ruggie corporate law project jul 2010

8/2/2019 Ruggie Corporate Law Project Jul 2010

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Mandate of the Special Representative of the Secretary-General (SRSG) on

the Issue of Human Rights and Transnational Corporations and other

Business Enterprises

CORPORATE LAW PROJECT

OVERARCHINGTRENDSAND

OBSERVATIONS

July2010

This paper is based on surveysof over 40 individualjurisdictions conducted

withtheprobonoassistanceofmorethan20leadingcorporatelawfirmsfrom

aroundtheworld,usingacommonresearchtemplateprovidedbytheSRSG.


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EXECUTIVESUMMARY

Corporate and securities law directly shapes what companies do and how they do it. Yet its

implicationsforhumanrightsremainpoorlyunderstood.Thetwoareoftenviewedasdistinctlegal

andpolicyspheres,populatedbydifferentcommunitiesofpractice.

Accordingly, in early 2009, the Special Representative of the UN SecretaryGeneral (SRSG) on

BusinessandHumanRightsannouncedhisCorporateLawProject(CLProject).Itinvolvedmorethan

20 leading corporate law firms from around the world helping on a pro bono basis to identify

whether and how corporate and securities law in over 40 jurisdictions currently encourages

companiesto respecthuman rights. The firmswereasked topreparejurisdictionspecificsurveys

basedona research templateprovidedby theSRSG,exploringsubjectssuchas incorporationand

listing;directorsduties;reporting;andstakeholderengagement.Severalexpertconsultationshave

beenheldtodiscussthefirmsworkandoptionsfor,aswellaschallengesto,legalandpolicyreform

inthisarea.

Tothe

SRSGs

knowledge

this

project

is

the

first

in

depth,

multi

jurisdictional

exploration

of

the

links

betweencorporateandsecuritieslawandhumanrights.

TheCLProjectformspartoftheSRSGsworktooperationalizewhatisnowcommonlyknownasthe

UNProtect,RespectandRemedyFramework forbusinessandhuman rights.TheFrameworkwas

welcomedunanimouslybytheUNHumanRightsCouncil in2008and itenjoysbroadsupportfrom

allstakeholdergroups. Itrestsonthreedifferentiatedyetcomplementarypillars:thestatedutyto

protect against human rights abuses by third parties, including business, through appropriate

policies,regulation,andadjudication;thecorporateresponsibilitytorespecthumanrights,whichin

essencemeans to actwithduediligence to avoid infringingon the rightsofothers; and greater

accessbyvictimstoeffectiveremedy,judicialandnonjudicial.TheCLProjectfocusesontheroleof

statesregarding

corporate

and

securities

law

and

policy,

but

it

is

also

relevant

to

the

concerns

of

the

othertwopillars.

Thispaperoutlines theoverarching trends thatemerged from theparticipating firms surveyson

individualjurisdictions.Itdoesnotpresentviewsonlegalandpolicyreformoptionsinthisarea,nor

doesitindependentlyassessthefirmsinterpretationofexistinglaw.

The surveys indicate that current corporate and securities law does recognizehuman rights toa

limitedextent.Putsimply,wherehumanrightsimpactsmayharmthecompanysshortorlongterm

interestsiftheyarenotadequatelyidentified,managedandreported,companiesandtheirofficers

mayrisknoncompliancewithavarietyofrulespromotingcorporategovernance,riskmanagement

andmarket

safeguards.

And

even

where

the

company

itself

is

not

at

risk,

several

states

recognize

through their corporate and securities laws that responsible corporatepractice shouldnot entail

negativesocialorenvironmentalconsequences,includingforhumanrights.

Yetdespitethese links,theCLProjectalsohighlightstwootherpatterns.One isa lackofclarity in

corporateandsecuritieslawregardingnotonlywhatcompaniesortheirofficersarerequiredtodo

regardinghuman rights,but in some casesevenwhat theyarepermitted todo.Theother is the

limited (to nonexistent) coordination between corporate regulators and government agencies

taskedwithimplementinghumanrightsobligations.Asaresult,companiesandtheirofficersappear

togetlittleifanyguidanceonhowbesttooverseetheircompanysrespectforhumanrights.

Thefollowingisabriefsummaryofthemaintrendsfromeachsectionofthispaper:

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Incorporationandlisting:Thesurveyssuggestthatmostjurisdictionsbestowsomeformoflimited

liabilityandseparatelegalpersonalityoncompaniesatincorporation.Exceptionstotheapplicability

oftheseconceptsarerare,withregulatorsandcourtsextremelyreluctanttopiercethecorporate

veil except in limited situations, such as fraud. Moreover, none of the surveys indicate that

incorporation laws expressly require companies to recognize a duty to society at the point of

incorporation,although

some

contend

that

this

could

be

implied

from

obligations

to

incorporate

for

aproperor lawfulpurpose,especiallywhere thestatehasstrong lawsguaranteeinghumanrights

protection. Theactof listing isalsogenerallynot linked toany recognitionofaduty to society,

although some listing rules are starting to encourage companies to consider and act on human

rightsrelatedimpacts,mainlyusingenvironmental,socialandgovernancelanguage.

DirectorsDuties:The surveys indicate that inmostjurisdictionsdirectorsowe theirduties to the

company andhave an overarching duty to act in the companys best interests,which generally

means the shareholders interests as a whole. Some jurisdictions are moving towards the

enlightenedshareholdervalueapproach,whichmeans incorporatingsustainabilityconcerns into

assessmentsofthecompanysbest interests,giventhepotential legalandreputationalrisksto its

longtermsuccessofnotdoingso.

The surveys suggest that directors are rarely expressly required to consider nonshareholders

interests, such as those of employees, customers or community members impacted by the

companys activities. Nevertheless, most surveys contend that if not considering human rights

impactscould lead to thecompanybreaching the laworencountering reputational risk,and thus

potentiallydamagingthecompanys longterm interests,directorsshouldconsiderthemaspartof

theirordinaryduties toactwithdue careanddiligence.Most surveysalso say thatdirectorsare

permittedtoconsidersuchimpactsprovidedthattheirconsiderationoftheserisksaccordswiththe

companysbestinterests.Buttheyalsohighlightthatregulatorsgenerallyprovidelittleguidanceas

to how tomake such balancing decisions, evenwhere states have express legislative provisions

allowingdirectorstoconsidersocialorenvironmentalissues.

In instances where directors should consider nonshareholder impacts, including human rights

impacts, such duties appear to remain at the oversight level and subject to wide directorial

discretion.Forexample,tofulfillthesedutiesdirectorsmightbeexpectedtohelpdevelopprocesses

and policies to prevent and address negative human rights impacts, but they would not be

responsibleforimplementingthosepoliciesandpracticesonadaytodaybasis.

Reporting: The law firms surveys indicate that inmostjurisdictions companiesmustdisclose all

informationthat ismaterialorsignificanttotheiroperationsandfinancialcondition. Wherea

humanrightsimpactreachesthatthreshold,thecompaniesgenerallywouldberequiredtodisclose

it.But thesurveysalsoconfirm that there is limited regulatoryguidanceonwhenahuman rights

impactmightreachthatthreshold.

The surveys highlight that some countries are starting to require separate corporate social

responsibility (CSR) reports for particular types of companies, typically listed companies and

stateownedenterprises. Suchprovisionstendtofocusonreportingofpoliciesratherthanimpacts,

andtheyarenotsubjecttothesameaccessibilityandverificationrequirementsasfinancialreports.

Stock exchanges and voluntary corporate governance guidelines are increasingly encouraging

companies to report on their environmental and social policies but again, express references to

humanrightsarerare.

Stakeholder Engagement: The surveys suggest that there are generally few substantive

impedimentstoshareholders includinghumanrightsconcerns inshareholderproposals forannual

generalmeetings.

Moreover,

in

some

jurisdictions

there

appears

to

have

been

arecent

shift

of

regulators being less likely to agree to the requests made by some companies to block such

2


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proposals. Butthereareproceduralbarriers.Forexample,sharequotastocirculateproxyproposals

maybeaconstrainingfactorforminorityshareholderswishingtoraisehumanrightsconcerns(such

associallyresponsible investors,employeesandcommunitymembers impactedby thecompanys

activities).

Thelawfirmssurveysindicatethatpensionfundtrusteesarerarelyexpresslyrequiredtoconsider

thehumanrightsimpactsoftheirinvestments,althoughsomeareaskedtosaywhethertheyhavea

socially responsible investmentpolicy.Nevertheless,mostsurveyssaythat ifnotconsideringsuch

impactscouldexposethefundto legalorreputationalrisk,thenatrusteewouldneedtoconsider

them.While it israrefor legislationtoexpresslyallowtrusteestoconsidersuch impacts,therehas

beensomegovernmentalencouragementtodoso.

OtherCorporateGovernanceIssues:Thesurveyssuggestthatwhilethereisvariationinthewaysin

whichcorporategovernancecodesandguidelinesaddressCSRissues,thereisalsoacommonalityin

thattheyarestartingtodealwiththeseissues;theyarerarelyentirelyvoluntaryinpractice;and

they increasingly rely on international CSR initiatives to help frame any relevant guidance.

Nevertheless,directreferencestohumanrightsinrelevantcodesandguidelinesremainrare.

