Businesses now have the latest tool to aid them in their efforts to trade responsibly. The OECD Due Diligence Guidance for Responsible Business Conduct, issued in May 2018 with the backing of 48 countries, offers practical help for all organisations, large and small.
Implementing these recommendations can help businesses to avoid and address adverse impacts related to workers, human rights, the environment, bribery, consumers and corporate governance that may be associated with their operations, supply chains and other business relationships.
The guidance builds on the OECD Guidelines for Multinational Enterprises, which itself followed the UN Guiding Principles on Business and Human Rights (UNGPs), the original initiative promoting ongoing due diligence. Applying the guidance isn’t merely a matter of doing the right thing: it’s essential for supporting business success over the long term, according to experts.
“Companies need to understand that they shouldn’t just be looking at the risk to themselves; their starting point should be looking at risk to others—in terms of people and the environment—because where they present a risk to people and the environment, they ultimately will pose a risk to themselves,” says Richard Karmel, head of business and human rights at Mazars.
In the 21st century, we live in a very transparent society. If a company’s actions harm people, even in remote parts of the world, access to mobile phones and social media means that news will get out.
Karmel continues: “The OECD guidance throws light on the fact that businesses need to put policies, processes and governance procedures in place to address wider business risks. There needs to be ongoing due diligence—it is not a one-off exercise. Meeting the requirements of the OECD guidance is an ongoing process.”
All businesses could ultimately be affected, as actions to ensure responsible business conduct (RBC) work their way along supply chains. “Multinational enterprises will have to make sure that their suppliers have appropriate [RBC] procedures in place, and that their suppliers’ suppliers have appropriate procedures in place, and so on. There’s a trickle-down effect in that a large proportion of businesses around the world are in the supply chain of the biggest companies in the world.” says Karmel.
Although Karmel fully agrees with the aims of the due diligence guidance, he has two issues with its drafting. Firstly, the guidance recommends that entities prioritise RBC risks based on their “significance”, whereas the Interpretative Guide to the UNGPs and the UNGP Reporting Framework introduced the prioritisation concept of “salience”.
The OECD guidance defines significance in a similar way as salience, i.e. the significance of an adverse impact is understood as a function of its likelihood and severity. It then defines “severity” as per the UNGPs as a function of scale, scope and remediability. “It’s a pity this OECD guidance introduced another term and missed the opportunity to build on one that is already being used and understood by business,” Karmel says. “The concept of salience is already being used as an entry point into materiality.”
Secondly, the RBC due diligence guidance separates labour rights from human rights. “The goal is to promote a greater respect for human rights by business, so this separation is frustrating,” Karmel says. “The term ‘human rights’ is a wrapper that includes labour rights. Human rights for employees includes their labour rights; so why carve out that one set of rights and not others?”
Nevertheless, Karmel sees the due diligence guidance as a valuable resource. The fact that it addresses prioritisation is helpful, for example. “It’s really important for businesses to prioritise where the greatest risks are, because if they try to do everything, they are likely to end up doing nothing,” Karmel says.
He continues: “But they can make a start and tell people about the journey they are on. For example, they could begin with discrimination in the supply chain or pay a living wage in the supply chain. Or they might recognise that the wastage coming from a chemical plant is potentially a huge risk to the environment and surrounding communities. As long as companies are able to articulate that they are prioritising and demonstrate the effectiveness of the processes they have in place to mitigate against those risks arising, these will lend greater credibility to their reporting.”
Making it happen
The RBC due diligence guidance identifies six key steps for companies to undertake in an ongoing cycle:
1. Embed RBC into policies and management systems.
2. Identify and assess adverse impact on operations, supply chains and business relationships.
3. Cease, prevent or mitigate adverse impacts.
4. Track implementation and results.
5. Communicate how impacts are addressed.
6. Provide for, or cooperate, in remediation where appropriate.
Implementing these steps successfully requires commitment from the top. “There should be one person on the board designated as accountable,” Karmel says. “Quite often the CEO takes it on, because it’s fundamental to the business. It also demonstrates to everybody else that responsible business conduct is on the board agenda and they should be taking it seriously.” For example, garment manufacturers may assign the responsibility to their heads of procurement, because their supply chains are so vital to business success.
It’s also essential to set up a cross-functional RBC working party, bringing together senior people from across the business, potentially including HR, legal, procurement, operations, sales, internal audit and, if the company is big enough, M&A.
“Getting them all round the table creates such rich conversation,” Karmel says. “You are trying to steadily change the culture of the business so that it is a more consistent and responsible culture—by bringing everybody together from all these different departments.”
Having a multi-departmental approach also encourages buy-in. “If people haven’t been party to decision-making, it’s difficult to implement wider policies,” Karmel says. “If there is greater engagement in the design of policies and processes, they are more likely to succeed. They will not only be appropriate, but they will also be effective.”
It’s vital that businesses do take action to implement the RBC due diligence guidelines, Karmel believes. “It’s no longer a question of ‘if’ a company is going to be challenged by external risks, it’s a question of ‘when’. Therefore, any business that is not able to react appropriately is gambling with its future existence.”
This article has been prepared in collaboration with Mazars, a supporter of Board Agenda.