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A Potential Tool for Protecting Human Rights in the Third World
August 16, 2007
By Bart Mongoven
The International Financial Corp. (IFC) announced recently it is joining forces with the United Nations' top expert on the business/human rights issue to study the impact of investment agreements on citizens in the developing world. The study suggests the United Nations is at least considering taking a powerful position regarding standards for Western multinational corporations operating in developing countries. It also suggests a tool might be coming to limit the degree to which state-owned enterprises can undo the efforts of these multinationals to protect citizens.
At issue are investment contracts that put a corporation's rights -- to water, for example -- above those of the people who live in the vicinity of a major development project. The study could recommend that such contracts include clauses that allow a government to break the deal in order to avoid human rights violations. If the recommendation is implemented, then, governments that might put their citizens' need for water second to the desire to maintain a lucrative contract no longer would have the excuse that their hands are tied. Such a clause would not directly force changes in what governments do -- ultimately governments will do what they are going to do -- but it would clarify state and corporate complicity in human rights problems.
Corporations and Human Rights
For more than two decades, major industrial projects in developing countries have been beset by questions of where corporate responsibility regarding human rights begins and ends. Major industrial projects in developing countries often result in massive changes to the landscape and environment -- and thus affect the people who live nearby. They also bring labor market changes and changes in social relations. When these changes rise to the level of human rights violations, companies are faced with two questions: First, to what degree are they responsible for either scaling back operations or stopping the violations? Second, under what conditions must they act to stop abuses in their sphere of influence?
In April 2005, then-U.N. Secretary-General Kofi Annan named Harvard professor John Ruggie as the U.N. special representative for business and human rights. Ruggie was tasked with assessing the existing status of rules, norms, codes of conduct and informal agreements on corporate responsibility regarding human rights globally and with recommending ways of combining these into one clear set of ideas.
The creation of Ruggie's role was a result of the change in attitude toward globalization during the first half of the 2000s, in which human rights, labor and other activists stopped seeing corporations as villains that needed restraint and began to see them as potential tools for positive change in globalization. The United Nations' first attempt at addressing this -- a document issued in 2003 and referred to as the U.N. Norms -- called for corporations to be considered nearly as equally responsible as states in protecting and ensuring human rights.
The Norms were heralded by campaigners as the epitome of the new view of corporations, since they not only held corporations to high standards of behavior, but also assigned them responsibility to act and react to changes on the ground. Governments, however, chafed at being put on par with corporations -- or losing jurisdictional ground to some unknown enforcement mechanism -- and corporations cringed at the prospect of being told to ensure human rights in places where they have little control over the actions of local and national governments.
The strong reaction to the Norms resulted in Ruggie's appointment -- and most saw his task as simply combining the Norms with other codes of conduct, including some developed by the IFC, into a comprehensive, workable system that would be palatable to governments, though not necessarily to corporations. However, Ruggie's first report, issued in March 2006, dashed any hope that he would limit his work to those boundaries. In it, he criticizes the Norms for putting corporate responsibility on par with that of governments. Though the mission of his office, he said, was to find a way to define corporate responsibility as it pertains to human rights, the primary responsibility for protecting those rights rests with governments.
Ruggie's initial report led many to believe that his recommendations would amount to a document suggesting ways of looking at the issue. Instead the second report included a comprehensive overview of work done on the issue so far, but Ruggie's actual recommendations for moving forward were put off for another year. The announcement that he and the IFC are going to investigate contracts and those areas where contracts could use reform suggests that he sees his report for the IFC study as far more powerful than many thought.
Specifically, Ruggie and the IFC will examine clauses in contracts between lenders and states that either freeze the human rights laws that affect investors, or that compensate investors for the costs incurred by complying with new human rights laws. The study will look at the potential impact of these clauses on the host states' ability to adopt and implement new human rights laws.
The power to develop contracts is central to business and the inviolability of them is necessary for successful commercial relationships. The study points not to finding ways to abrogate current contracts, but essentially to develop a norm for new contracts. The key is that many contracts contain clauses that say a country cannot change labor, environmental or other laws after a project contract has been signed. In some extraordinary circumstances, these agreements can indeed stop governments from undertaking their traditional role in preventing human rights crises.
