Shareholder Activists Push for Human Rights Committees

Board-level committees are proliferating, with boards at many companies considering adding a dedicated risk committee or a technology committee. Now investors are pushing some boards to add yet another group—a human rights committee.

Shareholders have targeted companies, including Hewlett-Packard, Apple, and Goldman Sachs, with resolutions that call for the creation of a board-level human rights committee.

Board committees dedicated to human rights issues are rare but not unheard of. Banking giant HSBC's board, for example, has a dedicated committee on sustainability that also addresses human rights issues. UBS Investment Bank has a board committee dedicated to environmental and human rights issues. Coca-Cola's board has a diversity committee that also considers human rights and other social issues.

While even the proponents of resolutions calling for a human rights committee don't see much chance of success this year—one at Apple garnered only 5 percent of the vote—companies may not be able to automatically dismiss such plans going forward, as social issues increasingly creep onto the agenda of shareholders and regulators. A recent survey by the Investor Responsibility Research Center Institute found environmental and social shareholder proposals gaining greater voting support from investors at U.S. public companies. From 2005-2011, average support for these proposals doubled, to more than 20 percent.

This year is a “tipping” point” and human rights issues will increasingly demand more formalized attention from directors, says Ganesh Rajappan, CEO of LogixData, a firm that collects and analyzes data from Securities and Exchange Commission filings. “This is just the beginning,” he says.

Rajappan has evaluated shareholder proposals and company disclosures in light of recent Dodd-Frank Act-mandated rulemaking that requires disclosures of Congo-derived “conflict minerals” in supply chains. That rule, paired with a specialized disclosure protocol, Form SD, adaptable to similarly mandated reporting of payments by oil, gas, and mining companies to governments for extraction rights, leads him to believe that social and human rights issues are becoming more of a concern among regulators and mainstream investors.

“Some [resolutions for human rights committees] may not pass for another two-to-three years, but I do see that more and more social and political problems are rising to a corporate level, and somebody has to deal with it,” Rajappan says. The Dodd-Frank Act, he adds, opened the door and “everything will pile onto it.”

Calls for companies to do more on human rights issues, such as conflict minerals reporting, are increasingly finding backers on Capitol Hill. Rep. Carolyn Maloney (D-NY), for example, co-sponsored the Human Trafficking Reporting Act of 2013 that would require companies with over $100 million in global revenue to disclose details of human trafficking, slavery, and child labor in their supply chain and efforts to eliminate them.

Jay Gould, a partner with the law firm Pillsbury Winthrop Shaw Pittman, agrees that social and political issues will become a greater responsibility for boards. He proposes, for example, that the SEC could, feasibly, have its hand forced by legislators to require disclosure for such matters as same-sex marriage policies and, for certain types of companies, their potential liability from gun violence.

“Yes some [resolutions for human rights committees] may not pass for another two to three years , but I do see that more and more social and political problems are rising to a corporate level, and somebody has to deal with it.”

—Ganesh Rajappan,

CEO,

LogixData

Apple shareholder John Harrington, who filed the resolution for a human rights committee, fully expected the vote against it. He's made the pitch unsuccessfully before and says he will do so again. He was also behind multiple, unsuccessful efforts in the past to require Google and Chevron to establish a board committee on human rights.

His Apple proposal, had it been successful, would have established a separate Board Committee on Human Rights, which would “elevate board level oversight and governance regarding human rights issues” and  “provide a vehicle to fulfill the board's fiduciary responsibilities for oversight of these issues,” according to the filing.

“They do not have anything dealing specifically with environmental sustainability or human rights in any of their committee charters,” Harrington says of Apple. “In some ways that is unusual because for most large companies, it is part of their governance committee.”

Harrington cites reports about poor labor conditions at large Apple supplier Foxconn Technology Group in China, as evidence of the need for a human rights committee. He says voluntary policies and codes of conduct are all fine, but he wants board members to be “responsible as fiduciaries for dealing with these issues as part of the duty of care and their obligations.”

