Source:

http://www.strategicrisk.co.uk/story.asp?sectioncode=37&storycode=382854

By Nathan Skinner

The multinational that abuses its power in poorer countries risks financial losses, litigation and reputational ruin. Yet shocking cases of exploitation still occur. It is time to take responsibility, says Nathan Skinner

Ever since the abolition of the slave trade, there has existed a moral consensus in most parts of the civilised world that all human beings have a right to be treated with respect and dignity. Nevertheless, the complexity and unevenness of global power relations combined with the absence of a strict and enforceable international rule system mean that human rights abuse continues to occur all over the world.

For centuries institutions from developed countries have exerted significant influence in poorer and less industrialised parts of the world. Today, many of these commercial operations strive to engage respectfully with their host countries. A frightening number, however, act with apparent disregard for the rights of the indigenous community.

This should be a serious concern for respectable multinational companies for a number of reasons. The proliferation of media channels, human rights activists and sympathetic journalists has increased the chances of corporate misbehaviour being uncovered wherever it falls below what is reasonably expected.

The extent to which a company is exposed to risk depends on where it operates and the type of activity it engages in. In order to avoid unwanted attention, businesses need to be aware of their moral and legal responsibilities. These are often clear at a personal level, because most ordinary people do not enjoy inflicting harm on others. It is more difficult to apply these standards across a geographically widespread and complex corporate machine.

In the pursuit of resources or cheaper production costs, transnational corporations have set up operations in countries with repressive administrations where the rule of law is sometimes weak and human rights receive little attention. Companies are sometimes required to engage with groups of people born into different value systems or with violent scores to settle. In some cases this can lead to claims of harassment, forced labour, arbitrary arrest, torture or worse.

Becoming embroiled in a human rights crisis poses a number of risks: litigation, extortion, lost production, sabotage, and higher security costs, to name a few. A company that is seen to be exploiting the local community will lose its licence to operate, either through the courts, or, by becoming the target of violent reprisal (like Shell in Nigeria, see map).

There are also quantifiable financial risks posed by a poor human rights record, in the form of fines, increased insurance premiums, restricted access to capital, or the loss of investor confidence. Legal penalties are increasingly being enforced as international human rights crusaders expose bad practice. With a bad human rights record it could also be difficult to recruit and retain the best talent.

The principal risk is one of reputation. This could be felt more strongly by consumer facing brands but any company, publicly traded ones in particular, will be wary of scaring away investors.

“Human rights impact management catapulted into the spotlight in 2009 and will continue to be an integral necessity for existing corporate risk management processes,” notes Michael Shtender-Auerbach, vice-president of social risk consulting for Control Risks.

“In 2010, multinationals will find increased pressure from governments, NGOs, stakeholders and shareholders to conduct human rights due diligence. In a climate where the state of the economy is precarious, companies may be tempted to play tough and cut corners without considering that this short-sighted approach may not result in sustained business success but rather lead to serious reputation and operational risks,” he argues, in an article published by the Huffington Post at the beginning of the year.

Guidelines and codes of conduct

Many businesses claim to recognise their responsibilities as corporate citizens, and yet a worryingly large number of them fail to apply even the most basic human rights standards to their operations in developing parts of the world.

At the very least, companies should be willing to accept responsibility for the social and environmental impact of their operations. As an extract from a plea by the government of India following the Union Carbide gas plant disaster puts it: “The multinational must necessarily assume responsibility [for harm caused]. For it alone has the resources to discover and guard against hazards and to provide warnings of potential hazards.”

A number of initiatives, albeit non-enforceable, bring multinationals to account with respect to their human rights obligations. The United Nation’s Universal Declaration of Human Rights (UNDHR) is the cornerstone of international human rights law. The basic premise of this is that « all human beings are born free and equal in dignity and rights”.

Organisation for Economic Co-operation and Development (OECD) guidelines state that enterprises should “respect the human rights of those affected by their activities consistent with the host government’s international obligations and commitments”.

The UN Global Compact encourages companies to build ten principles in the areas of human rights, labour, environment and anti-corruption into their business strategies. Principles one and two call on businesses to develop an awareness of human rights, to work within their sphere of influence to uphold these universal values and make sure they are not complicit in human rights abuses. Several multinationals have signed up, including Shell, BP and Rio Tinto.

