Muchlinski Article

8/10/2019 Muchlinski Article

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Implementing the New UN Corporate Human Rights Proposals:

Implications for Corporate Law, Governance and Regulation

Peter Muchlinski

Professor in International Commercial Law,The School of Law,

The School of Oriental and African StudiesUniversity of London

ABSTRACT: The UN Framework on Human Rights and Business comprises the States duty to

protect human rights, the corporate responsibility to respect human rights, and the duty toremedy abuses. This paper focuses on the corporate responsibility to respect. It considers how toovercome obstacles, arising out of national and international law, to the development of a legallybinding corporate duty to respect human rights. It is argued that the notion of human rights duediligence will lead to the creation of binding legal duties and that principles of corporate and tortlaw can be adapted to this end. Furthermore, the responsibility to respect, while not underminingshareholder oriented approaches to corporate governance, requires their adaptation towards amore stakeholder oriented approach. It is shown that recent legal developments accept anenlightened shareholder value approach that allows corporate managers to consider human

rights issues without violating the principle of shareholder primacy.


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The UN Special Representative of the Secretary General on Human Rights and Business

(SRSG), John Ruggie, has set in train what is perhaps the most comprehensive discussion to date

of the relationship between corporations and human rights. The SRSG has developed a three

pronged approach to this issue, known as the Protect, Respect and Remedy Framework(The

Framework). This is based on the states duty to protect human rights, the corporate

responsibility to respect human rights and access to an effective remedy.1The present paper

focuses on the second pillar, the corporate responsibility to respect. It considers its implications

from the perspectives of external corporate regulation and internal corporate governance, the

main elements of corporate accountability. The responsibility to respect has significant, if notrevolutionary, implications for both elements. These have not yet been fully mapped out or

debated.

The SRSG has himself sponsored research on the corporate law implications of the framework.

The overall conclusions are that while current corporate and securities laws offer some room for

the consideration of human rights issues as factors in the governance of the company there is as

yet very little official guidance as to the precise parameters of this relationship.2The present

paper is in broad agreement with these findings and attempts to make a further contribution by

highlighting some of the significant legal, regulatory and governance implications of the

corporate responsibility to respect.

In this connection the paper does not discuss whether corporate actors ought to have human

rights responsibilities, a matter already extensively debated elsewhere.3It accepts the assumption

that the corporate responsibility to respect human rights is based on a normative moral duty and

not merely on an instrumental political or legal duty. 4Rather, the paper argues that the corporate

responsibility to respect, as framed by the SRSG, has real legal consequences. It may prove

impossible in practice to establish such a corporate responsibility without creating consequential

legal duties. In particular the SRSGs framework envisages that the responsibility to respect will

be carried out through a due diligence mechanism used to assess the human rights risk involved

in an investment project and to develop strategic responses to control that risk. As will be shownbelow, due diligence mechanisms normally create direct duties of care upon the entity carrying

out such an assessment. Once a due diligence obligation is accepted, failure to use due diligence

is evidence of a breach of such a duty as is the careless operation of such a process.


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Such duties of care do not exist in a legal vacuum. The responsibility to respect is being

developed in the shadow of existing structures of corporate law and corporate governance theory.

The argument in this paper is that existing legal structures, and the theories supporting them, are

capable of relevant adaptation to operationalise the SRSGs framework. Corporations are

creatures of law. Collective bodies can exist without proper legal form but, historically, it has

been usual to place such bodies under some form of official legal organisation.5The corporate

form is one such method. The act of legal incorporation facilitates the operation of the economic

enterprise and outlines the permissible legal scope of its operations. The SRSGs frameworkrepresents a novel attempt further to develop the regulatory agenda of corporate law, so far as

changes in national legal environments are concerned. Although the corporate responsibility to

respect is not framed as a binding legal duty, due to the absence of legal personality for

corporations under international law, it can be seen as informing the legal form of the

corporation and the need to define its legitimate functional limits.

In this connection, as will be developed below, certain key issues arise. In particular three

questions need to be borne in mind: should corporate directors have a duty of care, based on

human rights due diligence, in relation to addressing the human rights responsibilities of their

corporations, should those affected have enforceable rights and remedies against directors and

the corporation, and does the extension of human rights responsibilities to corporate actors

challenge the dominant agency costs theory of corporate governance and necessitate a shift

towards stakeholder approaches?6These questions will be discussed using selected illustrative

approaches to corporate regulation and governance, taken from a number of jurisdictions studied

by the SRSG as part of his Corporate Law Tools Project as well as at the level of corporate

governance theory.7The paper begins with a brief overview of the elements of the SRSGs

approach, so that the interactions of the various elements can be fully appreciated.

I. THE PROTECT, RESPECT AND REMEDY FRAMEWORK

In his Report to the UN Human Rights Council of April 2008 the SRSG asserted that

international law provides that States have a duty to protect against human rights abuses by non-


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State actors, including by business, affecting persons within their territory or jurisdiction.8In his

Report of April 2009 the SRSG re-emphasized the States duty to protect as one grounded in

international human rights law.9In his latest Report of 2010 he continued to explore the

relationship between corporate law and human rights protection and the possible impact of trade

and investment agreements upon the States duty to protect human rights. 10The most recent

restatement of the SRSGs position can now be found in the Guiding Principles on Business and

Human Rights: Implementing the United Nations Protect, Respect and Remedy Framework

(Guiding Principles) which asserts that:

States must protect against human rights abuse within their territory and/or

jurisdiction by third parties, including business enterprises. This requires taking

appropriate steps to prevent, investigate, punish and redress such abuse through

effective policies, legislation, regulations and adjudication..11

The Guiding Principles elaborate this general duty by encouraging States to develop policies that

foster respect for human rights by business enterprises domiciled in their territory and/or

jurisdiction, by ensuring policy coherence between government departments, ensuring that State-

owned enterprises respect human rights, encourage human rights due diligence by export credit

agencies, use commercial transactions with corporations as a means of ensuring respect for

human rights as well as helping business enterprises operating in conflict zones to avoid

committing or contributing to human rights abuses.12Finally, the Guiding Principles exhort

States to maintain adequate domestic policy space to meet their human rights obligations under

investment treaties and contracts and to use their membership of multilateral institutions to

ensure that they do not hinder member states from meeting their duty to protect nor hinder

business enterprises from respecting human rights and encourage business respect for human

rights.13

As regards the corporate responsibility to respect human rights, the SRSG emphasizes that while

corporations can be considered organs of society,


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they are specialized economic organs, not democratic public interest institutions. As

such, their responsibilities cannot and should not simply mirror the duties of States.