Harrington concedes that such a push will likely never be well received by companies. “General counsel and attorneys are saying, ‘Don't touch this, don't even think about making this a fiduciary duty, because we can get sued,'” he says. “Any time they talk about litigation everyone just freezes up.”

Those legal fears may be unfounded, as company decisions made through the board, and a human rights committee, would likely be covered under the so-called “business judgment rule,” which protects officers, directors, and managers from liability when corporate decisions are made in “good faith,” adds Harrington.

APPLE VOTES NO TO HUMAN RIGHTS COMMITTEE

Below is an excerpt from Apple's “against” recommendation for a shareholder proposal that called for the creation of a “human rights committee.”

The company is committed to the highest standards of social responsibility and human rights wherever we do business. The board is aware of no other company doing as much to safeguard and empower workers as the company does today.

The company's dedicated Supplier Responsibility team continually audits the company's suppliers for compliance with the Company's industry-leading Supplier Code of Conduct. The Supplier Code of Conduct is based on widely recognized international human rights principles as defined by the United Nations and the International Labor Organization.

The company's auditing program has expanded in breadth and depth over the past several years. In January 2012, the Company became the first electronics company to be granted membership in the Fair Labor Association, a leading non-profit organization dedicated to protecting the rights of workers. In February 2012, at the company's request, the FLA began a series of independent inspections of the company's final assembly suppliers and has published the results on its Website for complete transparency.

In addition to monitoring and driving improvements for workers in the supply chain, the company places strong emphasis on education and worker empowerment initiatives. The company has established a training program for new employees at the company suppliers to inform them of their individual rights, local laws and the company's Supplier Code of Conduct. More than one million workers have been educated on their rights as part of this initiative.

The company also partners with educational institutions to offer free college-level courses to workers who make the company's products. More than 200,000 workers have attended these classes since 2008, and many have gone on to earn associate's degrees. The company recently expanded this educational program to offer more opportunities for participants to work toward a bachelor's degree.

The board does not believe that establishing a committee is an effective way for the company's practices and goals to continually evolve and improve in response to changing conditions. Instead, such an additional and redundant committee would distract the board from its other responsibilities to the company and its shareholders, while adding little value to the company's existing commitment to human rights and social responsibility. The existing governance framework of the company has produced a strong commitment to human rights and progress that is evident in the company's practices and policies.

Source: Apple.

Human Rights Responsibilities

Michal Littenberg, a partner with the law firm Schulte Roth & Zabel, doesn't see many scenarios where a human rights committee would be appropriate for a board. “These issues can be dealt with through existing board committees or through the board as a whole,” he says. “I don't think you need a committee to specifically deal with this.”

Nevertheless, he says, companies should take these issues seriously given the increased sensitivity shown by shareholders, consumers, and legislators. “It is certainly a higher topic on the board agenda than historically it has been,” he says.

“The reality is these proposals fail. Sometimes they get 20-30 percent of the vote, but they do fail,” Littenberg adds. “At the end of the day it should really be about creating a dialog within the company around these issues and devoting greater resources to them.”

His advice to companies and their boards is to benchmark human rights practices and policies relative to their peers.  Among the questions to ask: Are others in the peer group doing sustainability reports or human rights reports? Are you ahead or behind them? What are the particular risk issues in the context of your business both from an operational and shareholder standpoint? Where is your industry generally, and where should you be?

Despite pressure from shareholders and legislators, it is important not to resort to knee-jerk policy or governance changes. “You are dealing with emerging topics where there isn't necessarily clarity around them,” Littenberg says. “With the conflict minerals rule, for example, companies are still trying to get their arms around supply chain issues and there are a lot of things they still need to figure out. It is important to be methodical and not rush headlong into policies and procedures that you can't live up to.”

Recent research shows that even at a policy level, companies may have their work cut out for them. A 2012  report on sustainability practices by The Conference Board found that only 33 percent of the nearly 3,000 companies tracked by Bloomberg's environment, social, and governance data service disclosed having a human rights policy, compared to 21 percent of the S&P 500 and 13 percent of the Russell 1000.

That study, however, concluded that even though human rights have traditionally been thought of as within the realm of governments, they are starting to be recognized as a business responsibility.