On June 8th hundreds of students and concerned consumers gathered in front of the Hershey Store in Times Square to call on the company to eliminate child labor from its cocoa production supply chain. Eight days later on the same island, the UN Human Rights Council endorsed the "Guiding Principles on Business and Human Rights: Implementing the United Nations 'Protect, Respect and Remedy' Framework" proposed by UN Special Representative John Ruggie. The juxtaposition of these two events provides an ironic picture of the erratic enforcement of human rights issues and the multilayered net of liabilities waiting to ensnare multinational corporations.

Irony exists in this situation because when companies invest in socially responsible behavior, human rights compliance being one, there is a proven positive correlation between such corporate social responsibility and financial performance. This “virtuous circle” bestows financial benefits on all stakeholders -- customers, employees, shareholders, suppliers, business partners and community members.  What the intentional or accidental ironists fail to comprehend is that the financial risk from reputational damage springing from even an alleged human rights violation far outweighs the cost of prophylactic compliance.

There is a backstory about how the two events of June converge in a meaningful way regarding human rights due diligence. Years after the major chocolate companies, Hershey included, agreed to eliminate child labor, forced labor and trafficking from their supply chains in West Africa, these human rights abuses continue. In fact, Hershey, which owns the largest market share in the US at 42.5%, has not started using Fair Trade Certified cocoa, which guarantees farmers stable prices (reducing the use of child labor) and community development funds. Over 30,000 US consumers have taken action to communicate their dissatisfaction to Hershey.

Now, turn on your IPad or use your IPhone to fact check. Google the facts; you can do so in this country and get reliable information, but you can’t get uncensored results in China, where Google has fled to Hong Kong to avoid censorship. At the present time, Microsoft (interestingly both Google and Microsoft are members of the Global Network Initiative, a multistakeholder organization, the intent of which is to find a common platform on privacy and human rights issues)  is forming a partnership with China’s search engine, Baidu, which when operating, will certainly be censored. In another ironic twist, potentially a man bites dog moment for US companies,  industry rumors point to China mounting an effort, aided by Citibank, to buy a “meaningful” number of Facebook shares.

As you take off your jacket to sit at your desk, note where the item was made. Chances are that your clothing, gadgets (and the chocolate treats you were hiding) were sourced and produced in countries that have abysmal records for using child labor, China (manufacturing, cotton), India (ditto) and Cote D’Ivoire (cocoa) among them. As Maplecroft, an international human rights compliance consultancy, has reported “[our] new study has identified the key emerging economies that supply the world with manufactured goods and natural resources, and that are fueling the global economic recovery, as the countries with the worst record of underage workers within their labour markets.” On the heels of that report’s release, WSJ editor John Bussey wrote in his article on June 3, 2011, “Measuring the Human Cost of an iPad Made in China” regarding the explosion killing three people at a Chinese Foxconn plant where iPads and iPhones are manufactured: “If the body count had been 103 instead of three, global public opinion would have been more mightily stirred. And in that instance, an arm's length would have proved little protection for the company and its brand.” Apple’s brand value is estimated at $153 billion.

However pervasive the fruits of child labor and authoritarian regimes are to our lives, they are merely two sources of potential human rights liability.

Sticky Business

In virtually every nation, from conflict and weak governance zones to authoritarian and totalitarian regimes, potential human rights violations are present.  While basic human rights norms are universal (no nation openly espouses forced labor or torture for example), enforcement is inconsistent.  However, the principle that businesses have a “responsibility to protect” human rights has been rapidly evolving for the last two decades in the eyes of international civil society, the international legal system, as well as in some national legal systems. 

This evolution of standards governing business conduct has been uneven, inconsistent, and at times erratic.  Nonetheless, the consequences for business leaders who fail to grasp the specific challenges faced by their enterprise and who fail to take proactive measures to protect themselves and their companies, can be disastrous. 

HRDD is a concern for other elements of civil society outside the business community.  John Ruggie, the United Nations Secretary General’s Senior Representative for Business and Human Rights (SRSG),  has observed that “[B]usiness enterprises, can infringe” human rights and “those rights are the core standards against which other social actors hold enterprises to account for their adverse impacts” (emphasis added).  Furthermore, HRDD behavior is more than a marginal factor in the corporate context.  Globalization and the universal legal and rhetorical commitment of the international community to human rights since its post World War II inception has increasingly ensured that multinationals must comply with human rights norms or risk reputational harm.

In addition to ill repute, however, HRDD failures also expose multinationals to regulatory sanctions, litigation and, as the SRSG has observed, to the “expanding web of potential corporate liability for international crimes.” (emphasis added).

On the other hand, international criminal charges have been lodged against militia leaders in the Democratic Republic of the Congo (DRC) which has received “robust” prosecutorial attention at the International Criminal Court “ICC.”  The first case tried before the ICC involves the DRC.  Although there are six “situations” before the ICC, only the DRC situation has four accused currently in custody and a fifth facing charges as a fugitive.  A sixth suspect, Jean-Pierre Bemba, a Congolese, was charged in connection with alleged crimes in neighboring Central African Republic, even though he had been a candidate opposing president Laurent Kabila’s son, Joseph, in the 2006 DRC elections. 

When the ICC investigation in the DRC which is still unfolding will touch the corporate world, will not be known for some time.  The ICC lacks jurisdiction to try corporations for criminal violations.  This is not because corporations never exploit slave labor in violation of international law.  It is because nations vary greatly in whether and how they treat the problem of corporate criminal liability.  However, there is no bar to the trial of corporate executives for violations of international humanitarian law.   

