IMPROVING HUMAN RIGHTS COMPLIANCE IN SUPPLY CHAINS.

• Author: Parella, Kishanthi

INTRODUCTION 729 I. WHAT IS CORPORATE HUMAN RIGHTS COMPLIANCE? 736 A. From Multination Corporation to Globally Integrated 736 Enterprise: The Benefits of the Global Supply Chain to Transnational Corporations B. From Corporate Social Responsibility to Human Rights 738 Compliance: The Risks of Governance Gaps in the Global Supply Chain C. Regulating the Supply Chain 742 II. EXPLAINING COMPLIANCE THROUGH REPUTATION 748 A. The Value of a Reputation 749 B. A Typology of Reputational Mechanisms 751 C. Adapting the Typology for a Corporate Audience 755 III. USING REPUTATIONAL MECHANISMS TO IMPROVE TREATY DESIGN: CHALLENGES WITH CREATING SELF-ENFORCING AGREEMENTS FOR PUBLIC GOODS 755 IV. USING TREATY DESIGN TO IMPROVE REPUTATIONAL MARKETS: ORGANIZATIONAL CHANGE AS INFORMATION DISCLOSURE 759 A. External Reputational Mechanisms and Corporate Change 759 1. Illustrative Example: Disney, Shareholders, and 767 "Project Kaleidoscope" B. Legal Institutions as External Mechanisms 770 1. Illustrative Example: Federation Internationale de 772 Football Association and the UN Guiding Principles on Business and Human Rights C. External Reputational Mechanisms: Lessons for the BHR 776 Treaty 1. BHR Treaty as a Focal Institution 776 2. BHR Treaty as an External Institution 777 D. Reputational Mechanisms and Preventative Organizational 779 Changes V. IMPLICATIONS FOR GLOBAL HUMAN RIGHTS COMPLIANCE: SPIRALS, TEXTURE, AND TORQUE 780 A. Spirals: Is It Compliance or Public Relations? 780 B. Texture: Under What Conditions Will Change Occur? 784 C. Torque: How Much Change Is Possible? 788 CONCLUSION 792 INTRODUCTION

Last year, many of the world's largest corporations took a reputational hit, with particularly large declines for U.S. companies. (1) These declines reveal a "crisis of trust in the court of public opinion" as corporations fail to deliver on our expectations of them. (2)

This is particularly true for transnational corporations (TNCs) that operate globally through elaborate supply chains. Many of our most beloved brands do not actually make the products for which we love them: iPhones, sneakers, handbags, etc. (3) Instead, these products are sourced, manufactured, assembled, transported, distributed, warehoused, marketed, and sold by several different companies, often in several parts of the world. (4)

The supply chain is a source of both strength and weakness for corporations. While they offer considerable competitive advantages for many of the world's largest companies, they are also sources of reputational vulnerability for the same. For example, Nike vaulted to the top of the footwear industry through smart choices concerning its supply chain that allowed it to save on production costs and divert those resources to marketing. (5) But media exposure revealed that this cost saving also comes at a cost, contributing to "sweatshop conditions" in these supply chains. Exposure of supply chain conditions contributed to consumer boycotts and shareholder activism--all with serious and negative reputational effects for Nike. (6) The same is true for Apple. Often heralded as the leader in supply chain management, Apple has been plagued with media exposure and public criticism concerning labor practices in its supply chain. (7)

This Article examines the following: What does it mean to be socially responsible in the supply chain? We can imagine two different answers: "do good" or, at least, "do no harm." Under the first approach, we might hope that transnational corporations contribute to the social welfare of those in their supply chains, such as by building hospitals, developing infrastructure, improving access to health care, contributing to water purification efforts, and more. (8)

Instead, this Article investigates the second approach to corporate social responsibility in the supply chain: the "corporate responsibility to respect" that requires corporations to "become aware of, prevent and address adverse human rights impacts." (9) It is at this nexus that social responsibility becomes a matter of corporate compliance--specifically, about human rights. (10)

A key component of a successful compliance strategy is incentives. (11) For corporations, incentives can be supplied by either national or international legal institutions or reputational mechanisms (or some combination of both). The problem is that each of these independently is inadequate to address the incentive problem for social compliance.

