Liability within corporate groups: Parent company's accountability for subsidiary human rights abuses

Multinational enterprises have outsourced production and distribution to layers of subsidiaries and contractors to expand into new markets and increase profitability. This compartmentalization of the enterprise is facilitated by company laws and has resulted in risk shifting, excessive risk taking and lack of remediation for those injured. Company laws in virtually all jurisdictions allow for corporate personality, which means that the law sees shareholders and the company, or the company and its subsidiaries, as separate entities with their own assets, rights and obligations. The law erects a firewall that makes claims against parent companies extremely difficult. In economic terms, this ‘separation principle’ means the exposure of investors is capped; there is limited liability as investors can limit their losses by keeping assets separated. Parent companies can pursue outsourcing without commensurate responsibility for losses caused by their expansive operations.

This chapter offers reference points to facilitate analysis, and reviews options for reform. Corporate accountability writings often recognize in the separation principle one of the most significant obstacles on the path to increased access to remedies. In terms of structure, Section 2 shows the difficulties posed by legal separation and discusses the corporate group as a legal and economic entity. Section 3 presents the current situation in law (company law, tort law, and other regulatory areas) and policy (international soft law, and national action plans on business and human rights). Section 4 covers proposals for regulatory reform and puts them into perspective by explaining the resilience of the principle and its deep ramifications.