Recalculating human rights risks

When it comes to human rights issues, Apple is in a no-win situation. Since 2006, it has received heavy criticism over worker conditions at many of the foreign factories that outsource its manufacturing. The company has heard repeated allegations of low pay, long hours and unsafe conditions. Audits of Apple’s factories in China and company efforts to issue annual supplier responsibility reports since 2007 seem to have done little to change conditions that resulted in a number of worker suicides.
Such bad publicity has yielded a fall-out that includes shareholder ‘sustainability’ proposals from labor union pension funds. And now the politically conservative National Center for Public Policy Research has a proposal demanding a ‘conflict of interest report’, claiming the company’s greenhouse gas regulations were proposed only to benefit a board member (for whom read Al Gore).

Sometimes you’re damned if you do, and damned if you don’t.

Apple’s situation may be unique, but the implication of human rights issues for corporations isn’t. The topic grows in importance because of potential liability from emerging legislation, adverse publicity and shareholder lawsuits. Paying attention to human rights dictates stepped-up corporate risk management, which starts with having a solid human rights policy in place.

Social responsibility on the rise

‘A human rights policy is a commitment by the company, typically endorsed by the board and senior management, that the company has in place systems that allow it to know and show that it respects human rights where it operates,’ explains John Ruggie, professor in human rights and international affairs at Harvard’s Kennedy School of Government and senior adviser to the CSR practice at Foley Hoag. Such a policy typically includes both workplace and community aspects, the latter being of major import in such extractive industries as mining and petroleum exploration.

Vince Farhat, a partner at Holland & Knight, says interest in CSR has grown heavily over the last decade in part because of ‘the underlying premise that while governments ultimately bear the responsibility for public welfare, there was a need to construct a new understanding for the responsibilities of the private sector.’ In fact, a combination of things worked to sensitize the public to favor CSR efforts, including major scandals at Enron, WorldCom and others.   

Human rights concerns first emerged prominently in the 1990s. Nike had received, and denied, high-profile criticism for allegedly using sweatshops to manufacture its goods. But after its reputation and sales took a significant hit, the company admitted its problem, began a monitoring program, changed some of its practices and recovered its good corporate image. More recently, Apple seems to have been immune to similar negative publicity, but other companies cannot expect the same results.  
‘What if a company other than Apple that was teetering [financially] had the same bad publicity about workers in China?’ asks Stephen Siller, leader of the international law practice of LeClairRyan. ‘Isn’t that the kind of thing that could push the company further into a downward spiral?’

Farhat says companies should understand that a human rights policy is more than an exercise in image management. ‘We believe CSR is something companies have to take seriously, not just for public relations, but because it can have a ripple effect,’ he notes. Governance experts say CSR policies can have a broad impact on consumer responses, sales, potential regulatory actions against companies and investor interests.

Additionally, board members can leave or potential board members can back away from joining a company that has too many challenges with human rights issues. Board members are typically concerned about their own reputation and don’t want an association that might sully them.

For three years running, sustainability proposals have represented the largest share of shareholder actions, according to Allie Rutherford, associate director in the corporate governance group of Ernst & Young. Rutherford says the average support for such proposals has increased from 9.9 percent in 2005 to 18 percent in 2010 and 21 percent last year.
‘Growing support on these proposals shows the issue is resonating with larger numbers of investors,’ she says. ‘We’re seeing an increasing willingness for companies to engage with investors and act on some of their requests so an increasing number of proposals is being withdrawn because of substantive discussion or action from companies.’

For example, the New York City Pension Funds filed shareholder proposals asking for policies providing protection from gender identity and sexual orientation discrimination at six companies in its portfolio. The city’s comptroller announced in early March that two of the targeted companies – Dick’s Sporting Goods and Constellation Brands – negotiated and adopted non-discrimination policies, so the proposals were withdrawn. The city also had a similar experience with a shareholder resolution that would require Apple suppliers to disclose their own annual sustainability reports. Expect to see such trends continue.

