The Management and Oversight of Human Rights Due Diligence

• Published date: 01 December 2021
• Author: David Hess
• Date: 01 December 2021
• DOI: http://doi.org/10.1111/ablj.12197

American Business Law Journal

Volume 58, Issue 4, 751–798, Winter 2021

The Management and Oversight of

Human Rights Due Diligence

David Hess*

The COVID-19 pandemic showed how vulnerable workers in global supply chains

are to adverse human rights impacts. Protecting such workers must be a

primary policy goal in the efforts to “build back better”from the crisis, and

businesses conducting human rights due diligence (HRDD) is a primary means

to do so. In Europe, there is a fast-moving trend toward legislatively mandat-

ing HRDD, and there is potential for similar movement in the United States.

Whether HRDD will significantly improve human rights conditions, however,

is an open question. Based on our experience with corporate compliance

programs, it is clear that the management and oversight of HRDD is an essen-

tial factor in ensuring meaningful implementation, as opposed to corporations

focusing on form over substance. This article identifies those key internal

governance issues and provides advice on how best to ensure effective imple-

mentation. The article argues that for most corporations, the day-to-day

management of HRDD best fits with the compliance function—not the legal

function—and this new role could be part of the next step in the evolution of

the compliance function. This article also discusses the role of the board

of directors and how HRDD combined with recent developments in the law of

fiduciary duties can push directors to engageinmorerigorousoversight.In

addition, it discusses the types of information that are essential for supporting

the management and oversight of HRDD.

*Professor of Business Law, Ross School of Business at the University of Michigan. An ear-

lier version of this article was presented at the Ethical Leadership and Legal Strategies for Post-

2020 Organizations symposium hosted by the Tobias Leadership Center, Indiana University;

the Center for Legal Studies & Business Ethics at the Spears School of Business, Oklahoma

State University; and the American Business Law Journal. I thank Robert Bird, Rachel Cham-

bers, and John Sherman III for their comments on earlier drafts of this article.

©2021 The Authors.

American Business Law Journal ©2021 Academy of Legal Studies in Business.

751

INTRODUCTION

The COVID-19 pandemic of 2020 laid bare the human rights challenges

existing in global supply chains. In the midst of a global health crisis, millions

of workers in the supply chains of multinational corporations (MNCs) lost

their jobs, placing themselves and their families at risk of devasting poverty

and vulnerability to severely exploitive labor relationships, such as debt bond-

age.

1

Instead of trying to prevent these problems, corporations used force

majeure clauses to cancel orders that suppliers were in the process of

completing,

2

orusedthethreatofsuchactiontoobtainsignificantprice

reductions and other changes to payment terms.

3

In the hard-hit garment

industry, in just the three months of April through June 2020, researchers

estimated that suppliers lost $16.2 billion in revenue due to order cancella-

tions.

4

Asaresult,workerslostmorethan$1.6billioninwages,

5

and in

Bangladesh alone, more than one milliongarmentworkerslosttheirjobs.

6

Although domestic laws often require that terminated workers receive sever-

ance pay, few workers reported receiving the full amount, and many received

no payments.

7

Workers then faced food insecurity and took on debt just to

feed their families.

8

Asordersstartedtopickbackupinthefallof2020,

1

See INT’LLABOUR ORG.&UNITED NATIONS CHILD.’SFUND, COVID-19 AND CHILD LABOUR:A

TIME OF CRISIS,ATIME TO ACT 15 (Gretchen Luchsinger ed., 2020) [hereinafter ILO &

UNICEF].

2

See John F. Sherman III, Irresponsible Exit: Exercising Force Majeure Provisions in Procurement

Contracts,6B

US.&HUM.RTS. J. 127, 127–28 (2021).

3

See Jennifer Venis, Covid-19: Limited Accountability for Fashion Brands Hitting Suppliers with

Pandemic Losses,I

NT’LBAR ASS’N. (July 15, 2020), https://www.ibanet.org/Article/NewDetail.

aspx?ArticleUid=E61A3185-C95D-4CB9-9DE9-6647FCD30B80.

