Thursday, January 19, 2017

Beyond the Triadic Relationship in Business and Human Rights: Thinking About the Duties and Repsonsibilites of Banks, Sovereign Wealth Funds and State Owned Enterprises

(Pix © Larry Catá Backer 2016)

The UN Guiding Principles continue their development.  States have been strong in voicing their support for the concept of the corporate responsibility to respect human rights and are increasingly seeking ways to legalize those obligations--especially outside their national territories.  Enterprises have  been strong in their defense of the state duty to protect human rights--and of the limitations of their own legal obligations as objects  of law. Civil society continues to agitate for the legalization of the structures of state duty and enterprise responsibility--within a global system marked by the dereliction of states and enterprises of either their duties or their responsibilities.  And the individuals at the center of all of this activity continue to be under served by each of these grand stakeholders in a process undertaken on their behalf but with only limited engagement by those most affected.

But what of hybrid organization and hybrid activities?  This post considers the way in which it may be time to start thinking differently about the role sovereign wealth funds (SWFs), state owned enterprises (SOEs) and banks financing global production chains, in their role within the Guiding Principles.

Five years after the endorsement of the UN Guiding principles (UNGP)s, the basic contours of the obligations of the principal actors under the First and second pillars are well known. Much progress has been made in moving forward on a developing consensus of the state duty to protect human rights –currently managed through the National Action Plan process. Likewise, the contours of the corporate responsibility to respect human rights has been advanced to an even greater degree both by the development of procedures for engaging in human rights due diligence. Both states and corporate enterprises have also begun to clarify and operationalize more meaningful techniques of providing more better remedial procedures for remedying human rights wrongs. Thsi progress has been especially meaningful in the face of no strong consensus yet on paths toward development.

All three remain at a formative stage of development. The national action plan project remains essentially a project of developed states.  Many NAPs, as well suffer from a schizophrenia in which human rights duties and responsibilities appear to be projected out from host states with littkle attention to their application within states.  This is particularly regrettable as the developed states have missed an opportunity to lead by example in an area in which they have always sought to convince the Internationale community that their own internal systems provided some sort of model for emulation by developing states. Indeed, when NAPs suggest one set of uniform standards of expectaitons for business behaviors abroasd, but no such stadards for business behaviors within their own home states, that suggests an asymmetry that weakens the uniformity of the baseline standards that must be protected and makes multilateral efforst that much more difficult to implement.

The project of operationalizing the corporate responsibility through human rights due diligence frameworks suffers first from a lack of consensus among the number of private (and some public) organizations that are seeking to provide a model for standardization of practices.  That makes for a great market for regulatory competition but at the cost of standardization and regularization fo practices that make reporting meaningful. More importantly, the projects of human rights due diligence remain stubbornly narrative and descriptive. Most tend to avoid coherent quantification and reporting embedded in or attached to traditional financial statements.  That is a pity.  The emphasis on narrarive reporting provides good to excellent reporting on frameworks and efforts.  But it does little to measure impacts, either on business or on those communities affected by business decisions.  It provides very little that financial institutions and credit rating agencies can use to measure the costs and benefits of compliance and indeed substantially weakens both the business case for human rights due diligence and its utility as a tool for changing business behavior.

The remedial pillar remains underdeveloped.  That results, in part, from the reality that rhetorical flourishes and symbolic actions are much more compatible with the state duty to protect and the corporate responsibility to respect human rights.  Symbolic acts and powerful statements do not remedy human rights wrongs.  All of the best intentions in the world do not compensate victims of human rights abuses, of state and corporate  corruption that strips individuals of their rights and dignity without recourse.  Developed states have been reluctant, for perfectly good reason (including the protection of the coherence of their own domestic legal orders), to morph their legal systems to provide effective venues for the redress of transnational human rights wrongs of global production chains in the absence of national legislation or multilateral treaties.  It is indeed quite understandable that in a global system grounded int he integrity fo states that states would want to preserve the integrity of their domestic legal orders, and through that of their own political and legal integrity and autonomy. In the face of this reality there has been very little by way of legal reform to create those mechanisms for remedying human rights wrongs that are multilateral in form and effect. Except in a few exceptional cases, national courts, on their own, have not been willing to transform their core corporate jurisprudence to accommodate the transnational realities of global production chains.  States have shown little appetite to provide courts with the legal authority to do so; and civil society has shown even less appetite to consider the empowerment of transnational remedial mechanisms, especially if it is tied to emerging systems of global arbitration. 

Still, the contours of the debate and the possibilities available for the way forward are well recognized. Those contours have at their center the relationship between states, enterprises directly bound up within a global production chain, and the individuals and communities affected by the actions of both. Between them, civil society plays multiple roles.  They serve as the incarnation of individuals aggregated in stakeholder communities--consumers, human rights victims, global political communities and the like. In this role they engage, in a representative capacity, enterprises, states and other civil society forces, within the framework of the business and human rights project.  To that end, they also serve as aggregators of information--monitoring and reporting on the activities of the critical stakeholder communities (states, enterprises and individuals).

