Business compliance with human rights principles is increasingly moving from something that was a nice CSR issue to mention in publicity documents to a crucial element on boards' governance and risk agendas. Kieran Laird explains why private companies should be worried about the human rights effects of their businesses and supply chains - including moves in the EU and elsewhere to make human rights due diligence a legal obligation on certain companies. He explains what frameworks are relevant and how companies can begin to think about the relevant issues.
Michael Luckman: Good morning and welcome to our ThinkHouse spring program for 2021. I do not know about you but after the long dark lockdown days of the last couple of months it feels really good to be waking up in the light and seeing the sunshine and the flowers coming through.
This is the last of our series of four ThinkHouse webinars for spring. So far we have looked at employment issues in the post COVID-19 world. We have looked at data sharing and also customs and trade post-Brexit and if you would like see these events please feel free to download our recorded podcasts. It is probably fair to say that when we ran our spring ThinkHouse program last year it was our first fully online program and although it was well received we candidly did not think it would become a habit a year later, so things have really changed.
Indeed I do not need to show you where the fire exits are any more, or to ask you to set your mobile phones to stun for the Trekkies amongst you, but there is some housekeeping. We have allowed an hour for this topic. We have a presentation first and then we will be picking up some questions at the end. Please feel free to send your questions through during the presentation using the Q&A button at the bottom of your screen and I will try and marshal the questions accordingly to pick up at the end.
The webinar is being recorded and we will share the link with everyone after the event, if you want to review it or pass it on to your colleagues. At the end of the webinar we will be asking for some feedback in the usual way, and Kieran Laird's pay is entirely dependent on how well he does in this on his feedback. And very exciting, we are looking forward to the possibility that we might be physically back in the autumn office and so I am hoping, I am not sure to be honest, but I am hoping we might be running a quick poll on how many of you would be likely to attend a physical event when it is all over.
Some things however remain the same and we certainly aim to deliver our loyal audience high quality speakers such as Kieran, covering a mixed diet of regular catch ups and interesting topical subjects that we think will impact your day to day and are useful in providing a wider context on significant legal trends. And in that vein today's topic is human rights and their relevance to companies.
Ever since the concept of incorporation and separate legal personality were established questions have been asked on whether other aspects of personality are attached. Is the company made of amyloid capitalism focused purely on profit and shareholder value, or do we have moral streak with duties to the societies in which they live, to employees, to contractors' employees, to those effected by their operations and even to the environment.
Can the veil of limited liability be used to hide themselves from wider obligations and do directors have duties deeper than shareholder value? In the 1930s after the Wall Street crash these issues played out in the famous Burl Dodd academic debate between the architect of a new deal and the Harvard Law professor. These days the issues present themselves more in newspaper headlines judging on rapacious director shareholder behaviour and reputation destroying cost saving and social morays are creating a more nuance view on shareholder value and indeed perhaps shareholder values.
To help explain the context of this corporate environment and address some of the issues it raises I am delighted to be joined today by our own human rights champion and partner in our public regulation team, Kieran Laird who is working with an increasing number of clients to establish their good governance in this area. Kieran.
Kieran Laird: Thanks Michael. Morning everyone, let us hope the person across the road from me has finished mowing their lawn, or I am going to get some terrible feedback and it is going to be a lean year next year. So, as Michael says my job today is to give you quite a high level introduction to the area of business and human rights and there is a lot to cover.
So we will start off just with a bit of an introduction about why business are beginning to take this kind of stuff seriously. Where relevant human rights come from, and where risks arise for businesses in this area. We will then come on to talk a little bit about where the obligations in this area come from, both in soft law and hard law and I will explain those concepts when we come onto them. We will then round off at the end with a couple of action points.
Now the aim today is not to talk about the rights of companies themselves because of course, as Michael did say companies do have legal personality, so they do have some rights themselves but what we are going to discuss today is how the actions of companies can impact on the rights of others. Now whenever we think about human rights, we tend to think about the obligations and the actions of states and it can be a little odd sometimes to think about businesses having obligations in this space. But it is not so odd when you begin to think about the powers that companies have in the modern world, in relation to the communities that they operate in, their employees, the people who they sell their goods and services to. When you think about the impact and the debates around social media you get a good handle on how these debates are increasing, and of course then you add in the complexity of modern supply chains, where a company in the UK just selling to customers in the UK could be sourcing stuff from all round the world, from counties that have very little human rights protections.
