Leverage and the Management of Adverse Human Rights Impacts

by Foley Hoag LLP - Corporate Social Responsibility
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One of the challenges for companies seeking to manage the adverse human rights impacts of their operations is how to deal with impacts that are most directly tied to business partners, suppliers, and even governments. Companies have varying degrees of control over the actions of third parties, and yet the activities of third parties have the potential to expose companies to a range of reputational – and legal – risks.

In the U.N. Guiding Principles on Business and Human Rights, Guiding Principle 19 states that appropriate actions to prevent and mitigate adverse human rights impacts will vary according to the extent of a company's leverage in addressing the impact.

The commentary to Principle 19 states that

"leverage is considered to exist where the enterprise has the ability to effect change in the wrongful practices of an entity that causes a harm....If the business enterprise has leverage to prevent or mitigate the adverse impact, it should exercise it. And if it lacks leverage there may be ways for the enterprise to increase it."

Companies evaluating how best to operate in a manner that respects human rights must therefore evaluate not only their business relationships, but also how best to exercise leverage in the context of those relationships. In an interpretive guide to the Guiding Principles, published earlier this year by the United Nations, the authors identify a series of factors that companies should consider when evaluating the extent of their leverage in specific business relationships. These factors include: 

  • Whether there is a degree of direct control by the enterprise over the entity;
  • The terms of contract between the enterprise and the entity;
  • The proportion of business the enterprise represents for the entity;
  • The ability of the enterprise to incentivize the entity to improve human rights performance in terms of future business, reputational advantage, capacity-building assistance, etc.;
  • The benefits of working with the enterprise to the entity’s reputation and the harm to its reputation if that relationship is withdrawn;
  • The ability of the enterprise to incentivize other enterprises or organizations to improve their own human rights performance, including through business associations and multi-stakeholder initiatives;
  • The ability of the enterprise to engage local or central government in requiring improved human rights performance by the entity through the implementation of regulations, monitoring, sanctions, etc.

All companies should evaluate the extent to which it is appropriate to develop short- and long-term strategies to increase their leverage in the context of specific business relationships. There are a variety of means by which a company can increase its capacity to engage third parties in order to mitigate the potential for adverse human rights impacts, including:

  • The development of a clear human rights policy helps to ensure that the company’s expectations and commitments are understood by both internal and external stakeholders;
  • The integration of corporate human rights expectations into contracts with business partners and suppliers supports both oversight and accountability mechanisms as well as systems to incentivize good behavior;
  • Comprehensive human rights due diligence efforts ensure that key personnel have sufficient understanding of the human rights contexts in which the company is operating, including the relevant roles and capacities of specific third parties;
  • Regular training and appropriate capacity-building initiatives for corporate employees, as well as for key suppliers and partners, helps to ensure that all relevant parties have the knowledge and skills necessary to engage in collective efforts to address human rights concerns; and
  • Effective and ongoing engagement with stakeholders, including civil society and government institutions, can provide a company with critical capacity to address human rights concerns multilaterally.

As companies examine the extent to which particular business relationships might raise human rights concerns, it is important to remember that, in many instances, the extent of a company's leverage in those relationships is not fixed. Companies should assess their own capacity to increase their leverage, as appropriate, in specific relationships in order to mitigate the potential for adverse human rights impacts.  Developing strategies to increase leverage manages risks to the company and serves to protect those who may be subject to human rights harms in connection with the company's activities.

 

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