Within these relationships, (1) the “model” state is patterned after members of the OECD, (2) the default enterprise is a private undertaking usually organized in corporate form and chartered within an OECD compliant state, (3) those affected are usually understood as workers or communities in non-model states downstream in production chains willing to embrace consensus views about their relationship to work, state and enterprise, and (4) civil society actors as essential mediators and bridging agents and the active incarnation of the interests of the objects of human rights related business management.

Yet five years after endorsement, the situation respecting the relationship between the UNGPs and those actors beyond this core triadic relationship (states, operating businesses, and workers/civil society) remains relatively under developed. Among these, three actors are particularly critical to leadership and leverage in the operationalization of the UN Guiding Principles. Banks, sovereign wealth funds and state owned enterprises represent some of the greatest economic forces underlying the global system of production at the heart of the structural framework of the Guiding Principles. Banks stand at the center of the relationship between the supply of money and the operation of states and enterprises in those activates at the core of the UNGPs. Sovereign wealth funds (SWFs) and state owned enterprises (SOEs) each in their own way serve as the means through which states project their activities into private markets, not as states but as private actors, though as private actors serving the interests of states.

SWFs represent the bridge between the normative construction of human rights in economic activity and its application in investor markets. They serve as a means through which states and international organizations may leverage their regulatory authority and the obligations referenced in the UNGPs in their market participation. It provides an opportunity for states to lead by example, not just as states under the first Pillar but as private oriented investors under the 2nd Pillar. SWFs serve as an authoritative bridge organization--operating within the business sphere of the 2nd pillar while managed in accordance with and as a projection of state policy firmly grounded int he 1st pillar.  States have been quite strategic in their efforts to characterize these commercial enterprises that project state financial power abroad.  They have tended to find ways to avoid any public accountability, preferring to legalize the fiction that despite their form, these are purely private commercial ventures because they appear to operate that way in effect. This fiction is not new but invented for other good reasons--the need to strip states of some of their sovereign immunity with respect to some of their activities while avoiding questioning the doctrine of sovereign immunity itself. That fiction, however, has some substantial consequential effects, the principal one being the avoidance by states of any pointed application of a duty to protect human rights attaching to their activities that are "commercial."  And ironically, it highlights the increasingly anachronistic structures of sovereign immunity in a world in which it is no longer possible to segregate "state" from "Business activities of states." SWFs are an increasingly important and influential stakeholder in financial transactions.  Their obligations to bend that influence in the service of their responsibility or duty to protect (or respect) human rights has hardly been developed.

SOEs represent the state as a private actor—the most direct and effective means through which states might lead by example. They are an instrumentality of the state and thus directly subject to the state’s first pillar obligations to the extent that the state exercises its ownership rights. They share many of the same problems and opportunities as SWFs. But SOEs are also enterprises themselves directly subject to the potentially more expansive responsibilities to respect human rights in the 2nd Pillar. SOEs provide the best means of not only leading by example, but of leveraging state power and law through its application as enterprise policy at the instance of its principal shareholder. And yet, like SWFs, states have sought to play SOEs strategically--aligning them with states when it is advantageous, and aligning them as autonomous business units when that serves their ends.  As a result, the economic activities of states are also constructed as an enormous fiction within the logic of international standards for business and human rights. All states  ought to have a duty to protect human rights in whatever form state activity is manifested.  That states chose to project power and implement policy through economic means, and in the form of SOEs, should be irrelevant.  That it is not so again implicates the distorting effect of traditional assumptions about the nature and role of the state and the role of sovereign immunity in that construct. But SOEs are also enterprises and in that role are also bear a responsibility to respect human rights--and to do so through human rights due diligence frameworks.  In the case of SOEs, the obligation of these enterprises to respect human rights is a legal responsibility flowing from the international obligation of states to protect human rights in their  activities (including the activities of SOEs). That both states and enterprises reject this position tells us more about the lack of will to move the business and human rights project forward than it does about any flaws in its conceptualization in the form of the Guiding Principles.

Banks and related public financial institutions represent the potential of private leverage. But more than that—banks represent a means for hardening the soft law of international standards into the hard law of lending contracts supervised by financial institutions. Private banks represent a means through which the corporate responsibility top respect human rights can become its own governance order. In this case, however, one operates almost exclusively within the second pillar.  Yet even so the regulatory effects of banking policies and practices are enormous.  One can understand the magnitude of their effect by considering the analogous regulatory effect of bank conditionality embedded int he lending policies of the World Bank and the International Monetary Funds.  Each of these "banks" are well known to use conditions built into their loans to manage the conduct of their borrowers and to socialize those borrowers into the norms and practices which are believed to represent international consensus for good governance, corruption avoidance, robust civil society and the like. In that sense global consensus is well beyond the stage where it is even plausible to suggest that lenders have no role or obligation with respect to the conduct of their borrowers. That relationship--and the instrumentality of the responsibilities it implies--ought to guide the application of the 2nd pillar to lending institutions.  That application is not confined to their internal operations but to the regulatory effects of their lending and the quasi public responsibilities that arise therefrom.

