The Human Rights Obligations of State-Owned Enterprises: Emerging Conceptual Structures and Principles in National and International Law and Policy.

• Author: Backer, Larry Cata

TABLE OF CONTENTS I. INTRODUCTION 831 II. CHALLENGING ENGAGEMENT AND ENGAGEMENT CHALLENGES THROUGH THE LENS OF THE 2016 WG REPORT 849 A. Foundations: SOE CSR and Human Rights Compliance 849 B. The 2016 Working Group Report 855 1. Introduction to Analysis 855 2. Section I: Introduction 856 a. Background, Aims, and Outline of the Report 856 b. Defining State-Owned Enterprises 858 c. State-Owned Enterprises: State of Play 859 d. Scope and Limits of the Report 859 3. Section II: Normative and Policy Framework Underpinning State Action in Relation to SOEs 860 a. State Duty to Protect against Abuses by SOEs 860 b. The SOEs as Business Enterprises: the Corporate Responsibility to Respect Human Rights 864 c. Link between Corporate Governance and Human Rights 865 4. Section III 867 a. Setting Expectations 868 b. Instituting Mechanisms to Set and Manage Expectations through Ownership Arrangements 869 c. Developing the Relationship between the State and SOE Boards of Directors 869 d. Ensuring Oversight and Follow Up Mechanisms 871 e. Instituting Capacity-building Obligations 872 f. Imposing Requirements of Human Rights Due Diligence 873 g. Instituting Requirements of Disclosure, Transparency, and Reporting 873 h. Developing Effective Remedies 874 5. Section IV: Conclusions and Recommendations 876 a. Conclusion 876 b. Recommendations 876 IV. THE WORK LEFT TO BE DONE: FROM CONCEPTUAL LACUNAE TO IMPLEMENTATION 877 A. Definitions Impede Efficient Regulatory Approaches 877 B. The Current Approach Exacerbates the Existing Disjunction Between the Legal Duty of States and the Societal Responsibilities of Enterprises 878 C. The Possibility of Double Standards (Home State-Host State) Detracts From Regulatory Coherence and Promotes Regulatory Hierarchy 879 D. Extraterritoriality Continues to Plague Regulatory Governance at the Transnational Level 880 E. There is a Contradiction between the Principle of Active Shareholding and the Legal Protection of Corporate Autonomy and Asset Partitioning 882 F. Sovereign Immunity Serves as the Procrustean Bed on which State-SOE Relations are Distorted, and with it the Global Economy 883 G. Encouraging Governance Gaps and Multiple Standards among Classes of Public Economic Activity Produces Regulatory Incoherence within States and Governance Gaps Among Them 884 H. Legalization through SOE Active Shareholding Damages the UNGP Framework and Calls into Question the Value of Legalization 884 I. The Perversities of Capacity Building in an Asymmetrical Global Order 885 J. Data-Driven Regulatory Governance and Its Distorting Effects 886 V. CONCLUSION 887 I. INTRODUCTION

Consider the antique automobile pictured above. It sits rusting in a shop, still beautiful but now incapable of being driven anywhere and always awaiting repair. One can repair the auto, and perhaps one can drive it. But it remains obsolete, relates poorly to the modern highway and the objectives of driving, and has become less relevant to everyday life. It produces a comforting nostalgia for the museum or the Sunday drive, but is hardly fit for modern life.

This Article takes that automobile as its starting point. Sovereign conduct on the margins of the law, the title of the Symposium for which this Article was produced, (1) is perhaps no better manifested than in the commercial activities of states. And it is most fully formed when the state--the fundamental political body corporate--reconstitutes part of itself as an economic body corporate to engage in activities in national and transnational markets. (2) Yet, like the antique autombilile in the picture above, the conventional law of the commercial activities of states, especially when undertaken in the form of state owned enterprises (SOEs), suggest not merely that old auto, but the futility of bringing life back to a model of economic activity that has not had a sound foundation since the beginning of this century. This futility is most acutely expressed in current debate touching on state and SOE engagement with the human rights conseqeunces of their economic activity. Global elites might better consider the value of that work for the purposes to which it is being deployed. This Article develops that thesis in the context of recent efforts at the public international level to breathe new life into an old machine and suggests the contours of new approaches--a new regulatory machine for new times. This Introduction provides the context for the argument that follows. It sketches the emerging character of SOEs within globalization and the failures of governance regimes to regulate the conduct norms for these enterprises.