Accordingly, the Special Representative has focused on identifying the distinctive

responsibilities of companies in relation to human rights.14

Thus the SRSG turns to the economic functions of corporations as the starting point for the

responsibility to respect. This is seen as a responsibility rather than a duty. The SRSG

does this so as to underline the fact that, as a result of the international legal doctrine that non-

State actors, such as corporations, are not subjects of international law, there is currently nogeneral legal requirement for corporate actors to observe human rights under international human

rights law.15Thus the responsibility to respect under international law remains a standard of

expected conduct acknowledged in virtually every voluntary and soft-law instrument related to

corporate responsibility16To call this a duty would be to misrepresent the extent of the

obligation to respect human rights that a corporate actor has under international law.17This does

not mean that no binding legal duties can arise for corporate actors under the Framework. There

is nothing to stop a State, in the exercise of its duty to protect human rights, from imposing

legally binding duties upon business enterprises operating in its jurisdiction or even outside, as in

the case of claims made under the US Alien Tort Claims Act. Thus the SRSG can say that the

Framework is not a law-free zone to the extent that State action under domestic law can create

legal duties for corporations.18

The corporate responsibility to respect is a standard independent of the States duty to protect,

even though a corporate actor could infringe any of the rights contained in the main international

human rights instruments and even though they are addressed to States.19This raises the question

as to what we mean by human rights when applied to corporate actors. The Guiding Principles

avoid a full answer to this question by selecting certain international instruments as representing

the core internationally recognised human rights.20This approach is problematic as it leaves

out many important international human rights instruments, such as, for example, the UNConvention on the Elimination of all Forms of Discrimination against Women, which can create

issues of corporate respect for human rights. This approach also appears to side step the question


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of how the progressive development of international human rights law through new instruments

will be met by the Guiding Principles. For now the Guiding Principles state only that:

Depending on circumstances, business enterprises may need to consider additional

standards. For instance, enterprises should respect the human rights of individuals

belonging to specific groups or populations that require particular attention, where they

may have adverse human rights impacts on them. In this connection, United Nations

instruments have elaborated further on the rights of indigenous peoples; women; national

or ethnic, religious and linguistic minorities; children; persons with disabilities; andmigrant workers and their families. Moreover, in situations of armed conflict enterprises

should respect the standards of international humanitarian law.21

For the purposes of this paper the use of references to human rights will be understood to mean

the human rights covered by the instruments mentioned in the Guiding Principles and any other

rights contained in international human rights instruments that may, in given circumstances, give

rise to a human rights violation risk as a result of corporate action or inaction.

One important change from earlier Reports of the SRSG is that the do no harm basis of the

responsibility to respect has given way to a more comprehensive foundation for the concept. The

responsibility to respect human rights now means that business enterprises should avoid

infringing on the human rights of others and should address adverse human rights impacts with

which they are involved.22Thus a positive element of action is required not just a passive

avoidance of harm. This is significant given the SRSGs listing of a number of legal compliance

problems that may confront corporate actors, and which will require positive moves to respond

to adverse impacts. These include the need to observe international standards in weak

governance zones, resolving conflicts between international standards and national laws,

adequately assessing stakeholder risks that may require disclosure and action under national

company and securities law and certain categories of international crimes.23

The positive action element is also found in a more detailed exposition in the 2010 Report of the

due diligence concept. This requires the company to move from being a victim of naming and


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shaming to knowing and showing that they understand and internalise human rights through

due diligence.24The 2010 Report goes on to list the main elements of due diligence, including a

full human rights policy, periodic assessments of human rights impacts and proper control and

reporting systems laying stress on effective corporate grievance procedures. Quite correctly the

2010 Report stresses that this is not like other commercial due diligence processes, which are in

the main transactional processes, as there is a constant need to engage in communication with the

right-holders. In other words the firm must look beyond the protection of its own interests and

focus on the interests of those it affects by its actions.25Under the Guiding Principles the due

diligence concept is further elaborated. In particular Principle 17 states that due diligence:

(a) Should cover adverse human rights impacts that the business enterprise

may cause or contribute to through its own activities, or which may be directly linked to its

operations, products or services by its business relationships;

(b) Will vary in complexity with the size of the business enterprise, the risk

of severe human rights impacts, and the nature and context of its operations;

(c) Should be ongoing, recognizing that the human rights risks may change

over time as the business enterprises operations and operating context evolve. 26

Thus the concept is potentially far reaching affecting relations between the enterprise and those

with which it interacts.

The legal implications of due diligence are also considered. In particular the SRSG argues that

properly conducted due diligence will provide strong protection against mismanagement claims

by shareholders and give proof that the company took every reasonable step to avoid

involvement in a violation, which should count in its favour in litigation. However the SRSG

rejects the notion that human rights due diligence should automatically absolve the company

from liability under, for example, the Alien Tort Claims Act in the US.27The implications of this

due diligence based approach are discussed further in Section III below.

As to remedies, the SRSG is positive in his view that national legal remedies should be

strengthened and made more accessible to claimants.28Equally the barriers to effective remedies


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addition, the relationship between due diligence and a legally binding duty of care for human

rights observance will be considered from the perspective of both directors obligations and

those of the company itself. Human rights due diligence also raises more specific questions as to

whether all corporate human rights issues should be treated the same way or whether different

claims should give rise to distinctive due diligence approaches. Secondly, the responsibility to

respect human rights raises fundamental questions as to the nature of corporate governance and

how it should be regulated. Whether a responsibility to respect human rights is compatible with

the overarching concern about agency costs, characteristic of current corporate governance

models used in Anglo-American law, will be considered below.

II. THE RESPONSIBILITY TO RESPECT: A LEGAL DUTY TO RESPECT?

Under existing international law, the State may be indirectly responsible for human rights

violations by non-State actors under the so-called horizontal effects doctrine. This establishes

responsibility on the part of the State for the conduct of non-state actors that violates the human

rights of another non-State actor within their legal jurisdiction. The horizontal element may be

said to describe the relationship between the non-State actors themselves while being subject to

the law of the State that stands above them as guardian of their legal rights. There is some

evidence from case-law under the European Convention on Human Rights (ECHR) that the State

may be under an obligation to secure the rights of third persons against interference by a non-

state actor to whom they delegate activity. Failure to do so may result in a violation of the

Convention.35Beyond the ECHR the horizontal effects doctrine is an integral part of the UN

International Covenant on Civil and Political Rights (ICCPR) as by Article2(1), each State

Partyundertakes to respect and to ensure to all individuals within its territory and subject to its

jurisdiction the rights recognised in the present Covenant This suggests a positive duty to

ensure that, under domestic law, there exist obligations on the part of the State to protect against

human rights violations by non-state actors which harm the rights of third parties.


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As noted above, there is no international legal duty on the part of corporations to observe human

rights. Such a duty can only arise under domestic law at present. Thus it is in this sphere that the

legal development of a binding duty to respect human rights will first evolve, though future

international legal responsibility should not be ruled out. The development of a binding and

enforceable legal duty on the corporation to observe human rights faces a number of legal

obstacles both at the levels of domestic and international law. Under domestic law these may be

listed as: the limitations on liability arising out of the structure and logic of company law,

establishing the mental element of liability for the corporate actor and the impact of jurisdictional

limits on process and liability. Under international law the main obstacle remains the absence oflegal personality for corporate actors and limited direct human rights obligations on corporate

actors.

