Doing Business in Authoritarian States: Tackling Dilemmas While Preserving Integrity

Several international and national standards on business and human rights exist, as well as sector-specific standards. What most of them have in common is that they are voluntary. In general, they provide norms for responsible businesses to ensure that operations respect the human rights of employees and affected communities.

The two most authoritative international standards are the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights (UNGP).¹⁴ These documents constitute the framework for legislative work at the national and EU levels to make it obligatory for companies to do human rights due diligence and adhere to human rights norms.

The aim of this chapter is not to provide a complete account of these ground-breaking international documents. It is instead to present their main implications for enterprises that engage in business activities in authoritarian states and to prepare for the discussions in the following chapters on how to conduct business in such environments without compromising on the duty to respect human rights.

OECD Guidelines for Multinational Enterprises

In 1976 the Organisation for Economic Co-operation and Development (OECD) adopted the OECD Guidelines for Multinational Enterprises. Since then, the Guidelines have been updated five times and translated into more than 15 languages.

The Guidelines provide recommendations on responsible business conduct addressed by governments to multinational enterprises operating in or from the 50 adhering countries. While the Guidelines are not legally binding on companies, they are binding on signatory governments which are obliged to ensure that they are implemented.¹⁵

The recommendations cover all significant sustainability risks: human rights, labour rights, and the environment, information disclosure, bribery, consumer interests, science and technology, competition, and taxation.

In addition to setting standards, the Guidelines require governments to establish a grievance mechanism in the form of National Contact Points (NCPs).¹⁶ The NCPs promote the Guidelines and handle complaints against companies allegedly failing to adhere to the standards. This non-judicial grievance mechanism usually handles complaints through mediation or conciliatory practices that seek to help parties reach mutual agreement on past acts and future goals. In this way, the NCPs support access to remedy on a global scale.

Since the mediation procedure was invented in 2000, more than 450 cases have been handled covering employment and industrial relations, environment, human rights, and disclosure of information.¹⁷

In 2018 the OECD Due Diligence Guidance for Responsible Business was adopted. It provides practical explanations on how to conduct due diligence, a central recommendation of the Guidelines.¹⁸

The updated Guidelines include a chapter on human rights, consistent with the UN Guiding Principles, implementing the UN Protect, Respect and Remedy Framework.

Generally, the Guidelines require multinational enterprises to comply with domestic laws and regulations in the countries where they operate. Enterprises should take into account, prevent, and mitigate negative impacts regarding human rights, workers’ rights, the environment, and corruption. Notably, the Guidelines concern both enterprises’ operations and supply chain operations.

While governments must protect internationally recognised human rights, which are rights that apply equally to all people, multinational enterprises shall respect the same rights. They are also expected to find ways to prevent and mitigate negative impacts on human rights and to take corrective action in the case of negative impacts that have already occurred. They shall carry out risk-based due diligence “to identify, prevent and mitigate actual and potential adverse impacts” of their activities.

The Guidelines require enterprises to respect the rights of their workers, including the right to join trade unions. They shall combat discrimination, child labour and forced and compulsory labour. And they shall publish information on their business activities and financial performance regularly and transparently.

Finally, the Guidelines contain recommendations to prevent and mitigate negative impacts on the environment, fight corruption and bribery, ensure that products and services are safe and of high quality, comply with competition laws, promote economic growth and innovation, and pay taxes promptly and appropriately.

The Guidelines include several recommendations that may be particularly relevant for enterprises operating in authoritarian contexts.

First, “[i]n countries where domestic laws and regulations conflict with the principles and standards of the Guidelines, enterprises should seek ways to honour such principles and standards to the fullest extent which does not place them in violation of domestic law” (I. Concepts and Principles, par. 2). The Guidelines may thus be interpreted to limit the responsibility of enterprises in situations where domestic laws are not in compliance with international human rights law, by not requiring that they play an activist or civil disobedient role, placing human rights over domestic law. They should, nevertheless, seek to abide by the Guidelines as far as possible.

