In the report, the Working Group examines the duty of States to protect against human rights abuses involving those business enterprises that they own or control, which are generally referred to as State-owned enterprises. . . . The report calls attention to and clarifies what States are expected to do in their role as owners of enterprises and why. . . . In the present report, the Working Group suggests a range of measures that States could take to operationalize the call to take additional steps with regard to State-owned enterprises, by building on existing international guidance and national practices related to the corporate governance of those enterprises. (2016 WG Report, p.1)
This post takes a close look at the 2016 WG Report for the purpose of engaging with its premises and suggestions. The 2016 WG Report represents a very needed focus on one of the more difficult challenges for the UNGP. The state duty to protect differs from the corporate responsibility to respect human rights. The differences present some complexity when it is the state itself that operates the enterprise, directly or indirectly. It is to those issues that the 2016 WG Report, and my comments, are directed.
The Working Group Press Release is first reproduced below. My summary of the 2016 WG Report and my observations-challenges, including 10 recommendations for further development, then follow.
The discussion draft may also be accessed HERE.
State-owned enterprises must lead by example on business and human rights – New UN report
GENEVA (17 June 2016) – Governments seem to forget that they are economic actors in their own right, said a United Nations expert group today, while urging States “to lead by example on business and human rights, starting with those enterprises closest to them - State-owned enterprises.”
“Governments are currently sending an incoherent message to businesses,” said human rights expert Dante Pesce, who chairs the UN Working Group on Business and Human Rights, during the presentation of the group’s latest report* to the UN Human Rights Council.
“On the one hand, they ask private businesses to respect human rights, and increasingly set out such expectations in law and policy,” Mr. Pesce noted. “On the other hand – barring notable exceptions – they show no great desire to use the means at their disposal to ensure that those enterprises they own or control respect human rights.”
Many States the world over manage large portfolios on State-owned enterprises (SOEs), which have risen as significant actors in the global economy, active at home and abroad in diverse sectors such as energy, utilities, infrastructure, transports, telecommunications, and banking. The proportion of SOEs among Fortune Global 500 companies has grown from 9.8% in 2005 to 22.8% in 2014, with US$389.3 billion of profit and US$28.4 trillion in assets.
The performance of SOEs on issues of governance and human rights is mixed, with reported cases of corruption and lack of transparency, and harm caused to workers and communities throughout SOEs’ operations. “Yet these human rights impacts - and the duties of States to protect against them - remain largely ignored,” Mr. Pesce explained.
In its report, the Working Group clarifies how States should behave in their role as company owners and suggests measures that they should take to ensure SOEs fully respect human rights.
“It is high time for States to show concrete leadership, and require the enterprises they own or control to be role models on human rights,” the expert stressed. “Doing so is part of States’ international legal obligations, and it will only reinforce the legitimacy of States’ expectations towards private businesses.”
The Working Group will also lead discussions on SOEs at the annual UN Forum on Business and Human Rights, which takes place at the UN headquarters in Geneva (Palais des Nations) from 14 to 16 November 2016 (http://www.ohchr.org/EN/Issues/Business/Forum/Pages/2016ForumBHR.aspx).
(*) Check the Working Group’s report at: http://ap.ohchr.org/documents/dpage_e.aspx?si=A/HRC/32/45
The Working Group on human rights and transnational corporations and other business enterprises was established by the UN Human Rights Council in June 2011. Its current members are: Mr. Michael Addo, Mr. Surya Deva, Mr. Dante Pesce (current Chairperson), and Mr. Pavel Sulyandziga (current vice chair). The appointment of the fifth member of the Working Group will be made by the Human Rights Council in June 2016. Learn more, log on to: www.ohchr.org/EN/Issues/Business/Pages/WGHRandtransnationalcorporationsandotherbusiness.aspx
The Working Groups are part of what is known as the Special Procedures of the Human Rights Council. Special Procedures, the largest body of independent experts in the UN Human Rights system, is the general name of the Council’s independent human rights monitoring mechanisms. The Working Groups report to the Human Rights Council and to the UN General Assembly. Special Procedures mandate-holders are independent human rights experts appointed by the Human Rights Council to address either specific country situations or thematic issues in all parts of the world. The experts are not UN staff and are independent from any government or organization. They serve in their individual capacity and do not receive a salary for their work.
Read the UN Guiding Principles on Business and Human Rights: http://www.ohchr.org/EN/Issues/Business/Pages/Tools.aspx
For additional information and media requests please contact the Working Group Secretariat: +41 22 917 9323 / firstname.lastname@example.org -
1. Introduction to analysis.
The following discussion of the 2016 WG Report is offered as a conversation, one that is meant to push the excellent work of the Working Group and its Secretariat, further along the lines they themselves admirably, and to a great extent courageously, have framed so well. The 2016 WG Report represents an important and necessary step in the construction of a more unified approach to the application of the UNGP. It provides a means of thinking critically about the way that states and enterprises ought to better coordinate, and in the case of SOEs connect, the duties of the first pillar with the responsibilities of the second pillar. The Report also suggests the scope and direction of the work that remains to be done. It is to that effort that the engagement in this Summary Report is directed. But make no mistake, the comments and observations offered in the analysis that follows ought not to be read as a criticism of the 2016 WG Report or as a suggestion that it is somehow flawed or that it fails. Quite the reverse. Without the pioneering conceptual work in this strong 2016 WG Report, the analysis that follows would not be possible.
The 2016 WG Report is organized in four (4) sections.
Section I (Introduction pp. 3-7) considers (a) the background, aims and outline of the report, (b) defines an SOE for its purposes, (c) considers the role of SOEs in the larger global economy, and (d) defines the scope and limits of the report.
Section II (pp. 7-12) then focuses on the normative policy framework which the Working Group advances as underpinning its notion of state action in relation to SOEs, It considers (a) the state duty to protect against abuses by SOEs, (b) the SOEs own Pillar II obligations independent of the state's duty under national and international law, and (c) the possible link between corporate governance and human rights.