So when you take those two things together the increased power of companies at the moment and the complexity of global supply chains you being to see a re-evaluation of what we expect from businesses in terms of their corporate ethics. And one way in which this comes to be conceptualised is the idea of a business's social responsibility. Now you will see what Milton Friedman says about social responsibility. He says that a business has only one, and that is to increase its profits so long as it stays within the tramlines of fraud legislation and competition law. But over the last few decade we have seen a more expansive view develop about the social responsibility of business and about what we expect in terms of business compliance with human rights principles.
So it used to be that businesses asked well where is my obligation to comply with human rights principles? But these days you are seeing more of an acceptance that human rights issues are important and we will come on to that in a second and the question is now framed in terms of well given that this is important what do we do about it, what will it cost and who do we work with? So why are businesses beginning to take this kind of stuff seriously?
Well there are a number of positive and negative factors and before we get on to where any hard edged obligations lie, I think it is important to realise that there is an actual business case for taking human rights seriously. This stuff can impact the bottom line.
Let us start by thinking about investors. So asset managers are increasingly offering investment funds with human rights criteria. We are seeing, for example, the Dow Jones sustainability index, the FTSE4Good including human rights criteria. We are also seeing institutional investors like pension funds taking into account human rights issues and more importantly we are seeing those sorts of funds actually dump investments whenever human rights problems arise, or whenever companies do not meet their human rights obligations.
If you think back to the end of last year for example, we saw Scottish Widows dump £440 million worth of investments in companies that did not meet their wider environmental social and governance criteria, their ESG criteria, and those included some elements of human rights principles. And when problems arise in this area it can also effect a company's share price. So again last year we saw half of Boohoo's share value wiped out in nine days when concerns hit the media about its working practices. One of the other things that we saw happen to Boohoo was that its business customers started withdrawing from their contracts and individual consumers started boycotting the company. So you are also seeing both business and individual customers starting to take human rights considerations into account in their purchasing decisions. And we will come on a little later to talk about the fact that there is an increasing wealth of data out there for investors, for consumers, whenever they are trying to evaluate a company's performance in this area. But of course even before investors or consumers start digging into a company, whenever things go wrong and issues hit the headlines they can have a very immediate effect on the bottom line.
Government's too are increasingly expecting companies to act in accordance with human rights principles. One of the best examples of that is the Dutch government, which requires companies that it deals with to act in line with a series of specified human rights principles and we are only going to see that increase round the world.
Companies too are beginning to see the increase and importance of their social licence to operate, and by that I mean the level of approval or acceptance of a company and its operations in the communities in which it operates and from its stakeholders. And you can really see costs to begin to increase whenever a company loses that kind of approval. You can see sales fall off, you can see workforce issues, protests, etc. Therefore, many companies are beginning to see their social licence to operate as being as important sometimes as any regulatory permission that they might need to do business.
Corporate ethics are also increasingly important as a draw for potential employees and these are people who want to see their own values reflected not just in what they buy, but also in the companies that they work for. So taking all that stuff together there is actually a business case for taking human rights seriously and we are seeing this kind of stuff move out of CSR departments and onto companies' board level radars as an actual governance risk.
So when we talk about human rights where do these rights actually come from? Well there are two main sources of human rights in international law. The first is the International Bill of Rights and the second is the International Labour Organisation's Fundamental Principles and Rights at Work.
Let us take the first of those, the International Bill of Rights. Now that is made up of three separate components. The first is the 1948 Universal Declaration of Human Rights and that contains 30 substantive rights, things like the right to freedom from torture, freedom of speech, the protection of family privacy and home life for example. Now the Universal Declaration is just an aspirational statement, it does not actually have any binding obligations, so what you have in the International Bill of Rights are two covenants, the International Covenant in Civil and Political Rights and the International Covenant on Economic, Social and Cultural Rights. Between the two of these what they do is to take all of the rights in the universal declaration, apart from the right to property, and to make them legal binding on signatory states.
There are also other human rights treaties that are of relevance so you have treaties that address particular issues, for example anti-discrimination or anti-slavery and you also have treaties that address the rights of particular groups, such as women or children or migrant workers.
The second element of international human rights law is the International Labour Organisation's Fundamental Principles and Rights at Work and that requires signatories to promote from things like freedom of association, freedom of collective bargaining, the elimination of forced labour, elimination of discrimination in employment and occupations. Now these sorts of international human rights instruments are not actually directly binding on companies themselves. But what they do is they put an obligation on states to regulate companies in such a way as to protect human rights in order to make sure that the state complies with its obligations to protect rights. So that is where the rights come from, but how are these sort of rights actually relevant in a business context?
