Topics:   Business Ethics,Director Liability,Risk Management

Topics:   Business Ethics,Director Liability,Risk Management

December 9, 2020

Beware Human Rights Liability Risks in Corporate Supply Chains

December 9, 2020

To what extent should corporations be held liable for failure to uphold human rights in their supply chains and business operations? This important question is attracting growing attention from international members of the public, government regulators, and major firms themselves. As the media and human rights organizations have recently spotlighted abuse and exploitation within the supply chains of many major multinational companies, governments and nongovernmental organizations have been prompted to promote more stringent requirements for business compliance with broadly accepted international laws. Amid this atmosphere of increasing scrutiny, concerned companies should aim to actively address their role in supporting human rights and bolster accountability efforts to avoid unintentionally harmful business practices, reputational fallout, and potential legal liability. 

Switzerland’s Responsible Business Initiative (RBI), although it failed, is the most powerful recent example of the intensifying scrutiny around corporate liability and human rights. At the end of November 2020, Switzerland held a referendum on the RBI, a proposal which would have changed the country’s constitution to make Swiss companies liable in Swiss courts for extraterritorial human rights abuses or environmental destruction. The initiative received a narrow majority with 50.7 percent of the vote, but it failed to satisfy regional requirements to become law. Instead, an indirect counterproposal will take effect, still requiring new due diligence and nonfinancial information disclosures, but without the key factor of liability in Swiss courts. Rising interest in corporate human rights liability is reflected in the facts that the RBI gained even a slim majority of public support (especially in a country known for its staid economic policy) and that the RBI’s alternative is still an increase in regulation around corporate human rights accountability.

While a patchwork of regulations exists across the world, the United Nations Guiding Principles on Business and Human Rights (UNGPs), unanimously endorsed by the UN Human Rights Council in 2011, offers a base framework that can be implemented by nations and corporations alike. This past autumn, for instance, the US Department of State released first-of-its kind guidance for transactions involving surveillance technology, which focuses on implementing the UNGPs to ensure certain technologies do not fall into the hands of repressive government actors. Along with broad advice for corporate engagement on human rights issues, the Department of State’s guidance provides functional due diligence considerations, red flag lists, and appendices of research resources and human rights concerns linked to specific surveillance products. The UN also coordinates the UN Global Compact, an initiative comprising more than 12,000 corporate participants in upwards of 150 countries that encourages businesses to adopt sustainable and socially responsible practices and report on their implementation.

While the UN Global Compact is the world’s largest corporate sustainability initiative, it is far from the only one. Many corporations have signed on to nonbinding codes of conduct monitored by a variety of organizations, each with different reporting and accountability mechanisms. The Ethical Trading Initiative, an independent body that monitors the supply chains of member firms based on International Labor Organization standards, is a good example. This growing group of both voluntary accountability systems and legal regulations are steadily changing the international business environment to make human rights a more central consideration.

There is no question that human rights-related controversies can have numerous negative business consequences. The subcontractors of major companies can even garner significant negative attention. For example, a November BBC report on exploitation in Indian textile and leather goods factories sparked media furor over the companies implicated in the reporting. A prominent fashion brand was caught up in the media storm that ensued despite having relatively robust internal reporting practices on global citizenship issues; the company’s 2020 Global Citizenship and Sustainability Report revealed that it audited more than 75 percent of its subcontractors over “zero-tolerance issues,” including child labor and physical abuse. This particular case demonstrates the potential difficulties that companies face when fully examining their own supply chains for human rights issues.

Furthermore, the fallout from being perceived as noncompliant with recognized human rights standards can deeply affect consumers’ views of a business. In this modern age, consumers increasingly prefer to do business with companies that they feel are aligned with their personal values. This trend is especially present in younger generations: a 2020 survey by 5W Public Relations found that 83 percent of millennials prefer to buy from brands that they view as aligned with their social beliefs. In some cases, consumer dissatisfaction can lead to boycotts and loss of business. Multiple luxury jewelers, for example, decided to end their relationships with the mining sector in Myanmar after years of consumer boycotts and public pressure over the ties between that sector and the country’s powerful military.

Corporate boards should familiarize themselves with international standards such as the UNGPs and remain aware of evolving industry-specific codes of conduct, especially in highly scrutinized sectors including technology, mining, and garment production. As legal frameworks around human rights further develop and international media scrutiny persists, it is crucial for boards to set policies for rigorous due diligence practices, stay abreast of field-specific human rights issues, and invest in continuous geopolitical risk review. Moreover, boards can help their companies build positive corporate reputations through transparency, publicizing organizational adherence to human rights standards, and sharing periodic updates on implementation efforts.

The emerging system behind corporate human rights liability will be a key characteristic of international business for years to come and will increasingly overlap with rising expectations of corporate actors in other arenas, namely environmental impact and diversity and inclusion. Most importantly, establishing a culture of accountability is the key to centering values in corporate conduct.

Karl V. Hopkins is a partner and the global chief security officer at Dentons.

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