Section III (pp. 12-20) is the most ambitious--laying out the Working Group's framework for operationalizing the state's duty under UNGP Principle 4. That framework, mirroring the structure of human rights due diligence itself (UNGP ¶ 17 et seq) involves (a) setting expectation, (b) mechanisms to set and manage expectations through ownership arrangements, (c) the relationship between the state and SOE boards of directors, (d) oversight and follow up mechanisms, (e) capacity building obligations, (f) imposing human rights due diligence obligations on SOEs, (g) disclosure requirements, transparency and reporting, and (h) developing effective remedies.
The last, Section IV (pp. 20-23) provides a brief conclusion and more extensive recommendations. The recommendations are directed separately to states, SOEs, national human rights institutions, international organizations, the UN human rights system, civil society and academia, and business organizations
Each is briefly considered in turn. The challenges posed in the 2016 WG Report and the work left to be done is then considered in ten (10) short recommendations drawn from the analysis of the challenges and insights revealed through a close reading of this Report.
2. Section I Introduction (pp. 3-7).
(a) Background, aims and outline of the report.
The 2016 WG Report emphasizes the somewhat narrow focus of this report: "the duty of states to protect against human rights abuses involving those business enterprises that they own or control" (¶1). Though they also acknowledge the independent duty of SOEs under the UNGP, even that autonomous responsibility must be understood as exercised in the shadow of the state. SOEs are, as a matter of convenience, and within the presumptions of law, sometimes treated as independent juridical persons. Yet the relationship with the state, as "owner" is qualitatively distinct from ownership by non state actors. It is that "special relationship" that must be harmonized within the logic of the UNGP, a task that is made more difficult precisely because of the dual character of the state with respect to its SOEs. The state serves simultaneously as the "owner" of the SOEs (and an object of law like other owners), and as the regulator of SOEs (the generator of the laws that are applied to SOEs within their home states). In the transnational sphere, that fluidity becomes more complex: SOEs are simultaneously usually characterized as instrumentalities of (foreign) states to which exceptions to rules of sovereign immunity may apply, and they also serve as conduits through which states may project their own laws, norms and policies by the exercise of their leadership of SOEs. Where states own a significant interest in enterprises that are domesticated in foreign states, the relationship becomes even more complex--here the notion of SOE converges with the issues of Sovereign Wealth Funds and the duties of states as investors (e.g. here). And these multi-spatial dualities of the relationship among SOEs and states might have been better captured in the 2016 WG Report.
Following the logic of the UNGP, the 2016 WG Report adopted a coordinated compartmentalization approach--one that builds on the autonomy of the each of the Pillars (protect, respect, remedy) but than seeks an overall coordination in their inter-relations. That is a very useful means of making sense of the UNGP as applied. But it also leaves certain questions dangling. The heart of that compartmentalization is found in UNGP ¶ 4
States should take additional steps to protect against human rights abuses by business enterprises that are owned or controlled by the State, or that receive substantial support and services from State agencies such as export credit agencies and official investmentIt is around this "additional steps" principle that the WG will build its framework for the human rights related relationship among states and the SOEs they own or control. "Policies, guidelines and good practices are lacking at both the national and international levels. Governance and protection gaps exist, which must be addressed." ( 2016 WG Report ¶5). And thus the two objectives of the 2016 WG Report: first to clarify "what States are expected to do" and second to "suggest a range of measures that they could take to operationalize" the "additional steps" requirements (2016 WG Report ¶ 6).
insurance or guarantee agencies, including, where appropriate, by requiring human rights due diligence.
The 2016 WG Report is grounded in independent investigation and also in the responses of a number of states to a questionnaire that was distributed by the WG (2016 WG Report ¶ 8 note 2). A number of important SOE driving states responded. But so did a number of important states for which SOEs may be viewed with suspicion. It was a pity that one of the most important drivers of contemporary SOE practoce, China, did not. At some point it will be necessary to embed China more robustly in these efforts, if they are to remain relevant in fact and form.
(b) Defining State-Owned Enterprises.
Conceptual issues of definition are deceptively easy; in the case of SOEs even more so. Yet a robust definition of SOEs for purposes of regulation, that is of distinguishing one sort of ownership structure from another for the purpose of the application of legal requirements, has not proven to be easy. The 2016 WG Report avoid the issue by relying on the definition of the OECD Guidelines on Corporate Governance of State-Owned Enterprises (2015), which are self-described as providing "an internationally agreed benchmark to help governments assess and improve the way they exercise their ownership functions in state-owned enterprises" (here).
The focus is a blend of formal and functional characteristics.
For the formal requirements: The SOEs must (1) be recognized by some national law as (a) an enterprise (b) in which the state (c) exercises ownership. The object is to avoid distinguishing among the forms with which aggregations of capital may be organized for the purpose of engaging in concerted activity. Ownership and control is understood by reference both to formal conveyance of authority and the effectiveness of control in certain "marginal situations. The definition is meant to include minority ownership where effective control is exercised but in a nod to sovereign wealth funds, excludes minority ownership under 10%. Additionally, transitory ownership is also excluded. These are political concessions, to be sure, that may tend to weaken the conceptual unity of the Guidelines.
For the functional requirements: the SOEs (a) as part of their purpose or activity (b) must engage in activity of an economic nature. In the OECD principles (embraced in the 2016 WG Report) the definition of economic activity has a certain old fashioned feel to it. The notion of economic activity is built around the offer of goods or services on a given market "which could, at least in principle, be carried out by a private operator in order to make profits" OECD Guidelines at 15. At its core, however, the definition of economic activity presents a curious nod to static historicism: "Economic activities mostly take place in markets where competition with other enterprises already occurs or where competition given existent laws and regulations could occur." (Ibid).
(c) State Owned Enterprises: State of Play.