CORPORATE LAW AND LIABILITY

A major element limiting a binding corporate responsibility for human rights violations, and,

indeed for corporate wrongs in general, lies in the logic of company law. This is designed to

facilitate the formation of a capital fund for investment. It aims to reduce investment risk by

separating this fund from the personal assets of the company promoter and of its shareholders

who are often the same person. This leads to a legal separation between the owners and the

company itself and to a limitation of shareholder liability to the extent of the value of their shares

in the company. The classical model of the limited liability joint stock company assumes that the

owners are actual persons who require the corporate form to engage in the risks of business.36It

does not contemplate the situation where one company owns and controls another, as in the case

of a multinational enterprise (MNE) consisting of a transnationally owned and controlled group

of companies. This creates especial problems in relation to one class of actors: tort victims, who

are often referred to as involuntary creditors of the company that has caused them injury. The

assets of the shareholders can only be touched up to the extent of the value of their shares in the

company. It also creates problems relating to the extraterritorial application of home countryliability laws to events occurring outside the home jurisdiction in the host State of the subsidiary,

and issue discussed further below.37


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For present purposes victims of human rights violations may also be characterised as involuntary

creditors whose main claim against the company will normally lie in tort. Involuntary creditors

have no chance to bargain with the corporation over the allocation of risks, unlike voluntary

creditors, who enter into contracts with the company.38Yet they may have to bear the risk of loss

if the corporation does not possess sufficient assets to compensate them for their injuries.

Victims of alleged human rights abuses have brought claims against the parent company of a

MNE in its home State where they cannot obtain redress against the subsidiary in the host State

where they live and where the alleged harm arose. This type of litigation has come to be known

as foreign direct liability litigation.39

Such a claim depends for its success on proof that theparent company was directly involved in causing the alleged harm. This is not easy given the

logic of corporate separation and limited liability. This may lead to significant under-

compensation of victims, or even no compensation, if the parent has used the separation between

itself and its subsidiary to insulate itself from liability. This position is reinforced by the highly

restrictive conditions under which a judge will lift the corporate veil and find the parent directly

responsible for the acts of the subsidiary. Current law only permits this in cases of abuse of the

corporate form.40

This effect of company law has been criticised in that it externalises a risk that ought properly to

be held by the company to the involuntary creditor. Thus the poorer risk taker assumes the burden

of the risk, contrary to well understood notions of efficient risk allocation in law which stress that

the person who has the best knowledge of the risk should bear it, which, in the case of hazardous

corporate actions would be the corporation itself.41The logic of company law externalises the risk

of liability away from the controlling interest by insulating it from liability except in the few cases

where it can be shown that it has a direct involvement in the events leading to the violation. This is a

clear obstacle to the realisation of the third element in the SRSGs framework, namely, access to

effective remedies, as the SRSG has recognised. It is also a brake on the realisation of the corporate

responsibility to respect as this legal situation encourages irresponsibility by way of increasing

moral hazard. Therefore, one important change in national company laws would be to extend thecases in which the corporate veil ought to be disregarded to include cases of human rights violations

by the company.


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However, veil lifting is a far from perfect solution. It involves judicial discretion and so it may be

difficult to anticipate ex antewhether a particular legal form of group organisation will survive

judicial scrutiny.42In the alternative, a presumption could be introduced of parent responsibility for

the acts of the subsidiary based on the actual or potential control exercised by the former over the

latter. This could be achieved by way of a statutory exception to the doctrine of corporate

separation. The approach is shown in the UK Corporate Responsibility Bill of 2002 where such

liability may be introduced by law.43One important issue is whether parental liability should be

based on a duty of care, requiring proof of negligence on the part of the parent, or whether, as in

Indian enterprise liabilitydoctrine, it should be strict, arising out of the fact that the parent is thecontrolling entity in the enterprise.44Clearly the incentive to internalise risk on the part of the parent

would be greater if liability was strict. Whatever approach to liability is taken the major issue in

such cases would be to show what the boundaries of the enterprise are for the purposes of liability.

Not only the parent but other affiliates might be relevant parties in given cases.

ESTABLISHING THE MENTAL ELEMENT OF LIABILITY

A further problem arising out of human rights responsibility for corporate actors is how to

establish the mental element of liability. Human rights violations involve the commission of

criminal acts and/or civil wrongs. Proof of criminal intent will be required to establish criminal

liability while an element of foresight will be required to prove negligence. In both cases the

main difficulty is how to attribute the human actions and intentions of corporate officers to the

company itself. As regards criminal responsibility one approach is shown in the English law on

corporate manslaughter. Under the Corporate Manslaughter and Corporate Homicide Act 2007 a

new offence of corporate manslaughter has been created. This no longer requires proof that t he

directing will of the company carried the requisite intent and that one actual person acting as

an agent of the company, and who was part of the directing will, committed the act. 45Instead,

the offence is committed by an organisation if the way in which its activities are managed or

organised by its senior management is a substantial element in the breach46

The relevantorganisation includes a corporation among other bodies.47Senior management is defined as the

persons who play significant roles in the making of decisions about how the whole or a

substantial part of the organisations activities are to be managed or organised or the actual


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managing or organising of the whole or a substantial part of those activities.48A gross breach

arises where conduct alleged to amount to a breach of that duty falls far below what can

reasonably be expected of the organisation in the circumstances.49Thus while the threshold for

liability still remains high it is now possible to find the organisation liable where no one member

of senior management has committed a gross breach of duty but where the aggregate effects of

the actions of different senior managers, which in themselves do not amount to gross breaches of

duty, reach that threshold. Equally a larger range of managers conduct can now be taken into

account as the definition no longer limits itself to the very top of the management hierarchy but

extends to senior divisional managers as well.50

In relation to civil liability, the usual rule of attribution is that of vicarious liability. Thus the

company is liable for acts of its officers, agents and employees acting within the scope of their

authority or in the course of their employment.51The question arises whether the company can

be liable only if an officer, agent or employee commits a tort or whether the company can be

liable regardless of the legal effects of the actions of its personnel. The better view is that the

actions of the personnel can be attributed to the company and so it can be liable regardless of

whether the individual concerned is also liable.52Accordingly it is possible to make the company

itself liable for actions of its officers in a manner not dissimilar to criminal liability.

