This resource provides a menu of indicators of leadership and governance that can help to evaluate a company’s progress towards building a rights-respecting culture. It is not necessary to use all the indicators. They are intended as a menu from which organizations can draw as appropriate to their needs and contexts.
The primary intended users of the resource are:
Business leaders seeking to assess the strengths and weaknesses of their company leadership, governance and culture with regard to respect for human rights.
Investors and civil society organizations seeking to strengthen their analysis, strategies and engagement with companies regarding progress towards respect for human rights.
Connecting to Culture
Indicators of leadership and governance typically focus on formal systems – codes of conduct, organizational structures, roles, responsibilities and incentives. Evidence of these can signal how things should happen in an organization. But they miss the profound influence that the actions of governing bodies and senior leaders’ can have on what actually happens, through the day-to-day decisions and behaviours of people across the organization that determine its impact employees, workers, communities and consumers.
The indicators in this resource are grounded in four features of a corporate culture that are central to respect for human rights:
Authenticity such that the organization acts in a manner consistent with publicly asserted commitments to respect human rights, including when faced with inevitable tensions between respect for human rights and other business goals.
Accountability such that respect for human rights is embraced as the responsibility of people in every part of the business, and key staff are empowered and motivated to embed respect for human rights across the company.
Empathy such that everyone in the organization is motivated to know and care about whether and how it might be involved with harm to the human rights of people, including to remote individuals and communities.
Organizational Learning such that everyone seeks out and embraces new insights about human rights risks and makes an effort to learn from mistakes as well as successes.
Salient human rights issues: The human rights at risk of the most severe negative impact through the company’s activities and business relationships.
A company’s salient human rights issues are those human rights that stand out because they are at risk of the most severe negative impact through the company’s activities or business relationships.
This concept of salience uses the lens of risk to people, not the business, as the starting point, while recognizing that where risks to people’s human rights are greatest, there is strong convergence with risk to the business.
The emphasis of salience lies on those impacts that are:
Most severe: based on how grave and how widespread the impact would be and how hard it would be to put right the resulting harm.
Potential: meaning those impacts that have some likelihood of occurring in the future, recognizing that these are often, though not limited to, those impacts that have occurred in the past;
Negative: placing the focus on the avoidance of harm to human rights rather than unrelated initiatives to support or promote human rights;
Impacts on human rights: placing the focus on risk to people, rather than on risk to the business.
Salience therefore focuses the company’s resources on finding information that is necessary for its own ability to manage risks to human rights, and related risks to the business. In this way, it helps companies report on the human rights information that shareholders, investors, governments, customers, consumers, media, civil society organizations and directly affected people want to see.
What is the difference from materiality?
Materiality depends on the choice of a particular audience or goal for which things are then judged more or less important. The audience may be shareholders alone or other stakeholders as well. A goal may be profit-making alone, decisions of an investor more widely, or societal welfare generally. The choice of audience or goal then dictates the selection of material issues.
By contrast, salient human rights issues are not defined in reference to any one audience or goal. Salience puts the focus on those human rights at risk of the most severe negative impact. This provides a consistent, predictable and principled means of identifying the appropriate focus of human rights reporting. At the same time, it gives business an effective tool for understanding how human rights issues connect with risk to the business.
When conducting materiality assessments, many companies discount human rights issues due to common assumptions, such as:
Assumption of no risk to human rights: an assumption that the company doesn’t and couldn’t be involved with negative impacts on human rights, based on a limited knowledge of human rights and how they can be affected by business activities and through business relationships;
Assumption that risk to human rights doesn’t matter: An untested assumption that impacts on human rights are without substantial risk to the company and are, therefore, not material, ignoring the many ways in which such impacts can lead to tangible and intangible costs and loss of value for the business, particularly in the medium to long term;
Assumption that past impact defines future risk: An assumption that looking at past impacts will be sufficient for the identification of forward-looking risks to human rights, ignoring risks that might be identifiable from the experience of others in the industry, from other industries, from an understanding of emerging issues and from scenario planning.
Where materiality processes engage external stakeholders to help inform the company’s understanding of relevant issues for reporting, common pitfalls include:
Skewed feedback: Processes that engage with stakeholders based on their expertise in areas the company already assumes are material, such that their feedback reinforces the company’s starting assumptions.
Under-informed feedback: Engagement processes where stakeholders are not given sufficient insight into the company’s operations, range of business activities and business relationships in order to provide informed advice of where they most salient issues might lie.
