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Focus: UN Corporate Law Project summary released

6 August 2010

In brief: The United Nations Special Representative on Business and Human Rights recently released a summary of the results of the Corporate Law Project, which identified the extent to which corporate and securities law in 40 jurisdictions currently requires or encourages companies to respect human rights. Partner Annette Hughes , Senior Associate Rachel Nicolson and Lawyer Catie Shavin report.

How does it affect you?

  • This summary (the trends paper) provides guidance as to the extent to which corporate and securities law in 40 jurisdictions requires or permits companies to respect human rights.
  • In many jurisdictions, including Australia, consideration of the human rights impacts of a company's operations may be required or of benefit to minimise exposure under certain circumstances, even where it is not expressly required by corporate and securities legislation.
  • The UN found that where consideration of a company's human rights impacts is required, in general, limited statutory guidance is provided as to the practical implementation of these obligations.
  • The trends paper gives an indication of issues and recommendations likely to feature in the Special Representative's third report, due in 2011, and which will likely have a substantial impact on the development of international and domestic law and policy.

Background

The UN Special Representative on Business and Human Rights, Professor John Ruggie, was first appointed to the role in 2005 with a mandate to identify expectations and obligations faced by business in respect of human rights. In performing this mandate, he produced the 'UN Framework', which addresses the governance gaps between the impact of corporations on human rights and the management by states, business and societies of the consequences of those impacts. The UN Framework was unanimously endorsed by the Human Rights Council in 2008.1

The Corporate Law Project (the CL Project), which was announced by the Special Representative in 2009, aimed to map the relationship between human rights and corporate and securities law, and to provide guidance on the operationalisation of the UN Framework.

The CL Project was undertaken with the pro bono assistance of leading corporate law firms from around the world. Participating firms were asked to explore requirements relating to incorporation and listing, directors' duties, reporting and stakeholder engagement.

Allens Arthur Robinson contributed reports considering the corporate and securities law of five jurisdictions in the Asia-Pacific region (Australia, New Zealand, China (including Hong Kong), Indonesia and Papua New Guinea). These reports, along with the reports considering other jurisdictions can be found at the Special Representative's portal.2

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The CL Project trends paper

The Special Representative's trends paper considers the overarching trends that emerged from the CL Project and also provides general observations of the project and its results.3

The trends paper indicates that current corporate and security law recognises human rights, but only to a limited extent. The CL Project reports indicate that, in most jurisdictions, compliance with corporate governance rules may require companies and their officers to identify, manage and report human rights impacts where these may be relevant (in particular, harmful) to the company's interests, though it also identified a lack of clarity in respect of the obligations and the scope of the discretion of companies in relation to human rights in this context.

The key findings of the trends paper are considered below.

Directors' duties

The trends paper stated that, in most jurisdictions, directors have an overarching duty to act in the company's best interests. The reports indicated that directors are rarely expressly required to consider the human rights impacts of the company's activities or its impacts on non-shareholders.

However, in respect of a number of jurisdictions, the trends paper suggests that a failure to consider such impacts may cause the company to breach law or encounter reputational risk. For example, the UK Companies Act expressly requires that directors, in promoting the success of the company, have regard of the impact to the company's operations on the community and the environment. Also, common law jurisdictions, such as Australia and others, where the 'enlightened shareholder value approach prevail', directors have considerable discretion to determine whether a decision is in the company's best interests.

Reporting

The trends paper finds that, although separate corporate social responsibility (CSR) reports are now required to be provided by particular types of companies in some jurisdictions, there is limited regulatory guidance as to when human rights and non-shareholder impacts may reach the threshold of 'material' or 'significant' in respect of general reporting requirements.

Although the trends paper suggests that few jurisdictions expressly extend reporting requirements to extra-territorial impacts, they indicate that it is very rare for such requirements to be confined to impacts within the state's jurisdiction. For example, the US report contends that the jurisdiction in which a company conducts its activities will not alter its reporting obligations provided that it is subject to US securities laws. However, although these reporting requirements may incorporate an obligation to report on the activities of their subsidiaries, it is unusual for them to incorporate a similar obligation in respect of the activities of the company's suppliers or business partners.

Stakeholder engagement

The CL Project trends paper suggests that, generally, there are few substantive obstacles to the inclusion of human rights concerns in shareholder proposals for annual general meetings and that, in a number of jurisdictions, regulators have become less willing to block such proposals at the company's request. However, the trends paper notes that there are a number of procedural impediments, such as capital equity thresholds, which may have a strong preventative impact on the making of such proposals, particularly by minority shareholders.

The trends paper stated that, although it is rare that pension fund trustees are expressly required to consider the human rights impacts of their investments, where a failure to do so may expose the fund to legal or reputational risk, such considerations may be required. In some jurisdictions, the making of these considerations have been encouraged by government.

Other corporate governance issues

The Special Representative noted that issues relating to CSR and the human rights impacts of companies are increasingly being addressed in corporate governance codes and guidelines. Significantly, where these issues are addressed, they are rarely entirely voluntary and generally refer to international CSR initiatives.

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Conclusion

The CL Project is the first, in-depth, multi-jurisdictional exploration of the relationship between corporate and securities law and human rights.

The reports of the CL Project and the observations made in the trends paper indicate that, although there are few express references to the human rights of companies in corporate and securities law, consideration of these impacts is not only permitted, but, in some circumstances, may be required in most of the 40 jurisdictions considered. Importantly, to the extent that such considerations are relevant to corporate compliance with such law, the impacts considered may include extraterritorial impacts, and, in some circumstances, the impacts of the company's subsidiaries and business partners.

The final report of the Special Representative is due to be presented to the UN Human Rights Council in June 2011, and Professor Ruggie is currently considering appropriate recommendations on issues raised in the CL Project and, more generally, in relation to corporate human rights-related obligations and expectations.

Footnotes
  1. Proposed in the report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, Protect, Respect and Remedy: a Framework for Business and Human Rights.
  2. Business and Human Rights Resource Centre: UN Special Representative on Business & Human Rights, Corporate Law Tools.
  3. United Nations Special Representative of the Secretary-General on the Issue of Human Rights and Transnational Corporations and other Business Enterprises, Corporate Law Project: Overarching Trends and Observations, July 2010.

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