UK Law Society Advisory Group Urges Implementation of UN Guiding Principles

In 2016 the International Bar Association issued guidance for business lawyers on the Guiding Principles. Jump to the guidance.

On March 25, 2014, the Business and Human Rights Advisory Group of the Law Society of England and Wales – a cross-functional group of leading legal practitioners in the UK – released its report on the implications for lawyers of the UN Guiding Principles on Business and Human Rights. Prominently, the Report urges the Law Society to take the position that law firms have a responsibility to respect human rights in the advice that they give to clients as providers of legal services, as well as in their own operations. The Report is a significant contribution to a wider discussion on the role of the legal profession in putting the UN Guiding Principles into practice, in which Shift has been closely involved.

The Advisory Group’s report outlines the business case for law firms to meet their responsibility to respect, based on:

  • The increasing reflection and incorporation of the Guiding Principles in law, regulation, contracts and dispute resolution processes;
  • The reflection of the Guiding Principles in government policy, such as the UK National Action Plan; 
  • The rapidly changing contours of business legal liability for human rights harms;
  • The development of business and human rights practices in law firms in the UK and abroad;
  • The need for firms to demonstrate their respect for human rights in order to attract and retain the best talent; and
  • The increasing demand by companies for advice from their external lawyers on business and human rights issues.

The Report recommends that the Law Society consider, and develop practical advice, guidance and training on, key issues that must be addressed in the implementation of the Guiding Principles by the legal profession, including: human rights due diligence; access to legal advice; retainer agreements; client relationships; the exercise of leverage as defined in the Guiding Principles; the need to act in the client’s best interests; and confidentiality.

Importantly, it recommends that the regulatory scheme for solicitors – ie, the rules of professional responsibility – should not pose barriers to implementation of the Guiding Principles within the profession.

The Report focuses on what law firms should do align themselves with the second pillar of the Guiding Principles – the corporate responsibility to respect human rights. The report leaves the implications of the third pillar – the need for greater access to remedy – for further consideration and development.

Finally, the Report recommends that the Law Society:

  • Encourage law firms to develop policies and procedures to implement the Guiding Principles; 
  • Incorporate specific human rights guidance into its existing guidance and policies to ensure consistency and minimize additional compliance burdens; 
  • Engage in developing and sharing best practices; 
  • Incorporate business and human rights training into continuing professional development programs; 
  • Develop a program of awareness-raising activities; and 
  • Implement all the Report’s recommendations by the end of 2014.

The Report follows the American Bar Association’s endorsement of the Guiding Principles in 2012, and a report by the European Council of Bars and Law Societies on the relevance of the Guiding Principles for the legal profession.

The Report will feed into, and provide practical guidance for, a closely related effort at the international level – namely, the recently formed International Bar Association Working Group on Business and Human Rights, which is exploring the implications of the Guiding Principles for the global legal profession. Shift is leading that effort, together with the IBA, and chairing the Working Group. The IBA Working Group includes representatives of the bars of Brazil, Japan, Namibia, Spain, Turkey, the UK and the US. Bob Heslett, Chair of the Business and Human Rights Advisory Group of the Law Society of England and Wales, is also a member of the IBA Working Group.

In 2013, Shift, through its Legal Outreach Initiative, provided training to the UK Law Society and its members on the implications of the UN Guiding Principles for the legal profession.

Paradigm Shift: It’s Time to Speak about the Purpose of the Corporation

by Filip Gregor

On February 11, 2014, Frank Bold (a purpose-driven law firm), the Cardiff Business School and Richard Howitt MEP, long-standing rapporteur of the European Parliament on corporate social responsibility (CSR), organized a conference in the European Parliament on the purpose of the corporation. The conference was the first major step in a project aspiring to re-open a public discussion on this topic. It attracted over 120 participants, including representatives from companies, investors, academia, NGOs, and policy makers.

