Company law has failed human rights – time for change
By Beate Sjåfjell, 10 December 2020
The theme for the international Human Rights Day 2020 is ‘Recover Better - Stand Up for Human Rights’. While large parts of the world are still reeling from the ongoing Covid-19 pandemic, the United Nations are amongst actors looking forward, seeking to ensure that the way out of the pandemic is one towards a sustainable future. Securing human rights is one crucial element.
Protecting human rights is the responsibility of states. The United Nations Guiding Principles on Business and Human Rights (UNGPs) sets out that states, to meet their duty, should: ‘Ensure that other laws and policies governing the creation and ongoing operation of business enterprises, such as corporate law, do not constrain but enable business respect for human rights’ (UNGPs B:3:b). However, enabling business respect for human rights is insufficient. In this post, I discuss company law as a part of the problem and how company law can become a part of the solution.
Why do we still have a business and human rights problem?
I could refer to international human rights law regulating states and not companies as one part of the explanation. I could discuss the problem of the regulation of business mainly being national law while business is transboundary. Further, that much of the human rights violations occur across global value chains and in many – albeit not all – cases in countries where the national legislation to protect its peoples is lacking or weak in enforcement. Low-income countries may have limited capacity and be reticent of making demands of international business bringing investments into the country.
However, at the heart of the business and human rights problem we find the failure of company law, as I argue in my article ‘How Company Law has Failed Human Rights – And What to Do About It’ (published open access in the Business and Human Rights Journal earlier this year). Company law has for far too long been left out of the discussion of how to improve the impact business has on society. This is symptomatic of the silo-thinking that has given us such a fragmented and incoherent regulatory landscape. It is also a result of the Anglo-American drive for simplification and efficiency, where company law has been perceived mainly as providing a default contract for shareholders. Societal impact of business has been regarded as irrelevant to company law, based on a narrow definition of what company law should be concerned with.
Yet, companies, as a dominant legal form for doing business, are creatures of law and rely on law for their existence, and as such are directly accessible for regulation. Company law provides the regulatory infrastructure for companies, with significance for the perception of the purpose of companies and the duties of their decision-makers. Company law could have contributed to securing the respect of business for human rights. Instead, a wealth of multijurisdictional analysis that my article draws on, shows that the failure of company law is at the heart of the problem.
Company law reform is necessary
Drawing on extensive research across several projects, I am therefore convinced that reform of company law is key. Not solely as a ‘business and human rights’ issue but as an intrinsic element of the transition to sustainability. This is important to secure business respect for human rights, as it is for business itself. Allowing business to continue on the current unsustainable path is detrimental for business as it is for society and current and future generations. Sustainable business is a crucial component for a sustainable future: one where social foundations for humanity are secured within the ecological limits of this planet.
Companies need and are increasingly asking for a level playing field to enable them be a part of the transition towards sustainability. To achieve this, a law reform must not be just another box-ticking exercise or a new avenue for greenwashing, bluewashing or using the whole range of colours of the UN Sustainable Development Goals as a shield for unsustainable business.
A law reform must find a balance between being principles-based and open and at the same time firm enough, with clear boundaries within which a continuous improvement process can take place, with room for development based on new research-based knowledge as well as best practice evolving amongst business. It must attempt to encompass the complexity and opacity of business through locating responsibility for systems of business, including global value chains, within single legal entities of companies. Sustainability due diligence, which was one of three main issues at our recent event on Corporate Law, Corporate Governance and a Sustainable Future: Why, What and How, should be a crucial element in such a reform.
EU company law reform is possible
Obviously, the argument is not that everything can be solved through company law. Indeed, the reform proposals from the now concluded SMART project encompass a number of ideas of how business, finance and the production and consumption of products can be reformed. And these are just elements of the broader and even more comprehensive reform that needs to be undertaken. However, reforming company law is key to the necessary change.
While previous attempts at harmonising EU core company law have failed, there are several drivers for change that give hope: the EU’s Sustainable Finance Initiative and the EU’s Green Deal, the push for mandatory human rights and environmental due diligence and the EU’s Sustainable Corporate Governance initiative. The shift in social norms, to which the UNGPs and the debate concerning business and human rights have contributed, have formed a basis for a new discourse on reforming the regulatory infrastructure of business. An increasing number of national legislative initiatives are also a sign of this. Underpinning it all: the emerging recognition of the financial risks of continued unsustainability.
The comprehensive reform that is needed will require political courage and the support of a number of actors. I hope and believe that this kind of transformative change now is possible. It would be one important European step towards achieving global goals of a sustainable and inclusive recovery after Covid-19 and a safer and more just world for all.
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Editorial team: Eléonore Maitre-Ekern, Beate Sjåfjell and Jukka Mähönen.