Abstract
The article examines reporting laws to determine if and how these laws shape corporate conduct and protect human rights. Since 2010 a wave of laws with extraterritorial effects has appeared as home states of multinationals began to mandate social disclosures. However, opinions as to their importance differ and some wonder whether these transparency laws are ‘a hollow victory’. What is the evidence regarding the effectiveness of these laws? If they work, what are the exact pathways for change? The laws selected for analysis cover corporate sustainability, slavery, conflict minerals, revenue transparency, and corporate governance. To assess the impacts and potential of these laws, the article distinguishes between dynamics that are internal and external to the corporation, and between direct and more remote effects. Drawing on the evidence surrounding these transparency laws, their place in the regulatory regime for global value chains as well as the functions this regulatory method fulfils in relation to human rights are discussed.
1. Introduction
The governance of corporate social responsibilities (CSR) of multinational enterprises has largely evolved through soft law and corporate voluntarism, against a background of ‘governance gaps’ in international and national laws. 1 In the narrower area of ‘business and human rights’ (BHR), hard laws with extraterritorial effects were largely absent until 2010. 2 At that time home states began adopting such laws mainly in the form of mandatory disclosure of social and environmental impacts. However, opinions as to their importance differ. On the one hand, lawmakers and some activists consider them as a game changer, 3 ‘truly groundbreaking’, 4 ‘the ultimate appropriate regulation’, 5 a landmark step in the quest for corporate accountability. 6 On the other hand, some academics warn that it is unclear whether social disclosure actually changes corporate behaviour as ‘research on the utility of social disclosure obligations has been inconclusive’, 7 and some go further deeming mandated disclosure the ‘least successful regulatory technique in American law… a Lorelei, luring lawmakers onto the rocks of regulatory failure.’ 8
This article asks whether these post-2010 laws are ‘a hollow to victory.’ 9 What is the empirical evidence regarding their effectiveness? If they work, what are the exact pathways for change these laws chart to increase the protection of human rights? What are the functions of disclosure regulations in the multi-layered legal order that characterise transnational business governance? To begin answering these questions, the analysis covers the main transparency laws adopted by home states of transnational businesses in areas such as corporate sustainability, slavery, conflict minerals, anti-corruption, and corporate governance.
The article seeks to grasp the significance of transparency laws by tracking their effects and dynamics. It distinguishes between their internal and external dynamics, and their direct and indirect effects. Internal dynamics refers to dynamics within the company; there are direct effects on the information released, that is, the quantity and quality of reports, and indirect effects on the way companies change their decision-making as new information became available and new processes of data collection were set in place. In contrast, external dynamics refer to happenings outside the company; there are direct as well as more remote effects on the users of information and other legal orders.
Getting clarity on the more remote effects is indispensable for assessing transparency laws and grasping their added value to human rights protection. This is particularly important in an area like transnational BHR where other more coercive laws are in short supply and even problematic at times as they can create tensions with other legal orders. 10 Furthermore, transnational business operations are shaped through an emerging multi-layered legal regime relying on private, public and hybrid forms of regulation. 11 In this context, transparency laws appear as a distinctive regulatory tool for implementing soft law such as the UN Guiding Principles (UNGPs), 12 a project seeking to mobilise leverage from diverse sources and direct it through the blood vessels of the global economy to increase the protection of human rights. 13 Indeed, the UNGPs affirmed the importance of transparency both in terms of law as well as an element of corporate due diligence. 14 The OECD Guidelines are aligned with the UNGPs and similarly emphasise human rights disclosure. 15
In terms of structure, Section 2 identifies the objectives and expectations of lawmakers and civil society groups supporting transparency as a regulatory strategy. Section 3 gathers the evidence accumulated after these laws entered into force. Section 4 reflects on the functions of transparency laws in the governance of transnational business operations.
2. Objectives of disclosure laws
Transparency laws are policy instruments pursuing multiple goals. Their objectives can be identified from preambles in the laws, statements of policymakers, and the positions of civil society groups and potential users advocating for such instruments.
2.1. To support substantive policy goals
Transparency laws aim to contribute to specific substantive policy objectives. Thus, the California Supply Chains Act (2010) 16 and the UK Slavery Act (2015) 17 aim to protect workers in supply chains from forced labour. 18 The two laws share similarities and require companies to disclose the presence of slavery and human trafficking in their global supply chains and their efforts to eradicate them.
The EU Non-Financial Reporting Directive (2014) states that releasing nonfinancial information ‘is vital for managing change towards a sustainable global economy by combining long-term profitability with social justice and environmental protection.’ 19 The Directive asks businesses to report on human rights, social and employee-related matters, anti-corruption, and environmental matters. Information on policies, outcomes, risks, and due diligence processes should be released. 20 The first reports are expected in 2018.
The (US) Dodd-Frank Act (2010) – Section 1502 21 – and its counterpart EU Regulation (2017) 22 aim to cut the link between trade in minerals and conflict by draining revenues for armed groups. The objective is to ‘inhibit the ability of armed groups… to fund their activities by exploiting the trade in conflict minerals’ 23 as a way to protect human rights, end the conflict, and promote peace and security and development. 24 The Dodd-Frank Act requires companies to track to the source the minerals used in their products and report if they found minerals from conflict zones (the Democratic Republic of Congo region). Thus, the Act is a ‘trace and report’ type of law that mixes due diligence measures (trace) and transparency (report) requirements.
The (US) Dodd-Frank Act (2010) – Section 1504 25 – and the EU Directive on the annual financial statements (2013) 26 aim to combat corruption and ‘empower citizens of resource-rich countries to hold their governments accountable for the wealth generated by those resources.’ 27 The two laws require extractive industry companies to disclose the taxes and other revenues they pay to host governments.
The (US) Responsible Investment in Burma law (2012) 28 also used transparency as a lever for good governance to address the effects of new investment on ‘the political transition in Burma.’ 29 It asked companies to report on 11 points including human rights policies and procedures, risk prevention and mitigation measures. It operated from 2013 to 2016.