JURISDICTIONAL OBSTACLES TO LIABILITY

In addition to substantive and doctrinal obstacles to human rights liability for corporate actors,

procedural obstacles have arisen out of the mismatch between the national reach of state legal

systems and the transnational reach of multinational enterprise activities.53Thus claims against

the parent company of the MNE have often been subjected to lengthy and costly litigation over

jurisdiction. This is especially problematic in common law systems espousing theforum non

conveniensdoctrine. Here the judge presiding over the case that the claimant has brought before

the forum of one State, can exercise a discretion to remove the case to another, more appropriate,forum in another State on the basis of a balancing of private party interests in the conduct of the

case (such as the location of evidence and witnesses, the cost of presenting the case, the balance

of procedural advantages between the parties) and the public interests of the forum and the


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alternative forum jurisdictions (such as the extent of regulatory interest in the outcome of the

case). This has proved to be an impediment to the conduct of human rights based litigation

against parent companies of MNEs.54

A possible solution to this problem is to develop further the notion of universal jurisdiction for

human rights claims against corporate actors. Universal jurisdiction is defined as, the ability of

the court of any state to try persons for crimes committed outside its territory which are not

linked to the state by the nationality of the suspect or the victims or by harm to the states own

national interests.55

Crimes under international law, such as genocide, crimes against humanity,war crimes, torture, extrajudicial executions and enforced disappearances, just like ordinary

crimes and crimes under national law of international concern, such as terrorist crimes, are

subject to universal jurisdiction.56Where a corporate actor is implicated in such crimes universal

jurisdiction may be available in principle.57The principle of universal jurisdiction may also

acquire relevance in civil as well as criminal cases, should the practice of subjecting MNEs to

actions for violations of human rights, arising outside the forum jurisdiction, become more

widespread.58Should universal civil jurisdiction for human rights claims against corporate actors

emerge this would represent an act of legal harmonization and convergence that would further

strengthen the emergence of a new transnational order of responsibility. The SRSG has conducted

research seminars on universal jurisdiction but the issue is still open to significant disagreement and

debate.59

INTERNATIONAL LAW AND CORPORATE LIABILITY

Finally, the obstacles created by public international law are not insuperable. Corporations as

legal persons, have, as a consequence of this legal status, duties analogous to natural persons in

law. This is a result of the fact of incorporation which allows the enterprise to sue and, crucially

for this argument, to be sued. Indeed, as noted above, corporations can be liable for negligence,

for breaches of property rights and under criminal law including the law of manslaughter.60

Thusthere is no jurisprudential objection to the proposition that a corporate actor is bound to observe

human rights law to the same extent as a natural person given the already extensive range of

corporate liabilities in law or for national law to give sanction against it. The fact that the


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obligation arises under international law is then irrelevant. Furthermore in legal systems where

the individual is directly subject to international law there is again no reason why corporations

should be privileged in this regard, especially where violations of human rights principles are at

stake.61

That said considerable obstacles remain in relation to the imposition of direct international legal

obligations on corporate actors in relation to human rights. As Korbin notes, such an approach is

anachronistic in that it tries to fit the MNE into a State-centric international law and would

require a significant disempowering of States in the regulation of transnational business to whichthey are unlikely to consent.62Korbin thus favours a transnational solution by which a new

institutional regime based on both State and non-State elements would emerge and that would

develop applicable standards through a process of learning, persuasion and deliberation. 63In this

connection it is notable that the SRSG is considering something of this kind as a means of

embedding the UN Framework and building capacity in this field. The SRSG recommends that

the [UN Human Rights] Council give consideration to requesting the High Commissioner (or the

Secretary-General) to establish a Voluntary Fund for Business and Human Rights, with the

primary purpose of addressing these capacity building needs.64The Fund is envisaged as

providing a mechanism for supporting projects developed at local and national levels that would,

increase the capacity of governments to fulfill their obligations in this area as well as strengthen

efforts by business enterprises and associations, trade unions, non-governmental organizations

and others seeking to advance implementation of the Guiding Principles.65It could also be a

means to provide support to small and medium sized enterprises in implementing the Guiding

Principles, either directly or through local business associations, national networks of the UN

Global Compact, and national human rights institutions. Proposals might be coordinated and

submitted through UN Country Teams, which could help monitor their results. To ensure its

relevance and representativeness, the activities of the Fund should be overseen by a multi-

stakeholder Steering Committee.66 The Fund may also consider proposals from the SRSG, due

in March 2011 on methods of local company-community dispute resolution.67

III. THE RESPONSIBILITY TO RESPECT AND INTERNAL CORPORATE

GOVERNANCE


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As noted above the introduction of a corporate responsibility to respect human rights has

significant implications for the governance of companies. If the governance structure of the firm

cannot encompass such wider issues then the responsibility to respect will be a failed concept. At

heart is the need to understand human rights risk and corporate responses thereto. In this regard

human rights due diligence will be analysed both as a managerial tool and as the basis of a

general duty of care for human rights compliance. Then the more theoretical issues concerning

the relationship between the duty to respect and approaches to corporate governance will be

considered. This requires a re-examination of the relationship between shareholder and

stakeholder centred approaches to corporate governance.

DUE DILIGENCE AND HUMAN RIGHTS RISK

In the context of commercial transactions due diligence was first used to describe the process in

s.11 (b) (3) of the US Securities Act 1933, which offers a defence against a claim arising out of

the issue of a false securities registration statement to anyone who has made a reasonable

investigation into matters contained in the prospectus for the issue of securities and has

reasonable ground to believe, and does believe, that at the time the registration statement was

true.68Since then it has become a general term referring to, a process of discovery that is

relevant in key business transactions as well as operational activities.69This process has a

strong legal dimension in that the main types of due diligence concern the discovery of legal

liabilities and the integrity of financial information, the latter being essential to the conclusion of

a commercially and legally effective transaction. Due diligence is normally associated with the

buying or selling of company assets, the lending of finance for a specific project, the assessment

of a potential joint venture partner, the listing of a company on the stock exchange to verify its

ability to carry out its prospectus and the privatisation of state enterprises or state bodies.70In all

these cases investment risk is involved and due diligence seeks to minimise that risk through a

thorough investigation of the assets and liabilities of the firm or investor in question. Thus its

extension to human rights risks appears to be a novel departure as this is not a normal aspect ofwhat is generally understood as commercial risk, in that, as the SRSG points out, it requires a

shift form considering the risk to the company to risk to potential victims of corporate action.


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That said, human rights risk is as much a commercial risk as a social or ethical concern. Firms

have become aware through painful direct experience that failure to identify such risk, and to

minimise it through corporate decision-making, can lead to serious and unwanted commercial

consequences, particularly in relation to reputation and goodwill as well as creating significant

clear up costs.71For example Union Carbide incurred at least $270 million in punitive expenses

alone as a result of the Bhopal disaster.72It can also lead to legal liability as highlighted by the

rise of foreign direct liability claims in recent years as well as claims under ATCA. Furthermore,

as studies conducted on behalf of the SRSG show, failure to address human rights concerns may

give rise to consequential violations which themselves continue to mount.73

However, to view human rights risk as merely an issue of corporate profitability, to be controlled

by way of due diligence assessments, would be an inadequate corporate strategy. In particular,

unless a corporate culture of concern for human rights is instilled into the officers, agents and

employees of the company due diligence could end up missing the very issues it is set up to

discover. At worst it could degenerate into a tick-box exercise designed for public relations

purposes rather than a serious integral part of corporate decision-making. It is here that the

ethical duty to respect human rights is key. The acceptance of such a duty may be said to

constitutionalise concern over human rights impacts in the corporate psyche and culture.74The

due diligence process then allows this concern to be put into operation.

