The relationship between Country and Corporate Governance Mechanisms and type of company involvement in human right violations

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The relationship between Country and Corporate Governance

Mechanisms and type of Company Involvement in Human Right

Violations.

MSc Business Administration – International Management Nienke van den Brink

Student Number 11112263

Supervisor: Dr. M. Westermann-Behaylo Second Reader: Dr. J. Lindeque

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Statement of originality

This document is written by Student Nienke van den Brink who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Acknowledgements

With this thesis I am ending the chapter as a master student at the University of Amsterdam. I am looking back at a fantastic and educational year with gratification. My interest in the topic of business and human rights was triggered at one of international management core courses: international business context. Here I developed the interest in gaining more knowledge in global governance, inequality and to what extend businesses business should be held responsible. Therefore, with the assignment of the master thesis topics in May 2016, I considered myself lucky getting the first topic of my choice and being able to write my thesis about businesses and human rights.

Writing this thesis was a continuous process of learning and development and I would like to thank everybody contributed to the completion of my master thesis. My special appreciation goes out to my supervisor Dr. Michelle Westermann-Behaylo. She has been of great support and I want to thank for her guidance, feedback and her continuous enthusiasm and positivity during all the meetings.

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Abstract

The responsibility to protect human rights resides first and foremost with the countries and states themselves. These responsibilities include the regulation of firms operating within their borders to prevent them from violating human rights. However, when a country has weak institutions, low political stability, is ruled by an autocracy or faces high level of corruption, there is a larger chance that the host country government will not fulfil their human rights obligations. This can lead to corporate involvement in human right violations. However, businesses also have moral responsibilities to respect human rights. Scholars suggest that a significant amount and perhaps a majority of human rights allegations for MNEs stem from instances of complicity where businesses implicate themselves in human rights violations by working with another actor responsible for the direct violation of human right abuses. This paper addresses different corporations’ types of involvement in human right violations: direct, supply chain related human right violations and complicit with government violations. The purpose of this study is to examine what factors can impact a corporation’s type of involvement in human rights violations. In the process it will assess several corporate governance and contextual factors.

In this paper 453 observations of alleged human right violations over the period 1995-2014 have been used to examine companies’ type of involvement in relationship with home country corporate governance, and several host country factors: level of democracy, control of corruption and political stability. Hypotheses were developed about the relationship between these variables, all of which were supported by the data. Hence, the main findings suggest that all host and home country variables explain variance between the different categories of corporate type of involvement.

Keywords Complicity • Human Right Violations • Corporate Governance • Democracy • Corruption • Political Stability

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Introduction

Shortly after the Second World War, the United General Assembly adopted the Universal Declaration of Human Right, reflecting the wishes of people at the time and to try and never see such horror again. The UDHR is a milestone document in which a common set of standards were created to protect human rights for all people in all nations. Yet, until this day, examples, such as the Syrian war and the refugee crisis where nearly one million people have undertaken dangerous journeys to reach Europe, reflect failures to protect human rights.

Multinational enterprises (MNEs) have become actors with significant power and authority in the current international political system as they can set standards, supply public goods and participate in negotiations. Therefore, they have the potential to positively impact human rights. However, frequent reporting on the Business and Human Rights Resource Centre (BHRCC) show that the opposite is also true. Businesses have perpetrated in human right violations including incidents of sexual harassment, slavery, torture, rape as well oil spills and air pollution (BHHRC, 2015).

Political authority of MNEs should imply public responsibility (Kobrin, 2009, p. 350). Current perspectives from academics like Kobrin have received increasing attention in the business and human rights literature as they suggest that “a significant amount and perhaps the majority of corporate rights violations involve complicity, aiding or abetting violations by another actor, most often the host government.” (Kobrin, 2009, p. 351). Recent reports lead to shocking reactions worldwide, since those reports showed that companies knowingly assisted governments, armed rebel groups or others to commit human right violations. The following citation by Olsen (2015) gives a small sense of type of incidents that are occurring:

“Companies have reportedly given information that has enabled a government to detain and torture trade unionists or other perceived political opponents. Companies

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have allegedly sold both tailor-made computer equipment that enables a government to track and discriminate against minorities, and earth-moving equipment used to demolish houses in violation of international law. And others have allegedly encouraged child labour and sweatshop conditions by demanding that suppliers deliver goods at even cheaper prices.” (Olsen, 2015, p. 2)

In the last three decades rapid globalization has greatly expanded the possible geographic scope of MNEs. Many corporations have developed global supply chains, and have adopted network-based operating models involving multiple corporate entities located both within as well as across national borders (Elms & Low, 2013). Consequently, corporations from all industries have a global presence in countries where crimes against humanity and other gross human rights abuses occur. In the recent years, the number of complicity cases has increased extensively (e.g., United Nations, 2008b, p. 8; Kobrin, 2009). Complicity has become an important topic on the agendas of many entities. For example, clarifying and assessing corporate complicity was one of the main tasks for the first tenure of the UN Special Representative for Business and Human Rights (Wettstein, 2010). To better understand the level of responsibility and accountability of MNEs, academics have examined the conceptual underlying factors of corporate complicity (Wettstein, 2010; Wettstein, 2012; Olson 2015). They emphasize the growing power of MNEs to positively shape the institutional context of several local host countries, alongside their own operations. Scholars increasingly link this to higher expectations of corporate responsibility and accountability where for example MNEs need to use their power for putting pressure on the local governments (Wettstein, 2012; Weissbrodt & Kruger, 2003).

Most of these studies focus on international or political law when examining business and human rights (Wettstein, 2010: Olsen, 2015; Hofman. & McNulty, 2009). However, little

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research has been done on the managerial perspective. Additionally, the link between corporate governance models, institutional factors and different types of company involvement in human right abuses has not been studied yet. Furthermore, the literature about business and human rights is mostly of qualitative nature, and thus has not been tested empirically. To fill these gaps in research, this paper quantitatively analyses the link between corporate governance and country-level governance in relation to the level of company involvement in human right violations. More explicitly, the aim of this study is to examine how differences in underlying contextual factors are related to the likelihood of a type of company involvement in human right violations to occur - directly, through violations supply chains or complicit with government abuse.