Well I have put some examples on the slide here and I am not going to go through them all, but you can understand for example how the supply of certain technologies that could be used for harm could breach the right to freedom from torture, cruel or inhumane treatment. You could see how pollution can lead to effects under right to mental and physical health. You can see how the right of protection for children could be breached by inappropriate advertising and marketing to children. And you can also see how companies involved in life sciences, for example, need to pay particular attention to the concept of bio-piracy. Now that sounds quite exciting but what it actually means is where traditional law indigenous knowledge about the nutritional or medicinal properties of a particular plant or of natural genetic resources are appropriated and commercialised without appropriate acknowledgement or compensation.
So you can see how lots of the rights in international human rights law can be relevant in a business context, but where do risks then crystallise in relation to the breach of those sort of rights? Well it very much depends on how a company does business. So for example, certain risks can arise from a company's business model where, for example, the company is bringing cheap products to market with narrow product margins, where it relies on being the first to market in a very competitive environment or where it has a very seasonal business model. You can see sometimes suppliers being incentivised to pay low wages, to require excessive overtime, or to cut corners on safety, in order to expand what could be quite tight margins.
Who a company does business with can also be relevant. So there can be risks for example where a company enters into a joint venture with a government or with another company that has a poor human rights record. And also where a company does business, so you can see how there could be additional problems where a company is either operating in or working with suppliers in a country that is quite corrupt, high levels of corruption or conflict or poor human rights protections.
Each particular sector will also have its own specific risks, so for example if you think for a moment about the extractive sector, they will have particular risks around sort of indigenous land rights, around environmental issues, treatment of workers and artisanal miners for example. So too there can be risks related to particular product and service lines, where, for example, a particular product could be utilised in order to cause harm that will give rise to increased risk. So as I say all of this taken together means that this is increasingly a board level issue, it is part of the overall governance risk framework for a company. So many companies are thinking to themselves "OK, so we need to do something, but what should we do?"
Well at the moment there is not an awful lot of guidance to be gained from hard law, and what I mean by that is there are not an awful lot of legal obligations that can be enforced in court. Now that is changing as we will see in the next section. There are an increasing number of legal obligations and those legal obligations are drawing on a body of soft law that has developed since the 1990s. What I mean whenever I talk about soft law is a series of sort of agreements, principles, codes of conduct that companies have voluntarily signed up to. They cannot be enforced in court but which are voluntarily signed up to because of all the reasons we have just looked at.
And what that body of soft law has done is to allow the idea that business should have human rights responsibility to permeate through society and it has also created a body of concept that various jurisdictions are now drawing on as we will see in order to put in place hard edged legal obligations.
Now the most important of those soft law frameworks in the UN guiding principles on business and human rights. Now these came out of a previous failed attempt by the UN to negotiate a legally binding treaty on business and human rights. Now as we will see a little later on the UN is having another go at that, but at the moment we have the guiding principles. So they were adopted back in 2011 and the idea is that they apply to all business enterprises no matter what size the business is, where it does business either within one country or across boarders so multi-nationally and whether the business is either owned privately or by the state. And the guiding principles are organised in the tripartite framework, the protect, respect and remedy framework.
The first pillar of that is about the state's duty to protect human rights. So this is just an acknowledgement that under existing international human rights law states have a duty to protect against human rights breaches by all actors including businesses. So where states have a duty to protect human rights, under the guiding principles there is the idea of the company's duty to respect human rights.
So the idea under the principles is that the company should avoid infringing human rights wherever and however they do business and also address adverse human rights impacts with which they are involved. As we will see a little later, the types of concepts that are being deployed in the guiding principles are then being repeated in various other instruments so they are quite important, and the principles then talk about the way in which your company should unpack its duty to respect rights.
So first of all the company should have a policy commitment to respect rights. It should then engage in ongoing due diligence and that is to identify, understand and deal with and account for any human rights impacts both in its own business operations but also importantly in the operations of businesses with which it has a business relationship, so for example its suppliers and its sub-contractors. And thirdly businesses should put in place remediation mechanisms so a way to deal with any adverse human rights impacts that they either cause themselves or that they contribute to through their business relationships.