In this regard there is evidence to show that positive management commitments to such a moral

position have a far stronger effect on creating properly integrated ethics policies than merely

responding to external pressures, which may result in policies that are easily decoupled from

other aspects of corporate decision-making and which may be mainly legitimacy preserving

policies.75That said leaving it to management discretion is not an option given the risks of

inaction and drift.76Indeed the logic of the SRSGs framework and its stress on national legal

remedies among other policies, suggests that moral commitment may have to be induced by

instrumental means as well, even if non-instrumental normative moral preferences on the part ofmanagement are the best way forward in safeguarding corporate human rights practices.77


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As noted above, this goes beyond the SRSGs earlier exhortation of framework to do no harm

and requires positive action to operate investments in a human rights compliant way and to avoid

investments that cannot comply with human rights. In this regard the human rights due diligence

assessment may not sit easily with the corporate aim of profit maximisation. Whether corporate

actors can allow human rights concerns to trump profit maximisation concerns is open to debate

so long as corporate cultures and, as will be discussed below, corporate governance theories

upon which so much corporate law is based, remain rooted in the prioritisation of enhancing

shareholder value.78

DUE DILIGENCE AND A BINDING DUTY OF CARE

Notwithstanding issues of corporate culture and voluntary approaches to corporate human rights

observance, due diligence has certain important legal implications that may result in the

institutionalisation through legal practice of a legally binding duty to observe human rights. Due

diligence is part of the process of dealing with legal liability and so has to meet the standards set

up in law to discharge a duty of care. For example in Canada, due diligence has developed

beyond a simple commercial risk assessment process into a basic element of complying with a

wide range of environmental, health, safety and other regulations involving strict liability

offences. It has become analogous to the reasonableness element in civil tort cases. Toexercise

due diligence corporate officers must put in place internal corporate systems to prevent

violations of regulatory requirements and to minimise their adverse effects. They must also

supervise operational personnel effectively and they must be proactive in monitoring and

remedying problems rather than merely turning a blind eye.79Thus due diligence has led, in

Canada, to the development of important changes in internal corporate culture and decision-

making processes.80

Equally in the United States, important legal developments have influenced the behaviour of

managers and helped to foster cultures of compliance with regulatory standards in corporations.For example the Federal Sentencing Guidelines of 1991, which introduced guidelines for

sentencing organisations convicted of Federal crimes, require the establishment and effective

operation of a compliance programme based on good faith and due diligence.81The Guidelines


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list seven requirements of due diligence, and an effective compliance programme, covering: the

standards and procedures to be followed, the assignment of responsible personnel,

communication to employees, periodic evaluation of the programme, the establishment of a

secure and anonymous system for reporting infringements, procedures for responding to the

detection of criminal conduct and the continuing modification of the programme in response to

periodic risk assessment.82In determining whether to prosecute for an offence, Federal

Prosecutors will consider whether corporations have made good faith efforts to develop and

operate an effective compliance programme. However, according to the U.S. Department of

Justice,

the existence of a compliance program is not sufficient, in and of itself, to justify not

charging a corporation for criminal misconduct undertaken by its officers, directors,

employees, or agents. In addition, the nature of some crimes, e.g., antitrust violations,

may be such that national law enforcement policies mandate prosecutions of corporations

notwithstanding the existence of a compliance program.83

Nor does the existence of a corporate compliance programme, even one that specifically

prohibits the very conduct in question, absolve the corporation from criminal liability under the

doctrine of respondeat superior.84

In addition to the Sentencing Guidelines, certain laws in U.S. States concerning stakeholder

responsibilities of directors should be mentioned. Statutes adopted by thirty U.S. states,

including New York but not Delaware (the main state of incorporation for US companies)

explicitly permit directors to consider the effect of board action or inaction on other stakeholders

(referred to as constituencies in these laws), including employees, customers, suppliers,

creditors, the community and the economy of the state and nation.85These laws vary in terms of

the weight a director may give to nonshareholder interests in determining what is in the

companys best interests. They have been used by courts to safeguard directors decisions to take

into account the interests of nonshareholders.86As for Delaware, according to the US Survey for

the SRSG, although its corporate law does not include other constituency provisions,

directors of Delaware corporations are generally considered to have the discretion to consider


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societal effects in formulating corporate policies and otherwise making business decisions, in

determining what conduct is in the best interest of the corporation and its shareholders.87

Constituency statutes have proved controversial in practice.88The American Bar Association

Committee on Corporate Law argued in 1990 that these laws should be narrowly interpreted so

as to avoid undermining the shareholder interests that lie at the heart of corporate law, 89while

proponents replied that such an approach would denude the statutes of their proper purpose

which was to give stakeholders other than shareholders enforceable rights.90The better view

appears to be that these statutes allow for an enlightened management approach to be takenwhich permits managers explicitly to consider ethics, and to see the consideration of stakeholder

interests as being broadly aligned with long-term shareholder interests, without risking legal

liability for breach of duty.91

The SRSGs corporate law survey uncovered that such an enlightened management approach

is taken by other jurisdictions towards widening directors responsibilities when considering their

duties to their company, which might open the way for more explicit consideration of human

rights impacts of corporate activity. Thus the SRSG found that,

In Singapore, case law indicates that the companys best interests can correspond not

only to the interests of the company itself but also to the interests of its shareholders and

employees, creditors, or the group to which the company belongs. In Canada, the

Supreme Court has said that directors duties are owed to the corporation and not to

outside stakeholders, but that in considering the corporations interests, directors may

look to the interests of shareholders, employees, creditors, consumers, government and

the environment to inform their decisions. In the Netherlands, it is generally considered

that a director is to act in the interest of the company in the broadest sense, i.e. the

combined interests of its shareholders, employees, creditors and even society at large.92

This approach is also seen in changes made to English company law in 2006, an example that

has attracted considerable attention from the SRSG.93Under English law directors have a

common law based duty of care to act in the interests of the company and to fulfil their fiduciary


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duties towards the shareholders. The duty to act in the interest of the company has been reformed

by s.172 of the Companies Act 2006 to become a duty to promote the success of the

company.94It is framed in a more inclusive way than the earlier law, though it remains firmly

focused on enhanced shareholder value in that the main duties of the director are still to,

promote the success of the company for the benefit of its members as a whole. The section

goes on to list a number of wider factors that directors should have regard for when making

decisions in the best interests of the company:

(a) the likely consequences of any decision in the long term,(b) the interests of the companys employees,

(c) the need to foster the companys business relationships with suppliers,

customers and others,

(d) the impact of the companys operations on the community and the

environment,

(e) the desirability of the company maintaining a reputation for high

standards of business conduct, and

(f) the need to act fairly as between members of the company.

The reference to the impact of the companys operations on the community and the environment

has been interpreted as being capable of including human rights considerations. While s.172 does

not amount to a binding obligation to take such concerns into account it is an advance on the

previous law as it accepts that, community and environmental impacts along with other

considerations in section 172 are now expressly linked to the companys success in other

words, the legislature recognized that shareholders may be concerned that the companys

interests could be harmed by negative social impacts.95

The list of further factors that the director should consider relate to how the director should arrive

at his or her decision and so is a more precise articulation of the expectations arising from the[directors] duty of care.96Turning to the specific content of the directors duty of care, this is

explained in s.174 of the Companies Act 2006:


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(1) A director of a company must exercise reasonable care, skill and diligence.