Accordingtothesurveys, it israretorequirerepresentationofanyconstituenciesonboardsapart

fromshareholders.Wheresuchrequirementsexist,typicallytheyinvolveemployeesor,inthecase

ofstateownedenterprises,thegovernment.Itisalsoraretoseerequirementsforgenderorracial

representationoncompanyboards,although it iscommon forgeneralnondiscrimination laws to

apply to board appointments. In states where mandatory gender representation has been

considered there have been some constitutional challenges on the basis that such requirements

representimpermissiblepositivediscrimination.

TheSRSGhopesthattheCorporateLawProjectwillencouragefurtherscholarshipmovingbeyond

the40plusjurisdictionsconsidered in thisproject,aswellasstimulatediscussionamong thekey,

although

often

disparate,

actors

involved,

including

human

rights

lawyers

and

advocates,

corporate

andsecuritieslawexperts,companyrepresentativesandgovernmentregulators.

TheSRSGisexploringwhatguidancehemightprovideontheissuesconsideredintheCLProjectin

hisfinalGuidingPrinciplestobepresentedtotheUNHumanRightsCouncilinJune2011.

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ContentsINTRODUCTION....................................................................................................................................... 5

SETTINGTHELEGALLANDSCAPE ............................................................................................................8

INCORPORATIONANDLISTING ...............................................................................................................9

DIRECTORSDUTIES...............................................................................................................................13

REPORTING ...........................................................................................................................................26

STAKEHOLDERENGAGEMENT ..............................................................................................................32

OTHERISSUES

OF

CORPORATE

GOVERNANCE .....................................................................................36

CONCLUDINGREMARKS .......................................................................................................................40

ANNEXARESEARCHTEMPLATE .........................................................................................................41

ANNEXBPARTICIPATINGFIRMS ........................................................................................................43

ANNEXCJURISDICTIONS....................................................................................................................44

4


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INTRODUCTION

SRSGs mandate and the UN Framework

TheSpecialRepresentativeoftheUNSecretaryGeneral(SRSG)onBusinessandHumanRightswas

appointedin

2005

by

then

UN

Secretary

General

Kofi

Annan

with

abroad

mandate

to

identify

and

clarifystandardsofcorporateresponsibilityandaccountabilityregardinghumanrights,includingthe

roleofstates. InJune2008,afterextensiveglobalconsultationwithbusiness,governmentsandcivil

society, the SRSG proposed a policy framework to the UN Human Rights Council (Council) for

managingbusinessandhumanrightschallenges.

Itrestsonthreedifferentiatedyetcomplementarypillars:thestatedutytoprotectagainsthuman

rights abuses by third parties, including business, through appropriate policies, regulation, and

adjudication;thecorporateresponsibilitytorespecthumanrights,which inessencemeanstoact

with due diligence to avoid infringing on the rights of others; and greater access for victims to

effectiveremedy,judicialandnonjudicial.YoucanreadmoreabouttheFramework intheSRSGs

2008,2009

and

2010

reports

to

the

Human

Rights

Council,

available

at

his

website:

http://www.businesshumanrights.org/SpecialRepPortal/Home.

The Council unanimously welcomed the Framework, marking the first time the Council or its

predecessorhadevertakenasubstantivedecisiononbusinessandhumanrights.TheCouncilalso

extended the SRSGs mandate until 2011, asking him to operationalize the Frameworkto

produceGuidingPrinciples for the implementation ofwhat is now called theUN Framework for

businessandhumanrights.Therehasalreadybeenconsiderableuptakeof,andsupportfor,theUN

Framework by all relevant stakeholders, including international business associations and civil

society.

The SRSGs Corporate Law Tools Project

HowthisprojectfitsintotheUNFramework

AkeyaspectoftheUNFrameworksfirstpillar,thestatedutytoprotect,isthatstatesshouldfoster

corporatecultures respectfulofrightsbothathomeandabroad,throughallavailableavenues. In

particular, the SRSG has been exploring the opportunities and obstacles that corporate and

securitieslawandpolicycanprovideinthisregard.

Corporate and securities law directly shapes what companies do and how they do it. Yet its

implicationsforhumanrightsremainpoorlyunderstood.Thetwoareoftenviewedasdistinctlegal

andpolicyspheres,populatedbydifferentcommunitiesofpractice.

Forthisreason,inearly2009,theSRSGannouncedhisCorporateLawToolsproject(CLProject).It

involvedmore than20 leadingcorporate law firms fromaround theworldhelpingonaprobono

basis to identifywhether andhow corporateand securities law inover 40jurisdictions currently

encouragescompaniestorespecthumanrights.Lawfirmswerechosenbasedontheirexpertisein

corporatelawaswellasexperienceinworkingwithcorporateclientsonhumanrightsrelatedissues.

Jurisdictionswereselectedtoensureabroadgeographicalspreadandamixofcommon law,civil

lawandotherlegaltraditions.Theyalsoreflectedtheparticipatingfirmsexpertise.

TheCLProjectcomprisesan importantelementoftheSRSGsworkonthestatedutytoprotect.It

notonlyprovidesnecessaryinformationaboutcurrentstatepracticebuthasfacilitateddiscussionto

considerwhat,

if

any,

policy

recommendations

to

make

to

states

in

this

area.

5
http://www.business-humanrights.org/SpecialRepPortal/Homehttp://www.business-humanrights.org/SpecialRepPortal/Homehttp://www.business-humanrights.org/SpecialRepPortal/Homehttp://www.business-humanrights.org/SpecialRepPortal/Home


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HoweveritisjustoneelementoftheSRSGsworkonthestatedutytoprotect,whichalsolooksat

otherareasof the lawandnationalpolicieswhichmighthelp states toencourage companies to

respecthumanrights.

TheprojectalsosupportstheSRSGsworkonthecorporateresponsibilitytorespectandaccessto

effectiveremedy.

Regarding

the

former,

the

term

responsibility

to

respect

rather

than

duty

indicatesthatrespectingrightsisnotanobligationcurrentinternationalhumanrightslawgenerally

imposes directly on companies, although elements may be reflected in domestic laws.

Internationally, it isastandardofexpectedconductacknowledged invirtuallyeveryvoluntaryand

softlawinstrumentrelatedtocorporateresponsibility,andnowaffirmedbytheCouncil.

To discharge the responsibility, companies should conduct ongoing human rights due diligence

wherebytheybecomeawareof,prevent,andaddressadversehumanrights impacts.This includes

complyingwith local laws,evenwhere theyarepoorlyenforced.Therefore,anunderstandingof

national laws, includingcorporate law, remainsvital toensurecompaniesunderstandandcomply

withtheirnationallegalobligations.

Inrelationtoaccesstoremedy,severalaspectsofcorporate law, includingcompanydisclosureas

wellasmechanismsforstakeholderengagementmayassisttopreventescalationofdisputes.Andin

discussing obstacles to legal accountability of transnational companies for humanrights related

abusebytheirsubsidiariesandotherbusinesspartners,theSRSGhasseenincreasingdebateabout

theparticularchallengesposedbycomplexcorporategroupsandabout the relationshipbetween

corporateandindividualliability.

TheResearchTemplate

Thefirmswereaskedtopreparejurisdictionspecificsurveysbasedonaresearchtemplateexploring

subjectssuchasincorporationandlisting;directorsduties;reporting;andstakeholderengagement.

The

firms

were

asked

to

discuss

how

corporate

regulators

and

courts

apply

the

law,

without

includingnormativeviewsastolegalandpolicyreforminthisarea.Acopyoftheresearchtemplate,

aswellasalistofallincludedjurisdictionsandparticipatingfirms,isattheendofthisreport.

Toavoidconfusion, itwasagreedthatcorporateandsecurities lawforthisproject includes laws

and policies expressly designed to regulate a companys lifecycle. For instance, those laws and

policies, usually administered by corporate and securities regulators, including stock exchanges,

which regulate or provide guidance on incorporation and listing; directors duties; financial and

other reporting; shareholder and nonshareholder engagement; and other aspects of corporate

governance.Ofcourse,notallaspectsofstatescorporateandsecuritieslawscouldbecovered.

Moreover,

while

the

participating

firms

were

asked

to

discuss

other

areas

of

national

law,

such

as

labor law,environmental law,criminal law,tort lawandconstitutional lawtotheextentthatthey

provide context to obligations under corporate and securities law, these laws were not the CL

Projectsintendedfocus.

Atthetimeofwriting,13surveyswereavailableontheprojectswebsite(UK;France;SouthAfrica;

Canada;India;Singapore;Japan;Indonesia;PapuaNewGuinea;NewZealand;Australia,Chinaand

Argentina):http://www.businesshumanrights.org/SpecialRepPortal/Home/CorporateLawTools.

Theremainderofthesurveyswillbepostedwhentheeditorialprocessiscompleted.

Allsurveysareentirelytheworkoftheparticipatingfirmsanddonotnecessarilyrepresentthe

SRSGsviews.

6
http://www.business-humanrights.org/SpecialRepPortal/Home/CorporateLawToolshttp://www.business-humanrights.org/SpecialRepPortal/Home/CorporateLawToolshttp://www.business-humanrights.org/SpecialRepPortal/Home/CorporateLawToolshttp://www.business-humanrights.org/SpecialRepPortal/Home/CorporateLawTools


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Consultationtodate

Atthetimeofwriting,twostandaloneconsultationshadbeenheldto informtheSRSGaspartof

the CL Project. The first, attended by participating law firms,was hosted inNew York byWeil,

Gotshal&Manges in June2009. Itexplored current statepractice, including implementationand

enforcementinthisarea. Asummaryreportisavailableat:

http://www.reportsand

materials.org/Ruggie

corporate

law

tools

meeting

summary

30

Jun

2009.p

df.

