Author: admin_shift

Last week, the European Parliament adopted a new directive – or law – under which around 6,000 companies will have to report publicly on how they manage the environmental, social and human rights risks associated with their operations. Specifically, they will have to report on the relevant policies they have in place and those policies’ outcomes, the principal associated risks and how they are managed, including through due diligence processes. The 6,000 companies affected by the law include large European and non-European companies listed within the EU, as well as credit institutions and insurance companies.

The passage of this law represents the culmination of hard work by many civil society organisations, investors and others – but by no-one more than Richard Howitt, MEP, who began a long and often arduous campaign for a non-financial reporting law back in 1999, and did so much to bring it to fruition.

In the final stages of negotiations on the law, Shift and many others – such as the NGO coalition ECCJ and the investor grouping Eurosif – sought to shape its content. For many of us, a key concern was that it should reflect the content of the UN Guiding Principles on Business and Human Rights. Since their endorsement in 2011, the Guiding Principles have set the global standard regarding the corporate responsibility to respect human rights.

The final text of the law reflects a number of the central concepts in the Guiding Principles – indeed, not just in relation to human rights, but across the areas of environmental and social reporting as well. These include:

• the need to focus on risks to society, not risks to the company;
• the need to accord priority to the most severe impacts – both potential and actual;
• the need to look not just at the company’s immediate activities but also how impacts might be linked to its operations, products and services through its business relationships, including its supply chains; and
• the importance of a taking a risk management systems approach to addressing these issues, including the importance of implementing due diligence processes.

The law also references the Guiding Principles as an international framework that companies may rely on in providing the necessary information.

Inevitably, given the nature of such negotiations and the interests involved, the final text of the law falls short of our and others’ ambitions in a number of regards. However, now is not the time to pore over those flaws, but rather to focus on its strengths, and capitalise on the opportunities as we look towards its implementation.

The opportunities the law offers are many.

For reporting companies, it should increase awareness and discussion of human rights issues among senior management and Boards of Directors. As the process of gathering information for reports advances, this should improve the quality of internal conversations, sharpen analysis of problems and in turn improve practices. And the level playing field for reporting should then enable the strongest performers to reap benefits with shareholders, financers, customers and others.

For governments, the law – and its necessary conversion into domestic legislation – should reduce or remove tensions between their human rights law obligations and corporate law interpretations that have favored shareholder value over all other considerations. In short, the kind of “policy coherence” that the Guiding Principles press for becomes much easier in at least this regard. And this in turn should ease the way for governments to become champions of a race to the top – not just in what companies say, but also in what they do with regard to human rights.

For investors and other stakeholders in corporate conduct, there is an opportunity to gain far more meaningful insights than previously into what companies are doing to address human rights risks. This can supplement more ad hoc information from events that make it into the media or organisations’ campaigning choices. It should enable better targeting of both criticism and pressure on the one hand but also encouragement and recognition on the other – thus strengthening the incentives for good performance. And while there will always be limits on public reporting (not least ones of page length) the information provided should offer a starting point for pursuing more meaningful and detailed exchanges with companies in a host of different contexts.

These are just some of the opportunities ready to be reaped if implementation of this law achieves its potential.

But they will be missed if implementation becomes an exercise in letting a thousand (or 6,000) flowers bloom. Diversity is the enemy of progress in this regard. Let me explain.

That the law’s provisions reflect and further reinforce key aspects of the Guiding Principles is to be welcomed. But this law, inevitably, remains at a level of generality; its provisions are broad categories within which much more focused decisions have to be made on what exactly a company reports.

And therein lies the risk: absent clear and thoughtful supporting guidance, it is quite possible that the human rights reporting of many companies will continue to reflect what is easiest, rather than most meaningful, to report: success stories, pet projects, and least contentious issues. Each company could interpret the law in a manner that most closely fits its current practices, rather than adapting its practices to meet the underlying expectations of the legislation.

How do we avoid this outcome? Clearly, a reporting straitjacket is not the answer – one size does not fit all. But total free rein brings equal and opposite risks.