The 2016 WG Report makes the case for the continued importance of SOEs in the globalized economy post-1980s. (Ibid ¶ 12). And indeed, despite the denationalization of enterprises in Europe after the 1970s, the emergence of complex supply chains now makes their operation relevant again worldwide (¶ 13). The discussion of the rationale for SOEs is interesting (¶ 14), though one best left to the public policy of states. It is important to note, however, that the rationale reflects modern OECD thinking and European sensibilities (¶ 15), but may not adequately reflect the underlying importance of SOE for contemporary Marxist states like China. Again, it is a pity that China chose not to participate more vigorously. But all of this serves as the necessary justification for the object of the 2016 WG Report, one that is certainly hard to argue with (¶¶ 16-17)--the continuing importance of SOEs within global production chains, and their relationship to states makes their lack of responsiveness to human rights based concerns all the more troubling. And those relationships makes the case for the embedding of human rights related concerns int he operation of SOEs all the more compelling.
(d) Scope and Limits of the Report.
Perhaps it is because the 2016 WG Report makes such a strong case for the more vigorous embedding of human rights concerns in both state practice and SOE operation, that the limitations of the 2016 WG Report are most troubling. First, the 2016 WG Report focuses narrowly on SOEs "in the traditional sense." (¶ 19) In that respect the OECD definition is both a sword and a shield, providing narrow clarity but avoiding issues of coherence. That is lamentable. More importantly, the compartmentalization of SOEs as a factor apart permits a distinction to be made between SOEs, on the one hand and sovereign wealth fund, on the other (¶ 19). It is not clear that, part from political considerations that as a matter of theory or conceptualization this is necessary. More importantly, perhaps, this compartmentalization (investment versus direct economic activity) produces a division between the state's oversight of SOEs and its investment related activity also embedded in UNGP ¶ 4: export credit agencies, investment insurance or guarantee agencies and development related agencies (§ 18). Conceptually these distinctions are without difference with respect to the duty of states. They are different with respect to their consequences for the object of state duty. And indeed, it is this unnecessary constraint grounded perhaps in an unfortunate conflation of the differentiation among second pillar organizations (as objects of state duty) and what should be a unitary approach to state duty, may produce a missed opportunity and the possibility of conceptual advances of state behaviors under the UNGP first pillar. The 2016 WG Report nods in that direction (¶ 21). It is hoped that at some point there will be a greater exploration of those issues as the conceptual basis of the first pillar is deepened.
3. Section II Normative and Policy Framework Underpinning State Action in Relation to SOEs (pp. 7-12)
(a) State duty to protect against abuses by SOEs.
The 2016 WG Report starts with its conception of the regulatory governance framework within which the state's duty must be understood in UNGP ¶: "States should do more than simply treat State-owned enterprises as any other business enterprise." (¶ 22). This "do more than" standard is then embedded within the "additional steps" principle of UNGP ¶ 4.
To start, the 2016 WG Report adopts the view that "do more than" means in addition tot eh duty of states generally under UNGP ¶¶ 1-3, applicable to the state's relation with all enterprises (¶ 23). That is, the ownership or control relationship adds another layer of duty beyond the general duty as a regulator. It takes comfort in the development of parallel thinking within the Council of Europe (¶ 24), though, again, a non-European perspective might have added depth--especially, for example, as China in particular is assuming a much larger and more critical driving force in the realities of economic activity (and ultimately its rules structures).
However, the 2016 WG Report emphasizes as well that this "do more" standard goes to means and not to substance. The object is to avoid abuse. "The ultimate goal is to achieve full respect for human rights by all enterprises, irrespective of ownership." (¶ 25). Yet, as we will see, that uniformity of respect becomes incoherent in the face of a state duty that varies among states and that tends to be narrower than the full extent of the human rights responsibilities of business. That produces an awkwardness that remains unexplored. For example, may a state that defines its duty under international law to exclude the International Covenant on Civil and Political Rights ensure that its SOE abide by its policy position, even in its operations in foreign states, consistent with this rejection of the Covenant?
The 2016 WG Report then offers a number of policy rationales for its position. These include the notion that ownership provides the State with greater leverage for monitoring an ensuring respect for human rights. Implicit here is the recognition that at its limit, the SOE is an instrumentality of the state and as such ought to be subsumed within its governance matrix (¶ 26). In addition, the rationale of "policy coherence" is offered, with reference to UNGP ¶8 and its call for internal governmental policy coherence (¶ 27). That is true enough, though it has equal applicability to the state duty (through UNGP ¶¶ 1-3) to all enterprises. Yet it also raises the difficult issue of the disjunction between the scope of the enterprises responsibility to respect human rights (UNGP ¶ 12) and the limits of a state's legal duty under international law applied within its domestic legal order with respect to those human rights norms and instruments domestically legalized (UNGP General Principles: "Nothing in these Guiding Principles should be read as creating new international law obligations, or as limiting or undermining any legal obligations a State may have undertaken or be subject to under international law with regard to human rights."). Last, the 2016 WG Report suggests a basis in augmenting the legitimacy and credibility of states--and the "reputational risk" to states that appear less concerned about the state of their duty to protect human rights (¶ 28).
Lastly, the 2016 WG Report considers the international law implications of its application of the "do more" standard and its implementation through "additional steps" (¶¶ 29-34). They look to the thinking of U.N. treaty bodies. Most interesting, again, is the tendency, at the limit, to conflate the SOE with the state ("considering such enterprises as quasi-State organs or agents and assuming that they are wholly owned or controlled by the State" (¶ 32)). And indeed there is much merit to this line of reasoning--even as it reflects some substantial jurisprudence within the logic of the European Union Treaties and especially its state aids jurisprudence (see, e.g., here). Yet it has equal applicability to emerging Marxist SOEs (see, e.g., here). However, that line of reasoning does not necessarily square with the notion of the dual nature of the SOE as both autonomous enterprise (the OECD approach) and as state instrumentality (the EU jurisprudential reasoning and Marxist approach). Perhaps the problem lies not in conception but in consequences. To some extent these distinction arise form the need to figure out a way to avoid the constraints of the principle of sovereign immunity. Yet it seems odd that sovereign immunity principles ought to drive the conceptualization of the human rights in business conduct project of the UNGP. And the result is policy distortion in the pursuit of coherence and legal harmonization. Perhaps it is time to detach sovereign immunity from SOE human rights duty/responsibility concepts.
