Sunday, August 15, 2010

Corporate Responsibility to Respect Human Rights and Corporate Catastrophe--The BP Oil Spill and Human Rights Due Diligence

In 2005, the then United Nations Human Rights Commission requested the UN Secretary-General to appoint a Special Representative (SRSG) with a mandate to do the following:

(a) To identify and clarify standards of corporate responsibility and accountability for transnational corporations and other business enterprises with regard to human rights;
(b) To elaborate on the role of States in effectively regulating and adjudicating the role of transnational corporations and other business enterprises with regard to human rights, including through international cooperation;
(c) To research and clarify the implications for transnational corporations and other business enterprises of concepts such as “complicity” and “sphere of influence”;
(d) To develop materials and methodologies for undertaking human rights impact assessments of the activities of transnational corporations and other business enterprises;
(e) To compile a compendium of best practices of States and transnational corporations and other business enterprises.
The mandate also requested the SRSG to provide “views and recommendations” in relation to these issues for consideration by the Commission.

Since then, John Ruggie, the United Nations Secretary General's Special Representative for Business and Human Rights has been developing a framework for the incorporation of human rights into the institutionalized governance behaviors of states and corporations.  The resulting three Pillar framework, based on a state duty to protect human rights, a corporate responsibility to respect human rights and an obligation of both to provide remedies for  has proven to be increasingly influential. The SRSG has noted that
the U.N. Framework has already enjoyed considerable uptake, interacting with a range of processes well beyond the United Nations itself. These include the ISO26000 standard on social responsibility, the updating of the OECD guidelines for multinational enterprises, the International Finance Corporation revision of their Performance Standards, work with 19 leading law firms from around the world on how human rights considerations are addressed in corporate law across 40 jurisdictions, as well as road-testing of company-based grievance mechanisms by leading companies in China, Colombia, Russia, South Africa and Vietnam.  John Ruggie,  The Corporate Responsibility to Respect Human Rights, The Harvard Law School Forum on Corporate Governance and Financial Regulation  May 15, 2010. 
One of the most innovative parts of the Three Pillar framework is the corporate responsibility to respect human rights.  The latest elaboration of the corporate responsibility to respect was set oput in the SRSG's 2010 Report.  See, Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, John Ruggie, Business and Human Rights: Further steps toward the operationalization of the “protect, respect and remedy” framework, A/HRC/14/27, Human Rights Council, 14th session, Agenda item 3, Promotion and protection of all human rights, civil, political, economic, social and cultural rights, including the right to development (hereafter the 2010 Report). In a review of its discussion of the corporate responsibility I noted (Larry Catá Backer, A Consideration of John Ruggie's 2010 Report to 14th session of UN Human Rights Council: "Business and Human Rights: Further steps toward the operationalization of the 'protect, respect and remedy' framework", Law at the End of the Day, May 1, 2010):
The corporate responsibility to respect is offered as both contrast and supplement to the state duty to protect human rights.[9] Companies have a fundamental responsibility to comply with the laws of all host states.[10] This obligation exists even in the absence of a government (in which case the company is expected to fill the void).[11] It poses special problems where national law conflicts with international standards, a problem the solution to which remains elusive. [12] But actions that affect human rights may also collaterally affect the ability of a company top comply with law, producing community resistance that may delay otherwise lawfully operating companies.[13] Lastly, blind compliance with local law might expose companies to complicity in state violations of international human rights norms.[14]

The limitations on a company’s obligations to comply with local law in all circumstances suggests the key characteristic of the corporate responsibility to respect human rights: its autonomy from both domestic law systems and from the state. The SRSG continues to emphasize that “responsibility exists independently of States’ human rights duties. It applies to all companies in all situations. ”[15] This responsibility exists with respect to all actors with whom the corporation interacts.[16] It is framed by the International Bill of Rights combined with the ILO core Conventions,[17] but not limited to the principles contained therein.[18] Yet the SRSG resists expanding the scope of the responsibility to respect human rights to something more positive. Reflecting concerns about the democratic legitimacy of corporate control of political policy within states, the SRSG suggests that such a role would substitute the corporation for the government of a state.[19]