Corporate governance instruments in the UK 30 and the EU 31 rely on transparency to protect investors and to ‘facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company.’ 32 These instruments require companies to report how they comply with corporate governance provisions, but offer them the possibility to diverge from such provisions as long as they explain the reasons for departure. 33 These are the innovative ‘comply or explain’ provisions that first appeared in UK corporate governance in 1992. 34
2.2. To enhance the quality and quantity of data companies disclose
Rather self-evidently, the immediate objective of transparency laws is to increase the quantity and quality of disclosures. For example, the EU Reporting Directive state as its objective ‘to increase the relevance, consistency and comparability of information’ business disclose. 35 The Directive was necessary to correct market and regulatory failures. 36
2.3. To enrol the regulatory potential of private actors
Transparency laws are explicit in their aim of mobilising external actors such as consumers and investors. The EU Reporting Directive signals the importance of ‘identifying sustainability risks and increasing investor and consumer trust’. 37 Regarding costumers, the UK Slavery Act indicates that information will give consumers ‘greater confidence in the goods and services they buy.’ 38 The California Transparency Act aims to inform and educate consumers ‘on how to purchase goods produced by companies that responsibly manage their supply chains.’ 39 Regarding investors, the UK Slavery Act requires transparency that ‘allows investors to move capital towards more sustainable, responsible organisations and strengthen the long-term ethical sustainability of the financial system.’ 40 Dodd-Frank 1502 aims to ‘help American consumers and investors make more informed decisions.’ 41
The empowering function of transparency laws is emphasised by certain NGOs. For example, the Burma Reporting Requirements serves ‘to empower civil society [and] offer a framework for investors and civil society organisations to monitor, analyse, and engage with U.S. companies’. 42 Similarly, the EU Reporting Directive enables stakeholders to protect human rights: ‘Access to non-financial information by workers, communities, consumers is essential in order to hold companies accountable for negative impacts. Those affected by business operations will better assert their rights and fulfil their roles, as more robust reports will enable them to better assess the scope and impacts of companies’ operations on society and to monitor their progress.’ 43
2.4. To stimulate responsible decision-making
Transparency laws seek to stimulate improved internal processes within organisations. Policymakers behind the UK Slavery Act view reporting as a risk-management tool: ‘Due diligence processes and reporting are essential management tools that improve risk identification and long-term social, environmental as well as financial performance.’ 44 The EU Reporting Directive also considers that ‘Enhanced transparency may help companies to better manage non-financial risks and opportunities, and thus improve their non-financial performance.’ 45 Transparency on gender equality is justified in the EU Reporting Directive as promoting Board diversity and ultimately better management. 46 Corporate governance instruments target internal corporate processes with the stated aim ‘to facilitate effective, entrepreneurial and prudent management’ 47 and further refer to improvements in corporate culture which the ‘comply or explain’ principle promotes. 48
Some civil society groups also see reporting requirements as a trigger for more responsible business conduct. Commenting on the EU Reporting Directive, a NGO wrote: ‘For companies, publicly acknowledging the problems is a first step to start addressing them. By complying with the new requirements, companies will have a better understanding of the risks they face’. 49 Thus ‘If problems are not even acknowledged, they will never be addressed.’ 50 Another NGO supporting the Burma Reporting Requirements ‘believes that the process of responding to the reporting requirements is equally as important as the report itself. Companies are improving their practices simply by being required to consider issues and answer questions related to operations in Burma/Myanmar.’ 51
2.5. To generate change in other legal orders
Some transparency laws expressly draw on and reinforce other regulatory orders wherefrom authoritative and specific guidance emerges. For example, the conflict minerals laws 52 expressly refer to the OECD Guidance on conflict minerals while the revenue transparency laws 53 refer to the Extractive Industry Transparency Initiative’s Standards (EITI). The OECD Guidance on conflict minerals 54 and the EITI Principles 55 are governance schemes lacking legally binding character and emerged as the result of a ‘government-backed multi-stakeholder process.’ 56
For some proponents of transparency laws the implicit or explicit objective is to trigger or facilitate further regulatory changes. Thus, many civil society groups see mandatory disclosure as a break with voluntarism and a first step towards more stringent obligations on companies. A NGO considered that the EU Reporting Directive ‘creates precedents for future policy developments on CSR and corporate accountability.’ 57 Based also on the inherent limitations of transparency laws, some NGOs consider that ‘Legislation can and should go beyond transparency to mandate that companies conduct human rights due diligence in their supply chains regarding forced labour/human trafficking’ and give victims access to remedies. 58
2.6. To deliver flexible but effective state interventions
With mandatory disclosures legislators seek to turn the inherent limitations and the flexibility of a less coercive regulatory strategy into an effective policy intervention. 59 By their very nature, disclosure laws require companies to be more transparent about their decision-making processes and impacts of operations, but not to change their conduct to prevent or address human rights impacts. As commented on the UK Slavery Act, ‘While the act recommends disclosure of a company’s due diligence policies, it does not actually require a company to conduct due diligence’. 60
These inherent limitations of disclosure laws are accompanied by further flexibilities of various sorts. The EU Reporting Directive explains the regulatory design as ‘allowing for high flexibility of action, in order to take account of the multidimensional nature of corporate social responsibility (CSR) and the diversity of the CSR policies implemented by businesses matched by a sufficient level of comparability’. 61 The 2013 Draft EU Reporting Directive clarified that the EU ‘takes a flexible and non-intrusive approach. Companies may use existing national or international reporting frameworks and will retain their margin of manoeuvre to define the content of their policies, and flexibility to disclose information in a useful and relevant way.’ 62 In corporate governance, the ‘comply or explain’ approach ‘provides companies with flexibility by allowing them to adapt their corporate governance to their size, shareholding structure or sectoral specificities.’ 63
There are several ways through which legislators insert flexibility in transparency regimes. With the exception of the Dodd-Frank 1502 and 1504 and their EU equivalents, the transparency laws discussed herein are not that prescriptive and detailed in their requirements. Some of these transparency laws have outright opt-out clauses such as companies to ‘disclose to what extent, if any’ 64 or ‘may include’ 65 or to ‘the extent necessary’ or ‘where relevant and proportionate’ 66 information mentioned in the law. A slightly strengthened version of the opt-out is through ‘disclose or give notice’ provisions which are exempt from disclosure as long as express notice is given to the user. 67 An even more demanding version of opting-out are ‘comply or explain’ provisions which require a company to give reasons for not observing a requirement. 68
Other flexibilities consist of relevance thresholds such as ‘materiality’ of information 69 or ‘severity’ of impact with information below such thresholds not being required. 70 Also the sanctions for non-compliance tend to be limited to injunctions 71 and fines 72 and even the most prescriptive law herein, the Dodd-Frank 1502 has ‘failed to structure the compliance obligations in a way that maximises transparency.’ 73 The independent verification of reports is sometimes not required at all in social disclosure laws, or if required, auditors merely verify a report has been issued, but not whether the content is truthful. 74 There is also opacity that can be expected from the very reliance on self-reporting given the bias towards selecting positive items only 75 as well as from commercial secrecy (safe harbour) provisions 76 if they are not precisely circumscribed.
