Resource Type: Publications

Using Leverage in Business Relationships to Reduce Human Rights Risks

Summary

What is leverage? It is a company’s ability to influence the behavior of others.

The concept of leverage plays a key role for companies in meeting the corporate responsibility to respect human rights. The Commentary to Guiding Principle 19 states that leverage is considered to exist where the company ha the ability to effect change in the wrongful practice of an entity that causes harm

Leverage gets to the heart of what companies can realistically be expected to do in practice when faced with human rights challenges. Even when companies have a dominant or influential commercial position in a business relationship, there are many questions about how to identify and exercise the most effective forms of leverage. At the same time, every company — regardless of size, industry or geography — faces situations in which it does not have, or does not perceive, sufficient leverage to influence the behavior or others. This raises questions about what steps can be taken to create or increase leverage; what steps could have been taken earlier in the relationship to have created leverage; and when and how to consider terminating a business relationship.

Leverage Over Whom, How and for What Purpose?

Companies can ask themselves three questions when they are seeking to build and exercise leverage over an entity:

  1. Over whom am I seeking to exercise leverage?
  2. How could I exercise leverage?
  3. What purpose could different forms of leverage achieve?

1. Over Whom?

What types of business relationships may a company have that would connect it to potential human rights harms? Very often, those types of relationships may be:

  • upstream suppliers;
  • joint venture or other “horizontal” business partners;
  • downstream business customers, clients or end-users;
  • goverments.

For specific examples of ways to exercise leverage over these groups, see page 17 of the resource.

 2. How?

Once a company identifies who it is trying to influence, it can try to systematize its approach for exercise leverage by examining five categories of leverage.

  1. Traditional commercial leverage: leverage that sits within the activities the company routinely undertakes in commercial relationships. Specific means may include:
    1. Contracts;
    2. Audits;
    3. Bidding criteria;
    4. Questionnaires
    5. Incentives (price, volume, long-term business)
  2. Broader business leverage: leverage that a company can exercise on its own but through activities that are not routine or typical in commercial relationships. Specific means may include:
    1. Capacity building;
    2. Presenting a unified voice from each business department;
    3. Referencing international or industry standards;
  3. Leverage together with business partners: leverage created through collective action with other companies in or beyond the same industry. Specific means may include:
    1. Driving shared requirements of suppliers;
    2. Bilateral engagement with peer companies.
  4. Leverage through bilateral engagement: leverage generated through engaging bilaterally and separately with one or more other actors, such as government, business peers, an international organization or a civil society organization. Specific means may include:
    1. Engaging civil society organizations with key information;
    2. Engaging multiple actors who hold different parts of a solution.
  5. Leverage through multistakeholder collaborations: leverage generated through collaborative action, collectively with business peers, governments, international organizations and/or civil society organizations. Specific means may include:
    1. Driving shared requirements of suppliers;
    2. Using convening power to address systemic issues.

For more detail on types of leverage with examples, see page 14 in the resource. The Annex contains multiple examples of how companies have used these different types of leverage with suppliers, governments, joint venture partners and others.

3. For What Purpose?

Leverage is about creating the opportunity to change how people think and behave. In the context of the Guiding Principles, it is about changing the thinking and behavior of key people within a supplier, contractor, business partner, customer, client or government, where their organization’s actions are increasing risks to human rights.

The purposes of using leverage may range from obliging another entity to address the issue, to engaging another entity to discuss the issue, to persuading another entity to address the issue.

Identifying Opportunities for Leverage

Companies may find it helpful to identify moments of traction, where there is a particular opportunity to exercise leverage. These moments may include:

  • Contract negotiation;
  • Licensing agreements/renewal;
  • Setting qualification criteria for bidding processes;
  • Periodic reports on implementation of a service or plan of action;
  • Renewal of service agreements;
  • Points when services or products require maintenance;
  • Disbursement of funds;
  • Monitoring/audit engagements;
  • Provision of technical or advisory assistance;
  • Processes/investigations for addressing complaints.

Building the Skills of Persuasion

In practice, real behavioral change may happen more often through persuasion than through obligation.

The art of persuasion has been studied in the field of dispute resolution, including by Dr. Robert Cialdini, who developed six principles of persuasion based on basic human instincts. These are:

  1. Reciprocity: the tendency to want to return a favor;
  2. Commitment and consistency: the tendency to wish to honor commitments and be true to one’s self-image;
  3. Social proof: the tendency to do things one sees other people doing;
  4. Liking: the tendency to be persuaded by people one likes;
  5. Authority: the tendency to obey authority figures;
  6. Scarcity: the tendency to want something that is in short supply.