What the SRSG does posit as a positive obligation in the context of the responsibility to respect is the obligation to undertake and disclose the products of internal and external due diligence.[20] “Human rights due diligence can be a game-changer for companies: from “naming and shaming” to “knowing and showing.” Naming and shaming is a response by external stakeholders to the failure of companies to respect human rights. Knowing and showing is the internalization of that respect by companies themselves through human rights due diligence.”[21] The SRSG elaborates the way in which such due diligence is to be undertaken. He suggests four basic components of due diligence,[22] and indicates that such systems can increase the likelihood of better management of human rights violations, and serve as a basis for the provision of remedies.[23] He also notes that such systems are ineffective unless implemented.[24] And he seeks to reassure companies that due diligence will reduce rather than increase exposure to liability.[25]
[9] The SRSG explained in language somewhat more subtlety drawn than in the 2008 Report:
The term “responsibility” to respect, rather than “duty”, is meant to indicate that respecting rights is not an obligation that current international human rights law generally imposes directly on companies, although elements may be reflected in domestic laws. At the international level, the corporate responsibility to respect is a standard of expected conduct acknowledged in virtually every voluntary and soft-law instrument related to corporate responsibility,31 and now affirmed by the Council itself.
2010 Report, supra, at ¶ 55.
[10] Id., at ¶ 66.
[11] Id., at ¶ 67.
[12] Id., at ¶ 68.
[13] Id., at ¶¶ 69-73 (“human rights are adversely impacted, serious corporate value erosion occurs and disclosure requirements and directors’ duties may be breached. Clearly, better internal control systems and oversight are necessary. ” Id., at ¶ 73).
[14] “For example, the more than fifty cases brought since 1997 against United States-based and other companies under the Alien Tort Statute have included allegations of complicity in genocide, slavery, extrajudicial killings, torture, crimes against humanity, war crimes and other egregious human rights violations. ” Id., at ¶ 75.
[15] Id., at ¶ 57.
[16] Id., at ¶ 58.
[17] Id., at ¶ 60. The International Bill of Rights consists of the Universal Declaration of Human Rights and the main instruments through which it has been codified: the International Covenant on Civil and Political Rights and the International Covenant on Economic, Social and Cultural Rights.
[18] “Depending on circumstances, companies may need to consider additional standards: for instance, they should also take into account international humanitarian law in conflict-affected areas (which pose particular challenges)36; and standards specific to “at-risk” or vulnerable groups (for example, indigenous peoples or children) in projects affecting them.” Id., at ¶ 61.
[19] Id., at ¶ 62-65. He notes that
the proposition that corporate human rights responsibilities as a general rule should be determined by companies’ capacity, whether absolute or relative to States, is troubling. On that premise, a large and profitable company operating in a small and poor country could soon find itself called upon to perform ever-expanding social and even governance functions – lacking democratic legitimacy, diminishing the State’s incentive to build sustainable capacity and undermining the company’s own economic role and possibly its commercial viability. Indeed, the proposition invites undesirable strategic gaming in any kind of country context.
Id., at 64.
[20] Id., at ¶¶ 79-86. On the importance of monitoring in this context, see, Larry Catá Backer, From Moral Obligation to International Law: Disclosure Systems, Markets and the Regulation of Multinational Corporations, 39 Georgetown Journal of International Law 591 (2008).
[21] 2010 Report, supra, at ¶ 80. On the governance effects of surveillance and disclosure systems, see Larry Catá Backer, Surveillance and Control: Internal, External and Governmental Monitoring of Corporate Insiders After Sarbanes-Oxley, 2004 Michigan State Law Review 327 (2004).
[22] These include: “a statement of policy articulating the company’s commitment to respect human rights; periodic assessment of actual and potential human rights impacts of company activities and relationships; integrating these commitments and assessments into internal control and oversight systems; and tracking and reporting performance.” 2010 Report, supra, at ¶ 83.
[23] Id.
[24] “Accordingly, the Special Representative is also developing guidance points for their implementation.” Id., at ¶ 84.
[25] Id., at ¶¶ 85-86. 
In a recent excellent post, the SRSG suggested the utility of the human rights due diligence exercise as a central element of the corporate responsibility, especially in the context of corporate catastrophes, like that recently experienced by British Petroleum in the Gulf of Mexico. See John Ruggie, Whose Risk Is It? Corporate Catastrophe and Human Rights,  Harvard Law School Forum on Corporate Governance and Financial Regulation,  August 14, 2010.    This post is based on an article by John Sherman, a Senior Fellow at the Corporate Social Responsibility Initiative at the Kennedy School, Vice Chair of the Corporate Responsibility Committee of the International Bar Association and a member of the UN Global Compact Human Rights Working Group. The article was first published by the International Bar Association.  It is worth reading.

