Director Duties and Board Oversight: Reflections on European Commission Proposals

Last year, we highlighted why we believed human rights due diligence needed to be a mandated concern of corporate boards.

We cited disasters, such as the Brumadinho, Córrego de Feijão dam collapse in Brazil and the destruction of cultural heritage at Juukan Gorge in Western Australia, as examples of serious human rights impacts that can result when boards and senior management are not paying adequate attention. We argued that making human rights and environmental due diligence mandatory (mHREDD), but without requiring board oversight, risks encouraging a ‘tick-box’ and ‘compliance’ approach (as evidence suggests is the case for many companies in France) rather than a strategic one. Many in the human rights community agreed with these assertions, but there were concerns that references to corporate governance might ‘sink the mHREDD ship’ with European Union negotiations on the issue given the opposition of some business groups. We agreed that a holistic approach to mHREDD implicitly implies board oversight, but based on existing evidence from France, the Modern Slavery Act in the UK, and elsewhere, we felt the case needed to be maintained explicitly.

We are not aware of any international company worldwide, and especially not in the European Union, that does not at least have to ask itself the question about how it is respecting human rights in its operations and supply chains.

One year on, we are pleased that Directors’ Duty of Care and Oversight of mandatory due diligence are in the European Commission’s Due Diligence proposal issued last month, in Articles 25 and 26 respectively. This does not guarantee they will survive in the horse-trading ahead (the corporate governance element of this Directive has already been watered down substantively in the drafting), but we feel the case is even stronger now than it was then. Any board that believes human rights due diligence is optional for their company has not been paying attention to world affairs – whether it be COVID-19, climate change and the environment, or the crises in Ukraine, Myanmar, Afghanistan, or elsewhere. We are not aware of any international company worldwide, and especially not in the European Union, that does not at least have to ask itself the question about how it is respecting human rights in its operations and supply chains, whether via its own assessment of risk or responding to how governments are responding through regulation, including the rapidly increasing use of human-rights based sanctions (such as the so-called “Magnitsky” measures and the US Tariff Act). There is much else to be said on the proposal, but we will restrict ourselves here to the designated role of boards in relation to the due diligence requirement.

When it comes to environmental and climate issues, long-term can mean the very long-term, and the Commission needs to clarify whether it wishes business to encompass inter-generational considerations

Of course, the devil (who is very busy at present) will also be in the detail of the Commission’s draft Directive. Article 25 on Directors’ Duty of Care requires that “Member States shall ensure that, when fulfilling their duty to act in the best interest of the company, directors of companies referred to in Article 2(1) take into account the consequences of their decisions for sustainability matters, including, where applicable, human rights, climate change and environmental consequences, including in the short, medium and long term”. It goes on to require that: “Member States shall ensure that their laws, regulations and administrative provisions providing for a breach of directors’ duties apply also to the provisions of this Article”. The positive here is that the proposal makes the requirement a strategic one, even if it is not specific about the timeframes involved (how short term is short term, how medium is medium term and so on?). This is especially important in business sectors, such as commodity trading, apparel and other fast-moving consumer goods, that seem allergic to long-term planning, whether on sustainability issues or otherwise. When it comes to environmental and climate issues, long-term can mean the very long-term, and the Commission needs to clarify whether it wishes business to encompass inter-generational considerations. The Article also calls on member states to ensure that not doing so would be a breach of director duties, even though it permits states themselves to define what this might mean at the national level.

The question of board oversight of due diligence is dealt with in Article 26 and sets out that: “Member States shall ensure that directors of companies referred to in Article 2(1) are responsible for putting in place and overseeing the due diligence actions referred to in Article 4 and in particular the due diligence policy referred to in Article 5, with due consideration for relevant input from stakeholders and civil society organisations. The directors shall report to the board of directors in that respect.” It also dovetails this requirement with other aspects of the proposal: “Member States shall ensure that directors take steps to adapt the corporate strategy to take into account the actual and potential adverse impacts identified pursuant to Article 6 and any measures taken pursuant to Articles 7 to 9”. This Article is close to the spirit of what we hoped for in our earlier commentary.