Governments have a critical role to play as they put the directive into domestic law provisions and develop supporting guidance. Indeed the directive itself asks the European Commission to produce guidance for companies within two years. Much therefore rests on getting such guidance right. But what is “right” in these uncharted waters?

This is a question that Shift has been addressing through its facilitation of a multistakeholder consultative process, together with the auditing and assurance firm Mazars and the Human Rights Resource Centre for ASEAN. The Reporting and Assurance Frameworks Initiative (RAFI), launched in mid-2013, aims to develop a twin set of frameworks: one to give guidance on what good reporting on human rights looks like; and the other to give guidance on what good assurance of such reporting looks like.

The initiative is based on a process of broad and deep consultations across all stakeholder groups – business, civil society, government, investors, assurance providers and others. Its outputs and updates are all publicly available. It is supported by the UN Working Group on Business and Human Rights and benefits from a formal collaboration with the Global Reporting Initiative – which provides the leading reporting framework for non-financial issues more broadly.

RAFI will begin consultations on the potential structure and content of the human rights reporting framework later this month. Under current plans at least one company pilot of that framework will begin this year, with more pilots next year as both the reporting and assurance frameworks move to completion by the end of 2015. The final frameworks should be owned by one or more independent organisations, be freely available to all, and be capable of evolving further over time.

The adoption of the EU law on non-financial reporting is a potentially pivotal moment for the advancement of responsible business conduct, particularly with regard to human rights. Whether the opportunities the law represents can be realised now depends in large part on the development of clear guidance to ensure its proper interpretation and application. Over the coming months, and with the engagement of all those involved in the consultations, RAFI should help show what such guidance might look like.

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.

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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.”

On October 10, Shift and Microsoft jointly organized a dinner of in-house counsel and other lawyers to discuss the implications of the UN Guiding Principles on Business and Human Rights for their work. Shift’s Chair, John Ruggie, spoke at the dinner and wrote the following blog about the event, which was also published by Microsoft here.

Several thousand lawyers, in formal business attire and carrying briefcases, descended upon Boston’s Copley Square for the annual conference of the International Bar Association last week. In the air was talk about how the UN Guiding Principles on Business and Human Rights, which I authored—unanimously endorsed by the UN Human Rights Council in 2011—apply to law firms as business enterprises, with their own responsibility to respect human rights.

This was the subject of my presentation at a dinner on Thursday evening across the river in Cambridge, jointly organized by Dan Bross of Microsoft and John Sherman of Shift – the non-profit, independent center of expertise on business and human rights started by former members of my team, whose board I chair. The dinner, hosted by Microsoft, was attended by a mix of in-house corporate legal officers, representatives of several national bar associations, outside legal counsel and other legal organizations.

In my remarks, I noted that I had invited corporate lawyers into the business and human rights debate after reading a 2009 client memo from Marty Lipton at Wachtel Lipton, one of the world’s preeminent corporate lawyers. The memo expressed deep concern that the UN “Protect, Respect, and Remedy” Framework, which I had developed as the Special Representative of the UN Secretary-General for Business and Human Rights, would impose inappropriate duties on directors of corporate boards.

I realized then that corporate lawyers had large influence on their business clients, and that they would be essential in spreading wider understanding about the work I was doing. So I began a process of engagement with the corporate legal community, who became among the most consequential of the new actors that I engaged with. The International Bar Association (IBA) marshaled its global network of international lawyers to help create BASESwiki, a website of user-generated information about non-judicial grievance mechanisms (now hosted by www.accessfacility.org). Twenty leading corporate law firms contributed their time on a pro bono basis to the mandate’s Corporate Law Tools Project, which examined the corporate and securities laws of nearly forty jurisdictions to determine the extent to which those laws facilitated or obstructed corporate respect for human rights—the second pillar of the UN Framework.

The engagement paid off. Marty Lipton subsequently issued another client letter encouraging businesses to follow the UN Guiding Principles (which implement the “Protect, Respect, and Remedy” Framework). He characterized the Guiding Principles as outlining a balanced and prudent process for corporations to manage their human rights risks. And in 2011, the American Bar Association formally endorsed the UN Guiding Principles.