See this video to hear Dr. Cialdini explaining these six principles.

State of Play of Corporate Human Rights Reporting Initiatives 2013

Overview

This research took place in 2013 and was originally titled, “Update to John Ruggie’s Corporate Law Project: Human Rights Reporting Initiative.” Since that time, a number of corporate reporting requirements have been developed or amended. For more information on corporate reporting on human rights, please see the Communicate section of our resource library.

In early 2009, Shift’s Chair and the former Special Representative of the UN Secretary-General for Business and Human Rights, Professor John Ruggie, established the Corporate Law Project. The project involved more than 20 leading corporate law firms from around the world assisting pro bono to identify whether and how corporate and securities law in 39 jurisdictions encourages or impedes companies’ respect for human rights. The former Special Representative also convened several expert consultations to discuss key findings and next steps. This pro bono research fed into the report Human Rights and Corporate Law: Trends and Observations From a Cross-National Study Conducted by the Special Representative, presented by Prof. Ruggie as an addendum to his final report to the UN Human Rights Council in May 2011. This report explored issues of incorporation and listing, directors’ duties, reporting and stakeholder engagement.

Since the research for the 2011 report was conducted, there have been a number of notable developments with regard to reporting on human rights, spurred by the convergence of key international standards and other guidance around the provisions of the Guiding Principles, combined with growing demands from investors, shareholders, labor, consumer and civil society organizations for accurate information regarding companies’ social and environmental impacts.

Shift therefore provides this note to update the research related to reporting, and in particular question 16 of the Human Rights and Corporate Law Report: “Are companies required or permitted to disclose the impacts of their operations (including human rights impacts) on nonshareholders, as well as any action taken or intended to address those impacts, whether as part of financial reporting obligations or a separate reporting regime?”

Although this note provides an update where recent regulations and/or stock exchange requirements encourage or compel human rights-related information to be disclosed by companies, it is not intended to describe the effectiveness of those reporting requirements in practice. Where the language updates a specific paragraph in the Human Rights and Corporate Law Report, the paragraph updated is indicated in square brackets.

The remainder of this resource includes references to the following:

  • Regulatory requirements from the following governmental/intergovernmental bodies: Brazil, Colombia, Denmark, European Commission, France, India, Norway, South Africa, Sweden, United Kingdom, United States
  • Stock exchange requirements in the following countries: Brazil, Egypt, India Indonesia, Malaysia, Singapore, South Africa, Thailand, Turkey, United States

From Audit to Innovation: Advancing Human Rights in Global Supply Chains

Summary

Over the last several decades, global companies have increasingly recognized their roles and responsibilities in addressing social impacts and labor conditions within their supply chains – a responsibility reaffirmed by the Guiding Principles.

As awareness of this responsibility has increased, so too has a recognition of the limitations of the conventional approach to tackling these issues – social compliance auditing. Despite the hundreds of thousands of social compliance audits conducted each year to ensure minimum workplace conditions in companies’ supply chains, there is little evidence that they alone have led to sustained improvements in many social performance issues, such as working hours, overtime, wage levels and freedom of association.

There are many reasons why the traditional audit paradigm has struggled to produce sustainable improvements in these and other key areas of social performance, with each of the following playing their respective roles:

  • A lack of disclosure by suppliers of accurate information on their performance during some audit processes, calling into question the value and validity of information gathered;
  • A lack of capacity among suppliers to address issues that have been identified for remediation in a sustainable way;
  • A lack of perceived incentives among suppliers, both external and internal, to address social performance issues, and a corresponding lack of commitment to invest in sustainable improvements;
  • Systemic challenges that are beyond the control of individual suppliers, including social context, regulatory environments, and industry-wide issues;
  • The purchasing practices of global brands and retailers, and a need to recognize and improve upon the role they themselves may play in contributing to impacts on workers.

These issues are no secret to global brands and retailers, many of whom have grown increasingly frustrated with the limitations of the traditional audit paradigm. In the absence of clear alternatives, many companies continue to base their due diligence and remediation solely on an audit approach that they privately acknowledge is not producing sustainable results.

However, a number of leading brands and retailers are attempting to change the conversation. They are openly acknowledging what everyone knows – that audits alone have not produced sustainable change.

