The dissertation entitled as “Business and Human Rights: Unlocking the Potential of Directors’ Fiduciary Duties to Improve Human Rights Compliance”, considers whether developments in relation to the fiduciary duties in the USA can be applied in the regulatory context of the UK. In particular, it examines whether, and if so, to what extent, UK Company Law can be used as a mechanism for establishing a corporate-friendly, yet mandatory way of compelling corporations to adhere to human rights standards in the era of globalisation.
This evaluation involves an analysis of directors’ (fiduciary) duties, in particular ss.171-173 and 415-417 of the UK Companies Act 2006. There is substantial inconsistency as to how those duties, which were developed for the sole purpose of furthering shareholders’ interests can be applied to promote adherence to human rights. It will be proposed that an improved corporate governance system with the new suggested reading of the fiduciary duties in the UK; may result to corporations to adhere to human rights.
The dissertation began by critically discussing the impact of globalisation on human rights standards. Globalisation can be defined as the free movement of factors of production around the globe, including labour, capital and entrepreneurship. The removal of trade barriers and the free movement of capital; provides transnational corporations and other business enterprises enormous flexibility in exploiting economic opportunities around the world.
Therefore, based on the neoclassical business model, free market forces enable “good corporations” to focus on the enforcement of their own self-interest, discarding the welfare of other constituencies, especially the weaker ones. Transnational corporations and other business enterprises often knowingly and intentionally pay little or no attention to human rights initiatives, especially if such rights (and correlative duties) are not established in positive law. Consequently, corporations have a direct impact on the enjoyment of first as well as secondary generation rights.
The dissertation considered the effectiveness and shortcomings of certain International Human Rights Law instruments, among which includes the Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights, and the UN Guiding Principles on Business and Human Right, in attributing human rights obligations to all business entities, irrespective of their size (SME or supply chains), and whether or to what extent international criminal law provides the necessary framework for the prosecution of individuals involved in the abuses. Nevertheless, the dissertation argued that it remains rather challenging for international human rights law to impose duties on non-state actors, because they are not traditional subjects of international law.
It was provided that International Criminal Law may be used to discourage and punish human rights violations, by holding directors accountable in their individual capacity; provided that human rights abuses committed by corporations can fit any of the three main international crimes such as (a) genocide, (b) war crimes and (c)crimes against humanity. Some of the profound difficulties discovered in this examination include the high burden of proof in proving the crimes aforementioned.
The dissertation aimed at showing that corporate governance is the most effective way to improve human rights compliance by corporations. Directors, as the ultimate decision-makers, are the ones that should take the responsibility for any human rights abuses. An anti-deterrence mechanism, which can prevent abuses before occurring, is better than a complex and almost extrinsic compensatory procedure.
Section 171 CA 2006 identifies the duty of a director to act in accordance with the company’s constitution and to only exercise such powers for the purposes for which they are conferred. The Delaware Court of Chancery decision in Caremark International, although not referring explicitly to any of the CA06 provisions, helps to shed some light on how s.171 operates in relation to human rights protection. Directors’ obligation comprises of “a duty to assure in good faith that a company’s information and reporting system is adequate”. Director’s failure to declare “reasonable information and reporting system” can appear as lacking good faith.
Assuming that the reporting system of a company is not adequate, in that it provides misleading trading practices, human rights violations can be caused. The case indicates that director’s failure to take steps to remedy a violation of the law in which they knew or ought to have known it had taken place, can indicate a breach of duty. Directors’ should monitor their own employment strategies but also their suppliers, so as to realize their obligation to act in good faith, on an informed basis to minimize liability risk. Under this analysis, directors’ must have knowledge about human rights, as the duty of care, to the extent that there are criminal actions or could give rise to a civil suit.
Consequently, although IHRL and ICL cannot literally bind the corporation, directors’ duty of care, s.174, in combination with the fiduciary duty to act within powers, s.171, can establish a corporate governance system which respects peoples’ dignity. Directors’, as the ultimate decision makers, need to be informed about the potential human rights violations and to use contrivance safeguards such as absolute prohibition on such practices.
Section 172(1) Of the Companies Act 2006, requires directors’ to act "in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole", and in doing so to have regard to a range of factors listed under provisions (a)–(f). Directors are responsible for ensuring the success of the company in the present, medium and the long run. Consequently, for a company to survive self-interest behaviour ought to be limited and regulated. Instead, directors should consider what is now known as an ‘enlightened shareholder value’ (ESV) under section 172 CA 2006. ESV enables the company to take into consideration the interests of other constituencies, including employees, creditors, the societal welfare. Rational outcomes are indeed subordinated to the interest of the society as a whole and to the respect of human rights. Fiduciary duties can protect legitimate interests by raising standards without dampening investment activity or to control without interfering with the main objectives of a corporation, while preventing malpractice.
A duty, which is often overseen is the duty to keep proper, informed and up-to-date accounts. Sections 415-417 refer to the duty to prepare directors’ report, define the content of the report and the process of approval and signature. Section 417 requires publicly listed companies to file a Strategic Report (SR), including actual or proposed decisions/actions of the directors, while assessing the risk and performance of the company. The SR provides a greater degree of transparency and accountability of the directors’ discharge of fiduciary duties. This is because the SR requires the signature and approval of the directors. Hence, directors, who have knowledge of human rights violations occurring within a company, can be found liable for breaching their fiduciary duties and derivative suits can follow thereof. Pursuant to s.414D(2), a director can be held liable for management decisions that are oppressive for the wider public. Therefore, a director, which does not report on the conduct that it undertakes, would be found liable for breaching this duty, but also the duty to act within powers and for a proper purpose.
The dissertation suggests that in states that recognise the concept of fiduciary duties, such duties can be harnessed more effectively to protect human rights values, to the extent that such abuses could give rise to costly criminal or civil legal action or would result in the disqualification of directors as a deterrent for future similar behaviour. This goes to the root of the problem in that it regulates ex-post the rational business person behaviour through a set of binding and strict fiduciary duties. These duties go beyond the objective of maximising short-term profits through a more ethical approach with emphasis on the long-term success of the company.