Overview
This time each year, we eagerly await among the most insightful and important annual reports for in-house human rights practitioners: LRN's Program Effectiveness Report. The Report surveys over 1500 ethics and compliance professionals and other company employees across a wide range of sectors and geographies. It lists a trove of statistics, which it also meaningfully dissects in the context of analyzing trends among ethics and compliance programs, including the integration of supply chain and larger sustainability topics.
This year's Report offers important observations that, for human rights programs striving to align both with the UN Guiding Principles on Business and Human Rights (UNGPs) and the growing web of global regulations, are validating and also troubling. On the one hand, the Report suggests that human rights is becoming a regular component of international regulatory and compliance programs. On the other, it also suggests that programs have a limited focus on supply chain-related risks, and that there is a growing disconnect between the perceptions of senior management, middle management and line employees regarding integrating company values into decision-making. Both issues may undermine commitments to the UNGPs and enhance legal risks. For multinational companies seeking consistency with the UNGPs and adherence to regulation, program attention may be warranted.
The Macro Trends for Business and Human Rights Programs are Validating
First, the good news. Human rights has become mainstream in the programs of major companies, and many are actively contemplating enhancements. Among the higher impact programs that are generally associated with multinational companies, the Report states that just under one-half expend "a great deal" of effort on human rights and anti-slavery compliance, and sexual harassment. In that vein, we note that in last year's report, for programs overall, 72% of respondents spent some or a great deal of effort on human rights and anti-slavery compliance. Further, this year, just over half expend "a great deal" of effort on ESG requirements more generally. Those numbers are roughly akin to other areas, like complex government regulations, emerging technologies and information security, and higher than traditional international regulatory compliance areas like AML, export controls and trade sanctions. Further, for high-impact programs, about 43% are considering adding or strengthening human rights training, and just under half are considering adding or strengthening training on ESG issues. Again, those numbers compare favorably to other areas; they are stronger than financial fraud and trade controls, and roughly similar to data protection, for instance.
A systematized approach to embedding human rights throughout an organization is a critical first step in seeking to both meet new legal obligations and drive the corporate responsibility to respect human rights that animates the UNGPs. Companies taking these steps are now very much part of the norm.
With Warning Signs on Program Effectiveness
But storm clouds are on the horizon. Most troubling is the Report's data-derived conclusion that there is a growing disconnect in the perception of company leaders and line employees regarding how the company integrates its values into day-to-day decision-making. The Report details that approximately 80% of C-suite executives and executive leadership incorporate values into their difficult decisions, and about 75% say they hold top performers and managers to the same ethical and behavioral standards as all employees. Yet only 40% of frontline employees say they incorporate values into decision-making, only 50% say top performers are held to the same standards as others, and only 42% say managers are held to the same standards. The results from middle managers are right in between executives and line workers. Even worse, 36% of all employees surveyed believe middle managers – who make day-to-day operational decisions, and whose behavior serves as a model for frontline employees – make difficult decisions consistent with company values.
In other words, while human rights programs are becoming normalized amongst multinational enterprises, the Report identifies an apparent disconnect between the stated values of those companies and employee actions. Core values reflecting respect for people and communities – which fundamentally underpins business and human rights - mean little if middle managers and the workforce do not consider them when making decisions. Negative human rights impacts often occur in local markets, at factories, on farms, at mine sites and oil facilities, or through the decisions of managers distant from the executive suite. The risk of negative impacts increase where managers and employees disregard stated company values when making determinations that impact affected stakeholders and local communities. The Report also suggests an executive blind spot regarding these issues, and a possible misperception or lack of respect by middle managers tasked with implementing executive vision. Human rights policies and procedures are only as strong as the degree to which they are followed in letter and spirit, and the fact that programs now exist in companies does not mean they are effective.
Companies can seek to address these issues in a variety of ways. A good starting point is a survey to better understand how the trends referenced in the Report apply to their companies. Depending on the results, other steps might include tailored means of communication and training, transparency in decision-making, and reviewing the balance of productivity and ethical behavior in performance evaluations, bonuses, promotions, and other benefits. But where executives lose sight of how line managers make decisions and the ethical adherence of a workforce wanes, the odds increase that negative human rights and regulatory impacts will follow, increasing corporate legal risks from tort lawsuits, regulatory non-compliancy, and greenwashing allegations premised on inconsistencies between stated principles and actual conduct.
Finally, while human rights programs have become regularized, the Report references an unexpected and perhaps contradictory downward trend in supply chain oversight, even with the bevy of recent laws addressing supply chain due diligence and transparency and the conspicuous harms to businesses that supply chain abuses can bring. About one-quarter of all programs identify supply chain issues as a focus in their trainings, with only slightly higher numbers for high-impact programs. Citing resource constraints, just 32% of all companies are increasing their focus on supply chain risks, also down from last year, with 39% of high-impact companies increasing their focus, slightly higher than last year. Perhaps these numbers will improve with new laws coming online that compel close supply chain attention, such as the EU Deforestation Regulation, the EU Batteries Regulation, and the Corporate Sustainability Due Diligence Directive. These new laws are being closely watched by consumer organizations and NGOs, who can and will trigger review processes and potential litigation to drive attention and increase compliance. But weak supply chain oversight and management are never helpful to a human rights program committed to the UNGPs and legal compliance.
Conclusion
We take great comfort in the Report's macro trends, regarding the widescale acceptance of human rights as part of ethics and compliance programs. That is encouraging and validating. However, the task for multinational companies is growing in difficulty. It is no longer enough just to develop a program that aligns with the UNGPs in design and implementation – a challenging undertaking in itself. Programs also must meet the demands of a growing body of complex global human rights-related laws and regulations, or face a range of legal consequences. Meeting both goals, as companies are expected to do, will necessitate consistency between corporate values and operational decision-making, executive clarity regarding managers and line employees, and stout supply chain oversight. LRN's Report signals that more work lies ahead.