As a result of these common assumptions and pitfalls, many companies’ existing materiality processes fail to adequately reflect human rights issues or to identify those human rights that are at greatest risk and are therefore priorities for management and reporting.
Shift’s Business Model Red Flags is a set of indicators that may be found in dominant or emerging business models in and across a range of sectors. They are not intended to be an exhaustive list but may help spark reflection and enable the identification of additional red flags.
THE BUSINESS MODEL RED FLAGS ARE INTENDED FOR THE USE OF
Business leaders seeking to identify and address risks to people that may be embedded in the business model, in order to ensure the resilience of value propositions and strategic decisions.
Lenders and Investors scrutinizing their portfolios for human rights risk, engaging with clients and investees and diagnosing whether significant human rights incidents are likely to be repeated by the company concerned or replicated in other parts of their portfolio. And
Regulators, analysts and civil society organizations seeking to strengthen their analysis and engagement with companies in order to advance respect for human rights.
There are 24 Business Model Red Flags
(To see an overview chart with all 24 red flags, click here)
The Red Flags are organized around three features of a business model:
HOW EACH RED FLAG IS ORGANIZED
Each red flag is supported by a guidance document, organized into four levels:
Level One: Overview for Leaders
This includes:
Higher risk sectors in which the red flag feature is most prevalent;
Key questionsfor leaders to ask or be asked to aid decisions about whether further action is needed.
Level Two: Risk Analysis
This includes:
Risks to People: the key human rights risks associated with this red flag, absent appropriate mitigation efforts;
Risks to the business: evidence of legal, financial, operational and reputational risks that can arise as a result of companies not addressing the red flag.
Level Three: UNGPs and SDGs analysis
This sets out:
What the UNGPs say, with particular reference to how companies might be involved with the adverse human rights impacts associated with the red flag;
Possible contributions to the Sustainable Development Goals that can be achieved with effective mitigation or removal of the red flag;
Level Four: Resources for taking action
This includes:
Due diligence lines of inquiry for deeper analysis of the company’s impact and how it could effectively mitigate the risks associated with the red flag;
Mitigation examples illustrating how companies have in practice sought to reduce the impacts associated with the red flag;
Alternative model examples of companies that have either designed or redesigned their business model to function without the risk elements highlighted in the red flag;
Additional tools and resources to guide further analysis.
This resource is based on Shift’s experience working with companies’ M&A teams on practical steps that can be taken as part of the existing M&A due diligence process. For more explanation and discussion of this topic, we also recommend our webinar with the UN Global Compact, Ericsson and Total.
Summary
Buying new companies and selling to other companies often involves inherent human rights risks – meaning the risk of harm to people. Those risks are steadily on the rise, and there is no shortage of examples of M&A transactions that fail, or cost significantly more for a company in the long term, because of a lack of consideration of human rights issues.
These kinds of inherent human rights risks are leading companies to start to integrate consideration for human rights into their M&A processes. Yet little information is publicly available about how they are seeking to do so. Revising due diligence checklists and crafting template representations and warranties alone will not work.
There is no shortage of examples of M&A transactions that fail, or cost significantly more for a company in the long term, because of a lack of consideration of human rights issues. Prominent examples include:
Meridian Gold, which acquired Brancote Holdings, the owner of a site in Argentina, for US$320 million. Although legal due diligence did not uncover any issues, Meridian Gold ended up with five years of litigation rising to the Argentinian Supreme Court and lost its entire investment because the surrounding community opposed the use of the land for an open-pit gold mine. The M&A team could have assisted by flagging that the legal title to the land alone may not be sufficient in light of the local dynamics around mining;
Nokia, which suffered a significant hit to its reputation when news broke that its products and services had assisted the Iranian government’s efforts to track, imprison and harm political dissidents during the 2009 Iranian elections. In reality, Nokia had divested the business six months prior to the elections to Iran Telecom. But public opinion was that if a company sells a business that can cause harm, the seller should seek to limit the risk of such harm by incorporating restrictions during the sales transaction, or seeking to sell to another buyer;
US company American Sugar Refining, which acquired Tate & Lyle Sugars for £211 million in 2010. Subsequent to the transaction, Tate & Lyle Sugars was subject to a £10 million lawsuit in the UK High Court for alleged connection to land grabbing in Cambodia. The M&A team could have assisted by flagging risks associated with Tate & Lyle Sugars’ suppliers and the fact that legal title to land in Cambodia can mask corrupt practices.