This paper is divided as follows: the first section consists of a review of the existing research on the human rights and business and several institutional factors. In the next section, relevant hypotheses are developed after combining these theories. In the following section, data is analysed and interpreted. Lastly, this paper finished with a discussion and provide recommendations for future research.

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1. Literature Review

The first part of this chapter reviews the literature on human rights, including the responsibility of governments for human rights and how government democracy, corruption and political stability impact on whether host countries in the developing world satisfy their human rights obligations. When host country governments do not fulfil their human right obligations, this can lead to corporate involvement in human right violations. Therefore, the second part of this chapter discusses business and human right, specifically regarding the moral responsibility that businesses have within different spheres of influence, and the corresponding involvement of businesses in human right violations are elaborated on. In addition, the due diligence process is described, followed a review of corporate governance mechanisms. Lastly, this chapter concludes with existing gaps, a research question and the contribution.

1.1 Human Rights

The decades following the Second World War were pivotal in the development of the notion of universal human rights, with increased awareness and public support within the developed world. In 1948, the United Nations General Assembly adopted the Universal Declaration of Human Rights (UDHR), which serves as the basis for the international system for the protection of human rights (UDHR, 1948). The first Article of the UDHR states that “all human beings are born free and equal in dignity and right.” Under this declaration, human rights include cultural, economic and political rights such as the right to life, liberty, education and equality before the law, and rights of association, belief, free speech, information, religion, movement and nationality (Universal Declarations of Human Rights, 1948).

Human rights are the basic rights and freedoms to which all humans are considered entitled (UDHR, 1948). These rights represent entitlements of the individual or groups when

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facing the government, as well as responsibilities for the individual and the government authorities. These rights are regarded as natural rights, which means that they are not earned and cannot be denied on the basis of race, creed, ethnicity or gender (Little, 2013). The scope of human rights transcends national borders, and they should serve as a standard of concern for all people. Subsequently, many countries became visible protectors of people’s human rights (Posner, 2015; Dorfman, 2014). Human rights are often promoted as legal rights and protected by the rule of law. These rights can be used as standards for formulating or criticizing both local and international law, and it is widely considered that the conduct of governments and military forces must comply with these standards.

The responsibility to protect human rights within their territories resides first and foremost with the countries and states. Many believe that the protection of human rights "is essential to the sustainable achievement of the three agreed global priorities of peace, development and democracy” (United Nations, 2013, p. 34). However, in many cases public authorities and government officials institute policies that violate basic human rights. These abuses of power by political leaders and state authorities have devastating effects, including genocide, war crimes and crimes against humanity.

The primary human rights responsibilities faced by nation states include include (1) to not violate human rights themselves, and (2) to regulate firms operating within their borders to prevent these firms from violating human rights. Several mechanisms contribute to whether a nation lives up to these responsibilities and whether human rights are protected such as institutional effects and good governance effects at the host country level. These two effects will be elaborated on in the next two sub-sections.

1.2 Institutional Theory

As previously stated, there is this idea that countries have primary human rights responsibilities, which includes regulating firms within their border to prevent them from

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violating human rights. This paper focuses on both on developing and emerging countries, as MNEs often operate in these host countries and because MNEs operating in these countries face uncertain institutional frameworks and risk of complicity in abuse. Developing countries are identified by having low levels of life-expectancy and productivity, high population growth, underdeveloped industry and reliance on agriculture and exports for economic sustainability (WTO, 2015). Emerging countries are ‘low-income, rapid-growth countries using economic liberalization as their primary engine of growth’ (Hoskisson et al. 2000. p. 249).

Institutional frameworks are defined as the set of fundamental political, social, and legal ground rules that establish the basis for production, exchange, and distribution (Peng, 2002) and are used as signals of which choices are acceptable and supportable (Scott, 1995). Institutional frameworks are made up of both formal and informal constraints (North, 1991). Formal constraints refer to political rules, judicial decisions and economic contracts, whereas informal constraints refer to socially sanctioned norms of behaviour which are embedded in culture and ideology (Peng, 2002). They are designed to confront problems of collective action and market failure. National human rights institutions (NHRI), for instance, are established to promote and protect human rights. NHRI can take various forms, with the most common being human rights commissions, hybrid institutions and advisory bodies (International Justice Resrouce Centre, 2016).

Empirical research has found situations in which institutions have enhanced patterns of cooperation, compliance and effectiveness of states (Mitchel, 1994; Duffiel, 1992; Martin, 1992). Institutions have enhanced patterns of cooperation in issues including oil pollution (Mitchell, 1994), military force levels (Duffield, 1992), and economic sanctions (Martin, 1992). However, situations have also been found in which institutions do not seem to have this positive effect on states. In these cases, there is more emphasis on private interests that

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favor the goals of the institution (Botcheva & Martin, 2001). Regarding human rights, the formal constraints and regulatory elements of the institutional framework influence the protection of these rights. If institutions fail to influence states’ cooperation, compliance and effectiveness, this often leads to weak institutional environments. Weak institutions are defined as a context in which enforcement of the rules is low or institutional durability is low, in that formal rules change repeatedly (Henisz & Zellner, 2003). As mentioned before, states have primary human rights responsibilities which include the regulation of firms within their territory to prevent them from violating human rights. In weak institutional environments MNEs are often less influenced by the host countries rules and regulations, which are themselves often lacking. MNEs also face less pressures from the host countries’ state and can leverage from this.

Therefore, next to their institutional effects on nation states, MNEs are influenced by institutional effects in the host country they operate (North, 1991). According to North (1991) organizations owe their existence to the opportunities provided by the formal and informal institutional framework. Different opportunity sets lead to different historical paths, also defined as path-dependency (North, 1991). Through a process called isomorphism, institutions put pressure on MNEs by assessing their conformity to diverse value systems, existing rules and laws, as well as shared social knowledge and cognitive categories (DiMaggio & Powell, 1983). These influences are widely accepted as institutional frameworks (Scott, 1995; Peng 2002). So, as institutions from the host country significantly shape firms’ strategy and behaviour, it is therefore presumed that firms’ good behaviour with regards to human rights violations may be stimulated or discouraged by this institutional environment (Gao, Murray & Katabe, 2010).