Second, while the Guidelines primarily address multinational enterprises (i.e., “companies or other entities established in more than one country and so linked that they may coordinate their operations in various ways”), “domestic enterprises are subject to the same expectations in respect of their conduct wherever the Guidelines are relevant” to them (par. 5). Small and medium-sized companies, as well as suppliers and sub-contractors, shall be encouraged to follow the Guidelines (Concepts and Principles, par. 6, and General Principles, par. 13).

By broadening the addressees in this way and including suppliers and sub-contractors, the expectations of the multinational enterprises are considerably heightened. They must ensure that not only their activities but also their business partners comply with human rights. In authoritarian contexts, where state-owned or state-directed business companies often neglect the rights of their workers, adhere to corrupt practices, and put restrictions on the right to join trade unions, this may not be easy. Enterprises should nevertheless make efforts in this regard.

Third, enterprises are encouraged to communicate not only their financial results but also to state their values and standards of business conduct and to report on their performance in this regard (III. Disclosure, par. 3). Following this line, a growing number of firms have issued “voluntary codes of corporate conduct”, which express commitments to the environment, human rights, labour standards, consumer protection, or taxation. In authoritarian contexts, such statements and reporting may be interpreted by authorities as provocative since it starkly contrasts with the authorities’ neglect of or breach of such values.

Fourth, enterprises are expected to respect human rights both by not “infringing on the human rights of others” and by addressing “adverse human rights impacts with which they are involved” (IV. Human Rights, par. 1). A state’s failure to uphold its human rights obligations does not diminish the expectation that enterprises respect human rights. In other words, entering authoritarian playing fields where authorities systematically fail to respect human rights should not lead to enterprises lowering their human rights standards. They should, as noted above, seek to uphold such standards as far as possible.

The OECD Due Diligence Guidance for Responsible Business outlines the steps inherent in addressing and preventing adverse impacts, including human rights. While it acknowledges and encourages “the positive contributions that business can make to economic, environmental and social progress”, it also recognises that “business activities may result in adverse impacts related to corporate governance, workers, human rights, the environment, bribery, and consumers.”

“Due diligence is the process enterprises should carry out to identify, prevent, mitigate, and account for how they address these actual and potential adverse impacts in their own operations, their supply chain and other business relationships, as recommended in the OECD Guidelines for MNEs [multinational enterprises]. Effective due diligence should be supported by efforts to embed RBC [responsible business conduct] into policies and management systems and aims to enable enterprises to remediate adverse impacts that they cause or to which they contribute.”²⁰

In other words, due diligence refers to identifying risks of adverse impacts (human rights, environment, bribery and corruption, disclosure, and consumer interests) and addressing actual adverse impacts. While the Guidance does not explicitly address the risk of adverse impacts when operating in authoritarian states, it recognises that the likelihood of adverse impacts increases if “the circumstances associated with their supply chains or business relationships are not consistent with the recommendations in the OECD Guidelines for MNEs” (page 15).

Even if business operations by themselves may not be “inherently risky”, circumstances such as rule of law issues, lack of enforcement of standards, and the behaviour of business relationships may result in risks of adverse impacts. According to the Guidance, due diligence should help enterprises anticipate and prevent or mitigate these impacts. In some cases, due diligence may help them decide “whether or not to go ahead with or discontinue operations or business relationships as a last resort, because the risk of an adverse impact is too high or because mitigation efforts have not been successful.” (Ibid.)

UN Guiding Principles on Business and Human Rights

The UN Guiding Principles on Business and Human Rights (UNGP) has achieved status as the authoritative international standard on business responsibility to respect human rights. They were proposed by UN Special Representative on business and human rights John Ruggie and endorsed by the UN Human Rights Council in June 2011.

The UNGP is a set of guidelines for states and companies to prevent, address and remedy human rights abuses committed in business operations. The guidelines apply to all states and to all business enterprises, both transnational and others, regardless of their size, sector, location, ownership, and structure.

The UN Working Group on Business and Human Rights was established at the same time as the UNGP was endorsed. It encourages all states to develop, enact and update a national action plan on business and human rights as part of the state’s responsibility to disseminate and implement the UNGP.²¹

The UNGP are built on three pillars: Protect, Respect, and Remedy.