Based on work with companies that are at the leading edge of efforts to integrate consideration of human rights into their M&A processes, this article describes the notable differences between a traditional M&A process – one that seeks to identify and address risks to the company – and one that seeks to identify and address risks to people that play out throughout the M&A transaction. It describes the steps companies are taking to add the human rights lens when (i) identifying the issues to address in the course of due diligence, (ii) prioritizing the issues in preparation for contract negotiation and (iii) seeking to address these issues.
Although the article is intended primarily for companies and their in-house M&A teams, it will also be relevant for law firms that are increasingly seeking to advise clients in this area as well as other stakeholders interested in advancing business respect for human rights.
This webinar explores how business can use the UN Guiding Principles Framework to report in a meaningful way on human rights risks and impacts, and provides examples of how the Framework is being used to support internal management of human rights issues. The webinar also features speakers from Shift, H&M and Newmont.
Update: In March 2017 Shift Managing Director and Co-Founder Rachel Davis joined the newly established FIFA Human Rights Advisory Board. We see our participation in this Board as a significant opportunity to push for FIFA’s implementation of the April 2016 report For the Game. For the World. FIFA and Human Rights (link above), authored by John Ruggie with support from Shift. In our participation on this Board, we retain complete independence and do not accept any financial or other compensation for our time.
In December 2015, Shift Chair, Harvard professor and author of the Guiding Principles John Ruggie was asked by the world governing body of football FIFA to develop recommendations for embedding the Guiding Principles into FIFA’s policies and practices. In April 2016, those recommendations were published in an independent public report. The recommendations are based on a comprehensive review of human rights in the context of FIFA’s activities and events including consultations with internal and external stakeholders.
Ruggie was supported by a team from Shift and consulted with a range of internal and external stakeholder to undertake the review and develop his recommendations.
“FIFA’s global reach means that this initiative has the potential to make a difference where it matters most: in the daily lives of people,” said Ruggie. “I fully recognize that there will be challenges and complex change takes time. However, this has the potential to set the bar for other global sports organizations, and place respect for human rights front and center for a broad range of entities involved in global sporting events.”
“This is another important step in our ongoing reform process,” said acting FIFA President Issa Hayatou. “I am proud to see that FIFA is taking the lead among international sports organizations on such an important topic. Football and FIFA have an important role to play in this field; respect for human rights has to be at the core of our sport.”
This initiative builds on FIFA’s commitment to recognizing the relevance of the UN Guiding Principles to its operations, seeking technical support from the Office of the UN High Commissioner for Human Rights, and announcing publicly its plans to make the Guiding Principles part of how it conducts its activities.
For companies concerned about child labor connected to their business operations, particularly in global value chains, this comprehensive guidance walks readers through each step of implementing the Guiding Principles. It features an explanation of what constitutes child labor, foundational explanations of Guiding Principles elements, case studies, discussions about common dilemmas, diagnostic questions and tips about pitfalls to avoid. It builds on prior guidance from the ILO and IOE about how to prevent child labor in a company’s own operations, and focuses on the expectations of the Guiding Principles when it comes to preventing and addressing child labor that is several tiers removed in the supply chain. It includes a series of “hard questions” responding to real challenges that companies face.
Shift is pleased to have collaborated with the UK’s Equality and Human Rights Commission and Financial Reporting Council to develop guidance for board directors in the UK on human rights disclosure and performance. The guidance was launched in May 2016 — see our links above.
The project’s objectives were to improve UK-quoted company boards’ and investors’ understanding of the corporate responsibility to respect human rights, as well as the quality of companies’ human rights reporting and disclosure.
The project began in September 2015 and had three phases. The first phase included consultations with board directors, investors, advisors to boards and civil society organizations to explore appropriate content for the guidance. This phase included events in London, Manchester and Edinburgh. In the second phase, the project team developed and refined drafts of the guidance for directors on human rights disclosure and performance with input from an expert advisory group, consisting of leading individuals from board, investor and board advisor (including legal) backgrounds. The guidance was launched at a London event in May 2016 featuring speakers from the UK Equality and Human Rights Commission, Barclays, BT Group, Hermes EOS and Shift.
The UK’s Modern Slavery Act 2015 received Royal Assent on March 26, 2015. The Act is a critical step forwards in strengthening company disclosure on efforts to prevent some of the most serious abuses that exist in today’s global supply chains as a result of slavery, servitude, forced or compulsory labor and human trafficking.