And that then is reflected in the third pillar of the guiding principles which talk about to an effective remedy and the idea here is that remedies for human rights abuses and impacts should be transparent, should be accessible and should give rise to predictable consequences. They should not be expensive or corrupt or inaccessible. And at state the level the guiding principles talk about governments not just fortifying their code procedures but also putting in place non-judicial grievance mechanisms and we will see how some countries do that in just a moment. And then on the company side, the idea as we have seen, is that the company should either put in place or participate in an effective grievance mechanism for any human rights impacts with which they are involved.
A second important framework in the soft law space is the OECD guidelines for multi-national enterprises. Now the eagle eyed amongst you will immediately see that this is a narrower focus than the guiding principles, whereas the guiding principles apply to all companies the OECD guidelines just apply to multi-nationals. They pre-date the guiding principles, they were adopted in 1976, but it is only relatively recently that they have started talking about human rights. They were revised in 2011 to include a chapter which aligns with the UN guiding principles and what they do is they set out principles and standards for responsible business conduct for multi-nationals operating in and from countries that adhere to the OECD declaration on international investment and multi-national enterprises. That includes all 36 OECD countries including the UK as well as 12 others and the OECD guidelines cover a lot of the same ground as the guiding principles, in particular they talk about companies undertaking risk based due diligence to understand and to deal with any human rights impacts either actual or potential that they might give rise to.
What is most interesting though I think in the OECD guidelines is the idea that they require each signatory country to set up what is called a national contact point or NCP, and the NCP is there to investigate complaints about a company operating in or headquartered in that country. So you can see how it is one of the ways in which a state tries to comply with the idea in the guiding principles that it should put in place non-judicial grievance mechanisms and how countries do that varies pretty widely. So some are based in government departments and some are more independent bodies which can draw on NGO's or government officials or trade unions for example.
Here in the UK the national contact point operates out of the department for international trade. It does not have ministers sitting on it but it is housed in the department. And it is actually one of the most active national contact points around the world. It gets a couple of complaints a year, pretty much all of which deal with alleged breaches of the human rights chapter in the guidelines. What it does is it looks to see whether a complaint will fall within its jurisdiction, it then tries to get the parties to mediate and if mediation does not work it then puts out a non-binding determination and makes recommendations in terms of any breach that it finds.
So what is interesting about the national contact point is that even though they are based at national level and even though the OECD guidelines are not adopted by every country in the world. The national contact points are pretty much the only international mechanism for holding companies to account for human rights breaches.
Now the UN guiding principles and the OECD guidelines are set at a general level, they apply to all companies. So each individual company then has to try and figure out what that might mean for its own business and so what you have seen over the past few years is the development, sort of burgeoning of private and semi-private regulation in this area. At its most basic form it takes, you have company level policies and codes of conduct and this is where, for example, a company tries to adhere to the UN guiding principles by putting out a policy on human rights compliance. As you expect these sorts of policies differ widely in terms of what they cover and how they do it, but there are some general criticisms levelled at them in terms of lots of them do not involve stakeholders whenever they are being developed, and some do not have independent or transparent monitoring or reporting mechanisms.
You also see companies getting together at sector level to try and unpack the salient risks for each individual sector, and to try and share best practice about how to address those risks. That can be quite useful because it can help companies spread the costs of trying to unpack some of this stuff and it can also serve to set a common benchmark or standard to kind of level the playing field in terms of what is expected from companies in a certain sector.
So whereas companies band together themselves for that type of stuff, you also have some multi-stakeholder initiatives where companies also band together with other actors, like governments or NGOs, in order to try and set some voluntary standards.
A different kind of thing then are certificate schemes and this is where an independent body assesses a company or a product against certain criteria, for example, compliance with certain human rights issues. And then if it meets those criteria the body will give the company or the product a kind of stamp of approval, so think about things like the fair trade scheme, or in terms of jewellery the Kimberley Process Certification scheme that tries to eradicate the trade in blood or conflict diamonds that fund violent militias round the world.
And lastly in this section, I talked a little earlier about the fact that there is lots of information and data out there for investors and consumers, and part of the reason for that is the growth of indices and benchmarks in relation to human rights compliance. This is where third parties rank and compare companies against human rights criteria. Now usually that kind of data, the data on which these things draws is self reported and that means that in some ways they come in for some criticism but it can also mean that it is important for companies to actually engage with these sorts of processes because a company can define its own narrative to a certain extent. And you see these indices and benchmarks both at the sort of general level, so the corporate human rights benchmark is the most famous as well as industry specific level, so things like the fashion transparency index.
