Corporate Governance and International Law

Why should corporate managers comply with international law?  International agreements, customary international law, and non-binding recommendations are sources of norms that, if adopted, could address many of the harms that corporations create for society and the planet.

Corporations are increasingly exposed to a variety of reputational, legal, regulatory, and other risks when they operate in a manner inconsistent with society’s expectations.  Environmental, social, and governance (ESG) issues are priorities at many corporations, but managers struggle with how to implement them. Fortunately, many international laws offer the blueprint for ESG strategies.  For example, the United Nations Guiding Principles recognize the “corporate responsibility to respect” that involves human rights due diligence.[1] By complying with these due diligence requirements, corporations can improve how they treat individuals and communities around the world.  Similarly, corporations can improve their environmental impacts by adhering to the Paris Climate Agreement’s framework for reducing greenhouse gas emissions.[2]

Many corporate managers have already recognized the value of international law for corporate governance and operations. In a study of approximately 20 S&P 100 companies in six sectors, I find that corporate managers incorporated international law norms on human rights, climate change, and sustainable development into their organizations by allocating oversight to specific board committees; developing performance metrics; employing directors with relevant expertise; tying executive compensation to progress; creating executive level positions; utilizing cross-functional teams to coordinate implementation; joining industry-level organizations, and using supplier training to improve performance.

Yet some corporations embrace international law more than others.  One reason is that incentives may affect corporations differently based on jurisdiction, sector, size, supply chain organization, consumer preferences, and other factors. Certainly, many countries have encouraged companies to improve their environmental and human rights practices. This month, the Japanese Ministry for Economy, Trade and Industry published guidance on human rights due diligence in supply chains that addresses developing human rights policies, implementing due diligence practices, assessing effectiveness, providing remedies, and consulting with stakeholders.[3]  Earlier this year, the European Commission published a draft corporate sustainability due diligence directive that requires covered companies to implement human rights and environmental due diligence in their supply chains.[4]  Among other requirements, it “introduces directors’ duties to set up and oversee the implementation of due diligence and to integrate it into the corporate strategy”[5] and “when fulfilling their duty to act in the best interest of the company, directors must take into account the human rights, climate change and environmental consequences of their decisions.”[6]  In the United States, the Uyghur Forced Labor Prevention Act went into effect and creates a rebuttable presumption that “all goods manufactured even partially in [China’s Xinjiang Uyghur Autonomous Region] are the product of forced labor and therefore not entitled to entry at U.S. ports.”[7]

But corporations also comply with international law even when not legally required. Many corporate managers incorporate international law norms on human rights, climate change, and sustainable development to advance corporate strategy and purpose, manage risks, and maintain relationships with stakeholders. For example, some corporations explicitly connect international law norms to their corporate purpose in order to distinguish themselves from their competitors. Compliance with international law can also help a corporation to manage a variety of risks, including reputational.

These incentives lead corporate managers to adopt and comply with international law norms even when governments do not support those norms.  For example, many corporations in the case studies did so when the Trump administration criticized, challenged or rejected those norms.  In these situations, peer corporations, investors, proxy advisors, and civil society actors enforced international law.  For example, some corporations bound their upstream suppliers to international law norms using codes of conduct and supplier contracts. They create incentives for compliance through monitoring, rewards, remediation cooperation, and sanctions. Critically, some corporations require suppliers to apply international law norms to subcontractors, thereby transforming these suppliers from targets of international law to its enforcers.  Corporations also encourage, through peer pressure, other companies to comply with international law by adopting its norms as part of their overall corporate purpose.

ENDNOTES

[1]           United Nations, Human Rights Council, Protect, Respect and Remedy: a Framework for Business and Human Rights Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, John Ruggie, A/HRC/8/5 (Apr. 7, 2008).

[2]           UNFCCC, THE PARIS AGREEMENT (Dec. 28, 2021).

[3]           Japan Ministry of Economy, Trade and Industry, Guidelines on Respect for Human Rights in Responsible Supply Chains (draft)(Aug. 2022), https://bit.ly/3QnaY0x.

[4]           European Commission, Proposal for a Directive on corporate sustainability due diligence (draft)(Feb. 23, 2022), https://ec.europa.eu/commission/presscorner/detail/en/ip_22_1145.

[5]           Id.

[6]           Id.

[7]           Gibson Dunn, The Uyghur Forced Labor Prevention Act Goes Into Effect in the United States (Jan. 14, 2022), https://bit.ly/3bWzgiU.

This post comes to us from Professor Kish Parella at Washington and Lee University School of Law. It is based on her recent articles, “International Law in the Boardroom,” available here, and “The Symbiosis between Corporate Governance & International Law,” available here.

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