The FP Memo: A Strategy for Business and Human Rights

The United Nations has failed to produce a balanced set of enforceable rules to regulate the human rights impact of multinational corporations, squandering an opportunity to bolster public trust in globalization.



TO: U.N. Secretary-General Kofi Annan
Daniel Litvin
Raising Human Rights Standards in the Private Sector

Ensuring that companies respect human rights is an important and controversial challenge, one in which the United Nations has a unique role to play. As you, Mr. Secretary-General, have recognized, maintaining broad political consensus in favor of globalization and increased flows of foreign investment is crucial to raising living standards in the developing world. In addition to being inexcusable, human rights transgressions by multinational corporations threaten this consensus by giving ammunition to the many groups opposed to further global integration.

This memorandum argues that the United Nations must develop new standards concerning the relationship between corporations and human rights. It recommends drafting a set of principles that is tough on multinationals and backed by an enforcement mechanism but that also recognizes the difficulties companies face. The two most recent U.N. initiatives in this area, the so-called "Global Compact" and the Human Rights Norms for Businesses (the "Norms," as they are now known), both lack this balanced approach.

The failure of these initiatives to set reasonable and well-defined limits on the human rights responsibilities of companies helps explain the current hostility of business lobbies to any effort to create an enforceable code of conduct. A more realistic and fair approach can resolve this problem and win the support of both businesses and non-governmental organizations (NGOs).

What follows is a detailed look at the problem of human rights and multinationals; at the failure of U.N. efforts to address the problem; a proposed solution; and suggestions for that solution’s implementation.

The Problem: Multinationals confer many benefits, but they also can cause or exacerbate a range of problems in the places they invest, particularly developing countries. At worst, these problems may include civil conflict, repression of minorities, abuse of workers’ rights, and the perpetuation of abusive regimes (which obviously draw sustenance from foreign investment).

Only a tiny proportion of the world’s 50,000-plus multinationals explicitly include respect for human rights in their codes of conduct, and among those that do, not many can claim to have honored this commitment in every aspect of their operations. Fully implementing a policy of social responsibility in a large, globally dispersed organization presents a genuine management challenge.

Even if multinationals were able to guarantee complete adherence to such a policy, how they would go about upholding human rights in practice is unclear, for the boundaries of their responsibility — where it begins and where it ends — are often undefined. This ambiguity is the nub of the problem.

Take the issue of labor exploitation. Most of the Western multinationals that have been accused in recent years of abusing workers (by employing underage children, for instance) did not actually commit violations themselves; rather, the guilty party was a supplier, or a supplier of a supplier. Multinationals certainly have some duty to try to prevent these abuses, but how far down the supply chain do their obligations extend?

Many human rights controversies involving multinationals can be attributed to the lack of a clear dividing line between the responsibilities of a company and a host government. No one disputes that companies ought to do everything they can to uphold the rights of their employees and of local communities and to generally be a force for good wherever they operate. But what that means in practice is unclear.

Should a company investing in a country where union organization is restricted — China, for example — contravene the law by hosting unauthorized unions in its factories? Is a company operating in a politically repressive state such as Burma, where a number of Western firms still have investments, obliged to petition the government on behalf of jailed dissidents?

Companies cannot simply ignore these issues, but limits to their responsibilities need to be set. At the root of these problems is the failure of states to protect adequately the rights of citizens. Profit-making enterprises have neither the expertise nor the capacity to supplant the role of government in this regard. Moreover, if a multinational were to intervene heavily in the internal affairs of a country, it would rightly be accused of neocolonialism.

Inadequate Solutions: The United Nations has made two recent attempts to establish a set of human rights and broader ethical standards for multinationals: the "Global Compact," which you unveiled at Davos in 1999 and which has now been embraced by over 1,000 companies; and the "Norms," adopted in August 2003 by the U.N. Sub-Commission on the Promotion and Protection of Human Rights. The first has been attacked for being too soft on business, the latter for being too tough, and unfortunately, these criticisms are well founded.

The "Global Compact" has had various successes. For example, it has encouraged many fruitful local partnerships on development issues among companies, labor organizations, and other groups. But the objection raised by NGOs — that the compact is toothless and allows multinationals to "blue-wash" themselves (that is, to gain favorable publicity by associating themselves with the United Nations without actually improving their behavior) — has merit, too.

Companies wishing to participate in this voluntary initiative face a relatively low set of hurdles: Their CEOs must write you a letter expressing support for the nine principles enunciated in the compact. The corporations must then "set in motion changes to business operations so that the Global Compact and its principles become part of strategy, culture, and day-to-day operations." But enforcement, such as it currently is, consists of a requirement that firms describe in their annual reports the ways in which they are fulfilling their commitments.

Moreover, the two human rights provisions do little to define boundaries for companies in this area, merely declaring that firms should support human rights "within their sphere of influence" and not be "complicit" in abuses. The supporting literature on the compact’s Web site offers some suggestions for "possible actions" by companies in this respect — for example, that they undertake a "human rights assessment" of the situation in countries where they intend to do business. But obligations are not defined in any concrete fashion.