The essay starts with a reminder of the connection of due diligence to risk management, and the consequences of business and its stakeholders of a failure to pay attention to the managing risk--not merely in its customary form of financial risk, but also in its other forms, including those touching on human rights. 
The collapse of the global banking system in 2007, and the Deepwater Horizon disaster in 2010, came as complete surprises to the companies involved. Although individual banks thought they were acting rationally in their own self-interest by selling highly risky financial instruments, they did not anticipate that these risks would combine systemically to result in a freeze of liquidity, which triggered the financial collapse and the recession. And while the causes of the Gulf disaster are still under investigation, it appears that BP, like other deepwater drillers, believed that the likelihood of a runaway deepwater drilling leak was too tiny to plan for.  Id.
And indeed, there was little indication of corporate attention to this sort of risk management, other than perhaps a sense of impatience.  "To the contrary, Tony Hayward, the outgoing CEO of BP, told a business school audience in 2009 that when he took over the CEO job a few years earlier, he found that “we had too many people trying to save the world” at a time when BP needed to focus more on its core operations."  Id.  That more patience, the essay suggests would not merely have pandered to amorphous human rights concerns but might also have permitted more effective management of this catastrophe.  "That is the lesson of “human rights due diligence.” Harvard Kennedy School Prof. John Ruggie, the UN Special Representative on Business and Human Rights (SRSG), coined that term in 2008 to describe what companies should do to meet their responsibility to respect—i.e., not infringe upon—human rights, and to demonstrate to others that they do." Id.   And thus the point:
Viewed wholly from a shareholder perspective, the risks of infringing on human rights can cost a company big money, and so should be included in any company risk analysis. As the SRSG noted in his 2010 report to the UN Human Rights Council, a study of the oil and gas industry found that the risks to exploration from disputes between oil explorers and external stakeholders has been growing much faster than the technical risks of getting oil out of the ground. And one oil & gas company estimated that over a two-year period, it lost $6.5 billion in value from such ‘above ground’ disputes with communities. [9] These disputes can cause disruption and delay in financing, construction, and operations, greatly distract senior leaders’ attention, swiftly trash a company’s reputation, and lead to the loss of its legal and social license to operate. And that list doesn’t include the obvious risk of litigation, which is hugely expensive and distracting regardless of who wins.  Id.
The essay reminds us that this sort of due diligence based risk management has become increasingly embedded in the patterns of corporate management that is central to the operation of large economic concerns.  "Risk management standards requiring companies to assess the adverse impacts of their operations on external stakeholders have become embedded in various hard and soft law external corporate governance standards in such areas as fraud prevention, the accuracy of financial reporting, criminal and environmental law compliance, the fiduciary duties of directors, and the corporate governance codes of a number of countries."  Id.

More importantly, the essay reminds us of the importance of the automous obligation of this due diligence based responsibility to respect human rights.  It has been widely understood that the catastrophe was asmuch one of governmental regulatory failure as it was of corporate miscalculation.   But governmental failure ought not to set the standard for the global conduct of enterprises. 
But inadequate or absent government regulation doesn’t justify a company’s failure to respect human rights. Under the SRSG’s Protect, Respect, Remedy framework, a company’s responsibility to respect human rights is not a legal duty; rather it is “a standard of expected conduct acknowledged in virtually every voluntary and soft-law instrument related to corporate responsibility.” The responsibility “exists independently of States’ human rights duties. It applies to all companies in all situations.” Thus, a company should conduct human rights due diligence, including talking to external stakeholders to understand and address the potential impacts of its decisions and operations on human rights, even where the law is not enforced, or does not tell the company to do so. Id.
If this is so, then what is involved in corporate compliance?
Integrating human rights impact assessments into existing risk management processes requires an understanding of the limitations of traditional risk management tools when applied to human rights impacts. . . . . The traditional ways for companies to address risk are to bear the risk, to avoid it, to reduce it, to share it, to shift it, to pool it, to hedge it, or to diversify it away. [18] Choosing among these tools raises few ethical implications for voluntary transactions, like contracts between businesses. However, such concerns may arise when companies lead others to assume risks that they aren’t aware of and haven’t agreed to bear. . . . By taking into account the human rights dimension of such risks, and engaging with those who may be harmed by such risks, companies can address this potential ethical problem.  Id.
As important, such risk assessment more firmly grounds corporate activity in reality.  And that may be the greatest benefit to the company of internalizing in its business practices and behaviors a sensitivity to the human rights risks of corporate activity.
Considering the impacts of company actions on external stakeholders—through direct dialogue, where feasible—will likely reveal different risk tolerances, and may increase the sensitivity of risk company managers as to the potential impacts of such events on the community. Given the tendency of individuals and companies to overestimate their ability to predict disaster, this conversation is beneficial for both companies and communities. It will hopefully lead those risk managers to reexamine their analyses and predict more accurately the true impact—on individuals, the community and their companies. . . . If we have learned nothing else from business catastrophes, it is that their effects are not limited to corporate shareholders. It is to everyone’s benefit that businesses understand the impact of their decisions on the lives and livelihoods of others, in order to make better decisions about risk..  Id.

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