Human Rights for M&A Teams: lessons learned from company practice

In April 2016, the UN Global Compact and Shift organized a webinar for companies which explained the importance of integrating human rights considerations into M&A processes and provided guidance on how companies can do so. I facilitated the webinar on behalf of Shift and invited two companies who are members of Shift’s Business Learning Program, Total and Ericsson, to share their experiences working in this area.

The webinar is one-hour long and I recommend it to M&A teams interested in finding out more about this topic:

For those who have limited time, I have pulled out some of the key information for you.

Why is considering human rights as part of M&A transactions challenging?

M&A teams are typically subject to:

  • A very short timeframe to conduct due diligence, negotiate and sign the resulting contract
  • High confidentiality constraints. Even within one company, there is typically a small subset of people who are privy to what is going on
  • Limited Information that comes in solely from the target company (in the case of an acquisition), investment bank and/or local counsel
  • A baseline of legal compliance which will overlook human rights where the law is inconsistent with human rights standards
  • Silos, both within the M&A team as well as between the M&A team and rest of the company
  • An allocation of risk mindset. M&A teams are trained to protect the company they work for. M&A processes are not structured to seek to solve issues or tackle the root cause of issues

For further information on this, see 11’55 to 15’24

Particular challenges identified by Total and Ericsson:

  • Human rights are typically viewed by M&A team members as grave violations by state actors, and are not seen as related to business. M&A teams need to change their mindset to understand how human rights impacts can arise in the course of M&A transactions
  • M&A lawyers are not trained to identify human rights risks. They are well equipped to analyze business risks but do not look at risks from the stakeholders’ perspective which is what is required when analyzing human rights risks
  • M&A lawyers have little information to rely on in making an assessment of human rights risks. Tight confidentiality restricts site visits and conversations
  • Human rights touches upon a wide range of areas, ranging from human resources and employment practices to real estate and land ownership. Therefore, human rights cannot sit alone and has to be woven into the company’s existing processes. This requires the full M&A team to be informed of how their areas of practice could be involved with adverse human rights impacts.

For further information on this, see 46’46 – 51’54

What are the five key takeaways from working with companies seeking to integrate human rights into M&A processes?

  1. Make the business case and tailor it to your company
  1. Add the human rights lens to the company’s existing M&A processes
  1. Agree on a clear allocation of responsibilities
  1. Build channels of communication in the company
  1. Build capacity in the M&A team and maintain this strengthened capacity

These five key takeaways are explained at 15’22 – 26’42

What were the drivers for Total and Ericsson to start to consider human rights in their M&A processes?

  • Both companies have a clear commitment to respect human rights from the top levels and this is enshrined in their corporate documents. At the same time, they identified a gap in the M&A process where human rights were not being considered systematically
  • M&A processes focus on legal compliance which fails to provide a structured approach to identifying and addressing human rights risks in the course of M&A transactions
  • Companies tend to rely on the post-acquisition integration to “cure” the human rights issues but this integration doesn’t always take place and doesn’t fix past impacts the company may have inherited through acquisition
  • These companies have faced a number of recent examples which underscored the importance of paying attention to human rights in corporate transactions. For instance, Total describes a joint venture with INPEX in Western Australia where paying attention to the rights of neighbouring communities at the outset of the transaction (including changing the location of the port facilities) made the project more effective and reduced its long-term cost

For further information on this, see 27’44 – 36’07

What were the key lessons learned for Total and Ericsson from this process?

  • The process of considering how to integrate human rights into M&A needs to involve as many people are possible. It is only when everyone understands the need for it and the role that they play that this process can work. A concrete hands-on workshop which brings together the M&A team as well as others in the company can help in this regard
  • No one wants an additional layer of rules or a new process. People want a concrete process that can be used and implemented, which builds upon existing M&A processes
  • Training and awareness-raising is required to help the M&A team think beyond grave human rights issues to those that could be identified and addressed in the course of routine M&A transactions
  • There is a need to break down silos within the company. By allocating a role to everyone involved in the M&A transaction (e.g., who is responsible for what, who needs to provide information to whom) and building coordination into the internal processes, a company can effectively force an exchange of information which is necessary for this work
  • The processes need to be tailored to identify the human rights most at risk in light of the company’s sector and M&A transactions. For an information and communications technology company, these may relate to freedom of expression, privacy and labour practices while for an extractive company, these may relate to land, pollution and labour practices

For further information on this, see 36’13 – 41’22 and 51’54 – 55’40

Have Total and Ericsson withdrawn from M&A transactions because of human rights issues?

  • In general, human rights issues do not exist in a silo. They will be accompanied by other types of issues, such as poor governance and poor reputation. It is therefore difficult to separate human rights issues from other issues which, together, can lead to withdrawing from a transaction
  • However, the intent is not to have human rights as a deal breaker. Rather, this work is intended to enable business in a responsible manner; to equip the company to address issues at the outset when they have the most leverage, rather than to push companies to withdraw from transactions

For further information beyond this webinar, see What Do Human Rights have to Do with Mergers and Acquisitions?

 

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