Subsequently, in developing host countries there are relatively lower costs of obtaining legitimacy (Surroca, Tribó & Zahra, 2013). For example, in Angola no strict rules exist about

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the age when children are permitted to work, or rules about how many hours per day workers can work for and how many breaks they get, as compared to the strict labour rules in the Netherlands (World Health Organization, 2016). Thus, when expectations in home-countries for compliance with rules and standards increases production costs at home, MNEs may shift some of their operations to subsidiaries in countries where these expectations are lower. These MNEs then benefit from advantages in labour costs, raw material costs or other expenses. The operations are seen as unacceptable at home, but are considered acceptable in those host countries. MNEs are in a unique position to exploit cross-national differences in institutional environments (Ghemawhat, 2003). Ghemawhat (2003) emphasizes market imperfections, “the possibly limited cross-border integration of markets or, more generally, the possible location-specificity of key activities, resources, etc.” MNEs can perceive that the institutional environment in host countries offer comparative advantages for engaging in specific types of activities, and can ‘arbitrage’ its operations across countries to leverage location-based advantages. This process may encompass human rights violations as well, since some countries are less regulated compared to others. In short, developing host countries fail to protect their human right obligations and fail to regulate the immoral behaviour of the companies within their territory. MNEs can take advantage of this which leads them to implicate in human rights violations.

1.3 Country-level governance

Next to institutional effects on the host-countries’ state protection of human rights’, country-level governance effects from the host country significantly influence whether a government fulfills its human rights obligations. In particular, this section discusses how host country democracy, corruption and political stability impact whether the host government fulfills their human rights obligations.

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Country governance consists of the traditions and institutions by which authority in a country is exercised. This includes the process by which governments are selected, monitored and replaced; the capacity of the government to effectively formulate and implement sound policies; and the respect of citizens and the state for the institutions that govern economic and social interactions among them (The World Bank Group, 2016). Country-level governance mechanisms include a country's laws, its culture and norms, and the institutions that enforce the laws.

Features of democracy such as political pluralism, institutional checks and balances, and the periodic renewal of policy-makers through elections protect the economic system against abusive or predatory behavior typical of most authoritarian regimes (Comeau, 2003). The democratic process enables the development of civil liberties and secures contract and property rights and therefore is widely viewed as more suitable for economic prosperity. In addition, democracy makes it possible for individuals to engage in entrepreneurial behavior (Comeau, 2003). Subsequently, autocracies are less likely than democracies to enter certain economic agreements (Russett & Oneal, 2001), less likely to enter human right agreements (Landman, 2005a; Hathaway, 2002) and the commitments made by autocracies are in general less credible than those of democracies (Martin, 2000). So, lower levels of democracy significantly impact the likelihood of governments not fulfilling human right obligations.

Furthermore, political stability influences nation states’ compliance with their human right obligations. Political stability is the durability and integrity of a current government regime (World Bank, 2014). This is determined based on the amount of violence and terrorism experienced in the country and by citizens associated with the state. A stable society is one where its members are satisfied with the ruling party and are not interested in revolutionary or despotic ideas. Additionally, political stability requires the public to interact openly and freely with legislators on a regular basis. Granting individuals a say in how a nation need to be run

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enhances the stability of the region. So, lower levels of political stability enhance the likelihood of violence, terrorism, and revolutions, significantly impacting the likelihood of governments failing to fulfill human right obligations.

Lastly, there are the negative effects of corruption on the protection of human rights. Corruption is defined as “the abuse of public power for private benefit” (Doh et al. 2003). All of countries with the highest level of corruption are developing or transition countries (Kaufmann, Kraay & Mastruzzi, 2003). Corruption leads to violation of the government’s human rights obligations. Corrupt practices compromise the right to equality before the law and the right to a fair trial. Corruption, especially undermines the access of the disadvantaged groups to justice, as they cannot afford to offer bribes. Additionally, corrupt management of public resources compromises the government’s ability to deliver an array of services, including health, educational and welfare services, which are essential for the realization of economic, social and cultural rights. Furthermore, corruption may weaken democratic institutions. When corruption is prevalent, those in public positions fail to take decisions with the interests of society in mind. Therefore, corruption damages the legitimacy of a democratic regime in the eye of the public and leads to a loss of public support for democratic institutions.

In short, when the governance mechanisms of a host country are weak – i.e. when a country has low political stability, is ruled under autocracy and/or faces high level of corruption, and where there are weak institutional environments there is a larger chance of the host country government failing to fulfil their human rights obligations. These human right obligations include preventing corporations - operating within their territory from violating human rights. This can then lead to corporate involvement in human right violations. However, corporations have ethical obligations to respect human rights, even when the

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country has weak institutions and governance gaps. The next section will discuss business and human rights.

1.4 Business, Human Rights and a moral responsibility

Next to human rights in general, a particular topic of interest in the international business (IB) literature is that of businesses and human rights. This topic started to receive attention in the past three decades, largely due to the worldwide expansion of the private sector and the growth in transnational economic activity (Cragg, Arnold & Muchlinski, 2012). There is a shift occurring around the issues of responsibility and accountability of organisations. This shift stems from a debate with two opposing views: on the one hand that MNEs contribute to economic development and thus enhance human rights conditions; on the other hand the view that MNEs create highly uneven economic development, and through this contribute to lower levels of human rights protection (Wettstein, 2012). As globalisation increases, so does the power of MNEs to shape the host country environment. Consequently, many have argued that firms are complicit, and have ethical obligations to respect human rights even when the country has weak institutions/governance gaps.