The question of a corporation’s purpose has always been with us. It is the basis from which everything else flows when we come to discuss the corporation. Yet it is not something that most of us spend a lot of time thinking about. We should. 

The dominant paradigm of the last 30 years has been that the purpose of the corporation is to maximize shareholder value, the presumption being that society as well as investors would be better off as a result. This presumption assumes that specific societal interests that may be harmed by the pursuit of the maximization of shareholder value will be protected by clear legislation. In other words, it is the role of the legislature to address corporate externalities. Today, this theory is firmly embedded in business thinking; it is the “state of the art” taught at business and law schools around the world, and it provides a theoretical basis for corporate governance regulation. For several decades now we have been trying to align the interests of corporate executives with those of shareholders or, perhaps more accurately, financial markets.

One problem is that this model of corporate governance, in the words of Professor Joel Bakan of the University of British Columbia, “compels executives to prioritize the interests of their companies and shareholders above all others and forbids them from being socially responsible – at least genuinely so.” [Bakan, J. (2005). The Corporation. London: Constable & Robinson, p 35.] A further problem is that we seem to have largely forgotten the part of the model that expects government to legislate to protect society from negative corporate externalities.

This is particularly problematic in the area of business and human rights. As explained by Professor John Ruggie during his mandate as the UN Special Representative for Business and Human Rights, a root cause of some of the most pervasive negative impacts arising from businesses’ operations is the governance gaps created by globalization – between economic forces on the one hand and the capacity of societies to manage them on the other. Following shareholder value maximization thinking, it is perfectly acceptable for the managers of a corporation to create “shared value” – as is proposed both by the work of Professor Michael Porter and Mark Kramer and by the European Commission’s new policy on CSR – by a measure such as improving safety in the workplace if it can be shown that this will result in, say, litigation costs falling by more than the cost of the safety improvements. This is because a benefit is being delivered to society at the same time as the corporate bottom line is being improved. However, this does not hold true in the situation where the cost of the improvement is more than the saving. In that instance, setting aside the question of reputational risk, maximizing shareholder value, either in the short term or in the long term, requires that no improvement be made.

The complex corporate structures and value chains that characterize the organization of modern business in a globalized environment mean that these problems often seem far away from corporate board rooms, both literally and legally speaking. From this perspective, it is not very surprising that in most sectors, business struggles to deal effectively with the human rights impacts it generates. According to shareholder value maximization thinking, managing human rights risks is not what companies should be using their resources for in the first place. But at the same time, it is perfectly logical for companies to lobby against legislation that would set rules inconsistent with their business model. As a result, we remain locked in a vicious cycle where the level of governmental regulation ebbs and flows, often in proportion to the number and intensity of corporate scandals that populate our televisions and newspapers.

Yet one point came out very clearly from the European Parliament conference: there is no overarching legal requirement for company directors to blindly maximize shareholder value. This is consistent with the conclusions of Prof. Ruggie’s Corporate Law Tools Project carried out during his UN mandate, which found that corporate and securities law principles in over 40 surveyed jurisdictions generally do not explicitly prevent companies from seeking to respect human rights.

In other words, the understanding of shareholder value maximization as an overriding element in corporate purpose is merely a social norm, albeit a very powerful one. Cornell Law School Professor Lynn Stout, who spoke at the conference, wrote in her award-winning book “The Shareholder Value Myth” that not only is the business world misunderstanding and misapplying the law that underpins shareholder primacy, but that, as a concept, it “stands on the brink of intellectual failure”. [Stout, L. (2012). The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations And The Public. San Francisco: Berret-Koehler Publishers, p 115. Stout summarizes her arguments in a shorter paper, available here.]