(2) This means the care, skill and diligence that would be exercised by a reasonably

diligent person with

(a) the general knowledge, skill and experience that may reasonably be expected of a

person carrying out the functions carried out by the director in relation to the company,

and

(b) the general knowledge, skill and experience that the director has.

Thus the English law duty of care is both an objective and subjective duty. It allows for a basicbenchmark relating to the average reasonably diligent director and a higher benchmark taking

into account special skills possessed by the director in question. The main feature is that the duty

of care relates to the conduct of the companys affairs rather than to any wider public interest

considerations. Thus the essential elements of the duty are that the director has a sufficient

knowledge and understanding of the companys affairs and that the director remains responsible

for the acts of those to whom he or she has delegated responsibilities.97Is it sufficient to allow

for a duty of care to observe human rights?

Given that s.172 lists community and environmental concerns, and encourages the company to

maintain a reputation for high standards of business conduct, these could be interpreted to

include concerns over the human rights impact of the companys actions. Indeed the underlying

conception behind s.172 has been termed enlightened shareholder value in the United

Kingdom, so as to suggest that it goes beyond the strict enhancement of shareholder value and

requires that wider interests are taken into consideration.98Such an interpretation is by no means

certain. If human rights concerns were in issue why did they not get an express mention? The

OECD Guidelines for Multinational Enterprises expressly require, in their General Policies

Guideline, that enterprises Respect the human rights of those affected by their activities

consistent with the host governments international obligations and commitments.99As an

OECD Member, the UK could have used this as a benchmark for the list in s.172 but it did not.Perhaps the list should use the OECD Guidelines as an aid to interpretation, given that English

law must evolve in line with the UKs international commitments, even soft law commitments


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like the Guidelines, but there is no clear statutory intention that s.172 expresses the standards in

the Guidelines. Such an intention would need to be implied.100

More importantly, even if human rights concerns can be read into s.172 (d) and (e) the standard

of care may not be very exacting. According to the Explanatory Note to the Companies Act

2006:

328. In having regard to the factors listed, the duty to exercise reasonable care, skill and

diligence (section 174) will apply. It will not be sufficient to pay lip service to the factors,and, in many cases the directors will need to take action to comply with this aspect of the

duty. At the same time, the duty does not require a director to do more than good faith

and the duty to exercise reasonable care, skill and diligence would require, nor would it

be possible for a director acting in good faith to be held liable for a process failure which

would not have affected his decision as to which course of action would best promote the

success of the company.

Thus so long as a good faith exercise has taken place this should be enough. Bearing in mind that

this duty refers to the success of the company and not to the interests of third parties affected by

the decision, it is clear that the duty of care for human rights abuses needs some further

development.

First, a duty of care for human rights abuses is by definition owed to persons outside the

corporation and is not always instrumentally linked to the success of the company. Accordingly a

wider tort based duty of care applicable to the director and to the company would appear more

appropriate. The company law duty of care is too easily met compared to the tort based standard

as it is designed to balance the needs of the company and its members to be protected from

incompetent management and the need to give directors flexibility and freedom to engage in

entrepreneurial activity. That is what acting to promote the success of the company means inpractice. Arguably the company law standard is irrelevant as it does not cover the question of

harm to parties outside the company except to the extent that such harm materially affects the

success of the company, a very vague standard that is not centered on the effects of corporate


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decisions on third party victims. By contrast the tort based duty focuses on the avoidance of

harm to the foreseeable victim and so draws the line of balance differently. Here the general

standard of reasonable foreseeability of harm is a more appropriate guide to the parameters of the

duty of care than specific company law concerns.

Secondly, the relationship of liability between the director(s), or other relevant company

officer(s), and the company needs to be clarified. Arguably, the former will discharge their duty

through the undertaking of the due diligence approach advocated by the SRSG and the latter will

be liable on the basis of the principles discussed above. Thus the director(s), or other officer(s) oragent(s) of the company, responsible for carrying out the due diligence, will need to meet the

appropriate standard of care to avoid personal liability. However, the company may be

responsible even where individual officers have carried out their duties but the organization as a

whole has nonetheless caused a violation of human rights. This assumes that personal liability

for failure to carry out due diligence is needed, to encourage responsible conduct by directors

and other company officers. It is arguable that the company itself also needs to carry liability so

as to develop a culture of compliance. Equally, it is essential that due diligence liability is not

embroiled in arguments about the legal separation between the company and its directors,

officers and agents, so as to shield these classes of corporate personnel from personal

responsibility, nor the insulation of corporate liability though the direct and exclusive personal

liability of directors.

Thirdly small and medium sized enterprises and members of supply chains will also have to

undertake due diligence although the precise scope and extent of this is yet to be determined.

This may have significant cost implications for smaller businesses and for the degree of

compliance needed in order to come within the duty of care as is recognised by the Guiding

Principles, discussed above. In this connection it should be noted that s.174 of the Companies

Act 2006 requires consideration of the skill and knowledge of the actual director undertaking the

duty of care as well as applying a more general duty based on the average director. Thusdirectors in small and medium sized firms may well be less able to undertake due diligence

reviews than those working in larger firms with developed human rights compliance policies.

This will affect how far their duty of care will go.


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Finally, the question whether different human rights risks should be treated differently needs to

be considered. For example, do human rights relating to labour lend themselves to the same

general concerns for corporate due diligence as do human rights relating to property or to other

human rights? While an exhaustive analysis is beyond the scope of this paper (it would require a

paper of its own!) it is useful to note that the SRSGs Guiding Principles address this issue by

focusing on the actual or potential human rights impact of a business enterprises activities and

associated relationships. This includes a number of sub-questions that need to be considered in

the course of the human rights due diligence exercise. According to the Guiding Principles theseinclude typically, assessing the human rights context prior to the proposed business activity,

where possible; identifying who may be affected; cataloguing the relevant human rights

standards and issues; and projecting how the proposed activity and associated business

relationships could have adverse human rights impacts on those identified.101In this process,

business enterprises are exhorted to, pay special attention to any particular human rights

impacts on individuals from groups or populations that may be at heightened risk of vulnerability

or marginalization, and bear in mind the different risks that may be faced by women and men.

102

A further important factor would be to consider direct and indirect contributions to human rights

impacts. For example a direct contribution could involve a company inducing a supplier to abuse

worker rights due to unreasonable time demands being placed on it for delivery to the company.

An indirect contribution may arise where a company enters into a relationship with a business

partner that abuses human rights even though the activities of the company itself do not make the

human rights situation worse. The distinction is significant for due diligence analysis as direct

impacts can be avoided by changes in the firms own conduct while indirect impacts can only be

remedied by a change of behaviour of the business partner or through withdrawal by the

company from that relationship. The Guiding Principles expressly recognise this distinction in

Principle 13.103

IV. THE RESPONSIBILITY TO RESPECT AND CORPORATE GOVERNANCE

THEORY


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The corporate responsibility to respect human rights poses a challenge for corporate governance

theory. It is an important factor in the further development of the shareholder/stakeholder debate

that is common to both law and business ethics scholarship.104Indeed the inclusion of a

corporate responsibility to respect human rights suggests, at first glance, that a shareholder

primacy model of corporate governance may be inadequate to deal with the complex changes in

governance and regulation that such a responsibility would appear to impose on corporations.