Paragraph 33 speaks to this issue obliquely, in considering the extent of the state duty where the SOE performs public functions. Here one is at the edge of the conceptual constraints of the OECD SOE definition on which the reasoning of the Report itself is based. Here, the Report offers a hint that at the limit, again, the SOE responsibility to respect human rights merges into the state duty to protect. This suggests most importantly that the UNGP Pillars are hierarchically arranged, and that the state duty pillar invariably supersedes the corporate responsibility pillar when the two share governance spaces. Yet this produces the contradiction mentioned earlier. Where the scope of the state duty is considerably narrower than the autonomous corporate responsibility to respect, the result is a diminution of the scope of human rights consideration rather than its augmentation. There might be little comfort in the knowledge that what this narrowing "buys" is "legalization" of the obligation--to the extent that the state itself permits remedial mechanisms for its own failure of duty under Pillar I.
And yet the 2016 WG has a point. UNGP Principle 23 makes clear that the enterprise's responsibility to respect human rights may be subject to and limited by the constraints of the states in which enterprises operate. UNGP ¶ 23 Commentary notes that "Where the domestic context renders it impossible to meet this responsibility fully, business enterprises are expected to respect the principles
of internationally recognized human rights to the greatest extent possible in the circumstances, and to be able to demonstrate their efforts in this regard." What this suggests is that where there is contradiction between the constraints of the state's duty and the corporate responsibility, states may indeed limit compliance with Second Pillar requirements to the extent inconsistent with a state's domestic legal and constitutional order. On the other hand, in cases where there is no conflict--for example where the state duty is more limited than the scope of the responsibility to respect, but the two are not inconsistent, enterprises do have a responsibility to embed human rights under the 2nd Pillar beyond the legal requirements of the 1st Pillar. For SOE's that may mean that, for example, Chinese SOEs may be required to ensure respect for the provisions of the International Covenant for Civil and Political Rights when operating abroad to an extent quite different from its application in its home state.
Lastly, ¶ 34 of the 2016 WG Report notes the possibility of state liability for SE breaches where the acts of the SOE can be attributed to the state. Of course, as an instrumentality of the state, in theory, all acts of the SOE ought to be attributed to the state. Here again, the intersection between complicity, attribution and sovereign immunity rules distorts rather than clarifies the relation and muddies the analysis. The 2016 WG Report offers a facts and circumstances approach that largely reflects consensus thinking. But these conceptual conflations and distortions produce a potentially important liability that is not considered. Consider the following possibility: an SOE with its own independent and autonomous responsibility to respect human rights is found to have breached an obligation under the International Covenant on Civil and Political Rights. Because of the nature of the relationship between SOE and state, that beach can be attributed to the state. But the state in question has not incorporated the ICCPR in its domestic legal order. Under these circumstances the SOE has breached its responsibility but has the state breached its duty? This can be seen as a back door way of imposing international law on states otherwise unwilling to consent to its adoption. But states will tend to reject this as inconsistent with international law. Or it suggests a jus cogens character to the International Bill of Human Rights that is belied by the contemporary political realities. More likely that attribution may make the case for reducing the scope of the SOE corporate responsibility so that it aligns with the scope of the state duty. Yet that would do a disservice to the UNGP project and emphasize a fracture of corporate responsibility under the Second Pillar grounded on the ownership relationship between the enterprise and the state.
(b) the SOEs as Business Enterprises: the Corporate Responsibility to Respect Human Rights.
It is somewhat ironic, given the possibilities inherent in the reasoning of the 2016 WG Report ¶ 34, to then turn to the extent of the SOE responsibility to respect human rights under the Second Pillar of the UNGP (Report ¶¶ 35-37). But this is irony with an important purpose. It is a strong reminder in the 2016 WG Report that the second pillar matters, that its scope of responsibility is autonomous of the state duty, and that it applies in equal measure to both private and public enterprises--including the most state identified SOEs (¶35). And indeed, there is a point in noting that SOEs do carry the imprimatur--and thus the ethical and public purpose--burdens of the state, especially of transparency, accounting, disclosure, ethics and compliance--including but not limited to legal compliance (¶ 36).
These premises cannot be underestimated in importance. For though some of the preceding section of the 2016 WG Report might be read to suggest not mere convergence but the subsuming of the second pillar within the duty framework of the first pillar, the WG here makes it clear that such ought not to be the case. Yet the result of this dual obligation for SOEs can pose significant disjunctions. The most of important of these--those touching on the scope of rights--has already been discussed. But it matters. States will not be eager to have their SOEs apply international law under the Second Pillar that the state itself has rejected as a legal obligation under international law (and thus falling outside of the state duty). Alternatively, any implication that the state duty to protect human rights extends to instruments that do not bind states as a matter of international law would likely be rejected by a large number of states. These include those human rights that are (1) not legally binding, (2) reflects international norms inconsistent with the constitutional or political principles of a specific state, or (3) effectively constitutes the unilateral legalization of such law to states that have neither ratified nor transposed treaties and related documents evincing legal affiliations.
It is not clear, however, that the possible of opting out of the second Pillar, implied by the 2016 WG Report on the basis of a "performs public functions" standard (¶33) is consistent with the implications of the UNGP or its underlying philosophy. There is a little tension between that notion and the expression of the broad scope of the application of the second pillar to SOEs "regardless of whether they are purely commercial or related to specific public purposes." ¶ 37). The UNGP are meant to frame the way that human rights ought to be deeply embedded within the structures of economic activity. To add contingencies about the scope and manner of that protection on the basis of the character of the activity is at best ill advised. First the "performs public functions" stand is itself ambiguous. Public functions are understood quite differently depending on the political economy of a state, its traditions, and its operations. Moreover such a standard is at best difficult o implement and monitor. The United States Supreme Court's efforts to distinguish between traditional governmental functions and ordinary economic activity proved too difficult a task undertake in any sort of principled way. Adding the complication of differences among states, the resulting variation in the scope of coverage might well be used to undermine the coherence of the human rights project itself. It might be more useful to continue to focus on the character of the activity--whether or not it constitutes economic activity..and base distinctions on that criteria alone. And indeed, the OCED's own definition of SOEs has already embraced that view.
