Mandatory Human Rights Reporting

[*]

by Erika George, Professor of Law
S.J. Quinney College of Law, The University of Utah
erika.george@law.utah.edu
Overview

CSR Reporting

Corporate Social Responsibility (CSR) has become an increasingly important part of many business models. A growing number of corporations have voluntarily integrated social and environmental issues in their business models and daily operations through the adoption of related corporate policies and codes of conduct.[1] CSR has “changed from being an irrelevant or fashionable idea to one of the most widely accepted concepts in the business world.”[2]

More recently, legislative requirements that mandate reporting on social and environmental issues have met with controversy and varying levels of compliance. Mandatory reporting requirements are introducing business and human rights issues to a broader range of constituencies crucial to the success of a business enterprise, including investors and consumers. Professor of Business Law Lucien Dhooge has theorized that the renewed interest in CSR is based on recent developments in law and policy that “mandate a concurrent increase in corporate transparency and accountability, which may be achieved through social disclosure.”[3] These developments include increasing awareness of the social and environmental impacts of businesses, within their borders and beyond, on the part of government regulators, and mounting stakeholder pressure.[4]

Most mandatory reporting requirements concern financial reporting. Mandatory reporting by publicly traded corporations, those businesses that raise capital in regulated markets by issuing shares, is a central feature of national investor protection regimes. These reporting requirements are intended to empower individuals and organizations interested in purchasing shares in a corporation to make an informed decision about the corporation. Most publicly traded corporations also provide some form of voluntary non-financial reporting to the public through sustainability or CSR reports.

Learning and teaching about the implications of both CSR and human rights reporting is an important component of a course on business and human rights. Increasingly, investors and consumers are seeking information relevant to human rights performance. Corporations depend on investors to raise capital. Investors also influence corporate governance voting on the composition of corporate boards and policies. Corporations profit from the purchases consumers make. Accordingly, the influence these constituencies can have on monitoring a corporation’s performance with respect to human rights is worthy of exploration.

Reporting and Financial Performance

The popularization of CSR disclosures among companies has often prompted the question of the disclosure’s effect on financial performance. Studies have remained somewhat inconclusive, often pointing to varying flaws in study design, competing theories, or unaccounted variables as the source of the differences. For example, Allouche and Laroche performed a meta-analysis of the results of 93 empirical studies on the relationship between financial performance and social responsibility, 52.58% showing a positive relationship between social performance and financial performance.[5] Other studies have shown a negative link, theorizing that CSR is very costly and inhibits the company’s competitiveness.[6] Still others argue that there is a neutral or no relationship between CSR and financial performance,[7] especially when variables such as investment in R&D are controlled for.[8] Even so, “many executives in multinational companies believe that the performance of non-financial measures outweighs that of financial performance measures in terms of revelation of long-term value for shareholders.”[9]

The variance in relationship can also be accounted for in answering the question of how companies engage in CSR and address human rights impacts. For example, Yusoff and Duras’ studies indicate that the best financial performers engaging in CSR disclosures were those who increased the coverage of their disclosure to a broader range of stakeholders as well as those who increased the concentration on certain “definitive” stakeholders.[10] This “expedite[d] the revitalizing of a company’s legitimacy and consequently increase[ed] its financial performance.”[11]

Voluntary versus Mandatory Reporting

Complementing the popularization of CSR disclosures has been a robust academic debate over voluntary versus mandatory reporting regimes.[12] A 2014 review of the literature in business reviews found: “Most authors are against the CSR regulation because they understand that CSR goes beyond legal responsibilities. However, others have suggested the convenience of adopting some kind of regulation since they do not trust market mechanisms.”[13]

Mandatory reporting could eliminate many of the issues associated with voluntary reporting and actually benefit companies in the long run, because “[a]ctively disclosing negative aspects of sustainability performance might even be regarded as a positive signal in terms of actively managing risk, thus helping to avoid future issues.”[14] Voluntary reporting initiatives have been met with skepticism as companies are perceived to “gloss over negatives” in voluntary reporting. The perceived common practice of presenting only the positive ultimately results in less negative reporting in general, and hence less credible transparency. Moreover, the lack of common standards in the more popular voluntary reporting regimes reporting, such as the Global Reporting Initiative (GRI), complicates access to comparable and credible information. Subsequent to the GRI, additional voluntary standards have been introduced. A coalition of investors and activists has formed the Corporate Human Rights Benchmark (CHRB) to rank the human rights policies and performance of influential transnational corporations. Shift, a management consultancy firm formed by experts central to the creation of the United Nations Guiding Principles on Business and Human Rights, have piloted the UN Guiding Principles Reporting Framework.