For these reasons, the transparency laws and their prized flexibility might appear as watered-down requirements offering loopholes for companies not inclined towards meaningful reporting and a change of their conduct. Disclosure laws appear as alternatives to more coercive laws targeting internal processes, such as obligations to undertake risk management (i.e. ‘human rights due diligence’ laws 77 ), or imposing liability for the harm caused.
3. Compliance with and effects of disclosure laws
Lawmakers and some NGOs count on dynamics internal and external to the company, and hint at direct and indirect effects of transparency laws. But are these effects materialising? What is the evidence regarding the effectiveness of transparency laws?
3.1. Internal dynamics
This subsection analyses dynamics within the company that transparency laws trigger or facilitate. They cover direct effects on the quantity and quality of reports, as well as more remote effects on decision-making in the company.
Anti-slavery laws
Birkey and colleagues conducted an analysis of the first round of reports submitted under the California Transparency Act. 78 They found that although companies largely complied by issuing reports as requested, the disclosures appeared to be ‘more symbolic than substantive.’ 79 They trace this unsatisfactory compliance to diverging demands and reactions from investors and civils society, something not anticipated by lawmakers: ‘While consumers, NGOs, and other stakeholder groups clearly seem to want richer information on corporations’ efforts to ensure more ethical performance within their supply chains…, investors appear to interpret increased disclosure as potentially costly in terms of firm value. Accordingly, managers may be reluctant to be more transparent with respect to their supply chain activities.’ 80 Furthermore, with less meaningful information being gathered and released, the indirect effect on corporate risk-management might not materialise: complying without providing genuine transparency makes it ‘unlikely that the disclosure will induce better corporate efforts at safeguarding their supply chain activities.’ 81
Prokopets also studied the California Transparency Act and its potential effects in the decision-making processes of consumers and companies. 82 She evaluated the design of the law and its likely efficacy based on Fung’s theory on mandated disclosure regimes. Fung argued that ‘disclosure regulation can do more than simply provide information, that it can actually change practices’ if five criteria are met. 83 Prokopets found the Californian law deficient on two criteria – reporting structure and enforcement mechanisms – and concluded the law was unlikely to change the behaviour of consumers and companies. Nevertheless, she points to indirect dynamics of transparency laws: ‘Even if information disclosure does not directly cause an action cycle, it can help spawn political organising and activism as political and economic pathways often intertwine’. 84
Regarding the UK Slavery Act, companies issued reports and did not take advantage of a straightforward escape hatch: of the 1,300 company reports, ‘none of them explicitly states that the company has taken no steps to address modern slavery in its operations and supply chains.’ 85 However the reports were of weak quality pointing to paper compliance as ‘too many companies are using a tick-box approach, incorporating key words and generic language without providing substantive or meaningful information.’ 86 Overall the assessment stroke a cautiously positive note deeming there is ‘progress, but slow’ and pointed to indirect effects on internal decision-making: ‘Despite the lackluster findings from these first statements, it is clear the act is driving change…[A]s a result of the act, modern slavery policies and processes have been developed and implemented, or were in the process of being developed.’ 87
Another assessment of reports under the UK Slavery Act impresses the importance of directors having to sign the annual modern slavery statement. This requirement ‘has raised the profile of modern slavery issues within companies [and increased] senior level involvement and engagement across the business.’ 88 This indicates an internal effect on risk management given that ‘dealing with modern slavery issues tends to be dispersed throughout different corporate functions and lacking strategic oversight.’ 89 Such dispersion results in a less cohesive and effective due diligence effort; therefore inter-departmental cooperation and top-level leadership are indispensable. 90 This legal provision worked to increase the standing of CSR units within some companies. 91
Burma reporting requirements
A 2014 analysis of the first-year reports found ‘significant limitations’ and ‘uneven quality’, with some reports failing to provide information in direct contradiction to the law. 92 By 2016, it was noted that ‘many companies provide insufficient information, or none at all, and overall quality of the reports varies widely’ 93 with only three companies out of 32 companies submitting reports recognised as doing ‘a solid’ reporting job. 94
Concerning the law’s effects on risk management, an NGO counted on the reporting process to ‘provide an important incentive for new investors to assess potential risks, challenges and opportunities’. 95 In contrast, the American Chamber of Commerce considered that the law generated no discernible internal or external effects, neither on corporate conduct nor on better conditions on the ground. 96
Conflict minerals laws
Regarding Dodd-Frank 1502, Schwartz’s in-depth analysis of the first rounds of reports (over 1300) concluded the reports are ‘muddled, redundant, and difficult to compare’, ‘brief and devoid of detail’ and ‘reveal quite little about conflict mineral supply chains’. 97 Thus many company filers ‘complied in a largely superficial manner suggestive of minimal effort’ and some exploited the flexibilities within the law: ‘the companies usually chose to read the rules literally and narrowly, seizing on opportunities…to provide as little information as possible. Worse still, many corporate filers simply ignored clear requirements. The reports ultimately reveal shallow, almost cynical, compliance with poorly crafted rules built on a regulatory paradigm better suited to simpler contexts.’ 98
The Responsible Sourcing Network evaluated the third round of disclosures (2016). 99 Based on a sample of 200 reports, it arrived at a more up-beat assessment although the overall picture appeared uneven, evolving and difficult to interpret. The report found positive developments regarding the high level of detail compared with any other human rights issues. In the same time, there are both quality problems and gaps in reports. Thus, the information in most reports ‘lack[s] standardization or clarity’ and key actionable information on smelters and countries is missing from a majority of reports. 100 Even though the Securities and Exchange Commission recognised the OECD Guidance, most companies followed it ‘superficially, and only a handful of companies utilized the guidance to its full extent.’ 101
Although the law is highly prescriptive on how companies should go about collecting data and trace minerals, Schwartz indicated that the vast majority of companies ‘conducted their diligence in nearly the same way (the centrepiece of nearly every effort was a simple supplier survey).’ 102 Some companies used the industry-run certification of smelters (refineries). 103 However, his research notes the law had internal effects in terms of creating a conflict minerals policy (75% of companies) and setting up internal cross-functional teams (90% of companies). 104 A 2016 analysis showed some companies exploited a flexibility in the law that gives companies discretion to pursue an expedited, less demanding form of due diligence. 105
Another internal effect is on the purchasing decisions of companies. Were their products free of conflict minerals? Did they stop buying from the Democratic Republic of Congo (DRC) region altogether? The de-facto boycott of DRC minerals and its unintended consequences on DRC miners have been the main controversy around the Dodd-Frank 1502 from its inception. 106 This indicates that transparency and the associated reputational risks alter corporate behaviour but not necessarily in the most desirable way: companies subjected to Dodd-Frank might chose to become conflict-free by simply being DRC-free. 107 There is recent evidence that well-known companies prohibit their suppliers to purchase DRC minerals. 108 However Schwartz argued that Dodd-Frank did not change the conduct of American companies (purchasing decisions) as the first year filings ‘contain little to suggest corporations are significantly altering their sourcing practices.’ 109 Recent research from the Enough Project, a promoter of Dodd-Frank 1502, acknowledged that the boycott happened but proved temporary and the law ‘has now spurred record-breaking exports of clean, conflict-free minerals.’ 110