(c) Link between corporate governance and human rights.
The 2016 WG Report also seeks to make the case for a string link between corporate governance and the human rights project. This is consistent with the position of international financial institutions, such as the World Bank, and of multi-lateral organizations principally the OECD. And it reflects the notion that the management of the parameters of the internal governance of the corporation is intimately tied to the way on which the corporation itself manages its behaviors with other stakeholders, especially with their environmental and human rights effects. And yet, like these other institutions, the WG had to be quite careful to avoid offending that core principle of corporate governance--the shareholder or institutional welfare maximization theory that underlies the whole of the structures of corporate law and the principles of corporate governance. The issue of who the corporation serves remains a hotly contested one. But the consensus among enterprises and OECD states remains the same as it was in the early part of the last century--the corporation serves its shareholders through its institutional activities. While that may provide "play at the joints--long or short term time horizons, the ability to work toward aggregate shareholder welfare maximization, the ability to consider a host of factors in making the calculation (not just a narrow band of traditionally considered financial factors, and the like--the fundamental principle remains undisturbed.
And thus, in making the business case for business and human rights, and in making that case for the SOE, the 2016 WG Report faces the same constraints as have others who have sought to manage behaviors without running afoul of this basic principle. (¶¶ 40, 43-44) As a consequence, when considering corporate governance, on falls back--as one always falls back--on market and societal mechanisms for effective disciplining of corporate action, including the shape and operation of its governance regimes. The best one can do under these circumstances is what states have started to do in greater and more effective measure: (1) regulatory governance regimes in which corporate governance is nudged through objectives based regulation (principally relating to corruption, the institution of effective monitoring and surveillance mechanisms, and the reporting of their effective use); and (2) markets disciplining disclosure and transparency regimes (the UK Modern Slavery Act and the Dodd Frank Act ¶1502 Conflict Minerals rules are two cases in point).
The most interesting addition is the additional role for the state as the owner or controlling shareholder of the SOE. There is a sense that state conduct that transforms corporate governance as a mechanism through which the state (owner) may "spell out and implement their expectations that Satte owned enterprises respect human rights" (¶41) is troubling to the extent that it suggests a singular lack of enterprise autonomy. On the other hand, it is also troubling to the extent that state ownership can give rise to a corporate governance model for SOEs that is appreciably different form that applicable to private enterprises. These more aggressive suggestions are to be distinguished form the "active ownership" recommendation (¶42). Principles of active ownership ave been pioneered--not in the governance of SOEs but in the management of the investments of sovereign wealth funds. The Norwegian model provides a nice example (e.g., here, here, and here). It suggests the strong convergence between SOE and SWF models--in the governance context (another reason it was a pity that SWFs were excluded int his report).
4. Section III (pp. 12-20).
Section IV is the most ambitious--laying out the Working Group's framework for implementing the theoretical justification and conceptual framework developed in Sections I and II. That framework, mirroring the structure of human rights due diligence itself (UNGP ¶ 17 et seq) is centered around a "range of measures that States, as owners of companies, could take to operationalize their obligations under [UNGP] principle 4." (¶ 45). Each of the eight (8) measures is considered quite briefly
(a) setting expectations.
The initial measure, setting expectations, is both natural and necessary. Yet it is often overlooked. But one must consider this in two respects. First, the SOE ought to set expectations under the framework for enterprises contained in the Second Pillar responsibility to respect human rights. Second, the state, as the owner (controlling stakeholder) must set expectations in its role as owner. This is to be distinguished from the state regulating. Here the state duty does not extend to the legalization of its relationship as a shareholder to its SOE, but rather extends to the construction of a set of decisions with respect to its operating rules as a shareholder with respect to its management of its ownership interests. The difference is subtle but necessary. The former goes to UNGP ¶¶ 1-3. The later goes to the policy and operational obligations suggested in UNGP ¶ 4.
This is especially important, as the 2016 WG Report notes, in the elaboration of national CSR guidelines (¶ 47). But as the 2016 WG Report rightly notes--there is a distinction between CSR guidelines and the incorporation of business and human rights elements within them. Mere CSR codes that do not reference the UNGP framework or otherwise elaborate its principles are of little good, even for managing the reputational risk of states (¶ 49, esp. problematic given the last sentence of that paragraph). And the idea of operationalizing the "role model" function of SOEs (¶ 51) is laudable.
More problematic are the suggestions of extraterritoriality suggested by the "setting expectations" mechanisms (¶49) with respect to the prevention of human rights abuses abroad by reference to the policies and laws of home states. This problem is magnified when the home state is both regulator and owner, or operating through an instrumentality organized in corporate form. There is a very thin line between projections of economic activity abroad, and projections of state power abroad through the medium of institutions organized as SOEs. At worst, this sort of approach will make it harder for SOEs to operate outside their home jurisdiction (see here).
(b) mechanisms to set and manage expectations through ownership arrangements.
The 2016 WG Report follows the OECD here to good effect. Expectations set and established by the state (but note here also those expectations that ought to be set by the SOE under Pillar 2 as well, a distinction missing from the Report) should be publicly disclosed "and mechanisms for their implementation be clearly established" (¶55). To that end the Report falls back on a number of its alternative approaches--its National Action Plan project, responsible business conduct policy and state conduct policies with respect to their ownership interests. The most useful mechanism considered is the suggestion for the centralization of ownership supervision within the state (¶ 57). In China, the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), a special commission directly under the State Council, is responsible for managing SOEs. It is important to clarify which institutional actor within the state can exercise ownership rights, and to specify as well the norms those organs must apply in exercising ownership and control. On the other hand there is always the danger of adding an additional layer of bureaucracy, with its consequences for policy coherence and its danger for democratic accountability. The more remote the ownership facility the less accountable it may be either to the state organs, or the people.
