Which corporate bucket is going to pay for human rights?

Mon 08 Feb 2016

You won’t find human rights on any profit and loss account codes of company trial balances; well I haven’t seen any in my 25 plus years as an auditor.  And indeed, why should I have seen this? What, after all, does human rights have to do with business?  
And if you ask most people on the street (well at dinner parties anyway – you don’t want to sit next to me!), human rights has nothing to do with business.  Then how come legislators, regulators, governments and even the EU are requiring companies to report on the steps they are taking to respect human rights?

It turns out that business has everything to do with human rights.  Business underpins most societies and accordingly needs to act morally as much you and I.  Just because companies are legally constructed entities doesn’t mean they don’t have a moral obligation within society. One issue with human rights is the term itself – it’s generic and can reflect a different meaning to every one of us.  The labour laws under which companies operate in the UK have their foundations on fairness and human rights; the basis of health and safety laws are directly from the definition of human rights ie do no harm; data protection laws are further human rights protections…..and the list goes on.

However, most companies don’t think human rights applies to them due to either flawed thinking or processes such as:

• There is no risk to the company arising from human rights impacts which ignores the many possible ways in which such impacts can lead to increased costs or reputational damage; and
• The company can’t possibly be involved with negative human rights which is on account of a limited understanding of how the company’s activities and its business relationships can impact human rights.

During 2015, the Economist Intelligence Unit conducted a business and human rights survey of senior personnel at 850 companies globally.  Of these, almost 3 out of 4 respondents believed that their business had a responsibility to respect human rights beyond simple obedience to local laws.  Although working at the remaining 25% of companies is probably not much fun, a 3 in 4 hit rate is a reasonable start.  Unfortunately, the ideal follow up question to this isn’t ideal for a rating scale type survey; how does your company respect human rights?   My belief, simply based on adhoc discussions with companies, is that the majority of answers would be the wrong answer; “well my company this year contributed £x hundred thousand in building new schools or funding a local charity.” Why is it the wrong answer? Not because there is anything wrong with philanthropy; quite the opposite, provided companies don’t use it purely for PR purposes and to mask poor behaviours. However, as those of us who have been working in this area for a while will espouse: corporate respect for human rights is not about how companies spend their profits (see above re philanthropy), it’s about how it earns them.  It’s no good if your company has contributed to building a school, but used child labour somewhere in their production processes or in their supply chain.

Therefore, back to the question which the EIU survey ideally would have asked – how do companies know if they are respecting human rights?  I am afraid, that with the exception of a few leading multi-national companies, most companies don’t know. Why is that? Well the multiple choice answers to that could be as follows:

1. Human rights aren’t relevant to my business
2. Human rights are a responsibility for governments not business
3. We don’t know how to know
4. It is not a priority for us to know
5. It is not important for our business
6. Respect for human rights will not add value to my business
7. We have no budget to pay for the expertise to help us

To respond to answers 1 and 2 above, since 2011, we have had the unanimously adopted United Nations Guiding Principles. These clearly set out the separate responsibilities of governments and business. 

Answer 3 is provided by the UNGP  Reporting Framework launched by Shift and Mazars in February 2015 and referenced by the Swedish, Norwegian and UK governments as the framework for companies to set out how they respect human rights.

Answers 4 and 5 are addressed by current and impending EU driven legislation through the application of the EU Non-Financial Reporting Directive. 

Answer 6 is probably best addressed by considering the impacts on company market capitalisation when companies are called to account by journalists or NGOs on how their activities have done harm to individuals and/or communities.  To demonstrate this, you only have to look at the Business and Human Rights Resource Centre website, an objective platform which provides an opportunity for all sides of arguments.  This platform currently has listed over 100 cases at http://business-humanrights.org/en/corporate-legal-accountability/case-profiles. However, the case for respecting human rights is not just about protection of the downside risks and costs (legal fees, value destruction, project write-downs, aborted projects etc.) It is very much about the upside benefits: greater engagement with workforces and suppliers leading to greater productivity, enhanced staff loyalty, attractive to new recruits, greater access to capital from ethical funds, lower weighted average cost of capital ….and the list can go on.

So to Answer 7; there is no budget.  I am sure that is the current position for most companies.  However, times are a changing!!!To comply with the hard law of EU legislation and the soft law of the UNGPs there is going to have to be budget. To do what 3 out of 4 companies believe, in that respecting human rights goes beyond simple compliance with local laws, there will need to be budget. 

However, respect for human rights should not be treated as a cost but as an investment.  And as with all investments there needs to be demonstrable returns (see benefits above) which can be measured and monitored. 

So which department is going to take responsibility for this budget?  That probably depends on the industry, the type of business and its salient human rights risks.  For example, in the extractive industry it probably needs to be with those responsible for site development and production; in the retail industry it is likely to be with procurement; in a labour intensive business such as manufacturing it could be with human resources.  However, the key point is that respect for human rights is cross-functional; it doesn’t hit only one part of the business.  So those with lead responsibility will need to confer, engage with and implement procedures in other parts of the business.

And you never know, that day when us accountants and auditors see a line on the profit and loss account entitled “respect for human rights” may not be such a long way off.

Read more from Richard on human rights at http://www.richardkarmel.co.uk/