Lawsuits on the horizon

Companies that do not wish to engage shareholders should consider the impact of possible lawsuits. Companies could face potential legal liability if bad publicity about sustainability and human rights issues causes the company’s share price to drop. Investors might claim the lack of transparency was, in effect, incomplete reporting that resulted in financial damage to them.

Siller warns of potential class action lawsuits from investors, adding that ‘litigation could result from the government as well, and there could be government investigations’, resulting in legal bills for preparing testimony as well as the cost of diverting the attention of management and the board away from carrying out strategy and operations. He suggests the best course of action is to have a human rights policy, and a board or executive operating committee in place. ‘The more a company does up front, the better it can protect itself, in my experience,’ he observes.

Recent developments in California will likely move companies to increase transparency regarding human rights issues sooner rather than later. The California Transparency in Supply Chains Act, which went into effect this year, requires retail and manufacturing companies with $100 million or greater annual revenue that do business in the state to disclose their corporate policies about human trafficking and slavery. Since many multinational companies do business in California’s $1.9 trillion economy, and the threshold for who needs to comply is low, most will be compelled to begin complying with these measures now.  

‘[Companies] have to consider how it would look if they say, We do nothing in this area,’ Farhat points out. ‘It increases the pressure to develop risk management policies and compliance policies that advance responsible corporate citizenship.’
The act is civil, not criminal, in nature, but it does give the Californian attorney general the option of seeking injunctive relief to enforce compliance. The US Congress has already begun considering legislation modeled on California’s that would expand compliance to every industry, although there has been little progress yet.

Monitoring and making change

Because the California act requires accurate reporting, companies will have to work closely with their supply chains to substantiate their claims. As Apple has discovered, however, that is far more difficult than it sounds. Conducting adequate audits of a supplier’s facilities is a difficult task, according to Rachelle Jackson, director of sustainability practices at UL Responsible Sourcing, whichperforms more than 20,000 social audits annually.

‘The challenge is being able to look at enough of your supply chain and do a good enough job,’ Jackson says. Many companies have auditors spend only a day in a given facility, and cooperation is often only surface deep. ‘Especially in China, you’ll almost always, as an auditor, be lied to or get faked documents,’ Jackson adds. ‘Workers are coached to give false answers and they might be threatened with pay deductions or disciplinary action.’ Her team has found coaching sheets that tell employees what to say.

Corporate customers of the vendors typically compound those problems by combining high demands with thin margins. ‘It happens in so many trivial ways,’ says Ruggie. ‘A shirt manufacturer will decide that it wants different buttons at the last minute or it wants the pocket in a different place. I guess they[??] do it because they think they can.’ If not addressed, at best, such problems become public relations eyesores. At worst, they result in missed deadlines or goods of inferior quality.

Under the current business environment, a human rights policy has become a necessity, not a nicety. But it must extend beyond an arbitrary list of points to calm public displeasure or to act as a defense of reasonable precautions in a shareholder lawsuit. A corporate secretary or general counsel should help a company understand the risks it faces and develop policies and processes to avoid problems before government regulators or activist investors take action.

Human rights policy best practices

Experts suggest corporate secretaries help companies consider implementing some of the following best practices:

1. Treat the concept of human rights as part of sustainability. It’s about keeping a company going over the long run, not opting for short-term convenience over long-term viability.

2. Produce sustainability reports and make them publicly available. The more you divulge about issues, the fewer surprises you’ll have to deal with.

3. Adopt a human rights policy, but realize having a policy isn’t enough. You have to back it up with inspections and pressure on vendors to do the ‘right’ things. When considering the impact on workers or a community, don’t simply take the word of suppliers and other people who may have a financial interest in not doing what you want.  

4. Make sure your compensation and incentives will elicit the behavior you say you want. It’s too easy to fall into the classic mistake of claiming you want one action, but in effect paying people to do something else. People will find ways to do what you want without losing money.

5. Work with others in your industry. The more standard the conditions you demand, the more effectively vendors can comply, and the more you can work with other companies to monitor vendor compliance. Competitors need not duplicate each other’s efforts.