The composition of the target markets is also important in deciding between voluntary and mandatory reporting regimes. For example, customers who purchase products or services from a corporation may be interested in different information than investors who purchase shares in a corporation. Other stakeholders with an interest in or impacted by a corporation may be interested in still other types of information. Research demonstrates that in markets with informed consumers who understand disclosures, voluntary disclosure is more valuable than mandatory disclosure to a seller.[15] But in uninformed markets, mandatory disclosure is the only kind that will benefit informed customers because involuntary disclosures will not be forthcoming. If the fraction of customers, including investors, who understand the disclosures, is too low, then voluntary disclosure is not forthcoming.[16] Mandatory disclosures benefit the informed customers, are neutral for uninformed customers, and detrimental to sellers. Hence the motivation against mandatory disclosures.[17] Information has to be not only easy and costless to obtain, the market must also have a critical mass of informed customers to generate forthcoming voluntary disclosures.[18]

Mandatory reporting may comparatively lend legitimacy to the information a company offers, affecting the company’s reputation among stakeholders. Reputation is the main mechanism by which good companies are rewarded and bad companies are punished. As companies face pressure from non-market stakeholders including NGOs, policymakers, or the media to achieve greater transparency, a mandatory standard reporting regime could add efficiency. Hahn and Lülfs have found that “The disclosure of certain sustainability information can be an instrument for generating favorable impressions of an organization’s sustainability performance, thus preserving organizational legitimacy.”[19] Counter-intuitively, when reports are published by the company, “negative information can be expected to be perceived as more trust-worthy than the disclosure of positive information because the latter might be regarded as self-laudatory by external stakeholders thus diminishing its credibility.”[20] The positive link between CSR and financial performance implies that good companies are rewarded. The “stock market views activities of publishing these reports not as strategic investment, not purely cost.”[21]

Mandatory Human Rights Reporting

There has been a relatively rapid proliferation of mandatory reporting schemes requiring companies to disclose information on their human rights policies and impacts.

United States

In July 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) into law.[22] Ushering in a new era of reporting with the potential to influence human rights impacts, provisions of the financial reform act require covered companies to provide disclosures to the U.S. Securities and Exchange Commission, a regulatory agency responsible for protecting investors and maintaining fair and efficient markets.

The Dodd Frank Act, Section 1502

Section 1502 of Dodd-Frank amends Section 13 of the Securities Exchange Act of 1934 and requires disclosures, largely on corporate due diligence procedures, relating to conflict minerals that originate in the Democratic Republic of the Congo (the DRC) and adjoining countries.[23] The broad aim of the provision is to disrupt the connection between violent conflict and commercial activity.[24] Section 1502 requires publicly traded companies that utilize certain conflict minerals to report the due diligence steps they have taken to determine the source of their minerals. The goal of this provision is to ensure that companies demonstrate that links along their product supply chains are not, in effect, providing further financial support for the violent conflict in the DRC, or otherwise contributing to the country’s emergency humanitarian situation.[25] To serve these ends, issuers must annually disclose whether “conflict minerals” that are “necessary to the functionality or production” of a manufactured product originated in the DRC or an adjoining country.[26] The SEC has proposed rules changing the annual reporting requirements of issuers that file reports pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 to implement Section 1502. Under the proposed rules, all issuers with over $10 million in assets and a class of non-exempt equity securities held by more than five hundred owners that manufacture, or contract to manufacture, products for which conflict minerals are necessary to functionality or production, must make conflict minerals disclosures.

The Dodd Frank Act, Section 1504

Section 1504 of Dodd-Frank amends Section 13 of the Securities Exchange Act of 1934 to require disclosures by issuers engaged in resource extraction. A resource extraction issuer has a duty to disclose under the Section if it is ordinarily required to file an annual report with the SEC and if it engages in the “commercial development of oil, natural gas, or minerals.” Commercial development includes exploration, extraction, processing, and export, or the acquisition of a license for any such activity. Resource extraction issuers within the meaning of Section 1504 must report to the SEC any payments made directly, through a subsidiary, or through an entity under its control to a foreign government or the Federal Government. Covered corporations, those required to file an annual report with the SEC and engaging in commercial development of oil, natural gas or minerals, must report how much they pay governments for payments that are made to further the commercial development of oil, natural gas, or minerals, including: Taxes, Royalties; Fees; Production Entitlements; Bonuses; Dividends; and Payments for infrastructure improvements on a country-by-country and project-by-project basis. All payments that are “not de minimis” must be reported. Under this standard, any payment, either a single payment or a series of related payments, which equals or exceeds $100,000 during the most recent fiscal year, is regarded as “not de minimis.”

