The new judges

In our recent Insight report on business and human rights – published in September in association with Herbert Smith Freehills – we noted how the arrival of the Modern Slavery Act (MSA) in the UK in 2015 has crystallised awareness of the human rights concerns in business. We heard from in-house human rights experts how the debate over the last 15 years had moved beyond a vague concept to which lip service had been paid to become a mainstream business consideration, combining legal liability with potentially devastating reputational risk.

With this in mind, we teamed up with Herbert Smith Freehills (HSF) to gather together a group of specialists from a variety of sectors in which human rights issues can cast a significant shadow – banking; energy and natural resources; hotels and leisure; and security – to share their experiences. Stéphane Brabant, co-head of HSF’s business and human rights group, opened the discussion by asking each of the guests to talk about their roles in advancing human rights awareness within their organisations. He said: ‘Human rights issues are not the privilege of lawyers. They are the privilege of the people in each industry, company and entity who are aware they are critical to the future of the companies we work for, and our clients.’

***

Stéphane Brabant, Herbert Smith Freehills: The title of tonight’s discussion is ‘Soft law, hard sanctions’. We started to look at these issues seven years ago. It was clear at that time that respect of human rights entails some hard law, but also soft law that is very quickly becoming hard law, with contracts, policies, environmental commitments, as well as new legislation and regulations.

Hard sanctions include impact on a company’s reputation, problems with financing projects, negative influence on stock markets, issues with local communities and much more. Local communities, investors, consumers, joined by civil society, NGOs and social media are what we call the ‘new judges’. They can all have significant impact upon a company and should also be viewed as potential partners. Therefore it is absolutely crucial, within companies and along the supply chain, to have a strong awareness of what respect of human rights means.

Julia, as a member of the banking sector, how does your organisation raise awareness among employees and parts of the supply chain, as well as with your clients?

Julia Makra, Standard Chartered Bank: That is an ongoing question. The Modern Slavery Act is helping to bring that question into focus so I am pleased the UK government has introduced a piece of legislation that is elevating the priority of this issue within the bank.

Richard Morgan, Anglo American: The business is generally taking heed of human rights issues

We have our own supply chains to which we already apply human rights principles at a high level. For example, we ask our suppliers to adhere to a supplier charter setting out our expectations of their standards and practices. The MSA is likely to have the impact of requiring companies, including banks, to enhance steps taken to validate adherence to these standards. For companies in the financial sector, where supply chains are not our primary business area, this may entail a shift in practice.

The main area where banks can shape human rights is in our investment and funding decisions. We are an emerging markets bank; 75% to 80% of our profits are generated in Asia and Africa. We have a number of position statements influencing our investment decisions, including one specifically on human rights. As expectations increase on the role of businesses in improving human rights, we will need to keep an eye on whether we should enhance these standards or how they are embedded across the company. As our brand promise is ‘Here for good’, this is important to us and is being given further thought. It is helpful to have a piece of legislation that encourages these conversations.

Nili Safavi, BP: What I’ve realised since I first joined BP is that you need to continually raise awareness as you progress your human rights programme. The training we do depends on the audience. For example, we have standard awareness training available to all through virtual classrooms, training for leadership teams, as well as training on specific topics like the Voluntary Principles on Security and Human Rights. Now, in relation to modern slavery, we are looking at whether we need dedicated training for people in high-risk regions, ie what to look out for and, if you see potential red flags, what do you do about it? Processes and systems are needed as well, but once things are embedded in people’s awareness, that’s a large part of the battle.

Daniel Hudson, HSF: Companies will be looking to see what peers are coming up with in their statements

Susy Bullock, UBS: To go back to the question of supply chains: for new or renewing contracts, high-impact suppliers are assessed on whether they meet the standards of UBS’s responsible supply chain framework. Where deemed necessary, remediation measures are applied.

UBS is convener of the Thun Group – an informal group of bank representatives who discuss the implementation of the UN guiding principles from a banking perspective. This includes how to approach due diligence, which is the subject of the group’s 2013 discussion paper. Particularly in asset-specific financing, such as project financing, due diligence is probably one of the main touchpoints for a bank with its client for the discussion of potential human rights impacts. The outcome of a bank’s due diligence may influence the action of the client who is causing or contributing to those impacts, to prevent or mitigate them.

