serves as role model in terms of providing monetary incentives for whistleblowing activities that lead to monetary sanctions against the company. The implementation of an ethics and CSR policy should be guaranteed along the entire supply chain by means of contractual commitments. Breaches of core provisions of a code of business conduct and ethics, which ideally contains all of the material ESG aspects relevant for the respective industry, ought to give rise to claims for damages and contract terminations (after an opportunity to remediate). Arbitration is the preferable means of dispute resolution in international supply chain disputes, as the New York Convention guarantees the recognition and enforcement of arbitral awards almost worldwide. The implementation along the supply chain should regularly be evaluated by means of due diligences (prior to the contract is signed), the preparation of questionnaires, unannounced on-site visits (e.g. by ethics officers) and audits and assessments provided by external and independent third parties paid by the respective supply chain members. These requirements ought to be mirrored in all of the contracts along the supply chain. Reports of on-site visits and third party assessment results should be reviewed by the Ethics and CSR Committee. To guarantee certain minimum standards in relation to CSR reporting and the contents of codes of business conduct and ethics, either the enactment of laws or the adoption of minimum standards in corporate governance codes or listing requirements of stock exchanges is required. In the USA, the SOX, SEC regulations and the NYSE’s and Nasdaq’s listing requirements stipulate minimum standards for a corporate code of ethics. In Austria, the NaDiVeG (based on the NFI Directive) provides detailed rules for non-financial reports. In China, the CCCG contains comprehensive CSR provisions and both the SSE (SSE Notice and SSE Guidelines) and the SZSE (SZSE CSR Instructions) provide detailed CSR standards and guidelines. Taking everything into account, the second hypothesis can be confirmed. This monograph shows that leading companies developed comprehensive ethics and CSR policies that by far exceed legal minimum standards. This is due to the everincreasing stakeholders’ pressure. However, certain minimum legal standards are required to ensure that the various CSR reports can be compared and verified. To prevent window-dressing and greenwashing practices, certain internal and external (independent) control mechanisms and laws giving rise to both civil and criminal sanctions are necessary. Letting loose the invisible hand of Adam Smith would definitely lead to more window-dressing and greenwashing, as the pressure of the stakeholders and their reactions to window-dressing and greenwashing is still not strong enough to guarantee honest behaviour. This could change in the future due to the ever-growing climate change which in all likelihood will inevitably lead to the emergence of environmentally-oriented business models as a prerequisite for business success .

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Fig. 7.1 The “Perfect” ethics and CSR system

7.3 Conclusion Regarding Hypothesis 3 Contracts can give a binding effect to codes of business conduct and ethics along the entire supply chain. Usually, chain leaders are not in a direct contractual relationship with the lower-tier supply chain members. Therefore, a chain leader may only pursue

7.3 Conclusion Regarding Hypothesis 3

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claims against lower-tier supply chain members if they provide him with a collateral warranty, or the subcontracts and sub-subcontracts contain a third party rights clause in his favour. English law (or law based on it such as the law of Singapore) is often selected in international contracts as the governing law. Although English law does not award damages for loss of reputation, damages may be recovered if they arise from a breach of contract which leads to a loss of reputation that causes financial loss. However, the requirements of remoteness, causation and mitigation must be satisfied. In practice, this may be insurmountable. Direct and indirect loss of profits are often excluded in contracts as well. Hence, the inclusion of liquidated damages clauses is recommended. In terms of violations of a supplier code of conduct, such clauses must make clear which violations will give rise to a liquidated damages claim. When drafting a liquidated damages clause, attention needs to be paid to the fact that it may be rendered wholly unenforceable if the fixed amount of damages is held equivalent to a penalty. This is a major difference to civil law jurisdictions which allow contractual penalties. Recent developments in English case law (Cavendish Square Holdings BV v. Talal El Makdessi) indicate a somewhat softer approach in terms of interpreting a clause as a penalty. Courts may even take the legitimate interests of non-contracting third parties into account. Such a third party may be the public at large. In all likelihood, violations of core provisions of a legally binding supplier code of conduct, such as child and slave labour and severe environmental breaches (e.g. violations of emissions trading systems) are against the legitimate interest of the public at large and other stakeholders. In all probability, supply chain disputes will involve multiple parties, contracts and arbitration agreements. For example, in the construction industry an employer might commence an arbitration against the main contractor who has a recourse claim against a subcontractor. It is conceivable as well that the main contractor initiates an arbitration against the subcontractor who in turn holds liable a sub-subcontractor or supplier. A consolidation of the two pending arbitrations would most likely always be in the interest of the party who intends to assert a recourse claim against another member of the supply chain (main contractor in the first scenario and subcontractor in the second scenario). In both scenarios, the parties are not bound by the same arbitration agreement (this is quite usual in the construction industry). A consolidation prevents the rendering of inconsistent arbitral awards and provides more efficiency in terms of hearings and the proceedings for the taking of evidence (e.g. witnesses only have to give evidence in one arbitration and do not have to repeat there testimonies in other arbitrations). Provided that the arbitration agreements are compatible, such a consolidation is possible even in the event that the two other parties (the employer and the subcontractor in the first scenario and the main contractor and the sub-subcontractor in the second scenario) refuse a consolidation. By agreeing on institutional arbitration rules that allow a consolidation under certain circumstances (without the parties’ express consent after the commencement of the pending arbitrations), the parties’ advance consent for a consolidation of two or more pending arbitrations may be implied if those circumstances are met, and the arbitration agreement does not contain any contrary terms.