Instead they are asking – themselves, their industries, their suppliers, and other stakeholders – what to do about it. They have a growing body of individual and collective experience with alternative and supplementary approaches to addressing social performance issues in their supply chains – approaches that seek to recast their relationships with suppliers, from “policemen” to “partners.”

This research, undertaken by Shift in collaboration with the Global Social Compliance Programme (GSCP), is based on conversations with leading companies, industry experts, and – for the four case studies presented – suppliers and other stakeholders. The first part of the report begins by identifying 10 leading trends and elements that form this new generation of social compliance programs for supply chains:

  1. The shift from pass/fail compliance to comprehensive continuous improvement programs;
  2. Replacing audits with collaborative assessment and root cause analysis;
  3. The role of grievance mechanisms in improving social performance;
  4. The integration of capacity-building approaches for suppliers;
  5. Different forms of partnerships between global brand companies and civil society organizations;
  6. Providing commercial incentives to suppliers for improvements in social performance, such as price, volume, duration, and supplier preference;
  7. Developing metrics to help suppliers identify the business case for better social performance;
  8. Efforts by brands to use their leverage to address systemic issues;
  9. Industry-wide collaboration to tackle systemic issues;
  10. Aligning internal purchasing practices with social commitments made by global brands and retailers.

In the second part of the report, we highlight four company case experiences in more depth, whose approaches combine many of the elements identified above to address complex social performance challenges in supply chains:

  1. Timberland’s approach to collaborative assessment, which has transformed its relationship with suppliers globally (p. 22);
  2. Chiquita’s holistic approach to its passion fruit supply chain in Costa Rica, which combines commercial incentives and innovations, capacity-building, civil society partnerships, and adherence to social and environmental standards and practices (p. 34);
  3. Tesco’s approach to promoting sustainable improvements in addressing issues within its agricultural supply chain in South Africa, premised on the support of local initiatives driven by local actors (p. 42);
  4. HP’s multilateral approaches to a range of systemic challenges in different parts of its IT supply chain, through which it collaborates with industry, civil society, and government actors to address industry-wide issues (p. 49).

This report does not attempt to imply that any company has the best model for, nor a perfect record in, addressing supply chain human rights challenges. Nor did the research seek to rigorously test the models discussed. Rather, it explores innovative models used by leading companies, who themselves report their effectiveness, as a basis for further analysis and evaluation.

Bringing a Human Rights Lens to Stakeholder Engagement

Summary

Stakeholder engagement is foundational to effective implementation of the UN Guiding Principles. Meaningful stakeholder engagement is particularly essential in a business’ efforts to meet its corporate responsibility to respect human rights. An increasing number of companies have sophisticated systems and processes for conducting a wide range of stakeholder engagement activities, and there is a substantial body of guidance around effective stakeholder engagement. 

However, in practice, many human rights impacts can be linked back to challenges related to stakeholder engagement. It appears that more effective stakeholder engagement often could have prevented or mitigated them.

The Guiding Principles reference the importance of consulting with affected stakeholders at several key moments:

  • in identifying and assessing actual and potential human rights impacts;
  • in tracking and reporting on company efforts to prevent and manage those impacts;
  • in designing effective grievance mechanisms and remediation processes.

Affected stakeholders may include:

  • staff (employees and contract workers) and communities directly affected by a company’s operations;
  • more physically remote stakeholders affected through business operations in a company’s supply chain;
  • customers or end-users of a particular product or service who may be even more dispersed, such as in the ICT or financial services sectors.

Companies may also choose to engage at the broader policy level with issue expert stakeholders: individuals whose human rights are not themselves affected by a company’s activities, but who can provide insights into identifying and addressing human rights challenges, and with whom it may be important for companies to communicate about their overall performance on human rights issues. Engaging with issue experts may be helpful to companies, but it is not a replacement for engaging with affected stakeholders.

Key elements for companies to consider when engaging with stakeholders on human rights issues include:

  • Engaging the right stakeholders;
  • Engaging about the right issues;
  • Engaging the right way;
  • Engaging at the right time;
  • Engaging at the policy level;
  • Engaging internally;
  • Engaging neutral parties.