However, it may be equally difficult to reject outright a shareholder based model of corporate

governance on this basis alone. Not only is this approach strongly embedded in the corporatelaws of many countries, most notably those following the Anglo-American model, but it also

contains a strong ethical foundation of its own so far as the preservation of the legitimate

property rights of shareholders against corporate malpractice at the hands of managers is

concerned.105On the other hand it is hard to see how the existence of the corporate responsibility

to respect human rights can become a significant element in corporate action unless a more

stakeholder oriented approach is adopted in corporate governance and regulatory developments.

The implications of the shareholder and stakeholder approaches for this type of corporate

responsibility will now be considered in turn.

Shareholder oriented approaches to corporate governance were spurred by the interaction of

corporate strategy with market organisation and stimulus.106This led to the development of

multi-divisional corporations and to the separation of ownership and control between managers

and shareholders, with the latter remaining at best nominal owners of the company, while

controlling power lay with the managers.107It was this effect of corporate growth that led to the

development of agency based theories of corporate governance. These sought ways of avoiding

the problem that uncontrolled managers may not act in the best interests of the shareholders but

in their own interests, thereby undermining the basic promise made between the company and its

shareholders that it would be run in their best interests.

Consequently the main thrust of agency based theories is the reduction of agency costs, that is,

those costs which arise when managers fail to act in the best interests of the company and hence

of the shareholders. The principal cost that needs to be controlled is the misallocation of funds


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away from the shareholder towards the enrichment of the manager. Based on the initial promise

made between managers and shareholders, the theory develops a contractual analysis of the

enterprise and posits that it is no more than a nexus of contracts between the managers and the

shareholders.108Those contracts aim towards the protection of shareholders as the residual risk

bearers of the company. Thus the main thrust of these arrangements is to enhance shareholder

value. This is justified by the fact that shareholders take the greatest risks as they have no

contractual guarantee of a return on their investment, unlike voluntary creditors who have

entered into contracts with the company.109The main mechanism for controlling managers in this

situation is the market itself. Inefficient firms will not attract shareholder interest, or will lead totakeovers by more efficient management teams, and so the market offers the best discipline for

managers to run their companies efficiently. Equally managers are placed under a moral

imperative to protect the interests of shareholders as a result of their fiduciary duties towards

them.110

The value of these arguments can be questioned both from a regulatory and a business ethics

perspective. As John Boatright has asked whats so special about shareholders? His answer is

nothing much, given the erosion of shareholder power since the 1930s and the rise of public

policy shareholder protection regulation.111As a result he rejects, as an inadequate

characterization of corporate governance law and practice, the notion that only shareholders can

be the subject of fiduciary duties or that only fiduciary duties can cover shareholder interests, or

that managers might not have responsibilities to other types of constituencies. Indeed given the

limited nature of fiduciary obligations, pertaining to general matters of organisation and strategy,

in the ordinary conduct of business, where the business judgment rule applies, the interests of

other constituencies may be taken into account without the possibility of a successful shareholder

suit for the breach of any fiduciary duty.112In addition the success of the company cannot be

limited to the input of specific capital from shareholders, but is also dependant on the

opportunity capital that society provides.113Thus other interests apart from shareholders can

and should be taken into account to ensure the success of the company, though shareholdersremain special, to the extent that public policy considerations support the continuation of the

corporation as a private, profit-making institution, with strong accountability to shareholders.114


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Furthermore, the shareholder primacy approach has been criticised for limiting the scope for

wider claims to be taken into account by corporate managers as a result of an unfortunate trend

of analysis that has sought to overestimate the moral hazards arising out of the agency costs

issue.115In particular a crude kind of economic determinism has informed the content of agency

theory leading to a reductionist tendency that seeks out underlying economic incentives to ethical

choices and that regards economic self-interest and opportunism as the dominant motives for

human behaviour.116This in turn leads to the overemphasis on shareholder primacy even though

there is no necessary causal relationship between agency cost problems and shareholder

primacy.117

This approach is a caricature of human reality, and of corporate activity, and hasserious implications in relation to corporate human rights responsibilities.

Crude nexus of contracts and shareholder primacy arguments can be used to undermine

attempts to add human rights obligations to the range of corporate duties. First, they can be used

to prevent seeing the corporation as a collective actor based on co-ordinated management and so

could justify the rejection of a responsibility to respect human rights since corporations are no

more than, legal fictions which serve as a nexus for a set of contracting relationships among

individuals118and human rights victims by definition have no contractual nexus with the

corporation. Secondly, a crude agency approach is likely to see a commitment to observe human

rights as a threat to shareholder primacy. Should managers take steps to comply with any

corporate responsibility to respect human rights this would be an illegitimate extension of their

actions as it would fall outside the range of actions required to fulfil their agency obligations

toward shareholders. It sets up a competing set of claimants whose risks in relation to the firm

are virtually non-existent, at least in strict economic terms. The holders of human rights have

invested nothing in the company and so require nothing from managers, while the latter have no

right to exercise their managerial power to meet such third party claims.

In response to such arguments the stakeholder perspective recognises the company as an

institution rather than a bundle of assets, one which has to consider the needs not only of internalstakeholders, such as the shareholders, managers and employees, but also the external

stakeholders such as customers, suppliers, competitors and other special interest groups.119Thus

a more socially rooted approach to decision-making is required and more room is offered to


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ethical concerns. As Wesley Cragg notes, stakeholder theory creates a mechanism and thereby

opens the door to bringing fundamental moral principles to bear on corporate activities.120This

requires managers of investor-owned corporations to acknowledge that all corporate stakeholders

have, equal moral status and acknowledge that status in all their activities.121In relation to

actual or potential victims of corporate human rights violations the stakeholder model would

appear to require that the interests of such constituents should be taken into account in the

decision making processes of the firm. The development of due diligence and other corporate

governance mechanisms for furthering these interests would be consistent with a stakeholder

approach. Equally corporate actors may need to engage actively in institution building to ensurethat certain core public interests in the preservation of human rights are met so that they do not

benefit illegitimately from a lack of well ordered institutions, as in the case of weak governance

zones or less developed host countries, or from market failures. 122

The stakeholder approach has in turn been the subject of counter criticism. Thus Jensen sees it as

flawed, because it violates the proposition that any organization must have a single-valued

objective as a precursor to purposeful or rational behavior and that the corporation, will be

handicapped in the competition for survival because, as a basis for action, stakeholder theory

politicizes the corporation, and it leaves its managers empowered to exercise their own

preferences in spending the firm's resources.123Jensen adds that organisations following a

multiple objective policy, as stakeholder theory would require, cannot succeed and that in