Subsequently, I addressed, in an addendum to the Guiding Principles, the role of lawyers who negotiate long-term investment agreements with the governments of very poor but resource rich countries. I pointed out that if the company’s negotiators use their leverage to extract the most advantageous terms possible, regardless of the human rights impacts—such as freezing the state’s ability to regulate changing human rights impacts—this can have serious adverse consequences on affected individuals and communities in those countries. This may increase the likelihood of community conflict—expressed in strikes, blockades and violence—which can also threaten the investment’s profitability and long-term viability.

This generated a rich discussion at the dinner regarding the responsibility of law firms under the UN Guiding Principles to go beyond advising businesses on what is strictly legal, to what is acceptable – and now expected – from a human rights perspective. Senior in-house counsel from several companies that are serious about implementing the Guiding Principles unanimously expressed the strong expectation that their preferred outside counsel should become partners in helping them achieve the company’s strategic goals—including the management of human rights risks—by identifying human rights risks that relate to the company’s legal transactions.

So we’ve come a long way in just a few years. Where previously corporate counsel expressed deep skepticism about the implications of the UN Guiding Principles, corporate in-house legal leaders are now challenging their outside counsel to proactively advise them on human rights risks.

So the times change, and in this case, it’s for the better.

John G. Ruggie is the Chair of Shift and the author of the Guiding Principles. He is the Berthold Beitz Professor in Human Rights and International Affairs at the Harvard Kennedy School.

Corporate tax abuses have been increasingly in the media and political spotlight in recent months. Think of the CEOs of Google, Amazon and Starbucks being called in front of a British House of Commons committee to defend their “immoral” tax practices—said to involve the use of complex tax structures to avoid paying taxes in the UK despite having highly profitable operations in that country. While such tax practices may be technically legal, it appears they are less and less socially acceptable.

To date, the discussion about corporate tax abuses has been framed primarily in moral and legal terms. For example: Don’t companies have a moral obligation to pay a “fair share” of taxes and contribute to the societies in which they operate? On the other hand, why should a corporation not take full advantage of all legal means to minimize its tax burden?

Particularly when dealing with multinational corporations that operate in developing countries, questions are also being raised about the implications for poverty and development: How can governments effectively combat poverty when more money flows out of developing countries through corporate tax avoidance than flows in through development assistance? How can companies claim to be champions of sustainable development when they aggressively lobby for tax holidays or structure their affairs through “secrecy jurisdictions” and tax havens?

In addition, corporate tax abuses can be framed as a human rights issue. That is the key message of a new report from the International Bar Association’s Human Rights Institute (IBAHRI), entitled “Tax Abuses, Poverty and Human Rights.” The IBAHRI convened a Task Force that consulted with a wide range of stakeholders for over a year and examined the forms of potential tax abuses that are of greatest concern to developing countries: transfer (mis-)pricing; negotiation of tax holidays; (non-)taxation of natural resources; and the use of offshore investment accounts. All of these can seriously deprive governments of the resources needed to address poverty and to finance programs seeking to protect and fulfill internationally recognized human rights.

The UN Guiding Principles on Business and Human Rights provided the Task Force with an important analytical framework for exploring the human rights implications of corporate tax abuses. Indeed, the key findings of the report are structured in terms of the UN “Protect, Respect and Remedy” Framework, as outlined below.

State Duty to Protect

Considering the negative impact that tax abuses can have on human rights and poverty reduction efforts, the IBAHRI report observes that states have a number of obligations when it comes to tax abuses. These flow from their obligations to use the maximum available resources to progressively realize economic, social and cultural rights—arguably including an obligation to confront tax abuses as part of an overall plan to strengthen financial and tax governance.

Further, states are expected to strive for coherence between corporate, fiscal, tax and human rights laws and policies, both at the domestic and international levels. This includes the corollary expectation that they avoid corporate, fiscal or tax measures that have retrogressive impacts on human rights. The Task Force argues that states’ obligations to protect economic, social and cultural rights should be understood to include the obligation to assess and address the domestic and international impacts of corporate, fiscal and tax policies on human rights.