Pillar I is about the state’s duty to protect human rights and provides recommendations on how states can meet their existing international human rights obligations to protect against business-related human rights violations by creating an environment conducive to business respect for human rights.

Even though a state is not per se responsible for human rights violations committed by private actors, it is obliged to take appropriate steps to prevent, investigate, punish, and redress such abuse.²² It should also set out clearly the expectation that all business enterprises domiciled in its territory and/or jurisdiction “respect human rights throughout their operations”, also if these operations take place abroad.

Among the steps states shall take is legislation and enforcing laws requiring businesses to respect human rights. They shall guide and encourage business enterprises to communicate how they address their impact on human rights. Additional steps should be taken against abuse by state-owned or controlled business enterprises.

Privatising service provision does not relinquish states from their international human rights obligations. Through their procurement activities and other commercial transactions with business enterprises, states must promote awareness of and respect for human rights.

“Because the risk of gross human rights abuses is heightened in conflict-affected areas, States should help ensure that business enterprises operating in those contexts are not involved with such abuses” (Principle 7). Such help can include identifying, preventing, and mitigating human rights-related risks of their activities and business relationships, and denying support to companies that refuse to cooperate on addressing human rights issues.

Finally, states must ensure respect for human rights by their own agencies, in their agreements with other states or business enterprises, and in their involvement with multilateral institutions dealing with business-related issues.

In short, Pillar I underlines states’ central role as primary duty-bearers under international human rights law, while clarifying their roles in ensuring that business enterprises respect human rights through legislation, enforcement, and softer measures of guidance and encouragement.

While referring to conflict situations as particularly challenging, requiring additional supportive and punitive steps by states where business enterprises are domiciled, the UNGP fails to address challenges specific to operating in authoritarian playing fields. The risks of being involved in or affected by gross human rights abuses are heightened in such contexts. They require business enterprises to invest heavily in identifying, preventing and findings ways to mitigate those risks to ensure that they live up to the standards set by the UNGP.

Pillar II is about companies’ duties to respect human rights and provides a guide for enterprises to prevent and address adverse human rights impacts. Companies shall both “avoid infringing on the human rights of others” and shall “address adverse human rights impacts with which they are involved” (Principle 11).

According to the commentary on Principle 11, these duties are not dependent on states’ willingness or ability to abide by their human rights obligations.²³ Companies’ responsibility to respect human rights exists independently of state obligations but does not diminish those obligations. The responsibility of business enterprises to respect human rights “exists over and above compliance with national laws and regulations protecting human rights”.

In defining human rights, the UNGP refer to the International Bill of Human Rights and the International Labour Organisation’s (ILO) Declaration on Fundamental Principles and Rights at Work (Principle 12). However, certain groups of the population may face heightened risks of abuses, and enterprises may therefore need to consider additional standards. In situations of armed conflict, they must respect international humanitarian law.

Human rights, as defined by the International Bill of Human Rights, are categorised as civil, political, economic, social, and cultural rights.

Civil rights protect life, integrity, personal freedom and security, equality before the law and non-discrimination, private and family life, freedom of expression, religion, assembly, association, movement, the right to seek asylum, and property rights.

Political rights protect the right to participate in government, including voting rights and the right to stand for election. According to Article 21(3) of the Universal Declaration of Human Rights, “the will of the people shall be the basis of the authority of government; this will shall be expressed in periodic and genuine elections which shall be by universal and equal suffrage and shall be held by secret vote or by equivalent free voting procedures.”

Economic rights protect the right to work, professional rights and appropriate living standards (health, food, housing). Social rights protect the individual's right to support in the event of unemployment, illness, disability, and other conditions that the individual cannot control. Cultural rights protect the right to education, to take part in cultural life, and to enjoy science, and copyrights.