ThesecondwasamultistakeholderexpertconsultationconvenedbyYorkUniversitysOsgoodeHall

LawSchoolinTorontoinNovember2009.Participantsdiscussedpotentialpolicyandlegalreformin

thisareaandasummaryreportisavailableat:

http://www.reportsandmaterials.org/CorporatelawtoolsTorontomeetingreport56Nov2009.p

df.

Theroleofcorporateandsecuritieslawhasalsobeendiscussedatother,broaderconsultationsheld

by theSRSG, includingata recentmeetingofCorporateCounsel,andhewill continue toconsult

widelyon

this

issue.

Acknowledgments

TheSRSG is immenselygratefultoallparticipating lawfirms,withoutwhomthisprojectwouldnot

havebeenpossible. Thewillingnessofsomanyfirmstoprovidetheirservicesprobonoinorderto

expandthecommonknowledgebase indicatesthatcorporate lawfirmsworldwideappreciatethat

humanrightsarerelevanttotheirclientsneeds.Healsowouldliketoacknowledgetheadviceand

assistance of Larry Cata Backer; Aaron Dhir; Nora Gotzmann; Daniel Guzman; Sara Seck; John

Sherman;MeredithTapper;ChadTravis;AnnaTriponel;andNatalieZerial.

Aim of this Paper

Thispaper

summarizes

overarching

trends

from

the

law

firms

surveys

of

individual

jurisdictions.

This

paper is organized according to the projects research template. Readerswishing to read about

featured examples should go to the corresponding template answer in the jurisdictionspecific

report.

Thispaperdoesnotpresentviewson legalandpolicy reformoptions in thisarea,orcritique the

firms interpretationofexisting law.Andreferencestosuch lawsshouldnotbetakenastheSRSG

endorsing them or considering them to be best practice. Moreover, no external sources were

consultedallmaterialistakenfromthefirmssurveys.Readersshouldnotethatthebroadtrends

identifiedinthispaperarebasedontheSRSGsunderstandingofthelawfirmssurveysanddonot

necessarilyrepresentthefirmsviews.

TheSRSG isexploringwhat furtherguidancehemightprovideon the issuesconsidered in theCL

ProjectinhisfinalGuidingPrinciplestobepresentedtotheUNHumanRightsCouncilinJune2011.

7
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SETTINGTHELEGALLANDSCAPE

Questions 1 through 5 of the research template contextualize themore detailed exploration of

corporateandsecurities lawwhich the restofthedocumentrequests.Thesequestionsaskwhich

humanrightsobligationsarealreadyplacedoncompaniesthrough lawsotherthancorporateand

securitieslaws

(question

1);

what

the

jurisdictions

legal

tradition

is

(question

2);

whether

corporate

andsecurities lawsareregulatedfederallyorprovincially(question3);whatthekeycorporateand

securitiesregulatorsareandtheirrespectivepowers(question4);andwhetherthestatehasastock

exchange(question5).

Mostsurveys listedanarrayofdifferenttypesof lawsandpolicies intheiranswerstoquestion1,

from constitutional law to labor, environmental, employment/antidiscrimination, criminal,

tort/delictandprivacy laws.Asstatedabove,thisproject focusesoncorporateandsecurities law.

However, the SRSG appreciates that the significance of certain corporate law provisionsmay be

strengthenedorweakenedbytheexistence,orabsence,ofotherdomesticlegalobligationsonthe

corporation to respect human rights. For example, in the United States, directors duties are

informedby

the

wider

legal

liability

landscape,

which

includes

such

statutes

as

the

Alien

Tort

Claims

Act,usedsofarinover40casestosuecompaniesintortinUScourtsforhumanrightsrelatedabuse

abroad.

Thus, inansweringquestion1,thefirmswereaskedtoprovideageneral,concisepictureastothe

jurisdictionsbusinessandhumanrightslegallandscape.

The introductory nature of questions 1 through 5 means that the responses were highly

jurisdictionspecific,makingitdifficulttoidentifyoverarchingtrends.Nevertheless,onepatterndoes

emerge,ofatendencyforcorporateandsecuritiesregulationtobeseparatefromimplementation,

enforcement and awarenessraising of other laws and policies encouraging business respect for

humanrights. Thisisevidentfromthesurveysexaminationofthe(oftenlackof)interrelationship

between corporate and securities law, andmore specifichuman rightsrelated lawsandpolicies.And the surveys also indicate the organizational structure of the key corporate and securities

regulators in each jurisdiction, providing an insight into the opportunities and challenges of

promoting greater interaction between those agencies and those taskedwith implementing the

stateshumanrightsobligations.

ThesurveysarebroadlyconsistentwiththeSRSGsfindingsinrelationtostaterolesandpracticein

the business and human rights domain as awhole. The SRSG has found that the area exhibits

substantial legalandpolicy incoherenceat thenational level,often replicated internationally.The

most widespread is what he has called horizontal incoherence, where economic or

businessfocused departments and agencies that directly shape business practices conduct their

workin

isolation

from

and

largely

uninformed

by

their

governments

human

rights

agencies

and

obligations,andviceversa.Suchagenciesmay includethosedealingwithcorporateandsecurities

law.

8


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INCORPORATIONANDLISTING

Introduction

Insomejurisdictions,thecorporateform, including itsrelatedbenefitssuchas limited liabilityand

separatelegal

personality,

was

historically

viewed

as

aprivilege

in

exchange

for

serving

apublic

purpose.Thissectionofthetemplateaimstodiscoverinwhichjurisdictionssuchlinksweremadein

thepastorindeedexisttoday.Italsoasksaboutsimilarrequirementsorexpectationsinrelationto

listing, due to the increasing role stock exchanges play in encouragingmore socially responsible

behavior.Giventherelevanceofthecomplexitiesofthecorporateformtothebusinessandhuman

rights domain, the research template asks for an elaboration of concepts such as separate legal

personalityand limited liability, includingexceptionsto theapplicationsoftheseconcepts.Finally,

drawingagainontheroleofstockexchanges,the finalquestion inthissectionasksaboutsocially

responsible investment indices. It aims to get a sense of how, in addition to listing rules, stock

exchangesmaybepromotingmoresociallyresponsiblebehavior.

Question by Question Analysis

Question 6: Dotheconceptsoflimitedliabilityandseparatelegalpersonalityexist?

This question assesseswhetherjurisdictions provide all or some companieswith "separate legal

personality"and"limited liability"and, ifso,towhatextentexceptionstotheapplicationofthese

conceptsexist.Underthedoctrineofseparatelegalpersonality,acompanyhasthelegalcapacityto

exercisecertainrightsandassumecertainobligationsseparatetotherightsanddutiesofitsowners.

Theprincipleof limited liabilityprovides thata company's liabilitiesdonotextend toanyof the

shareholdersordirectorspersonalproperty.

Someformof"separatelegalpersonality"and"limitedliability"existinallofthe39jurisdictionsfor

whichtheSRSGhasreceivedfinalsurveyreports.Thesurveysprovidethatallofthesejurisdictions

haveagoverningstatutethatdescribes:(i)thetypesofpermissiblebusinessforms;(ii)thecreation

andoperationofeachform;and(iii)thetypeof liabilitythatappliestoeachform.Alljurisdictions

havesimilarpermissiblebusiness formswith limited liability,and themostcommon is the limited

liabilitycompany.Mostjurisdictionshaveabodyofcommonlaworstatutoryprovisionsdescribing

limitedexceptionstotheseconcepts,wherebythecompanysownersmaybehelddirectlyliablefor

thecompany'sliabilities,anactionknownas"piercingthecorporateveil."

Typically, such exceptions are limited to situations involving fraud, the intentional avoidance of

statutoryorcontractualobligations,orsomeotheractofbadfaith.Forexample,inIndia,thecourts

haveliftedthecorporateveilincasesoffraudorimproperconduct.Japanallowsthecorporateveil

tobe

pierced

where

acompany

is

being

used

to

commit

fraud

or

to

avoid

statutory

or

contractual

obligations.Likewise,inAustraliacourtsmay"liftthecorporateveil"whereacompany'sstructureis

usedtoperpetrateafraud,ortoenablealegalorfiduciaryobligationtobeevaded. Nevertheless,

severalsurveyshighlightthatcourtsareextremelyreluctanttopiercetheveilandwilldosoonly

inexceptionalcircumstances.

Some jurisdictions have express statutory exceptions to limited liability and separate legal

personality. InSingapore,theCompaniesActhasexpressexceptionsforinstanceswheredebtsare

contractedwithoutanyreasonableorprobableexpectationthatthecompanywouldbeabletopay

its debts, orwhere dividends are paid in the absence of available profits. In South Africa, the

CompaniesActcreatesexceptionsto limited liabilityforrecklessorfraudulentactions.Likewise, in

China,under

the

Company

Law,

shareholders

that

abuse

their

rights

must

compensate

the

company

9


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orothershareholdersforanylossescausedbysuchabuses,andshareholderswhousethecompany

totrytoavoiddebtswillbeheldjointlyandseverallyliableforthecompany'sdebt.

In addition, somejurisdictions appear to allow recourse against controlling shareholderswithout

fault incasesofenvironmentaldamageorbreaches related to taxor laborobligations,oragainst

shareholders

when

fraud

is

present.

