Thursday, July 15, 2010

Corporate Law and Obligation to Respect Human Rights--Report of the Corporate Law Project

Vanessa Zimmerman, Legal Adviser to John Ruggie, the UN Special Representative on Business and Human Rights recently shared the results of a research project prepared under the mandate of the Special Representative of the UN Secretary-General on Business and Human Rights that examined whether and how corporate and securities law in more than 40 jurisdictions around the world currently foster corporate respect for human rights.  UN Special Representative John Ruggie: “Corporate Law Project: Overarching trends and observations” 
Ms. Zimmerman noted that, to her knowledge, this is the first in-depth, comparative study of the links between human rights and corporate and securities law. More than 20 leading corporate law firms from around the world participated in the research on a pro bono basis.  The Report starts with a brief Executive Summary (pages 1-3) and Annexes B and C set out the participating firms as well as the jurisdictions covered. Annex A provides the common research template upon which the firms were asked to base jurisdiction‐specific surveys. The template explores subjects such as incorporation and listing; directors’ duties; reporting; and stakeholder engagement. Ms. Zimmerman reminds us that  the report is strictly informational, it does not present views on legal and policy reform options in this area, nor does it independently assess the firms’ interpretation of existing law.

The conclusions are modestly heartening.  First, corporate law does recognize a limited obligation to take into account the human rights impacts of corporate activity.  But usually that obligation is derivative of the primary obligation to report all activity that might have a material impact on the financial condition of the company.  Since the focus of corporate law remains shareholder (or entity) wealth maximization, the focus of reporting is on financial impact rather than on the character of the actions themselves.  The Report provides a vivid reminder of the universality, power, and impact of the often ignored fundamental premise of corporate organization--the obligation maximize the welfare of the entity and its principal stakeholders (the providers of capital).  There have been modest movement to privilege the reporting of human rights specific actions, but those tend to be in a very early stage of development and hardly effective as a foundation for changes in corporate behavior.  

Second, the Report confirms the great implementation impediment--regulatory incoherence. See, Larry Catá Backer, On Challenges to Operationalizing a Transnational Framework for Business and Human Rights--the View From Geneva, Law at the End of the Day, Oct. 13, 2009. The Report describes the extent of ambiguity in corporate and securities law regarding not only what companies or their officers are required to do regarding human rights, but in some cases even what they are permitted to do. It also focuses on the anemic coordination between corporate regulators and government agencies tasked with implementing human rights obligations. The resulting regulatory incoherence--with multiple governmental organs failing to coordinate, communicate and sometimes act in a coordinated manner, provides significant opportunities to avoid any movement to address the issue of the legal obligations of business to take the human rights consequences of their activities into account.  This, in turn, strengthens the case for the further development of an autonomous  governance framework for  corporate behavior.

The Executive Summary is reproduced below:

Mandate of the Special Representative of the Secretary-General (SRSG) on the Issue of Human Rights and Transnational Corporations and other Business Enterprises
July 2010
This paper is based on surveys of over 40 individual jurisdictions conducted with the pro bono assistance of more than 20 leading corporate law firms from around the world, using a common research template provided by the SRSG.
Corporate and securities law directly shapes what companies do and how they do it. Yet its implications for human rights remain poorly understood. The two are often viewed as distinct legal and policy spheres, populated by different communities of practice.

Accordingly, in early 2009, the Special Representative of the UN Secretary‐General (SRSG) on Business and Human Rights announced his Corporate Law Project (CL Project). It involved more than 20 leading corporate law firms from around the world helping on a pro bono basis to identify whether and how corporate and securities law in over 40 jurisdictions currently encourages companies to respect human rights. The firms were asked to prepare jurisdiction‐specific surveys based on a research template provided by the SRSG, exploring subjects such as incorporation and listing; directors’ duties; reporting; and stakeholder engagement. Several expert consultations have been held to discuss the firms’ work and options for, as well as challenges to, legal and policy reform in this area.

To the SRSG’s knowledge this project is the first in‐depth, multi‐jurisdictional exploration of the links between corporate and securities law and human rights.

The CL Project forms part of the SRSG’s work to operationalize what is now commonly known as the UN Protect, Respect and Remedy Framework for business and human rights. The Framework was welcomed unanimously by the UN Human Rights Council in 2008 and it enjoys broad support from all stakeholder groups. It rests on three differentiated yet complementary pillars: the state duty to protect against human rights abuses by third parties, including business, through appropriate policies, regulation, and adjudication; the corporate responsibility to respect human rights, which in essence means to act with due diligence to avoid infringing on the rights of others; and greater access by victims to effective remedy, judicial and non‐judicial. The CL Project focuses on the role of states regarding corporate and securities law and policy, but it is also relevant to the concerns of the other two pillars.

This paper outlines the overarching trends that emerged from the participating firms’ surveys on individual jurisdictions. It does not present views on legal and policy reform options in this area, nor does it independently assess the firms’ interpretation of existing law.

The surveys indicate that current corporate and securities law does recognize human rights to a limited extent. Put simply, where human rights impacts may harm the company’s short or long term interests if they are not adequately identified, managed and reported, companies and their officers may risk non‐compliance with a variety of rules promoting corporate governance, risk management and market safeguards. And even where the company itself is not at risk, several states recognize through their corporate and securities laws that responsible corporate practice should not entail negative social or environmental consequences, including for human rights.

