#9_From supply chain transparency to mandatory due diligence: The struggle is just beginning…

Most recently, lawmaking initiatives for a new European Union directive on mandatory due diligence in the supply chain have gained some prominence in the media and press. The proponents of this new regulation suggest combating the organized irresponsibility in transnational business operations as far as labour standards violations are concerned. In short, multinational corporations should not just be legally required to inform on human rights and environmental issues in their supply chain, but also to document how and with what impact they have acted upon changing any business practices in conflict with human rights. Albeit diverging in quality, examples for already existing regulation of this kind are found in several countries and business areas (for an overview European Commission, 2020): the UK Modern Slavery Act (2015), the Transparency in global supply chains Act in California (2010) as well as the “Duty of Vigilance” law in France (2017). Also, similar regulations for the businesses sourcing conflict minerals – which are ingredients to many electronic appliances – have been widely debated (e.g. Hofmann et al., 2018).

The nature of the underlying policy problem is complex and tragic: With every step away from the core firms in global production networks, compliance with labour standards becomes weaker (e.g. Palpacuer, 2008, Barrientos, 2013). Large multinationals or retail brands are involved in management and buying practices that go along or even benefit from labour standards violations. This is also the result of an organized irresponsibility in transnational business networks: Subcontractors and suppliers put the blame on buying companies such as large brands or retail chains for pushing prices downward so that suppliers cannot afford to uphold basic minimum standards for their workers if suppliers want to stay in business. At the same time, the buyers, often large multinationals corporations, declare that they do care for these very basic standards in principle, but they would lack the legal capacities to control the conduct of their suppliers and their subcontractors in the countries of operation. Ultimately, business representatives argue that upholding compliance with labour standards should be the duty of the state authorities of the country from which the parts and products are sourced. States, in turn, either argue they lack the capacities to oversee complex transnational business operations, they have no legal mandate to interfere in another country’s jurisdiction, or they need to develop local businesses in global competition.

The resulting trap of irresponsibility contributes to the prolongation of heavy violations of very basic labour standards and workers’ rights around the globe. Even the first two decades of the 21st century saw slavery, human trafficking, child labour, and union oppression beyond imagination (e.g. Crane, 2013; Pogge 2011): In principle, child labour should be abolished for decades now, but the International Labour Organization (ILO) documents about 152 million children in work, i.e. individuals aged between 5 and 17 years (ILO, 2017a). Likewise, forced labour in its private and state varieties should be long gone. Nevertheless, the ILO estimates see around 40 million people in forced labour of which 15 million are in forced marriages, 16 million work in the private economy, 5 million live under forced sexual exploitation and 4 million are subject to forced labour imposed by state authorities (ILO 2017b). Even more difficult to quantify, but undeniably a persistent reality in many workplaces is discrimination (ILO 2011), although condemned by ILO conventions (100 & 111) prohibiting discrimination and demanding equal treatment irrespective of a worker’s race, gender, religion or political views. And although ILO conventions (87 & 98) – guaranteeing workers’ rights to organize and collective bargaining – are in place for decades, dismissals of unionized workers, imprisonment of organizers and other sorts of violent oppression are regularly documented by the ITUC (2020a). Not to mention the millions of workers who are effectively excluded from the reach of ILO Conventions and other employment rights, because they are working along the subcontracting chains in precarious and informal work (International Metalworkers’ Federation, 2010).

The new due diligence regulations aim at contributing to end these labour standard violations. The rationale for these lawmaking activities is that workers’ rights are part of the Universal Human Rights and, on these widely accepted grounds, also multinational entities have a duty to oblige to and protect these human rights by managing their cross-border activities in a manner which is not in violation of labour standards (Young, 2004; Pogge 2011). And, where multinationals are complicit in such human rights violations, they have a legal responsibility to remedy (Ruggie, 2009). Based on these considerations, judicial duties can be derived which allow states or state-like authorities to craft laws and rules that sanction what has been called the “due diligence” of multinational firms engaged in cross-border supply chain operations, even where these are not under direct control of the organization in question (for a legal discussion, Davidov, 2015).

This newer generation of regulations aims to go beyond non-financial reporting as an indirect lever to bring companies to comply with labour standards (e.g. ITUC 2020b). Critics of pure transparency regulation have argued that these laws have had not much effect on changing or tackling the irresponsibility trap, not least because the problem with this regulation is that multinationals can gauge (“white-wash”) their reports with the help of their counselors from large auditing and law firms (e.g. Birkey et al., 2018; on audit firms see Fransen & LeBaron, 2019, on legal loopholes see Emma Cusumano & Charity Ryerson, Corporate Accountability Lab). Hence, policy proposals have been made to enhance European legislation by going one step further and establish not just a duty to report but also a mandatory duty to respond and act.

For example, the European Union Transparency Directive (2014) holds accountable parent undertaking and large groups, according to estimates of the European Commission a group of approximately 6000 companies, for issuing non-financial reports on their conduct in areas such as environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters. Beyond information on a group’s development and performance, this regulation demands a description of the policies pursued by the group in relation to human rights and environmental issues, information about the due diligence processes implemented to foster compliance, as well as a documentation of the outcomes of a multinational corporations’ policies and an identification of the related risk management. Also, the directive requires from a reporting group to link this information back to the group’s operations including its business relationships and to issue relevant key performance indicators. Substantively, the directive contains what is known as the “comply or explain”-regulation, which leaves room for multinationals either to report or give a clear and reasoned explanation for not doing so.