To conclude on the internal effects on risk management, it appears that the supply chains are changing towards being conflict-free, and traceability is advancing (at least in 3 T minerals if not in gold). Whether, or to what extent, this is happening due to the purchasing practices of companies and the transparency strategy enshrined in Dodd-Frank is unclear. It appears that corporate reports remain rather opaque and of poor quality, and there has been neither a detectable mobilisation of consumers or investors nor some enforcement action from the Securities and Exchange Commission.
There are two factors that seem to have triggered change. The minor factor is how specific and prescriptive Dodd-Frank 1502 is about collecting and reporting information, an exception among transparency laws. The major factor might well be that so much is happening in the governance of conflict minerals: the OECD guidance, 111 certification schemes for smelters, 112 certification of mines, 113 the appearance of new laws in other jurisdictions, the innovations of leading companies, and changes on the ground in the DRC. 114 The positive trend in corporate sourcing behaviour seems due to ‘public scrutiny, collaboration, and alignment with global principles.’ 115 This enabling environment shapes the risk management strategies of companies subjected to Dodd-Frank as they offer different compliance options ranging from boycotting DRC minerals altogether, to relying on third-party certification for smelters, to making individual efforts to purchase responsibly.
Corporate governance instruments
The UK authorities wrote in 2016, 24 years after introduction of the ‘comply and explain’ requirement, that ‘Overall, too many explanations of non-compliance are of poor quality.’ 116 Some appear misguided as these ‘explanations are indeed sometimes rather perfunctory. They can come across as an assertion of difference rather than a full explanation of why the company in question has chosen to deviate from agreed best practice.’ 117 The EU also found that explanations were of poor quality, used ‘standardised language’ and disabled the possibility of meaningful dialogue between companies and shareholders. 118
Therefore both the UK and EU have issued guidelines on comply or explain requirements. 119 To improve the quality of explanations, the EU recommends companies should explain ‘the manner in which the company has departed [from a corporate governance code], the reasons for the departure, the way in which the decision to depart from a recommendation has been arrived at, the timeframe of the departure and the measures taken to ensure that the company action remains consistent with the objectives of the recommendation, and of the code.’ 120
3.2. External dynamics
This subsection analyses dynamics outside the company. They cover immediate effects on the users reacting to corporate reports and more remote effects within the transparency legal regime and other legal orders.
It is important to get more clarity on the external dynamics for three reasons. First, there are inherent limitations of mandated disclosure as a regulatory strategy, which cannot by itself force changes in conduct and offer reparations for harm. Second, there is an overall picture of superficial compliance, poor quality of reports, and ambiguous indirect effects on a company’s decision-making, as documented in the previous section. Third, known from voluntary CSR reporting, there is some apathy from stakeholders; companies complain that their CSR reports are not read despite recurring public calls for increased transparency. 121 There are thus reasons for caution about relying too much on users to press companies based on information released. Grasping the more remote effects of transparency laws is therefore necessary for a fuller assessment of this regulatory strategy.
A. Effects within the transparency legal regime
Anti-slavery laws Evaluations highlight both the importance of a reaction from the users of data as well as the kind of reaction. The UK Slavery Act has transformative potential but only if investors, civil society, consumers and companies use their leverage. 122 The corporate responsibility to disclose has to be matched by a responsibility to use the information. Furthermore, users should ‘reward leaders and expose laggards’ to create ‘positive competition among businesses.’ 123 Thus there should be reputation rewards and, for laggards, reputation risks. In this respect, an NGO called for a change in the reaction from media and civil society, to ‘focus their attention on laggards, and avoid penalising leading companies that demonstrate greater transparency.’ 124 Apparently a trivial detail, the UK Slavery Act failed to provide a centralised database of reports. This can trigger unproductive external dynamics: the lack of a register makes it ‘nearly impossible to monitor whether companies that are meant to report have done so. A consequence of this, however, is that the statements of companies with name recognition will be sought out, while less familiar companies will be able to get away with not reporting at all.’ 125
Planitzer analysed the Californian and UK slavery laws and is sceptical whether consumers have sufficient leverage to alter corporate conduct. She indicates that ‘many steps are necessary before even a limited impact can be identified’ 126 and the role of consumers should not be overestimated. Chilton and Sarfaty reach a similarly reserved conclusion regarding the Californian and UK laws. They ran tests to measure consumers’ confidence and comprehension of disclosures and found that despite consumer interest, the current regulatory design and corporate reports ‘do not help consumers determine which companies are making comprehensive efforts.’ 127
Exemplifying with the California Transparency Act, Chon concurs that stakeholders are not offered ‘reliable, trust-worthy, and ultimately verifiable’ information. 128 She detects the paradox of living in an information society but where “smart information” is in short supply. Her proposal is to develop ‘tracermarks’ through which stakeholders can ‘disclose, disseminate, and ultimately make decisions about previously hidden qualities of specific goods and services throughout global value networks.’ 129 Such information enables consumers or citizens ‘to protect themselves and police the market’ and would ‘shorten the ethical and communicative distance between consumers and the most distant and typically disconnected network nodes.’ 130
Burma Reporting Requirements During the consultation for renewal in 2016, NGOs strongly supported the Burma Reporting Requirements and generally assessed positively their impact. One NGO explained the beneficial impacts of the law through its own experience as a user. It sought to demonstrate the ‘multiplier effect’ of the law and highlighted its increased engagement with companies, its capacity support for local stakeholders, and its ranking of companies on transparency. 131
There were suggestions to improve the design of the law along several lines. One NGO advocated for the inclusion of a ‘comply or explain’ requirement. 132 Global Witness suggested that the law should oblige investors to check and publish information on individuals who ultimately own and control local partners. 133 Such disclosure of ‘beneficial owners’ is essential in a secretive economy like Myanmar’s which is still under the control of cronies and military-owned companies. 134
Conflict minerals laws Schwartz analysed Dodd-Frank 1502 as a ‘name and shame’ law, a transparency approach based on the belief that ‘exposure of reprehensible conduct eliminates it’. 135 He sees this law as a failure in its ‘principal goal of naming and shaming companies that source minerals from militarised mines in the Congo.’ 136 It lead to uninformative reports that do not provide ‘insight into which companies ought to be praised and which condemned.’ 137 He explains that the name and shame approach ‘works best when the culpable can be clearly identified and separated from the rest, and when those who are signalled out face severe public sanction.’ 138 However, the deficient quality of reports resulted in a homogenous mass of companies.