(c) Relationship between the state and SOE boards of directors.
The 2016 WG Report constructs an interesting relationship among the state, as owner, and the boards of directors, as the incarnation of the SOE as an autonomous institution. To avoid the potential implications of conflating state and enterprise, the 2016 WG Report posits the SOE board as a sort of conduit for state direction but also as the institution that protects the SOE form absorption into the state. The method selected for this careful balancing is a "comply or explain mechanism" (¶ 61). This makes excellent sense and draws on the notions of regulatory governance in a useful way. Here the SOE remains free of direct control but must also either satisfy the owner that its preferences have been met, or that they have been considered and rejected. On the other hand, it is unlikely that in an SOE context that "comply or explain" would ever produce a situation where the SOE board did not comply.
That suggests that this method might be less effective than it appears as a means of protecting the autonomy of SOEs especially where the state has set up an aggressive and vigorous program of oversight and direction. The latter may especially be the case in political systems grounded on ideologies that advance socialist modernization or related principles. In these cases, "comply or explain" combined with supervisory and support mechanisms (¶62), control of board nomination and evaluation (¶63) and efforts at managing the gender equality of the board (¶64) may effectively reduce autonomy to a formality. If that is the case, then the question emerges again--the extent to which the SOE, as a state instrumentality in fact, is required to comply with the responsibility to respect in addition to serving as the expression of the state's duty to protect human rights to the extent of the state's legal obligations under international law and otherwise in the state's discretion.
In addition, it raises as well another concern--where the state oversight of the board of directors is so complete, there is a question of its compliance with OECD Principles. But more importantly, it opens the SOE to issues of veil piercing--the doctrine in many jurisdictions that presumes that an enterprise is solely liable for its own obligations and entitled to the sole use of its assets, unless the enterprise is found to be a sham, or the enterprise is deemed to be the alter ego of the state (here, here, and here). A state owner whose control is extensive enough may be deemed to have assumed both the authority for and the obligations of the enterprise. In that case the state as well as the enterprise may be liable. Yet if that is the case, the state could seek to avoid liability by invoking sovereign immunity principles. And here, again, in this context, it suggests the perverse effects of the OECD definition of SOEs limited by the formal requirement of separate incorporation. The human rights effects of economic activity are not a function of the form of that activity but of the activity itself--whether the result of the conduct of a private enterprise, an SOE, or the state. Economic activity, in whatever form, ought to be subject to the corporate responsibility to respect, and as well, where appropriate the state duty. The embrace of the more antiquated framework will continue to bedevil both conceptual and implementation issues.
(d) oversight and follow up mechanisms.
The 2016 WG Report again turns to principles of regulatory governance in suggesting methods for SOE oversight and follow up mechanisms. And again, the consequences of these might produce either special legislation or rules for SOEs, a consequence that is at odds with the equal treatment principles of the OECD Guidelines and the UNGP, but it might also reduce substantially SOE autonomy to the point where it and the state merge.
Specifically, and following the lead of the Council of Europe, (¶ 65) the 2016 WG Report suggests that "States should evaluate measures taken and respond to any deficiencies as necessary, including by providing adequate consequences (¶ 65). To that end it is suggested that states "set up--or at a minimum require that SOEs adopt--explicit human rights targets, and monitor their achievement int he same manner and with the same mechanisms used for sustainability targets" (¶67, referencing the experiences of some states with respect to the latter at ¶ 66).
There is an interesting wrinkle to this proposal. It suggests that value maximization for SOEs depart form the traditional calculus of profitability using generally accepted accounting principles and instead adopt a broader interests maximization model grounded in the maximization of "value to society" (¶68). That value, it is assumed would be measured in relation to the targets imposed, though it is not clear how they would be measured. To that end, perhaps, the 2016 Report also suggests creation of systems of ownership meetings and dialogues (69¶ and the use of assessment tools with more detailed human rights related criteria (¶ 70). Lastly the state could also use independent review and audit mechanisms (¶71).
All of these are quite laudable suggestions. One wonders, however, at the costs of compliance and their effects both on productivity (of the SOE) and the institutional capacity (of the state) to actually and appropriately engage in these activities robustly and over a long period of time. It is easy enough of rich states with complex and well seasoned bureaucracies to begin to work through these institutional mechanism, but poorer states, especially those downstream in supply chains--where a number of human rights related activities may occur--may not be in a position to do more than give lip serve. And that brings us back both to privatization--the need to delegate these functions with SOEs or to private certification and monitoring institutions, delegate them up to international organizations, or permit states chartering apex SOEs to intervene downstream more directly. Any of these alternatives are likely to be unacceptable.
(e) capacity building obligations.
And that discussion of oversight and monitoring brings the 2016 WG Report inevitably to capacity building (¶¶ 72-73). Capacity building is focused on building the capacity of SOEs (¶72) on the nature of international standards, national expectations and appropriate systems building. But it also relates to capacity building focused again on SOEs with respect to multi´stakeholder initiatives (¶73) including international public mechanisms. These are important areas of capacity building. Yet it is as important to note that states themselves may require substantial efforts at capacity building and the funds necessary to effectively commit resources to the development of capacity. Indeed, with respect to the state duty to protect human rights through SOE ownership, the critical question becomes the capacity of states as much as the capacity of SOEs to work effectively within these human rights frameworks. It is not clear that these have been addressed especially for low and middle income states and states with weak or thin governmental structures. More will have to be done to avoid capture by larger richer states and the problems of projection of national interests and views downstream to poorer weaker and less prepared states.
And, of course, this effort might also find a tie with corruption, an area of emerging human rights based conduct (See, e.g., here). The issue of corruption runs just to those affected by corruption in its various forms, but also goes to heart of the legitimacy of state oversight and SOE operation. Corruption thus can be understood both as a form by which government capacity is threatened, and as a cluster of actions that themselves contribute to human rights threats to stakeholders. The global scandals of property seizures for land deals through the misuse of official discretionary authority provides a case in point (see, e.g., here).