Indeed, while we have believed that the interests of corporate managers need to be aligned with those of a model shareholder, financial markets have become extremely short-term oriented. The risks this may pose to market stability and to the economy at large were sufficiently demonstrated by the financial crisis, but there is also an obvious message for the business and human rights debate. As expressed by Professor Simon Deakin from the University of Cambridge: “In systems which treat the corporation as the shareholders’ private property, the highest-valued companies will continue to be those which are most effective in externalising the costs of their activities on to others.” [Deakin, S. (2010). Corporate Governance and Financial Crisis in the Long Run. Centre for Business Research, University of Cambridge, Working Paper No 417, p 19.] Participants at the conference reported that they were surprised to learn that shareholders do not, in fact, own companies – a point made by no less than four law professors on the day.

Recognition of these problems is not limited to academia – leading company voices are also calling attention to them. For example, Jack Welch, shareholder value maximization early adopter and former CEO of GE, commenting in the Financial Times (this article is not available online)  on the 2008 financial crisis, has said that “strictly speaking, shareholder value is the dumbest idea in the world”, if it is understood, as he later explained, as a strategy rather than an outcome. Paul Polman, CEO of Unilever and a vocal critic of the “quarterly capitalism” that results from the shareholder value maximization drive, has put sustainability, demands of consumers and customers, and the needs of communities where Unilever operates ahead of a short-term focus on shareholders’ interests. It seems that this strategy is paying off as Unilever has performed strongly and delivered excellent returns to shareholders despite a challenging economic environment. At the conference, Susanne Stormer, Novo Nordisk’s Vice President for Corporate Sustainability, explained how sustainability and social responsibility is encoded in her company’s purpose and how this purpose is guarded by a foundation that controls minority shares vested with voting rights 10 times stronger than ordinary shares. The conference also heard that the business models of certain corporate forms, such as Cooperatives and Benefit (or “B”) Corporations, likewise have a purpose beyond mere profit maximization. 

It is encouraging to see these and other companies trying to bring business and society back together. They prove the possible. Investors such as Calvert and Aviva are doing their share of this work by speaking and acting on behalf of societal interests both in the market and in public discussions. But it would be naïve to assume that the problem will be solved by market dynamics alone, reliance on which largely created the problem in the first place.

First, we need to recognize the importance of this debate. At present there is no process for bringing the relevant actors together in a meaningful way, so that the models that underlie thinking in this area can be properly examined. The reason why reconsideration of these models is needed is neatly captured by the man some describe as “the father of corporate governance”, Bob Tricker. Tricker recently observed that we still think about company law and corporate governance using a model of the corporation as it existed in the 19th century. This, he says, “bears about as much relationship to reality as a hang-glider does to a fleet of jumbo-jets.” [Tricker, R. (2012). Corporate Governance: Principles, Policies, and Practices. Oxford University Press: Oxford, p 7.]

We need to start discussing and exploring how to adjust existing frameworks, regulations and incentives to allow corporate governance to better reflect the reality and fit the needs of the 21st century. This includes the question of business and human rights. The Purpose of the Corporation Project aims to create a safe and apolitical space for the relevant actors to engage in this discussion.

Filip Gregor is Head of the Responsible Companies Section at Frank Bold. He is an expert in the responsibilities of multinational corporations and has been extensively involved in litigation and public discussion in this area. He also sits on the Steering Group of the European Coalition for Corporate Justice.

The synopsis and program with links to videos from the Purpose of the Corporation Conference are available online. The Purpose of the Corporation Project has produced succinct memoranda drawing on law, management studies, politics, and accounting, which address the challenges of corporate governance, freely available here. There is also a LinkedIn group “The Purpose of the Corporation.”

Letter to European Commission on Conflict Minerals Reporting

On March 5, 2014, European Commissioners will be discussing an EU legislative proposal on conflict minerals due diligence. Shift’s Chair, John Ruggie, submitted a letter to European Commission President José Manuel Barroso today, expressing concern that the proposal before the Commission may view reporting on such due diligence as merely optional. A move to make reporting entirely optional risks leaving the most responsible companies exposed while those least attentive to their human rights responsibilities continue their current practices undeterred.

Learn more: reporting on human rights