There are additional factors that make a naming and shaming strategy ‘inherently difficult’ in the conflict minerals context: the societal demand for information and action seems to be insufficient as conflict minerals do not appear to be ‘a top social issue’, the law did not stem from ‘a public outcry’, and the poor quality of first reports triggered a few complaints about their ‘lack of substance, but there has been no semblance of public outrage’. 139 Showing the weaknesses in the Dodd-Frank 1502 regime, Schwartz concluded: ‘By paving the way for disclosures that were difficult to absorb and compare, the regulations undermined the very market processes on which they depend for their efficacy.’ 140
Revenue transparency laws Dodd-Frank 1504, and other similar national laws, refer to the Extractive Industry Transparency Initiative (EITI). 141 Through its principles and detailed guidance the EITI emphasises the role of users and the importance of dialogue: ‘Publishing data is necessary, but not enough. EITI implementation is most effective when it promotes and informs dialogue between government, industry and civil society, and encourages informed debate about the reforms that are needed to ensure the extractive industries support national development priorities.’ 142 Notably the EITI has built institutional mechanisms for dialogue and secured a place for civil society representatives to join governmental and corporate representatives in national multi-stakeholder groups. 143
Corporate governance instruments There is 25 years of experience with ‘comply or explain’ requirements in corporate governance. By now several external dynamics have become clearer. The engagement of users with such explanations has neither been automatically high, nor has their reaction been necessarily conducive for reasoned debates.
Regulators emphasise that ‘Satisfactory engagement between company boards and investors is crucial to the health of the UK’s corporate governance regime.’ 144 In corporate governance, the ultimate prize is for organisational arrangements best suited to the circumstances of the company and as agreed between the company and shareholders as most productive. However, alarmed by the passivity of shareholders, the UK authorities have taken steps to enhance the participation of users in the system through the introduction of the 2010 Stewardship Code ‘to increase the quantity and quality of engagement’. 145
Through the years, the users’ reaction to explanations has however been problematic. It was noted that shareholders mistakenly took a ‘box-ticking’ approach 146 and it was recommended that departures from the UK Governance Code ‘should not be evaluated in a mechanistic way and departures from the Code should not be automatically treated as breaches.’ 147 This compromises the prized ‘flexibility and experimentation’ 148 in the corporate governance system that comply or explain seeks to promote. Apparently, the users’ reaction to information was different from the reasoned and constructive dialogue envisaged initially. Mechanistic adherence (comply) should not become a substitute for dialogue and engagement (explain), which increase trust and thus ‘could generate a virtuous upward spiral in attitudes to the Code and in its constructive use.’ 149 However the reaction of shareholders can partly be explained by the low quality of the explanations that end up triggering a vicious circle. 150
There were two evolutionary dynamics that comply and explain triggered. On the one hand, through its stated flexibility, comply or explain helped smoothen the transition to new practices as it ‘helped prevent people digging in around differences of opinion and bringing the whole process to a halt. “Comply or explain” was a bolt hole which meant that opponents did not have to be overwhelmed or vanquished in the name of progress’. 151 Because comply or explain ‘relied on market discipline rather than law or hard regulation to raise standards, resistance from business failed to turn into effective opposition.’ 152
On the other hand, companies learned that despite the claimed flexibility, the reality was that the ‘emphasis in the media and the markets was on “comply.” Non-compliance, even when explained, was tolerated initially as a curiosity but it was seldom accepted for long. An organisation which did not follow the letter of the Code, and persisted in not doing so for more than two or three reporting periods, found markets ran out of patience…“Comply or explain” was usually a brief prelude to “saving face with grudging acquiescence.”’ 153 There was stigma attached to non-compliance. 154
The relation between comply or explain and more coercive laws should also be highlighted. As the UK Code impresses, ‘Companies and shareholders both have responsibility for ensuring that “comply or explain” remains an effective alternative to a rules-based system.’ 155 This British innovation has been hailed as ‘a pragmatic tool that can improve corporate governance without the need for inflexible, burdensome and misguided rules, laws or regulation.’ 156 That raises the spectre of de-regulation and lenient regulatory regimes. 157 Is comply or explain transparency an inherently weak alternative displacing more coercive laws? The FRC Chairman noted that ‘Codes cannot replace all regulation. But they can reduce the need for it, especially where the objective is cultural and behavioural change over time.’ 158 Another writer considered that ‘the Code provides an antidote to the risk of corporate failure by accident or arrogance – it will never beat criminal intent but continues to guide the inexperienced, focus the ambivalent and control the adventurous. Most importantly, it encourages adherence to the spirit of the rules rather than simple obedience to the letter of the law.’ 159
B. Effects on other legal orders
Identifying effects in other legal orders is necessary in order to complete the assessment of transparency law, which otherwise appear rather lacklustre on their own terms. Such effects can be tracked in several directions. First, effects in other jurisdictions that decide to pass similar transparency laws. Second, effects within the same jurisdiction but in other bodies of law. Third, effects over time as the transparency laws provide new information and understandings that make it necessary to adopt more prescriptive laws.