So all of that soft law, as I say, has created a situation in which the idea that businesses have human rights responsibilities is not beyond appeal anymore and if you spoke to lots of people on the street they would kind of agree with it. And it has also created this set of concepts that are increasingly being wired into hard law obligations. So let us look at some of those obligations. Let us start at home.
So when I was talking about what the relevant rights might be, some people might have thought to themselves well actually some of that is actually just reflected in general law isn't it? And it is important to recognise that governments around the world have been regulating areas that relate to business and human rights for decades, long before the concept of business and human rights was first coined.
So for example in the UK you will see the ILO's fundamental principles and rights at work being reflected in employment law and you will see various other human rights issues being reflected in things like data protection and health and safety law for example. Now there are more specific human rights and business laws in the UK. So for example, the Human Rights Act 1998, it requires companies that perform a public function to adhere to the European convention on human rights whenever they are performing that function. The idea there is that when a company steps into the role of the state and undertakes some of the functions of the state, it should have the same obligations as the state in international human rights law in terms of protecting human rights.
Now of course the Human Rights Act will only apply to a minority of companies. Of wider application is Section 172 of the Companies Act and that is the section that talks about directors' duties. So if you remember back, what that says is that a director must act in a way that he or she considers is most likely to promote the success of the business for the benefit of its shareholders, so good old capitalism. However, in doing so he or she must have regard to the impact of the business on the community and on the environment and, also have regard to the desirability of maintaining a reputation of high standards of business conduct.
So you can see how that can actually bring in human rights concerns. Now people's first reaction to that is generally well that is just a half regard to a duty, that is quite a woolly thing, you know no one is ever going to be held to account against that. But there was a case a couple of years ago Antuzis & Houghton in which company directors were actually found to be in breach of section 172 in relation to human rights issues. This was a case where the company directors had knowingly and willingly allowed employees to be paid below minimum wage and to be treated in absolutely horrendous conditions. And what the court said there was that these conditions pretty much amounted to modern slavery, were so abhorrent to the community that by allowing this to take place the directors had pretty much trashed the company's reputation. It had damaged the business to such an extent that it must be a breach of section 172, as well as breaches of employment contracts and as well as this company losing its gang master's licence to employee immigrant workers. So even though that duty can seem a little vague it is important to realise that directors can be held to account against it the area of human rights.
There are also reporting obligations in UK law and sticking with the Companies Act again for a moment, so for example Section 414C requires certain companies, certain large companies, to put a strategic report and part of that report is to outline whether the company has a human rights policy and how effective it is. We also have the Modern Slavery Act which lots of you are familiar with, and that requires companies with an annual turnover of £36 million or more to put out a report each year detailing what steps they have taken in the last year to make sure that there is no forced labour or slavery either in their own operations but also in the operations of their supply chain. Now of course, we have seen proposals to toughen up the Modern Slavery Act at the end of last year, now of course it is just a reporting duty so a company can say well I have taken no action whatsoever, and that would still comply with the law. But from a government's perspective these sorts of reporting obligations are a way of requiring companies to begin to audit and understand our human rights impacts and also to provide data against which a company can be held to account in the market.
So, for example, the idea is that a company's consumers may not be too happy if it says well I have taken no steps to address modern slavery. Those sorts of reporting obligations can also be a way of getting companies used to and familiar with human rights concepts, and that then provides a basis on which governments can impose more onerous human rights duties, and we are seeing that at the moment in the EU and we will talk about that in just a second.
However, staying close to home for just a moment longer, of course statute law is not the only sort of law we have in the UK. We have the good old common law, and over the past few years we are seeing an increasing number of cases in which companies are being sued in tort in the UK on the basis of human rights abuses overseas. This is usually, at the moment, where a parent company is being sued because of the actions of its subsidiary abroad. Now these sorts of cases are generally taken as personal injury or damage to property cases, so they do not cover all of the relevant human rights but they are nonetheless critically important.
So let us just take the example of Vedanta which was a case from 2019. So what you had here is a group of Zambian individuals who brought claims in the English court against the Zambian owner of a mine and its UK parent company, in relation to toxic emissions from the mine in Zambia. So of course as you can understand the first reaction of the UK parent company was to say well this is not about us, we have no duty of care here, so the Supreme Court then had to look at whether or not the claim was properly brought against the UK parent and what they did was to reiterate the test. What you do is you look to see whether there is a real issue to be tried against a UK parent company and if there is that parent company can then act as what is called an anchor defendant and you can also bring in a co-defendant from outside the jurisdiction, in this case the Zambian mine owner.
