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17 Feb 2021

John G. Ruggie, Harvard Kennedy School

John Ruggie raises concerns about combining new rules on directors’ duties and mandatory due diligence in same EU instrument

"European Commission initiative on mandatory human rights due diligence and directors' duties," February 2021

I am on record in support of a mandatory due diligence requirement based on the UN Guiding Principles on Business and Human Rights (UNGPs), which the EC references as a model. However, I have three reservations about combining this with additional directors’ duties in the same instrument: (1) directors are not the main driver of short-termism; (2) opposition to addressing directors’ duties is substantial and may jeopardize the entire initiative; and (3) doing so may be largely unnecessary, because a properly constructed mandatory due diligence requirement itself will significantly change directors’ duties in the desired direction.

... Directors themselves are responding to investor pressure, especially from hedge funds, other so-called activist investors and private equity firms, whose primary interest is in obtaining short-term returns and then moving on. Investors elect directors.

... The construct of human rights due diligence (HRDD) in the UN Guiding Principles was deliberately adapted from other due diligence processes (legal, financial, technical) that are familiar to business – but with critical distinctions. One is that HRDD is not a transactional process... but an ongoing process... A second critical distinction... [is] it places the focus on and requires engagement specifically with those people (or their legitimate representatives) whose basic dignity and equality are at risk of harm from the ways in which a company does business.