According to Ruggie (2008) the cause of businesses complicity with human rights violations lies in the governance gaps created by globalization, and these governance gaps provide the permissive environment for wrongful acts of all kinds by companies, without adequate consequences e.g. sanctioning and remedy. In particular, MNEs are active in some of the most dynamic sectors of national economies, such as extractive industries, telecommunications, information technology, electronic consumer goods, footwear and apparel, transport, banking and finance, insurance, and securities trading (Weisbrodt & Kurger, 2003). They bring new jobs, capital, and technology, and with this their rules and standards. Academics therefore argue that the responsibility of MNEs should go beyond merely respecting human rights principles, and should emphasize a more proactive company

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involvement in the protection and realization of these rights – creating corporate human rights obligations (Wettstein 2012). This implies that corporations have a moral responsibility to help and positively protect human rights by, for example, putting pressure on host governments involved in perpetrating human rights abuse (Wettstein, 2012; Fasterling & Demuijnck, 2013). Scholars emphasize not merely a negative responsibility to avoid harm, but a positive responsibility to do good (Wood, 2012; Preuss & Brown, 2012; Fasterling & Demuijnck, 2013). Summarized, an international consensus is moving towards the notion that good human rights performance requires the conduct of company operations without causing damage to people, either directly through company activities, or indirectly through the company’s relationships with relevant stakeholder who cause harm. The next sub-sections elaborate on the sphere of influence and involvement of MNEs in human right violations.

1.5 Sphere of influence

The Global Compact introduced the concept ‘Sphere of Influence’ into corporate social responsibility discourse (Ruggie, 2008). This concept is best described through a metaphor. The “sphere” can be expressed in concentric circles with company operations at the core, moving outward to suppliers, the community, and beyond. Influence—and thus, presumably responsibility—of the company declines from one circle to the next (figure 1). This concept forms a useful analogue to the jurisdiction of states and is used as a basis for attributing obligations to companies (Ruggie 2008). Sphere of influence can function as a useful metaphor for companies in thinking about their human rights impacts beyond the workplace and in identifying opportunities to support human rights in accordance with the principles of due diligence. Two different mechanisms can be defined when looking at a company’s influence. The first is impact, where the companies’ activities are causing human right violations. The second one refers to the leverage a company may have over actors that are causing harm. The former falls into the responsibility to respect,

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whereas for the latter this is more complex and depends on the context (Ruggie, 2008). This is because a company for example cannot be held accountable for every entity over which they have some influence. Furthermore, it might not be desirable to have companies act whenever they have influence, particularly over (the absence of) governments. In short, the scope of due diligence to meet the corporate responsibility to respect human rights is not a static sphere (Ruggie 2008). Rather, it depends on the potential and actual human rights impacts resulting from a company’s business activities and the relationships connected to those activities (Ruggie 2008).

This paper takes uses these spheres to define three distinct levels of corporate involvement in human right violations: (1) direct, (2) through the supply chain and (3) complicit in government violations. To better understand the distinction between, and responsibility deriving from these levels, the next sections will elaborate on each specific level.

Figure 1. Spheres of influence

Source: Human Right Council, (2008) Retrieved on 28 December 2016 from: https://business

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The involvement of an MNE with human rights violations can be assessed through multiple levels. The immediate and most obvious level of assessment, stemming from the first mechanism of ‘Sphere of Influence’ impact, is through direct involvement, where a company’s action directly is the cause of the human rights violations. Examples include employees of a company that are accused of raping local citizens, a company is dumping toxins into a river, or a company that is building a dam that is displacing the local residents (Coumans, 2002; Kemp, Bond, Franks & Cote, 2010).

1.7 Complicity

Next to direct human rights impact, businesses can also implicate themselves in human rights violations by working with another actor responsible for the direct violation of human rights. In other words, these companies are not accused of committing human rights violations themselves, but of being complicit in the violation of human rights committed by someone else. Scholars suggest that a significant amount, and perhaps a majority of human rights allegations for MNEs stem from instances of complicity (Wettstein, 2010; Wettstein 2012; Hofman & McNulty, 2009). As the perception that the incidence and pervasiveness of complicity cases has increased (e.g. United Nations, 2008b, p. 8), academics have started to look at the concept more closely (e.g. Wettstein, 2010; Wettstein 2012; Hofman & McNulty, 2009). Complicity refers to indirect involvement by companies in human rights abuses— where the actual harm is committed by another party, including governments and non-state actors (Ruggie, 2008). A corporation’s action merely facilitates human rights violations rather than directly causing them (Wettstein, 2010).

The notion of complicity used in the specific context of business and human rights can be derived from criminal law. Therefore, the current debate on corporate complicity is heavily dominated by the legalistic point of view on the issue (Wettstein, 2010). However, this paper

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focuses on the moral side of the concept. This means that a company may not be liable from a legal point of view, but nevertheless be regarded as an accomplice from an ethical perspective (Wettstein, 2010). This paper follows the following description of corporate complicity by The International Commission of Jurist:

“Frequently, the concept is not used in the legal sense, but rather in a rich and

multi-layered manner to convey that someone has become caught up and implicated in acts that can be perceived as negative and unacceptable. Such use of the term has become commonplace in the context of work on business and human rights, and it has provided a tool to capture and explain in some simple terms the fact that companies can become involved in human rights abuses in a manner that incurs responsibility and blame.”

(International Commission of Jurists, 2008, p. 34)

According to the International Commission of Jurists and the UN Guiding Principles complicity is “knowingly providing practical assistance or encouragement that has a substantial effect on the commission of a crime” (Ruggie, 2011; Commission of Jurist, 2008). The key word is “knowingly”. Thus, a company is complicit in human rights violations if it “knows” about the abuse, if it “reinforces” an actor, and the “substantial outcome” of the reinforcement results in a human rights violation. Each of these terms “knowingly,” “assistance,” and “substantial outcome” is defined broadly under international law (United Nations Global Compact, n.d.). The corporate responsibility to respect human right includes avoiding complicity.

1.8 Indirect Corporate Involvement

In the next paragraphs, two types of involvement will be defined and elaborated. In the 1990s, changes in the strategies of transnational companies towards outsourcing relatively

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standardized activities to lower-cost production locations enabled the shift from import-substituting industrialization (ISI) to export-oriented industrialization (EOI) in developing economies. This corresponds with the shift from producer-driven to buyer-driven commodity chains at the level of global industries (Gereffi, 2014). This school of thought emphasizes how outsourcing is “one of the greatest organizational and industry structure shifts of the century,” (quoted by C. B. Clott, 2004), and how leveraging from partners within the supply chain is likely to increase, leading to human right violations occurring more often (Mares, 2010; Wood, 2012). An example could be underage labour or low wages within suppliers in emerging economies. Another example could be a shoe company that buys leather from a supplier in Vietnam. This supplier is polluting a river in Vietnam with chemicals used in its leather-making process. In it interesting to note that in this type of involvement it is not necessary that a corporation is directly or indirectly involved in a particular act of wrongdoing to be held to be complicit; it may be sufficient that the corporation benefits from human right abuses committed by a third party (Clapman & Jerbi, 2001, p. 346). This type of company involvement in human rights violations in this paper hereafter will be defined as supply chain involvement.

