Companies face many risks when operating in countries with dubious records. A new tool developed by British firm Maplecroft pinpoints where they are
Every business should understand the risks it runs. A company's reputation is at stake every time it sources goods and services, makes investments, or sets up distribution in new markets. This extends as well to the sphere of human rights: Corporations increasingly face the problem of stakeholders considering them to be complicit in human rights violations by virtue of operating where standards are low or the rule of law is weak.
Indeed, reputational risk can arise from the association of any part of a business's value chain with human rights violations, even where the business is not the culpable party. Matters of concern include lack of protection for human security, labor standards, and civil liberties. A lack of policy and monitoring can increase a company's risk exposure, even if violations are not its direct fault, but are considered by stakeholders to have happened within the company's sphere of influence.
Now, for the first time, businesses have a tool to help pinpoint where risks are greatest and action is most needed. Developed by British research and advisory firm Maplecroft, of which I am a director, the set of 25 human rights risk indices offers a country-by-country outlook for 2008 of the human rights risks across 20 different categories. These range from extrajudicial killing and torture, to child labor and women's rights, to freedom of association and the press. A human rights complicity risk index identifies the countries where businesses' risk of association with human rights violations is highest.
Penalizing Poor Practices
The existence of profitable business opportunities in countries where human rights violations are common poses a number of challenges to companies, including the potential for future litigation and loss of consumer confidence. Companies may also face lost production, higher security costs, restricted access to finance, falling share prices, and difficulties in recruiting or retaining staff. The fact is, financial markets rarely reward responsible business practices, but they do sometimes penalize poor ones.
The following examples show why human rights risk is relevant to business.
Energy and finance in South Asia: A proposed pipeline bringing natural gas from Iran through Pakistan and into India offers commercial opportunity for both construction companies and financial investors. But the human rights risks involved are considerable. Both Pakistan and Iran are classified as "extreme risk" in the Maplecroft Human Rights Risk Index (HRRI), and in both countries, the risk of allegations of complicity for businesses operating there is "extreme" and needs to be managed.
Plans foresee the proposed pipeline running through the Pakistani provinces of Sindh and Baluchistan. Militants in resource-rich Baluchistan are fighting an insurgency to gain self-determination and a greater share of economic wealth. A pipeline running through this territory would be vulnerable to attacks, and employee security could be compromised. A company's creditworthiness might also be affected.
Emerging economies—India: The business success stories that emerge from India tend to mask the prevalence of widespread human rights violations across the main categories, especially relating to labor standards and female rights. India ranks as the highest risk country in the Maplecroft civil liberties composite index and 183rd of 196 in the HRRI. State officials commonly perpetrate serious violations. Business risk of complicity is "extreme."
Mining in Africa: Africa is the new frontier for the extractives sector. While investors have traditionally been wary of associations with many African states where rule of law is poor, the natural resources there are increasingly attractive. A key example is China's recent $5 billion investment in the Democratic Republic of Congo (DRC), as well as its association with Sudan, from which it receives about 5% of its oil. Other key countries and commodities include: Angola (oil), Chad (oil), Equatorial Guinea (oil, titanium, iron ore, uranium, gold), Gabon (oil, iron ore), Mozambique (titanium, aluminium), Sierra Leone (diamonds), and Zambia (copper).
The human rights risks associated with working in these countries are substantial. According to Maplecroft, operating in all of these countries poses a business complicity risk that is either "high" or "extreme." Chad, the DRC, Equatorial Guinea, and Sudan were found to pose "extreme" risk to business. The DRC fares worst worldwide in both the HRRI and the complicity risk index.
Private security and human rights: Another Maplecroft index lets companies see at a glance where they are likely to require an extra degree of carefully trained and monitored private security in order to protect their assets. It also shows businesses where they are at greatest risk of complicity in human rights violations due to a private security company committing a violation while in their employ. The indices show that violations are more likely to occur in countries with valuable natural resources, where human security is poor.
Countries with severe internal conflict carry the highest risks for companies hiring private security forces. These include the Democratic Republic of Congo, Sudan, Iraq, Somalia, Sri Lanka, and Colombia, where local private security or irregular forces protecting assets have committed human rights violations, including extrajudicial killings.
The private security industry is insufficiently regulated and in many cases poorly trained and monitored, so there is an obvious advantage for companies in ensuring they hire legal and responsible security providers. Charges that private security companies commit human rights violations with impunity are commonly recorded for Afghanistan and Angola, where there has not yet been a case brought for extrajudicial killing.
The helpful thing about these indices is that they focus business efforts at remediation on the key risks. For example, Indonesia scores 1.2 (extreme risk) for labor rights and protection because the worst forms of child labor are tolerated and compulsory labor for some migrant workers still exists. In China, on the other hand, child labor is rated only "medium risk," but forced and involuntary labor scores "high."
The bottom line for businesses investing in unfamiliar markets is they must be aware of what they're getting into—and understand exactly which country-specific risks will likely require remediation and which require monitoring. That should be of concern from the corner office on down, because reputation, market capitalization, and even litigation may be at stake. Risk managed responsibly leads to reputation advantage.
At the same time, foreign investment is essential for the development of emerging economies. If business is better able to manage and monitor risks and reputation, it is to the mutual benefit of all.
With Carolin Seeger, Maplecroft