The California Supply Chain Transparency Act

In 2010, California enacted the first State law requiring manufacturers and retail companies to publicly disclose their policies to eradicate slavery, forced labor, and human trafficking within their supply chains. The California Supply Chain Transparency Act (CTSCA) became effective January 1, 2012. Retailers and manufacturers subject to its provisions are required to disclose their efforts, if any, to ensure that their supply chains are free from slavery and human trafficking by evaluating and addressing risks along links of the supply chain. The disclosure must, at a minimum, explain whether and the extent to which the business entity is engaged in any activities to eradicate slavery and trafficking, including: (1) verifying product supply chains to evaluate and address risks of human trafficking and slavery; (2) auditing suppliers to evaluate supplier compliance with company standards for trafficking and slavery in supply chains.; and (3) requiring direct suppliers to certify that materials incorporated into the product comply with the laws regarding slavery and human trafficking of the country or countries in which they are doing business.[28] These disclosures must note whether or not audits for information were conducted by a third party, independent and were unannounced.[29] Failure to comply with California’s reporting requirements may result in an action brought by the Attorney General of California for injunctive relief.[30] Although the only relief available under the California Supply Chain Transparency Act for failure to report is injunctive, the enforcement strength of the statute may be in consumer choice and consciousness.

Europe

The U.K. Modern Slavery Act and European Union Non-Financial Reporting Directives

Recent European legislation, includes mandatory human rights reporting requirements for companies.

On March 26, 2015, the United Kingdom passed the Modern Slavery Act, outlawing all forms of modern slavery, forced servitude and human trafficking.[31] The Act requires companies to prepare an annual statement describing steps that the company has taken to ensure that slavery and human trafficking is not present in the company’s operations or in any of its supply chains, and to publish it on the company’s web site.[32]

Proposed European Union regulations on conflict minerals mirror the U.S.’ Dodd-Frank Act[33] to enforce supply chain management principles and reporting requirements for corporations using certain kinds of metals. In 2014, the European Council and European Parliament adopted national requirements on non-financial reporting.[34] The new regulations require publicly listed European companies with more than 500 employees to disclose policies and risks on human rights, employee-related issues, diversity on boards of directors, anticorruption, anti-bribery, and the environment.[35] Each of these resolutions expressly acknowledge the role of the UN Guiding Principles on Business and Human Rights (UN Guiding Principles)[36] in improving standards of corporate practice in relation to human rights and are setting new standards for mandatory corporate reporting and human rights protection.

After the European Commission’s original mandatory corporate reporting proposal from April 16, 2013, the European Council suggested an amendment to existing accounting legislation to improve the transparency of companies with more than 500 employees on social and environmental issues, specifically regarding human rights impacts. The European Parliament and the Council reached an agreement on February 26, 2014, with the European Parliament adopting the amendments to its Annual Financial Statements Directive 2013/34/EU on April 15 2014 and the Council of the European Union adopting the amendments on September 29 2014.[37] In comparing the EU’s new legislation and the UK’s 2006 Companies Act, scholars have stated that the EU’s non-financial reporting requirement is a “major achievement…wider than comparable UK law” primarily because it embodies the concept of human rights due diligence.[38] While the UK’s non-financial reporting from the 2006 Companies Act is focused on providing information to shareholders to assess the financial performance of a company, the EU’s new legislation requires human rights and environmental due diligence for the purposes of upholding the UN Guiding Principles and understanding corporate impacts on human rights.[39] Despite general international knowledge of the emerging trend towards human rights due diligence and CSR for corporations[40], the last few years of EU legislation are proving to be a major step in the direction of creating binding national laws of this sort.

Teaching Approaches

Teachers are addressing mandatory human rights reporting in business and human rights courses as a discrete topic, in relation to specific human rights issues (e.g. slavery, human trafficking) or industries (e.g. conflict minerals), as a tool for corporate accountability, and in the context of corporate practices like human rights due diligence.

Because mandatory reporting remains a controversial development, class discussion provides students with the opportunity to develop skills evaluating information and ideas from their own position and those of others. A useful classroom technique is to organize students in “Think Share Pairs” to come to the discussion with some of their own questions, and pair off students to alternate asking and answering questions from various stakeholder perspectives. Other ways of engaging the material include staging student “Debates” on contested questions, such as the merits of voluntary versus mandatory CSR or human rights reporting. Organizing “Group Work Exercises” or “Expanded Simulations” allows students to examine source material in greater depth through interaction with one another. Finally, “Applied Exercises” ask students to engage with constituencies outside the classroom. Teachers can assign students to comment on regulatory proposals or to reach out to stakeholder constituencies active in policy debates.

