Soft or Hard Law? – Battling Human Rights Abuses in the Corporate World

Human rights abuses in multinational businesses draw immediate public attention and cause the reputation of the company to take a deep dive. Remember how many years it took for Nike to regain its reputation after their child labor scandal started back in the 1990s?

Regaining lost reputation requires actions in many different fields, the legal arena being one of them. So, what judicial tools are available to battle human rights abuses?

International and National Legislation

As discussed in my previous blog post, international human rights conventions oblige countries to comply with their standards and implement corresponding national legislation. However, this national legislation often only reaches the companies established in that state.

Severe human rights abuses usually occur farther from home in the subsidiaries or supply chains of multinational companies, as was the case with Nike. Given that national legislation doesn’t reach that far, the respect for human rights has traditionally relied on companies’ voluntary commitment to soft law mechanisms, such as international standards and guidelines.

However, now things seem to be changing. Europe is taking steps to introduce hard law measures to spread the corporate veil to cover operations further down multinational supply chains.

The United Kingdom on the Front Line

human rights_kuvituskuvaThe UK introduced the Modern Slavery Act last October. The act obliges companies exceeding a turnover threshold (£36 million) and doing business in the UK to prepare an annual public statement. This statement should cover the actions the company has taken to ensure that slavery and human trafficking are not taking place in its operations. The act requires that the statement is published on the company website with a link in a prominent place on the homepage. The act increases transparency of supply chains regarding possible abuses.

One notable feature of this act is the wide scope of application: all corporations doing a certain amount of business in the UK are obligated to prepare this public statement. Thus, it not only applies to companies incorporated in the UK, but also to those incorporated, for example, elsewhere in Europe, but operating in the UK.

France Tried to Take Things One Step Further

The French parliament introduced the so called Rana Plaza Bill, which aimed to hold French parent companies legally accountable for human rights abuses conducted by their foreign subsidiaries. Multinationals opposed this proposal heavily, saying it would harm their competitiveness. The chosen legislative path was deemed to be too aggressive in the current economic climate, and the proposal was overruled in the Senate. However, the French legislative procedure allows for the reopening of this issue. Thus, this case may not yet be closed.

EU-wide Obligations Upcoming Up

Despite France’s retreat, there is already something more wide-spread on the horizon. The EU Parliament has accepted a directive that obliges large public-interest companies to disclose relevant information on non-financial matters, such as respect for human rights and anticorruption issues. National legislation is to be in place by the end of 2016, and the first obligatory non-financial reports covering the financial year 2017 should see daylight in 2018.

What Should Corporate Executives Make of All This?

My first recommendation is that, if you’re involved in the management of a multinational, you should keep a close eye on this issue, as it is clearly gaining increased attention on the agendas of legislators. The media and various NGOs have worked hard to raise awareness of human rights issues for several years.

The bottom line, however, is this: companies are obliged to obey and respect human rights globally, as these matters should be implemented in respective national constitutions. Thus, it doesn’t really matter whether a specific hard law measure is in use in any given country. Companies simply cannot opt out of human rights in their operations.

Anne Vanhala

 

When Human Rights Sat Down at the Corporate Table

Before Christmas, I wrote about corporate responsibility in quite general terms. My lawyer friends are still a little puzzled about what this has to do with the legal field. It may seem far-fetched at first sight, but corporate lawyers should be no strangers to corporate responsibility matters.

Basic Ingredients

First of all, many international human rights conventions oblige countries to comply with their standards and implement respective national legislation (for example, the UN Universal Declaration of Human Rights, International Covenant on Economic, Social and Cultural Rights and ILO Declaration on Fundamental Principles and Rights at Work). Human rights are at the core of corporate responsibility.

From the start of the 21st century, human rights have also entered into the corporate world with increasing power and are, thus, something corporate lawyers have to think about as well. The most recent international proof of this development is the UN Guiding Principles on Business and Human Rights. These so called Ruggie principles are seen as a starting point for more a coherent responsibility approach within multinational companies. The field is certainly evolving, and there is pressure for lawyers to elaborate on how these principles, conventions and declarations affect everyday business.

Corporate responsibility is too large a chunk to bite off in one mouthful. To make it more digestible, I decided to serve you a three course menu:

Appetizer – Setting up Guidelines and Policies

The whole starting point for corporate responsibility is how a company operates. Companies follow the rules derived from the legislation, but voluntary codes of conduct are increasingly defining how to operate.

A natural extension of an internal code of conduct is to extend it to the supply chain of the company in question. This seems to be the most crucial corporate responsibility topic today, as supply chains are long and complex.

The first thing many companies have to do is to define their supply chain. Not an easy task if your business is, for example, shutterstock_187138466_umbrellasbuying umbrellas from a warehouse in China and selling them globally through wholesalers. Do you really have a clue who dyed the fabric used in the umbrella and whether any harmful chemicals were used in the process?

A code of conduct for suppliers attached to the agreements you make with them safeguards you against scandals in the supply chain. Freshfields has examined the economic effect of the scandals in 12 countries across the UK, Europe, Asia and the US. The ‘Fun Fact’ of the survey is that 53% of scandal-struck companies had not seen their share prices regain pre-crisis levels.

Getting hungrier? 

Main course – Making Sure Policies Are Understood and Followed

Now that you have drafted codes of conduct for your company and your suppliers and have attached them to your agreements, you can relax, right? In an ideal world yes, but not in a real life.

Codes of conduct not only require training, but also follow-up on how the guidelines have been adopted by the employees and suppliers. These kinds of compliance functions are usually where corporate responsibility and legal departments meet. The costs of proper training and compliance are marginal compared to the expenses that a company can incur if the milk spills.

Let’s go back to our chosen products, umbrellas. Your warehouse manager gave you the list of the used manufacturers in accordance with the code of conduct for suppliers. I hate to be pessimistic, but can you rely on the list and on simple written confirmation that no harmful chemicals are being used? Regular audits are recommended to see what is really happening at the manufacturing site. Like in other risk scenarios, your agreements should include penalties for misconduct if the policies are not properly followed.

Now, I think it’s time for something sweet.

Dessert – Expanding through Acquisitions

There may come a time when your company has cash burning a hole in its pocket, and you start looking for something nice to buy.

A traditional legal due diligence review keeps a close eye on the agreements, reorganisations, and assets of the target company to find potential risks and action points before signing the deal. However, today it is equally important look at corporate responsibility aspects: you don’t want to be surprised by a front page headline that your supplier in Asia has used forced labour in its umbrella factory. When a scandal hits the front page, it doesn’t matter whether the supplier mistreated employees under the previous owner or on your watch.

We have heard rumours that clear shortcomings in corporate responsibility matters can affect valuation. I have no problem believing this rumour.

The three course menu above is linked by one clear common theme: each course seeks to minimise risks. Proactively. Before the milk spills.

Over the upcoming spring, we are organising a client seminar on business and human rights. These three aspects are sure to be discussed in the seminar, but we would be happy to listen to your thoughts earlier!

Anne Vanhala