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Shell Wins; the World Loses

By Sara Murphy - Apr 17, 2013 at 10:53PM

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Shell prevailed in its landmark Supreme Court case. Will investors do what the judicial system won’t?

The Supreme Court sided with Royal Dutch Shell ( RDS.A -1.07% ) today in the landmark Kiobel v. Royal Dutch Petroleum case dealing with alleged corporate human rights abuses in the Niger River Delta. This decision constitutes a disgraceful victory for corporate impunity. Shell shareholders would be shortsighted to celebrate, and responsible investors have the power to do what the judiciary won't.

Dismissed, but not innocent
To be clear, the Supreme Court did not find Shell innocent of the accusations against it. Those accusations are for crimes against humanity, including torture and extrajudicial executions. Rather, the court found that the case could not be resolved in U.S. courts under a federal law called the Alien Tort Statute (ATS), because Shell is a foreign company that allegedly committed acts against foreign victims on foreign soil. Never mind that Shell is listed on the New York Stock Exchange and earned almost 20% of its 2012 revenue in the United States.

In the past, activists have used the ATS as an accountability tool for the worst corporate human rights abuses. Indeed, the groundbreaking 1997 Doe v. Unocal case -- which yielded compensation for victims of horrific abuse by security forces while working on a natural gas pipeline in military-ruled Burma -- was brought under the ATS. Today's result seriously curtails the future applicability of the ATS.

If your interest as an investor is purely in the bottom line, you might think this is a very good development. That kind of thinking could get you into trouble, though. I asked Bennett Freeman, senior vice president of sustainability research and policy at Calvert Investments, for his reaction to today's judgment.

"What's crystal clear here," Freeman said, "is that this decision is going to make it very difficult, if not impossible, to use the [Alien Tort] Statute for this purpose in the future. This was a very significant ruling." But Freeman emphasizes that the court's decision should in no way be interpreted as undermining a consensus that the international community long ago established: Business has a responsibility to respect human rights. Indeed, this responsibility is embodied in the United Nations' Guiding Principles on Business and Human Rights (link opens PDF).

A glimmer of good news
For as troubling as today's decision is, it's important to remember that Shell lost on some key points. The company had shamelessly argued that corporations are immune from the ATS, and the court didn't buy that. It's interesting how corporations want to enjoy the same rights as people when it comes to things like free speech, but none of the responsibilities of people when it comes to criminal liability.

Furthermore, the court's finding does not undermine the use of the ATS in cases of human rights abuses. It just requires a stronger connection to the United States. That means that other ATS cases currently working their way through the legal system, such as Earth Rights International's case against Chiquita (NYSE: CQB) for allegedly funding and arming Colombian terrorists, are still on track. That also means that the link from human rights violations to corporate liability remains.

A role for investors
Investors have tools available to them that subvert the courts entirely. Increasingly, activist investors are filing shareholder resolutions with corporations to pressure them to manage their human rights risks more effectively.

For example, Chevron ( CVX -0.68% ) is embroiled in a take-no-prisoners battle with its shareholders over a $19 billion lawsuit in Ecuador for its pollution of that country's rainforests. Last year, in connection with the Ecuador debacle, more than a third of Chevron's shareholders voted to strip the CEO of his other role as chairman of the board. Investors also continue to propose resolutions requesting greater transparency from Chevron on its decision-making process with regard to entering countries with poor human rights records. These salvos from shareholders are becoming increasingly difficult for companies to ignore.

Last month, the Institute for Human Rights and Business, in collaboration with Calvert Investments and the Interfaith Center on Corporate Responsibility, published a guide, "Investing the Rights Way," that helps investor to assess human rights risk. Bennett Freeman advises investors to treat human rights as a critical part of their due diligence process.

Takeaway
"The wrong takeaway for investors is that they don't need to worry about human rights risks or potential liability, or that somehow this is a blow against corporate responsibility," Freeman said. "The best takeaway is to realize that companies, and therefore investors, face human rights risks and share human rights responsibilities, and that has not changed one iota."

The Supreme Court gave Shell a pass on this one, thereby denying justice to people who have already suffered so much. Investors can and should demand better for their money.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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