So in these cases what the court does is to look at whether there is an arguable case that the UK parent company owes a duty of care to people effected by its foreign subsidiary. And the Supreme Court was reluctant to set out any hard and fast test at this point, but from our perspective what is interesting is that it did say that the duty of care on the parent company is likely to arise where the parent holds itself out as exercising supervision and control even where it does not do so. So if you say that you control your subsidiaries you could be under a duty of care. And also where the parent company takes active steps to make sure that the subsidiaries implement a group level policy. What is really interesting is that the Supreme Court said that the same principles could apply to policy or public statements about business relationships with third parties. So that could mean that where you said that you control your suppliers you could also have a duty of care in relation to people effected by their actions. And that approach was affirmed just very recently in the last couple of weeks by the Supreme Court in another case of Okpabi and Shell. So what you have in these cases is companies being held to account basically creating a duty of care for themselves by the policies that they implement. And you think to yourself well is this going to have a chilling effect, are companies going to say to themselves well listen I am not going to create a rod for my own back here. I am not going to have a policy that says that I will take anything to do with what my subsidiaries do in this area. But that is a little short sighted, because obviously whenever we get to the point in the main hearing in these cases of seeing whether or not there has actually been any breaches by the subsidiaries, of course the parent company is going to want to know about that, because if there have been actions that should not have been undertaken by the subsidiaries, the parent company needs to know and needs to deal with it for all of the reasons we looked at in the first part of the presentation.
So what this does is it shows the importance of human rights due diligence and what we are increasingly seeing is jurisdictions around the world bringing in obligations, legal obligations, to conduct mandatory human rights due diligence. So France has had this since 2017, the duty of vigilance law. At the beginning of this month we saw Germany adopt a draft law requiring companies to a certain size to undertake mandatory human rights due diligence through their supply chains and to put in place complaints mechanisms. Switzerland and Norway are going to enact similar legislation this year and Denmark and Finland also have legislation in the stocks. And against that background we are also seeing action at the EU level in the form of a draft directive that will require mandatory human rights due diligence.
Now at the moment the idea is that that directive would apply to large undertakings, now that is not defined, but it might be same sort of companies that are covered by the non-financial reporting directive. It will apply to publicly listed small and medium enterprises and SMEs operating in high-risk sectors. Now high-risk sectors is not defined, but the idea is that the European Commission will put out a list. Now what is important to realise is that it is not just companies falling within those categories that are established in the EU that will be affected, it will also be companies that sell into the EU so where a company falls within those categories and it is a UK company selling into the EU it will be affected. And so what are the obligations? Well some of these will look familiar. States will require companies to undertake mandatory human rights due diligence as well as wider due diligence in relation to environmental and governance risks, in order to understand and to deal with any risks posed by their own operations or those with whom they have business relationships. They will also be required to put in place robust complaints mechanisms and to make sure that a wide variety of stakeholders, are involved at every point in the process. States are also going to be required to enforce these obligations. Now what is really interesting is that in one of the earlier drafts of this directive, the commission had floated the possibility that repeated infringement should be a criminal offence. Now they have backed away from that in the draft that we have now. So there will only be civil penalties, for example fines. But what is really interesting is that the current draft would allow individual claimants to bring civil cases against companies for harms caused in overseas value chains and that might mean if this is enacted in a way it is framed at the moment, that a UK company that is caught by the directive selling into the EU could be sued by an individual in the EU on the basis of actions by a supplier overseas. So quite an important thing to keep an eye on this draft directive. The European Commission has a draft, it is going to introduce it into the European parliament's legislative process with the idea of trying to get it on the books by the end of this year. Of course, because it is a directive individual member states will then need to implement it in their own domestic legal frameworks. So we are going to see a year or two before this actually bites.
On a slightly longer finger and on a slightly higher level, the UN is also having another go at negotiating a legally binding treaty in this area. As I have said before the UN has had a couple of attempts at this and has not been successful so far. Now this current attempt kicked off in 2014 and what we have is a draft that was released in August last year. The draft treaty would apply to all business activities conducted by all business enterprises, so corporations acting just within one state, multi-nationals, privately owned enterprises, state owned companies, for example, and no matter what the turnover, and again some of this stuff will look familiar. It just draws again on those ideas that we saw in the UN guiding principles. So the states that sign up to this treaty would be required to get all businesses within their territory to undertake proportionate due diligence so proportionate to the size and to the risk profile of the company in order to identify, understand and deal with any actual or potential human rights abuses. Again that is in their own operations or in the operations of their supply chain, to monitor effectiveness and to communicate regularly with stakeholders. And the draft treaty outlines a little bit about what this due diligence would include, so it would be things like impact assessments, engaging with stakeholders, non-financial reporting, taking into account gender perspectives, flowing obligations down in contracts and undertaking enhanced due diligence in high risk areas. There would be enforcement so states would be required to provide criminal or civil sanctions against companies or individuals within those companies, who have caused or contributed to human rights abuses. Now as I say this has been on the cards since 2014 and as with anything in the UN, it does not get anywhere fast. We will have to see whether, over the next few years, it is actually adopted as a treaty and then of course which countries sign up to it.