Our criticism is that wording such as “due consideration for relevant input” and “where relevant”, as well as the lack of stakeholder engagement language in the introductory ‘umbrella’ paragraphs of key due diligence Articles, suggests engagement is optional where it should be central.

Nevertheless, weak language (“take steps") around the vital integration of risk and impact information into corporate strategies should be strengthened. There also remains a lot of wriggle room on the question of what “input from stakeholders and civil society organisations” might mean in practice. While clear reference to human and environmental defenders should be added, we generally welcome the definition of “stakeholders” in Article 3(n) of the draft, defined as being the company’s employees, the employees of its subsidiaries, and other individuals, groups, communities or entities whose rights or interests are or could be affected by the products, services and operations of that company, its subsidiaries and its business relationships. Also, engagement with (affected) stakeholders is mentioned in some provisions concerning the due diligence process itself. For example, the company shall engage with them as part of risk identification (Article 6), as part of a possible “preventive action plan” (Article 7 on preventing abuse) and for a potential “corrective action plan” (Article 8 on mitigating/ending abuse). Such references are welcome and, if strengthened, would align well with the UN Guiding Principles on Business and Human Rights and other related international standards. Our criticism is that wording such as “due consideration for relevant input” and “where relevant”, as well as the lack of stakeholder engagement language in the introductory ‘umbrella’ paragraphs of key due diligence Articles, suggests engagement is optional where it should be central. But these provisions constitute good starting points for improvements.

Human rights due diligence reports are one of these mechanisms, but not the only one, and boards need to ensure company management have all necessary mechanisms to ensure respect for the rights of affected stakeholders and that these are effective in practice.

In a few months’ time, the World Economic Forum (WEF)’s Global Future Council on Human Rights will publish its “Guidance Note for Boards” on human rights and affected stakeholders. We hope the Commission will take this work – the result of extensive multi-stakeholder cooperation – onboard. Having spoken to numerous individuals serving on boards in the drafting of this note, the WEF Council concludes that ensuring effective mechanisms are in place is a key component of board oversight. Human rights due diligence reports are one of these mechanisms, but not the only one, and boards need to ensure company management have all necessary mechanisms to ensure respect for the rights of affected stakeholders and that these are effective in practice. This includes ongoing and meaningful dialogues with human rights and environmental defenders, workers, communities, consumers and other affected stakeholders. Board members need not be directly involved (although occasionally they should be) but they do need to ensure that they happen and happen effectively.

Just transition is only material, for business and communities alike, in specific contexts (rooted in time and place) and so boards need to ensure that company due diligence captures not just global commitments but also local expectations.

One final observation here is the opportunity for systemic transformation of business models through consideration, together, of environmental, climate and human rights issues at the board-level as ‘ESG’ approaches demand. It is good that climate stands alone from other environmental issues (such as the newly recognised right to healthy environment) as climate action has immediate urgency. But all three are heavily interrelated. It is at the intersection of these issues that some of the greatest challenges for boards’ duty of care will be found. For example, the issues of climate justice and the just transition sit at the human rights-climate change intersection and are amongst the biggest challenges for society and business alike. From transitioning out of the high-carbon economy, and into low-carbon industries, as well as steps needed to ensure resilience and adaptation required to meet the effects of climate change, boards need to be prepared with commitments relating to 2030, 2050, and beyond.

We note that Article 15 of the Commission draft requires companies to adopt “a plan to ensure that the business model and strategy of the company are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C.” This would sit better at board level in our view. At the same time, climate impacts should be prevented and addressed through due diligence, and this should be clear in the law and connected to the civil liability mechanism. Just transition is only material, for business and communities alike, in specific contexts (rooted in time and place) and so boards need to ensure that company due diligence captures not just global commitments but also local expectations. As we have written elsewhere, the green economy might indeed mean more and not less mining and will not necessarily be friendly in human rights terms.

We congratulate the Commission on its work so far. We find the current draft to be an encouraging first step. There is much missing from the proposal as a whole, including on corporate governance elements, and others are eloquently making these points. But the draft is a platform from which to work to enhance the effectiveness of the final Directive.

This article is also published on Business and Human Rights Resource Centre

Photo by Damir Kopezhanov on Unsplash