16/03/2014
The fire in a nine-story factory building in Bangladesh killed 400 people. More than 600 people remain unaccounted for. It housed five garment factories that supplied to international brands – J.C. Penny, The Children’s Place, Dress Barn, Primark, Wal-Mart etc. The workers were asked to come to work even when cracks appeared in the building the previous day.
Bangladesh is the second largest exporter of clothes and the workers get the lowest compensations. Just around USD 37-40 per month. The question arises why are the multinational organizations not following the UN Guiding Principles for Human Rights protection. The reason is simple; they want to show higher and higher profits to the investors.
In Delhi, in Munirka one will find numerous small factories full of workers making export garments. A friend of mine also ran one. I had bought a few shirts from her at cost price ranging from Rs 300-500 (USD 6-10). In one international visit, I found the same shirts selling in range of USD 15-30. The fivefold increase in price was because of the brand tag attached to the shirt.
The multinational buyers push the prices down and some supplier gives a rock bottom price. The others are forced to match that price to get the business. End result is that basic facilities are not provided to the workers and they work at really low wages. Unknown workers are paying with their lives in developing countries to satisfy the growth targets set by CEOs to earn their bonuses and keep investors happy. It is the dark side of capitalism which organizations want to hide.
In most companies, human rights risk management is not a focus area. The 2013 Global Risk Management Survey conducted by RIMS identified seven risks related to human resources among the top fifty risks. Though worker injury and harassment were included there was no specific emphasis on human rights risk management.
The risk management team can conduct annually or bi-annually a human rights risk management assessment. It requires attention not only from human resources perspective but from operational, financial, legal and reputational risks perspective. Any breach can result in huge losses.
Here are some of the steps mentioned in the UN Guiding Principles on Human Rights and guide “Investing the Right Way” issued by Institute of Human Rights and Business.
1. Review the Human Rights Policy Statement
Human rights risk management is emerging as an important issue, especially with multinationals entering emerging markets and developing countries. They are expected to protect and respect rights of workers, communities and society. Investors can play a crucial role by influencing companies to promote human rights relating to gender equality, child labor, rights of indigenous people, land acquisition, mineral processing etc.
Hence, companies need to publish Human Rights Policy Statement on their websites. The UN Guiding Principle 16 states –
“As the basis for embedding their responsibility to respect human rights, business enterprises should express their commitment to meet this responsibility through a statement of policy that:
(a) Is approved at the most senior level of the business enterprise;
(b) Is informed by relevant internal and/or external expertise;
(c) Stipulates the enterprise’s human rights expectations of personnel, business partners and other parties directly linked to its operations, products or services;
(d) Is publicly available and communicated internally and externally to all personnel, business partners and other relevant parties;
(e) Is reflected in operational policies and procedures necessary to embed it throughout the business enterprise.”
As a first step risk managers need to check whether the organization has a human rights policy statement and the above mentioned steps have been adhered to.
2. Human Rights Impact Assessment
The second aspect of UN Guiding Principles is for companies to establish human rights due diligence processes. Guiding Principle 17 states:
“In order to identify, prevent, mitigate and account for how they address their adverse human rights impacts, business enterprises should carry out human rights due diligence. The process should include assessing actual and potential human rights impacts, integrating and acting upon the findings, tracking responses, and communicating how impacts are addressed. Human rights due diligence:
(a) Should cover adverse human rights impacts that the business enterprise may cause or contribute to through its own activities, or which may be directly linked to its operations, products or services by its business relationships;
(b) Will vary in complexity with the size of the business enterprise, the risk of severe human rights impacts, and the nature and context of its operations;
(c) Should be on going, recognizing that the human rights risks may change over time as the business enterprise’s operations and operating context evolves.”
Human rights risk management is complex and challenging. If ignored, they can increase political risks and deteriorate relationships of the organization with the government. For example, Tata Motors wished to establish Nano manufacturing plant in Singur, West Bengal. The government allocated agriculture land using 1894 land acquisition rule, meant for public improvement projects, to take over 997 acres farmland. The farmers protested with help of activists and the then opposition leader Mamta Banerjee. Tata Motors moved out of West Bengal and established the factory in Gujarat. Multinationals looking for large tracts of land to establish factories are facing similar challenges in India.
Another aspect to look into is that scrap, waste disposal, sewage, environment pollution etc. from factories can impact food, water and health of local communities.
Decision needs to be taken whether investments should be made in countries or states with poor human rights record. In India, the Naxalite area is extremely conflict prone and business operations can have severe human rights impact.
