Businesses can and ought to deliver objectives beyond those serving shareholders and only shareholders, Diversity List candidate Farzana Aslam asserts.
(Photo credit: Chris Lusher)
Too often business and human rights are seen as existing in two distinct spheres. I often have people react with puzzlement and surprise that I teach a course on Business and Human Rights. I even had the CEO of a prominent Hong Kong business association once matter-of-factly advise me that its members are businessmen and therefore “may not be interested in human rights issues”.
That business and human rights are often conceptualised in such binary terms is perhaps unsurprising. After all we live in an age where free market economics have prevailed, and with it, the dominant paradigm of shareholder primacy, namely that the purpose of the corporation is to maximise shareholder value. This is an economic model that places profit as a primary purpose of the corporation, and shareholders as the primary stakeholders when it comes to corporate accountability. This has been achieved at the expense of the interests of other stakeholders such as employees, suppliers, consumers, and local communities. The most well-known and oft-cited proponent of this model is Milton Friedman, who defined the sole purpose of the corporation as being to maximise shareholders’ profits. Such was the influence and appeal of Friedman’s version of free market economics that in 2002 George W. Bush hosted a White House Tribute for Friedman’s 90th birthday.
One of the consequences of this economic model pervading common corporate consciousness is that it propagates the myth that shareholders are the ‘owners’ of a company. Property rights have been long-cherished by western society, and so association with ownership has given credence to the idea that shareholders have rights that somehow trump those of other stakeholders in the company. As a matter of law however, this proposition is incorrect and has long been contested by legal scholars. Shareholders are not owners of a company in a strict legal sense. The corporation exists as a separate legal personality. The classic hallmarks of property ownership don’t exist in the case of shareholders of a company: although they have voting rights and a right to appoint and remove directors under prescribed circumstances, they are not entitled to take part in the day-to-day running of the company; they don’t have the right to the services, products or know-how owned or provided by the company; they are not liable for the company’s actions; they are not entitled to exercise any rights or claim over a company’s assets during the subsistence of the corporation – such rights only extend to shareholders upon liquidation, and even then, they are not first in line. Most shareholders of publicly listed companies own a small fraction of the entire issued capital, and rarely speak, or act in unison with each other. And yet the primacy of shareholder value has been allowed to permeate both corporate organisation and behaviour, and the regulatory landscape that holds corporations to account.
One of the damaging consequences of this misconception has been short-termism, most notably enshrined in the corporate fixation with quarterly earnings reporting. The pressure of quarterly earnings goals force many public companies into continually trying to drive up share prices by cutting costs in order to maximise profits for shareholders at the expense of other stakeholders in the company that might otherwise be more invested in achieving long term, more mission driven or sustainable goals. Companies are generally rewarded with higher valuations for externalising the costs of their activities on to others. It is therefore not surprising that many businesses do not invest the time or resources to consider the human rights impacts of their core business operations, let alone that of their supply chain.
Why are human rights the business of business?
The stark truth is that you cannot run a business of any scale without having some impact upon or inter-section with human rights; whether it be labour rights, environmental protection, indigenous rights, or social and economic rights. For example, any business that has employees is in a position to adversely impact upon their employee’s human rights, such as the right to a safe and healthy work environment, the right to a living wage, the right to non-discrimination, or the right to equal pay for equal work. The larger the business the more likely that its operations are going to affect the environment, its workforce, and the community within which the business operates. The more labour or resource intensive the business, and the vaster its supply chain, the more likely that many other stakeholders’ human rights will be affected.
Companies now operate in public spheres which were historically controlled, or at least heavily regulated, by the State. Many basic utilities such as the supply of electricity, gas, and water; the management of waste; and the supply of healthcare are in the hands of private companies, placing them in a position where it is impossible to ignore potential human rights impacts.
More and more companies operate transnationally, or outsource core operations to lower cost centres, through a complex web of subsidiaries and affiliates, and production and supply chains in countries where different standards or enforcement regimes apply. More often than not it is to developing states whose judicial systems may lack either the means or the will to provide an adequate access to remedy for victims of human rights abuses. While lax regulatory and legal frameworks in such jurisdictions may result in lower operating costs, they come at a high a price in terms of the social and environmental impact to the host communities affected by the business operations. Moreover, many practical and legal hurdles exist to prevent victims of such abuses from bringing claims against the parent company in its jurisdiction of incorporation, and so often human rights abuses are left unchecked and the victims without access to remedy.
