How much do human rights matter to company value?
Nearly ten years ago, I had a meeting with an investment fund manager. We discussed human value and risk, and covered the subject of human rights in company supply chains. He made the point that while it was unfortunate, this kind of problem did not affect his investment decision-making. Such issues were simply not “material” to running his portfolio.
Since this meeting, the rise of ESG and sustainability now means that a company’s external impact – human and environmental – is no longer a peripheral matter. This FT piece reminds us that human rights are now a key risk.
In this example, the US has impounded thousands of VW cars as a consequence of an alleged human rights problem. ESG risk now brings the prospect of direct effects on a firm’s ability to do business.
As the article states: “The US prohibits the import of products that have been made with forced labour in the western Xinjiang region and other areas in China under the Uyghur Forced Labor Prevention Act of 2021.”
It also brings heightened awareness and concern about a company for a variety of other reasons:
1. VW says it “takes allegations of infringements of human rights very seriously, both within the company and in the supply chain” including “any allegations of forced labour” But, is VW’s issue an isolated problem? Corporate re-assurances on such matters often belie deeper cultural and systemic issues that mean that such occurrences may arise again.
2. What would forced labour in a supply chain suggest about VW’s management of people? Incidences like this can indicate that people are seen as a cost of doing business rather than as a source of sustained value. If so, this should be a major risk red flag. From assessing hundreds of firms, we have seen that risks that manifest in supply chains can flag other types of human risk within the organization itself.
3. What is the impact on other stakeholders? ESG ratings downgrades have apparently caused some investor flight. How does it affect workforce engagement? Will it impact customers? Will other countries and regulatory bodies become more cautious about VW?
In Maturity analysis, we consider questions of “human governance”:
Do principles of responsible human governance* apply to all the people that the company manages or affects?
Who is responsible for the company's wider obligations to all the people involved with, both inside and outside, the organization?
Do they understand the true nature and materiality of human governance?
How would you answer these questions about your firm?
*The Maturity Institute defines Human Governance as explicit recognition that continuously improving organizational value is dependent on improving the value, and minimizing the risk, of the organization’s entire human system. The human system comprises workers, suppliers, customers, and wider stakeholders (e.g. citizens and communities).
#ESG #risk #culture
Knowledge Management and Organisational Learning Consultant, Coach, Trainer and Speaker. FCIPD FCLIP
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