So I think it is clear that there are legal obligations coming down the track. This stuff is only going in one direction but of course I would hope that it is also clear that even before or where there are not legal obligations there is a very good business case for taking human rights seriously in a business context, and as I say we are increasingly seeing human rights issues making it onto board level radar in terms of an overall package of governance risks.
So where would a company start? Well it is important to get board level buy in and I think this stuff only really works if it is led from the top and then it is a question of just trying to identify and understand where your particular human rights risks lie and then considering what can be done to remove or mitigate any risks that you identify. And it can be important to put in place complaints and a whistleblowing processes, and the reason for that is that it is always good for a company to be able to identify quickly any emerging issues before they either hit the press or hit the courts. And do look at some of the sector level initiatives that are out there. There is a lot of really valuable learning that companies can draw on and of course here at Gowling WLG we are always happy to help with these issues. We have a great team here in the UK, in Canada, in our other offices across all of the different areas that this stuff touches upon and we are more than willing to help companies whenever they are thinking about policies or grievance mechanisms, or god forbid if a complaint is brought against them.
So I hope you have found that useful. I see that there are a couple of questions already. And thank you very much.
Michael: Thank you and thank you very much Kieran, that is a fascinating skip through some very interesting issues there, and at a level which is engaging and beyond the day to day and clearly a strategic issue. As you say, we have got a few questions come through and I think I can probably take them in order, and forgive me, I am going to be using people's Zoom tag name, so forgive me if I get the name wrong but I will just be using what I can see.
The first question Kieran, from Elizabeth is what you have observed in relation to sort of competition and economic regulators, in terms of how they are incorporating those human right principles into their regulatory standards or their approach to enforcement?
Kieran: You do see this to an increasing extent. What is interesting is that lots of these sorts of regulators will not necessarily count these sorts of things in human rights terms, but for example whenever you see Ofgem for example putting in place protections for particular vulnerable customers in terms of how companies seek to recover debts, whenever you see Ofwat putting in place, well sorry I think it is a statute, the idea that you should not actually cut off someone's water for failure to pay bills, that is obviously to maintain access to water as a basic right. What is really interesting is where Ofcom is going to start going in this space because of course one of the things that Ofcom is going to have to deal with over the next few years is peoples increasing attention to things like social media, to the way in which data gets used, where companies harvest data and then use that, the way that AI gets deployed and how that can breach human rights in some areas. And of course, at an overall level we are also going to see something like the Centre for Data Ethics and Innovation coming in to try and address some of those, how human rights plays out in some of these very new frontiers. So lots of interesting stuff happening.
Michael: Yes and I think there is, I am not a corporate lawyer but I think from recollection some time after the company law review a few years back, the Takeover Code got amended a bit to allow businesses, certainly directors, to take more than just the price of a particular offer into account, and I think that was largely of this nuanced view of shareholder value being more than just money but including things like reputation and goodwill and standing, if I can put it that way.
OK, so we have a couple of questions then from Angelo which is around I think the Lungowe decision and the status of those companies that share common directors and I think Lungowe was a bit more around statements in glossy accounts around its high fluting standards and that kind of thing. But obviously very often there are closer links when a parent and subsidiary sharing common directors so I think there was a question there about the extent to which that can establish the correct link. Then a related question from Angelo is around how do you go about establishing losses in terms of parent when the losses are felt in the jurisdiction a long long way away in relation to activities carried on by a subsidiary a long way away?
Kieran: OK well just taking the first of those first. There is not an awful lot I can say about this because the way in which liability is established the law always depend on the particular sort of company structure that is in place, and in particular whether or not directors duties bite will depend on where those duties lie in relation to whatever entities the director owes the duties to.
