LAW AND SOCIAL ENTREPRENEURSHIP

HUMAN RIGHTS GUIDANCE FOR CORPORATE LAWYERS

Originally posted  in the Triple Pundit 

In the years since the United Nations Guiding Principles on Business & Human Rights (Guiding Principles) were unanimously endorsed by the U.N. Human Rights Council in 2011, groups like Shift and the International Corporate Accountability Roundtable (ICAR) have worked hard to educate businesses on how the Guiding Principles impact their operations and influence their decision-making.  Much of this guidance has been sector specific, and rightly so.  Human rights are not impacted uniformly or in the same ways across industries, and companies in the extractive, apparel or ICT sectors, for instance,  arguably operate in “riskier” environments than businesses in other industries.

Yet, despite playing major roles in drafting, advising and acting on the Guiding Principles, lawyers had thus far been offered little help understanding the impact of the Guiding Principles on their work.   Last week, the International Bar Association (IBA) did its part to rectify that, issuing guidance — the first of its kind — to bar associations, private lawyers and law firms about how to integrate the Guiding Principles into their work.   This is a welcome first step in what should be a broad discussion among lawyers and bar associations regarding the role of lawyers in the implementation of the Guiding Principles.

Why the IBA guidance is necessary

Not only are many law firms big businesses in their own right — and the legal industry, by some measures, represents a $400 billion market in the U.S. alone — but lawyers make their livings by advising companies on compliance and risk avoidance.  Thus, as the IBA points out in the introduction to its report, “There are few areas of legal practice for which the Guiding Principles – and the international human right standards they reference – are not potentially relevant.”  Companies also increasingly expect their legal counsel to be able to provide advice on human rights risks.

What role individual can lawyers play

General advice.  The first aspect of the IBA’s substantive guidance addresses how lawyers, in their roles as outside or inside counsel, can help businesses respect human rights — the second pillar of the Guiding Principles.  The IBA notes that often the lawyer’s role could simply be to advise a business on how to comply with existing national laws that protect human rights.  Such advice would first require a lawyer to analyze the national legal framework and determine that national laws meet the minimum standards underpinning the Guiding Principles.

Where there is a gap between what national law and the Guiding Principles require, the lawyer should be prepared to explain the gap and advise on what the business must do to satisfy the higher standards.  For instance, as the IBA explains, acquiring legal title to land may be, in and of itself, insufficient to discharge a company’s duty to respect human rights. This would be true where that land was ‘grabbed’ by a government without consulting with or compensating the affected households or communities — common practice in countries across Africa and Asia.  In those cases, not only is the company linked to a serious human rights violation, but the “defective government acquisition process may sow the seeds of conflict between the community and the company, which could threaten the project’s long-term viability.”

Specific company actions.  Beyond broadly advising business clients on their human rights responsibilities under national law, lawyers are increasingly called upon to provide human rights-related advice as it relates to certain company actions.  One such action is public reporting or disclosure.  In one of the more encouraging trends in the business and human rights movement, non-financial reporting requirements have greatly evolved and increasingly require disclosure of a company’s human rights “policies, processes and performance.”

For example, the European Union is on the verge of passing a directive that would require broad reporting on the environmental, social (including human rights) and governance impacts of their work.  Denmark has a non-financial reporting law, as does the U.K., and the U.S. already requires certain disclosures related to conflict minerals and businesses operating in Burma.

Human rights litigation and tactics.  Though the battle against corporate impunity for human rights abuses may still be an uphill one, the rise in human rights-related claims filed against companies around the world should be of particular concern to corporate lawyers. In the United States, there is the rapidly evolving — if disheartening — Alien Tort Statute jurisprudence.  Internationally, the use of National Contact Points under the Organization for Economic Cooperation and Development’s (OECD) Guidelines for Multinational Enterprises has exploded.  Understanding the Guiding Principles and the international human rights laws on which they are based is crucial to any lawyer hoping to navigate such matters.

The IBA also deserves credit for pointing out that the Guiding Principles may also require a lawyer to question a company’s litigation strategy or tactics in human rights cases.  The Guiding Principles’ architect, Professor John Ruggie, himself raised this in the runup to the U.S. Supreme Court’s Kiobel opinion.  In the time since Kiobel, we have learned that Shell — the defendant in the Kiobel case — extensively lobbied the U.K. government, seeking amicus support at the U.S. Supreme Court, which it received.