Second, another form of involvement in human rights abuses for organizations can come through the actions of host government, either as contributors or in the form of silent complicity. For example, a company could be indirectly involved in human rights abuses through host government actions, if this government requires these firms e.g. support them in financing a war, to be eligible to operate in that country. Another example could be companies that sponsor the Olympics is a country with a poor human rights records (Wettstein, 2010). According to the Universal Declarations of Human Rights, states have positive responsibilities - that is: ‘the duty to protect’, and the responsibility to impose human rights. However, many states fail to do so. This has led to public debate nationally and

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internationally as to whether corporations have duties relating to human rights (Kolstad, 2012). There is a concern that corporations that speak out against human rights will be put at a disadvantage by host countries’ governments (Wettstein, 2010). However, cases such as the allegations of Shell’s complicitity in the killing of Ken Sare Wiwa in Nigeria, or the moral and financial support of Total to the military government in Burma, have had implications for public opinion that might push corporations to emphasize the positive duties in their pursuit for legitimacy (Kolstad, 2012). Therefore, the second type of indirect involvement of corporations in this paper is defined as complicity with government abuses.

In this context, it is important to note that actors such as suppliers and governments have human rights responsibilities as well, so the direct responsibility lies with the party committing the human rights violations. However, in this paper the assumption is made that a company’s responsibility to respect human rights extends to its ties with suppliers, customers, and governments in operating countries. Human rights impact assessments are conducted by the companies with consideration as to the degree to which they have leverage over the actions of those with whom they conduct business with respect to human rights.

1.9 John Ruggie

John Ruggie has played an important role in this field, proposing the “Protect, Respect and Remedy (PRR)” framework in June 2008 for the better management of business and human rights challenges (Ruggie, 2009). Ruggie’s framework is built upon three pillars: (1) the state duty to protect against human rights abuses by third parties, including business, through appropriate policies, regulation and adjudication (2) the corporate responsibility to respect human rights, that is, to act with due diligence to avoid infringing on the rights of others and address adverse impacts with which they are involved; and (3) the need for greater access by victims to effective remedy, both judicial and non-judicial (Ruggie, 2013). John Ruggie (2011) presented the PRR-framework to the UN Human Rights council with the

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"Each pillar is an essential component in an inter-related and dynamic system of preventative and remedial measures: The State duty to protect because it lies at the very core of the international human rights regime; the corporate responsibility to respect because it is the basic expectation society has of business in relation to human rights; and access to remedy because even the most concerted efforts cannot prevent all abuse (p. 4)"

The United Nations (UN) encouraged Ruggie to bring the guidelines into practice, developing the UN Guiding Principles of Business and Human Rights (UNGP), which serves as a practical guideline for the ‘Protect, Respect and Remedy’ Framework of the United Nations (UN). The UNGP established an authoritative global standard on the respective role of businesses and government in helping to ensure that companies respect human rights in their own operations and through their business relationships (Ruggie, 2013). The UNGP provides a basis for conceptualizing business and human rights. A fundamental mark towards ensuring good human rights performance of an MNE is the conduct of human rights due diligence. Due diligence can help a company avoid complicity. The due diligence process is explained in the next sub-section.

1.10 Due Diligence

The due diligence process requires a company to critically investigate the risks of major transactions, projects and ongoing operations (Sherman & Lehr, 2010). With regards to human rights, this paper defines the due diligence process as “the steps a company must take to become aware of, prevent and address adverse human right impacts” (Hamann, Sinha, Kapfudzaruwa & Schild, 2009. p. 9). Companies seek a certain standard that reduces risk regarding corporations’ self-interest (Friedman, 1970). Due diligence should reduce

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information asymmetries, by contributing to the amount and quality of information available. Furthermore, merely respecting human rights does not suffice (e.g. Ruggie, 2008: Wettstein, 2012). Therefore, companies need detailed guidance to investigate current and/or potential human right impacts, either of their own actions or a result of cooperation with another party e.g. another business partner or a government. According to the UN Guiding Principles Reporting Framework, this risk assessment requires four essential steps: assessing actual and potential human rights impacts; integrating and acting on the findings; tracking responses; and communicating about how impacts are addressed (Langlois, 2016).

The due diligence process requires a company to be critical about past decisions made and this may reveal unwelcome facts (Sherman & Lehr, 2010). Additionally, Sherman & Lehr (2010) assess the impact of risk assessment versus the paradox of companies’ risk of liability. This means that the conduct of human rights due diligence - instead of reducing a company’s risk - could harm a company’s liability. Yet, in accordance with Ruggie’s point of view, they state that not conducting due diligence is too risky, for both business and society. Additionally, the effectiveness of the conduct of due diligence depends on the moral commitment of a company, or in other words, the positive responsibility to do good (Fasterling & Demuijnck, 2013). As previously stated, one of the reasons companies implement the United Nations Framework stems from the extent to which companies feel obliged to act with due diligence. Therefore, Fasterling & Demuijnck (2013) point out that since due diligence depends on the moral commitment of corporations, often strategic implementation of guidelines is very limited. Consequently, this may be enforced by the revelation of unwelcome facts due diligence could bring (Sherman & Lehr, 2010).

Yet, companies should implement codes of conduct and standards of best practices to overcome the risks of human rights violations. Codes of conduct and standards of best practices are two broad regulatory mechanism in corporate governance (Aguilera &

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Cazurra, 2004). Corporate governance will be elaborated on in the following sub-section, in order to better understand how it is related to a company’s human rights impact.

