Recently Released: OECD Due Diligence Guidance for Responsible Business Conduct

I was delighted to hear that the Organization for Economic Cooperation and Development (OECD) had recently published its OECD Due Diligence Guidance for Responsible Business Conduct (Paris: OECD, 31 May 2018).   The OECD describes this work in the following terms:

Businesses can play a major role in contributing to economic, environmental and social progress, especially when they minimise the adverse impacts of their operations, supply chains and other business relationships. The OECD Guidelines for Multinational Enterprises recommend that enterprises conduct due diligence in order to identify, prevent or mitigate and account for how actual and potential adverse impacts are addressed.

The OECD Due Diligence Guidance for Responsible Business Conduct provides practical support to enterprises on the implementation of the OECD Guidelines for Multinational Enterprises by providing plain language explanations of its due diligence recommendations and associated provisions. Implementing these recommendations can help enterprises avoid and address adverse impacts related to workers, human rights, the environment, bribery, consumers and corporate governance that may be associated with their operations, supply chains and other business relationships. The Guidance includes additional explanations, tips and illustrative examples of due diligence.

This Guidance also seeks to promote a common understanding among governments and stakeholders on due diligence for responsible business conduct. The UN Guiding Principles on Business and Human Rights as well as the ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy also contain due diligence recommendations, and this Guidance can help enterprises implement them.

This is a quite useful addition to materials available to business ion implementing their responsibility to identify, assess, mitigate and remedy adverse impacts of their economic activity, at least within the scope of the OECD Guidelines for Multinationals.  This Post includes some brief thoughts, along with the Press Release of OECD Watch and links to some useful sites.

The development of the OECD Due Diligence Guidance for Responsible Business Conduct followed a process of deep institutional consultation appropriate to governance making at this level under conventional contemporary standards:

The development of this Guidance was overseen by the OECD Working Party on Responsible Business Conduct (WPRBC) and involved a multi-stakeholder process with OECD and non-OECD countries and representatives from business, trade unions and civil society. A first draft was submitted to the WPRBC and institutional stakeholders of the OECD for comment in May 2016. A public consultation on a revised draft of this Guidance was held in February 2017. A multi- stakeholder advisory group was formed in June 2017 to support the WPRBC in integrating stakeholder comments and completing the Guidance. United Nations Human Rights collaborated extensively in this process. (Due Diligence Guidance, supra., p. 3).

Like the human rights due diligence built into the UN Guiding Principles for Business and Human Rights, the OECD Due Diligence Guidance is based on the development of structures for identifying, assessing risk, and then mitigating and remedying adverse impacts for which business may be deemed responsible. "Due diligence is the process enterprises should carry out to identify, prevent, mitigate and account for how they address these actual and potential adverse impacts in their own operations, their supply chain and other business relationships, as recommended in the OECD Guidelines for MNEs." (Due Diligence Guidance, supra., p. 10). The Due Diligence Guidance makes a distinction  between actual and potential adverse impacts, the later identified in the common business parlance of risk. The scope of harm and risk for which a business is responsible id defined by the OECD Guidelines for Multinational Enterprises.  That intertwining of standard risk analysis and mitigation (as a core business policy) with the human rights language of impact, remedy and mitigation,  is meant to merge the two approaches.

For many enterprises, the term “risk” means primarily risks to the enterprise – financial risk, market risk, operational risk, reputational risk, etc. Enterprises are concerned with their position in the market vis-à-vis their competitors, their image and long-term existence, so when they look at risks, it is typically risks to themselves. The Guidelines however refer to the likelihood of adverse impacts on people, the environment and society that enterprises cause, contribute to, or to which they are directly linked. In other words, it is an outward-facing approach to risk.(Ibid., p. 15 (Box 1)).

The Due Diligence Guidance is careful not to suggest that business ought to avoid activity that runs the risk of creating adverse impact, even where mitigation is not entirely possible, but it does suggest that those considerations be heavily weighed in making a business decision about the value of that activity.  "In some limited cases, due diligence may help them decide whether or not to go ahead with or discontinue operations or business relationships as a last resort, because the risk of an adverse impact is too high or because mitigation efforts have not been successful." (Ibid., p. 16).

The Due Diligence Guidance is careful to stress the multiple character of due diligence itself. Due diligence is preventative, involves multiple processes and objectives, is commensurate with risk, can involve risk based prioritization, is dynamic,  does not shift the burden of responsibility, is focused on internationally recognized standards of responsible business conduct (societally based governance), is contextually determined on the basis of the enterprise's circumstances and the nature of its business relationships, is informed by stakeholder engagement, and requires constant communication. (Ibid., 16-19).  It is thus neither a standard of liability, nor a method of embedding risk within financial statements.  Rather, it is a method that is meant to provide some basis for assessing the risks of business conduct in terms of its impacts (within the scope of the OECD Guidelines for Multinational Enterprises only). 

The Due Diligence Guidance creates a simple and straightforward structure designed to make incorporation relatively seamless with ordinary business operations.   It is structured around six due diligence nodes:

1. Embed responsible business conduct into policies and management systems 
2. Identify and assess actual and potential adverse impacts associated with the enterprise’s operations, products or services
3. Cease, prevent and mitigate adverse impacts 
4. Track implementation and results
5. Communicate how impacts are addressed 
6. Provide for or cooperate in remediation when appropriate

For those already invested in the UNGP's human rights due diligence framework, there is little here that surprises.  And that is a good thing.  Better, that the OECD Due Diligence Guidance  provides sound advice for enterprises seeking to comply with both. But, of course, that leads to the difficulties of identification and assessment (Ibid., pp. 25-28). These functions, of course, sit at the center of the due diligence  exercise.  It speaks to the construction and operation of systems that can be utilized efficiently to amass information on virtually a real time basis, and to subject them to algorithms that might realistically assess their impact in accordance with measures that are consistent, coherent and legitimate.  This is a tall order. Even more so were these systems of adverse impact to align, as they should, with those of financial risk usually embedded within financial statements. Here, perhaps, the office of the compliance might serve a useful purpose in many firms.