In recent years, the paradigm of shareholder primacy has come under increasing scrutiny, due largely to growing concerns about the increase in levels of inequality (Oxfam reports that the richest eight people now hold as much combined wealth as half of the world’s population), and the rise in power and influence of MNCs. A number of highly publicised environmental, and labour-related scandals have implicated the unregulated corporate pursuit of profit in human rights abuses. Some notable examples include the spate of suicides of Foxconn workers in Shenzen; the Rana Plaza collapse in Bangladesh; and the reports of forced labour in the Thai fishing industry. In each of these cases the corporate response of household names such as Apple, Costco, Walmart, Benneton, Kappa, and Primark have had to look beyond a strict legal defence of the claims in order to respond to public moral outrage. If human trafficking, child labour, or forced labour is discovered in a company’s supply chain it is no longer tenable to hide behind legal defences such as privity of contract, i.e. the workers were not employed, contracted or otherwise directly engaged by the company but by one of its suppliers.
In addition to risk factors, increasingly, companies are starting to realise the opportunity that the integrati0n of social responsible and sustainable business goals presents. A 2015 report by the Smith School of Enterprise and the Environment at the University of Oxford and Arabesque Partners strongly supports a shared value proposition, namely that businesses with solid Environmental, Social and Governance (ESG) practices outperform their competitors operationally and financially over time. The report, a meta-analysis of current research (over 200 academic studies, industry reports, articles and books) on ESG practices and its impact on financial performance, contains 3 key findings:
- 90% of the studies on the cost of capital show that sound sustainability standards lower the cost of capital of companies
- 88% of the research shows that solid ESG practices result in better operational performance of firms
- 80% of the studies show that stock price performance of companies is positively influenced by good sustainability practices
The report concludes that “it is in the best economic interest for corporate managers and investors to incorporate sustainability considerations into decision- making processes.”
In addition to the risks and rewards of focusing on human rights impacts, there has been a shift in the regulatory and corporate governance environment. Challenges to the shareholder centric model are evident in recent hard law and soft law developments. While corporate and securities laws in most jurisdictions does not preclude companies from respecting human rights, there have been a number of developments that confer positive obligations to consider human rights issues.
The UK Modern Slavery Act which came into force in October 2015 requires companies with a total turnover of GBP36 million or more which are either incorporated or carrying on business in the UK to publish a statement setting out the steps that they have taken during that financial year to ensure that slavery and human trafficking are not taking place anywhere in their supply chains or in any part of their own business. Section 172 of the UK Companies Act 2006 is another example of this paradigm shift. It requires Directors when exercising their duty of good faith to act in the interests of the company to have regard to a series of factors listed in the section which refer to the promotion of social, environmental and governance objectives. As of this year, the Hong Kong Exchange (HKex) ESG reporting requirements now require listed companies to report on their ESG performance on a ‘comply or explain’ basis.
At an international level, soft law initiatives include the UN Guiding Principles on Business and Human Rights, the Global Reporting Initiative’s G4 Sustainability Reporting Guidelines, and the UN Principles for Responsible Investment.
Business as a force for good
While compelling enough, reliance on the business case as a justification for the implementation of socially responsible ESG practices ought not to be the prime mover for corporate engagement with human rights issues. While it may be easy to demonstrate shared value when it comes to environmental impacts, such as energy or resource savings that can result in savings to the business and also increase customer loyalty, there are other human rights issues where the cost of doing the right thing may not result in an immediate or tangible financial or reputational benefit to the company. For example, ensuring the absence of human trafficking in supply chains may involve a cost that cannot be recouped in the short term. Does that mean that companies should not invest the necessary resources to ensure that their operations and supply chains are free from human trafficking?
Corporations can and ought to be a force for good. This requires businesses to become not only interested but invested in human rights issues. This is simply the right thing to do, and is driven by a moral and ethical imperative. There is no shame in mixing ethics and morality with business, nor is it inconsistent with the rights of shareholders to receive a return on their investment.
“The real purpose of business has always been to come up with solutions that are relevant to society, to make society better.”
– Paul Polman, CEO, Unilever
As a first step, corporate thinking and behaviour needs to move away from the idea of shareholder primacy to reconceptualise the purpose of the corporation. Shareholder primacy is an idea based on the myth of ownership. It is nonetheless a very powerful idea that has become a social norm. However, social norms can and ought to change in line with changing political, social and economic conditions. If there was ever a time when a call for change is needed it is now.
Ms Farzana Aslam
Principal Lecturer, Faculty of Law, University of Hong Kong and Director of Kintillo, a Workplace Training and Coaching Consultancy. Farzana is also part of the Diversity List endorsed by the Zubin Foundation.