The role of human rights for international small and medium-sized enterprises

Small and medium-sized German enterprises are increasingly international in their orientation. This is a trend that is gaining momentum significantly with the advance of globalisation and digitalisation, and with it, framework conditions are changing that in part exert a major influence on companies’ core business. It is becoming increasingly important for SME entrepreneurs to be aware of these conditions and to take them suitably into account within the scope of their business activities.

These framework conditions relate both to environmental and, increasingly, to human rights aspects. There can be no doubt that the international commitment of German companies in the countries in question has a fundamentally positive local effect. With investments and entrepreneurial activities, for example, employment, incomes and tax revenues increase, and with them social security does too.

Yet breaches of human rights repeatedly occur in the form of enforced population displacement, environmental damage, child labour, restrictions on trade union rights or harm to employees’ health, for instance. This is not always caused directly by the company itself but frequently occurs in connection with the upstream supply chain or the use of locally manufactured and processed products.

Redefinition of entrepreneurial responsibility

In the past, a company’s de facto area of responsibility was clearly recognisable. The moral responsibility usually lay within the company’s immediate sphere of influence. But this clear boundary of responsibility is increasingly blurred in connection with growing globalisation. Entrepreneurial responsibility is spreading, intentionally or not, and confronts companies with new challenges.

The United Nations is a main driver for human rights, and, in addition to government bodies, increasingly sees business enterprises as under an obligation to deliver. The formal basis is the UN Guiding Principles on Business and Human Rights (UNGP), which are subdivided into three interlocking pillars: the state’s duty to protect human rights, the responsibility of business enterprises to respect these rights, and the need for access to judicial and extra-judicial remedies for violations of human rights or their redress.

The specific focus of these human rights principles is on the negative repercussions on individuals or society that can arise in connection with the business activities, products and services of a company – directly or within the framework of business relationships (supply chain). To prevent breaches of human rights within business processes, it follows that companies should maintain a process for exercising due diligence obligations in the area of human rights. The aim must be to identify at as early a stage as possible human rights repercussions of business activity, to prevent negative repercussions and to make good and compensate damage that has already been done. Furthermore, companies are to publish publicly accessible reports on the repercussions and the measures undertaken.

A corresponding due diligence process is recommended already in the OECD guidelines for multinationals with a focus not only on human rights but also on further aspects such as employees’, environmental or consumer concerns and the subject of bribery.

Human rights in companies – current trends in Germany

The German federal government has already taken up this international demand for companies to take on responsibility for respect of human rights. The Foreign Office has taken the lead and drawn up a National action Plan on Business and Human Rights jointly with interest groups such as associations, companies and NGOs. The Action Plan is due to be approved by the Cabinet in mid-2016. The resulting consequences in entrepreneurial practice are not currently foreseeable in specific detail, but within the current debate there are actors who consider a voluntary entrepreneurial commitment to be insufficient. Pirmin Spiegel, general manager of the charity Misereor, says, “We urgently need rules that commit German companies to respect human rights in other countries”.

What is clear is that pressure on companies and the government to introduce binding German regulations is on the increase. The background is not only regulatory initiatives at the EU and international levels but also the fact that German firms are regularly associated with significant human rights violations. According to a recent survey by the University of Maastricht, 87 out of 1,800 human rights complaints evaluated related to German companies. Among the countries listed, Germany thus takes an inglorious fifth place. Only the United States, the UK, Canada and China have a worse track record. The complaints relate mainly to imports of primary raw materials for the automobile and chemical industries. That is where the National Action Plan on Business and Human Rights, which has been in the process of being drawn up since the end of 2014, kicks in.

Reluctance on the part of internationally oriented German SMEs

Internationally oriented German SMEs show reluctance in dealing with the topic of human rights. Statements such as “human rights problems really are not a German problem” and references to existing the CSR management and corporate culture seek to excuse this reluctance.

In practice, human rights as an area of corporate activity have until now seldom been managed centrally and systematically, and if they do play a role, then in individual instances and in relation to specific projects. Furthermore, human rights issues as seen by many German companies, irrespective of global commitments or global supply chains, are considered to be fundamentally less important than environmental issues, for instance.

What can be said for sure is that no company is calling for further regulation, especially on such a hard to pinpoint and, from a German viewpoint, such an emotionally remote issue as human rights. As a consequence many SMEs are biding their time and waiting to see what regulations may be in the pipeline. That is a risky strategy!

The following examples testify to both the dynamics and the clarity with which the issue of human rights is gaining in relevance:

  • Human rights in German courts: families of victims of the devastating fire that swept a Pakistani textiles factory have sued the textiles discounter KiK for damages in the Dortmund district court. This is the first case of its kind in Germany. Never before has an employee of an Asian supplier taken legal action against a German company in a German court.
  • France: the French National Assembly recently approved the first reading of a bill to require large companies domiciled in France to observe due diligence on human rights and environmental issues. Fines of up to ten million euros or liability under civil law for breach of this requirement are envisaged.
  • Conflict commodities: many companies are already required by the US Dodd-Frank Act and OECD guidelines to observe due diligence in conflict and high-risk areas and to provide proof of responsible behaviour in dealing with conflict commodities. What this means is that companies directly affected by the Act or called upon to do so by a contractual partner must make their supply chain transparent and develop resilient reporting.