Stéphane Brabant: Do banks have a specific role to play in making companies aware of human rights issues?

Julia Makra: Yes. How we discharge this responsibility at Standard Chartered is being given further thought. We encourage our employees to be aware and have conversations with clients, and rising industry standards in this area such that these conversations become a norm will help.

Richard Morgan, Anglo American: The reality of the human rights angle is there, irrespective of wider business conditions. It doesn’t make a difference whether commodities prices are up or down. I have noticed that there are quite a lot of things that we put out there from head office – with a greater or lesser degree of response from the business – but the human rights angle has been something that has caught on quite well in terms of general awareness. This is about soft law: that sort of quasi-legal status is making them think: ‘Well, perhaps we do need to be prepared for this and have the right sort of answer.’

The main area where banks can shape human rights is in our investment decisions.
Julia Makra – Standard Chartered

Peter Wilson, Petroceltic International: I guess I speak for small-cap, extractive industry companies. Like similar companies we operate at the sharp end of things, in high-risk, potentially high-impact, environmentally sensitive areas. Our day-to-day operations can be intrusive, invasive and very often challenging in a number of respects.

I strongly believe that when it comes to leadership, in terms of being aware of and respecting other people’s human rights and pushing human rights further up the corporate agenda, the non-executive directors on the board have a key role to play. They are not paid as executives to run the business and so they tend to be more focused on setting the organisation’s standards on matters such as respect for human rights. One of the biggest concerns for them is reputational risk, both corporate and, by association, personal. They tend to be the key driver on issues such as implementing and monitoring a policy.

One of the other key players in moving human rights further up the corporate agenda could also be banks and I’d be interested to hear whether in the future they might be prepared to take a more pro-active lead by introducing covenants or warranties in credit agreements that cover compliance with an organisation’s human rights policy.

Yukako Kinoshita, Hitachi: When I went to Japan back in 2010, and talked about human rights with people who were responsible for them in HR at Hitachi, I did not feel like we were talking about the same things. How we each perceive human rights can make it very difficult to get to the same point. What makes it even harder is that we are such a large organisation – we have almost 1,000 companies in the group.

We raised awareness in several ways. We first created a Hitachi group human rights policy, which is the overarching policy approved by the top management, and all the individual companies are expected to integrate it as a company rule that people have to comply with. However, we really do not know whether colleagues in all the companies understand it or not. Then we started training. We conduct face-to-face training for executives and managers and via e-learning for other employees. One of the difficulties has been deciding if everyone has to know about human rights, or is it necessary only for managers? The more we work on the topic, we realise that there are still lots of questions. It is an ongoing journey.

Stéphane Brabant: Patricia, there are many companies that have declared they respect human rights. Do you think it is more declaration than action?

Patricia Carrier, Business & Human Rights Resource Centre: Reporting is difficult, because your company might be doing plenty behind the scenes and you are not reporting on it at all, or you are not reporting on it effectively. That is the problem, as far as the statements we have seen so far are concerned. We have over 700 on the website. You may know there are about 12,000 to 17,000 companies that are believed to fall under the MSA, so 700 is not very many, but it is a good start. The majority of them are not very good, so those companies might have some good policies and processes in place, but they are not reporting on them.

Daniel Hudson, Herbert Smith Freehills: Is your impression that some of the statements are ‘over-lawyered’?

Patricia Carrier: Yes.

Daniel Hudson: Too much risk aversion?

Stéphane Brabant, HSF: Establishing awareness of human rights is the hardest part

Patricia Carrier: Yes, there are quite a few statements that are identical in language. Either lawyers are providing generic language or they are using a template. That is how poor some of these statements are. Some of the bigger companies have had reputational backlash because of some things that have happened, or they are just more accustomed to reporting requirements. Those companies are usually the standouts. There is still a lot of work to be done and there is a lot more being done by companies that is not being reported.

David Eveleigh, Serco: The key is not so much the policies. Most companies will have them and I agree that they are all fairly banal. The key is driving what the board talks about. If your non-executives are not speaking about this relatively regularly, then it is not going to embed itself. Part of the reason the policies are so banal is because it is very safe to have a banal policy. Building in a human rights decision tree process for when you are going into a country or a new area is good. The MSA is brilliant. It is great that there is a piece of hard law rather than very grey law.

