Smart Regulation Proposal 2: Imposing duty of care Olivier De Schutter

Imposing a duty of care The proposal The advantages (1)Facilitating extraterritorial reach of legislation targeting EU companies (2)Overcoming the insufficiencies of private initiatives in supply chain management (3)Incentivizing the company to monitor its business partners The outstanding problems

The proposal

The distinction between ownership relationships (parent-subsidiary) and contractual relationships (joint ventures or supplier-buyer relationships) The (draft) Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights (2003) Final Report of the Special Representative of the UN Secretary General on the issue of human rights and transnational corporations (2008)

The proposal Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights (2003): ‘Each transnational corporation or other business enterprise shall apply and incorporate these Norms in their contracts or other arrangements and dealings with contractors, subcontractors, suppliers, licensees, distributors, or natural or other legal persons that enter into any agreement with the transnational corporation or business enterprise in order to ensure respect for and implementation of the Norms.’

The proposal Final Report of the Special Representative of the UN Secretary General on the issue of human rights and transnational corporations (2008): ‘To discharge the responsibility to respect requires due diligence. This concept describes the steps a company must take to become aware of, prevent and address adverse human rights impacts. (…) sales or procurement teams may not know the risks of entering into relationships with certain parties’ (paras. 54 and 62)

The advantages

The advantages (1): jurisdiction The problem of extraterritorial jurisdiction in order to impose compliance with human and environmental rights where direct foreign liability is imposed Targeting the companies domiciled in the home State and imposing on them obligations of due diligence

The advantages (2): overcoming private initiatives The proliferation of private initiatives for supply chain management The problems

The advantages (2): overcoming private initiatives 1. The problem of scale Too few MSIs / IFAs to effectively concern most TNCs (75000, affiliates, 60 million workers) OECD Guidelines on Multinational enterprises require ‘investment nexus’ Model IFAs recommend extension to suppliers / co- contractors of suppliers 2. The problem of coordination Joint Initiative on Corporate Accountability and Workers’ Rights (JO-IN) (Clean Clothes Campaign, Ethical Trade Initiative, Fair Labor Association, Fair Wear Foundation, Social Accountability International, and the Workers Rights Consortium) Global Social Compliance Programme (GSCP) (Carrefour, Metro, Migros, Tesco and Wal-Mart) Objectives : references codes, mutual recognition of auditing

The advantages (2): overcoming private initiatives But such coordination efforts -may lead to alignment on the lowest common denominator -may lead to free rider behavior and to a ‘Gresham law’ in various monitoring schemes 3. The problem of laggard companies or non- trademark companies No incentive to develop effective forms of supply chain management

The advantages (3): incentivizing control Comp. Connelly v. RTZ Corporation and Others, UKHL 1997 (Namibian subsidiary of RTZ exploiting a uranium mine : liability of RTZ which had advised the subsidiary about health and safety policies) with Lubbe and 4 Others v. Cape plc, UKHL 2000 (exposure to asbestos from a mine exploited by a subsidiary of defendant company: the parent ‘failed to take proper steps to ensure that proper working practices were followed and proper safety precautions observed throughout the group’)

Three outstanding problems

1. Weak linkage to non-export sectors risk that the highest wages, and the best quality jobs, will be concentrated in the export sectors, whereas the local economy will remain based on low-skilled, low-paid jobs, often outside the formal economy forms of spillover should be promoted from the export sector to the local economy more generally

Three outstanding problems 2. ‘Private regulation’ as a Northern product dominated by the concerns of Northern NGOs / unions take little account of concerns specific to developing countries’ workers may pay more attention to working conditions than to labor rights empowering workers (freedom of association and collective bargaining), sometimes neglected in order to allow doing business in repressive contexts (cf. debate on ‘parallel means’ to exercise freedom of association) may create non-tariff barriers to access to global markets (costs of auditing, situation of SMEs) 3. The question of remedies The role of civil liability and damages to victims Dilemma of cutting off from suppliers who do not comply - remedy may be worse than the evil to be combated Ambiguity of imposing compliance by suppliers where they also must offer the best prices and meet volume requirements