Are you underestimating human rights risk?

Legal actions and sanctions against companies over human rights issues are increasing worldwide, and Corporate Malaysia should wake up to this risk before it’s too late. A check of the Withhold Release Orders (WRO) list issued by the U.S. Customs and Border Protection (CBP) included four companies from Malaysia as of December 2020.

The WRO effectively prevents imported goods from entering the United States if suspected to be produced by forced labor. Based on the updated active list, Malaysia currently has the second highest number of companies in the WRO – second to China.[1] On 12 January 2021, the UK and Canada became the latest jurisdictions to impose new policies on imports as measures to combat forced labor and human rights violations.[2]

For unprepared companies, receiving a WRO or import sanction can be costly not least for the impact to the company’s future earnings. Failure to identify and respond to human rights issues will lead to costly and disruptive legal actions, cause investor divestment, negative publicity, reputation damage and significant financial loss. The damages cause by poor human rights risk management have a perpetual effect that will take companies tremendous effort and resources to repair.

Unfortunately, many business leaders in Malaysia tend to underestimate human rights risks and the impact on their companies until the damage is done. Just refer to several widely reported human rights cases that emerged out of Malaysia recently, which were brought to light because of the COVID-19 contagion among migrant workers.

A jarring example is the case of Top Glove Corp, which drew national and international attention when over 1,000 of the company’s contract workers were infected giving rise to community spread. Investigations revealed the source of the contagion was found in the housing facilities provided to its workers. Subsequent enforcement operations in five States — Perak, Kedah, Kelantan, Negeri Sembilan and Johor – resulted in the Ministry of Human Resources (MoHR) opening 19 investigation papers against six companies related to Top Glove Corp under the Workers’ Minimum Standards of Housing and Amenities Act 1990 (Act 446).[3]

The impact to the company was immediate. Top Glove’s shares declined 17% with about RM11 billion in market capitalization reportedly wiped out. The glove maker had also spent over RM1 billion, more than half its FY2020 earnings, repurchasing its own shares.[4]

Implications for Corporate Malaysia

These cases show that managing human rights is not only about doing the right thing, it is also about protecting the bottom line. Corporate Malaysia must acknowledge that every business, partnership or sourcing decision entails significant questions about potential human rights issues.

This reality demands a shift in thinking, away from traditional risk-to-business concerns and towards non-financial risk-to-people concerns.

Human rights risk goes beyond working conditions for workers to also encompass aspects across the enterprise, including suppliers and partners in the value chain, acquired businesses or activities in new global markets and regions, project financing, loans, asset-management services, and more.

Awareness of human rights across the organization and prioritizing them is only the beginning of the governance process. Following KPMG’s strategic 7-step approach to risk analysis, business leaders and boards should consider the following guide to enhance and prioritize their management of human rights risk:

1. Set the tone at the top by appointing a board member or board committee with responsibility for human rights;
2. Ensure boards and leaders are committed to respecting human rights and to challenging traditional assumptions about corporate responsibility;
3. Set up a cross-functional working group that includes the sales, procurement, operations, legal, ethics, safety and HR functions to implement a human rights policy;
4. Build human rights actions into annual business-unit plans and ensure that accountability sits with business unit leaders;
5. Integrate human rights risks into risk management across different business functions;
6. Monitor the effectiveness of systems to manage and respond to human rights risk and establish appropriate grievance and remediation processes;
7. Ensure a clear line of reporting to the board and leaders on human rights risks and impacts so serious cases are escalated rapidly.

The COVID-19 pandemic has amplified a global movement driven by investors and consumers for companies to put purpose over profit. As expectations and requirements to improve human rights risk management grow, Corporate Malaysia should explore new ways to identify, manage and report on potential issues that can negatively impact the company. Examples have shown that business leaders underestimate this risk only at their peril.