European Commission Sector Guides on Implementing the Guiding Principles

The link above leads to all three guidance documents in English. There are also a few unofficial translations of these guides: Japanese: ICT sector | French: oil and gas sector

While implementing the Guiding Principles is very specific to each company, there are common challenges and strategies by industry or sector. These guidance documents feature “a to z” guidance for companies in three sectors: information and communication technology (ICT), oil and gas, and employment and recruitment. The guides were developed through an extensive process of multistakeholder consultation.

Learn more about the collaboration that supported the development of these resources.

Conducting Meaningful Stakeholder Consultation in Myanmar

The research for this report was funded by the Government of Sweden. | Also see our Viewpoint on this topic

Summary

A large number of western companies from a wide range of sectors are now seeking to operate in Myanmar and can bring a number of substantial benefits to Burmese citizens. At the same time, Myanmar is only recently emerging from years of military rule that were characterized by extensive human rights violations, weak rule of law, corruption, and decades of civil war in Myanmar’s ethnic states. In this context, companies face significant risks of causing, contributing to, or being linked to negative human rights impacts in Myanmar. The UN Guiding Principles on Business and Human Rights, endorsed by the UN Human Rights Council in June 2011, provide guidance on how meaningful consultation with potentially affected groups and other relevant stakeholders can assist companies, both to gauge and mitigate their risk of involvement with human rights impacts.

Shift compiled this report to assist companies that are considering operating, or are already operating, in Myanmar as they structure their stakeholder engagement process. Shift conducted community consultations and interviews with representatives of non-governmental organizations, networks of organizations, think tanks, and other civil society organizations, as well as entrepreneurs, Embassies and development agencies in Myanmar and on the Myanmar/Thai border. The questions asked were designed to (1) enable a survey of stakeholder viewpoints relating to the entry of companies into Myanmar, and (2) elaborate on the elements for companies to consider when structuring a stakeholder engagement strategy. A number of recurring themes emerged from the answers provided.

High Expectations: Interviewees have high expectations of the benefits that companies can bring to Myanmar. Not only do they look to companies to create jobs and decrease the level of poverty, they also hope that companies can assist in ensuring that Myanmar’s recent economic and political reforms pave the way for a peaceful future, founded on respect for human rights and fundamental freedoms, by all and for all. Interviewees further observed that the entry of new companies can be an opportunity to set higher standards for corporate conduct than those imposed under current laws, which were deemed to be inadequate, weak and poorly-enforced.

Significant Fear: Interviewees expressed significant fear of being taken advantage of as the country opens up to the outside world. Interviewees remarked that they have yet to see benefits resulting from the presence of companies. Moving forward, they would like to see companies establish a ‘win-win’ situation, where corporate operations benefit both the companies and the people of Myanmar generally, rather than a select few within the country. Interviewees further feared that companies would structure their operations in Myanmar without an accurate understanding of the situation on the ground. They emphasized how fragile and complex the recent economic and political reforms are.

Interviewees noted with concern the increase in land grabbing. In particular, the mere anticipation of business is leading unscrupulous powerful individuals as well as crony-led companies to grab land, which they plan in turn to sell to companies at a profit in the future. They feared that companies would perpetuate low labor standards and contribute to environmental degradation. Interviewees also requested that companies make an extra effort to prevent violent crackdowns against protestors, and urged companies to recall that freedom of expression and peaceful assembly is very new in Myanmar and that its limits are currently being tested by local communities. Interviewees expressed concern that new companies may wipe out their small farming businesses or favor one group of Burmese over others. A large number of interviewees remarked that companies will have to hold themselves to a higher standard than the current laws and regulations.

Regional Differences: Interviewees from ethnic states remarked that companies are not welcome in the ethnic states until the ceasefire agreements are stable, peace agreements have been concluded and political dialogue has been achieved. The interviewees noted that the stakes are high in the current context. They fear that companies will upset the ongoing democratic reform process that is still seen as extremely fragile. Interviewees further noted that change has yet to trickle through outside of the larger cities of Yangon, Naypyidaw and Mandalay.

Shifting Civil Society Scene: Interviewees emphasized that stakeholder consultation in a country emerging from decades of military rule is necessarily complex. They underlined that the long history of opposition to the military regime makes the situation especially polarizing and that the role of civil society, including community-based organizations and non-governmental organizations, was shifting considerably.