(f) Requirements of Human Rights Due Diligence.
The key issue for the state under UNGP 4's "additional steps" standard appears to revolve in some key respects to the question of mandating human rights due diligence for SOEs. Under the Corporate responsibility to respect pillar enterprises have a responsibility to conduct HRDD but there is no legal obligation to do so. States, of course, are free to impose the requirement. Most have not. But the issue becomes acute where the enterprise is state owned. The 2016 WG Report shies away from a recommendation of mandatory HRDD for all SOEs as a baseline. Instead they move back to the traditional encouragement standard (¶ 75-76). But they also point ot regimes where HRDD for SOEs are mandatory and in addition suggest that States define the criteria under which they will require SOE HRDD (¶ 77). That is an important step in the right direction.
(g) Requirements of Disclosure, Transparency and Reporting.
Here the 2016 WG Report is at its strongest. It notes the trends toward regimes of greater transparency and disclosure for all enterprises relating to matters of economic, social and environmental significance (¶¶78-79). On that basis it recommends "that States take the additional step to systematically require the enterprises that they own or control to report on environmental, social, and human rights performance." (¶80). Companies should follow an established methodology (¶ 81). Though here, of course, the issue of coordination, and analysis looms large. In the absence of a uniform standard the disclosure may be difficult to compare across industries and between companies in the same sector. Perhaps some greater coordination on disclosure methodologies would be useful for SOEs as well.
(h) Effective Remedy.
The issue of remedies has been a difficult one for the UNGP project. Both the Working Group and the Office of the High Commissioner have devoted efforts, sometimes coordinated, to the problem of the integration of remedial mechanisms with the conceptual and framework structures of human rights norms, including but not limited to the UNGP. This remains very much a work in progress. Part of the problem, of course, is that the conversation is usually directed downward, from elites in powerful states and their coordinates in "downstream" states to governmental organizations. These elites--well educated and well off members of an increasingly coherent intellectual, social, and economic class, tend to work for, but rarely with the objects of remedial measures. The problem is of course one of representation, coordination and engagement with significant obstacles (discussed here). The problems are magnified in the case of SOEs. Here the obligation of the state in its own right ought to be paramount--that at any rate is an implication of the organization of the 3rd Pillar of the UNGP. At the same time the SOE as an instrumentality of the state, sometimes more and sometimes less connected with the governmental apparatus, ought to have a heightened responsibility precisely because of that connection--which is absent in the case of private enterprises. Yet even this premise is complicated where SOEs of one state operate in the territory of another. In that case, they represent both an instrumentality of the state, a guest in the territory of another and a commercial venture with few of the advantages of state power.
Within this difficult conceptual context the 2016 WG Report seeks to chart a middle ground--but ne focused especially on the home country relationships between an SOE and its state owner. They start with the premise that access to remedy ought, as an initial matter advance an equal treatment principle (¶ 83), at least with respect to the state duty to protect within its territories. The Report then elaborates on the nature of the specific manifestation of that duty with respect to the SOE.
As the owner of State-owned enterprises, the State should make sure that: (a) the enterprises it owns or controls do not obstruct justice; (b) they cooperate fully with judicial and non-judicial grievance mechanisms; and (c) they fully comply with their responsibility to respect human rights, including providing remediation for human rights abuses that they may be causing or contributing to (¶84).These recommendations are then applied to the three main categories of remedial mechanisms provided under the UNGP's Third Pillar. With respect to state-based judicial mechanisms (¶85) the 2016 WG Report notes but does not resolve the issue of sovereign immunity. It suggests a continuing role for immunity. But it is not clear how preservation of the principle and protections of sovereign immunity--either running to the SOE or to the state as owner exercising the sort of oversight contemplated in this Report advances in any respect the project of human rights protection. It certainly works effectively to retard the availability of effective remedy; and it reduces any real incentive for states to undertake their duty or for the people (usually victims) to vindicate their rights through judicial mechanisms. That is lamentable. Indeed, it is now time to consider reversing the traditional premise of sovereign immunity as counter to the spirit of the UNGP; it is now time to interpret the state duty as requiring the waiver, in tot, of sovereign immunity for acts of state related to the operation of SOEs, and to eliminate entirely the whole complex of sovereign immunity for SOEs, whether operating within the state or abroad.
Lastly, the 2016 WG Report well describes the utility of state based non-judicial remedies (¶86) and SOE based grievance mechanisms (¶87). The continuing development of the connection between the OECD's NCP process--and its judicialization (considered here) is to be welcomed. More focus, however, ought to be given to SOE grievance procedures and especially to mechanisms for anticipating issues and resolving them before loss occurs. To that end, there ought to be a stronger connection, one implied in the UNGP, between HRDD and grievance procedures.
5. Section IV Conclusions and Recommendations (pp. 20-23).
The conclusions drawn together the conceptual insights around which the Working Group would construct a framework for managing the human rights related relationship among states and the SOEs they own or control (¶¶88.94). There is an emphasis on the distinct character of the SOE responsibility to respect human rights and the state duty to protect human rights. Yet those distinctions are sometimes blurred even int he construction of the framework put forward in the 2016 WG Report. The difficulty is to compartmentalize the role of state as regulator and its role as owner. Yet in a world in which regulatory governance--markets based and principals based governance is becoming more prominent (see here)--such a compartmentalization is neither easy, nor necessary. It also emphasizes the context based approach to the development of the state duty with respect to its role as SOE owner and specifically with respect to the application of the "additional steps" specified in UNGP 4. Yet more might be necessary to avoid the strategic use of context to either avoid the state duty or to substitute it for the sometimes broader scope of obligation under the 2nd Pillar. It is true as well that states should lead by example. Yet until states get their own houses in order--that is until their own legal frameworks are more compatible with international consensus standards--it will be difficult to consider 1st Pillar duties as an important contributor to the legal management of human rights in business activities.