Regarding effects in other jurisdictions, there is ample evidence available. Regarding slavery, the California Transparency Act served as model for the UK Slavery Act 160 , and the latter serves as model for the draft Australian act. 161 In the literature this has been dubbed the ‘California effect.’ 162 Regarding conflict minerals, the Dodd-Frank 1502 inspired the EU Regulation 163 and Canadian and Norwegian laws 164 and served to reinforce the efforts of the OECD on due diligence in mineral chains 165 and other initiatives. 166 Regarding revenue transparency in the extractive sector, the Dodd-Frank 1504 inspired EU legislation and reinforced the EITI. 167 In this way the Dodd-Frank 1504’s effects endured even after the Trump administration revoked the law in 2017. Finally, the UK innovation in corporate governance, the ‘comply or explain’ approach to transparency, has spread in Europe and globally in other corporate governance systems.
Regarding effects within the same jurisdiction but in other bodies of law, the California Transparency Act was invoked in litigation concerning the Thai fishing industry. 168 The potential effects of this law on Californian competition and consumer protection law are illustrated by how both plaintiffs and defendants invoked the Act either as a ground for liability or on the contrary as a defence under anti-competition law. 169 Another example is the ‘comply or explain’ approach, which is spreading now in other legal orders, including human rights disclosure laws. Finally, transparency laws such as the EU Reporting Directive might have effects of in tort law. Thus, the ECCJ (European Coalition for Corporate Justice) indicated that the (lack of) information on a company’s due diligence can be used as evidence that the company was negligent and thus should be liable for the harm. 170
Regarding effects over time, NGOs work actively for a progressive strengthening of regulatory regimes. For the corporate accountability movement, transparency laws are a first step in the right direction as they mark a break with laisses-faire and corporate voluntarism. 171 Comments on the UK Slavery Act show that the second step could be within the transparency regime or outside it. Thus, activists pursue a double approach. One the one hand, make the transparency regime work effectively so a company basically ‘demonstrate[s] that it takes the issue of slavery and forced labour seriously and has developed a well-thought through response which covers the whole of its business.’ 172 On the other hand, go beyond transparency to obtain more coercive laws that provide victims with effective judicial remedies. 173 This evolutionary dynamic would be powered by showing perfunctory compliance with transparency laws, justifying therefore more forceful regulatory strategies to hold businesses answerable. Alternatively, drawing on the information thus released would show the seriousness, scale and complexity of a problem that defies individual corporate efforts, and would justify calls for stronger safeguards for victims.
4. Implications for the regulation of transnational business operations
The analysis so far established recurrent weaknesses in the quality of reports. The interest of users in these reports as well as their actual leverage cannot be taken for granted. The limits inherent in this regulatory strategy are evident and further raise the question whether meaningful self-disclosed information can actually be expected under these laws. A lot seems to depend on producing the right type of information as well as on the indirect effects of transparency laws. The next two subsections identify two types of information that appear particularly consequential for the BHR regime: actionable information and explanations following ‘comply or explain’ requirements. The last two subsections reflect on the functions of transparency laws after which some specific challenges of regulating transnationally for human rights are highlighted.
4.1. Actionable information
There is a kind of straightforward information that enables immediate external action. Such actionable information gives stakeholders data that would otherwise be difficult to obtain. Its simplicity prevents the positive information bias in self-reporting. It enables stakeholder reactions in both ‘name and shame’ and ‘name and reward’ modes that some NGOs recommend. Therefore, where possible, there is a strong case for lawmakers to adopt narrow and prescriptive designs of transparency laws focused on actionable information. A few examples stand out from the laws analysed here.
First, information on smelters and refineries under conflict minerals laws. Schwartz proposed that the Dodd-Frank 1502 should require companies to disclose the ‘identity and conflict status of the facilities that process their conflict minerals. These pieces of information are largely obtainable and illuminate corporate supply chains more than a thousand other details.’ 174 Enforcement of the law would be simplified and already running schemes that certify smelters would facilitate compliance. 175 The EU Regulation moved in this direction by giving importers a choice between purchasing from certified smelters and conducting own inquiries into the source of minerals as a way to comply with the Regulation. 176
Second, information on revenues companies pay to resource rich states is also actionable. This quantitative information is released through Dodd-Frank 1504 and its EU counterpart. The EITI was set up as a voluntary multi-stakeholder initiative to generate precisely such simple information as a way to promote good governance.
Third, data on beneficial owners is another actionable information. The NGO Global Witness advocated for such data to be mandatorily released through the Burma Reporting Requirements. This is in line with the recent emphasis in the EITI on hidden owners as a crucial piece of information needed to combat corruption. 177
Fourth, information on board diversity disaggregated by age, gender or educational and professional backgrounds is required under the EU Reporting Directive. 178 The UK gender pay gap law also requires disaggregated quantitative data which some expect to deliver better results than four decades of traditional equality legislation. 179
Finally, transparency on manufacturing sites in global supply chains is the focus of a civil society initiative – Follow The Thread – that sprang up in 2017. It asked 72 companies in the garment sector to reveal manufacturing sites in their supply chain. This concentrates on ‘a narrow yet critical part of transparency in apparel supply chains.’ 180 The ways in which the disclosure of sites would help promote responsible conduct are explained: early warning for buyers, savings of time and effort for watchdogs, and checks on unauthorised subcontracting. 181
4.2. Comply or explain provisions
Not all transparency settings might be amenable to requests for straightforward, actionable information. There is thus place for comply or explain requirements to help assess the policies and efforts of companies. Indeed a few of the laws herein have comply or explain provisions: the EU Reporting Directive, and the corporate governance codes. The slavery laws have opt-out provisions (California Transparency Act) or a mere ‘disclose or give notice’ provision (UK Slavery Act); these provisions could be strengthened through a ‘comply or explain’ clause. Such an upgrade was advocated for the Burma Reporting Requirements 182 and for the Dodd-Frank 1502. 183 The Follow The Thread initiative also relies on this provision as it asks companies not taking the Transparency Pledge to provide reasons for choosing not to do so. 184
As comply or explain is or will be transplanted into human rights laws, corporate governance offers both encouraging and cautionary messages. 185 On the one hand, the interest of users for meaningful dialogue able to promote experimentation and adaptation cannot be taken for granted. The quality of explanations has been low. In combination, this has created a vicious cycle that policymakers are struggling to break. On the other hand, comply or explain worked in a more ‘comply’ mode than originally envisaged and sold to the business community. This facilitated the introduction and acceptance of new principles, placated business opposition, and generated market pressures for compliance stronger than envisaged. However, the special relationship between shareholders and companies makes the corporate governance setting unique. The BHR context is different from corporate governance as right holders have a much less privileged legal and financial relation with the company.