Of course, identification and assessment are meant to serve as triggers.  Action is structured through the pro-active obligations to cease, prevent and mitigate (Ibid., pp. 29-31).   These are focused not merely on those at risk of suffering adverse effects of business activity, but also supply chain partners. Here the Due Diligence Guidance aligns nicely with the also current project of guidance in sector specific supply chains (Sector-specific due diligence). 

Beyond that, tracking and communicating, of course, are essential, but in aid of the project of identification, assessment, and mitigation. The responsibility to inform stakeholders, and particularly workers, remains contentious, even in developed states.  The contention increases where businesses are sought to be made responsible for communication to customers. The tension between the fundamental adverse relationships between buyer and seller at the core of markets organized economics, and the cooperative model inherent in systems of human rights, have yet to be coordinated completely.  And that tension remains apparent in the somewhat subtle language of the Due Diligence Guidance.  But it is a good step forward without taking sides in the battle between the ideology of markets and those of cooperative transactions.

And the provisions for remediation  provide substantial support for non-state non judicial mechanisms that are likely to be quite helpful (Ibid., Q. 51). This aligns generally with an important current of the UNGPs. It may be a generally responsibility of enterprises to aid the state in the construction of their good governance mechanisms, including the construction and operation of a judicial mechanism operating autonomously according to law.  But especially where the enterprise represents foreign interests, there must be some discretion exercised to avoid, and quite rightly, a sense among local populations that reform is directed by and for the benefit of non local interests. But here again, there is enough ambiguity to cause some concern--a concern that ties back to the initial structural issue of due diligence--the standards that form the basis of responsibility (beyond and in addition to legal obligation) and the standards, tied thereto, for determining an appropriate form of remedy (Ibid., Q. 50). Of course, that interwtining of legal and societal standards is inherent in the scope of the Guidelines for Multinational Enterprises themselves.  And to some extent, that may well point, yet again, to the weakness of any sort of governance enterprise that might seek to tilt the balance of governance from an amalgam of public and  societal norms to one that is principally centered on the state, its laws, and its forms of remediation. That effort cannot work, precisely because it fails to acknowledge the governmentalized sphere of the societal inherent in the construction of global production in which states, like enterprises, merely form a part. ta

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OECD Watch Press Release noted:

This week the OECD formally launched its new Due Diligence Guidance for Responsible Business Conduct (the Guidance). Due diligence has emerged as the fundamental and essential behaviour expected of any responsible business. The 2011 revision of the OECD Guidelines for Multinational Enterprises (OECD Guidelines) and the adoption of the UN Guiding Principles on Business and Human Rights (UNGPs) raised the expectation of due diligence by companies to an international consensus. Until now, however, there was no agreement over what due diligence really means.

Authoritative guidance

The new Guidance resolves that by clarifying exactly what is expected of business to prevent harm and conduct business responsibly. The guidance is intended for use in all sectors of the economy and by all companies, regardless of size, geographical location or value chain position. It was developed over a two-year period through a credible, multi-stakeholder process involving governments, business, unions, and civil society.

According to the Coordinator of OECD Watch, Joseph Wilde-Ramsing, who led the civil society delegation negotiating the text of the Guidance, “The endorsement of the Guidance by the OECD Council means that it will be the most authoritative international elaboration of due diligence available for many years. States have made a high-level political commitment to promote the Guidance and actively monitor its implementation by business. Civil society can and should use it in advocacy to hold companies accountable for their behaviour.”

Given it’s authoritative nature, the Guidance is sure to have a role in future developments including national, regional and international requirements for due diligence

Prevention and remediation are key

The Guidance clarifies and elaborates several key concepts related to responsible business conduct and provides recommendations to business on how to fulfil these expectations.

“The Guidance makes clear that due diligence is first and foremost about preventing harm”, said Gabriela Quijano, legal adviser at Amnesty International. “Companies must consult individuals and communities whose human rights might be at risk from their activities, and provide them with all the relevant information to allow them to make informed decisions. Under the Guidance, disclosure is the rule, not the exception.”

The Guidance also clarifies that due diligence means more than “do no harm” and involves bundles of interrelated iterative processes, many of which must involve pro-active behaviour. And when companies do cause or contribute to impacts, the Guidance is clear that they must remediate them.

According to Joseph Wilde-Ramsing, this is important because “When it comes to adverse impacts, there are only two things that count in the end: one is prevention and the other is remedy.”

In order to help civil society interpret and use the Guidance, OECD Watch and Amnesty International have developed a briefing for civil society and written a blog.

Useful Links:

Download the Due Diligence Guidance

Countries commit to step up efforts to drive more responsible business conduct through new OECD instrument
Recommendation of the Council

OECD Guidelines for Multinational Enterprises

OECD's Due Diligence Guidance for Responsible Business Conduct.

Blog by OECD Watch’s Dwight Justice and Joseph Wilde-Ramsing and Amnesty International’s Gabriela Quijano.

OECD Watch & Amnesty International’s briefing for civil society.