Corporate Social Responsibility and Joint Venture Governance—the Forgotten Issues

The purpose of this article is to consider the relevance of corporate social responsibility to joint operating agreements, host government agreements and the governance of joint ventures in the oil and gas sector, and its impact on the joint venture’s relationship with the state where the joint venture operates. ‘Corporate social responsibility’ refers to the evolving concept that businesses owe duties of care to wider society beyond their employees, shareholders and contractual counterparties for the impact that their global business operations may have on the environment and human rights. It is directly connected with the so-called ‘social license to operate’ which society expects such companies to observe in their business operations. Oil and gas companies are under extreme pressure to respond to this agenda because their operations regularly have significant environmental impact, either in terms of direct pollution or carbon emissions, and those operations may take place in countries with poor human rights records. The same operations generate significant revenues which are returned to shareholders and pension funds that are increasingly themselves under pressure to defend the sustainability of their investments.¹

Corporate social responsibility extends to a very wide range of potential concerns and societal issues. Environmental protection and climate change are probably the most significant, but oil and gas companies currently must take into account civil society initiatives on a range of issues such as child labour, modern slavery, the trade in illegal forest products, anti-bribery and corruption, disclosure of government revenues and human rights generally; many of these initiatives have resulted in specific country or multistate legislation.² Emerging foci of civil society attention include racial and gender inequality as well as economic inequality and access to employment opportunities.

The article will not discuss the detail of the legislation, multilateral conventions, statements of good practice and guidelines which have been proposed or implemented by the United Nations, other multilateral organizations and non-government organizations as part of the corporate social responsibility agenda. This article will discuss the challenges joint ventures will face in deciding how to meet the duty of care which United Nations and European Union propose to impose upon businesses so that those businesses actively check for, report on and remediate human rights, environmental and governance issues arising in the scope of their business operations. It will consider how liability for any failure to discharge that duty of care will be allocated, between the business operator, the other participants, their parent companies and the host state, in the context of the joint operating agreements and host government agreements that presently govern their operations. It will consider the role of the host state in the management of the joint venture, and therefore the host state’s share of responsibility for compliance with the new legislation.

The corporate governance applicable to joint ventures, particularly unincorporated versions, creates very specific issues with respect to managing corporate social responsibility. The joint venture in the oil and gas sector is not merely a mechanism by which several investors can own an interest in a single business run by the nominated operator. The participants actively negotiate and agree upon the scope of the business operations of the joint venture, voting in the relevant management committee to approve annual programmes and budgets for it, setting its direction and positioning it with respect to corporate social responsibility as well as all other relevant business considerations. Their guidance of the business and the scrutiny of its outcomes come much closer to the ‘hands-on’ management of the Board of Directors than a general meeting of shareholders. But like a shareholder meeting, each participant’s leverage in the management committee is proportionate to its shareholding. As a matter of English law, the representatives and the companies they represent on the management committee of the joint venture do not usually owe each other or the joint venture any fiduciary duty, still less any fiduciary duty to any third party, in contrast to members of a partnership.³

Understandably, the United Nations Human Rights Council and EU have taken the approach that enterprises exercise their control through the relevant company board of directors, being the body responsible for the direction of the business and deployment of its resources. This is an appropriate starting assumption for domestic business but is not directly applicable to international joint ventures commonplace in the oil and gas and mining sectors.⁴ Simply put, the board of directors of any one joint venture participant does not exercise direct control over that joint venture unless that participant also has de facto control of the joint venture’s management committee. From a governance perspective, the joint venture’s impact on the environment and human rights is ultimately decided by its management committee (commonly described as the ‘operating committee’), for which reason it is essential for the joint venture participants to negotiate and agree upon a strategy for corporate social responsibility for the joint venture to adopt.

Since the publication of the UN Guiding Principles on Business and Human Rights in 2011,⁵ joint ventures may have taken the view that corporate social responsibility could be left to the joint venture operator to implement and report upon, in the same way that it implemented and reported upon health and safety performance.⁶ After all, the specific technical requirements for compliant petroleum operations are dictated by local law and are best left to the operator. For several reasons, this will not work as a strategy for managing corporate social responsibility in the context of the new legislation in the form of the current drafts.⁷

First, the country of incorporation of each joint venture party may, in response to the UN and/or EU initiatives, impose duties to report on the environmental and human rights performance of its global operations, including non-operated businesses. It is increasingly likely that these duties to report will be enhanced by duties of due diligence, requiring such companies to take proactive steps to avoid or mitigate environmental and human rights impacts of such businesses.⁸ As will be discussed in relation to the UN Human Rights Council deliberations on a binding instrument on transnational corporations and other business enterprises with respect to human rights⁹ and the proposed EU Directive on Corporate Due Diligence and Corporate Accountability,¹⁰ the legislation is unlikely to provide any specific guidance on how responsibility and liability will be allocated between joint venture participants. It will likely not address directly the question whether a non-operator has responsibility for the businesses which it partly owns through a joint venture, whether or not they are able to exercise control via the joint venture’s management committee on the content and manner of performing joint operations.

Secondly, there is a trend in several legal systems to permit parent companies whose subsidiaries are accused of human rights or environmental violations in other jurisdictions to be held responsible for failing to detect and address those violations. To a greater or lesser extent, this trend prioritizes environmental and human rights protection over the principle of corporate separateness, limited corporate liability and the corporate veil.¹¹ In some measure, the trend takes its lead from the United Nations ‘Guiding Principles on Business and Human Rights’ on the issue of human rights and transnational corporations and other business enterprises. This development was entirely unforeseen by the drafters of the model and executed joint venture agreements which now govern the operations most likely to be the target of such parent company liability. How the joint venture agreements may be interpreted in relation to this legislation is considered below.

Both the UN Binding Instrument and the EU Directive will impose duties on states to introduce legislation compatible with that state’s jurisdiction. There are no guarantees therefore that the new legislation adopted by one state will be compatible in terms of operational detail with the legislation of any other state.

This is bound to cause concern both for operator and non-operator parent companies; on the one hand, the operator’s parent company will wish to ensure that operations are conducted in a manner that minimizes the risk of such liability being incurred by it in its jurisdiction, with the result that it may insist upon the joint venture adopting policies of reporting and due diligence consistent with the laws of its country of incorporation.

By contrast, the parent companies of the non-operators face a dilemma; should they, through their non-operator participants, insist that the operator enhances its environment and human rights performance to be consistent with the expectations of each parent companies’ home state laws? Should they insist that the joint venture agreement contains additional audit rights and/or seek to appoint secondees to key roles in the Operator organization and/or more control over the operator conduct of operations via the joint venture management committee?¹² Should the joint venture simply adopt a strategy of following the most onerous applicable legal regime? How acceptable that might be to the joint venture, given the implications in terms of cost and disclosure of information, will depend on whether the terms of the joint venture agreements would ‘socialise’ any liability incurred by any participant to the others, creating...