What is interesting about establishing liability in losses is that in the cases that we have at the moment, so Vedanta and the Shell case, we have only really got to the point of establishing the preliminary point that you can go against the UK parent company for the actions of its subsidiary. We have not actually seen any cases yet that have come to conclusion where we will see how the Court addresses how do you unpack losses and things like that. But one thing I will say about that is that you are seeing some companies that are just seeking to settle this kind of stuff fairly quickly. So for example, at the end of last year Camellia UK parent company, which sells avocados to Tesco, there was a case launched against it in the UK High Court by I think it was a group of 79 Kenyan individuals, about alleged human rights, some quite stark stuff happening allegedly in an orchard in Kenya. Camellia settled that in February for £41 million so we have not seen that get to Court but that is an indication of the type of things that companies are settling for.
You also see some companies whenever this stuff kicks off trying to get ahead of the issue, so I think it was Petra Diamonds, there was a case launched against Petra Diamonds in about September of last year as well. Petra Diamonds are famous because they sold the Queen, well they either sold or gave to the Queen the lovely big pink diamond, flawless pink diamond that she has. So this obviously hit the media and Petra have tried to really get in front of this issue before it gets any traction in Court and have put in place lots of investigations and have been very astute in trying to report actions that they have taken. Hopefully with the idea that they will not get to a point where there is any finding of loss or liability.
Michael: That is one of the advantages of open systems of justice, where you have a social sight guise which is holding companies to account for their behavioural standards, not just their financial performance, that that willingness to settle obviously becomes an important factor because you do not want even the publicity of a bad case even if you win. You can still win bad cases and not have the right result, can't you.
Kieran: There are two things there Michael. Just in the Camellia case, whenever you talk about the effect of this stuff, as soon as that case was lodged at Court, before there was any finding you know even about jurisdiction, Tesco immediately cancelled the contracts. So as far as it was concerned just the sniff that there might be an issue here was sufficient from its reputational perspective to just say okay we want nothing to do with this.
And the way the companies handle this can be quite important because you can think about the comparison between the fact that when Boohoo encountered issues, half of its share price gets lost in nine days, Amazon cancels contracts such like. When you think about H&M by contrast we have just seen this morning actually that lots of people in China are sort of boycotting H&M because H&M is saying it is no longer sourcing cotton from certain areas in China and that is because of H&M's reaction to issues that were drawn to its attention in relation to forced labour in cotton and packaging. But whenever those issues first came out, they did not affect H&M's share price. Now part of the reason for that is that H&M actually has a really good reputation in this area. They are seen as sort of market leaders in business and human rights in fashion retail. So they were able to get on top of this very quickly.
Michael: OK, we have probably got time for just one last question and then we will wrap it up I think.
Lungowe and Okpabi were I think as you rightly pointed out forum cases, forum non conveniens cases, and so we have yet to get to what we might call the legal issue. I think the trouble with that of course is those kind of cases have jurisdictional issues don't they? Things like we will not hear it because we might have reconcilable judgments or there is courts already seen so we will not do anything until we find out what is happening there. Do you see there being an international play-off of human rights, a kind of human rights forum shopping situation arising there?
Kieran: It is certainly a danger. Now one of the issues that arose in Vedanta was the application of EU jurisdictional rules in this case. One of the things the claimants had to show was that there was no possibility of being able to take this case in any other jurisdiction, and the Court accepted that there was not. But the Court was very clear to say we might see a change to jurisdictional rules such that if we do think it is appropriate for a case to be brought in the country in which the breach took place then we will be happy to let the case proceed in that jurisdiction.
In America they had very broad jurisdictional rules, which just in the last year or two have been overturned by the Supreme Court so it used to be the case in America you could sue a business for any human rights breach, anywhere in the world, but now they have restricted that jurisdictional element, it has to touch upon the US.
Just a final point in that regard, is it will be really interesting to see this draft directive in the EU and how that unfolds because of course it has that ability for claimants in the EU to sue companies outside the EU in relation to actions of suppliers somewhere else in the world so that is going to make forum shopping an awful lot easier I think, where cases touch the EU.
Michael: Thank you very much Kieran and thank you all of you for attending. For those of you who are still around and I am conscious we have gone a little bit over time so I know people might be leaving, if you have got a bit of time, I am hoping Susie's been able to set up our poll as for those of you who would like to attend in person next time. So if you could, before you disappear off, if you could just give us a quick flick of the button there, that would be really helpful. Thank you, and whilst you are doing that it is up to me to say thank you to Susie for organising this and for Kieran for such a really interesting and thoughtful presentation. Thank you very much Kieran.
Kieran: Thanks all for listening.
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