The importance of good corporate responsibility rules

The EU is currently considering making the standards set out in the OECD guidelines mandatory for multinational companies. This means that companies must pay attention to human rights and the environment when producing or purchasing goods and services worldwide, in order to prevent abuses. Johan Barnard (Head of International Public Affairs) and Anna Pot (Head of Global Responsible Investment Capital Markets & RI Communications) on why APG encourages this, but also what to look out for.

What do these guidelines mean?
Barnard: “The Organization for Economic Cooperation and Development (OECD) guidelines define what is expected from companies in OECD member countries in terms of corporate social responsibility (CSR) in international business. These are based on, for example, the UN Guiding Principles on Business and Human Rights and other international standards. They offer companies guidance on how to deal with various issues. These include a company's responsibility for its suppliers, human rights, child labor, the environment and corruption. These OECD guidelines, to which the Netherlands as OECD member has also committed itself, play a prominent role in Dutch international CSR policy. They are also a key focus APG’s responsible investment policy.”

And these are still optional?
Barnard: “I would not call it optional. Think of it as a standard that the OECD member states have agreed on together, without it being legally binding. Many Dutch companies subscribe to the guidelines. In addition, a series of covenants have been concluded with the government and NGOs in which sectors agree on how to implement the OECD guidelines. The pension sector, for example, has concluded the covenant on International Socially Responsible Investment (IMVB). A special feature of the OECD guidelines is that they include a complaints mechanism. Anyone can submit a complaint about a company that does not appear to be adhering to the guidelines to the National Contact Point (NCP) of the country concerned. At that point, a mediation process starts in which all parties get together. If mediation is successful, the parties then agree on how to proceed with the issue. The NCP facilitates the process, but does not decide on the outcome; that decision is made by the parties themselves.”

Why does APG want a European mandate?
Pot: “We want to invest in sustainable companies that respect human rights, care for the environment and have a sound governance. Because we invest globally, that expectation also applies to companies worldwide. We want a clear standard that does not only apply in the Netherlands. What also helps us as a responsible investor is if companies report on how they operate sustainably and that they are also encouraged by the regulator to operate in a sustainable manner.”
Barnard: “The European Parliament believes that companies do not take enough responsibility for working abroad in a decent way. That is why it has asked for a binding regulation. Some Member States, such as France and Germany, have introduced national laws to establish mandates regarding the supervision of chain partners. The Dutch Ministry of Foreign Affairs concludes that despite the covenants, things are not yet going well enough in the Netherlands. A discussion is therefore underway with the Dutch House of Representatives about the question of whether a Dutch law should be introduced to make the OECD guidelines mandatory. In addition, judges are also starting to take the OECD guidelines into account when determining what companies are required to do. A recent example is the Shell affair.”

On February 23, the EU will present a proposal, the so-called Sustainable Corporate Governance Directive. What are you hoping for?
Barnard: “First of all, it is important for a European standard to be established in this way. That is much better than running the risk of this matter being regulated in different ways in different Member States.”

Pot: “To capture the OECD guidelines in legislation, we do see some areas of concern. The direct contact between stakeholders such as civil society organizations and companies or investors is important to us. We are in constant dialogue and cherish this dialogue because it provides us with new information and insights. Stakeholders can always contact us directly. Where they prefer to use the unique, good mechanism of the NCP, and/or cannot find us directly, we will certainly cooperate. We must ensure that the NCP approach is not too easily duplicated or replaced by formal proceedings in court.

Finally, clear definitions are needed to delineate responsibility: what is the role of companies versus investors? In a recent case on McDonalds, you saw that these are quite often mixed up.”

During that McDonalds issue, APG sat down with the NCP as one of the defendants. What was this issue about?
Pot: “Four international trade unions had filed a complaint against fast-food chain McDonalds for allegedly failing to take sufficient action against allegedly systemic sexual harassment in the workplace in a number of Latin American countries. And against two investors. APG was accused of not doing enough to prevent 'gender-based violence and harassment' (GBVH). And according to the unions, that is a violation of the OECD Guidelines for Multinational Enterprises.”

APG holds less than one percent of the shares at McDonalds. Remarkable then that this investor is being sued and not one of the much larger shareholders.

Barnard: “This is certainly striking. Many larger shareholders who also subscribe to the OECD guidelines, but are based in other OECD member states, are not addressed. Perhaps because the rules are better in the Netherlands, the complainants thought they could win their case more quickly. In that respect, too, a European regulation is better, because there will not be such a big difference between member states. Of course, that is still possible with countries outside the EU, but a regulation for the entire OECD or even the entire world is very difficult to achieve. You want to prevent complainants from shopping around where the most favorable judgment can be expected, instead of having a conversation with the most responsible parties.”

Is that one of the areas of concern in mandating that you are referring to?
Barnard: “Exactly. APG wants to be responsible for things we can actually influence. That is first and foremost our own investment policy, including our own engagement activities. With and without NCP we will be discussing this with stakeholders.”
Pot: “We do due diligence, or careful research, in the investment choices we make and we have discussions with companies we invest in, such as McDonalds, about responsible business practices. In that respect, the responsibility of an investor is really different from that of the company about its business practices. A second area of concern is the complaint procedure at NCP that is primarily aimed at mediation. The parties must come to an agreement together before there is a solution. That fits in with very open standards, which can be fleshed out by the parties together in a case-by-case procedure. With a binding arrangement, you have a procedure before a judge who ultimately decides for the parties, and also makes jurisprudence. In that model, much more clarity is needed in advance.”

And not enough clarity can lead to unpleasant consequences?
Barnard: “In the most serious cases, the OECD guidelines ask companies to pay compensation to injured parties. Incidentally, this is not for the NCP to determine. The NCP only acts as a mediator. But in the event that a judge could indeed decide on compensation in the future, it is extra important for companies to know in advance where they stand.

It then becomes crucial to have clarity about the difference in responsibilities between companies on the one hand and the investors in those companies on the other. Fortunately, the OECD does endorse this in its guidelines for institutional investors, but these are sometimes interpreted differently by, for example, NGOs than by us.”

The outcome of the McDonalds investigation by the NCP has now been published. How will APG emerge from the battle?
Pot: “For the second time, we are being complimented by the NCP on the way in which we, as a shareholder, take responsibility and act in accordance with the OECD guidelines. The unions that brought the case also acknowledged this, based on our discussions. The NCP concludes in its final statement that 'pension administrator APG, which manages pension funds for ABP among others, has fulfilled its responsibility as a minority shareholder and acted in accordance with the OECD guidelines'. APG thus uses its influence within the frameworks of our investment policy to avoid or reduce negative impact. In 2015, the NCP also ruled regarding APG and stated that we act in line with the OECD guidelines and use our influence to make our portfolio investments/companies more sustainable.”