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June 2, 2008 9:55 PM

A Sarbanes-Oxley for Human Rights?

Posted by Michael D. Goldhaber

A report to be presented Tuesday to the United Nations Human Rights Council in Geneva has publicly divided two of America's leading authorities on corporate governance: Martin Lipton of Wachtell, Lipton, Rosen & Katz and Ira Millstein of Weil Gotshal & Manges.

In a memo to Wachtell clients, Lipton and associate Kevin Schwartz portray the U.N. proposal as the opening wedge of a global Sarbanes-Oxley regime for human rights. Ultimately, it would "force directors to navigate a maze of procedural imperatives," they warn, and "impose on corporations the obligation to compensate for the [various] deficiencies of the countries in which they conduct business."

Weil Gotshal has responded with an opinion on behalf of pro bono client Oxfam America, urging U.S. business to embrace the U.N. report. Millstein and five prominent colleagues cite the precedent of the Foreign Corrupt Practices Act, which inspired U.S. business to lobby successfully for the creation of global anticorruption conventions. "Rather than being alarmed," Weil concluded, "U.S. corporations should welcome [these] proposals as a means to facilitate leveling of the international corporate playing field by bringing foreign firms in line with U.S. standards for respect of human rights."

"Truthfully, we feel Marty may well have misunderstood [some of the] U.N. language," says Millstein. "This is an international diplomatic document, not a U.S. corporate law document," adds Weil Gotshal litigator Steven Reiss, who coauthored the memo. "Those two universes don't mesh all that well."

Wachtell Lipton "understood poorly how the U.N. system works," says John Ruggie, who authored the report as the secretary general's special representative on human rights. Ruggie directs the center for business and government at Harvard University's Kennedy School of Government.

Lipton and Schwartz responded at length to several e-mail queries from The Am Law Daily. Unlike Weil, they wrote, "We think that the generalities and ambiguities of Professor Ruggie's proposals do create the opportunity for inviting new litigation and imposing new liabilities on corporations and their directors in ways that would hinder, rather than advance, the most effective protection of human rights."

Lipton, who has advised the New York Stock Exchange and U.S. Competitiveness Council on corporate governance, is the coauthor of the seminal 1992 article, "A Modest Proposal for Improved Corporate Governance." He is well-matched with Millstein, who chaired the private sector advisory group to the Global Corporate Governance Forum and teaches corporate governance at the Yale School of Management (the school's Millstein Center for Corporate Governance and Performance was named in his honor).

The Ruggie report to the U.N. proposes nonbinding guidelines for improving corporate systems of human rights compliance, in keeping with what the U.N. calls "the corporate responsibility to respect." It also spotlights innovative state approaches to the protection of human rights, which Ruggie believes deserve serious consideration. Among them are the new United Kingdom Companies Act, which requires directors to "have regard" to "the impact of the company's operations on the community and the environment;" and an Australian provision that takes corporate culture into account in determining criminal liability.

In 2006 Ruggie effectively scrapped the U.N.'s draft norms on the human rights responsibilities of transnational corporations, which would have imposed on corporations a wide range of legal obligations. The U.N.'s new focus on fixing corporate culture has won praise from sources as diverse as The Economist, the International Chamber of Commerce, Oxfam, and the Ethical Globalization Initiative. At the same time, Ruggie's approach has been criticized by Amnesty International and Human Rights Watch as smacking of self-regulation.

"My report is about anticipation and prevention," says Ruggie, "which is why I find the Lipton thing so mind-boggling. That's exactly what lawyers are supposed to help companies do."

The Weil memo argues that a range of U.S. legal regimes already make human rights compliance a standard practice at well-managed American companies. These include the common law of fiduciary duties, which requires directors to identify, measure, monitor, and control all significant risks; and the federal securities laws, which require disclosure of all material foreseeable risks faced by U.S.-listed corporations. Signficantly, the coauthors of the Weil memo include a former Delaware Supreme Court chief justice, E. Norman Veasey, and a former SEC commissioner and general counsel, Harvey Goldschmid. "If anyone knows about fiduciary duties, it's Norman Veasey," says Reiss, "and if anyone knows about disclosure obligations, it's Harvey Goldschmid."

The Weil memo also notes that the potential for liability under the Alien Tort Claims Act, however uncertain, has become a real boardroom concern. Weil has intimate knowledge of alien tort, too (although Reiss did not wish to discuss it), as the counsel to Exxon Mobil Corporation in the action brought by victims of South African apartheid. (The case was forced to proceed last month after the Supreme Court failed to grant certiorari.)

Lipton and Schwartz respond that the procedural guidelines that have been contemplated by Ruggie in a past report go well beyond the general exigencies of current U.S. law; and even a U.N. recommendation of best practices could potentially lead in practice to binding obligations.

Reiss maintains that it's already clear to any sane U.S. corporate lawyer that U.S. company directors should be apprised of human rights violations. "What Ruggie said in effect is that companies need to have in place systems to be aware," he says. "Is there a responsible director who would disagree?"

Reiss reverts to the analogy with corruption, where U.S. business promoted global regulation, both because it was the right thing to do and because it leveled the playing field. "We're not telling U.S. companies to do anything they're not already doing," he says. "Where this really could have an effect is at a company like Gazprom, where human rights sensibilities may be less developed."

Download the U.N. report on global business human rights.

Download Weil Gotshal's response to the U.N. report.

Download the Wachtell Lipton memo on global business human rights.

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