However, the Act has raised questions for many UK companies about the relationship between its provisions, particularly Part 6, which deals with transparency in supply chains, and their broader responsibility to respect human rights. What exactly are they being asked to report on relating to modern slavery? And how does this new reporting requirement relate to what they are already doing to implement the UN Guiding Principles?
This short analysis by Shift aims to help companies and other stakeholders understand the relationship between the provisions of the Act and the expectations of the UN Guiding Principles. It is not intended as legal advice.
1. Context
The Act asks companies of a certain size to publish an annual “slavery and human trafficking statement” to disclose the steps the company has taken during that year to ensure that slavery and human trafficking is not taking place in any of its supply chains or in any part of its own business (Section 54(4)). Alternatively, a company can state that it has not taken these types of steps. Where a company has a website, it must publish the statement on its website (Section 54(7)). The statement must be approved by the board or its equivalent (Section 54(6)). Unlike a similar law in the state of California in the US, there is no requirement that companies conduct a certain amount of business in the UK for the law to apply. The Act applies if a company is carrying on business, or part of a business, in any part of the UK.
The law applies to a significant number of companies. In line with the general view expressed by both business and civil society stakeholders during the public consultation on this point, the Government announced on July 29 that the law applies to any company with an annual turnover of £36 million – the lowest of the proposed turnover thresholds. As a result, the Act applies to an estimated 12,000 UK active companies; that is more than the number that will be subject to the new EU non-financial reporting directive that is being transposed into UK law this year.
2. Analyzing the Modern Slavery Act through the Lens of the UN Guiding Principles
So what are UK companies that are subject to the Act being asked to do? Section 54(5) provides that a company’s statement “may include” the following:
the organization’s structure, its business and its supply chains;
its policies in relation to slavery and human trafficking;
its due diligence processes in relation to slavery and human trafficking in its business and supply chains;
the parts of its business and supply chains where there is a risk of slavery and human trafficking taking place, and the steps it has taken to assess and manage that risk;
its effectiveness in ensuring that slavery and human trafficking is not taking place in its business or supply chains, measured against such performance indicators as it considers appropriate;
the training about slavery and human trafficking available to its staff.
The text is, admittedly, potentially confusing for those trying to assess its requirements against the expectations of the UN Guiding Principles. But in essence, paragraph (a) asks for critical context to enable a reader to understand the business; the remainder of the provisions reflect expectations set out under the UN Guiding Principles and apply them to the risks of slavery and human trafficking in a company’s own operations and in its supply chain. This is consistent with the UN Guiding Principles, which expect companies to seek to prevent or mitigate negative human rights impacts that are directly linked to their operations, products or services through their business relationships, even if they have not caused or contributed to those impacts.
In short, companies are being asked to disclose:
Evidence of a policy commitment in relation to slavery and human trafficking, as well as evidence of the effectiveness of the embedding of this policy specifically through training provided to staff;
The company’s human rights due diligence processes in relation to slavery and human trafficking in its operations and supply chains. This includes:
Identifying the parts of a company’s operations and supply chains where the risks of such impacts are the most salient, that is, where they would be the most severe in terms of the impact on people, were they to occur, and where they are the most likely to occur;
Explaining the steps a company has taken to assess and manage those risks and the effectiveness of its efforts, which are all parts of human rights due diligence as set out in the UN Guiding Principles.
The law does not specifically refer to information about companies’ remediation processes where negative impacts have taken place and the company has caused or contributed to them. (Remediation is the third element, together with a policy commitment and human rights due diligence processes, that the UN Guiding Principles expect companies to have place to meet their responsibility to respect human rights in practice.) However, the list of relevant information in Section 54(5) is non-exhaustive.
So companies can rest assured: the law does not introduce anything new. It is not asking for additional information beyond that which is already covered by the UN Guiding Principles. Rather, the Act is asking for evidence of specific policies and processes to prevent and address slavery, human trafficking and related severe impacts.
3. The Relationship between the Modern Slavery Act and Broader Human Rights Reporting
Companies and their stakeholders can now benefit from the UN Guiding Principles Reporting Framework – the first comprehensive guidance for companies to report on human rights in alignment with the UN Guiding Principles – in their efforts to meet the requirements of the Modern Slavery Act.
The table below illustrates the connections between the information asked for under the Act and the guidance provided in the UNGP Reporting Framework.