Corporate Responsibility to Respect

While business enterprises are important partners in the fight against poverty and can make significant contributions to sustainable development, they also have the responsibility to respect human rights throughout their operations. Business enterprises—including tax advisors and financial institutions—need to understand that their tax planning strategies and services can negatively impact on human rights, and conduct appropriate human rights due diligence.

Looking at tax practices through a human rights lens also reveals the potential for companies to make significant positive contributions to sustainable development and human rights. For example, in order to confront the “resource curse” (whereby resource-rich developing countries can fail to realize adequate economic and social benefits from resource extraction), new legal and policy initiatives are requiring greater transparency about revenues from natural resource projects. These include regulations under the Dodd-Frank Act in the United States, the European Union Accounting and Transparency Directive, as well as the protocols developed under the multi-stakeholder Extractive Industries Transparency Initiative. Moreover, there is increasing pressure for country-by-country reporting of payments by all multinational enterprises to governments, which can be a key component in giving tax authorities (and the public) the information they need to confront cross-border tax abuses, corruption and other illicit financial flows.

Lawyers have a special role to play in addressing tax abuses, given their involvement in drafting tax laws, structuring transactions and advising corporate clients on tax planning matters. As business enterprises, law firms also have a responsibility to respect human rights according to the Guiding Principles. Structuring a transaction to obtain the maximum tax benefits that an investor can extract from an extremely poor country (such as through tax concessions or tax holidays) can have significant human rights impacts because doing so may deprive the country of revenues needed to address the human rights impacts of poverty. In such cases, mere tax compliance is unlikely to satisfy the responsibility of a company, or its tax advisors, to avoid being involved with negative human rights impacts. The responsibility to respect human rights applies in situations where lawyers are involved with third parties’ actions that negatively impact on human rights—typically through their clients. In such situations, lawyers should use their leverage (or influence) to encourage their clients to refrain from tax abuses.

Access to Remedy

Both states and businesses have roles to play in helping ensure greater access to effective remedies for those negatively impacted by corporate tax abuses. Currently, the most effective remedies remain in the realm of domestic tax authorities. Consequently, it is important to strengthen good fiscal and tax governance and enforcement capacity, especially in developing countries where impacts can be particularly severe.

Transparency and access to information are important human rights principles that can support more effective remedies for tax abuses. In particular, these principles are at the heart of the emerging multilateral framework for automatic exchange of information between tax authorities that is being promoted by the G20 and implemented by the OECD Global Forum on Transparency and Exchange of Information. These principles also support states’ individual and collective initiatives to require business enterprises to disclose financial and non-financial information about their operations on a country-by-country basis.

At present, there are few human rights mechanisms that can deal effectively with tax abuses. However, several UN mechanisms have the mandate, and potential, to help articulate the links between tax abuses, poverty and human rights. Further attention and debate on tax abuses from a human rights perspective is important for developing more coherent international standards and good practices for states, multinational enterprises and their advisors and financiers. In the short-term, applying a human rights lens should also help bring greater public and political attention to this fundamentally important issue.

The report of the IBAHRI Task Force is novel in that it begins to connect the dots between tax abuses, poverty and the role of legal advisors from a human rights perspective. The UN Guiding Principles provide an important touchstone for making this “human rights case”—particularly with respect to the issue of corporate tax abuses. This is an immensely complex subject, but hopefully the Task Force’s report will stimulate discussion within the legal and corporate community, as well as among other interested stakeholders, and encourage the development of better tax laws, policies and business practices that are in line with states’ existing human rights obligations and companies’ responsibility to respect human rights.

The author was a Rapporteur for the IBAHRI Task Force.

Supply chain human rights issues continue to make the headlines. Even in industries like apparel, it seems we are far from solutions despite significant investments to address systemic supply chain human rights issues since the 1990s.

Technological trends suggest that in the next several years we will enter an age of “hyper-transparency” in upstream and downstream supply chains with lower cost technologies like smart phones creating new communication platforms for workers and communities in the global south.