As for the "Norms," their weakness lies not so much in failing to define companies’ responsibilities but in defining them too expansively. While declaring that governments have the "primary responsibility" for upholding human rights, the "Norms" list an array of rights that companies themselves must protect. However, little is said about how firms should behave when fulfillment of these obligations would force them to violate local laws or to demand changes in host government policy.

For instance, the "Norms" say that firms should not directly or indirectly benefit from abuses and that they should "contribute" to the realization of, among other things, "freedom of thought, conscience, and religion, and freedom of opinion and expression." This goal sounds admirable, but what does it actually mean? As a practical matter, how far is General Motors supposed to go in trying to support human rights in China? Should it break the law? Should it permit, for example, Falun Gong meetings at its Shanghai plant?

Furthermore, the "Norms" recommend that companies be subject to periodic monitoring by the United Nations and other national and international bodies and provide "reparation" should they fail to meet their responsibilities.

The long list of obligations, coupled with the threat of sanctions, suggests that even ethical firms could be held financially liable for myriad human rights abuses in countries in which they invest. Put another way, the "Norms" potentially could deter responsible firms from investing in precisely those developing countries where governance and human rights problems are most acute — a perverse result, given that these countries are also most likely to be in urgent need of foreign capital and of integration with the global economy.

The "Norms" approach has not been received warmly by business lobbies and is likely to encounter even stronger resistance when put before the full U.N. Commission on Human Rights. It confirms the corporate sector’s worst fears: that multinationals will be held accountable for problems over which they have little, if any, influence.

A Better Solution: Corporations are generally averse to regulation and to proposals for binding international rules governing human rights. On the other hand, most CEOs are intelligent people; they understand that the issue of social responsibility is not going to disappear. They also recognize that without a more detailed code of conduct and some means of enforcement, charges leveled against companies will be adjudicated in the court of public opinion, where mitigating details count for little, where boundaries of corporate responsibility are defined by NGOs and other critics, and where firms are easily cast as ogres.

High-profile multinationals such as Shell and McDonald’s have been vilified in recent years. Surely, it is a source of consternation to them that they are sometimes blamed for problems that are really the responsibilities of a host government and that they have been made symbols of corporate greed and callousness while less familiar firms often get away with worse sins.

In short, large, prominent firms have a strong incentive to create a global set of rules by which all multinationals should play — a set of rules that is fair, realistic, and, above all, clear. And obviously, corporate backing for any such initiative is essential if it is to work.

It is possible for the United Nations to develop a set of principles that is strict as well as enforceable and that commands the support of both NGOs and the business community. The details would need to be discussed carefully and hammered out partly through a process of consultation with the various lobbies and interests concerned. But the obligations and boundaries that might be placed on firms can be envisaged in general terms.

With regard to labor rights and supply chains, for example, companies above a certain size could be expected to demand appropriate standards of their immediate suppliers and to put in place basic monitoring systems to help guarantee these standards are being met. But they would have no obligation under these principles to ensure similar adherence from their suppliers’ suppliers.

It would also be reasonable to expect companies to report to the United Nations substantial abuses perpetrated by host governments against local communities and to state publicly their opposition to such practices — but that should be the extent of their overt political involvement. With this issue and other equally knotty ones, the key will be to define obligations in such a way that they are politically and economically realistic but do not absolve multinationals of their responsibilities.

Making It Happen: The need for the United Nations to develop a balanced set of principles that elicit more than just a public relations response from multinationals is obvious. The question is how you, as secretary-general, can help the organization accomplish this task.

I would suggest you begin by establishing a timetable — by declaring that within, say, five years, you want the United Nations to have completed work on a new body of human rights commitments for multinationals and to have also conceived a means of enforcement to ensure compliance. You will need to mention enforcement to signal the seriousness of this endeavor but should not discuss the form it might take. (For the foreseeable future, the only politically practical enforcement mechanism may be a modest one — a U.N. rapporteur, for instance, to assess the behavior of a select number of firms each year.)

Drafting the new principles should be entrusted to a small, carefully selected group of experts from the business community, the NGO sector, the labor movement, and the United Nations itself. The participants should be equally drawn from the North and the South.

Once new standards have been agreed upon, the United Nations will need to secure the backing of the many multinationals and NGOs that have not participated in the drafting process. Assuming that the principles adequately address their interests and worries, it should be possible to get both sides to support the new rules. Governments will follow — although some developing countries may need reassurance that the code of conduct is not a rich world conspiracy to exclude them from Western markets but rather a means of ensuring the capital inflows they need.

If a way is found to bridge business and human rights concerns, the United Nations will have taken a big step toward building public trust in globalization and tempering some of its ill effects. And you, Mr. Secretary-General, will have secured a large part of your legacy.

Daniel Litvin is author of Empires of Profit: Commerce, Conquest, and Corporate Responsibility (New York: Texere, 2003), and director of Percept Risk and Strategy, a London-based firm that provides analysis to companies on social and ethical issues.

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