Learning objectives for students may include:

  • Understanding the historical context that has led to mandatory human rights reporting
  • Understanding the objectives and content of the current mandatory human rights reporting requirements worldwide
  • Critically assessing the strengths and weaknesses of specific human rights reporting regimes
  • Developing skills evaluating information and ideas from multiple perspectives

Law courses can emphasize normative questions of institutional capacity of different government regulatory agencies or the practical skills of advising clients in compliance. Courses can incorporate applied exercises, such as drafting pleadings to challenge reporting requirements; pleadings to defend reporting requirements; and client letters on compliance with reporting requirements.

In business courses, exercises and case studies can focus on business implementation of reporting. Beyond reporting, students can explore ways to improve performance in areas related to reporting.

In policy courses, exercises can consider the efficacy of reporting requirements as an experiment in creating incentives for change. Does transparency translate into different areas or industry sectors that are as yet unregulated with respect to reporting requirements?

Key Questions

General

  • What is the difference between CSR reporting and human rights reporting?
  • What are the most common forms of mandatory human rights reporting?
  • What are the pros and cons of voluntary vs. mandatory reporting?
  • Does mandatory reporting reward good companies and punish bad companies?
  • How could financial reporting address corporate human rights impacts?
  • How does mandatory transparency help investors and/or consumers?

For business students

  • Under what conditions do voluntary reporting regimes (like corporate social responsibility reports and sustainability reports) and systems of transparency (mandatory disclosures) work to improve business performance?
  • Are mandatory or voluntary reporting regimes more cost effective?
  • How can the costs of mandatory reporting be reduced?

For law students

  • What is the “comply or explain” model of mandatory reporting?
  • What role could corporate reporting and disclosure play in promoting human rights protections?
  • What is the relationship between transparency and accountability?
  • How have human rights organizations used reporting to raise concerns?

For policy students

  • Has mandatory human rights reporting to date changed business practices?
  • How can policymakers calibrate reporting requirements to reach aims to promote more responsible business conduct?
Teaching Resources
Notes

[*] This Teaching Note may be cited as:

Erika George, “Teaching Note: Mandatory Human Rights Reporting,” in Teaching Business and Human Rights Handbook (Teaching Business and Human Rights Forum, 2016), https://teachbhr.org/resources/teaching-bhr-handbook/teaching-notes/mandatory-human-rights-reporting/(opens in a new tab).

[1] Robert G. Eccles, Ioannis Ioannou and George Serafeim, “The Impact of Corporate Sustainability on Organizational Processes and Performance,” National Bureau of Economic Research 2 (2012).

[2] Maria del Mar Mira Rodriguez, Corporate Social Responsibility and Financial Performance: A Controversial Relationship, in Corporate Social Responsibility: Challenges, Benefits and Impact on Business Performance 227, 227 (2014).

[3] Lucien J. Dhooge, “Beyond Voluntarism: Social Disclosure and France’s Nouvelles Regulations Economiques,” Arizona Journal of International Comparative Law (Vol. 21, 2004), 441, 452.

[4] Id. at 454.

[5] See Patrice Laroche & José Allouche, “A Meta-Analytical Investigation of the Relationship Between Corporate Social and Financial Performance,” Revue de Gestion des Resources Humans (Vol. 57, 2005), 18–41; see also A. Najah & A. Jarboui, “The Social Disclosure Impact on Corporate Financial Performance: Case of Big French Companies,” International Journal of Management and Business Research (Vol. 3, 2013), 337, 339.

[6] Najah and Jarboui, supra note 5 at 340.

[7] Id.

[8] Abagail McWilliams & Donald Siegel, “Corporate Social Responsibility and Financial Performance: Correlation or Misspecification,” Strategic Management Journal (Vol. 21, 2000), 603, 608.

[9] Najah and Jarboui, supra note 5 at 348.

[10] Haslinda Yusoff, Siti Salwa Mohamad & Faizah Darus, “The Influence of CSR Disclosure Structure on Corporate Financial Performance: Evidence from Stakeholders’ Perspectives,” Procedia Economics and Finance (Vol. 7, 2013), 213, 219.

[11] Id.

[12] del Mar Mira Rodriguez, supra note 2 at 229.

[13] Id.