The recommendations are directed separately to states, SOEs, national human rights institutions, international organizations, the UN human rights system, civil society and academia, and business organizations (¶¶95-112). Most of these are driven by the need to develop systems of engagement and coordination among these most relevant stakeholders. And they rightly point to both the neglect of this important area of business and human rights, and the need to ensure that SOEs and private enterprises engage in the busines of human rights in an equivalent way.
6. The challenges posed in the 2016 WG Report and the work left to be done.
What might one learn fro the 2016 WG Report? What work might be left to be done in the wake of the powerful insights developed in that Report? Let me briefly and perhaps somewhat provocatively suggest challenges and to sketch the work to be done and the ways forward in the construction of a robust framework for managing the human rights related relationships among states and SOEs:
First, the reliance on the OECD SOE definitions and framework is troublesome. That framework is altogether too strongly grounded in European historicism and ignores the robust development of a new form of SOE and SOE-state relationship within modern Marxist Leninist states. Moreover, this approach--so severely grounded in institutional formalism tends to ignore and marginalize the object of the regulatory management goals of this effort--the management of economic activity in whatever form it is undertaken (e.g., here). The institutional imperatives of the OECD and of the 2016 WG Report tend to hobble the analysis and create substantial conceptual complexities. A better approach would be to start from the premise that economic activity owned or controlled by the state, in whatever form organized, is the subject of both UNGP 4 and the 2nd Pillar. Economic activity and not its forms, should guide the framework that shapes the state duty to protect as a direct obligation when undertaken within a home state, and subject to the requirements of the 2nd pillar when undertaken abroad.
Second, the current approach leaves undisturbed the starling disjunction between the broad scope of responsibility to respect human rights in Pillar 2, and the quite variegated scope of state duty to protect human rights in Pillar 1. This disjunction is only augmented where the state owns and operates enterprises engaged in economic activity. The resulting contradictions produce both the opportunity to "game" the oversight of human rights activities and fractures any effort to produce uniformity in approach.In the context of the management of the global economy, these are particularly important negative effects. Yet states are not inclined to adhere to uniform international legal standards--localist sovereignty tend to avoid efforts at harmonization. The only source of such uniformity--the scope of the Pillar 2 obligations of enterprises--is effectively undermined by a state duty based approach to management. That irony produces farce.
Third, there is little mention of the ways in which the application of both state duty and corporate responsibility might vary from the home to host state, and form application to apex SOE and then downstream to supply chain partners. The use of extraterritoriality, and a BIT-inspired internationalization of local law applied more of less normally everywhere hardly suffices. The current National Action Plan process only highlights and deepens the contradictions--fostering a "·not in my backyard" attitude that permits developed states to impose stricter standards to overseas conduct tan to the conduct of their own apex corporations within their home territories. Again--starting from the basic premise that it is economic activity rather than discrete institutions that are being regulated may help produce a better conceptualization base for this issue.
Fourth, the continued obsession with extraterritoriality as a sort of means of papering over governance failures down supply chains ought to be reconsidered. First it exacerbates the unequal relations among states. Second it tends to marginalize the voices of developing states, states where the bulk of human rights wrongs occur. Third, it serves as an impediment to development by substituting foreign state power for the development of indigenous capacity. This is no doubt an unpopular argument, but the dangers of extraterritoriality as a substitute easy short term measure should not be underestimated.
Fifth, the focus on active shareholding and SOE autonomy create challenges to the integrity of global markets and its regulatory governance. At its limit, a strong active shareholding by states--operating by analogy to the controlling shareholder of a closely held enterprise--can collapse the distinction between state and enterprise. That implicates both sovereign immunity and the integrity of the public-private distinction on which much law is still based.
Sixth, related to the fifth point, it seems odd that sovereign immunity principles ought to drive the conceptualization of the human rights in business conduct project of the UNGP. And the result is policy distortion in the pursuit of coherence and legal harmonization. Perhaps it is time to detach sovereign immunity from SOE human rights duty/responsibility concepts. Better still, it is time to abolish sovereign immunity in all respects from both the exercise of the state duty to protect human rights with respect to its ownership of SOEs, and to eliminate sovereign immunity entirely form SOE activity.
Seventh, the unnecessary constraint, grounded perhaps in an unfortunate conflation of the differentiation among second pillar organizations (as objects of state duty), and what should be a unitary approach to state duty, may produce a missed opportunity and the possibility of conceptual advances of state behaviors under the UNGP first pillar. Greater exploration of those issues as the conceptual basis of the first pillar is deepened is required. This is particularly important in the context of the growing willingness to compartmentalize investment versus direct economic activity. The effect produces a division between the state's oversight of SOEs and its investment related activity also embedded in UNGP ¶ 4: export credit agencies, investment insurance or guarantee agencies and development related agencies (§ 18). Conceptually these distinctions are without difference with respect to the duty of states.
Eighth, the suggestion that the UNGP Pillars are hierarchically arranged, and that the state duty pillar invariably supersedes the corporate responsibility pillar when the two share governance spaces ought to be rejected. Where the scope of the state duty is considerably narrower than the autonomous corporate responsibility to respect, the result is a diminution of the scope of human rights consideration rather than its augmentation. There might be little comfort in the knowledge that what this narrowing "buys" is "legalization" of the obligation--to the extent that the state itself permits remedial mechanisms for its own failure of duty under Pillar I.
Ninth, the issue of capacity building must be understood not merely as a methodological issue but as an issue at the core of development. States that require substantial efforts at capacity building also may require and the funds necessary to effectively commit resources to the development of capacity.
Tenth, the problem of the meaningfulness of data and data driven disclosure and transparency systems remains unexplored. I have suggested earlier that the narrative approach to environmental,, social and human rights reporting is ineffective. I renew the call for the development of fianncial statement based reporting mechanisms for the value and cost of environmental, social, and human rights compliance and their failures to comply (see, e.g., here). Additionally, the absence of a uniform standard the disclosure may be difficult to compare across industries and between companies in the same sector. Perhaps some greater coordination on disclosure methodologies would be useful for SOEs as well.