How to operationalise stakeholder capitalism? Through human rights due diligence

Putting ‘stakeholder capitalism’ into practice is an ongoing challenge for companies, investors and civil society organisations, especially when diverse stakeholders hold different perspectives on how to define it and what it should look like. John Ruggie, Caroline Rees and Rachel Davis argue that the business and human rights framework provides one possible pathway to operationalise stakeholder capitalism: as human rights due diligence is increasingly made mandatory for companies, risks to stakeholders are already becoming a significant corporate governance issue.

The Harvard Kennedy School Corporate Responsibility Initiative has published a working paper on Making ‘Stakeholder Capitalism’ Work: Contributions from Business & Human Rights. The paper was authored by business and human rights experts John G. Ruggie (Berthold Beitz Research Professor in Human Rights and International Affairs and Faculty Chair of the Corporate Responsibility Initiative at Harvard), Caroline Rees (President and Co-Founder of business and human rights organisation Shift), and Rachel Davis (Vice President and Co-Founder of Shift).

As more and more companies, investors and corporate lawyers consider the social purpose of the corporation, “[t]he idea of stakeholder governance – moving beyond shareholder primacy toward some form of ‘stakeholder capitalism’ – is in play.” But at the same time, there is no clear pathway to get there. The working paper offers insights on how to leverage human rights due diligence to operationalise stakeholder governance and bring it from the conceptual to the practical.

Key takeaways

• • Making human rights due diligence (HRDD) mandatory will embed it as a key element of corporate governance—thus fitting it into a framework already accepted by companies, investors and regulators.
  • The authors point out that the origins of human rights due diligence make it particularly suited as a pathway to stakeholder governance: HRDD “was deliberately adapted from other (legal, financial, technical) due diligence processes traditionally familiar to business.”
  • There are key distinctions between these types of due diligence, however.
  • For one, HRDD “is not a transactional process, as for a new acquisition, partnership or investment, but an on-going process that continues and evolves. This reflects the fact that human rights risks connected to a company’s operations and value chain are themselves constantly changing, whether due to internal factors such as a new product development or evolving workforce composition, or due to external factors such as regulatory changes, moves into new markets or the emergence of local conflict.”
  • The second distinction: “Human rights due diligence reflects the general categories of stakeholder – employees, suppliers, customers and communities – that is typically cited in reference to stakeholder capitalism.” But, unlike corporate due diligence which seeks out and prioritises stakeholders based on risks to business, HRDD centers “squarely on those people whose basic dignity and equality are at risk of harm from the ways in which business gets done.”
  • Further, as publicly-listed companies are increasingly obligated to report on “at least some aspects of their human rights due diligence processes,” there is a “growing recognition that a company’s salient human rights risks – its most severe potential impacts on people – converge ever more strongly with risks to the business, be they reputational, legal, operational or financial.”
  • With the proliferation of mandatory HRDD legislation—and as investors in parallel privilege transparency and robust governance of human rights risks and impacts—stakeholder capitalism is likely to be strengthened.   

Read the full working paper here: John G. Ruggie, Caroline Rees and Rachel Davis, Making ‘Stakeholder Capitalism’ Work: Contributions From Business & Human Rights, Working Paper No. 76, Corporate Responsibility Initiative, Harvard Kennedy School (November 2020).