1.11 Corporate governance

The corporate scandals of the 1980’s in the United States and United Kingdom started the discussion about corporate governance (Aguilera & Jackson, 2010). In the IB literature, multiple definitions of corporate governance can be found. Originally, the literature on corporate governance focused on improvement of shareholder value, and definitions were used like: “the ways in which the suppliers of finance to corporations assure themselves of getting a return on their investment.” (Shleifer & Vishny, 1997). This definition emphasizes mainly shareholders. However, a shift has occurred where the focus of governance lies on all parties involved with the organization, and definitions are used such as.: “Corporate Governance concerns the structure of rights and responsibilities among the parties with a stake in the firm." (Aoki 2001). In this paper the following definition of corporate governance by Aquilera & Jackson (2010) will be used: corporate governance is the study of power and influence over decision-making within the corporation, regarding the firm’s organization and accountability to various stakeholders, shareholders, employees, local communities, boards, director’s etcetera (Aquilera & Jackson, 2010).

Two regulatory mechanisms are applicable to corporate governance: 'hard’ versus ‘soft’ law. In the former, regulation can take the form of statutory rules, where the latter can constitute standards of best practices, such as codes of good governance. Codes of good governance can be defined as a set of 'best practice' recommendations regarding the behaviour and structure of the board of directors of the firm (Aguilera & Cuervo-Cazurra, 2004). They are designed to guard against deficiencies in the corporate governance system by recommending a comprehensive set of norms on the role of the board of directors, relationships with shareholders and top management etc. These codes vary across countries,

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but all codes aim to improve the quality of companies' board governance, and increase accountability of companies to shareholders while increasing shareholder value (Aguilera & Cuervo-Cazurra, 2004). Examples of areas covered by such recommendations include independent directors on the board to ensure proper shareholder representation, the position of shareholders, the formation of board committees, and the role and position of auditor.

In addition, the national systems of corporate governance are dependent upon the context and historical path of countries (Williamson, 2000). In Germany, for example, superior board members include representation from founding family members, banks and insurance companies (Larcker & Tayan, 2008). Here, shareholders have far less influence on board matters as compared to Anglo-Saxon countries. This results in a legal code that places a greater emphasis on the preservation of jobs in Germany, whereas in Anglo-Saxon countries government regulation based on recommended best practices and pressures from shareholders are more prevalent (Larcker & Tayan, 2008).

1.12 Comparative Corporate Governance models

As previously mentioned, the national systems of corporate governance are dependent on their institutional context from the home country, and are therefore different among countries due to their legal tradition, social and cultural values and structure of capital markets (Aguilera & Jackson, 2010). In IB literature, several corporate governance systems are defined, with the largest perceived opposition that of the shareholder approach compared to the stakeholder approach (Aguilera & Jackson, 2010). Moreover, the classification of countries with regards to their corporate governance regimes can be separated into two dichotomous models: the Anglo-Saxon model versus the Rhineland (or German) model (Weimer & Pape, 1999).

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The Anglo-Saxon model places the emphasis on shareholders, compared to the Rhineland model which emphasizes stakeholders. The shareholder theory perceives shareholders as the most important actors in their system, and has a neoliberal focus based on free market forces and opposition to regulation. This national governance system is mainly characterized by a market-oriented focus, capital-financing, with insiders on the board, short-term relationships and competing labour markets (Aguilera & Jackson, 2010).

1.12.2 Rhineland model

Stakeholder participation may be related to efficiency, based on models of team production, commitment and risk sharing. Stakeholder theory sees the corporation as a set of relationships between multiple stakeholders, which have an interest in the firm and thus a broader set of goals to be satisfied (Aguilera & Cuervo-Cazzurra, 2004). When employees participate in a firm’s decisions through internal channels or decision making, this has strong integrative functions, fosters consensus and has a positive influence on the implementation of decisions (Rogers & Streek, 1994). Moreover, a few characteristics of this national governance system are high union strength, a long-term orientation, debt financing and a two-tiered board with independent auditors (Aguilera & Jackson, 2010). Table 1 provides a schematic overview of the characteristic of these two corporate governance models.

1.13 Contribution and Research Question

The UNPG framework was positively received in diverse quarters. This was arguably based on the report’s emphasis on commonly accepted principles. However, Chandles (2008) is more critical, arguing that the report presupposes that ‘companies are already sensitised to their broader responsibilities, which has yet to be true of most.’ He therefore suggests that more concrete guidance is required for companies. Tapping into this recommendation,this

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research will address different corporations’ type of involvement in human right violations using the “Spheres of Influence” concept.

Table 1. Schematic overview of characteristics Corporate Governance models

CG Regime Anglo-Saxon Model Rhineland Model

Underlying Theory Shareholder theory Stakeholder theory

Government involvement Low Moderate to High

Core aspects  Objectivity

 Market orientation  Rivalry  Short-term relationships  Equity financed  Labour market competition  Low union strength

 Single tier board

 Proximity  Network orientation  Cooperation  Long-term relationships  Debt financed  Labour protection

 High union strength

 Two tier board

Countries United States, Great

Britain, Ireland, Australia, Canada, Switzerland, Portugal, Sweden,

Finland, Czech Republic, Argentina, Brazil,

Ecuador, Colombia, Bolivia, Argentina, Thailand, Malaysia Nigeria, Peru, Mexico, Venezuela, Chile, Singapore, United Arab Emirates

Germany, Austria, France, Italy, Belgium, Japan, Denmark, the Netherlands, Spain, Lithuania, Poland, Romania, Slovakia, Hungary, India, China, Taiwan, Hong, Kong, Russia, South Africa, Ghana, Malawi, Mauritius, Kenya, Tanzania, Uganda, Zambia, Zimbabwe,

Source: Aguilera & Jackson (2010); Aguilera & Cuervo-Cazurra (2004); Aiko (2001); Friedman (1970); Rogers & Streek (1994), Hiles (2014), Rossouw (2008); Weimer & Pape (1999), OECD (2001), Larcker & Tayan (2008)

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Scholars suggest that a significant amount and perhaps a majority of human rights allegations for MNEs stem from instances of complicity address different corporations’ type of involvement in human right violations using the “Spheres of Influence” concept. Specifically, regarding the leverage a company may have over actors that are causing harm, it would be interesting to investigate what situations impact these types of involvement. Therefore, this paper will assess several contextual factors and investigate the impact on the different types of corporations’ involvement. It will contribute to human rights debate in the literature through being, to the best of my knowledge, the first study to test this relationship through quantitative, empirical data analysis. Consequently, it could considerably contribute to the comprehension of the complex concept of complicity, as it will provide of a better understanding of the determinants of the human rights violations and the role of organizations. In this way, a contribution will be made to a better understanding of the determinants (corporate governance and host-country governance factors) and consequences (types of corporate involvement in human right violations) that are concerned in allegations of corporate human rights abuses involving MNEs. Hence, the following research question will be examined: “What factors can impact a corporations’ type of involvement in human rights violations?”