Human rights – an issue for international SMEs?

Around the world many laws and requirements on aspects of human rights are today binding on international SMEs in individual countries and regions. Furthermore, more and more groups and large enterprises with global supply chains are requiring their contractual partners within the supply chain to commit to verifiably observing relevant human rights standards.

Companies that are not directly affected in Germany by legislation requiring them to observe specific standards can also be obliged to observe and to prove that they observe human rights standards by an international equity interest or by supply chain relationships. If the company itself, such as a carmaker or a brand-oriented food producer, is the head of a supply chain, that usually presupposes respect of international human rights standards in its supply chain. A breach can lead to extensive economic consequences such as fines and cancelled orders, damage to reputation and a boycott.

The Volkswagen case demonstrates, however, that with international commitments the moral and cultural standards of the company’s headquarters or its central management are difficult to implement throughout the company. At Volkswagen there was, in effect, a gap which arose between VW compliance requirements and incidents, especially in the United States, that ought to have been closed by clear and voluntary commitments to observe national laws and requirements. Even if the repercussions that VW faces can hardly apply to other companies, this example at least makes it clear that observing standards and voluntary commitments in complex international enterprises and supply chains is a major challenge.

Rising pressure on enterprises

Internationally, human rights are increasingly finding their way into national legislation. The result is, for internationally active companies, a very heterogeneous regulatory environment. As a consequence companies must manage the different requirements and regulations consistently and incorporate them more firmly in their own compliance endeavours. In the case of breaches and failure to observe them, they face sanctions in respect of both their reputation and by their contractual partners. Companies in the automobile and chemical industries and in retail and consumer goods in particular are responding increasingly sensitively and are fearful of accusations that they do not have their supply chain under control.

In particular, the “driving forces behind global supply chains” are expected to have a “clean” and transparent supply chain. Leading initiatives and standards such as the Global Reporting Initiative, the Dow Jones Sustainability Indices, etc. specify clear requirements and call for expansion of existing monitoring activities. Companies affected pass these demands down along their supply chains. Suppliers who enter into a direct or indirect business relationship with a principal must observe defined international human rights standards and may be required to prove that they do so.

No less relevant are groups of investors that systematically put issues such as corporate social responsibility (CSR) and human rights on their agendas. They expect that to reduce the risk for their investments. Furthermore, digital communication and social media are leading to a growing influence of stakeholders from the public environment of companies. For one, they uncover human rights violations and make them public; for another, they enter into discussion processes on government guidelines and legislation in the pursuit of their own objectives.

Human rights reporting standards: now is the time for companies to act!

Companies should deal with human rights seriously and at any early stage. Essentially, they must define and adopt a systematised and standardised behaviour on human rights across the company and within the framework of business relationships.

Helpful in this context is the UN Guiding Principles Reporting Framework developed by the international accountants and tax advisors Roever Broenner Susat Mazars and the human rights organisation Shift which was published in May 2015. It constitutes guidelines that for the first time are likely to establish themselves as an international standard. The Framework enjoys a high level of acceptance both by international NGOs, investors and mutual funds and by companies. Companies such as Unilever, Nestle and H&M have already adopted this UN Framework for their own human rights reporting and other well-known companies are planning to follow suit.

The advantage is that companies can on the basis of a global standard identify human rights issues and action areas that are of relevance for them and systematically and actively monitor and control them. Furthermore, a company is in a position to make a targeted statement if contractual partners, NGOs or the media make enquiries about specific events. By using the UN Guiding Principles Reporting Framework companies can demonstrate their ability to act and make reliable statements on human rights aspects in their own supply chain. Last but not least, by being prepared to report and to abide by an internationally recognised UN framework a company documents its acceptance of responsibility for respecting human rights, not just superficially, but in fact.

In conclusion it can be said that in human rights an issue has come to the fore that will influence internationally oriented SMEs very quickly and with far-reaching consequences. In my view action is clearly required!

Kai M. Beckmann, Roever Broenner Susat Mazars

Human rights: top tips for companies

Important steps towards integrating the subject of human rights in companies:

  • Define the significance of human rights for the company, taking into consideration direct, in-house consequences and external repercussions, the supply chain and environmental issues or dual-use aspects.
  • Secure a mandate from the management or the proprietor. Without a commitment on human rights from the management, the subject will continue to play no part in the company or in further business relations. Entrepreneurs and management should assume responsibility for the subject by means of active intervention as role models.
  • Focus on topics with a particularly high risk potential.
  • Set up a cross-departmental team that covers all areas of the company and can thereby incorporate all of its essential entrepreneurial aspects (Sales, Procurement, HR, Communications, Marketing, etc.) and identify conflicting goals at an early stage.

This article appeared in the blog.