Yet despite these links, the CL Project also highlights two other patterns. One is a lack of clarity in corporate and securities law regarding not only what companies or their officers are required to do regarding human rights, but in some cases even what they are permitted to do. The other is the limited (to non‐existent) coordination between corporate regulators and government agencies tasked with implementing human rights obligations. As a result, companies and their officers appear to get little if any guidance on how best to oversee their company’s respect for human rights.

The following is a brief summary of the main trends from each section of this paper:

Incorporation and listing: The surveys suggest that most jurisdictions bestow some form of limited liability and separate legal personality on companies at incorporation. Exceptions to the applicability of these concepts are rare, with regulators and courts extremely reluctant to “pierce the corporate veil” except in limited situations, such as fraud. Moreover, none of the surveys indicate that incorporation laws expressly require companies to recognize a duty to society at the point of incorporation, although some contend that this could be implied from obligations to incorporate for a proper or lawful purpose, especially where the state has strong laws guaranteeing human rights protection. The act of listing is also generally not linked to any recognition of a duty to society, although some listing rules are starting to encourage companies to consider and act on human rights‐related impacts, mainly using environmental, social and governance language.

Directors’ Duties: The surveys indicate that in most jurisdictions directors owe their duties to the company and have an over‐arching duty to act in the company’s best interests, which generally means the shareholders’ interests as a whole. Some jurisdictions are moving towards the “enlightened shareholder value” approach, which means incorporating sustainability concerns into assessments of the company’s best interests, given the potential legal and reputational risks to its’ long term success of not doing so.

The surveys suggest that directors are rarely expressly required to consider non‐shareholders’ interests, such as those of employees, customers or community members impacted by the company’s activities. Nevertheless, most surveys contend that if not considering human rights impacts could lead to the company breaching the law or encountering reputational risk, and thus potentially damaging the company’s long‐term interests, directors should consider them as part of their ordinary duties to act with due care and diligence. Most surveys also say that directors are permitted to consider such impacts provided that their consideration of these risks accords with the company’s best interests. But they also highlight that regulators generally provide little guidance as to how to make such balancing decisions, even where states have express legislative provisions allowing directors to consider social or environmental issues.

In instances where directors should consider non‐shareholder impacts, including human rights impacts, such duties appear to remain at the oversight level and subject to wide directorial discretion. For example, to fulfill these duties directors might be expected to help develop processes and policies to prevent and address negative human rights impacts, but they would not be responsible for implementing those policies and practices on a day‐to‐day basis.

Reporting: The law firms’ surveys indicate that in most jurisdictions companies must disclose all information that is “material” or “significant” to their operations and financial condition. Where a human rights impact reaches that threshold, the companies generally would be required to disclose it. But the surveys also confirm that there is limited regulatory guidance on when a human rights impact might reach that threshold.

The surveys highlight that some countries are starting to require separate corporate social responsibility (CSR) reports for particular types of companies, typically listed companies and state‐owned enterprises. Such provisions tend to focus on reporting of policies rather than impacts, and they are not subject to the same accessibility and verification requirements as financial reports. Stock exchanges and voluntary corporate governance guidelines are increasingly encouraging companies to report on their environmental and social policies but again, express references to human rights are rare.
Stakeholder Engagement: The surveys suggest that there are generally few substantive impediments to shareholders including human rights concerns in shareholder proposals for annual general meetings. Moreover, in some jurisdictions there appears to have been a recent shift of regulators being less likely to agree to the requests made by some companies to block such proposals. But there are procedural barriers. For example, share quotas to circulate proxy proposals may be a constraining factor for minority shareholders wishing to raise human rights concerns (such as socially responsible investors, employees and community members impacted by the company’s activities).

The law firms’ surveys indicate that pension fund trustees are rarely expressly required to consider the human rights impacts of their investments, although some are asked to say whether they have a socially responsible investment policy. Nevertheless, most surveys say that if not considering such impacts could expose the fund to legal or reputational risk, then a trustee would need to consider them. While it is rare for legislation to expressly allow trustees to consider such impacts, there has been some governmental encouragement to do so.

Other Corporate Governance Issues: The surveys suggest that while there is variation in the ways in which corporate governance codes and guidelines address CSR issues, there is also a commonality in that they are starting to deal with these issues; they are rarely entirely “voluntary” in practice; and they increasingly rely on international CSR initiatives to help frame any relevant guidance. Nevertheless, direct references to human rights in relevant codes and guidelines remain rare.

According to the surveys, it is rare to require representation of any constituencies on boards apart from shareholders. Where such requirements exist, typically they involve employees or, in the case of state‐owned enterprises, the government. It is also rare to see requirements for gender or racial representation on company boards, although it is common for general non‐discrimination laws to apply to board appointments. In states where mandatory gender representation has been considered there have been some constitutional challenges on the basis that such requirements represent impermissible positive discrimination.

The SRSG hopes that the Corporate Law Project will encourage further scholarship moving beyond the 40‐plus jurisdictions considered in this project, as well as stimulate discussion among the key, although often disparate, actors involved, including human rights lawyers and advocates, corporate and securities law experts, company representatives and government regulators.

The SRSG is exploring what guidance he might provide on the issues considered in the CL Project in his final Guiding Principles to be presented to the UN Human Rights Council in June 2011.

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