In private conversations, the current ICC prosecutor, Luis Moreno Ocampo, has told me that he would vigorously investigate corporate activity in Darfur if he had evidence that corporate conduct fell within the subject matter jurisdiction of the court.  He has made similar representations concerning the DRC to representatives of states that have ratified the Rome Treaty for the ICC.  Such investigative efforts could unquestionably lead to charges against corporate executives and their subordinates.

Conflict Minerals:  Guidelines Lead to Regulation

Few situations illustrate contemporary HRDD challenges more starkly than the question of the integrity of the supply chains that move goods, produce or minerals from source to retailer.  This issue potentially effects every segment of the global economy. Developments in the Democratic Republic of the Congo, “DRC” have dramatically highlighted these supply chain issues drawing important responses from a wide variety of institutions including the United Nations, the US Congress, the Organization on Economic Cooperation and Development “OECD” and a broad array of civil society stakeholders.

The OECD is not the only source of increased regulatory attention inspired by the DRC conflict. The U.S. Congress has vested the Securities Exchange Commission with the responsibility to require greater transparency by corporations in the supply chain of “conflict minerals.”  Without much debate, the Congress added the Conflict Minerals Section to the Dodd-Frank Act.  In doing so Congress expressed a concern that:

…the exploitation and trade of conflict minerals originating in the Democratic Republic of the Congo is helping to finance conflict characterized by extreme levels of violence in the eastern [DRC], particularly sexual- and gender-based violence, and contributing to an emergency humanitarian situation therein…

The Conflict Minerals Section requires companies filing SEC reports to disclose any “conflict minerals” utilized by them if the minerals are “necessary to the functionality or production” of their products.  Additionally, companies must conduct due diligence inquiries throughout their supply chains, submit reports on their efforts and post relevant findings in their SEC annual reports and on their “internet websites.”

The SEC Proposed Rule governing the reporting requirements imposed by the Conflict Minerals Section shies away from “proposing any particular conduct requirements” for the issuers of Conflict Mineral Reports.  However,  it “expects issuers…to conform […] to nationally or internationally recognized standards.”  However as examples, the Proposed Rule suggests the OECD Draft Due Diligence Standards and the recommendations of the UN DRC Experts be used as standards by reporting companies.  These are essentially the standards advocated by the NCP in the DAS Air case.  Thus, in a short time, OECD soft law norms have migrated to US “hard” law, enforced by the SEC.

ATS a/k/a ATCA and Policy Considerations

Corporate social responsibility (CSR) in the context of human rights due diligence, and the correlative financial performance of multinationals, was made a more nuanced policy consideration by another Court of Appeals decision. ( 2011 US App Lexis 13934; view the opinion - http://1.usa.gov/pE1M2r).

On Friday, July 8, 2011, the U.S. Court of Appeals for the District of Columbia Circuit, reinstated a lawsuit by Indonesian villagers that seeks to hold Exxon Mobil Corp. liable for alleged killings and torture committed by Indonesian soldiers guarding its natural gas operations in the country's Aceh province. In its 2 to 1 decision, the Court delineates its rationale and position vis-à-vis the New York Circuit Court of Appeals opinion which reached an opposite result on the ATS claims:

For the reasons that follow, we conclude that aiding and abetting liability is well established under the ATS. We further conclude under our precedent that this court should address Exxon’s contention on appeal of corporate immunity and, contrary to its view and that of the Second Circuit, we join the Eleventh Circuit in holding that neither the text, history, nor purpose of the ATS supports corporate immunity for torts based on heinous conduct allegedly committed by its agents in violation of the law of nations. (p. 3).

The split between the circuits likely presages that the issue will be addressed by Congress or the U.S. Supreme Court.

The other holdings of the decision included affirming the dismissal of the plaintiffs-appellants’ Torture Victim Protection Act claims and a reversal of the dismissal of the plaintiff-appellants’ non-federal tort claims, which, along with the ATS claims, were remanded to the district court.

The import of the current decision is one of policy considerations for American multinationals, which is to say, the issue is one of risk management hedging strategies: will individuals and or NGOs pursue claims against individual executives or not? Will multinationals indemnify those executives or not? Finally, how can this litigation risk be prioritized against other risks stemming from the same facts?

Ultimately, if corporations cannot be sued under the ATS in U.S. courts (as they cannot be prosecuted by the International Criminal Court), the risk analysis turns on the question of indemnification of executive employees. As I have written in other articles: “At the present time, whether you can sue a corporation in US federal courts for human rights violations committed abroad depends on where in the US such a case is filed as the Circuit Courts of Appeal are “split” on this issue. However, there is no dispute that individuals, including corporate executives, may be sued under the ATCA [a/k/a, ATS]. [emphasis added].”

At the end of the day, whether or not corporations can be sued in U.S. courts under the ATCA/ATS, brand damage suffered from the reaction of stakeholders (investors, customers, and employees, among others) to a human rights allegation, justiciable or not, may be equally as important a risk consideration for executives. In what has been termed a “virtuous circle”, CSR has been positively linked with corporate financial performance. While it is beyond the scope of this article to frame the many implications of brand damage springing from ill repute, the globalization of our society ensures that significant negative financial impacts would likely spring from reputational harms based on human rights due diligence missteps.

In a sense, comparing the potential magnitude of harm from a federal court decision versus other mishaps, such as an SEC violation of the Dodd-Frank requirements for conflict minerals in one’s supply chain versus a well documented and reported human rights violation, is a nearly impossible feat unless one comprehends that each of those categories of risk are underscored by reputational or brand damage. In that light, whether corporations can be sued in U.S. courts is almost in consequential; while the timing of the financial impacts may be different by category of misstep, the financial result of a well documented human rights violation by a prominent brand would be the far greater risk.