Print
E-MailJohn Ruggie is the Berthold Beitz Research Professor in Human Rights and International Affairs at Harvard University Kennedy School of Government, and Caroline Rees and Rachel Davis are Senior Fellows at the Kennedy School Corporate Responsibility Initiative, and are President and Vice President of Shift, a nonprofit focused on the UN Guiding Principles on Business and Human Rights. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).
For the first time in nearly a half-century, leading business associations, corporations, and the corporate law and governance community are seriously proclaiming that maximizing shareholder value is no longer adequate as the primary let alone sole purpose of the listed corporation—that the corporation must also benefit and be accountable to its workers, suppliers, consumers, and society at large. The new paradigm is variously called stakeholder governance, stakeholder capitalism, or corporate repurposing.
But the question of how this is to be achieved unveils significant differences of opinion and practical difficulties. Some advocates place their bet on enlightened voluntary cooperation between corporations, large institutional investors, and other stakeholders. Yet considering the financial incentives the current system affords corporate executives and directors, especially in the Anglo-American system heavily driven by equity-based compensation, voluntarism by itself is unlikely to move the needle far enough. Others provide long and detailed lists of laws and regulations that would need to be changed or newly adopted to ensure that accountability to wider stakeholder groups is established. But that inevitably involves political contestation, which is an inherently slow process and has a high risk of generating unanticipated consequences.
Some critics, still wedded to the market fundamentalist views of Milton Friedman, reject the idea of a new paradigm on essentially ideological grounds. Others who examine it more deeply posit what amounts to an impossibility theorem. They contend that corporate leaders simply are unable to identify ex ante who the relevant stakeholders are or devise a formula regarding how to weigh and balance their conflicting interests—let alone how those interests should be represented at board levels. Moreover, they contend, if what they call stakeholderism were to succeed it would insulate corporate leaders from the influence of shareholders, reduce their accountability to anyone but themselves, and thus potentially harm shareholders, other stakeholders, the firm and society alike.
In contrast, we focus on a pathway that serves the ambition of securing corporate governance in the interest of stakeholders beyond shareholders while avoiding the main criticisms and impediments described above. We draw on the practical experience of the UN Guiding Principles on Business and Human Rights (UNGPs), unanimously adopted in 2011. Among its central features is a provision for businesses to conduct human rights due diligence (HRDD), enabling them to identify, prevent, mitigate, and account for potential and actual human rights harm that may result from their own activities or through their business relationships. Leading businesses are increasingly embedding these provisions into their strategic and operational decision-making, essentially as a social-risk management tool.
Taking a major a step forward, the European Commission is developing a mandatory HRDD requirement modeled on the UNGPs, covering certain corporations (determined mainly by size) and including their global supply chains. Liability provisions are likely to be included. And extending the requirements to non-EU-based firms that have a major business presence within its jurisdiction is also under consideration. Conceived as part of the European Green Deal, it offers a promising pathway to a form of stakeholder governance.
The construct of HRDD in the UN Guiding Principles was deliberately adapted from other due diligence processes (legal, financial, technical) that are familiar to business—but with critical distinctions. One is that HRDD is not a transactional process, as for a new acquisition, partnership or investment, but an ongoing process. This reflects the fact that human rights risks connected to a company’s operations and value chain are themselves constantly changing, whether due to internal factors such as a new product development or evolving workforce composition, or due to external factors such as regulatory changes, moves into new markets, or unexpected occurrences in its operating environment.
A second critical distinction lies in engagement with stakeholders. HRDD reflects the general categories—employees, suppliers, customers and communities—that are typically cited in reference to stakeholders other than shareholders. Yet it avoids the common critique that these categories are too expansive and the interests of their members too varied for executives to make sense of them in their deliberations. It is a distinct feature of HRDD that it does not attempt to identify general classes of stakeholders ex ante. Instead, it places the focus on and requires engagement specifically with those people (or their legitimate representatives) whose basic dignity and equality are at risk of harm from the ways in which a particular company does business. In other words, the relevant stakeholders are identified situationally, not in ex ante categorical terms. While HRDD can be included within broader enterprise risk management systems, it must go beyond simply identifying and managing material risks to the company itself, to include risks it poses to these affected stakeholders. Indeed, it is highly likely that the more severe the risks to stakeholders are the higher the material risk to the company becomes—which a traditional risk management system might not catch early enough.
By making HRDD mandatory it becomes a legal responsibility not only for management but also for boards. It becomes necessary for business enterprises to address and report on actual or potential risks to stakeholders, which in turn requires that it has effective systems in place to know and show that it does so. Where it is necessary to prioritize actions to address adverse human rights impacts, business enterprises should first seek to prevent and mitigate those that are most severe or where delayed response would make them irremediable. In response to mandatory HRDD boards may well wish to add members with relevant subject matter expertise and/or appoint a cross-sectional advisory body. Neither is a particular hardship or without precedent.
Finally, these developments are reinforced by the remarkable rise in ESG investing, in which most of the “S” themes in fact are human rights issues or close cousins: workplace standards, employee relations, non-discrimination and diversity, customer and community relations, responsible R&D, privacy rights, and other such matters. The pandemic has drawn particular attention to precarious work and social and economic inequalities—the result, in good part, of business practices that externalize risks onto vulnerable workers and communities, enabled by inadequate protection of their rights by states.
In sum, this model of mandatory HRDD creates a system of multi-fiduciary obligations by taking the business enterprise to situationally relevant stakeholders and incorporating the learnings from that engagement into its compliance system—contributing, thereby, to the advent of the new paradigm.
The complete paper is available here.