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In the supply chain context, it may be argued that subcontracts (or subsubcontracts) are ancillary or subordinated contracts to the main contract between the employer and the main contractor. They usually depend on the contents of the main contract and include back-to-back provisions passing to the subcontractor/subsubcontractor key terms of the main contract and specific obligations of the main contractor/subcontractor. Based on efficiency considerations, it is arguable as well that supply chain members are involved in the same legal relationships. If the legal and factual issues in the pending supply chain arbitrations are mainly the same, the term “same legal relationships” ought to be interpreted broadly as a series of bilateral contracts that are related to one and the same project. Moreover, the contracts beneath the main contract usually contain mirroring back-to-back provisions. If there are common questions of law or fact in all of the pending arbitrations, the argument should be supported, too, that supply chain disputes (in particular construction supply chain disputes) arise out of a series of related transactions. In Hong Kong, the Court of First Instance granted the main contractor’s application for the consolidation of three pending arbitrations involving the employer, the main contractor and two subcontractors. The two subcontracts flowed from the main contract, and all of the three contracts involved had to be regarded as one series of transactions. In addition, the subcontracts contained material back-to-back provisions. Following all of these arguments, the institutional arbitration rules of SIAC, AIAC, CIETAC and HKIAC allow for a consolidation of supply chain disputes even if a party refuses a consolidation, provided that the arbitration agreements are compatible and do not contain terms which expressly disallow a consolidation. In arbitral proceedings in accordance with the CIAR an R-7 arbitrator has to decide on a consolidation if the parties are unable to agree to consolidate related arbitrations. With regard to joinders, the wording of the ICDR Rules is very flexible and does not require the parties’ express consent (an implied advance consent by agreeing to the ICDR Rules is sufficient) prior to the appointment of an arbitrator if the arbitration agreements are compatible. The Vienna Rules grant the arbitral tribunal broad discretion deciding joinder applications. Like in the case of the ICDR Rules, no list of certain criteria is provided. The arbitral tribunal shall hear all parties involved and must consider all relevant circumstances. An implied advance consent to joinders is in all likelihood possible if the arbitration agreements are compatible, and a connection can be established between the parties or the underlying legal relationships. In the author’s view, related contracts in the supply chain context (involving parties that are not bound by the same arbitration agreement) should be sufficient to grant a joinder, provided that the arbitration agreements are compatible and do not contain contrary terms. It ought to be emphasized that the Vienna Rules also allow other types of third-party participation instruments such as third-party notifications and third-party interventions. However, an arbitral award cannot have a binding effect on third-party interventionists. Taking all of the above-mentioned into consideration, the third hypothesis can be confirmed for both consolidations and joinders.

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© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 A. Peter, CSR and Codes of Business Ethics in the USA, Austria (EU) and China and their Enforcement in International Supply Chain Arbitrations, https://doi.org/10.1007/978-981-33-6073-0

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