corporate life this is especially true if the value of profit maximization is displaced. The result is

the need to make trade-offs between different interests and the handing of unaccountable

discretion to managers.124The consequence is that, stakeholder theory will reduce social

welfare even as its advocates claim to increase itjust as the failed communist and socialist

experiments of the twentieth century.125Jensen does not however dismiss the need for

stakeholder interests to be ignored and suggests an enlightened value maximization/enlightened

stakeholder theory alternative. This would give managers and employees incentives to resist

maximizing short-term financial performance and instead to devote themselves to long-termvalue creation. This is to be achieved by learning from stakeholder theory to think more

generally and creatively about how the organizations policies treat all important constituencies of

the firm.126


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Jensens ideas appear to be representative of what is actually taking place in corporate law

developments related to stakeholder issues. An enlightened management or enlightened

shareholder value approach to directors duties was noted earlier in relation to several

jurisdictions, including s.172 of the UK Companies Act 2006. The UK Company Law Review

took the robust position that a company, should be run in a way which maximises overall

competitiveness and wealth and welfare for all but that this, should not be done at the expense

of turning company directors from business decision makers into moral, political or economic

arbiters, but by harnessing focused, comprehensive, competitive business decision making withinrobust, objective, professional standards and flexible, but pertinent, accountability.

127 In the

light of these concerns the duty to act in the interest of the company was reformed by s.172 of

the Companies Act 2006 to become a duty to promote the success of the company. As noted

above s.172 assumes a stewardship role for directors through the listing of the various other

interests that the director should take into consideration when making decisions. The stewardship

element is present in the assumption that such interests can be taken into account as part of the

process of securing the success of the company. In this sense the enlightened shareholder value

model of corporate governance can allow for some room to make human rights oriented

decisions provided that they do not weaken the success of the company.

Other corporate governance mechanisms conducive to respecting human rights could be

developed from existing models. For example continental European models of corporate

governance often allow for worker participation in corporate affairs whether through works

councils or through the use of co-determination laws that require a certain proportion of the

board to be made up of worker representatives.128Under the Anglo-American model wider

stakeholder interests can be introduced through the appointment of suitable non-executive

directors to the board.129Equally the use of social accounting devices may assist.130However, in

relation to human rights concerns the relevant class of stakeholder is potentially very wide. It

would encompass all those affected by corporate actions whether or not they can impact thecorporation. For example it is highly unlikely that existing devices for widening stakeholder

participation in companies could deal with aboriginal groups whose culture and way of life is

threatened by an investment project.131The identification of such potential stakeholders or their


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inclusion in corporate governance structures is hard to determine. Of course local project specific

solutions can be found, such as local community consultation bodies, but these are outside the

mainstream of corporate governance. This is a field ripe for further analysis.

Finally it may be argued that compelling existing firms, founded on a shareholder focused

model, to undertake additional responsibilities might be considered ethically objectionable from

a libertarian perspective.132From this standpoint it is unclear whether the imposition of new

human rights responsibilities on such firms could be said to have the public support necessary to

justify such incursions into existing and accepted arrangements. The argument continues that ifsupport for such new types of responsibilities exists, employees, investors, customers and other

persons in contractual relations with firms would be willing to make investments in, or contracts

with, a firm with a high human rights culture, or set up new firms with such a culture as their

focus. In response it may be said that such investments are being made through ethical

investment institutions, shareholder activism, consumer boycotts, or by employee choices as to

where they prefer to work.133For example, recruitment officers for major companies often stress

the social responsibility of their firm as a reason for seeking employment there.134Furthermore,

it is only recently that concern for the human rights responsibilities of business has become a

mainstream issue. It may take time for all relevant stakeholders to change their behaviour.

Finally many constituencies that deal with corporations have no choice in the matter of who they

contract with due to their relative economic dependency on the company. The case of employees

or sub-contractors working in a recession comes to mind here.

CONCLUDING REMARKS

This paper has argued that the proposed Framework of the SRSG, through the introduction of a

responsibility to respect human rights and of the due diligence mechanism, may result in certainreforms of corporate organisation that may lead to significant legal consequences. In particular a

binding duty of care towards foreseeable potential victims of human rights infringements arising

out of investment projects may eventually crystallise. It is inherent in the human rights due


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diligence concept and there is no reason in principle why existing laws cannot evolve to contain

such a duty. Equally, it seems clear that any move towards operationalising the corporate

responsibility to respect human rights will involve a departure from a shareholder based

corporate governance model towards a more stakeholder based model.

The holder of the human rights in question will be any one of a number of stakeholders in the

company. Most obviously the employees (both of the company and of its suppliers and

distributors) are the closest example as they are most likely to be exposed to violations of

fundamental rights in the workplace. Other holders include the local community that is directlyaffected by corporate actions, whether as individuals or as a group. However, it is the involuntary

creditors of the company, those who are injured or otherwise harmed by corporate action, who

represent the most problematic group of external stakeholders in relation to human rights duties

of companies. The introduction of managerial obligations to perform human rights due diligence,

based on a binding legal duty of care under tort law for both management and the corporation,

would be a significant addition to the protection of involuntary creditors and to the recognition

that they have an unanswerable moral claim to consideration in corporate decision-making based

on the established and evolving standards of corporate responsibility, in both national and

international law.

Finally, the development of human rights compliance systems, and managerial structures to

achieve this, might go beyond enlightened shareholder value and become a feature of a

reformed civil corporation.135Such a corporation could differ significantly from the

shareholder oriented model, encompassing distinctive value systems that rest upon the view that

business and society are not mutually exclusive or irrelevant to one another and that these values

will be informed by the dominant social discourses of the 21stcentury such as environmentalism,

feminism and human rights.136Future research may seek to develop further such a model of the

corporation, building upon the implications of stakeholder theory for the reform of corporate law

and regulation, and upon the role which human rights considerations will play in this process.Increased interactions between corporate law and business ethics research will be required to

achieve this aim.

Comment [GW1]: May is ambiguousbetween predicting likelihood (orpossibility) vs. giving permission; I assumeyoure talking about a possible future

development, so I changed this to might(and later could).


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ACKNOWLEDGEMENTS

The ideas developed in this paper were first presented at the Expert Multi-Stakeholder

Consultation Closing the Governance Gaps: Application of the UN Protect, Respect, Remedy

Framework, hosted by the German Federal Ministry for Economic Co-operation and

Development, Berlin, 20 January 2010 and at the Canadian Business Ethics Research Framework

Business and Human Rights Symposium 25-28 February 2010 Schulich Business School, York

University Toronto, hosted by Wesley Cragg. My thanks to those who gave me comments and

feedback at these events, particularly John Ruggie, John Bishop and Stepan Wood. Thanks alsoto Andrea Schemberg for commenting on my initial draft and to Denis Arnold and Wesley Cragg

for encouraging me to consider the link between moral and legal issues raised by the UN

framework. Finally thanks too to Gary Weaver and the three anonymous referees whose

instructive comments helped me to develop a better interaction between law and business ethics

in this paper.


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