Risk managers should evaluate the strategy and operations of the company from human rights, environmental, social and governance factors. The companies can face operational risks (project delays or cancellation), legal and regulatory risks (lawsuits and fines) and reputational risks (negative press coverage and brand damage). The impact assessment should be done from investors, customers, employees, society and supplier perspective. Identify business owners for the risks and devise appropriate risk mitigation plans to address adverse impact.
3. Grievance Mechanisms
UN Guiding Principles state that victims of corporate related human rights abuse should have access to judicial or non-judicial remedies. Companies should provide some remedies themselves and cooperate in the remediation process.
UN Guiding Principle 29 states –
“To make it possible for grievances to be addressed early and remediated directly, business enterprises should establish or participate in effective operational-level grievance mechanisms for individuals and communities who may be adversely impacted.”
However, this isn’t followed by the companies in true spirit. “A Vigieo analysis of human rights records of 1500 companies listed in North America, Europe and Asia revealed that, in the previous three years, almost one in five had faced at least one allegation that it had abused or failed to respect human rights.”
Ideally the investors in the company should ensure that grievance mechanisms exist and address human rights issues. The transparency and disclosure of the same in annual reports would highlight the financial, legal and reputational risks. However, the investors don’t seem to be bothered by it.
See the case of Apple. It reported Gross Profit Margin – 42.5%, Net Profit Margin – 26.7%, Revenue Per Employee – $ 2,149,835 and Net Revenue Per Employee – $ 573,255. It has 43000 employees in US and 20,000 outside US. However, Apple contractors hire an additional 700,000 people to engineer, build and assemble iPads, iPhones and Apple’s other products.
An Apple supplier in Taiwan, Foxconn was recently in the news for its workers attempting su***de. As per reports “Workers are required to stand at fast-moving assembly lines for eight hours without a break and without talking. Workers, sharing sleeping accommodations with nine other workmates, often do not know each other’s names. They do not have much time to get to know each other. The basic starting pay of 900 RMB($130) a month – barely enough to live on – can be augmented to a more respectable 2,000RMB ($295) only by working 30 hours overtime a week.”
See the difference the company earns per employee and the payment made to the supplier’s employees. Apple shows profits at the expense of lives of Taiwanese workers. The workers don’t have much of a grievance mechanism in China as the government stated that the su***des are within the normal su***de rate. Can Apple investors sacrifice some profit margin for safety and security of the contractual workers?
Another old example is the class action suit since 2001 on Wal-Mart Stores that involved 1.5 million current and former Wal-Mart female employees. It is the largest workplace bias case in US history.
4. Human Rights Reporting
The biggest challenge is that most of the human rights abuses are not reported. The victims of human rights exploitation hold little power in comparison to the exploiters. They can hardly take up the might of powerful businesses when they are struggling to get basic food and shelter. Secondly, in the developing and emerging countries, corruption levels are generally high. Hence, media, law enforcement agencies etc. are bribed by the power players to silence the victims. However, with internet and social media, things are gradually changing. People have a voice and collectively they can fight.
UN Guiding Principle 21 lays out the requirement for companies to communicate human rights impact externally. It states -
“In order to account for how they address their human rights impacts, business enterprises should be prepared to communicate this externally, particularly when concerns are raised by or on behalf of affected stakeholders. Business enterprises whose operations or operating contexts pose risks of severe human rights impacts should report formally on how they address them. In all instances, communications should:
(a) Be of a form and frequency that reflect an enterprise’s human rights impacts and that are accessible to its intended audiences;
(b) Provide information that is sufficient to evaluate the adequacy of an enterprise’s response to the particular human rights impact involved;
(c) In turn not pose risks to affected stakeholders, personnel or to legitimate requirements of commercial confidentiality.”
As per the UN principles, the reports must cover appropriate qualitative and quantitative indicators, feedback from internal and external sources including affected stakeholders.
Risk managers can evaluate the reports and the reporting process to ensure that all risks are properly addressed. They should evaluate whether cautionary steps are taken and nothing is being done to exacerbate the situation. They should highlight severe or irreversible risks to the management to ensure appropriate decisions are taken.
Closing Thoughts
Inequalities in income are the main cause of human rights abuse. The rich want to get richer at the expense of blood and sweat of the poor, and sometimes life. The diamond manufacturers and sellers took the right step to publish that they do not source blood diamonds. Since 2003, the Kimberley Process Certification Scheme (KPCS), supported by national and international legislation, has sought to certify the legitimate origin of uncut diamonds. Trade organizations – International Diamond Manufacturers Association (IDMA) and the World Federation of Diamond Bourses (WFDB) – representing virtually all significant processors and traders – have established a regimen of self-regulation.
Other industries, be it technology, electronics or textile manufacturers, need to come out with similar steps to stop human rights abuse. The risk managers have a vital role to play in it. If we do not do anything, we are cheating this and the next generation of their right to live happily.