For

example,

in

Brazil,

controlling

shareholders

may

be

liable

(in

proportiontotheirrespectivecapitalstakes)forenvironmentaldamagesifthecompany'sassetsare

insufficient to cover such damages, irrespective of any guilt on the part of the company or the

shareholders.Additionally,controllingshareholdershavebeenheldliablefortheircompany'slabor

obligationsinalmosteverysituationinwhichthecompanydoesnothavesufficientassetstocover

suchobligations.InColombia,foundersofalimitedliabilitycompanyarejointlyandseverallyliable

fortaxandlaborobligationsregardlessofguilt,whereasitappearsthatshareholderswouldonlybe

liablefortaxandlaborobligationstotheextentthatfraudispresent.

Question 7: Didincorporationorlistinghistorically,ordoesittoday,requireanyrecognitionofa

dutytosociety,includingrespectforhumanrights?

Thesurveyssuggestthatmostcountriesdonotexpresslyrequireanyrecognitionofadutytosociety

forincorporatingorlisting.IntheUnitedStates,forexample,incorporatinginDelaware,NewYork

ora state thathasadopted theModelAct,doesnot specifically require recognitionofaduty to

society, and there is no specific requirement that a corporation wishing to list on a securities

exchangerecognizessuchaduty.

Nevertheless,thesurveysprovidethatinseveraljurisdictions,incorporationdoesrequirecompanies

to establish that they are operating for a lawful purpose. Some surveys suggest thatwhere the

jurisdiction has strong constitutional or other legal protections visvis human rights, this could

imply thata company incorporating tocarryoutactivities clearlyatoddswithhuman rights,and

thuswiththelaw,maybedeniedtherightstoincorporate.However,severalsurveysalsohighlight

thattheydonotknowofsuchargumentsbeingmadeinpractice. Moreover,manysurveyssaythatitisunclearwhetheracompanywouldsimplyneedtoshowthatitisnotincorporatingforthesole

purposeofabusinghumanrights,orwhether itwouldalsoneedtoshowmore indirectlythat it is

notincorporatingforactivitieswhichamongstotherimpactsmaynegativelyaffecthumanrights.

Examples of requirements to incorporate with a lawful purpose include Indonesia, where

incorporatingcompaniesmustnothavegoals,objectivesorbusinessactivitiesthatarecontraryto

law, public order ormorality. Indonesia'sHuman Rights Law provides that certain international

humanrightsinstrumentsformpartofdomesticlaw.Accordingly,thereportforIndonesiacontends

that theremaybean impliedduty for incorporatingcompaniesnot toperformanyactivities that

wouldviolatesuchinstruments. InFinland,incorporatingcompanieshaveageneraldutytocomply

withall

applicable

laws,

which

the

report

contends

include

the

Constitutions

human

rights

provisions. In Japan, the legal affairs bureaumay reject an application for incorporation if the

businessobjective isdeemed illegal,whichthereport indicatesmay includeactivitiesatoddswith

humanrights. InColombia,thereportcontendsthatthefactthatacompany'sconstitutioncanbe

challengedifitiscontrarytothestateconstitutionsuggeststhattheremaybeanimplieddutynotto

violaterightsinlinewithanystateconstitutionalrequirements.

Similarly, many jurisdictions broadly require that incorporating companies respect the "public

order. Forexample,inFrance,corporationsmustpursueapurposerespectfulofthepublicorder.

The report forFrance suggests that theFrenchcourtsmaycancelacontract for failure topursue

suchapurpose,butthattherearenosuchprecedentsforpursuingapurposeinviolationofhuman

rights,environmental

or

social

norms.

In

China,

the

Company

Law

requires

corporations

to

"observe

socialmoralsandcommercialethics,actwithintegrityandgoodfaith,acceptthesupervisionofthe

10


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governmentandthepublic,andundertakesocialliability.InSingapore,undertheCompaniesAct,

theregistrarmayrefuseto incorporateacompany ifthecompany is likelytocarryoutanactivity

thatisprejudicialtothepublicpeace,welfareorgoodorder. IntheUnitedKingdom,theSecretary

ofStateundertheInsolvencyActmaypetitionacourtforacompanytobewoundupheifconsiders

it"expedientinthepublicinterest"todoso,andthecourtmaygrantthisactionifitisdetermined

tobe

equitable.

However,

the

report

suggests

that

the

extent

to

which

human

rights

violations

wouldmeritsuchanactionisunclear.

Regardinglisting,thesurveyssuggestthatthatstockexchangesareincreasinglypayingattentionto

socialissuesandthatcompaniesthatfailtoconsiderthemcouldriskdelistingorothercensure. For

example,inChina,rulesfortheShenzhenandShanghaiStockExchangesrequirelistedcompaniesto

commit themselves to environmental protection and community development whilst pursuing

economic interestsandprotectingshareholders' interests. InLuxembourg, listedcompaniesmust

have"highstandardsofintegrity"andbehave inaresponsiblemanner. InNewZealand,market

participantsandadvisorsmustobserve"properethicalstandards"andactwith"honesty, integrity,

fairness,dueskillandcare,diligenceandefficiency. InMalaysia,thelistingrulesprovideguidelines

for

CSR,

but

the

report

suggests

they

are

not

regularly

enforced

and

contain

no

penalties

for

noncompliance.

Question 8: Do any stock exchanges have a responsible investment index, and is participation

voluntary?(Seee.g.theJohannesburgStockExchangesSociallyResponsibleInvestmentIndex.)

Thisquestionassessesinwhichjurisdictionscompaniesarerequiredorencouragedtoparticipatein

socially responsible investment (SRI) indices.Such indicesgenerally list corporationswhich satisfy

certainenvironmental,socialandgovernancecriteria. Thesecriteriaareusuallybasedonprevailing

internationalstandards,suchastheUNPrinciplesforResponsibleInvestment(UNPRI). Additionally,

anSRIindexcanfocusoncompaniesengagedincertainindustries,doingbusinessinspecificregions

or

of

a

certain

size.

The

SRSG

sought

to

further

explore

the

extent

to

which

national

stock

exchanges

areutilizingsuchindices,eitherthroughvoluntaryormandatorymeans.

ThesurveyssuggestthatmostjurisdictionsdonotoperateSRI indicesthroughtheirnationalstock

exchanges, apart from a few exceptions, detailed below. And even where such indices exist, it

appearsthathumanrightsarenotspecificallycontemplatedasindicatorsforranking.

Forexample, inBrazil, theBovespaCorporate Sustainability Index tracks theeconomic, financial,

corporate governance, environmental and socialperformanceof leading companies listedon the

SoPauloStockExchange. The indexaims toacknowledge companiesactivelyengaging in social

responsibility,andtoencourageethicalcorporateresponsibilityinallcompanies. Similarly,inSouth

Africa,theJohannesburgSecuritiesExchange(JSE)SRIIndexwas launched in2004pursuanttothe

secondKing

Report

on

Corporate

Governance.

Public

companies

listed

on

the

FTSE/JSE

All

Share

IndexwhowishtofeatureontheSRIIndexmustmeetminimumcriteriawhicharebasedontheUN

PRI. InJune2009,theIndonesianStockExchangeandBiodiversityFoundationKEHATIlaunchedthe

KEHATISRIIndex. ThisindextrackstheperformanceofIndonesiancompanieswithgoodsustainable

business practices according to international environmental, social and governance criteria. In

addition,stockexchanges inDenmark,Finland,NorwayandSwedeneachparticipate in theOMX

GESEthicalNordicIndexandtheOMXGESNordicSustainabilityIndex,andhavesimilarethicaland

sustainabilityindicesspecifictoeachcountry. Companieslistedontheseexchangesareratedbased

on the "GES Global Ethical Standard" and the "GES Controversial," which are based upon

internationalguidelinesforenvironmental,socialandgovernanceissuesinaccordancewiththeUN

PRI. Forexample,companiesthatproduceorsellweapons,tobacco,alcohol,pornographyorthat

areinvolved

in

gambling

are

not

included.

11


13/45

Inmostcountries, largecompaniescanchoosetoparticipatevoluntarily in thirdpartySRI indices,

such as the FTSE4 Good Index or the Dow Jones Sustainability Index (DJSI)World,which are

typicallyoperatedbyprivateentities. TheDJSIWorldevaluatesthe2,500largestcompaniesonthe

Dow Jones Global Index on environmental, social and financial issues, and lists only the top 10

percentineachsector. TheFTSE4GoodIndexrequiresthatlistedcompaniesmeetcertaincorporate

socialresponsibility

standards

based

on

international

norms

established

by

NGOs,

government

bodies,consultants,academicentities,the investmentcommunityandthebusinesssector. There

arealsocountryspecific indicesoperating in this space. For instance, theSaudiArabianGeneral

Investment Authority launched the Saudi Arabian Responsible Competitive Indexwhich assesses

leading Saudi Arabian businesses based on company strategy, management, stakeholder

engagementprocessesand social,environmental,andeconomicperformance systems. In Japan,

theMorningstarSociallyResponsible Investment Indexselectscompaniesbyassessing their social

responsibility intheareasofcorporategovernance,employment,consumerservices,environment

andsocialcontributions.

Furthermore, in a fewjurisdictions, such as Indonesia and Singapore, companies participate in

indices

that

operate

similarly

to

SRI

indices

but

which

are

based

on

criteria

other

than

social

or

environmentalresponsibility,suchasIslamiclaw.

Conclusion

Thesurveyssuggestthatmostofthejurisdictionsfeaturedinthisprojecthavesimilarapproachesto

theconceptsofseparatelegalpersonalityandlimitedliabilitynamely,itisrareforthecorporate

veiltobepierced. Moreover,itremainsuncleartheextenttowhichavailableexceptionstothese

conceptsmaybeappliedtosituationsofhumanrightsrelatedabuse.

