Business, Human Rights and Non-Profit Corporations

The binary--good/bad, public/private, military/civilian, profit/non-profit corporation--remains a basic building block for the ordering of reality within most disciplines.  It serves as the bedrock animating (and often unstated premise) in discussion of policy and in the construction of institutions and law systems.  But the binary tends to oversimplify, and distort, as much as it might serve to order and discipline human organization and law.  

The difficulties and contradictions of the binary as an ordering mechanism in law is particularly troubling in its application to corporations.  Most jurisdictions make the basic assumption that there is a fundamental difference between for profit and not-for profit corporate entities.  The  difference is grounded in the idea, grounded in history, tradition, and public policy (facilitating the charitable impulse as a holdover from a world in which government was less intrusive), that corporations  nor organized for the production of profits would be operated differently from for profit corporations in virtually every instance.   The lack of shareholders, the different role for directors and officers, and the different assortment of stakeholders  suggested a different regulatory framework.  Consider, e.g.,  Eric D. Werker and Faisal Z. Ahmed,  What Do Non-Governmental Organizations Do? HBS Working Paper Number: 08-041 (DSec., 2007). Yet the functional equivalence of non-profit and for-profit corporations may suggest that a more forgiving regulatory framework for non-profit corporate governance may require rethinking. 

A recent article suggests the need to rethink the fundamental validity of the profit/not-for-profit binary for purposes of framing principles of corporate governance.  Danné L. Johnson, Seeking Meaningful Nonprofit Reform in a Post Sarbanes-Oxley World, St. Louis University Law Journal 54(1):187-240 (2009).  Professor Johnson notes the significant economic role played by non profit corporations, their financial impact, and their impact on U.S. labor markets.  (Text pages 190-95).  Professor Johnson notes the similarity of legal duties imposed on directors in both profit and non-profit entities.  (Text 195-200).  Citing for support the work of Juidth L. Miller ("The Board as a Monitor of Organizational Activity:  The Applicability of Agency Theory to Non profit Boards," Nonprofit Management & Leadership 12:429 (20902) and Edward Glaeser ("Introduction," in The Governance of Not-For-Profit Organizations 1, 36 (E.L. Glaeser, ed., 2003)), Professor Johnson argues for the adoption of Sarbanes-Oxley style reforms for the non profit sector (Text, 217-240).   Professor Johnson suggests that borrowing certain governance principles and methods from Sarbanes-Oxley--certification, independent audit committee rules, internal control systems, principally, would imporve non-profit corporate governance. (Text 234).

Such calls for a revaluation of governance frameworks suggests a substantial weakening of the profit/not-for-profit governance binary in fact and form.  Consider, with respect to the issue of accountability, e.g., Alnoor Ebrahim, The Many Faces of Nonprofit Accountability, HBS Working Paper Number: 10-069 (Feb., 2010).  That convergence might be made stronger still by the move toward corporate social responsibility as an important factor in corporate governance.  It suggests that the usual core approach for CSR--its focus on the profit motive and the maximization of shareholder value--overly narrows the application of CSR values.  Profit, as the predicate for CSR, ignores the functional equivalence of institutional activity.  Non-profit corporations may violate international human rights norms, child labor provisions, and may be complicit in the violation of the rights of employees, or the communities in which they operate to the same extent as profit corporations.   This suggests that the usual division between profit and non-profit corporations is too simplistic.  While it is true enough that civil society actors may function to monitor for profit corporations in their activities (Backer, Larry Catá, Economic Globalization and the Rise of Efficient Systems of Global Private Lawmaking: Wal-Mart as Global Legislator. University of Connecticut Law Review, Vol. 39, No. 4, 2007).  it is also true that these "monitors" may also breach the norms they are meant to protect.  It may be time to consider including non-profit entities within the soft law CSR governance frameworks of the OECD and perhaps John Ruggie's business and human rights protect-respect-remedy framework.  [PDF] Protect, Respect and Remedy: a Framework for Business and Human Rights

Author: John Ruggie, Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises  Dated: 07 Apr 2008.