4

See MARK ANNER,SCOTT NOVA &LIANA FOXVOG,UNPAID BILLIONS:TRADE DATA SHOWAPPAREL

ORDER VOLUME AND PRICES PLUMMETED THROUGH JUNE,DRIVEN BY BRANDS’REFUSAL TO PAY FOR

GOODS THEY ASKED SUPPLIERS TO MAKE 5 (2020).

5

Id.

6

See Mei-Ling McNamara, World’s Garment Workers Face Ruin as Fashion Brands Refuse to Pay

$16bn,T

HE GUARDIAN (Oct. 8, 2020, 2:15 a.m.), https://www.theguardian.com/global-

development/2020/oct/08/worlds-garment-workers-face-ruin-as-fashion-brands-refuse-to-

pay-16bn.

7

See PENELOPE KYRITSIS,GENEVIEVE LEBARON &SCOTT NOVA,HUNGER IN THE APPAREL SUPPLY

CHAIN:SURVEYFINDINGS ON WORKERS’ACCESSTO NUTRITION DURING COVID-19 2 (2020).

8

Id.

752 Vol. 58 / American Business Law Journal

buyers did not attempt to remedy these problems, but instead took advan-

tage of suppliers’ vulnerabilities and demanded deep price cuts, a practice

one organization termed “leveraging desperation.”

9

The negative economic impact of the pandemic is expected to persist for

some time. Researchers at the International Monetary Fund (IMF) state that

low-income developing countries (LIDCs) are facing a “lost decade,”with

the pandemic’s impact wiping out gains attained on reducing poverty over

the last ten years.

10

With schools closed and families desperate for money,

millions of children in countries such as Kenya and India are being

employed as cheap labor and are at risk of not going back to school.

11

In

short, the combination of MNCs using supply chains to shift financial risks

and human rights responsibilities to suppliers and both businesses’ and local

governments’ past lack of investment in social security systems has resulted

in “full-blown violations of social and economic human rights.”

12

Once the health crisis of the COVID-19 pandemic is under control,

the focus will shift to the economic recovery and addressing these human

rights concerns. There is a push, however, not just to rebuild the econ-

omy as it was, but to “build back better.”

13

For example, the World Busi-

ness Council for Sustainable Development (WBCSD) states that the

profound disruption to our economic systems creates an opportunity in

9

MARK ANNER,LEVERAGING DESPERATION:APPAREL BRANDS’PURCHASING PRACTICES DURING

COVID-19 1 (2020). A majority of suppliers reported having to accept orders at a price below

cost. Id.at2.

10

Daniel Gurara, Stefania Fabrizio & Johannes Wiegand, COVID-19: Without Help, Low-

Income Developing Countries Risk a Lost Decade,I

NT’LMONETARY FUND: IMF BLOG (Aug.

27, 2020), https://blogs.imf.org/2020/08/27/covid-19-without-help-low-income-developing-

countries-risk-a-lost-decade/.

11

See Jeffrey Gettleman & Suhasini Raj, As Covid-19 Closes Schools, the World’s Children Go to

Work, N.Y. TIMES (Sept. 27, 2020), https://www.nytimes.com/2020/09/27/world/asia/covid-19-

india-children-school-education-labor.html;ILO & UNICEF, supra note 1, at 17.

12

CORINA AJDER,MIRIAM SAAGE-MAAB &BEN VANPEPERSTRAETE,GARMENT SUPPLY CHAINS IN INTEN-

SIVE CARE?HUMAN RIGHTS DUE DILIGENCE IN TIMES OF (ECONOMIC)CRISIS 1–2 (Corey Barber &

Michelle Trimborn eds., 2020). Social security systems should provide benefits for such

employment-related matters as sickness, injury, unemployment, and old age. International

Labour Organization [ILO], Social Security (Minimum Standards) Convention,atPartIII-V,

No. 102 (June 28, 1952), https://www.ilo.org/dyn/normlex/en/f?p=NORMLEXPUB:12100:0::

NO::p12100_instrument_id:312247.

13

Org. for Econ. Co-operation & Dev. [OECD], Building Back Better: A Sustainable, Resilient

Recovery After COVID-19, at 2 (2020).

2021 / Human Rights Due Diligence 753