Between Compliance and Commitment: Confronting the Challenges of Mandatory Human Rights Due Diligence

The effectiveness of corporate social responsibility (CSR) as a means of addressing the adverse impacts of business is constrained, in part, by the voluntary nature of corporate commitments and the fragmentation of industry standards. In recent years, laws mandating that companies conduct human rights due diligence (HRDD) have emerged as a regulatory tool. In a recently published article, I explore how HRDD laws are influencing how companies conceive of human rights—and, to varying extents, related social and environmental impacts—in the context of their governance and operations. 

My article highlights two corporate law implications. First, these regulatory mandates add a new dimension to the long-standing debate about corporate purpose, in particular legal obligations of companies to account for the interests and needs of their employees, communities, and the environment. Second, the corporate compliance function serves as the primary operational conduit for HRDD laws to translate into corporate conduct. The effectiveness of mandatory HRDD hinges on internal corporate governance processes, norms, and practices that enable boards to monitor and respond to human rights risks.

The Hardening of HRDD

The concept of HRDD is rooted in the UN Guiding Principles on Business and Human Rights (UNGPs). Under the UNGPs, corporations have the responsibility to respect human rights, which includes an obligation to conduct HRDD by identifying and assessing actual and potential human rights impacts arising from their business activities, integrating findings into business processes, tracking the effectiveness of their measures, communicating externally how adverse impacts are being addressed, and providing remediation. HRDD is distinct from traditional business due diligence by focusing on human rights risks to rights-holders—ie, shifting from an enterprise-centric focus on commercial risks facing the firm to a stakeholder-centric focus on affected individuals and communities.

The UNGPs have spurred wide-ranging efforts to create industry standards and business regulation. Responding to the limitations of voluntary practices and standards-based frameworks, laws mandating that companies conduct HRDD have emerged in Europe, including the European Union’s Corporate Sustainability Due Diligence Directive (CSDDD), as well as domestic HRDD laws enacted by, inter alia, France, Germany, the Netherlands, and Norway, which are more robust than prior disclosure-based regimes like the United Kingdom’s Modern Slavery Act. These laws require companies to identify, prevent, cease, or remediate adverse human rights, labor, and environmental impacts within their own operations, their subsidiaries, and their value chains. While the EU’s omnibus package narrows the scope of CSDDD’s due diligence obligations, the CSDDD nonetheless will affect the regulatory environment for both EU and non-EU companies.

HRDD Laws and Corporate Purpose

HRDD laws, such as the CSDDD, do not specify a corporate purpose, nor do they require companies to articulate one relative to human rights. Nonetheless, I posit that HRDD will influence corporate purpose by compelling corporate directors and officers to internalize human rights as legal risks. In particular, HRDD laws potentially expand directors’ oversight duties, established by Caremark and subsequent decisions under Delaware law and encompassing evolving societal notions of corporate citizenship.

Nonetheless, HRDD’s impact on corporate purpose is muddled and incomplete. In respect of human rights and other social issues, boards must weigh different risks and needs—which, in certain instances, may undercut or even conflict with each other. HRDD laws do not provide sufficient guidance on how boards should balance demands of multiple constituencies nor sufficiently prescribe how they should engage with stakeholders. Moreover, regulatory monitoring and enforcement and civil liability for HRDD violations vary from jurisdiction to jurisdiction.

HRDD through Corporate Compliance

Notwithstanding the prospect of oversight duties at the board level, the hardening of HRDD into business regulation makes corporate compliance the appropriate locus for HRDD within firms. However, HRDD laws are susceptible to formalistic, superficial compliance, whereby companies adopt practices without truly integrating them into operations or corporate culture. Cosmetic compliance undermines mandatory HRDD from the bottom up.

At the firm level, companies may seek to minimize compliance costs relative to the perceived benefit of reducing violations, leading to underinvestment if anticipated penalties for non-compliance are low. The proliferation of HRDD laws across jurisdictions, each with its own scope and requirements, may lead to inconsistent compliance efforts and potentially foster a 
‘race to the bottom’ where companies only meet minimal requirements to avoid penalties. Deficits in regulatory resources exacerbate this problem. 

Corporate compliance hinges on a company’s commitment to ethical conduct. However, meaningful HRDD compliance is potentially vulnerable to political polarization and ideological division. Differences in the cultural values associated with human rights and social responsibility may undercut HRDD compliance, particularly when many harms occur in other countries and outside of the company (ie, human rights violations in a company’s global supply chains). Conversely, if compliance professionals perceive human rights as an ethical imperative and are able to inculcate these values across the firm, companies will be more likely to conduct HRDD in a manner that advances corporate respect for human rights.

HRDD and the Art of the Possible

HRDD laws are a flashpoint in an ongoing debate about the appropriate role of corporate law and business regulation to further the protection of human rights. Business and human rights scholars have called for more robust regulatory monitoring and enforcement and more stringent penalties for non-compliance, akin to anti-corruption enforcement, with the ultimate goals of transforming corporate decisionmaking. In my article, I connect this debate to corporate compliance and highlight the limitations of legal sanctions, the lack of consensus on corporate compliance’s role in HRDD, and the polarizing nature of corporate human rights accountability as a cautionary note. These observations can serve as the foundation for further research that engages with companies, corporate compliance and legal professionals, affected communities, and regulators and policymakers. 

Stephen Park is an Associate Professor of Business Law at the University of Connecticut.

The author’s complete paper can be found here.