In the next section relevant hypotheses will be developed after an integration of these concepts. In the following section, data will be collected, analysed and interpreted. Lastly, I will finish with a discussion and provide recommendations for future research.

2. Theoretical Framework

The extractive industries are central to the economies of many developing countries. At the same time, these industries often contribute to human rights violations for example child labour, bad working conditions and corruption (Human Right Watch, 2016). Corruption for example, defined as “the abuse of public power for private benefit” (Doh et al. 2003), is

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very common in the extractive industries. Extractive recourses are limited in supply and non-renewable, hence firms compete for access to them. Alongside this, the exploitation of natural resources requires large capital investments and technological know-how, often possessed by foreign countries. Due to high-switching costs there is a ‘lock-in’ effect for these foreign MNEs and they become highly dependent upon the local and often rent-seeking governments (O’Higgins, 2006). Africa, South-America and Asia are huge suppliers of these natural resources, with 63 countries active in the oil, gas and mining industries (Human Right Watch, 2016). Amnesty International argue that there is a high co-occurrence of human right violations and these extractive industries, and that “operations often occur in the most disadvantaged areas in the world, encountering some of the most vulnerable children, with profound and diverse impacts.” (Amnesty International, 2016; World Bank and United Nations Development programme, 2016). This paper will focus on firms operating in Africa, Asia and South-America as this gives a good representation of emerging and developing countries firms tend to shift their operations to.

Next to the extractive industries, the textiles and apparel industries are also central to many developing countries, yet also tend to violate human rights. The customers of garment producers are frequently global brands looking for low prices and tight production timeframes. These global brands also make changes to product design, product volume, and production schedules, and place last-minute orders without accepting increased costs or adjustments to delivery dates. The burden of such policies usually fall on factory workers (D’Ambrogio, 2014). Furthermore, the plants often face over-capacity, and fire doors are deliberately blocked by factory owners, causing unsafe working conditions. In addition, trade unions are often suppressed, and union organizers intimidated. Workers claim that some managers mistreat employees involved in setting up unions, or force them to resign. With regards to the consequences of accidents, the lack of regular contracts frequently means that

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many workers who are injured in factory fires, nor the relatives of those who die receive any compensation (D’Ambrogio, 2014).

So, it appears that multinationals frequently operate in Africa, South America and Asia for several location-specific advantages, such as the extraction of natural resources and cheaper labour. Therefore, this paper examines companies operating in the oil, mining and gas, and the textile and apparel industry on these continents.

2.1 Corporate Governance and Type of Company Involvement

In developing and emerging countries, there are often zones of weak governance in place that fail to ensure the economic development of human rights (Nwapi, 2015). Zones of weak governance refer to “investment environments in which governments cannot or will not assume their roles in protecting rights ... and ensuring that public sector management is efficient and effective...[,] lead[ing] to broader failures in political, economic and civic institutions.” (OECD, 2006 p. 11). The state’s regulatory and enforcement agencies may be malfunctioning due to lack of adequate resources or lack of political will (Nwapi, 2015). When foreign MNEs invest in the extractive industries or textile and apparel industries they can have serious impacts, positively or negatively on economic development.

On the one hand, an example of a positive effect is the resources extracted have the potential to generate income and wealth, which can reduce levels of poverty in these countries. Sustainable development is ‘a process of change in which the exploitation of resources, direction of investments, orientation of technological development, and institutional change are made consistent with future as well as present needs.’ (WCED, 1987, page 9). The revenues generated by the businesses such as large oil plants can be invested to develop human capital and infrastructure, enabling higher, value-added, high margin economic activities, thus creating a vibrant domestic and export economy (O’Higgins, 2006). This paper argues that MNEs with a home country regime based on the Rhineland model are

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more likely to engage in these positive spill overs. The Rhineland model tends to have a longer-term focus, which also includes the indirect effects it has on an economy. Furthermore, the stakeholder theory argues that no company is self-contained. Marcus & Fremeth (2009) argue that the success of every company is affected by supporting companies and infrastructure, which also includes the stakeholders in the supply chain or the government in place. Simply put, companies strategically need the cooperation of their environment to work efficiently.

On the other hand, a negative effect that foreign MNEs have on their environment could arise from acting out of self-interest and taking advantage of a situation where they do not have rules that they must abide by. Mock (2003) states that oil exploitation has not only failed to destroy economic growth, but that it has damaged development and provoked poverty (Mock, 2003). For example, in countries based on extractive industries, labour and capital are drawn away from less corruptible sectors like manufacturing and agriculture, which leads to a dependence on extractive resources. In addition, the change in land use leads to the displacements of communities and the disruption of lifestyles (Nwapi, 2015). Therefore, the type of economic growth that result does not tend to provide employment for large numbers of poor people, and relies on a small number of highly skilled workers. Most of these are foreign workers who live and work in areas separate from the local economy (O’Higgins, 2006). Another phenomenon occurring in extractive industries is the support of large oil companies for military activity and civil war (Rosenberg, 2002). In the textile and apparel industry MNEs frequently make changes to product design, product volume, and production timeframes, and place last-minute orders without accepting increased costs or adjustments to delivery dates. The burden of such policies usually fall on factory workers (D’Ambrogio, 2014). Workers claim that some managers mistreat employees involved in setting up unions, or force them to resign.