As the IBA points out, the Guiding Principles in no way undermine a lawyer’s duty to zealously defend his or her client(s) or to betray client confidences.  However, they likely do require that a lawyer explain “the entire range of risks entailed by the [company’s] litigation strategy and tactics, … as part of helping their client understand the full implications of any proposed approach to responding to claims of human rights harms.”

The implications for law firms as businesses

Finally, the IBA explores the human rights obligations that arise from a law firm’s provision of legal services and advice to business clients.  Importantly, despite having independent human rights obligations, a law firm “cannot force a business client to do anything that the client does not want to do.”  This tension may lead to situations where a firm’s duty to its client could appear to conflict with its human rights obligations under the Guiding Principles.

Where such a tension arises, the IBA suggests that the law firm consider whether it can leverage its role as the business’ trusted advisor to encourage the business to consider the human rights impacts of its decisions.  Given the confidential nature of the firm-client relationship, a law firm can do so “without fear that the communication will become public.”

The IBA recommends the following practical tactics:

  • Emphasizing to all clients up-front that it intends to advise on the ‘big picture,’ which includes human rights risks, in order to provide greatest value to all clients
  • Raising the kinds of problems that other companies have faced when they have not fully addressed human rights issues associated with a similar matter
  • Offering capacity-building training to clients and their legal departments on human rights issues
  • Providing advice and services on business and human rights on a pro bono basis to clients
  • Issuing client alerts on specific human rights issues related to its individual practice groups
  • Participating in multistakeholder dialogues where the firm can champion business and human rights issues
  • Supporting the efforts of law societies and bar associations to provide training and guidance for member lawyers on business and human rights issues

The IBA ends on a collaborative note, suggesting that law firms and lawyers, “when acting collectively, are likely to be able to assert much greater leverage than they can alone.”  Hopefully the American Bar Association and state bar associations will heed the IBA’s call and start talking about these challenging issues.

HHS MANDATE AND SOCIAL ENTERPRISE LEGAL FORMS

Here, Professor Bainbridge kindly asks for my thoughts on Keith Paul Bishop’s article Would Hobby Lobby Stores, Inc. Have A Stronger Case As A Flexible Purpose Corporation?

I agree with Bishop’s conclusion that the question is still open.  Both the Flexible Purpose Corporation (“FPC“) and the Benefit Corporation version of social enterprise legal forms are quite new and each became available in California as of January 1, 2012.  The FPC is only available in California (though Washington state’s social purpose corporation is similar in many respects) and the Benefit Corporation legislation has passed in 20 U.S. jurisdictions (19 states and Washington D.C.), starting with Maryland in 2010.  As the name suggests, the FPC allows managers more flexibility in choosing their particular corporate purpose(s), whereas most of the Benefit Corporation statutes require a “general public benefit purpose” to benefit “society and the environment” when “taken as a whole” but also allow additional “specific public benefit purpose(s).”  Delaware’s version of the benefit corporation law (called a “public benefit  corporation”) requires the choosing of one or more specific public benefit purposes.

Converting to an FPC or a Benefit Corporation, without more, likely would not be much help to companies fighting the HHS mandate.  The statutes are simply too broad, and I think courts would want more evidence regarding the corporation’s stance on the issue.  Obviously, people would disagree on whether a “socially focused”  corporation would oppose certain types of contraceptives.  And it seems that the majority (though certainly not all) of those in the social enterprise area lean left of the political center. But, if an FPC or Benefit Corporation made its particular social/religious purpose(s) clear in its articles of incorporation, including enough information to determine a stance against certain types of contraceptives, I think the entity’s argument could be strengthened.

In some states, like Oregon and Texas, relatively recent amendments to their state corporation statutes make clear that a social purpose can be included in the articles of incorporation of a traditional corporation.  In other states, whether such a social purpose would be acceptable in a traditional corporation is a debatable question, and thus social enterprise legal forms would clear the way toward including a social/religious purpose that would suggest (or clearly state) opposition to the mandate.

In short, the social enterprise forms, without customization, are likely insufficient, but use of a social enterprise form, with language in the articles of incorporation that suggest that the corporation would be opposed to the mandate, could strengthen the argument of those fighting the HHS mandate.  In some states, as mentioned above, a social enterprise form would likely be unnecessary, and a traditional corporation with customized language could be used.

I think the question posed by Keith Paul Bishop and Professor Bainbridge is an interesting one and would love to hear additional thoughts from others, especially any Constitutional Law scholars.

Cross-posted at Business Law Prof Blog.

