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GreenMoney Journal - publishing since 1992
Fall 2010 issue
Socially Responsible Investing – Better Companies, Better Communities
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Cintas Lawsuit Could Set Dangerous Precedent
Tiffany Kary, Dow Jones Corporate Governance
Tim Smith spoke in the blunt, colorful language he usually uses to rally shareholders against human
rights abuses when he piped up at Cintas' October 2003 shareholder meeting. "Cintas is sourcing
from a factory which is a poster child for sweatshops," said Smith, the director of socially
responsive investing for Walden Asset Management. He went on to describe the Haitian American
Apparel Co. S.A. (HAACOSA) in Port-Au-Prince where Cintas outsources some production for its
uniform-making business: workers toil in 90 to 100 degree rooms choked with dust and bereft of
running water, bound into unpaid overtime by unrealistic production quotas as well as "loan
sharking by supervisors" where managers demand interest rates as high as 25% from subordinates.
Instead of the usual tense debate Smith has grown to expect during his 30 years as an
advocate of socially responsible investment, Cintas slapped him with charges of defamation and a
claim for $75 million in damages. A Cintas spokesman declined to address Smith's specific
allegations, but said third party auditors have visited the factory in question, and "found no
factual information that showed violations of our code of conduct." Cintas' code of conduct
prohibits the company from working with factories that don't have humane conditions.
The
lawsuit has raised concerns about free speech in shareholder meetings, and cast some shadows across
the corporate governance record of Cintas, one of the largest U.S. uniform makers. Trend watchers
in corporate governance said the suit could set a dangerous precedent of quashing open debate
between shareholders and companies, but note that it is also a rare black spot in the increasingly
transparent nexus between social responsibility and shareholder responsibility at many
multinational corporations.
"It's like using a bazooka to swat a fly. This shows a
stunning lack of judgment," said Nell Minow, director of corporate governance advisory firm The
Corporate Library.
Cintas's lawsuit against Smith is the first known case of a company
suing a shareholder for something said during an annual meeting.
"This raises the fear
that other companies could pick up on this tactic and use it to chill free speech at annual
meetings," said Adam Kanzer, general counsel for Domini Social Investment, which filed a
shareholder resolution at 2003's annual meeting alongside Walden Asset Management, asking Cintas to
evaluate its compliance with its own code of conduct for vendors.
Not only is Cintas being
criticized for suing a shareholder who brought up a claim which could be of concern to all Cintas
shareholders, the company has chosen its target poorly: Smith is a well-respected guru of the
socially responsible investment movement, known for his work in the South Africa divestment
campaign of the 1980s.
"He's built his career on dialogue, not beating companies up. It's
amazing that he's the one who would get sued," said Kanzer.
Smith, who couldn't comment on
the lawsuit, spent most of his career as executive director of the Interfaith Center on Corporate
Responsibility. Like most socially responsible stockholders, Smith works by trying to engage
companies in dialogues about frowned-upon practices. Only when attempts at dialogue fail is a
shareholder resolution filed and presented at an annual meeting.
"Dialogue is a good
leverage tool. Lots of companies don't want to see this kind of thing go to their proxy," Kanzer
said, adding that Cintas didn't respond to any of Domini's attempts at dialogue either.
Smith's resolution called for Cintas to evaluate its compliance with its own code of conduct,
which clearly states that its vendors must comply with humane standards around overtime, and
provide clean and safe working conditions. Other large shareholders who have filed resolutions
asking Cintas to report on compliance to its code of conduct include New York City Employees
Retirement System, General Board of Pension and Health Benefits of the United Methodist Church,
Evanston, Ill., Boston Common Asset Management on behalf of Brethren Benefit Trust, Catholic Funds,
Milwaukee, Wisc., and Sisters of Saint Joseph, Philadelphia, Pa.
"This is not a lawsuit
about public and open debate in shareholder meetings," said Wade Gates, a spokesman for Cintas. He
pointed to the lawsuit's language, which alleges that Smith's statements amount to defamation.
Gates pointed out that Cintas hasn't filed suit against the other shareholders who have filed
resolutions regarding its vendor compliance, and says the lawsuit is justified because it will help
prevent shareholders from losing out should potential customers shy away from doing business with
Cintas due to Smith's allegations the company works with sweatshops.
Good governance
advocates say suing a shareholder is rarely a good idea.
"By lashing out through a legal
action, it forces a wedge between shareholders and the company rather than building a bridge," said
Rev. David M. Schilling, director of global corporate accountability for the Interfaith Center on
Corporate Responsibility.
"They have a heavy burden of proof to show this lawsuit will
benefit shareholders," said Minow, noting that legal fees could affect Cintas' balance sheets.
Cintas declined to estimate how much the suit could cost.
Gates said Cintas has had third
party auditors visit the factory in question, and said the auditors have refuted Smith's claims. He
also noted that Smith never visited the site in question, and is relying on information from UNITE,
the Union of Needletrades, Industrial & Textile Employees, which he said has its own agenda -
unionizing Cintas workers.
Gates declined to give the name of the third party auditor who
has visited HAACOSA, and Cintas' large shareholders say they're still not convinced the
company
is complying with its own code of conduct.
"They say the conditions described don't exist,
but if that's the case, the company should make that information public, and they haven't," said
the Interfaith
Center's Schilling.
The UNITE investigator who visited Haiti herself,
speaking on condition of anonymity, said she has no doubts the conditions exist. She interviewed
eight workers from the factory, who reported the conditions at HAACOSA outlined in UNITE's
23-page report. The report also outlines sweatshop-like conditions at facilities in Mexico as well
as in a Chicago factory.
Cintas is also suing UNITE for defamation and trade secret
violations, a case which UNITE and Cintas declined to elaborate on.
Regardless of the
actual conditions in Haiti, Cintas is handling the situation poorly, governance experts say. Its
actions contrast with other companies in the apparel industry, like Gap Inc. and Nike Inc., who are
joining a growing movement for transparency about the social and ethical implications of overseas
business.
In May, Gap issued a public report on its progress in monitoring 3,000
factories, and admitted something commonly suspected of firms in the garment industry: forced
labor, child labor, pay below minimum wage and other workers' rights violations occur at many of
its factories.
"This is the kind of report we believe Cintas needs to do," said Schilling.
"Good corporate governance includes management of issues of risk. The company has to protect itself
and live up to its policies."
Indeed, at a recent New York conference held by the
International Center for Corporate Accountability, Smith disturbed a late Friday afternoon lull
during Mattel Inc.'s presentation on labor conditions at its Chinese and Mexican factories by using
the S-word again.
"Investors aren't going to stop knocking on your door as long as you're
still paying survival wages; from my point of view, you're still running a sweatshop," said Smith.
His comments were met with an understanding smile from the presenter, James Walter,
Mattel's senior vice president of worldwide quality assurance.
"The bar will continue to
be raised," said Walter, articulating Mattel's philosophy of trying to improve conditions at
factories with poor records rather than sever ties with them altogether, a move that could only
have a worse effect on poor communities.
Such realism has earned Mattel a gold star from
corporate governance experts who see the weave between social accountability and shareholder
accountability drawing tighter in this time of heightened accountability.
"The traditional
firewall between corporate governance and social issues has really broken down. Now a company is
only viewed as a good corporate citizen if it can manage the social, environmental, and economic
variables of its business. There is now more than one bottom line," said Schilling.
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