The surveysprovide thatmostjurisdictionsdonotexpressly requireany recognitionofaduty to

society or respect for human rights as a condition of incorporation or listing. However, several

surveyssuggest

that

the

requirements

or

expectations

to

incorporate

or

list

for

alawful

purpose,

or

inaccordancewiththepublicorder,mayindirectlyhavethesameeffect,dependingonthenational

legalcontextregardingbusinessandhumanrights.

Finally,while thenumberof stockexchangesusingSRI indices seems tobe slowly increasing, the

surveyssuggestthattheytendnottoincludeexpresshumanrightsindicators.

12


14/45

DIRECTORSDUTIES

Introduction

Thetemplatequestionsrelatedtodirectorsdutiesassesstheextenttowhichdirectorsarerequired,

allowedor

encouraged

to

consider

the

human

rights

impacts

of

the

companys

activities,

as

well

as

the discretion they are given inmaking these considerations.Directors are regularly required to

makechallengingdecisionsregardingacompanysbusinessactivities,includingthoserelatedtothe

companyshumanrights impacts.Thus thissectionaimstoexplorewhatguidancecorporate laws

aroundtheworldprovidetodirectorsonthisissue.

The surveys suggest that the scopeofdirectorsduties isusually setout ina countrys statutory

corporatelawandcomplementedbycaselawandregulatoryguidance. Thewayastateenvisionsa

directorsrole inacompany isrevealingofthatstatesgeneralapproachtotheroleofbusiness in

society. Ashareholderapproachwherebydirectorsactionsmustaimatmaximizingshareholders

position as owners above all, contrasts with a stakeholder approach, whereby directors are

requiredto

take

arange

of

stakeholders,

not

just

the

shareholders,

into

account

in

their

decisionmaking. A hybrid approach, commonly known as the enlightened shareholder value

approach,hasrecentlyappearedincertainjurisdictions.Here,directorsmayormustconsiderother

stakeholderswithinthecontextofmaximizingshareholdersvalueasowners.

Question by Question Analysis

Question 9: Towhomaredirectorsdutiesgenerallyowed?

Thisquestionaimstoexplorethetypesofdutiesdirectorsgenerallyoweandtowhotheseduties

areowed, including clarificationonwhetherdutiesareowed tononshareholders. Indoing so, it

seekstoidentifymoregenerallywhethertheparticularjurisdictionhasashareholder,stakeholderor

hybridapproachtodirectorsduties,whichwouldinturncontextualizeotheranswersinthissection.

In several cases, theSRSGencouraged firms to furtherdefine the terms stakeholderandthird

party so thatwheredutiesareowed to suchpersonsorgroups, it isclearerwhether theycould

encompasspersonsaffectedbyallegedhumanrightsrelatedabuse.

Althoughdirectorsdutiesvary in scopeamongjurisdictions, the surveys suggestoneoverarching

trend:therequirementfordirectorstoact inthecompanysbest interests,whichgenerallymeans

acting for the shareholders as awhole. The surveys identify that this is generally the directors

primary duty andusually incorporates elements of due care, loyalty and due diligence,with the

understanding that thedirector is toperform theseduties in good faith. Somejurisdictionsalso

havemorespecificduties,suchasthedutyofsecrecy(Spain,ChinaandPapuaNewGuinea),the

dutynot

to

misappropriate

company

property

(China)

and

the

duty

to

establish

internal

control

systems(India).

The surveys suggest that in somejurisdictions, the companysbest interest isexplicitly stated to

correspondtotheshareholdersinterestsasawholeasthecompanysowners(Luxembourgandthe

U.S.). Inotherjurisdictions,thiscanbe implied(Germany,SouthAfrica, Italy,Australia,Chileand

Algeria), or can be confirmed by soft law (Spain). In Spain, for example, the Unified Code for

Corporate Governance interprets the companys best interests as including the shareholders

commoninterests.

Accordingtothesurveys, inat leastfourjurisdictions,statutoryand/orcase law indicatesthatthe

companysbest

interests

can

correspond

to

the

interests

of

arange

of

actors,

extending

beyond

those of the shareholders if such consideration promotes the companys long term success in

13


15/45

otherwords, adopting the enlightened shareholder approachmentioned above. In Singapore,

caselawindicatesthatthecompanysbestinterestscancorrespondnotonlytotheinterestsofthe

companyitselfbutalsototheinterestsofitsshareholdersandemployees,creditors,orthegroupto

whichthecompanybelongs. InCanada,theSupremeCourthassaidthatdirectorsdutiesareowed

to the corporation and not to outside stakeholders, but that in considering the corporations

interests,directors

may

look

to

the

interests

of

shareholders,

employees,

creditors,

consumers,

governmentand theenvironment to inform theirdecisions. In theNetherlands, it isgenerally

considered thatadirector is toact in the interestof thecompany in thebroadest sense, i.e. the

combinedinterestsofitsshareholders,employees,creditorsandevensocietyatlarge. IntheUK,as

detailedfurtherinquestion11below,theCompaniesActprovidesthatinpromotingthesuccessof

thecompany,directorsmusthave specific regard tothe interestsof thecompanysemployees;

theneedtofosterthecompanysbusinessrelationshipswithsuppliers,customersandothers;and

theimpactofthecompanysoperationsonthecommunityandtheenvironment.

Inotherjurisdictions,theenlightenedshareholdervalueapproachrequiringnonshareholdersto

betaken intoaccounthasbeenexpresslyrejected. InHongKong,for instance,thegovernment is

currently

conducting

public

consultations

in

relation

to

the

rewriting

of

the

Companies

Ordinance.

Preliminary consultations indicated only limited support for incorporating the enlightened

shareholdervalueapproachintodirectors'duties.Objectionsincludedthatsuchdutieswouldplace

tooheavyaburdenondirectors,thattheymaybedifficulttocomplywithandthattheconceptof

enlightenedshareholdervaluewasnotwidelyacceptedinHongKong.

Directors inanumberofjurisdictions,primarilycommon lawjurisdictions,oweseparateduties to

shareholders (asopposedtothecompanyasawhole)underspecificcircumstances (SouthAfrica,

theU.S.,Australia,HongKong,India,NewZealand,andJapanwhichisacivillawsysteminfluenced

bycommonlaw). Suchdutiestendtoapplywhendirectorsareinaspecialpositionoftrustvisvis

the shareholders. Generally, directors in common law jurisdictions also owe special duties to

creditorswhenthecompany is insolvent (orapproaching insolvency insomecases). Ina fewcivil

lawjurisdictions(Denmark,Swedenand Italy),directorsoweaspecificdutytocreditorsregardingthemaintenanceofthecompanyscapitalandassets,whichapplieswhetherornotthecompanyis

insolvent. However, the surveys highlight that civil law systems generally only impose limited

directorsdutiesinrelationtoshareholdersandcreditorsintheirownright.

Ina fewjurisdictions it appears thatdirectors canowe specialduties to thirdparties. Thisarea

meritsfurtherexploration.Thesurveyssuggestthatconfusionexistsinanumberofjurisdictionsas

towhetherdirectorsgenuinelyoweseparatefiduciarydutiestothirdpartiesundercorporatelawor

whetherthis isbasedongeneraltortprinciplesnottocausedamagetothirdparties.Thequestion

also remains as towhich thirdpartiesor stakeholdersdutiesmaybeowed to, andwhether

these could include suppliers, customers or other persons or groups affected by the companys

activities.

Directorsdutiesareusuallyfound incorporatestatutes. Theycanalsobefound inothersources,

including case law, the companysorganizationaldocuments,directorsemployment contracts,or

listingrules. Forexample,inRussiaspecificdirectorsdutiesaregenerallyincludedinthecompanys

organizationaldocuments. In Luxembourg,directorsof listed companies havemore duties than

thoseofprivatelyheldcompaniesundertheTransparencyLawandtheMarketAbuseLaw. In the

U.S.,asinmanyotherjurisdictions,itisclearthatifacompanyincludesdutiesrelatingtosocialor

environmentalissuesinitsconstitutionthenthecompanymayhaverecourseifthosedutiesarenot

fulfilled.

14


16/45


17/45

Question 11: More generally, are directors required or permitted to consider the companys

impactsonnonshareholders,includinghumanrightsimpactsontheindividualsandcommunities

affectedbythecompanysoperations? Istheanswerthesamewheretheimpactsoccuroutside

thejurisdiction? Canormustdirectorsconsidersuchimpactsbysubsidiaries,suppliersandother

business

partners,

whether

occurring

inside

or

outside

the

jurisdiction?

(See

e.g.

s.

172

UK

CompaniesAct2006)

Thethreesubsetsofthisquestion intendtoassesswhetherdirectorsarerequiredorpermittedto

considerthecompanysimpactonnonshareholders,includinghumanrightsimpacts,whereverthey

mightoccur, includingsituationswherethecompanyssubsidiariesorotherbusinesspartnersmay

becontributingtotheimpacts. ThequestionwasinspiredinpartbytheSRSGspreviousexploration

ofsection172oftheUKCompaniesAct,whichrequiresdirectorstohaveregardtosuchmatters

astheimpactofthecompanysoperationsonthecommunityandtheenvironmentaspartoftheir

duty to promote the success of the company. The SRSG sought to find out whether other

jurisdictionshavesimilarprovisionsandifso,theboundariesofsuchprovisions.