FIRM COMMITMENT BY COLIN MAYER

After meeting Colin Mayer (Oxford) and hearing him present at Vanderbilt’s 2013 Law and Business Conference, I purchased and read his recent book, Firm Commitment: Why the Corporation is Failing Us and How to Restore Trust in it.  The book is organized in three parts: (1) how the corporation is failing us; (2) why it is happening; (3) what we should do about it.  While the first two parts contain some helpful background and interesting case studies, I found the third part the most useful.  In the third part, Professor Mayer suggests:

“These three straightforward adaptations of current arrangements – establishing corporate values, permitting the creation of a board of trustees to act as their custodians, and allowing for time dependent shares – together solve the fundamental problems of breaches of trust in relation to current and future generations.” (pg. 247)

In discussing corporate values, Professor Mayer writes:

“Corporate social responsibility was rightly dismissed as empty rhetoric and jettisoned when recession forced a return to more traditional shareholder value.  Why should I trust an organization that is owned and controlled by anonymous, opportunistic, self-interested wealth seekers?  Without commitment, there is no reason why there should be any trust in the corporation, however much its fine promotional material suggests otherwise.  Values need value.  They need to be valuable to those upholding them and costly to those who do not.  They need to inflict pain on those who abuse them and gain on those who do not.” (pg. 244)

While Professor Mayer was writing about corporations generally, and not benefit corporations specifically, the same commitment concern is present with these new corporate forms (called benefit corporations or public benefit corporations) that claim to be focused on society and the environment.

As one possible solution to the commitment problem, Professor Mayer suggests time dependent shares.  Time dependent shares would provide greater voting power to shareholders who commit to hold shares for a longer period of time.  This feature, Professor Mayer argues, would focus the managers on long term value, which could benefit all stakeholders.  Professor Mayer does not favor requiring time dependent shares for all corporations, but suggests that time dependent shares might be useful for those firms that need or desire long-term investment and commitment.  I am still thinking through all the possible implications of time dependent shares, especially in the M&A context, but appreciate the effort to fight short-termism and focus management on longer term goals for the corporation.

Interested readers can find Firm Commitment through Oxford University Press.

Cross-Posted at Business Law Prof Blog.

HOW TO STRUCTURE SOCIAL ENTERPRISE FOR IMPACT

 

This is a full two-hour lecture at Harvard’s iLab on how to structure your social enterprise for impact. The lecture addresses the three types of social enterprise business models, then compares and contrasts seven legal structures including:

  • Corporation
  • B Corp Certification
  • Benefit Corporation
  • Flexible Purpose Corporation
  • LLC
  • L3C
  • Nonprofit

PROFIT + PURPOSE

Over the last year, I’ve been lecturing at Harvard Law and Stanford Law about structuring social enterprises for impact. I always have people asking me to see the slides, but have never publicly shared the slides. Today I’m releasing those slides to the public.

This is meant to be an introductory presentation that touches on the possible legal structures for social entrepreneurs. The presentation discusses Corporation, B Corp Certification, Benefit Corporation, Flexible Purpose Corporation, L3C and Nonprofit legal structures. Within each legal structure, the presentation touches on Formation, Management, Taxation and Capital.

Click below to access the presentation. Leave your feedback in the comments section. Thanks!

 

SOCENTLAW LIVE! – NYC

This fall you have not one, but two, opportunities to attend a live lecture about the legal structures for social enterprise in New York City. Click on the date below for more details.

 

October 11th / 7:00 PM / Skillshare HQ

November 8th / 7:00 PM / General Assembly 

 

Class Description:

Have a great idea for social innovation, but trying to figure out whether it should be a nonprofit or a for-profit? Have you heard something about these new hybrid legal structures but can’t figure out what the heck they do? If so this course is for you! We’ll be digging into:

  • 501(c)(3)
  • L3C
  • Benefit Corporation
  • B Corp Certification
  • LLC
  • Corporation
This course is taught by Kyle Westaway. Kyle believes in the power of the market to create a positive social and environmental change. He has helped build Biographe – a sustainable style brand that employs and empowers survivors of the commercial sex trade. Kyle is the founding partner at Westaway Law – an innovative New York City law firm that counsels social entrepreneurs.Kyle is a Cordes Fellow. He lectures at Harvard Law School and Stanford Law School. He launched Socentlaw – a blog about the legal side of social enterprise. Kyle has been featured by We Are NY Tech and Dowser; and writes for Huffington Post, GOOD, and Social Earth. He is Chairman of the Board for both the Excel Charter School in Brooklyn and The Adventure Project – a nonprofit that seeks to add venture capital to social entrepreneurs in the developing world.

 

photo: elsonpro