Operations by enterprises may influence any internationally recognised human right, although based on circumstances some rights are more likely to be influenced than others. The list of internationally recognised human rights contains at least 35 distinct rights, while the most relevant rights for business enterprises may include the following:²⁴

1. Right to life
2. Right not to be subjected to slavery, servitude or forced labour
3. Right not to be subjected to mistreatment
4. Right to equality before the law and non-discrimination
5. Right to access to effective remedies and to a fair trial
6. Right to privacy
7. Right to protection for the child
8. Rights to fundamental freedoms, such as freedom of religion or belief, thought, information, expression, assembly, association, and movement
9. Right to enjoy just and favourable conditions of work
10. Right to form and join trade unions and the right to strike
11. Right to an adequate standard of living
12. Right to health
13. Right to education
14. Rights of groups that face heightened risks, such as women, children, indigenous populations, and ethnic or sexual minorities

In authoritarian states, political and civil rights are restricted, and authorities may target anyone who does not abide by such restrictions, including employees of business partners of multinational enterprises. While the primary duty of such enterprises is to “avoid causing or contributing to adverse human rights impacts through their own activities”, they cannot turn a blind eye to employees being sacked, arrested, or even tortured by authorities or state-owned or state-controlled businesses they transact with. Employees being targeted in such ways may be because they exercise their political and civil rights, for instance, by supporting or taking part in activities by peaceful political opposition.

When state authorities systematically violate certain human rights, multinational enterprises with stated policies to respect human rights may end up in situations where they are challenged to provide some sort of protection or defence against these violations. In this way, authoritarian playing fields may challenge the fundamental boundaries of enterprises’ duty to respect human rights as prescribed by the UNGP. The problem they face is not weak governments that cannot fulfil or protect rights. They instead find themselves in situations where they, aligned with the UN, other international organisations, and democratic governments, must determine their role in addressing human rights violations committed by business partners and national authorities.

In preparing for conducting business in line with the duty to respect human rights, enterprises are expected to express “a policy commitment to meet their responsibility to respect human rights”, conduct due diligence to “identify, prevent, mitigate and account for how they address their impacts on human rights”, and invest in processes to remedy “any adverse human rights impact they cause or to which they contribute” (Principles 15-22).

Where business enterprises have large numbers of entities in their value chains, it may be “unreasonably difficult to conduct due diligence for adverse human rights impacts across them all”. In such circumstances, they should identify where “the risk of adverse human rights impacts is most significant, whether due to certain suppliers’ or clients’ operating context, the particular operations, products or services involved, or other relevant considerations, and prioritise these for human rights due diligence.”²⁵

The purpose of conducting due diligence is to understand “the specific impacts on specific people, given a specific context of operations”. It will often entail analysing the human rights situation before engagement, identifying who may be affected by business operations, cataloguing relevant human rights standards, and anticipating how business activities will impact those identified. In situations where positively influencing the human rights situation of specific individuals or groups is difficult, enterprises shall nevertheless use their “leverage to mitigate any remaining impact to the greatest extent possible. Leverage is considered to exist where the enterprise has the ability to effect change in the wrongful practices of an entity that causes a harm.”²⁶

Notably, the UNGP anticipates that there may be situations where business enterprises lack the leverage to positively impact a situation where a business partner violates human rights.

“There are situations in which the enterprise lacks the leverage to prevent or mitigate adverse impacts and is unable to increase its leverage. Here, the enterprise should consider ending the relationship, taking into account credible assessments of potential adverse human rights impacts of doing so.

Where the relationship is “crucial” to the enterprise, ending it raises further challenges. A relationship could be deemed as crucial if it provides a product or service that is essential to the enterprise’s business, and for which no reasonable alternative source exists. Here the severity of the adverse human rights impact must also be considered: the more severe the abuse, the more quickly the enterprise will need to see change before it takes a decision on whether it should end the relationship. In any case, for as long as the abuse continues and the enterprise remains in the relationship, it should be able to demonstrate its own ongoing efforts to mitigate the impact and be prepared to accept any consequences – reputational, financial, or legal – of the continuing connection.”²⁸

The UNGP also underlines that in dealing with such situations, enterprises should consult with experts and civil society organisations and be prepared to communicate externally on how they deal with human rights issues. Communication can take many forms, “including in-person meetings, online dialogues, consultation with affected stakeholders, and formal public reports.”²⁹

If business enterprises identify that they have “caused or contributed to adverse impacts, they should provide for or cooperate in their remediation through legitimate processes”.³⁰ In contexts where it is impossible “to meet this responsibility fully, business enterprises are expected to respect the principles of internationally recognised human rights to the greatest extent possible in the circumstances, and to be able to demonstrate their efforts in this regard.”³¹

In such complex contexts, including in conflict-affected areas, enterprises must consider the risks of being complicit in human rights violations or core international crimes as “a legal compliance issue”. Such complicity may result in criminal investigations and indictments.

