Legal Business Blogs

The new risk front for GCs – nearly half of contracts have human rights clauses, LB research finds

When John Ruggie began his mandate as chief architect of the UN Global Compact in 2000, fewer than 100 of around 80,000 multinational corporations in the world were known to have policies in place to mitigate against human rights abuses.

Since that time, the situation has changed dramatically. With the 2010 California Transparency in Supply Chains Act, the 2011 UN Guiding Principles, the 2011 modifications to the OECD Guidelines for Responsible Business and Human Rights, and the 2015 UK Modern Slavery Act, a significant fraction of the world’s largest companies are now facing at least some form of obligation to disclose their performance.

According to our survey of 275 GCs and senior counsel, the 46% of businesses now have a human rights policy in place. For companies in the $10bn+ revenue bracket, that figure rises to 84%.

The research, conducted as part of a flagship report on human rights published in partnership with Herbert Smith Freehills, shows that the growing importance of these issues to business is changing the way GCs operate.

As Stéphane Brabant, co-head of Herbert Smith Freehills’ (HSF’s) business and human rights group, commented: ‘Human rights are not a law-free zone for businesses. Failing to respect human rights presents real legal risks for companies and the way lawyers, both in-house and external, advise businesses requires a new way of thinking – this is a new legal practice.’

As mandatory reporting laws come to affect more and more companies, the issue will become even more important. Although only 34% of respondents report that their business is currently reporting publicly, as part of its non-financial reporting obligations and market conduct obligation, on human rights, the forthcoming EU Non-Financial Reporting Directive will, once implemented by EU Member States, affect an estimated 6,000 large companies, including a number of US multinationals with operations in Europe.

Other key findings from the report include:

• Legal is now the most likely of all business functions to be assigned responsibility for human rights issues. Although commonly seen as an issue for corporate and social responsibility (CSR) teams, our research shows that legal (29%) or compliance (27%) functions are far more likely to be assigned responsibility for human rights than CSR (19%) or social and environmental affairs (12%).

• Commercial contracts are bringing human rights issues to in-house teams’ attention. Just under half (46%) of respondents said they had encountered specific human rights clauses in commercial contracts.

• Mandatory reporting laws and commercial contracts are leading legal teams to place greater scrutiny on supply chains. Fifty-one percent of those surveyed report they have made changed to the way they manage supply chains in response to human rights concerns. As Nestlé chief legal officer Ricardo Cortés-Monroy, quoted in the report, says: ‘Supply chains are now the fundamental point of intersection between the GC and the business’.