This brave new world is empowering to some stakeholders and creates much needed transparency and thus accountability. However, it may be of concern others. New engagement processes will be required as information loops exponentially picks up pace and brands lose control of their message and engagement strategies. In response to this evolution, every corporate apparel executive should be asking themselves the following questions:

1. What is the story behind our product or service?
2. Are we proud of that story?
3. Would my customer be proud of that story?
4. Do we own the story or do others own it for us?

Addressing supply chain human rights issues is not easy and in fairness there is still a large number of “free riders” in the industry that invest little or nothing in ethical trade. However, there is much to be learned from the mistakes of the past and opportunities to leverage that learning.

The industry’s approach to addressing these issues has come in a number of “acts” in what might be seen as an evolving play. With each act comes learning about what has not worked and understanding for how the script should be developed. Companies need to keep evolving along with the unfolding narrative.

Act One: Codes and Auditing

Brands have been at the auditing cat and mouse game for the past fifteen years and some brands like Levi’s even longer. In 1991, Levi’s was the first company to establish comprehensive Global Sourcing & Operating Guidelines.

While these efforts are welcome, their impact on the factory floors, farms and mines of global supply chains has largely been ineffective, while creating duplication. | See our report on company experiences going “beyond auditing”

Numerous studies have highlighted the limited effectiveness of code implementation and social auditing. Most studies looking at the first tier of supply chains in the garment industry agree that basic health and safety has generally improved and child labor is no longer an issue. Sadly, very little progress has been achieved on issues like non-discrimination, freedom of association/collective bargaining and excessive working hours.

And in some cases working conditions may have actually worsened over time. Bangladesh is a case in point, where there are over 4,500 garment-producing factories that employ 3.4 million mainly young female workers, and where most of the major Western brands source product, attracted by low labor costs.

Since November 2012, 28 factory fires have been reported in Bangladesh. In the last five years, there have been over 600 worker deaths related to fire safety and structural collapses – a system failure. In some of the recent fire-related tragedies social auditors overlooked basic fire safety problems, including too few emergency exits and lack of automatic fire prevention systems.

There have been attempts to improve ethical trade practice including additional skills training for social auditors, code of conduct alignment, and sharing audits to reduce audit fatigue and free up resources for other interventions. However, the harsh reality is they are all dependent upon a largely broken monitoring system.

Act Two: Towards Collaboration

Some brands realized over time that individual efforts and monitoring were ineffective and that in order to drive scalable, effective change to complex and seemingly intractable challenges there was a need for new approaches including strategic collaboration and engagement.

As a result, membership in multistakeholder initiatives grew in order to leverage the expertise, experience and resources of multiple stakeholders. This has produced some positive outcomes, such as UK legislation protecting vulnerable workers, and increased engagement with local NGOs and trade unions in developing countries. However, the jury is still out on the cumulative impact that these initiatives will have in the coming years.

Brands also learned that training at the supplier level was important. Brands either independently or in partnership with other stakeholders launched training programs in various areas including worker rights and responsibilities, labor law, health and safety, management systems development, supervisory skills training, worker and management dialogue and productivity enhancements.

While these trainings do target key needs in suppliers they have largely failed to reach scale and sustain themselves over time. Like the code fatigue mentioned earlier, the industry is beginning to face “training fatigue.”

Act Three: Responsible Lobby

While still an emerging area, there is a tremendous opportunity for brands to engage collectively with governments and/or international organizations on expectations related to human rights. They have a shared interest in a level playing field, rule of law, remedy processes and developing competent and resourced labor inspectorates.

Many governments feel if they enforce all their labor and environmental laws then the brands will leave due to the increased costs of compliance. Yet price is not the only consideration in sourcing decisions. Brands also factor into the equation supply chain stability, good infrastructure, quality, skills and innovation. Some have taken the step of making clear that they welcome the effective enforcement of labor and environmental standards, as this provides greater predictability and less risk for their business.

However, while there have been some admirable one-off efforts to develop responsible lobby platforms these have generally not gained traction. A couple of examples include:

• In Mexico, where the Maquiladora Solidarity Network, a Canadian based advocacy group, worked collectively with global brands to pressure Mexican state governors to intervene and protect human rights, leading to positive outcomes for those affected.
• The Uzbekistan Cotton Coalition made up of brands, NGOs, responsible investors and trade unions that have been collectively lobbying the Uzbek government and the International Labor Organization to intervene and put an end to the government-mandated practice of forced child labor in the Uzbek cotton fields.

