This paper was Prepared for Symposium: Sovereign Conduct on the Margins of the Law: Default, Terrorism, Cybercrime, Tax Evasion and State Owned Enterprises Organized by the Vanderbilt Journal of Transnational Law, Vanderbilt Law School, Nashville, TN, 17 February 2017. This past summer, the Working Group on the Issue of Human Rights and Transnational Corporations and other Business Enterprises delivered its 2016 Report to the U.N. Human Rights Council. The focus of that report was the relationship of states and state owned enterprises to the state duty to protect and the corporate responsibility to respect human rights at the core of the United Nations Guiding Principles for Business and Human Rights. Part II develops a deep analysis of the 2016 WG Report, interrogating its conceptual framework and its implantation programs. Part III then briefly considers the work left to be done: from conceptual lacunae to implementation. It consists of a set of ten (10) challenges and recommendations for further development. These recommendations and challenges suggest that issues of corporate personality, of sovereign immunity, of asset partition, and of the mania for compartmentalization that marks certain approaches to global economic and financial regulation may well hobble the work of embedding human rights within the operation of states as owners and SOEs as public enterprises. More importantly it suggests the difficulty of the current strongly held consensus that the focus of regulatory governance must be grounded in and through a formally constituted enterprise, the SOE, rather than focusing regulation on economic activity irrespective of the form in which it is undertaken. Until these conceptual issues are considered the regulation of economic activates—SOEs, supply chains, multinational corporations, will remain elusive.

1. Between State, Company, and Market:
A Preliminary Engagement on the Business
and Human Rights Obligations of States and
State Owned Enterprises (SOEs)
Larry Catá Backer
Principal, Coalition for Peace & Ethics; W. Richard and Mary Eshelman Faculty
Scholar, Professor of Law and International Affairs, Pennsylvania State University
Prepared for Symposium:
Sovereign Conduct on the Margins of the Law: Default, Terrorism, Cybercrime, Tax Evasion and State Owned Enterprises
Organized by the Vanderbilt Journal of Transnational Law
Vanderbilt Law School, Nashville, TN
17 February 2017

2. Core Issue:
• How do institutions fit old conceptual models into new realities quite remote
from the principles for which the old model was developed?
• Old Model: (1) Model of the state; (2) Model of the enterprise
• Producing principles grounded in the notions that the public and private functions of the
state were distinct and separable.
• Structural consequence produced walls:
• between shareholder and board power (veil piercing)
• between states and enterprises and among them as autonomous legal persons of differing
power (asset partitioning and sovereign immunity)
• between the regulatory and ownership power of states
• Emerging realities challenge the viability of the old framework where states in
global production:
• become a subsidiary actor, producing goods and also supplying the means of production
(local security and regulatory structures)
• use their private commercial activities (1) as a regulatory instrument at home and (2) as a
means of projecting their policy and regulatory structures abroad

3. Roadmap
Part I: Problem—SOE hybridity and CSR
Part II develops a deep analysis of the 2016 WG
Report,
• interrogating its conceptual framework and its
implantation programs.
Part III then briefly considers the work left to be
done: from conceptual lacunae to implementation.
• Ten (10) challenges and recommendations for further
development.
Conclusion
• Moving Forward to where?

4. On State Duty and SOE Responsibilities

5. The Contemporary Faces of SOEs
• State Owned Enterprises (SOEs)
• Long history producing a malleable concept and useful tool
• Legal status varies: from government department to classic stock companies.
• National Development and Projection of economic power abroad
• European Models from the 1980s
• De-socialization; European Union and Free Movement as a constraint on state aids
• Nordic Capitalism: profitability and exemplary responsibility
• Chinese Models from the 1980s
• Socialist modernization; Go-Out Policies 走出去战略; Internationalism and
production management
• Central Inspection Group inspection of the SASAC's Party Group and the Party Group
of the Central SOEs.
• It found that some enterprises blindly copied Western corporate governance models,
weakening Party leadership, the "articles of association of some central enterprises do not
clearly specify the requirement of Party building"; it was pointed out to many central
enterprises "that discussions of major issues do not go through the Party Committee Meeting
or use instead use Party/Government joint meetings etc"
• Developing States
• Internal development and control of resources; state planning and macro economic
policies

