The Impact of enhanced corporate transparency

Human rights reporting by companies has become a hot topic in the business and human rights world, particularly with the passage of an EU Directive making it mandatory for certain large companies to report on their human rights impacts as part of their annual reporting. The Directive requires companies to provide a description of their human rights policy, the main human rights risks they face, including those arising from business relationships, how these risks are managed and the due diligence processes they employ to identify, prevent and mitigate adverse impacts. Corporate groups should disclose the relevant information on a group-wide basis. The Directive is yet to be implemented by EU member states, but some large corporate groups, such as Unilever, Nestle and Ericsson, who fall within the scope of the Directive, have taken a pro-active approach to human rights reporting and endorsed the UN Guiding Principles Reporting Framework.

By Dr. Anil Yilmaz Vastardis. You can follow Anil on twitter: @anil_yv.

Unilever was the first to actually publish their human rights report using that framework. Unilever’s report was critically analysed in an earlier blog post published here by Dr Tara Van Ho, who rightly highlighted the lack of information in the report on allocation of responsibilities between different corporate entities within the corporate group. If corporate human rights reporting is to have a real, positive impact on the protection of human rights, companies should stop believing that they can fulfil the human rights reporting requirements by reporting on their CSR activities (the distinction between the two was aptly described, again, by Tara in an earlier blog post published here) and start reporting information pertinent to their impact on human rights. Rigorous reporting would not only require companies to take a good look at their human rights impact, but would also empower victims of corporate human rights abuses with knowledge that could assist them in building a case against companies.

Information is power

In the last two decades, numerous claims for remedy have been filed in various European countries, the US and Canada by victims of human rights abuses committed overseas by subsidiaries of companies headquartered and/or listed in those countries. Obstacles to accessing remedies for such cross-border claims were analysed in depth in a 2013 Report co-authored by Professor Gwynne Skinner, Professor Robert McCorquodale, Professor Olivier De Schutter, and Andie Lambe. Structures of corporate groups (i.e. the challenges created by corporate veil) and evidentiary burden are listed among the most significant barriers to the success of these claims. The report explains how the barriers created by the corporate law principles of separate personality and limited liability shield the direct and indirect shareholders from the liabilities of their subsidiary. Courts may disregard these principles (i.e. lift the corporate veil) on limited grounds provided in national laws and hold the shareholder or the parent company liable for actions of its subsidiary. Among reasons for this, courts have repeatedly pronounced that the disregard of limited liability and separate personality is possible where the parent company exercises beyond a certain level of control over the decisions of the subsidiary.

The separate personality, combined with the allocation of the burden of proof on the claimant to show the direct involvement of the parent, and the difficulties in obtaining such evidence (and add the financial difficulties of pursuing litigation abroad to the list), makes it a miracle for claimants to even overcome the jurisdictional hurdles of such a claim.

As a result, a recent US court ruling allowing a case of human rights abuses filed against ExxonMobil by Indonesian citizens to proceed under the Alien Tort Statute (‘ATS’) is being hailed as a victory for the enforcement of human rights law. The case concerns allegations that ExxonMobil aided and abetted the torture, kidnapping, sexual assault and murder of villagers by security forces in the Aceh province, where the company was operating gas fields. The case was first filed in the US in 2001, for alleged abuses that were committed in 2000 and 2001. Having struggled with probably each barrier listed in the 2013 Report over 15 years, the case is finally moving beyond the jurisdictional phase.

Certainly, this decision will be analysed from many different angles by legal scholars in the US and beyond who are experts in transnational human rights litigation. What caught my attention is the ability of the claimants to fulfil the ‘touch and concern’ standard established previously by the US Supreme Court in the Kiobel v Royal Dutch Petroleumbecause they gained access to key information found only in internal company documents.  The Supreme Court’s decision in Kiobel, in the simplest terms, was that the presumption against extraterritoriality of the ATS could only be reversed if the claimants could show that the claim sufficiently touched and concerned the US. Accordingly, in cases involving corporate defendants, if the tortious acts giving rise to a violation of international law were committed by a foreign corporate citizen outside the US, say in Indonesia committed by the subsidiary or sister of a US company located in Indonesia, the US courts will not have jurisdiction under the ATS unless some element of the violation sufficiently touches and concerns the US. The Supreme Court did not provide guidance in Kiobel as to how this standard would be applied, except to say that having a mere group presence in the US would not satisfy the requirement (Royal Dutch Shell group had a corporate presence in the US and was listed in the New York Stock Exchange, but the Supreme Court found this was an insufficient basis for jurisdiction).

The evidentiary burden becomes immediately evident by the fact the Indonesian claimants will only succeed if they can show that the case sufficiently touches and concerns the US. In this respect, the court stated that “the presumption against extraterritoriality may be displaced if, in combination with other factors discussed below, the plaintiff alleges substantial and specific domestic conduct relevant to a violation of the ATS.” The claimants thus need to show a link between the conduct of the US parent company and the violation, beyond mere investment in the subsidiary operating the business in Indonesia. What made the difference in the ExxonMobil claim was the information uncovered by the claimants’ lawyers among the documents released by ExxonMobil during the discovery phase. After reviewing those documents, the claimants alleged that the parent company executives seated in the US were not only aware of the abuses, but were also involved in the abuses.

The claimants allege that “High-level executives in the United States approved the deployment of military security, including the specific locations and tasks to be performed by the military security personnel…Exxon Mobil received “daily reports” on security matters, officials frequently travelled to the region to address them and company legal counsel approved requests to provide support to the military, the complaint said. Villager complaints were allegedly forwarded to executives in the United States, where company employees could view a live feed from closed-circuit cameras at the Aceh facility that was streamed over an internal computer network.”

Remedying the information asymmetry

Had the claimants not had access to internal company documents during discovery, they would not have the information that helped them show domestic conduct sought by the court. ExxonMobil’s liability is yet to be decided by a jury trial. It is hopeful to see that the victims now have the opportunity to have their day in court.

As explained by the 2013 Report, “[i]n continental Europe there is a particular barrier as there is no discovery or disclosure rule obliging the other party to divulge information in its possession.” The Report gives the example of the Netherlands where “the plaintiffs may demand that the corporate defendant provides relevant documents, [but] such a request is restricted by the fact that the requesting party needs to have a legitimate interest and that they need to specify the documents required.” This creates almost an impossibility for the victims, where the claimant carries the burden of proof but does not have the means to access internal company documents or have a specific knowledge about which documents held by which members of the corporate group would help its case.

Clearly, more generous rules on discovery would assist the victims in fulfilling the burden of proof. But without being naïve, one could expect that rigorous human rights reporting by companies could also remedy the information asymmetry between the claimants and the defendant companies to some extent. We are yet to see how these reports will evolve in practice. No doubt, even if a company is aiding and abetting security forces that commit human rights violations, they will not voluntarily publicise this on their annual report. If, however, they are obliged to honestly report on these issues, as otherwise they would be misleading investors, they are more likely to do their due diligence and refrain from taking part in such atrocities in the first place.

In terms of access to remedy, rigorous human rights reporting would allow claimants to identify which entities within the corporate group are tasked with taking the decisions that have an adverse impact on their human rights. Reporting on human rights due diligence would allow claimants to acquire knowledge about what the company does or fails to do about identifying, preventing, mitigating and remedying adverse human rights impact. Closing the information gap between the company and the victim would certainly allow the claimant carrying the burden of proof to present a stronger case.

Disclaimer: The views expressed herein are the author(s) alone.