Brands can play an important role in sending a clear, unified message to national governments about their concerns regarding human rights protections, leveraging the role they play in providing employment opportunities and economic development.

Act Four: Responsibility Defined

A positive development that defines the responsibility of brands and their suppliers in relation to human rights are the United Nations Guiding Principles on Business and Human Rights.

In June 2011, the United Nations Human Rights Council unanimously endorsed the Guiding Principles. The principles enjoy wide support from business, civil society and governments.

Former Special Representative to the Secretary-General, Professor Ruggie proclaimed, “The UN Guiding Principles will not bring all human rights challenges to an end, but their endorsement marks the end of the beginning. The principles provide a solid and practical foundation on which more learning and good practice can be built.”

The principles outline the corporate responsibility to respect human rights. In order to meet their responsibility to respect human rights, business enterprises should have in place policies and processes appropriate to their size and circumstances, including:

• A policy commitment to meet their responsibility to respect human rights;
• A human rights due diligence process to identify, prevent, mitigate and account for how they address their impacts on human rights;
• Processes to enable the remediation of any adverse human rights impacts they cause or to which they contribute.

The Guiding Principles can play an important role in reducing duplication, framing responsibility boundaries and roles, and setting expectations for business, including both brands and their suppliers by:

• Distinguishing between the roles and responsibilities of global brands, their suppliers and the governments of the states where they operate;
• Emphasizing the notion of human rights due diligence through which companies should anticipate and mitigate risks;
• Ensuring that companies have put in place effective remediation processes to address grievances;
• Reducing the potential for “free riders” in the system.

Curtain Call: Purchasing Practice and Business Integration

Any solution to supply chain human rights issues will be multifaceted and require brands to look into the mirror to assess how their own purchasing practices may be a part of the problem. The Guiding Principles require that a company looks at how their own activities may contribute to human rights impacts through their business relationships as part of their responsibility to respect human rights.

Brands should therefore determine if their own purchasing practices are undermining the monitoring efforts of their internal compliance teams or their external auditors.

They should consider making a “deep-dive” assessment of their product pricing, supplier capacity, product lead times, ship dates, product changes and critical path management to determine ways to improve in order to take unnecessary pressure off suppliers and the workers they employ.

Director’s Corner

There are no silver bullets, but there are some practical steps that can be taken to address the pressures that underlie purchasing practices.

• Developing longer-term, trust-based relationships between retailers and suppliers that send a signal to suppliers that the brand is investing in them and will be around next season.
• Developing financial incentives for suppliers, rewarding them for transparency and compliance.
• Appropriate product pricing. Retailers should set product pricing that a factory can realistically meet without subcontracting and have the technical capacity to question when pricing is “too good to be true.”
• Launching new communications technologies like LaborVoices that use mobile phone text and voice messaging to enable workers, NGOs, trade unions and communities to alert retailers and others to unauthorised subcontracting or other abuses.
• Greater communication between retailer compliance and design divisions to make sure the compliance consequences of design changes are understood.
• Improved systems to measure supplier’s production capacity.
• Recalibrating buyer performance evaluations to include labour standards performance and not just metrics for quality, price and speed of delivery.

Until apparel brands take responsibility for their own purchasing practices, monitoring and auditing will continue to be a cat and mouse game with little or no positive impact and a great deal of wasted resources.

Brands and suppliers need to take a hard look at current buyer purchasing models and take mutual responsibility to ensure that workers making their products are treated with dignity and respect as part of their responsibility under the Guiding Principles.

So ask yourself again:

1. What is the story behind your product or service?
2. Are you proud of that story?
3. Would your customer be proud of the story?
4. Do you own the story or do others own it for you?

Sean Ansett is the Founder of At Stake Advisors, a supply chain sustainability and strategy consulting group based in London. He has over 15 years working on supply chain human rights issues and was formally the Director of Global Partnerships at Gap Inc., and the Director of Corporate Responsibility at Burberry.