Innearlyallofthejurisdictionssurveyed,thesurveyshighlightthatcorporatelawdoesnotexplicitly

require directors to consider the companys impactonnonshareholders, includinghuman rights

impacts. Moreover,evenwherethereissuchaduty,ittendstobeframedwithintherequirement

toactinthecompanysbestinterest,andaspointedoutinquestion9,maynotalwaysbespecificas

tothetypesofnonshareholderstobeconsidered.

Asignificantnumberofsurveyssuggestthatconsideringnonshareholderinterests,includinghuman

rightsimpactsonnonshareholders,isimplicitlyrequiredaspartofthedutytoactinthecompanys

bestinterests. Thisisbecauseofthepotentiallegalandreputationalrisksthatacompanymayface

if it fails to takeaccountof such impacts,and isespecially the casewherenational laws layout

human rightsrelatedduties forcompanies.Themost relevant laws in this respectare labor laws,

occupationalhealth

and

safety

laws,

consumer

protection

laws,

environmental

laws,

and

privacy

laws,aswellasconstitutionalprotections.

Inany case, the surveys argue that inmostjurisdictions,directorsarepermitted to consider the

interestsofnonshareholders as long as this is in accordancewith the companysbest interests.

Directorsmayevenbeencouragedtodosobystatute,case law,corporategovernanceguidelines,

and other regulatory guidance. This appears to be a relatively recent trend,withmost of the

guidancefromthesesourcesdatingfromthepastdecade.

RequirementstoConsiderNonShareholders

Thesurveys

suggest

that

in

some

limited

cases

there

are

express

requirements

for

directors

to

considersocialandenvironmentalimpactsonnonshareholders,althoughthetermhumanrights

doesnotappear.

For instance, in theUK,asnotedabove, theCompaniesAct requiresdirectors, inpromoting the

successofthecompany,tohaveregardto,amongotherthings, (i)the interestsofthecompany's

employees, (ii) theneed to foster the company'sbusiness relationshipswith suppliers, customers

andothers,and(iii)theimpactofthecompany'soperationsonthecommunityandtheenvironment.

The report contends that to have regard to means that the directors must give proper

considerationtothesefactors,butdoesnotmeanthatdirectorshavetogiveprimacyto,orcannot

actinconsistentlywith,thesenonshareholdersinterests. Theimpactofdecisionsonshareholders

continuesto

be

key.

16


18/45

ThereportforGermanyhighlightsthatdirectorshavetoconsiderstakeholders interestsalongside

shareholders' interests in theirpolicymakinganddecisionmakingprocesses. Althoughanexplicit

reference tostakeholders interestscannotbe found inanycurrentstatute,theCompaniesActof

1937didrefertodirectorsdutiestoemployeesandcommonwelfare.Thiswasdeleted ina1965

reformoftheCompaniesActbecauseofagreementthattheneedtoconsiderthese interestswas

selfevident.

However,

the

report

for

Germany

provides

that

the

government

is

considering

reintroducing this reference given the salience of the issue as highlighted by the recent global

financialcrisis.

In otherjurisdictions, the surveys suggest that a duty to consider impacts on nonshareholders,

includinghumanrightsimpacts,canbeimpliedfromthedutytoactinthecompanysbestinterests

andwithinthatduty,toabidebythelaw. Forexample,thereportforBrazilarguesthatcorporate

lawcanbereadasrequiringdirectorstopursuethecompanyspurposesofgeneratingprofitswhile

consideringthepublicat large. ThereportforSouthAfricaexplainsthatwhileSouthAfricasnew

CompaniesActdoesnothaveasimilarprovisiontotheUKAct,areadingoftheSouthAfricanActs

provision defining directors duties together with the Acts purposes (which includes respecting

South

Africas

Bill

of

Rights)

gives

rise

to

a

requirement

for

directors

to

consider

the

companys

impactsonnonshareholders, includinghuman rights impacts. The report for theU.S.highlights

existing directors duties to implement appropriate information, reporting and internal control

systems, aswell as toassess the risks that are significant to theirorganizations and ensure that

management istakingthestepsnecessaryto identify,measure,monitorandcontroltheserisks. It

then suggests that where certain human rights violations impose a meaningful risk to the

corporation,boardsofU.S.corporationsarewelladvisedbyexistingcaselawtobecomeawareof,

andthenimplementappropriatemechanismstocontrolforsuchrisks.

Accordingtothesurveys,theimplicationthatdirectorsshouldconsiderthecompanyshumanrights

impacts is even strongerwhere failure todo sowouldmean that the companybreaches a legal

provision. Thiscouldincludelabor laws,occupationalhealthandsafetylaws,consumerprotection

laws,environmentallaws,andprivacylaws.

Even where the surveys suggest that there may be some instances in which directors should

considernonshareholderimpacts,includinghumanrightsimpacts,suchdutiesappeartoremainat

theoversight leveland remain subject towidedirectorialdiscretion. Forexample, to fulfill these

dutiesdirectorsmightbeexpected tohelpdevelopprocessesandpoliciestopreventandaddress

negativehumanrightsimpacts,butnotimplementsuchpoliciesandpracticesonadaytodaybasis.

PermissionorEncouragementtoConsiderNonshareholders

As highlighted above, permission or encouragement for directors to consider the interests of

nonshareholders,

including

those

potentially

affected

by

human

rights

impacts,

may

be

found

in

awiderangeofsourcesguidingdirectorsdecisionmaking,includinglegislationinsomejurisdictions.

For example, the Indonesian Code ofGood CorporateGovernance indicates that directors have

scopetoconsidernonshareholders interests. TheJapaneseCharterofCorporateBehaviorofthe

NipponKeidanreninsistsonthenecessityforcompaniestotakeintoaccountconsumers,members

of societyasawhole,aswellas the environment. InRussia,nonbinding corporate governance

guidelines recommend that a company's executivebodies consider the interestsof third parties,

including thecompany'semployeesand stateandmunicipalbodies. Inaddition, theseguidelines

advise large companieswhoseoperationsareof significanteconomicand social importance fora

particularcityordistrict (cityformingenterprises)to take intoaccountthe interestsofthe local

populationas

well

as

the

economic

consequences

of

any

decisions.

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In Australia, a number of commentators and parliamentary reports have indicated that it will

generallybeinthecompanysbestinterestsforthedirectorstoconsiderthehumanrightsimpacts

of the company's operations. In Singapore, the Companies Act refers to the interests of the

companysemployeesasoneofthemattersthedirectorsofacompanyareentitledtohaveregard

inexercisingtheirpowers. IntheU.S.,constituencystatutesadoptedbythirtyU.S.statesexplicitly

permitdirectors

to

consider

the

effect

of

board

action

or

inaction

on

other

constituencies,

including

employees,customers,suppliers,creditors,thecommunityandtheeconomyofthestateandnation.

These constituency statutes vary in terms of theweight a directormay give to nonshareholder

interestsindeterminingwhatisinthecompanysbestinterests. Theyhavebeenusedbycourtsto

safeguarddirectorsdecisionstotakeintoaccounttheinterestsofnonshareholders.

ImpactsOccurringOutsideoftheJurisdiction

The surveys suggest that where there is a requirement or permission to consider impacts on

nonshareholders,thiswillgenerallyapplywhetherornottheimpactsoccurinsideoroutsideofthe

jurisdictionwherethecompanyisincorporated.

Mostof

the

surveys

provide

that

corporate

law,

whether

statute

or

case

law,

is

generally

silent

on

thequestionofimpactsoutsidethejurisdiction.Thus,theyarguethatthegeneralassumptionwould

bethatthesituationisthesamenomatterwheretheimpactsoccurred i.e.thedirectorwouldbe

requiredorallowedtoconsiderimpactsonnonshareholdersabroadifs/hewasrequiredorallowed

to consider them if theyoccurathome,provided it remained in the companysbest interests to

considertheimpacts. Forinstance,thesurveysforBelgium,France,theUKandGermanymakethis

argument. InparticularthereportforGermanymaintainsthatthefactthattheStockCorporation

Actspecificallyprovides thatdirectorsofcontrollingcompanieshave thesamedutiesofcareand

responsibility across the corporate group implies that they owe the same duties for impacts

occurringoutsidethejurisdictionasaresultofcorporategroupactivity.

Thereport

for

Papua

New

Guinea

notes

that

given

that

the

Companies

Act

is

silent

on

geographical

application, itmay be implied that it only applies within PNG's boundaries, airspace, ships and

aircraft. Italsosuggests,however,thatthisdoesnotmeanthattheinterestsofthecompanyhave

the samegeographical limitations:directorsmay consider impactsonnonshareholderswherever

theyoccursolongassuchconsiderationpromotesthecompanysinterests.

On legalcompliance, thesurveyssuggestthatholdingadirectorresponsible for failing tooversee

thecompanysadherencetoaparticularnationallawoverseaswilldependonwhetherthatlawhad

extraterritorial application. For example, the report for Denmark explains that the PlanningAct,

which imposesanumberof requirementsoncompanies, is limited toactivitieswithin theDanish

jurisdiction. Accordingly, in holding a director accountable for failing to oversee the companys

compliancewith

that

law,

it

is

arguable

that

only

the

companys

activities

within

Denmark

would

be

relevant. Similarly, in Kenya, environmental reports that include consideration of impacts on

nonshareholdersareonlyconcernedwithprojectsundertakenwithinKenya. Incontrast,several

surveyshighlightthatlegislationregardingcorporatecriminalliabilityforinternationalcrimestends

tocoverinternationalcrimesathomeandabroad.

