Why Human Rights Due Diligence Must be a Mandated Concern of Corporate Boards
3 March 2021
Last year Rio Tinto destroyed a 46,000 year old native cultural site at Juukan Gorge in Western Australia without the free, prior and informed consent of its owners – the Puutu Kunti Kurrama and Pinikara peoples. The company’s own internal investigation stated the decision was never brought to the board. This example raises fundamental questions about the relationship of board governance and human rights – something a new legislative initiative of the European Commission looks set to address.
The European Commission (EC) proposes to make mandatory human rights due diligence (mHRDD) a requirement for companies, the scope of which has yet to be defined. One of the key questions is how much board oversight is needed for effective management of a company’s environmental and human rights risks and whether this oversight should be mandated directly in law. The existing French law on mHRDD (loi de vigilance) does not make this a requirement, while the insistence on board approval of corporate compliance statements for the Modern Slavery Act in the UK is one of its few strengths. Australia has also made board sign-off a legal requirement of its modern slavery legislation and, in the Netherlands, the recent child labour mHRDD legislation for supply chains also includes potential criminal sanctions for company directors.
How much knowledge should boards have of such risks and is it up to governments to mandate this? The answer, we believe, is already out there based on the collective experience of recent years.
Three years after the French law made HRDD mandatory for large French companies, a recent report commissioned by the L’Entreprise pour les droits d’homme initiative suggests that while compliance has spread, HRDD is far from being a strategic concern for most companies. Of the 103 mHRDD plans assessed between September 2019 and August 2020, the vast majority of companies reported that mHRDD had become part of their public disclosure routine. Only a quarter of these companies gave specific details on how mHRDD would be operationalised or monitored. And only one in five made explicit reference to either board level or even executive committee involvement or oversight. The data shows that three years into the French mHRDD law, the response from businesses has been more administrative than strategic. It suggests that left to their own devices, mHRDD reports do not reach boards in most companies any time fast. Law makers who do not specifically require board oversight should not expect that it will happen in the majority of cases.
But does it matter?
In recent years, the Corporate Human Rights Benchmark (CHRB) has helped make the case for mHRDD. Of the 230 companies across all sectors that CHRB assessed in 2020, nearly half (46%) failed to score any points at all in the area of HRDD. We found similar results in 2017, 2018 and 2019. While a minority of companies are working hard to improve their performance, many are not, despite the pressure of institutional investors and others. Under the existing, mainly voluntary, approach the gap between those companies that undertake HRDD, and those that do not, is not closing. If anything it continues to widen. This makes a solid case for a mandatory approach in our eyes and one we have advocated since the Finnish Presidency of the European Union in 2019.
At present, in an environment of mainly voluntary HRDD, the 30-40% of companies that have demonstrated some seriousness about human rights are likely to demonstrate this in the boardroom as well. In other words, for some of these companies, human rights are an issue of strategy as well as compliance.
For those companies that have engaged in HRDD, the CHRB data also shows a strong correlation with board engagement. At present, in an environment of mainly voluntary HRDD, the 30-40% of companies that have demonstrated some seriousness about human rights are likely to demonstrate this in the boardroom as well. In other words, for some of these companies, human rights are an issue of strategy as well as compliance. As Europe moves to a more level playing field in a new world of mHRDD is it also important to maintain such board level engagement? Some specific examples suggest that it is.
The Juukan Gorge case is one of the few instances where a company has fired its CEO and other members of senior management for an adverse human rights impact that has not directly involved the loss of life. In addition, the Rio Tinto chairman Simon Thomson has said he will not seek re-election. Had there been a legal requirement to hold such knowledge at board level, in the same way as health and safety for example, this might have made the crucial difference in terms on how both the site level management and the higher executives acted.
In a nutshell, HRDD is more potent when it is integrated into decision-making at all levels within a company – including the strategic function of boards. This is also a conclusion of the Global Industry Standard on Tailings Management report published last year as a result of the Brumadinho, Córrego de Feijão mining disaster in Brazil, which claimed the lives of 270 people in January 2019. The report’s first recommendation was the need for HRDD across the whole industry, and it also expressed the need for boards to require adherence to this and other standards and to hold executives accountable for their implementation.
In a nutshell, HRDD is more potent when it is integrated into decision-making at all levels within a company – including the strategic function of boards. This is also a conclusion of the Global Industry Standard on Tailings Management report published last year as a result of the Brumadinho, Córrego de Feijão mining disaster in Brazil, which claimed the lives of 270 people in January 2019. The report’s first recommendation was the need for HRDD across the whole industry, and it also expressed the need for boards to require adherence to this and other standards and to hold executives accountable for their implementation.
This is not to suggest that board oversight is a ‘silver bullet’. In 2013, international private security provider G4S was one of the first in its sector to commit to HRDD in what it called a “landmark human rights policy”. This stated its board would have the ultimate accountability for its human rights performance. Yet in 2019, the Ethics Committee of the Norwegian Government Pension Fund decided to divest from G4S based on the “unacceptable risk that the company contributes to human rights violations” in the Gulf – not something the fund, which owns 1.5% of all publicly listed shares globally, often does. This board commitment was re-emphasised in the company’s response to the sovereign wealth fund’s decision, but without providing any explanation as to how this ‘unacceptable risk’ had occurred even with board oversight. It is unknown how closely G4S’s board was involved in its HRDD relating to the Gulf but it is interesting to note that the company has ‘doubled-down’ on the importance of board oversight in its response.
Such cases suggest even companies that have fallen short in aspects of their human rights performance consider board oversight of HRDD to be advantageous.
In his recent Harvard commentary, the former UN Special Representative for Business and Human Rights, Professor John Ruggie urged those in favour of mHRDD not to link the effort to that of reforming director duties. When asked specifically on this issue of board-level oversight of the mHRDD itself, his position is nuanced. As he expressed to us in preparation for this commentary: "I think the answer depends on how well specified the mHRDD requirement is. If it becomes a legal duty for the company, with specific steps spelled out (as in the UNGPs, especially with regard to stakeholder engagement and communication), then a board would be failing in its own fiduciary responsibility if it did not exercise sufficient oversight – as is true for any other legal obligation of the company. Framed and elaborated in this manner, HRDD becomes the process of determining whether a duty of care exists in a given case."
The European Commission should act unambiguously to make the issue of board oversight an explicit part of its mHRDD approach. The evidence from France suggests that not doing so risks making mHRDD an administrative issue and not a strategic one.
Our own position is that the European Commission should act unambiguously to make the issue of board oversight an explicit part of its mHRDD approach. The evidence from France suggests that not doing so risks making mHRDD an administrative issue and not a strategic one. Looking at other companies that have failed in areas of their human rights performance also reinforces the same conclusion.
Read the full article on the BHRRC website here.
John Morrison is CEO of the Institute for Human Rights and Business, Phil Bloomer is Executive Director of the Business and Human Rights Resource Centre, and Camille Le Pors is the lead for the Corporate Human Rights Benchmark at the World Benchmarking Alliance
Image: Roby Jay