Furthermore, the very applicability of comply or explain strategies, of transparency laws more broadly, to the human rights area needs justification. Indeed, such transparency laws fall short of more prescriptive command-and-control laws that might be warranted for the protection of human rights as they create stronger legal incentives and/or legal remedies for victims.
4.3. Transnational human rights regime and regulatory options
The analysis so far revealed the limitations of transparency as a regulatory strategy. A legitimate question to ask is why would such a law be chosen for the protection of human rights and not a more coercive type of law? That helps answer the main question posed in this article: do transparency laws matter and, if yes, how? To begin answering the first question, some distinctions introduced in the UN Guiding Principles (UNGPs) facilitate reflection on regulatory dynamics and choices.
The UNGPs indicate businesses have a responsibility to respect human rights. That requires them to act when they cause harm, when they contribute to it, or when they are linked to infringements through their business relationships. 186 This points to two broad types of involvement: direct and indirect involvement with abuses in value chains. For regulatory analysis, it is essential to not conflate direct and indirect involvement, that is, not imply that all value chain infringements are ultimately traceable to decisions at the top of the chain. Indeed, the UNGPs expects businesses to undertake due diligence in both types of involvement as a way to respect human rights; also, the four steps of due diligence are the same. 187 However the regulatory task is very different in the two settings.
The UNGPs specify appropriate conduct for the causation-contribution-linkages settings. The corporate responsibility to act takes two main forms. On the one hand, the causation and contribution settings recognise that the lead firm’s own decisions can be a cause for infringements throughout value chains. Thus, the purchasing decision of lead firms or the way parent companies set up subsidiaries in risky environments can expose right holders in weakly governed zones to human rights abuses. In such direct involvement situations, the responsibility to respect becomes a responsibility to cease harmful conduct. 188 On the other hand, the linkages and contribution settings recognise that the conduct of business partners (e.g. suppliers) and the host state (i.e. inadequate laws) are the cause of human rights abuses. Thus, lead firms are associated with private and public actors infringing human rights and have to answer for the benefit they derive from or the remote contributions to third party’s harmful conduct. In such indirect involvement situations, the responsibility to respect becomes a responsibility to exercise leverage over the third party before termination of the relationship is contemplated. 189
Regulating cessation and regulating leverage are two rather different tasks for lawmakers and this has implications on the (coercive or less coercive) regulatory options available. Thus, regulating cessation is as simple as prohibiting the harmful conduct. For direct involvement of lead firms, legal coercion is the appropriate strategy for the task of ensuring the company is ceasing its harmful conduct and is held liable for its wrongful conduct. 190 However regulating leverage is about mobilising and guiding leverage and not simply about instituting a prohibition. Could coercive legal strategies hitting the top of the global value chain (lead firm) achieve this leverage objective? The risk lies in creating incentives for lead firms to prematurely disengage from business partners, as revealed in the DFA 1502 context of conflict minerals. Thus, applying legal coercion on the lead firm has to be assessed against the danger of actually destroying the leverage rather than securing that leverage. As a result, for indirect involvement of lead firms the regulatory picture becomes complicated and one might need to look beyond coercive laws.
The peculiarity of protecting human rights in a transnational economic context needs to be explained when pondering on coercive and less coercive regulatory options. The complication with using legal coercion against lead firms as a way to regulate leverage lies in the compliance response of the lead firm. Compliance with the law (e.g. a law mandating ‘human rights due diligence’) could result either in strengthened protections for right holders through monitoring and influencing affiliates or in the redirection of global value chains (GVCs) away from high risk zones so the lead firm does not carry the administrative burdens and liability risks. Actually, regulating coercively lead firms for their indirect involvement can be explained in terms of frictions with three foundational principles: the legal separation of entities (company law), national sovereignty (international law), and right holders’ interest in maximum leverage being mobilised (human rights law). 191 These principles define the transnational BHR context and shape legalisation options. 192
The spectre of redirection of GVCs and the three foundational principles show the difficulty of using legal coercion for indirect involvement situations, where the task is to mobilise the leverage of lead firms. An important question remains: do less coercive strategies matter and can they ever alter business conduct? The regulatory puzzle for less coercive mechanisms such as transparency laws is: can they increase in strength without evolving into legally coercive forms targeting the top of value chains? The beginning of the answer is to expand analysis beyond the lead firm-affiliate relationship and account for developments in six transnational policy areas: international trade law, international investment law, international human rights law, development cooperation, CSR, and home state laws with extraterritorial effects. 193 They have a bearing on the governance of GVCs and address causes of infringements at the top, bottom and throughout the chain. However most of these developments are not coercive in nature, neither on states nor on businesses.
So even if all these developments are relevant and the density of such initiatives in the BHR field has increased dramatically in the last 10-20 years, does the lack of coerciveness not doom them anyway? There is some evidence that these channels increasingly align and interact, creating new opportunities to harvest and direct their combined leverage towards the root causes of human rights infringements. 194 These new openings in multiple policy channels create the possibility to devise a regulatory strategy of knitting harder and softer instruments into a protective network for right holders. 195 A possibility appears to devise a strong “rope” from weaker threads. This is a way to achieve strength without having to default on going coercive against lead firms at the top of the chain. Transparency laws fit in this picture as a less coercive regulatory strategy but also as an enabler of complementarities and interactions within the regulatory regime.
4.4. Functions of transparency laws in regulating global value chains
Once the place of transparency laws in the transnational human rights area has been demarcated and justified, the question is what are the ways in which transparency laws contribute (or not) to the increased protection of human rights?