In general, it seems like a good reading that the UNGP go a step further than the OECD Guidelines in prescribing that enterprises respect human rights even if this may conflict with national laws. At least, the UNGP emphasises the independent role of enterprises regarding human rights.

Pillar III is about access to justice for victims of business-related human rights violations through effective judicial and non-judicial grievance mechanisms. The state must ensure effective legal remedies supplemented with non-judicial mechanisms – state and non-state. There are also specific criteria for effective complaint mechanisms that apply to state and non-state complaint mechanisms.

Other international standards

Other important international standards are the UN Global Compact and the Voluntary Principles on Security and Human Rights.

In 2000 the UN Global Compact was launched at UN headquarters in New York. It was a special initiative of the UN Secretary-General calling companies everywhere to align their operations and strategies with ten stated human rights, labour, environment, and anti-corruption principles. It has become the world's largest initiative on corporate sustainability, with more than 15 000 corporate participants.³²

The Global Compact is not a regulatory instrument but a forum for discussion and a network for communication where companies are brought together with UN agencies, labour groups and civil society organisations. It has two main objectives: 1) To mainstream the ten principles in business activities around the world; and 2) to encourage business enterprises to support broader UN goals, such as the Millennium Development Goals (MDGs) and the Sustainable Development Goals (SDGs).

A resolution by the UN General Assembly adopted on 21 December 2021 reaffirmed UN Member States’ support for the mandate of the Global Compact, “to engage the private sector in advancing the Sustainable Development Goals”.³³

The Voluntary Principles on Security and Human Rights (VPs) were also launched in 2000 and is a multi-stakeholder initiative involving governments, companies in the extractive and energy sectors, and civil society organisations.

The VPs primary purpose is to guide companies doing business in risk-exposed areas, relying on private and/or public security providers to maintain their operations’ safety and security and ensure respect for human rights and fundamental freedoms. They are non-binding and offer companies guidance on how to do human rights risk assessment as part of their engagement with security providers and put forward a set of principles to which their private security actors must adhere. The VPs recommend that companies include the principles in their contracts with security providers and ensure adequate training of their security personnel.³⁴

Following the endorsement of the UNGP in 2011, human rights due diligence was established as the preeminent standard by which companies approach adverse human rights impacts resulting from their activities. Until recently companies carrying out due diligence have done so voluntarily. Now there is, however, a growing push at different levels towards making it mandatory.

At the international level, there are ongoing efforts to advance due diligence laws under a proposed legally binding UN Treaty on business and human rights.³⁵

On 29 April 2020, the European Commission announced that it would launch a legislative initiative on mandatory due diligence for companies domiciled in the EU Member States to prevent adverse human rights impacts abroad and in their supply chains.³⁶ On 23 February 2022, the Commission finally launched such an initiative, a draft corporate sustainability due diligence directive. The proposed directive is a critical component of its sustainable corporate governance initiative.³⁷

The draft, which is likely to be adopted within a year, requires large EU companies (with 500+ employees and EUR 150 million+ in net turnover worldwide) and some non-European companies doing significant business in Europe to identify, prevent, end, or mitigate adverse impacts of their activities on human rights, such as child labour and exploitation of workers, and on the environment, for example, pollution and biodiversity loss. Companies that fail to conduct effective due diligence or implement preventative or remediation measures face administrative penalties and civil liability.³⁸

While welcoming the proposal as an important first step, Amnesty International and other human rights organisations were critical that the proposed regulation only will cover about 1 % of EU companies. It also “threatens to restrict access to remedy for victims of corporate human rights abuses by allowing companies to shift their responsibilities onto business partners using contractual assurances”.³⁹

A few Member States have already enacted legislation that obliges business enterprises to perform human rights due diligence, covering many European companies.