[14] Id.

[15] Michael J Fishman & Kathleen M Hagerty, “Mandatory Versus Voluntary Disclosure in Markets with Informed and Uninformed Customers,” Journal of Law, Economics, and Organization (Vol. 19, 2003), 45, 46 .

[16] Id.

[17] Id.

[18] Id.

[19] Id.

[20] Rüdiger Hahn & Regina Lülfs, “Legitimizing Negative Aspects in GRI-Oriented Sustainability Reporting: A Qualitative Analysis of Corporate Disclosure Strategies,” Journal of Business Ethics (2013), 401, 402.

[21]Jegoo Lee & Sylvia Maxfield, “Doing Well by Doing Good?,” Business & Society Review (Vol. 120, 2005), 577, 578-79.

[22] The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) [hereinafter the Dodd-Frank Act]. See also Helene Cooper, “Obama Signs Overhaul of Financial System,” The New York Times (Jul. 21, 2010), available at http://www.nytimes.com/2010/07/22/business/22regulate.html.

[23] Dodd-Frank Act, § 1502, 124 Stat. 2213-18 (2010)(to be codified at 15 U.S.C. § 78m(p)).

[24]See 145 Cong. Rec. S3816-17 (daily ed. May, 17, 2010) (statement of Sen. Durbin) (Section 1502 “encourages companies using [conflict] minerals to source them responsibly” and also seeks to “address where the armed groups are receiving their funding.”)

[25] See Dodd-Frank Act, supra note 22 at §1502(a).

[26] Id. §1502(b). For the purposes of Section 1502, “conflict minerals” are defined to include columbite-tantalite (coltan), cassiterite (tin), wolramite (tungsten) and gold or their derivatives, which are limited to Tantalum, Tin and Tungsten, unless the Secretary of State determines that additional derivatives are financing conflict in the Covered Countries. Conflict Minerals, 77 Fed. Reg. 56274, 56285 (Sept. 12, 2012) (to be codified at 17 C.F.R. pts. 240 and 249b).

[28] Id. at (c)(1)-(3).

[29] Id. at (c)(2).

[30] Id. at (d).

[31] United Kingdom, “Modern Slavery Act 2015,” http://www.legislation.gov.uk/ukpga/2015/30/contents/enacted/data.htm.

[32] Anthony P. Ewing, “Mandatory Human Rights Reporting,” in Dorothée Baumann-Pauly and Justine Nolan, eds., Business and Human Rights: From Principles to Practice (Routledge, 2016), 284, 290. See also Elise Diggs, Catherine Meredith and Vera Padberg, “The Modern Slavery Act 2015: corporate reporting requirements to tackle slavery in supply chains,” Doughty Street International (Oct. 29, 2015), available at http://www.doughtystreetinternational.com/blog/modern-slavery-act-2015-corporate-reporting-requirements-tackle-slavery-supply-chains.

[33] Robin Emmott, “EU proposes scheme to certify mineral imports blood free,” Reuters (Mar. 5, 2014) http://in.reuters.com/article/eu-minerals-idINL6N0M230M20140305.

[34] European Commission, “Disclosure of non-financial information by certain large companies: European Parliament and Council reach agreement on Commission proposal to improve transparency” Press Release Statement (Brussels, Feb. 26, 2014), available at  http://europa.eu/rapid/press-release_STATEMENT-14-29_en.htm?locale=en.

[35] Business and Human Rights Resource Centre, “EU Requirements on companies’ non-financial reporting (2014),” available at http://business-humanrights.org/en/eu-requirements-on-companies-non-financial-reporting-2014.

[36] “Guiding Principles on Business and Human Rights: Implementing the United Nations ‘Protect, Respect and Remedy’ Framework,” Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises,” UN doc. A/HRC/17/31 (21 March 2011), available at http://www.ohchr.org/Documents/Publications/GuidingPrinciplesBusinessHR_EN.pdf.

[37] Anil Yilmaz and Rachel Chambers, “New EU human rights reporting requirements for companies: One step beyond the current UK rules,” EU Law Analysis: Expert insight into EU law developments (Oct. 22, 2014), available at http://eulawanalysis.blogspot.com/2014/10/new-eu-human-rights-reporting.html.

[38] Id.

[39] United Kingdom, “Companies Act 2006,” available at http://www.legislation.gov.uk/ukpga/2006/46/section/417.

[40] Ioannis Ioannou and George Serafeim, “The consequences of mandatory corporate sustainability reporting: evidence from four countries,” Harvard Business School Research Working Paper 11-100 (2014).