First, transparency laws can serve either an appeasing or a stepping stone function where coercive strategies are genuinely needed. This can happen in both direct and indirect involvement situations. In direct involvement cases where a company causes or contributes to harm, coercive strategies are the only satisfactory option. Transparency laws might appear as appeasing businesses in a laisses-faire mode and thus betray the lack of political will of home states to hold ‘their’ multinationals (lead firms) accountable and create much needed remedies for victims. 196 From a different angle, such laws could appear as stepping stone, that is, a break with corporate voluntarism and a first step on the ladder to coercive laws and corporate accountability. Even in indirect involvement cases, transparency laws can act as a stepping stone. Thus, coercive strategies could exceptionally be justified if the spectre of redirecting global value chains is acceptable: home states might institute trade restrictions in exceptional cases (e.g. bans on importing blood diamonds or products tainted by slavery), and host states might consent to take the risk of redirection of value chains (e.g. not objecting to foreign laws with extraterritorial effects meant to protect human rights throughout the value chain). Outside these two situations, tackling indirect involvement through legal coercion becomes less feasible and problematic, and that requires alternative regulatory strategies.
Second, transparency laws can by-pass challenges from the three foundational principles and reach further into GVCs than coercive, command-and-control laws. Because disclosure laws do not impose reparations for harm, they cannot hold the lead firm liable for harm in affiliate operations and thus do not trigger objections based on the legal separation of entities in company law. Because these laws are privately enforced, they are not as vulnerable to trade objections based on national sovereignty as more coercive laws are. 197 Because of less incentives to redirect prematurely the value chains, such laws do not shortcut the mobilisation of leverage that is important for the human rights system. 198 Thus transparency laws have the function of managing frictions with foundational principles characteristic to transnational BHR.
In this light, these laws are not necessarily signs of lacking political will from home states to hold MNEs accountable, but have a crucial role in mobilising leverage from stakeholders with a bearing on GVCs. By not being outright coercive, transparency laws have a special ability to cross jurisdictional borders and organisational boundaries in ways that coercive laws cannot. So, there is a good match between transparency as regulatory strategy and GVCs as an organisational system. Transparency laws are able to track a moving target like GVCs and reach deep into these chains.
Third, transparency laws function as part of a package of regulatory measures in a multi-layered and decentred legal order such as BHR. 199 This legal order cannot revolve around coercive laws at the top of GVCs. However, such transparency laws generate internal and external dynamics and direct or more remote effects on companies, users and even other legal orders. Within this transnational legal order, transparency laws can perform several useful functions: innovation, facilitation of evolution of legal orders, and integration of a fragmented governance order.
Fourth, the innovation-promoting function is evident in supply chain management. Businesses are asked under the UNGPs to eliminate their contributions and exercise leverage over their value chains. The latter is no straightforward task for lead firms when competitive market pressures are strong, the complexity of value chains is daunting, and the causes of human rights abuses run deep (e.g. in host countries). Innovations around supply chain operations have occurred during the last 20 years of CSR and there is an appreciation that more complex solutions are needed in contrast to simplistic ‘auditing’ approaches of yesteryears. 200 The ‘comply or explain’ approach itself is an answer to such complexity and was developed to generate organisational innovations and fast adaptability of companies to their environment.
Notably, there is also innovation needed in reporting. Guidelines for sustainability reporting are still evolving to capture relevant dimensions and deliver more ‘material’ information, 201 starting with the 20 years old Global Reporting Initiative, 202 continuing with the International Integrated Reporting Framework, 203 and most recently with the arrival of the UNGPs Reporting Framework. 204 It appears that mandatory disclosure can trigger innovation either through internal effects on corporate decision-making (internal reflection) and/or on users (dialogue and engagement). 205
Fifth, transparency laws have a facilitation function for the evolution of the transnational legal orders. This seems to operate in at least two ways. First, these laws have triggered effects in other legal orders: they impact on more coercive laws already existing or being contemplated by policymakers, and can reinforce or trigger private and hybrid, public-private CSR governance schemes. 206 Second, transparency laws are able to stimulate discussion and action on root causes of infringements, reveal difficulties and good practices. With an approach to change depending on leverage from numerous private and public stakeholders, transparency laws can steer dialogue on policy options and collective action. Thus, transparency laws can facilitate the development of a multi-layered legal order around GVCs.
Sixth, transparency laws have integrative functions. GVCs are wrapped in a multi-layered governance order mixing laws of home and host states, and involving public, private and hybrid forms of governance and standard-setting. However, the issue of policy incoherence is pressing and recognised in the UNGPs as well as by numerous policymakers. 207 To the extent that transparency laws generate meaningful information and dialogue, they can be the magnifying lenses that expose policy misalignments and inconsistencies. That can facilitate efforts toward policy coherence and to find complementarities between policy instruments. Transparency laws can play a coherence-enhancing function for a fragmented and evolving transnational legal order.
5. Conclusions
Are transparency laws ‘a hollow victory’? If the analysis is confined to direct effects, the answer is hardly encouraging. Evaluations of corporate reports reveal a stream of uninformative reports and superficial compliance. Responses from users such as consumers and investors have not been overwhelming. Thus, the laws have so far not succeeded in a ‘name and shame’ mode of operation, except maybe in corporate governance where ‘comply or explain’ requirements have generated strong pressures. For the protection of human rights such laws seem inadequate and inherently unable to overcome the profit motive and market pressures; furthermore, these laws could work in a deregulatory mode to pre-empt needed coercive laws aimed at the top of value chains.
The picture becomes more complex when the more remote and rather diverse effects of disclosure laws are accounted for. There are both internal dynamics (i.e. impacts on decision-making within the company) and external dynamics (i.e. impacts on users, the transparency law regime and other legal orders) at play. For regulating the human rights impacts of GVCs, transparency laws appear as a distinctive regulatory tool with genuine potential. Its merits become apparent once contrasted with more coercive forms of law and when placed in the specific context of protecting human rights in transnational business operations. One function of transparency law is to reduce frictions with the legal principles shaping GVCs and to reach deeper into GVCs than more coercive laws could. There are also functions regarding innovation, the evolution of legal orders, and the integration of the polycentric business and human rights regime.
Footnotes
Declaration of conflicting interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.