Banks, SWFs and SOEs, then, represent an extraordinary means—(1) banks through their contracts, (2) SWFs through their investment decisions and active shareholding, and (3) SOEs through their internal governance within production chains—for implementing international business and human rights substantive norms. In that context it is worth considering ways in which the interventions of SWFs, SOEs and banks might enhance the business and human rights project under the Guiding Principles.

SWFs and Active Shareholding. Active shareholding poses the issue of the extent to which the SWF ought to develop standards of investment grounded in the 1st or 2nd pillar obligations (or both—where the 2nd pillar scope s broader), the extent to which that should affect investment decisions and the extent to which the SWF ought to use its shareholder status to monitor and seek to induce changes in the company. Active shareholding represents the ability of a state, through its SWF, to project state power into the governance behaviors of enterprises in which it has invested.  It would seem that this is a public law responsibility.  The state duty touches all aspects of state behavior, including those undertaken  in the commercial sphere.  Yet the recent history of the Norwegian SWF also evidences the difficulties of this project.  Standards that provide a large measure of discretion, inconsistently applied, the ambiguity of the prominence of financial factors over other concerns, and the complicated governance and decision making structures through which such power is exercised suggest bith caution and a need to reform implementation if this mechanism is to be effective.

 SOEs and the standardization of business practices. SOEs operate along abroad spectrum of connection to the state.  At one end, SOEs are merged with and represent the activities of the state organized as and conducted through legally distinct sub units that for purposes of convenience goven their role are referred to as "corporations" or "enterprises". At the other end, SOEs may exhibit only the most tenuous relationship with the apparatus of government and such division might be protected through law. There are a number of tensions within this range. One tension lies between duty and responsibility where the state’s duty is narrower than the UNGP’s responsibility for the company. It considers the extent to which the SOE has an independent responsibility under the UNGP and the extent to which that responsibility creates liability or obligations in the state owner.Another exists where the state seeks to avoid its duty entirely by privatizing (through SOEs) activities with respect to which it would choose not to bear the burden of a duty to protect human rights under even the rules of its own domestic legal order. Yet SOEs ought to be the vehicle through which state provide leadership to private enterprises on the appropriate behaviors within he UNGP, for example.  Indeed, SOEs do serve as a role model, but one that suggests the power of state avoidance of its own duty.  One has yet t see an SOE that has adopted as a legal standard the obligations imposed as a social requirement under the 2nd pillar, even among the most progressive European states. 

Banking conditionality.  Much was made of the recent proceedings before the Netherlands National Contact Point (Rabobank), in which banks pledged to incorporate certain operational standards as conditional loan requirements for borrowers seeking financing of their palm oil business.  That was to be lauded to be sure.  Yet that embrace of conditionality and internationalism also exposed its weaknesses.  First the standards adopted might not have been effective.  Worse when there are multiple competing standards that might serve as the basis for conditionality. In the absence of sector discipline--among banks lending and among borrowers--there is little likelihood that these standards will be meaningful.  As important, it is not clear how banks will monitor compliance or the standards to be used to exercise discretion.  Indeed the extent to which the banks have a responsibility to determine the full extent of international standards that might be applicable and the manner in which they are to be applied remains terra incognita. The consequences are significant for limiting the effect of bank willingness to employ conditionality in the service of coherent and harmonized conduct expectations and enforcement.Yet it is also clear that banks cannot remain blind to the way in which their funds are being used, at least to the same extent that operating companies can no longer be blind to the sources of their own activities.

Taken together, what emerges is a large and largely ignored area of governance in both the legal and societal sphere.  That regulatory area is centered on those who make operations possible--banks and SWFs.  And it also focuses on the disintegration of the wall that once separated public from private activity, state duty from private obligation to obey the law. Until banks, SWFs and state organs seeking to avoid the imposition of their own constraints by the invocation of formal distinctions are brought more fully into the UNGP framework it will be difficult to realize it potential.  And until the distinctions between public and private activity and between the levels of obligations that follow the choice of form in which the state elects to operate, to will be difficult to avoid weakening even the public duty aspects of the UNGP through the cultivation of strategic behaviors by states. To that end, just as it may be time to rethink the protection of corporate autonomy, so it might be time to rethink the protection of states through antiquated doctrines like sovereign immunity.

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