6. The Problem:
SOE CSR and Human Rights Compliance
• Legal framework for SOE governance underdeveloped at national and international levels
• Developing multilateral frameworks
• UN Guiding Principles Business and Human Rights
• UNGP ¶ 4“States should take additional steps to protect against human rights abuses by business enterprises that are owned or controlled by the
State, or that receive substantial support and services from State agencies such as export credit agencies and official investment insurance or
guarantee agencies, including, where appropriate, by requiring human rights due diligence.
• OECD framework: Guidelines on Corporate Governance of SOEs.
• I. Rationales for state ownership
• II. The state’s role as an owner
• III. State-owned enterprises in the marketplace
• IV. Equitable treatment of shareholders and other investors
• V. Stakeholder relations and responsible business
• VI. Disclosure and transparency
• VII. The responsibilities of the boards of state-owned enterprises
• U.N. Working Group and OECD considering application of multilateral soft law frameworks to hybrid entities—
SWFs and SOEs
• Problems remain:
• Corruption
• Inefficiency
• Suspicion that SOEs represent projection of public power by other means
• View of SOEs as vehicles through which legalization of CSR and human rights responsibilities might be undertaken

7. Framing the Issue in Context:
SOE CSR and Human Rights Compliance in Multilateral Public
and Societal Spheres
• Summer 2016:
• Working Group on the Issue of Human Rights and Transnational Corporations
and other Business Enterprises delivered its 2016 Report to the U.N. Human
Rights Council.
• Focus of that report was the relationship of states and state owned
enterprises to the state duty to protect and the corporate responsibility to
respect human rights at the core of the United Nations Guiding Principles for
Business and Human
• February 2017
• 45th Presidency announces changes in approach to multilateralism
• China uses its SOEs as central element of One Belt One Road
• IGWG moves forward on Comprehensive Human Rights Treaty

8. The Human Rights Regulatory Universe

9. 2016 Working Group Report: Normative Framework
• Section I (Introduction pp. 3-7)
• (a) the background, aims and outline of the report,
• (b) defines an SOE for its purposes,
• (c) considers the role of SOEs in the larger global economy, and
• (d) defines the scope and limits of the report.
• Section II (pp. 7-12): the normative policy framework
• (a) the state duty to protect against abuses by SOEs,
• (b) the SOEs own Pillar II obligations independent of the state's duty under national and
international law, and
• (c) the possible link between corporate governance and human rights.

10. 2016 Working Group Report: Operationalization
• Section III (pp. 12-20) framework for operationalizing the state's duty
under UNGP Principle 4.
• (a) setting expectations,
• (b) mechanisms to set and manage expectations through ownership arrangements,
• (c) the relationship between the state and SOE boards of directors,
• (d) oversight and follow up mechanisms,
• (e) capacity building obligations,
• (f) imposing human rights due diligence obligations on SOEs,
• (g) disclosure requirements, transparency and reporting, and
• (h) developing effective remedies.
• The last, Section IV (pp. 20-23) brief conclusion and recommendations.
• directed separately to (1) states, (2) SOEs, (3) national human rights institutions, (4)
international organizations, (5) the UN human rights system, (6) civil society and
academia, and (7) business organizations

11. From Policy Pitfalls to Challenges

12. Policy Challenges 1: SOE Definition as
Impediment
• First, the reliance on the OECD SOE
definitions and framework is
troublesome because it does not
mirror emerging economic realities.
• Economic activity and not its forms,
should guide the framework that
shapes the state duty to protect as a
direct obligation when undertaken
within a home state, and subject to
the requirements of the 2nd pillar
when undertaken abroad.

13. Policy Challenges 2: Disjunctions
• Second, the current approach leaves undisturbed the startling disjunction
between the broad scope of responsibility to respect human rights in Pillar
2, and the quite variegated scope of state duty to protect human rights in
Pillar 1.
• This disjunction is only augmented where the state owns and operates
enterprises engaged in economic activity.
• The state duty might well extend down to its enterprises
• The corporate responsibility ought to extend up to the state
• Critiques:
• Framework is altogether too strongly grounded in European historicism and ignores
the robust development of a new form of SOE and SOE-state relationship within
modern Marxist Leninist states.
• Grounding in institutional formalism tends to ignore and marginalize the object of
the regulatory management goals of this effort--the management of economic
activity in whatever form it is undertaken .

14. Policy Challenges 3: Inbound vs. Outbound Duties
• Third, there is little mention of the ways in
which the application of both state duty and
corporate responsibility might vary from the
home to host state, and from application to
apex SOE and then downstream to supply
chain partners.
• The use of extraterritoriality, and a BIT-inspired
internationalization of local law applied more
of less normally everywhere hardly suffices.
• The current National Action Plan process only
highlights and deepens the contradictions--
fostering a "not in my backyard" attitude that
permits developed states to impose stricter
standards to overseas conduct than to the
conduct of their own apex corporations within
their home territories.