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Firms from an Anglo-Saxon corporate governance regime tend to see their shareholders as their ‘only stakeholders’, neglecting the voices of communities in the environments they operate in. Hence, they tend to have a more short-term focus on profits, and seeing economic development as a cost and not as a strategic investment that can generate revenues in the long-run (Friedman, 1970). Therefore, this paper argues that companies with a home country parent baed on the Anglo-Saxon governance model are more likely to indirectly violate human rights, as they do not take into account of other stakeholders. In short, firms operating in emerging countries tend to have positive and negative spill over effects because the rules and their enforcement in these countries are lacking. MNEs tend to ‘lobby’ to attempt to influence rules and regulations. Whether this either has a positive or negative effect depends upon the different corporate governance regimes from the home country.

Hypothesis 1: Companies that are accused of human rights violations that are based in home countries using an Anglo-Saxon corporate governance regime are more likely to be accused of abuse through direct company actions, supply chain related action, or complicity with government human right violations compared to companies with a home country parents based on the Rhineland corporate governance regime.

2.2 Country-level Governance and Type of Company Involvement

The external, or host country environment is an important factor an MNE should consider when operating globally. MNEs must deal with multiple pressures to adapt to diverse local environments arising from the several institutional, legal and regulatory regimes of the host countries they are operating in. These firms need to conform the to the laws, values and norms of the overseas host country in which they are operating, i.e. the country-level governance mechanisms.

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In the IB literature, the ethical behaviour of corporations has largely been connected to the political structure of host countries (Bota,-Avram, 2013; Agymang, Fantini & Frimpong, 2015). Host country-level governance has been found to be an important influence in creating a well-established business environment (Bota,-Avram, 2013). In this paper, host country-level governance is defined as the country-country-level dependence of the manner in which corporations can abide by the legal structures of these countries (Agymang, et al, 2015). The paper of Agyemang et al. (2015) examines the impact that host country-level governance has on the ethical behaviour of firms. The authors find a statistically significant and positive relationship between host country-levels of rules of law, regulatory quality, control of corruption and democracy on the one hand, and firm ethical behaviour by MNEs operating in African economies on the other. To build on this, it is interesting to examine how specific host country governance mechanisms contribute to the type of corporate involvement in human rights violations in that specific country.

For the examination of different types of involvement firms’ have in human right violations, it is interesting to look at institutional host-country differences MNEs operates in. According to North (1991) path-dependency is key in explaining the opportunities firms get from the institutional environment they operate in. So, whether a firm is involved in human rights violations, and to what degree, might also be explained by ‘the opportunities’ provided in the host-country. Apartheid in South-Africa, for example, still shows its consequences in political instability and a relatively high level of corruption (Laverty, 2007). In short, this paper will focus on firms operating in Africa, Asia and South-America, as this gives a good representation of the kind of emerging countries that MNEs tend to shift their operations to. Furthermore, both the extractive industries as well as the textile and apparel industry will be examined, as differences between these industries might help explain different forms of company involvement in human rights violations.

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Corruption is defined as “the abuse of public power for private benefit” (Doh et al. 2003) and includes the use of a position of trust for dishonest gain. Corruption reflects an underlying institutional framework and as stated before, corruption most often leads to violation of human rights. Corruption involves at least two parties: the bribe-takers and the bribe-payers. In highly corrupt countries government officials are most likely to be seen as the bribe-takers (Svensson, 2005). Bribe-payers are most likely to come from developing countries as this ‘play of the game’ is more accepted in these countries. According to Meyer (2009), prevailing norms regarding bribery exist within the business community that stem from MNEs and suppliers home country. This paper assumes that most MNEs are from developed countries. In developed countries bribery is more likely to be seen as unacceptable compared to developing countries (Svensson, 2005)1. Host country suppliers are often from a weak institutional environment, which makes them more susceptible to engage in bribery. Hence these suppliers are more used to the ‘this play of the game’. Therefore, they are more likely to be identified as bribe-payers. Subsequently, this could be an indication that MNEs operating in highly corrupt countries are more likely to be subject to corrupt supply-chains, which may result in indirect violations through the supply chain. Additionally, this paper expects that it is less likely that corruption explains direct company actions, because the majority of MNEs face corruption distance when operating in a host country as corruption is less accepted within the norms of the business community in developed countries. Therefore, the following hypothesis is developed:

Hypothesis 2: Companies that are accused of human right violations while operating in highly corrupt host countries are more likely to be accused of supply chain related human rights violations, or complicity with government abuses, than direct company actions.

1

Note: this paper is aware of the differences is the level of home-country corruption, however due to complexity and time constraints this will be discussed in section 6.

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Furthermore, the level of democracy of the host country is considered as a factor that plays a vital part in the institutional context. Democracy is defined as ‘a rule of the people’ or ‘government by majority’ (World Bank, 2016). Numerous studies have found that when democratic systems exist, it is generally expected that the authorities’ willingness and capacity to violate human rights are diminished (e.g. Davenport & Armstrong, 2004; Russell, 1993; Rousseau, Gelpi, Reiter & Huth, 1996). Authorities generally decrease repressive behaviour when they will suffer from some punishment for undertaking such activities and/or when an alternative and more efficient strategy of social control is made available (Dallin & Breslauer, 1970). Democracy requires a state to shape better policies, articulate grievances and seek justice and accountability from both leaders and the private sector (Agyemang, Fantini & Frimong, 2015). Furthermore, democratic political systems have been found to decrease political bans, censorship, torture and mass-killing (Davenport, 1995; Mitchell & McCornmick, 1988; Zanger, 2000; Rousseau, Gelpi, Reiter & Huth, 1996). Subsequently, an economy that practices democracy goes all-out to create rules and monitoring mechanisms to guide the conducts of corporate organisations (Agyemang, Fantini & Frimong, 2015). Therefore, this paper includes democracy as one of the indicators of country governance. One could argue that where there is no democracy in place, the authorities in place hold larger power. This also means that corporations would be more influenced by the government, compared to the public and/or other stakeholders. Therefore, the following hypothesis is developed.

Hypothesis 3: Companies that are accused of human rights violations while operating in highly autocratic host countries are more likely to be accused of complicity in/with government abuses than supply chain related human rights violations, or direct company actions.

The relationship between Country and Corporate Governance Mechanisms and type of company involvement in human right violations