The conduct of economic activities through SOEs occupies the space where public duty and private obligation meet--that is, where the legal duties of the state merge with the governance responsibilities of the private organization. The SOE does not easily fit within the classical division of obligation, expressed in political and legal theory, between public and private entities, or into those entities' respective relationships to law. (3) States have a duty that is undertaken through law; (4) enterprises have a responsibility that is embedded in their governance. (5) These fundamental divisions form part of the current international efforts to institutionalize human rights related norms on and through states and enterprises, most notably through the U.N. Guiding Principles for Business and Human Rights (UNGP). (6) The problems of conforming to evolving norms become more difficult where states project their authority through commercial enterprises--that is, where the societal (and economic) governance order of the enterprise is conflated with the political and legal order of the state. (7)

SOEs have undergone tremendous change in both operation and framework ideology since 1945. (8) The contemporary faces of SOEs also reflect substantial divergences in the character and operation of SOEs. (9) Within globalization, consensus about the role and operation of SOEs, like that of sovereign wealth funds (SWFs), (10) has moved toward a commercial and private model. (11) For all that change, SOEs remain an important element of national macroeconomic policies and a means through which states may directly operationalize macroeconomic policies through governmental instrumentalities; (12) they continue to serve quite important public purposes. (13) The SOE's importance is in part the product of the malleability of the SOE concept itself, which has made the device a useful tool for states. (14) That malleability has also permitted SOEs to become an increasingly important factor in globalized economic activity, (15) shaping its patterns and approaches with a reference to the national policy and politics of the owner-state.

But their use by states has also been criticized for inhibiting the construction of robust internal and global markets, in part because of their inefficiency, (16) and in part because such open and robust markets serve as the foundation of economic activity within and beyond states. (17) The difficulty stems from the relationship between states and their economic enterprises. On the one hand, states regulate all economic enterprises--including SOEs (to the extent they are treated like other similarly constituted entities). On the other hand, the state that regulates also owns the regulated entity; the state, in this instance, may distort markets by using its regulatory power to favor its own entities over others. That produces asymmetries in market power that might challenge the efficacy of the emerging market-driven regulatory structures of globalization and its so-called neoliberal order. (18) The asymmetries run beyond the usual problem of state subsidies, from that of states being tempted to tilt markets in favor of SOEs (producing a sort of systemic corruption in markets driven systems), to that of issues of interference with sovereignty when SOEs serve as the apex enterprise in global production chains. (19)

The legal status of an SOE varies from being a part of government to being a stock company with a state as a regular stockholder. (20) But their purpose--national development and the projection of economic power abroad--has remained constant, though with quite distinct differences in emphasis and application among states inclined to use them. (21) The regional variations are quite contextually rooted and historically driven.

European models from the 1980s were driven by the principles of free movement basic to the EU treaties, within the context of desocialization from the 1980s. (22) The contemporary approaches of European states represent a long dialogue (sometimes quite strident) between market-driven states and the brand of market-rejecting European Marxist Leninism that characterized the old Soviet Empire and its satellites in Europe. The apex of this European flirtation with robust SOE-driven economies occurred through the 1970s (23) with substantially different approaches to "socialism" and state management of economic activities across democratic Europe, in contradistinction to the central planning economies of the Soviet Union with a negligible private sector. (24) By the end of the 1990s, that system was in the advanced stages of dismantling. The dismantling of SOE-driven economies was propelled both by the fall of the Soviet Union and by the rise of a level- and unsubsidized-markets ideology within the jurisprudence of the European Court of Justice and reflected in the policies of the institutions of the European Union. (25) The emerging rules constraining state aids reduced the value of state ownership and its relevance, and economic integration made the consequences less drastic.

The Nordic states are a current driving force in European SOEs, under the so-called policy of Nordic Capitalism. (26) Nordic Capitalism is guided by principles of profitability and exemplary responsibility--profits rendered to the state and the state...