Finally,thesurveysnotethatwhenvoluntaryguidelinesimposeadditionalexpectationsondirectors,

theseguidelinesusuallyprovideforapplicationtothecompanysactivitiesabroad. Accordingtothe

ConfindustriaGuidelinesinItaly,ethicalcodesareusuallyaddressedtoallpersonsworkingwiththe

company and its group, including subsidiaries and suppliers. These Guidelines recommend that

ethical codes also apply in all foreign countries where the company is active. The Charter of

CorporateBehavior

of

the

Nippon

Keidanren

in

Japan

encourages

directors

to

consider

the

companysimpactsonnonshareholdersoutsidethejurisdiction. TheCharterstatesthatmembers

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shallobserve lawsandregulationsapplyingtotheiroverseasactivitiesandrespectthecultureand

customsofothernationsandstrivetomanagetheiroverseasactivitiesinsuchawayastopromote

andcontributetothedevelopmentoflocalcommunities.

Impactsbysubsidiaries,suppliersandotherbusinesspartners

The surveys suggest thatdirectorsaregenerallynotobliged to considerhuman rights impactsby

subsidiaries, suppliers and other business partners, whether occurring inside or outside the

jurisdiction,unlessthecompanycouldfaceriskslinkedtotheiractsand/oromissionsinrelationto

thisbehavior,includingasaresultofadirectviolationofanapplicablelaw.

However,therearea limitednumberofjurisdictionswheredirectorsarerequired toconsiderthe

human rights impacts of their subsidiaries, suppliers and other business partners. In the UK,

directorsmustpromote thesuccessofthecompanybyhavingregard,amongotherthings,tothe

needtofosterthecompany'sbusinessrelationshipswithsuppliers,customersandothers. Coupled

withtheobligationtohaveregardtothedesirabilityofthecompanymaintainingareputationfor

high standards of business conduct, the report for theUK suggests that directorsmay need to

considersocial

and

environmental

impacts

by

these

entities,

whether

occurring

inside

or

outside

of

thejurisdiction. InFrance,theCommercialCoderequirescompaniestoreportonthesocialimpacts

of thecompanysand itssubsidiariesactivitiesboth inFranceandabroad. Thereport forFrance

suggests that this requirement may encourage directors to consider the social impacts of the

companysforeignsubsidiaries.

Inanycase,thesurveyssuggestthatdirectorsgenerallycanconsiderthehumanrights impactsof

subsidiariesandotherbusinesspartnersprovided suchconsiderationaccordswith the companys

interests.

Question12: Ifdirectorsare requiredorpermitted to consider impactsonnonshareholders to

whatextent

do

they

have

discretion

in

determining

how

to

do

so?

Thisquestionassessestowhatextentdirectorshavediscretioninconsideringhumanrightsimpacts

on nonshareholders, particularlywhere such consideration is expressly or implicitly required or

allowed. In particular, especiallywhere there is broad discretion, the SRSG wanted to explore

whetheranyregulatoryguidanceisavailabletodirectorsinmakingthedifficultbalancingdecisions

involvedinsuchconsiderations.

Ashighlightedabove, theoverwhelming trendamongst the surveys is thatwhetherdirectorsare

requiredorpermittedtoconsiderthecompanysimpactsonnonshareholderstheyareusuallygiven

broaddiscretion in theirdecisionmaking. This isparticularlyso inrelationtothestepsadirector

may

decide

are

appropriate

at

an

oversight

level

to

prevent

and

address

human

rights

impacts.

In

otherwords,evenwhentheyareaskedtoconsidercertainimpacts,theyhavebroaddiscretionin

decidingwhat,ifanything,todoaboutthemandsuchactionsaregenerallylimitedtooversight.

DiscretionWhenDirectorsareRequiredtoConsiderImpactonNonShareholders

In thejurisdictionswheredirectorsare required to consider impactsonnonshareholders,either

expresslyorimplicitly,thesurveyssuggestthatdirectorshavealargedegreeofdiscretionastohow

toconsidersuchimpacts. IntheUK,forexample,thereportnotesthatthereiswidediscretionasto

themannerinwhichthedirectorsmaydeterminethecompany'simpactonnonshareholdersasno

strict guidelines exist. Nevertheless, the government has confirmed that having regard to

particularnonfinancialmattersdoesmeanmorethansimplygivingthemlipservice.

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21/45

InGermany,whenconsideringthehumanrightsimpactsonnonshareholders,directorsarefreeto

determine how to proceed. The report for Germany remarks that it is not yet clear whether

shareholders'interestshavetotakepriorityovernonshareholders'interestsinconflictingcases. In

theNetherlands, the report suggests that conceptually the shareholders andother stakeholders

interestsareonequalfooting,meaningthatdependingonthecircumstanceseachinteresthasthe

potentialto

be

paramount.

Accordingtothesurveys,discretionmaybenarrowerwhereadirectorsdutyislinkedtoaparticular

legal provision, often outside of the corporate law. For example, in Kenya, environmental law

imposesanobligationondirectorstoreportontheimpactsofvariousprojectsonnonshareholders.

Thisprocess isheavilyprescribedandthereforethere is limiteddirectorsdiscretion regarding the

scopeand contentsof the reporting. The report forAngolamakesa similarpoint in relation to

productionsharingandminingagreementswhichmayplacedutiesondirectorstoconsidercertain

nonshareholders interests. However, directors may have a certain amount of discretion and

negotiatingpowerduringthedraftingoftheseagreements.

DiscretionWhenDirectorsarePermittedtoConsiderImpactonNonShareholders

Unsurprisingly, there is often even broader discretion where directors are simply permitted to

consider impacts on nonshareholders, provided such consideration aligns with the companys

interests.For instance,thesurveysmentionthatdirectorscanusuallychoosetoadoptacorporate

socialresponsibilityprogram,adoptavoluntarycode,developinternalcompanypolicies,orcreatea

committeespecificallyfocusingontheseissues,includinghumanrights.

Incommonlawjurisdictionswherethebusinessjudgmentruleapplies,thesurveysindicatethatthe

courts will allow directors considerable discretion in determining whether a decision is in the

companysbest interests (e.g.Australia,Canadaand theU.S.). TheU.S. reportexplains that the

businessjudgmentruleprovidesdirectorswiththebenefitofthepresumptionofproprietyoftheir

decisionmaking

in

that

role,

and

therefore,

the

shareholder

bears

the

burden

of

proving

any

breach

ofsuchduty.

Finally,statutesprovidingexpresspermissiontoconsiderimpactsonnonshareholders,suchasthe

U.S. constituency statutes, provide some guidance on the weight a director may give to

nonshareholderinterestsbutgenerallystillprovidebroaddiscretiontothedirector.

Question13:Whatare the legal consequences for failing to fulfillanydutiesdescribedabove?

Whomaytakeactiontoinitiatethem? Whatdefensesareavailable?

The three subsets of this question explore the extent towhich directors can be held liable for

breaching

any

of

the

duties

listed

above.

In

particular,

the

SRSG

was

interested

in

learning

more

about which parties, including nonshareholders, are capable of bringing a complaint, and the

proceduralhurdlesthattheymightfaceindoingso. TheSRSGisalsopursuingrelatedissuesunder

hisaccesstojudicialremedywork.

Thelegalconsequencesforfailingtofulfillanydutiesdescribedabove?

Thesurveysgenerallyprovide thatdirectorswhobreach theirdutiesundercorporate lawmaybe

subject to a civil claim by the company, including by the shareholders on its behalf, aswell as

criminalandadministrativepenalties insomesituations. Therangeofpenaltiesusuallyvary from

injunctive relief, damages, pecuniary penalties, recovery of property or profits derived from a

transaction, adeclaration that a transaction is void, and/or removalof thedirector fromhis/her

position.Severalsurveysalsorefertotheabilityofthirdpartiestotakecivilactionagainstdirectors,butitwasoftenunclearwhomightbeclassifiedasathirdpartyandwhethertheactionwouldbe

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broughtasabreachofa fiduciarydutyunder corporate laworwouldbeanaction in tortunder

negligence.

Thesurveysgenerallyprovidethatwhetherthedirectorisheldindividuallyorjointlyliable(withthe

other directors) depends on the circumstances of violation of directors duties. The general rule

seems

to

be

that

individual

directors

are

personally

liable

for

the

consequences

of

breaching

their

directors duties. However, in somejurisdictions if the breach was approved by the board, all

directorsmaybeheld responsibleunless theyobjected toor voted against the resolutionwhich

resultedinthebreach.(e.g.,China,SaudiArabia,theUAEandMozambique)

Whomaytakeactiontoinitiatethem?

Accordingtothesurveys,itismostcommonforthecompanytotakeactionforbreachofdirectors

duties,assuchdutiesaregenerallyowedtothecompany.Theactiononbehalfofthecompanycan

usuallybebroughtbyaspecificpercentageofshareholders(20% inFrance,50% inGermany,Italy

andColombia, 10% in Indonesia,and 5% in SpainandChile) (socalledderivative claim),newor

formermanagementmembers,orotherdirectorsininstancesofmultipledirectorgovernance. The

surveyslist

anumber

of

procedural

hurdles

involved

in

derivative

claims,

including

the

need

for

shareholderstoapplytoacourtforpermissiontobringanactioninthecompanysname(UK,New

ZealandandSingapore)orto theboardtodemandthat theboardbringsuchanaction (U.S.and

NewZealand). Practicaldeterrentstosuchaclaimalso includethecosts involvedforthe lawsuit,

especially considering that damages will generally be awarded to the company and not the

shareholders.