Determining Stakeholders to Engage With: Interviewees highlighted a large number of organizations that could assist companies in understanding the specific context in their area of operation, identifying who to speak with, and providing guidance on how to tailor stakeholder engagement so that it is meaningful in that area. The stakeholders identified included the government and the political opposition, international actors, local networks and sector-specific organizations working, for instance, on land, labor, the environment, gender, and special economic zones. Interviewees highlighted the added complexity of meaningful consultation in ethnic states characterized by years of armed conflict, poor living conditions, and negative experience with corporate engagement. They identified a number of community-based organizations, issues-specific civil society organizations, and youth and student organizations that can assist companies in structuring their stakeholder engagement in these ethnic states, once political dialogue has been achieved.

Expectations of Meaningful Consultation: Interviewees expected companies to proceed with genuine, meaningful consultation and provided suggestions for how companies can conduct grassroots stakeholder consultation which involves: (1) transparency and understanding in a public education phase, (2) inclusion in a public dialogue phase, and (3) integration of community concerns in a feedback phase. They saw these phases as key for companies to provide a “win-win” situation that benefits both the companies and the Burmese people at large.

Unternehmensverantwortung für Menschenrechte: Ableitung von Handlungsempfehlungen auf der Basis von Experteninterviews und internationalen Fallstudien

Also see: our news update on support to the German government on its National Action Plan on implementing the Guiding Principles.

This study was a precursor to the consultation process on a German National Action Plan on Business and Human Rights and is available in German only. The summary is excerpted from the resource.

Summary

Das Bundesministerium für Arbeit und Soziales (BMAS) hat die vorliegende Studie zur Umsetzung der VN-Leitprinzipien im Rahmen der „Nationalen Nachhaltigkeitsstrategie zur gesellschaftlichen Verantwortung von Unternehmen (Corporate Social Responsibility – CSR) – Aktionsplan CSR – der Bundesregierung“ vergeben (im Folgenden kurz: CSRAktionsplan).

Der CSR-Aktionsplan sieht u. a. ausdrücklich die „Stärkung von CSR in internationalen und entwicklungspolitischen Zusammenhängen“ (Bundesregierung 2010: 23) vor. Vorliegende Studie ist im Kontext dieser Bemühungen zu verorten und soll laut Ausschreibungstext dazu beitragen, „Voraussetzungen und mögliche Wege für die Umsetzung der von Prof. Ruggie beschriebenen ‚Guiding Principles‘, insbesondere zum Kapitel ‚The corporate responsibility to respect human rights‘ […, zu] erörtern. Dabei soll es im Kern um die Frage gehen, ob und inwieweit staatliche Institutionen Unternehmen hierbei unterstützen können.“

Vor diesem Hintergrund stellt die Studie als Basis für die weitere Untersuchung und Analyse zum einen die Anforderungen der Leitprinzipien der Vereinten Nationen (VN) an Unternehmen in Bezug auf deren Verantwortung, die Menschenrechte zu respektieren, dar. Zum anderen berücksichtigt sie die korrelierenden Anforderungen an Staaten, die sich aus der Verpflichtung ergeben, die Menschenrechte zu schützen. Entsprechend der Konzeption des Gesamtprojektes basiert die Studie des Weiteren auf 22 leitfadengestützten, vertraulichen Experteninterviews mit Vertretern/-innen von Unternehmen (kleiner und mittelständischer sowie großer Unternehmen), Unternehmensverbänden und -netzwerken, der Zivilgesellschaft, von Ministerien, der Wissenschaft und aus dem gewerkschaftlichen Bereich sowie auf fünf Fallstudien zu Beispielen guter Praxis aus Dänemark, Norwegen, Großbritannien, den Niederlanden und den Vereinigten Staaten von Amerika (USA).

Respecting Human Rights Through Global Supply Chains

Summary

The UN Guiding Principles state that companies may be involved with adverse human rights impacts either through their own activities or as a result of their business relationships. ‘Business Relationships’ are understood to include relationships with “entities in [the company’s] value chain.” As part of their corporate responsibility to respect human rights, companies are expected not only to avoid causing or contributing to adverse human rights impacts, but also to address, “human rights impacts that are directly linked to their operations, products or services by their business relationships, even if they have not contributed to those impacts.”

Adverse human rights impacts can occur at any level of a supply chain – from the first tier of direct or strategic suppliers, all the way down via multiple layers of sub-suppliers and sub-contractors, to those providing the raw material inputs. For some companies, relationships with suppliers are held by their licensees, or may be intermediated by vendors or other agents, creating yet more complex structures. To meet their responsibility to respect human rights, companies need to understand human rights risks at all levels of their supply chain – not only in the first tier.