Modern Slavery Act, s 57
UNGP Reporting Framework
5(a) Information about an organization’s structure, business and supply chains
Reporting Principle A.
5(b) Information about an organization’s polices on modern slavery
Relevant information is contained under Question C1.
5(c) Information about an organization’s due diligence processes in relation to modern slavery in its business and supply chains
Relevant information is contained under Questions C2 through C5. The four components of due diligence are: (i) assessing impacts, (ii) integrating findings and taking action, (iii) tracking performance and (iv) being prepared to communicate about a company’s efforts. Note: “Communicating” encompasses both formal reporting about the company’s efforts to manage its human rights risks, where appropriate, and communication with stakeholders through other means. Since the UNGP Reporting Framework itself provides guidance on formal reporting, its questions focus on the other main aspect of communication under C2 on stakeholder engagement.
5(d) Information about the parts of an organization’s business and its supply chains where there is a risk of modern slavery taking place, and the steps it has taken to assess and manage that risk
Relevant information is contained under Questions C2 through C5.
5(e) Information about an organization’s effectiveness in ensuring that modern slavery is not taking place in its business or supply chains, measured against such performance indicators as it considers appropriate
Relevant information is contained under Questions C2 through C5.
5(f) Information about the training on modern slavery available to its staff
Relevant information is contained under Question C1.1. Note: The Implementation Guidance provides other examples of how a company can demonstrate that a policy commitment has been embedded into company practice beyond training.
The UNGP Reporting Framework provides additional resources on how companies can enhance the credibility of their disclosure in relation to their efforts to prevent and address risks related to slavery, human tracking and related impacts, particularly in terms of stakeholder engagement (see C2) and remediation (see C6).
Companies that use the UNGP Reporting Framework for their human rights reporting more generally, and for which slavery, human trafficking or related impacts are a salient human rights issue, will already have addressed the Act’s disclosure requirements by addressing the provisions of the Reporting Framework indicated above. In this way, companies’ disclosure on their efforts to prevent and address these severe impacts can become part of a broader, more coherent approach to human rights reporting.
This guidance is relevant for companies of all sectors but may be particularly helpful for public and private sector financial institutions. It draws on Shift’s work with the International Finance Corporation to explore the relationship between human rights due diligence and the IFC’s Performance Standards.
Summary
High risk circumstances are situations in which the likelihood of severe human rights impacts is greatest. Human rights due diligence (HRDD) consists of the processes that help businesses become aware of the actual and potential human rights impacts on people associated with their business and take appropriate action to prevent and address those impacts.
From the perspective of the United Nations Guiding Principles on Business and Human Rights (UNGPs), high risk circumstances should be the highest priority for company action since they present the greatest risks to individuals. In such situations, it is therefore especially critical for companies to conduct effective HRDD. Moreover, high risk circumstances for human rights often present high risk to the business as well, including commercial, reputational, investor related and legal risks. This convergence creates a constructive opportunity for human rights leaders within companies to gain the necessary buy in for identifying and addressing human rights risks and impacts.
While it is particularly critical for HRDD to be effective in high risk circumstances, those circumstances can also pose unique challenges for a business’ HRDD processes. High risk circumstances are more complex and fluid. There may be practical difficulties in engaging directly with some affected individuals and groups. The capacity to manage identified risks and impacts may be beyond the sole control of the business enterprise.
Key lessons and insights from business practitioners, further elaborated in this resource, include:
To understand the source of risk, and determine where there are high risk circumstances, companies can ask themselves a set of targeted questions, looking at the operating context, the nature of the company’s business relationships, the nature of the company’s business activities, and the types of people who could be affected by the company’s activities (or activities of its business relationships). A listing of these diagnostic questions is an annex in this resource.
Engage internal stakeholders in ways that: (a) raise awareness of high risk circumstances, (b) create expectations about identifying and escalating these types of risks, (c) ensure that due diligence is ongoing and responsive to changes in circumstances.
Engage external stakeholders in ways that: (a) are integrated into more robust strategies, (b) involve independent third parties in support of company efforts, (c) enable the business to push information to stakeholders and empower stakeholders to push information to the company.
Across these insights and examples, one crosscutting message becomes clear: while the tendency within many companies is to seek greater control over and protection of information as risks increase, in reality, enhanced transparency is critical for success.
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Business Model Red Flags 
Leadership, Governance, & Culture 
Tool for Indicator Design 
Quality of Relationships 
