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You Want Human Rights With That? McDonald's Serves Up Due Diligence on Human Rights

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By Amol Mehra, Esq., and Nicole Santiago

Shareholders are using their voting power to join the movement for corporate accountability and the most recent company to serve up policies and practices on human rights in its operations may be just around the block.

In January, McDonald's Corporation released its Report of the Sustainability and Corporate Responsibility Committee of the Board of Directors of McDonald's Corporation in response to a shareholder proposal that McDonald's explain its processes for identifying and analyzing human rights risks related to the company's operations, products and supply chain. In corporate social responsibility (CSR) terms, shareholders demanded that McDonald's prove that they conduct human rights due diligence. Referencing international human rights instruments, including the United Nations Universal Declaration of Human Rights, the United Nations Guiding Principles on Business and Human Rights (UNGPs), and the OECD Guidelines for Multinational Enterprises, the report outlines how McDonald's specifically identifies and assesses human rights risks in its operations as part of its broader enterprise risk management process.

The most remarkable part: McDonald's provided the report voluntarily. The proposal for reporting was brought by shareholders, supported by the American Federation of State, County and Municipal Employees (AFSCME), but only 28% of shareholders voted in favor of disclosure. McDonald's went ahead and developed the report anyway, concluding that "the issue of risk management as relates to human rights matters within McDonald's operations may be of interest to some shareholders."

Similar shareholder proposals, also supported by AFSCME, were submitted to the Boards of Directors at Caterpillar and Halliburton. Like McDonald's, they have extensive global operations, and as such, they face great exposure to human rights risks and violations that can affect their share value. That affect can be especially acute for companies who, like Caterpillar and Halliburton, deal in sensitive environments and offer products that can be used as tools in human rights violations.

By now, it is indisputable that human rights impacts on businesses are real. The direct impacts of litigation, financial penalties for non-compliance with regulations and the reputational risks associated with abuses are just a few of the ways that human rights have a material impact on long-term corporate value. Everyone -- directors, investors, consumers, and, not least, prospective victims of human rights abuses -- stand to gain when businesses takes concrete steps to implement their duty to respect human rights, and human rights due diligence is a key step in this process.

As illustrated by McDonald's, the work of civil society in calling for corporate accountability is beginning to pay off and values are clearly shifting. Consumers are demanding more accountability in exchange for buyer loyalty. Some governments are also responding, choosing to develop innovative policy tools, including supply chain due diligence obligations, disclosure and reporting regimes around human rights policies and impacts, and even exploring imposition of civil or criminal liability around harm.

Challenges exist to scale up this momentum. One key stakeholder group has stayed relatively quiet: institutional investors. Their silence makes it easier for corporations to maintain the status quo, thinking that their investors do not want or care about human rights reporting. Given the enormous amount of influence that institutional investors have, they can have a significant impact in shaping corporate practice in favor of respecting human rights.

The U.S. Securities and Exchange Commission (SEC), the agency responsible for enforcing federal securities law, also has a role to play. Under the current law, and despite evidence that human rights impacts are material to investors, the SEC has been reluctant to embrace mandatory disclosure of human rights diligence. Their argument is that this type of disclosure would only result in "information overload" for investors. McDonald's plainly disagrees, and other companies are likely to follow suit.

To make the issue much clearer and easier for investors and business alike, the most direct fix would be for the SEC to issue interpretive guidance to explain how material human rights-related information should be incorporated into existing reporting requirements, or promulgate a new rule specifically requiring human rights-related disclosure. The SEC has already found that its mandate to regulate "as necessary or appropriate in the public interest or for the protection of investors" extends to other social issues such as climate change. There is no reason to think that human rights abuses are any less important.

The message is sounding loud and clear: companies should be doing their diligence to prevent human rights abuses in their operation and they should be regularly reporting on these policies and processes. If they don't, advocates and human rights groups are not the only ones that will take these companies to task -- shareholders can and will use their investment power to do the same.