This resource examines how companies can work to implement the Guiding Principles across their business relationships through the following activity areas:

  • Identifying risks: mapping and prioritizing within the supply chain;
  • Leveraging and incentivizing sustainable change in suppliers;
  • Applying these approaches in sensitive, high-risk contexts;
  • Achieving internal alignment within and across the business;
  • Supporting grievance mechanisms with respect to supply chains.

Identifying Risks: Mapping and Prioritizing Within the Supply Chain

The corporate responsibility to respect human rights requires companies to conduct human rights due diligence to identify, address and mitigate adverse human rights impacts with which they may be involved through their business relationships. However, in most cases, it is simply not feasible for a company to conduct due diligence for the entirety of its supply chain – particularly where supply chain relationships may number into the thousands, tens of thousands, or more. Companies therefore often need to prioritize those business relationships for which it is most critical to conduct human rights due diligence. However, as a first step, they need to know who is in their supply chains.

Many companies have established, or are in the process of establishing, centralized systems for tracking the “moving target” of their supply chains. While these systems can be housed centrally, the inputs into that system must come from a variety of decentralized sources. Company leaders note the need for internal and external buy-in for a collaborative approach to mapping the supply chain. Internally, this means engaging across the different business functions that might interact directly with the supply chain. Externally, this requires the authentic engagement of one’s own suppliers in the mapping exercise. In developing that buy-in, company leaders emphasize the critical importance of spending as much time on the “why” as on the “how” – conveying an underlying rationale for the importance of mapping the supply chain that resonates for key audiences. Specifically, they have found that simply contractually obligating suppliers to disclose their supply chains, while necessary, has proven ineffective and inadequate.

Prioritizing Relationships for Due Diligence

Given the sheer scale of many companies’ supply chains, those with responsibility for managing human rights issues within supply chains can face a daunting task. The pressing question for many company leaders is simply: Where do I begin?

As a practical reality, most large companies will almost certainly need to prioritize the management of human rights risks within their supply chain. That prioritization may take place at several levels, including prioritizing which areas of the supply chain to map, which business relationships may need to be prioritized for a more detailed assessment of potential human rights risks, and which adverse human rights impacts may need to be prioritized for prevention and mitigation.

In prioritizing which business relationships and which adverse impacts to address, prevalent company practices focus first and foremost on risks to the business. Many companies define their supply chain due diligence priorities based on their “top spend” suppliers or their top tier, strategic suppliers, or other factors that suggest their leverage with the supplier is greatest. Others focus on relationships that pose greatest risk to their own reputation, such as suppliers of products carrying their own brand, or issues where public pressure and mobilization are greatest.

While this can make intuitive business sense, applying a human rights lens to due diligence requires a different set of calculations, instead of, or in addition to, approaches based on business risk. When assessing human rights risk, companies should start by assessing risk from the perspective of potentially affected stakeholders, based on the severity and likelihood of potential impacts. These adverse impacts – the most severe and most likely – may not be occurring among a company’s top tier suppliers, where a company has more leverage to compel mitigation measures, but may be deeper within the supply chain, even several steps removed from a direct relationship with the company, and where leverage is lacking. Learn more about how to identify the most severe potential impacts on people in this video about salient human rights issues.

Managing Human Rights Risks in Supply Chains: Leverage and Sustainable Change

Once potential human rights risks in the supply chain are identified, all companies face challenges in figuring out, simply put, “what works?”. An initial challenge may arise in generating sufficient leverage with suppliers to influence their practices.

Finding and Increasing Leverage

Where a company has identified that it may be linked to an adverse human rights impact through its supply chain and that it has leverage over the supplier in question, the Guiding Principles require a company to exercise that leverage to prevent or mitigate the adverse impact. Where it lacks the leverage, the company should look to increase its leverage in order to be in a position to prevent or mitigate the impact.

Read more on leverage on p.13 in the resource, or check out our dedicated resource on the topic of leverage.

Beyond Compliance Auditing and Towards Sustainable Improvement – What Works?

For many years, companies attempted to manage human rights performance in their supply chains through compliance auditing. However, research points to the clear conclusion that compliance auditing alone is insufficient to promote sustainable improvements on issues of social performance.

