Human rights abuses? Blame the parents
Source: The Guardian
Author: Nick Mathiason
Date: 9th December 2011
Action is needed to stop companies avoiding legal liability for alleged human rights violations by hiding behind subsidiaries.
These rights comprise the right to food, the right to work, the right to an adequate standard of living, and the right to health and a healthy environment.
The sheer scale of environmental degradation which has wrecked farming and fishing livelihoods in the Delta was confirmed in August, when the United Nations environment programme called for an initial $1bn fund to clean up oil-related pollution.
Three years before the UN’s detailed study, in May 2008, four Nigerian fishermen and farmers from the Delta villages of Oruma, Goi and Ikot Ada Udo filed lawsuits against Royal Dutch Shell in the district court of the Hague, where the oil group has its international headquarters.
The villagers alleged Shell was negligent in its clean-up of oil spills and their health was adversely affected as a result.
Shell argues that a recent preliminary court ruling stated that all the spills under the spotlight were caused by sabotage.
This keenly-watched case, expected to be heard in the Hague next year, is an object lesson in how corporate ownership structures can affect legal redress in alleged human rights violations.
Attempts by Royal Dutch Shell, the parent company, to argue the claims should be brought not at the “mother company” but at its Nigerian subsidiary resulted in an 18-month delay. Royal Dutch lost that argument in December 2009.
Requests by lawyers to access relevant information from the parent company have recently been blocked in the Dutch courts.
For those campaigning for economic transparency, like the Task Force on Financial Integrity and Economic Development, it seems the same intractable problems of corporate secrecy and difficulties establishing beneficial ownership also play out in the human rights arena.
Human rights defenders say parent companies often try to prevent attempts to bring cases against them by arguing that claims should be brought against the operating company – a subsidiary – where the alleged violation took place.
“This is not about avoidance,” stated a Shell spokesman. “It is about who is legally responsible. Like most corporate groups, Shell’s corporate structure is determined by normal business considerations.”
But for those seeking redress against alleged abuse or wrongdoing, prosecuting a subsidiary company is problematic. Potential claimants in developing countries are often unable to hold the corporate to account for three major reasons. First, legal systems in developing countries on occasion find it hard to manage lengthy and complicated cases. Second, the subsidiary in the developing country may not have enough cash to meet the size of financial claims. And finally, developing countries may be unwilling to hold a corporate to account due to complicity or corruption.
(That said, developed countries also have a history of preventing sensitive cases from being heard. Witness the UK government’s decision in 2006 to end an investigation into alleged bribery and false accounting in BAE’s arms deals with Saudi Arabia.)
The challenge for human rights defenders is best summed up in one phrase: piercing the corporate veil.
The corporate veil is a legal term to which lawyers often make recourse in their attempt to pin liability on the parent companies of major corporations.
Andie Lambe, head of the international justice at Global Witness, said: “Very few of the alleged abuses committed or facilitated by companies ever make it to court for a variety of reasons. One of these is that the structure of the corporation protects it from liability.”
Professor Sheldon Leader, director of the Essex University business and human rights project, added: “What Shell has said to the Netherlands’ judiciary – and it will be important to see how far other major companies argue the same – is that they do have high standards but they do not give orders to subsidiaries. Therefore, they argue, they are not responsible for damage to local populations due to the shortcomings in their subsidiaries’ performance.”
Companies may not admit legal responsibility for their subsidiaries when difficulties arise, but they certainly take responsibility for the cash they generate. When companies publish financial reports, subsidiaries are inextricably linked to the parent. Consolidated accounts, by definition, embrace the thousands – if not millions – of transactions conducted by all subsidiaries in which the owner has a beneficial interest.
What’s more, quoted companies in the US and UK stock exchanges are obliged to reveal all the subsidiaries they either own outright or have substantial stakes in which are considered to be materially important.
Clearly, in financial reporting, a link between the parent and subsidiary is manifest. Yet company law treats every business entity as legally separate, even within the same “business family”. And this is where difficulties arise in seeking to hold a parent company accountable, even in instances where it knew of, or supported, the conduct of its subsidiary.
To remedy this, a corporate “duty of care” principle needs to be established which states that, in the event of a parent financially benefitting from a subsidiary, it has a responsibility to ensure the subsidiary carries out duties in line with established laws. When the subsidiary fails to live up to required standards, the parent cannot hide behind a corporate veil but has to face legal liability.
The way large corporations often behave when subsidiaries get into trouble is to wash their hands of responsibility. Effectively, they run away. Most would call that bad parenting. And that also happens to be a human rights violation – in its own way.