15. Policy Challenges 4: Extraterritoriality
• Fourth, the continued obsession with extraterritoriality as a sort of
means of papering over governance failures down supply chains
ought to be reconsidered.
• First it exacerbates the unequal relations among states.
• Second it tends to marginalize the voices of developing states, states
where the bulk of human rights wrongs occur.
• Third, it serves as an impediment to development by substituting
foreign state power for the development of indigenous capacity.

16. Policy Challenges 5: Active Shareholding
• Fifth, the focus on active
shareholding and SOE autonomy
creates challenges to the integrity
of global markets and its
regulatory governance.
• Bumps up against principles of asset
partitioning
• Ownership steering by the State
Finland (regulatory also the owner)
• At its limit, a strong active
shareholding by states--operating
by analogy to the controlling
shareholder of a closely held
enterprise--can collapse the
distinction between state and
enterprise.

17. Policy Challenges 6: Sovereign Immunity
• Sixth it seems odd that sovereign immunity principles ought to drive
the conceptualization of human rights in business conduct project of
the UNGP.
• Result is policy distortion in the pursuit of coherence and legal
harmonization.
• Time to detach sovereign immunity from SOE human rights
duty/responsibility concepts.
• Best Case: abolish sovereign immunity in all respects from both the
exercise of the state duty to protect human rights with respect to its
ownership of SOEs, and to eliminate sovereign immunity entirely form
SOE activity.

18. Policy Challenges 7: Regulatory Incoherence
• State duty as a regulatory in
character and SOE regulatory
obligations are not consistent
• Product of an unnecessary
constraint, grounded perhaps in an
unfortunate conflation of the
differentiation among second pillar
organizations (as objects of state
duty), and what should be a unitary
approach to state duty.
• Produces tensions as well
between the investment and
development activities of a state
and its operational economic
activities through SOEs.
• SWFs; Development Mechanisms

19. Policy Challenges 8:Hierarchy and Legalization
• Eighth, the price of legalization may be high.
• suggestion that the UNGP Pillars are hierarchically arranged, and that the state duty
pillar invariably supersedes the corporate responsibility pillar when the two share
governance spaces ought to be rejected.
• Where the scope of the state duty is considerably narrower than the
autonomous corporate responsibility to respect, the result is a diminution
of the scope of human rights consideration rather than its augmentation.
• There might be little comfort in the knowledge that what this narrowing
"buys" is "legalization" of the obligation--to the extent that the state itself
permits remedial mechanisms for its own failure of duty under Pillar I
• The reality is that the state tends to undermine the broader corporate
responsibilities of its SOEs under the Second Pillar through assertion of the
legal constraints of its obligations under the 1st Pillar

20. Policy Challenges 9 Development
• Ninth, the issue of capacity building
must be understood not merely as a
methodological issue but as an issue
at the core of development.
• Disproportionate negative effects on
poorest states and states with weakest
governance capacities
• States that require substantial efforts
at capacity building also may
require the funds necessary to
effectively commit resources to the
development of capacity.
• SOEs from developing states are less
capable of these CSR strategies

21. Policy Challenges 10: Reporting
• Tenth, the problem of the meaningfulness of data and data driven
disclosure and transparency systems remains unexplored.
• This exacerbates a core problem of the UNGP built around narratuve
disclosure
• That marks current efforts that criticize the narrative approach to
environmental, social and human rights reporting as ineffective.
• Renew the call for the development of financial statement based
reporting mechanisms for the value and cost of environmental,
social, and human rights compliance and their failures to comply.

22. Conclusion
• SOEs sit between state, market, and company.
• The Hybridity of SOEs—between state and market—
poses the most interesting set of conceptual issues
for state based but market driven economic and
regulatory agendas.
• Issues of corporate personality, of sovereign
immunity, of asset partition, and of the mania
to compartmentalize that marks certain
approaches to global economic and financial
regulation may well hobble the work of
embedding human rights within the operation
of states as owners and SOEs as public
enterprises.
• Confuses lines of responsibility between the
regulatory state and the state as property owner
• These issues suggest the difficulty of the current
strongly held consensus that the focus of
regulatory governance must be grounded in and
through a formally constituted enterprise, the
SOE, rather than focusing regulation on
economic activity irrespective of the form in
which it is undertaken.