With the exception of serious offences, these prescriptions are, by and large, voluntary. Richard Meeran, a leading human rights lawyer who specialises in claims on behalf of victims injured through the actions of British companies overseas, says there is an urgent need to improve corporate legal accountability with respect to human rights. He considers “binding and enforceable international regulations” to be the best way of protecting individual rights. But he thinks it is “unrealistic to expect such laws to come into existence in the near future”.

Promisingly, however, last December, the UK’s House of Lords published a report recommending that the government ensures that all UK companies understand their responsibility to respect human rights wherever they operate. “This is an important call to action which the government cannot ignore, » Meeran says.

Responses

In the absence of properly enforced human rights laws the pace of improvement is set by those companies who recognise that without embedded ethical codes of conduct, significant costs and damage to corporate reputation may be incurred. The Business & Human Rights Resource Centre lists 243 companies with a human rights policy statement. The list includes many companies that have offences to their name, indicating that the existence of such a code far from guarantees ethical conduct.

Multinationals have traditionally struggled to embed effective codes of conduct across their whole business, which operate in diverse economies and cultures. Each company generally takes its own approach to the issue, but it usually encompasses a combination of communication, enforcement and auditing, to try to ensure the code is working in the company’s day-to-day operations. Codes are a useful way of defining acceptable conduct. They can help a company drive training programmes and build trust with its stakeholders.

Struck by prolonged criticism of its human rights record in hot spots such as Papua New Guinea, Indonesia, Peru and South Africa, resource giant BHP Billiton initiated a scheme to help it better assess and manage human rights risk. It developed an in-house human rights assessment methodology, which has to be completed by managers at all its sites around the world. The decision came at a time when many unions were questioning the company’s inclusion on sustainability indices because of its perceived poor labour standards.

Disturbingly, the UN Special Representative on business and human rights claims that only a few companies actually have in place a system of ongoing human rights due-diligence to support their public statements.

The group identified the core elements of human rights due diligence, which consist of a statement of policy, assessment of impacts, integration programmes and a procedure for tracking and reporting performance (more information is available online at http://www.strategicrisk.co.uk).

Crucially, it says, companies should assess human rights impacts on an ongoing basis and have in place an effective company-wide grievance mechanism to help identify problems or avoid escalation of disputes. “To meet their responsibility to respect human rights, companies must also seek to ensure that impacts identified via this feedback loop are effectively remediated,” the group’s website states.

Violations

A hundred years ago, Joseph Conrad described the colonial plunder of Congo in his book Heart of Darkness. According to international human rights groups, nothing has changed. Currently, companies are thought to be indirectly financing the war in Central Africa and profiteering from the regions mineral and economic resources. Over a thousand Congolese are estimated to die each as a result of the ongoing war, the most bloody since the Second World War.

The Congo, known since 1997 as the Democratic Republic of Congo (DRC), is one of the most mineral-rich countries in the world, with sizeable deposits of gold, tin, tantalum and tungsten. Armed groups are believed to generate an estimated $180m a year by trading these minerals, which contributes to continued violence. The majority of minerals are smuggled to neighboring countries where they are sold to smelters, and ultimately find their way into products such as cell phones, laptops, and video games, as well as components for automobiles, airplane engines, and medical devices.

The DRC is the world’s biggest supplier of cassiterite, or tin ore, which is highly valued because of its use in electrical circuit boards. The metal is one of the most heavily traded in the London Exchange fetching hundreds of dollars on the world market. Plundered ore is believed to fuel the conflict in the DRC, because the lure of riches spurs on the armed groups. Without any official mine management, government soldiers or militants rule the pits by gun law, regularly stealing what the miners pull out of the ground. There are reports of armed men forcing porters at gunpoint to carry 50kg bags of cassiterite for long marches through the jungle.