Let's begin with the legal incentives. Many national and international transparency laws and other initiatives only require that corporations publicly disclose what steps they take to improve social compliance in supply chains, but many do not require that corporations adopt specific compliance programs. (12) A corporation can satisfy these laws by stating what it does or does not do. In contrast, article 5(2) of the 2019 revised draft of a legally binding instrument on business and human rights ("BHR treaty") requires that state parties to the treaty adopt measures that ensure that those conducting business activities engage in human rights due diligence. (13) The draft text specifically lists the compliance requirements of human rights due diligence including identifying and assessing human rights risks, taking preventative action, monitoring human rights impacts, and communicating with stakeholders on progress. (14) However, while promising, this treaty may fail in many ways. Even if a draft text is adopted, the home jurisdictions of large transnational corporations, such as the United States, may decline to join the treaty or implement its requirements through domestic legislation. This presents a problem because treaties regulate corporations vis-a-vis state intermediaries; if states are unwilling to fulfill this role, then it proves challenging for a treaty to regulate corporations directly.

Alternatively, we can turn to the reputational markets to provide the incentives that the law cannot. But reputational markets have their own incentive problems that have to do with signaling. Corporations may only invest in costly compliance efforts if there is a prospect of a reward, such as increased market gains. The problem with reputational markets for social compliance is that the actors who supply the reputational rewards or sanctions--such as consumers--often cannot tell the difference between a good compliance program and public relations "greenwashing." This confusion creates the risk that "good firms" are undercompensated and "bad firms" are overcompensated by the reputational markets, thereby reducing the likelihood that the former will actually invest in a meaningful compliance program given that the costs invested in a compliance program are unrecognized and unrewarded in the reputational markets. This signaling problem compromises the types of voluntary organizational change that we may expect both ex ante (preventative) or ex post (reactive). Corporations may be unwilling to invest in costly compliance efforts ex ante if their efforts go unrecognized and unrewarded in the marketplace. Similarly, even corporations struggling to reestablish legitimacy following a crisis may opt for a lower level of organizational change if it is sufficient to satisfy consumers. (15)

This is where the law comes in. This Article argues that the incentive problem is surmounted by blending "law and reputation" so that (a) reputational mechanisms improve the effectiveness of legal institutions, such as the BHR treaty, or (b) legal institutions improve reputational markets for social compliance by correcting the signaling problem. This Article draws upon scholarship examining international human rights," (1) organizational behavior, (17) and corporate reputation (IK) to develop a typology that illustrates the complementarity between reputational mechanisms and international legal institutions that can improve human rights compliance in global supply chains.

First, reputational mechanisms can help improve the effectiveness of international legal institutions {reputation enhances law). This Article's typology may help design better international agreements concerning human rights by identifying the "carrots and sticks" an agreement should include in order to incentivize corporations to cooperate. This insight is particularly important when we consider that the business and human rights treaty under development may never enter into force; even if it does, powerful states may refuse to join it. This Article's typology of reputational mechanisms explores how this treaty can "shortcut the state" to reach its primary audience--corporations--even if that corporation's home jurisdiction refuses to join the treaty. (19)

Second, legal institutions (both domestic and international) can improve signaling within reputational markets for social compliance, thereby correcting the incentive problem (law enhances reputational markets). Legal institutions can do so in a number of ways. First, legal institutions can create a "focal point" (20) regarding normative standards that helps to correct reputational markets so that "good firms" are adequately rewarded for their investments in costly compliance programs. Legal institutions can help correct this problem by serving as a "focal point" for what constitutes best practices on global social compliance. This focal point then helps to distinguish between different companies purporting to "invest in CSR" (corporate social responsibility) so that genuine compliance programs "stand out" and are appropriately rewarded. (21)

Second, this signaling value is especially important in a postcrisis situation when a corporation embarks on organizational change. Like all organizations, a corporation is not self-sufficient. (22) It requires certain resources to survive, and those resources are provided by external actors. (23) Legitimacy is such a resource. (24) Corporations need it to secure consumers, recruit talent...