This is not to suggest that compliance audits do not have an appropriate role to play in managing human rights performance in supply chains. Audits can serve as a tool for identifying current shortfalls in standards. But they are only ever a snapshot in time. As one company representative summarized, his message to suppliers is: “It’s what happens after the audit that matters. If you improve, there will be continued and expanding commercial opportunities with us. If you don’t improve, then you will not continue to be our supplier.”

Other companies have shifted their emphasis away from a reliance on compliance auditing towards more collaborative approaches, working with suppliers to assess gaps, build capacity, and incentivize sustainable improvements. One company pointed to more extensive “systems gap analysis” audits conducted by some firms, in which the company and the supplier share the cost of the audit.

Read more about going beyond auditing in our dedicated resource on this topic.

Managing Supply Chains in High-Risk Contexts

Multinational companies frequently find that commercial interests make it desirable to initiate or expand operations in high-risk contexts. For extractive companies that have to locate themselves where the natural resources are, operating in such contexts is increasingly unavoidable. High-risk contexts typically include conflict-affected zones, where security issues are prevalent, the state is unable to fulfill its duty to protect, and the rule of law is weak. They also include other contexts with clear and severe risks to the fulfillment of human rights, which may be denied either in law or in practice.

While the same principles for managing human rights risks in supply chains more generally apply also in these contexts, the costs of not getting it right can be much higher – not only in terms of the reputational risk to the company, but also in terms of the potential severity (scale, scope and irremediability) of adverse human rights impacts on individuals.

Learn more about human rights due diligence in high-risk circumstances in our dedicated resource on this topic.

Internal Alignment Within and Across a Business Enterprise

While discussions of human rights challenges in supply chains often focus on the suppliers themselves, there are important dimensions internal to the buying company that can increase or reduce human rights risks. Central to these are the company’s own purchasing practices. There may in some instances be inherent tensions between the commercial interests that guide buying decisions and the avoidance of human rights harms. If left unreconciled, these can place the company in a situation of actively contributing to human rights impacts by its suppliers.

Examples may include making late changes to the design of a product or to the volume or an order without taking into account the consequences for the supplier in terms of time and costs, which may mean the company could contribute to any resulting adverse impacts such as excess hours, unpaid overtime or illegal sub-contracting. Or, for an extractive company sourcing security services, poor decisions or misleading messages with regard to the treatment of local communities that it expects from the external security providers may leave the company in the position of contributing to any adverse human rights impacts that result.

Embedding the Responsibility with Those Who Make Purchasing Decisions

In the experience of many companies, reconciling the internal tensions that can exist between commercial drivers for procurement decisions and the company’s responsibility to respect human rights can only occur if that responsibility to respect is embedded with those who make procurement decisions.

Some consumer goods companies – in which purchasing departments play a central role in creating value for the company – have chosen to locate the human rights function within those departments, or have allocated specific human resources to those departments to address these issues from within. In another such company, the human rights function reviews all purchase orders after they have been submitted and compares them against a rating system. If it determines that the order might be inconsistent with the company’s human rights commitments it has the authority to cancel or reroute the order.

Ultimately, however, the successful integration of human rights considerations comes down to individual buyers making individual decisions that need to incorporate this added human rights dimension into the business formula.

Read more about strategies to embed respect for human rights in procurement functions on page 20 of this resource.

The Role for Grievance Mechanisms with Respect to Supply Chains

A basic requirement of the Guiding Principles is that companies engage actively in ensuring access to effective remedy for adverse human rights impacts they cause or to which they contribute. Many companies, industry- and multistakeholder initiatives require that grievance processes are available at the level of suppliers as well. However, by their own admission, these efforts have not generally included practical guidance to suppliers; nor conveyed the value of effective complaints processes; nor ensured that their quality is sufficient.

Read more about the business case for suppliers to have effective grievance mechanisms, as the case for companies to support supplier-level grievance mechanisms, on page 25 of the resource, or our dedicated resource on grievance mechanisms.

Implications of the Guiding Principles for the Fair Labor Association

Since this analysis was published in 2012, the FLA has made a number of changes to its standards and processes. | Also see our Collaborations page on this work

Summary

Following the adoption of the Guiding Principles in 2011, the Fair Labor Association (FLA) asked Shift to conduct a review of the implications of the Guiding Principles for its own work. Established in 1999, the FLA is a collaborative effort of universities, civil society organizations and socially responsible companies dedicated to protecting workers’ rights around the world.

The review was conducted through a high-level desk-based analysis of the FLA’s written policies and procedures, its programs, complaints mechanism, governance structures, and information on its website portal to identify correlations, strengths and weaknesses with regard to the Guiding Principles.