Customers of this trade include European and Asian companies, such as the Thailand Smelting and Refining Corporation (THA ISARCO), the world’s fifth-largest tin-producing company, owned by British metals giant Amalgamated Metal Corporation (AMC); British company Afrimex, and several Belgian companies such as Trademet and Traxys, according to a Global Witness investigation. The human rights group claims that several of these trading companies have no effective monitoring system in place to check their supply chain or assess the human rights impact of their trade.

“These minerals find their way into consumer products and brands have a responsibility to make sure their products are not inadvertently financing the systemic rape and murder of innocent civilians,” Responsible Sourcing Network director Patricia Jurewicz says. The investor group is calling on companies that use cassiterite to explain what they are doing to prevent conflict minerals entering their supply chains. Simply verifying that a supplier is legal may not be enough. Some of these “legal” suppliers are among the main facilitators of the illicit trade with armed groups and army units, says Global Witness.

The US Senate as well as the EU has taken up the cause, reports Shtender-Auerbach of Control Risks. “In the Senate, two separate bills are under discussion, the Congo Conflict Minerals Act and the Extractive Industries Transparency Disclosure Act, which are set to force an industry to provide to its investors and consumers the locations of the source of its minerals.”

In 2009, the UK company Afrimex was heavily fined for violating OECD guidelines by sourcing minerals from the Congolese war zone. Global Witness and other international rights groups brought the complaint in the UK, which resulted in the verdict that Afrimex had « failed to contribute to sustainable development in the region and to respect human rights » and « applied insufficient due diligence to the supply chain, sourcing minerals from mines that used child and forced labor”.

“Multinationals in 2010 will be pressured (through legislation or activist networks) to conduct robust supply chain assessments to ensure their products are conflict-mineral free,” Shtender-Auerbach notes.

Enforcement

Some say that because the fundamental objective of a company is to further its financial interests, in the absence of any tough sanctions, compliance with corporate human rights obligations is brushed aside. From a purely commercial perspective, if the fines aren’t big enough, then how can a company justify to its shareholders a significant investment in proper ethical systems?

Without a strict international regulatory framework, human rights lawyers are one of the principal mechanisms for holding companies to account. How well companies live up to human rights standards is also monitored by journalists and human rights groups. The more a company claims to be doing the closer it is likely to come to scrutiny.

But, according to Meeran, who is a partner with law firm Leigh Day, there are currently “significant deficiencies in existing mechanisms for holding corporations legally accountable”. One of the reasons corporations are sometimes able to escape prosecution, he says, is their complex multinational structure, what he calls the “corporate veil”. One facet of this is that multinationals don’t usually own the operating companies on the ground in foreign territories, rather, they are controlling shareholders.

Unfortunately for claimants, a principal tenant of commercial law is that shareholders cannot be held liable for the conduct of a subsidiary in which they invest. “The straddling of corporate entities across national boundaries creates an additional layer of complication in terms of the regulatory effectiveness of national laws over multinationals,” Meeran notes. Other reasons why access to justice may be limited in certain parts of the world include lax enforcement of local laws and limited access to legal funding for ordinary citizens.

Claimant lawyers have found ways around these barriers by focusing on the legal duty of care of the parent company towards those who could suffer as a result of its operations, says Meeran. The approach is to bring a negligence claim against the parent in its home market for failing in its legal duty of care. These types of negligence claim are insurable and therefore more likely to result in a payout for the claimant, Meeran points out.

In another novel approach, claimants successfully sued Nike for false advertising under Californian consumer protection laws. They alleged that Nike’s campaign misled the public about working conditions inside its supplier factories. The US Alien Torts Claims Act has also been successfully extended to cases involving alleged human rights violations by corporations.

Corporate defence lawyers sometimes try and hold up cases for years by insisting they are heard in developing market courts, where they think they stand a better chance of winning, Meeran claims. The Brussels Convention, however, stipulates that European courts cannot decline proceedings against local multinationals brought by foreign claimants. The UK is also bound by this principle.

The message from the lawyers and international organisations is clear. Companies need to engage sustainably with the communities in which they operate, no matter where they are located. By not doing so, they risk losing customers and coming under fire from regulators, lawyers and activists, not to mention the local community itself. Increasingly, the best companies are beginning to understand that the only sustainable business is an ethical one, which behaves responsibly and does not plunder.