Thesurveyshighlightthatinsomejurisdictions,anactionbroughtonbehalfofthecompanycanalso

bebroughtbyarangeofactorsadditionaltothose listedabove,providing thatcertainconditions

aremet.Additional actors includeminority shareholders (Algeria, Italy andArgentina), creditors

(Spain),thedirectorofthefederalcorporatestatute(Canada),thedirectorofthenationalsecurities

commission(Australia),

or

the

supervisory

board

(Indonesia

and

Germany).

Inthefewjurisdictionswhereshareholdersmaybeoweddutiespersonallybydirectors,thesurveys

indicatethattheseshareholderswillbeabletobringanaction intheirownrightonly iftheyhave

suffereddamagepersonally. Mostsurveysagree thatproving thatdamagecanbequitedifficult,

particularlyasitisgenerallyintertwinedwithanydamagesufferedbythecompany.

Thesurveyssuggestotherthirdparties,suchasmembersofacommunityaffectedbyacompanys

operationsoremployees,wouldgenerallyonlybeabletobringanactionagainstadirectorunder

general tort principles, contract or criminal law. An exception is in the new South African

CompaniesAct,whichallowsanypersontolaunchaderivativeactionforbreachofdirectorsduties

evenif

they

are

not

ashareholder

provided

they

have

the

courts

leave

to

do

so,

which

will

depend

onshowingthattheactionisnecessarytoprotecttheirlegalrights.

Wheredirectorsowespecificdutiestothirdparties,however,thesepartieswillbeabletobringan

actionagainstthedirectorsbasedonsuchduties. Forexample,inItaly,wheredirectorsoweaduty

tocreditorstomonitorthemaintenanceofthecompanyscapitalandassets,thecreditorsmaysue

thedirectorswherethecompanysassetsarenotsufficienttorepaythecreditors.

Availabledefenses

The surveys highlight that the defenses available to directors in a claim for breach of directors

duties includeexpirationofthestatuteof limitations (theallegedbreachhappenedtoo longago),

theprudentpersondefense(alsoknownasthereasonablepersondefensebasicallydependenton

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whetherthedirectorcanprovethatareasonableperson inhis/herpositionwouldhavemadethe

samedecision), thebusinessjudgment rule,andshareholder ratification. Asexplainedabove, in

commonlawjurisdictions(e.g.theU.S.,CanadaandAustralia)andinsomecivillawjurisdictions(e.g.

Finland,ItalyandJapan),thecourtswillgivedirectorsdeferenceunderthebusinessjudgmentrule

bypresumingthattheywereinthebestpositiontoassessthealternativesatthetimethedecision

wasmade.

Somejurisdictionsalsohavespecificdefenses. InPapuaNewGuinea,thedirectorhasadefenseif

s/he couldnot reasonablyhavebeen expected to take steps to ensure that the board/company

compliedwiththerequirementsofcorporatelaw. InRussia,directorsmayhaveadefensethatthe

dutiesbeingclaimedwerenotenumeratedthisisbecausespecificdutiesinRussiamustgenerally

bespeltoutinthecompanysorganizationaldocuments.

Question 14:Are there any other directors dutieswhichmight encourage a corporate culture

respectfulofhumanrights?

This

question

seeks

to

explore

whether

there

might

be

any

other

specific

duties

for

directors,

both

withinandoutsidethecorporate law,whichmighthelpencouragedirectorsto fosteracorporate

culturerespectfulofhumanrights.Thisquestionisintentionallybroadtoencourageadiversearray

ofinformation.

Severalsurveys indicatethepresenceofdirectorsdutiesadditionaltothosediscussedabovethat

maycontributetocorporateculturesmorerespectfulofhuman rights. Forexample, inAlgeria,a

generalstandardelaboratedbythecourtsrequiresdirectorstoactwiththestandardsofabonus

paterfamiliasorgoodfamilyfather. Thisissimilartothereasonablepersonstandardfoundunder

common law.ThereportforAlgeriaprovidesthat,forthemoment,thecourtsapplythisstandard

fromabusinessperspective,meaningthatthestandardisintendedtoprotectthecompany,andnot

society.

Further,thesurveyshighlightthatcorporategovernanceguidelines(exploredfurtherinquestion22)

may send a strongmessage to directors to foster responsible corporate behavior, though again,

explicitreferencestohumanrightsarerare.

Forexample, in Japan, theCharterofCorporateBehaviorasks topmanagement to listen to their

stakeholders, both internally and externally (including local communities), and to promote the

developmentandimplementationofsystemsthatwillcontributetotheimplementationofbusiness

ethics. InSaudiArabia,theCorporateGovernanceRegulations(imposedbythestockexchangeon

publicjoint stock companies) requires the board to outline a written policy that regulates the

relationshipwithstakeholderswithaview toprotecting their respective rights. Oneof the items

thatmust

be

covered

in

the

policy

is

the

companys

social

contributions,

which

will

include

any

noncommercial activitywith a community focus undertaken by the company. In South Africa,

additionalexpectationsfordirectorsarecontemplatedunderthe latestKingcorporategovernance

report. They include: (i) ensuring that the company acts as, and is seen to be, a responsible

corporate citizen; (ii) cultivating and promoting an ethical corporate culture; (iii) considering

sustainability as a business opportunity; (iv) ensuring the integrity of financial reporting; and (v)

ensuringthatthecompanyimplementsaneffectivecomplianceframeworkandeffectiveprocesses.

Some surveys inanswering thisquestionnote that regulators in theirjurisdictions can choose to

restrictwhocanbeadirector,dependingoncertainmoralstandards. Forexample, intheUAE,a

personmaynotbeadirectorofapublicjointstockcompanyifs/hehasbeenconvictedofa"crime

ofhonor

or

honesty"

(unless

pardoned

or

rehabilitated).

22


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Finally, someof the surveysnote thatnewdutiesarebeing contemplated fordirectors regarding

whistleblowingprocedureswhichmaypromotemore transparentcorporatecultures, including in

relation to human rights. For example, in Germany, the BaFin regulator has recommended

implementation and improvement of such internal communication structures in insurance

companiesaspartofitsguidelinesonriskmanagement. InSpain,whistleblowingisalsolimitedto

financialand

accounting

matters,

although

the

corporate

governance

code

recommends

that

listed

companies establish whistleblowing mechanisms (used essentially to denounce financial and

accountingirregularities).

Question15:Forallof theabove,does the lawprovideguidanceabout the roleof supervisory

boardsincasesoftwotierboardstructures?Foralloftheabove,doesthelawprovideguidance

abouttheroleofseniormanagement?

Thisquestionassessestheroleofsupervisoryboards, ifany, inencouragingacompanytorespect

human rights, including the extent to which the same duties are owed by members of the

supervisoryandmanagementboards. Italsoqueriestheroleofseniormanagement.

Supervisoryboards

The surveys suggest that practices regarding twotierboard structures vary significantly amongst

jurisdictions. Forexample, in Sweden, theUK,Canada, the U.S.,Australia, New Zealand,Hong

Kong,India,Malaysia,PapuaNewGuinea,Singapore,NigeriaandSouthAfrica,therearegenerally

notwotierboardstructures. Inotherjurisdictions, twotierboardstructuresvary frombeing: (a)

allowedforpubliccompaniesbutrarelyused(Algeria,Belgium,Finland,LuxembourgandSpain);(b)

compulsory (Indonesia for limited liability companies, Germany for listed companies, the

Netherlandsforsomelistedcompanies,Russiaforcompanieswithmorethan50shareholdersand

theUAE for limited liabilitycompanies); (c) notrequiredbutcommonlyused(e.g.Japan);and (d)

not

required

but

provided

as

an

over

arching

alternative

to

more

specific

committees

(Italy).

The surveys suggest that in most jurisdictions with twotier structures, the supervisory board

controlsthemanagementboard,which isresponsibleforthecompanysdaytodaybusiness. The

supervisoryboardremainsresponsible fordetermininggeneralcorporatestrategy,supervisingthe

managementboardand inspectingall company transactions. Itmayalsobe taskedwith specific

functions,suchassupervisingthebudgetorannualreport(UAE). Inmostcasesitappearsthatthe

supervisoryboardmembersaredirectorswiththesamedutiesasthemanagementboard. There

are some exceptions, such as China and Japan, where the supervisory board is made up of

shareholderandworkerrepresentativesandnonvotingstatutoryauditorsrespectively.

Some surveys contend that the existence of a supervisory board may contribute to fostering a

corporateculture

respectful

of

human

rights,

especially

where

that

board

is

given

aparticular

corporategovernance role, including in relation to thecompanysCSRactivities. Forexample, in

Russia, the 2002 Corporate Governance Code issued by the Federal Financial Markets Service

suggests that the supervisoryboarddevelops internal ethical guidelines reflecting the company's

social responsibility, in particular, affirming its duty tomaintain high standards of quality for its

products and to comply with environmental and safety regulations. In the Netherlands, the

managementboardhastosubmittheCSRpolicytothesupervisoryboardforapproval. InIndonesia,

companiesoperatingon thebasisof Islamic lawmust alsohavea Shariah SupervisoryBoard to

advisethedirectorsandsupervisethecompanysactivities.

Thesurveysalsosuggest that,at times,themakeupofsupervisoryboardsmaymake themmore

qualifiedto

advise

on

human

rights

related

issues.

For

example

ruggie corporate law project jul 2010

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