The review focused on the second pillar of the Guiding Principles – the corporate responsibility to respect human rights. This focuses on the kinds of policies and processes that a business needs to have in place in order to ensure that it avoids infringing on human rights and addresses any adverse impacts with which it is involved.

This review is not an assessment of the impact of the FLA’s work on the lives of workers; nor is it an assessment of how far company participants in the FLA meet the Guiding Principles. Rather, it focuses on what the FLA itself requires of its Participating Companies and how it knows and shows whether they meet those requirements in practice. The review sought to take into account new developments in the FLA’s evolving approach to the improvement of labor standards.

There are many ways in which the FLA’s policies, processes and practices are well aligned with the Guiding Principles. The revised Workplace Code of Conduct provides a clear set of labor rights outcomes, in line with international standards, and the Principles of Fair Labor and Responsible Sourcing closely parallel the Guiding Principles’ six core requirements regarding a policy commitment, four due diligence steps and remediation processes. The inclusion in the Principles of Fair Labor and Responsible Sourcing of key aspects of purchasing/sourcing practices is notable in filling a previous gap with regard to embedding respect for human rights across all relevant company departments.

Also noteworthy is the FLA’s recent move away from pure compliance auditing towards the incorporation of more root cause analysis and capacity building approaches, aimed at more effective and sustainable mitigation of risks to workers’ rights. The FLA has strong verification and reporting practices with regard to Participating Companies’ suppliers, and provides considerable transparency through the publication of its independent monitoring/assessment reports. Transparency has also been a strong feature of the FLA’s Third Party Complaints mechanism, which has achieved some notable remediations of complex labor rights impacts over the years. The FLA also has a strong set of commitments and practices regarding stakeholder engagement.

In order to achieve further alignment with the Guiding Principles, Shift recommends that the FLA:

  • improve its ability to track the performance of Participating Companies with regard to the Principles of Fair Labor and Responsible Sourcing, including by helping Participating Companies develop the capacity to know and show that their own activities (including sourcing/purchasing decisions) are consistent with respect for human rights.
  • pay particular attention to the role that performance incentives for staff making purchasing decisions play in driving respect for labor rights compliance in the supply chain. Participating Companies could be requested to include information on this in their annual reporting to the FLA.
  • define a process for coming into line with its own Charter commitments with regard to reporting on the performance of Participating Companies, and keep external stakeholders appraised of its plans and progress in this regard.
  • clarify the grievance mechanism requirements in the Workplace Code, including with regard to what makes for an effective grievance mechanism. This might be elaborated in supporting materials to the Code and based on Guiding Principle 31.
  • provide greater clarity on what Participating Companies should themselves provide by way of grievance reporting channels for workers, with due allowance for their varying resources and capacities.
  • ensure a full description of the FLA’s Third Party Complaints process is again made available on its website in key languages, pending the completion of the current review process.
  • ensure that the FLA Charter is updated to be consistent with revised FLA policies and principles, and keep stakeholders appraised via its website and other communications of current or future FLA reforms.

The FLA might also consider:

  • Discussing with Participating Companies the extent to which they apply the same standards to their corporate employees as they expect their suppliers to apply to workers, and the implications of any discrepancies for the FLA’s mission.
  • Using the move to its new Sustainable Compliance program to promote more explicitly the development of human rights due diligence processes at the suppliers of Participating Companies, and sharing the learning about how to achieve this in a small factory setting.
  • Providing clearer timelines and pathways for smaller licensees to meet the full range of FLA standards in a manner appropriate to their resources and human rights impacts, to avoid the risk of these companies having de facto exemptions from provisions that are integral to the Guiding Principles.

Embedding Respect for Human Rights Within a Company’s Operations

This resource was developed as part of the first workshop with Shift’s Business Learning program participant companies.

What are key factors for success in embedding respect for human rights into a company’s DNA – the way it gets business done on an everyday basis?

This resource captures and distills company reflections on what it takes to embed respect for human rights into corporate culture, focused on the following key areas:

  • “Tone from the top”: commitment from leadership;
  • Appropriately setting up the human rights function in the company;
  • Creating the space for human rights amongst competing priorities;
  • Effectively communicating the relevance of human rights at an operational level and with supply chain partners;
  • Finding the appropriate balance between clarity and flexibility in policies and processes.