For instance, if a contract guarantees a specific water supply for an industrial project, states cannot divert that supply to humanitarian purposes in the event of drought. The company can argue that without a guarantee that the water supply will be stable, it cannot profitably run the operation. The company is not causing the humanitarian crisis and it might not be preventing government action deliberately, but the effect is to limit the government's ability to act to protect human rights.
The Larger Context
In inserting himself into contracts between companies and states, Ruggie is clearly saying that he is willing to make a difference in how the international community views corporations' responsibilities on human rights. It goes beyond what some believed would be the limited scope of his work and, given the wide amount of buy-in to his work from all the relevant parties, it instead points to the inevitability of a new set of rules that will affect businesses working globally.
It also is clear, however, that Ruggie is planning to have a powerful impact on governments in developing countries. In his interim report, Ruggie said he aimed to achieve a workable balance between governments as the primary guarantor of human rights and corporations as upholders of the standards. To achieve his mission, he is looking for models and guidelines, and the IFC Guidelines are one of the most influential. In 1995, the IFC issued its own standards for lending and human rights. The IFC guidelines are a thorough and relatively strict set of standards that banks must follow when lending to a project that involves the IFC. The guidelines have been held out by campaigners and corporations alike as a reasonable way to address the issue, and they have influenced almost every similar effort that has followed, including the Equator Principles, a code of conduct signed on to by banks representing more than 80 percent of private development lending.
The problem, however, is that while the IFC can simply decline to do business with certain banks, there is no mechanism to enforce the Equator Principles -- outside of the threat of public condemnation. Even if the Equator Principles are followed to the letter, they do not constrain the activities of some 20 percent of projects that get development lending. Those projects that cannot get funding from Equator banks can get it elsewhere. Similarly, the effectiveness of the numerous codes of conduct developed by Western companies is severely limited by the fact that a state-owned company will step in if Western companies will not take on a project because it is considered too risky from a human rights point of view.
Western companies see this as lost business, while human rights campaigners see it as a step backward -- from a responsive party taking on a delicate project to an uncontrollable party taking it on. Governments of many poor developing countries, meanwhile, see it as a blessing not to have corporations and their lenders meddling in internal affairs.
Ruggie's answer, alluded to in his interim report, is that a future regime of "shared responsibility" must emphasize and clarify government responsibilities when faced with corporate activities that could have or are having a deleterious effect on human rights. He suggests that, through international cooperation and internal capacity building, states can become better at policing human rights abuses. This appears to be a return to the traditional situation in which human rights protection is the responsibility of states, which may or may not care to act.
On one hand, the criticism is accurate; it would be a return to the status quo -- governments bear responsibility. On the other hand, it would set up a situation in which, if states are given guidance and resources, they no longer can claim that human rights abuses surrounding industrial projects are outside their control. In possibly setting up a robust support system for developing country governments, Ruggie essentially is calling the bluff of despotic leaders who say they are powerless to stop corporate abuses.
The key point is that, because of the pressure from human rights campaigners, Western multinationals are unlikely to place their contracts above the need to protect human rights. To use the example of a water guarantee, no company with shareholders and a consumer market in the West could withstand the public blowback of placing its water needs above those of a dying population. Though some examples are far messier than the water diversion issue, public companies are sensitive to the possibility of criticism and few are willing to take the chance of holding back the hand of a government that is actively trying to protect human rights.
One important aspect of this approach, then, is that it appears to place pressure on deals between Third World governments and corporations owned by foreign states, such as a Chinese or Malaysian national oil corporation working in an African country. A global norm regarding these contracts will not, by itself, solve human rights problems caused by industrial projects, but it will give governments a way to circumvent contracts when the concern is human rights. Clauses in contracts providing an out for governments would make clear in the event of a human rights crisis that governments have actively decided to favor commercial interests over humanitarian ones, or vice versa. The excuse that contracts are stopping them from action will have been forcibly removed.
In one effort, therefore, Ruggie has sent two distinct messages. First, he has signaled that his report will provide tangible rules that likely will evolve into international norms. Second, he is setting the stage to call the bluff of governments that use lending agreements (and, more broadly, commercial contracts) to justify human rights violations -- or inaction in the face of them. This also will set the stage for companies to demand harmonized human rights impact assessments -- a goal that Ruggie and activists share.