In addition to that transparency regulation, in the newer variety of supply chain regulation proposals have been put forward which understand the term “due diligence” as a new legal standard for a duty of care. Seen this way, due diligence contains an informational dimension, i.e. the multinational corporation identifies, assesses, and engages with human and environmental impacts of its activities including those along the supply chain. At the same time, due diligence ought to contain an operational dimension, i.e. corporations should be held accountable to a process in which they are also expected to actively manage their operations as well as the respective business relationships to improve compliance with labour standards (OECD, 2018).

In spirit, and given the size of the challenge, the proponents of the idea to place mandatory due diligence in the supply chain on a legal footing are heading in the right direction. However, the mandatory due diligence approach is likely to face similar obstacles as the transparency legislation before it, although already a couple of multinational corporations comply with the idea of a duty of care on a voluntary basis. On the one hand, a couple of companies are already in resistance mode and object against any sort of binding regulation of their business conduct in the supply chain. On the other hand, other corporations are more sophisticated in agreeing with the overall idea but pressing for exemptions and watering down the precise details of a possible European regulation. For example, the new regulation should be confined to certain sectors or firms of a certain size. Also, the debate about the consequences shows considerable variety in suggestions about the terms and conditions of monitoring and enforcement, legal and non-legal remedies as well as the possibility of sanctions.

The most important questions about the possible legal consequences of labour standard violations – if confirmed – are still unresolved and remain pending in the debate: In the end, how binding will the new legislation of due diligence be? Which are the options for legal litigation? Whether enforcement and sanctioning authority resides with extant state agencies, a newly formed transnational body or individual workers filing a case to the courts, is as unclear as how the new regulation is processed on an ongoing basis in terms of implementation, good-practice documentation, and conflict resolution. Especially the latter is a rather weak point in the current debate. Obviously, the ILO would be best positioned to play such a role with authority in conflict resolution about labour standard violations, but so far this has not been widely discussed as an option. Additionally, it may also be important to consider a set of operations and management practices to be changed explicitly as well as the ruling-out of certain contracting forms which give rise to peculiar worker vulnerability in supply chains. What is also missing, is the idea of mandatory stakeholder involvement, especially unions and worker representatives. This is a serious shortcoming, because a stakeholder network model has been identified as being key for upholding basic human rights already two decades ago (Ruggie, 2003).

In sum, implementation and legal sanctioning, process management, enforcement, and litigation are all unsettled issues in the debate around mandatory due diligence regulation opening a space for loop-holing and circumvention; problems which already plagued earlier initiatives of a similar kind. One may even dare questioning the usefulness of a due diligence regulation without teeth: Even if the potential EU regulation sets up a functioning monitoring agency and will be implemented in member states’ national law, it might have even detrimental effects when it fails to actually change the situation on the ground. What is needed is less intention-dropping and window-dressing and more real action in practice. As long as employers are allowed to craft new employment and work arrangements – think of all the varieties of subcontracted agency work – which systematically deny workers their human rights and foreclose a proper participation of workers in formulating company policies, a duty of care as a legal requirement remains opaque and runs the risk of just restating workers’ rights and labour standards once more on paper only. Nevertheless, a regulation improving the compliance with labour standards in supply chains seems worth the efforts, but proponents of mandatory due diligence legislation better prepare for a long journey…

Barrientos, S. (2013). ‘Labour chains’: Analysing the role of labour contractors in global production networks. Journal of Development Studies, 49(8): 1058-1071.
Birkey, R.N., Guidry, R.P., Islam, M.A., & Patten, D.M. (2018). Mandated social disclosure: An analysis of the response to the California Transparency in Supply Chains Act of 2010. Journal of Business Ethics, 152: 827-841.
Crane, A. (2013). Modern slavery as a management practice: Exploring the conditions and capabilities for human exploitation. Academy of Management Review, 38(1): 49-69.
Davidov, G. (2015). Indirect employment: Should lead companies be liable? Comparative Labor Law & Policy Journal, 37(5): 5-36.
European Commission (2020). Study on due diligence requirements through the supply chain. BIICL, Civic Consulting, LSE. Luxembourg: Publications Office of the European Union, 2020, doi:10.2838/39830.
Fransen, L. & LeBaron, G. (2019). Big audit firms as regulatory intermediaries in transnational labor governance. Regulation & Governance, 13: 260-279.
Palpacuer, F. (2008). Bringing the social context back in: governance and wealth distribution in global commodity chains. Economy and Society, 37(3): 393-419.
Pogge, T. (2011) Are we violating the Human Rights of the world’s poor? Yale Human Rights and Development Law Journal, 14(2): 1-33.
Ruggie, J.G. (2009). Protect, Respect and Remedy: A United Nations Policy Framework For Business And Human Rights. Proceedings of the Annual Meeting (American Society of International Law), Vol. 103(March 25-28, 2009), pp. 282-287.
Ruggie, J.G. (2003). The United Nations and Globalization: Patterns and Limits of Institutional Adaptation. Global Governance, 9: 301-321.
Hofmann, H., Schleper, M.C. & Blome, C. (2018). Conflict minerals and supply chain due diligence: An exploratory study of multi-tier supply chains. Journal of Business Ethics, 147: 115-141.
International Metalworkers’ Federation (2010). Precarious work: Undermining Human Rights. IMF’s submission to the UN Special Representative of the Secretary General for Business and Human Rights. May 2010, IMF: Geneva.
Young, I.M. (2004). Responsibility and global labor justice. Journal of Political Philosophy 12(4): 365-388.

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