Sylvia White, GardaWorld: When we talk about human rights as another special interest group, I find it very frustrating. Anti-corruption is special interest, environment is special interest, sustainability is special interest, but human rights is all of those issues. I found it powerful once I was able to look at it like that.

Mark McAteer, Legal Business: Is there not enough raw experience of the consequences of ignoring these issues to concentrate minds?

James Walker, Amec Foster Wheeler: That is what concentrates the minds of boards at the top of the company. It is not: ‘Well, calculate the damage and the risk for the liability exposure to this activity.’ It is: ‘What is the hit to your share price?’ Well, 30% to 40%: that will get their attention.

Stéphane Brabant: How do each of you understand the relationship between liability and responsibility? You know that the corporate
veil, which means that the head office is not liable, has been
pierced. More often you will see actions before the courts and
draft legislation that try to lift this corporate veil. How do you
see your companies’ liabilities and responsibilities, for the group and for your supply chain?

James Walker: We are in an unusual position because we sit in multiple places within the supply chain. We may have BP as a client, and BP for a project may say: ‘You must use this approved list of suppliers, of third parties. Here is a list. You may not deviate from these individuals.’ Then we will say: ‘How do we know that these people do not present a risk to us? What if we decided that we do not want to use one of those because of the risks they may pose?’ There is often an unwillingness in our company to push back and to test this, but we are drilling down into our supply chain and asking questions about who these third parties are and what risks they expose us to.

Nicolette Henfrey, InterContinental: Reputation is becoming important, not just legal liability, when it comes to human rights decisions

Nicolette Henfrey, InterContinental Hotels Group: The focus has certainly shifted from concern about pure legal liability to include broader reputational issues. Previously, the lawyer in me would have said: ‘If we are not legally liable, do not pierce the corporate veil.’ But a lot of the time it is not just the legal liability driving your approach; it is the reputational impact. For companies where the brand, and trust in the brand, is so important, reputation drives the approach.

Sylvia White: If I were a business and BP or a company of that level told me to use a particular supplier, and if I were looking at what my salient issues are, I would say: ‘Their reputation is bigger than mine; I will take the risk on this one,’ whereas if I were a Tesco, I may not. That is definitely one area where I would say: ‘Okay, that is fine, let us go with it.’ We have got so many other human rights commitments to look into and things to do, areas where we have big exposure and we have the potential of impacting on human rights; I would rather spend my resource there.

Nili Safavi: When it comes to human rights impacts on communities and people living near or working on a company’s facilities, there may be a reputational risk that results and that could translate into a legal risk, but the focus of our code of conduct and human rights policy commitments are about preventing and mitigating adverse human rights impacts to people.

Nili Safavi, BP: Training is a vital aspect of raising awareness of human rights impacts

Daniel Hudson: The MSA and the obligation to produce statements is a signal of things to come. Tell a company they must do something. The minute you say that, a company is going to want to say: ‘We have been wonderful. We are doing everything we can.’ Because it is implied that these statements need to show improvement over time, it is not surprising that they are a bit bland and banal to start with.

I do expect everyone in the next year to be looking around more. They will be saying to themselves: ‘Who is saying what? Oh, they are saying far better things. They are in the same sector. We want to be saying that. Next year we need to be saying that.’ Of course, the minute they say anything at all, they will have their internal audit and others saying: ‘If you say it, then you need to be able to show it.’ That is how I see that this will raise standards generally.

David Eveleigh: If you look at viability statements, every listed company had to do them this year. The first few were awful and they grew during the year. They are being developed all the time. It will become a self-perpetuating development of ‘we do that’ or ‘we could do that’.

James Walker, Amec Foster Wheeler: We are looking more closely at what risk third-party suppliers pose

Julia Makra: What happens if the majority of transparency statements this year are poor quality, but then there is no follow-up? Is there a risk that companies will then feel able to just change the date on their statement and re-issue the same thing the following year? If the hope is that the standard of transparency statements will increase every year, then there may need to be some form of external review.

Sylvia White: If you accept the principle, without being too Pollyanna-ish, that most people are fundamentally not bad, for most people there is just a complete lack of awareness. There is no understanding of the relationship between us earning money in a board room in London and something terrible happening to somebody someplace else in the world. The more of these conversations there are, the more people have to think: ‘What does that mean?’ We need to understand the relationship between behaviours, outcomes and unintended consequences.

mark.mcateer@legalease.co.uk