Multinational corporations

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The problems with instituting effective legal control of multinational corporations are complex. Arguably there exist at least three major regulative dilemmas: who should regulate; what specific activities or areas should be regulated; and how should the regulations be enforced10. Firstly, who should regulate the activities of MNCs? Should it be nation states, international organisations or non-government organisations? Should it be the corporations themselves through internal codes of conduct? Or should it be all, or maybe a combination, of the above?

Nation states and the international community are struggling to establish an effective regulatory regime of legal responsibility11. There are a multitude of existing domestic and transnational codes and principles in the area of trans-border corporate regulation, but the four major ones are the OECD’s Guidelines for Multinational Enterprises, the International Labour Organisation’s Tripartite Declaration of Principles concerning Multinational Enterprises, the United Nations Global Compact and the Draft Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights12..

Until 1993, the UN had a Centre on Transnational Corporations (UNCTC), an inter-governmental body charged with developing a code of conduct for MNCs. In 1998 a draft code of conduct was produced which, while voluntary, would have prohibited some MNC activities. The draft code was gradually watered down and a final version never approved, mainly due to pressure from business and the US government. In 1993, UNCTC was closed down and UN Conference on Trade and Development (UNCTAD) became the focal point for UN work on MNCs.

Another UN initiative, the UN Global Compact (UNGC) was launched in July 2000. The Compact involved nine principles based on the Universal Declaration of Human Rights, the Rio Principles on Environment and Development and the ILO’s Fundamental Principles on Rights at Work. The UNGC asked companies who join to make three commitments: to publicly advocate the principles and the Global Compact; to post on their website concrete steps they have taken to respect the nine principles; and to join in partnership projects of benefit to developing countries.

UNGC was hailed as a new partnership between the UN and international business. Problematically, however, there are no enforcement mechanisms if companies violate any of the nine principles, and there is no indication to show how compliance will be monitored or verified13. The international legal system does as not fully recognise MNCs as a subject and a person. This international non-status makes them unaccountable directly to international laws. Their undesirable acts cannot constitute a breach of international obligation as the breach is not attributable to an international legal person14.

Although it might be expected that an international code would place obligations directly on MNCs, this would be difficult. States are extremely reluctant to grant full legal personality to corporations, particularly if this allows MNCs to participate in treaty-making on the same terms with states and claim rights under international law. Further, it must be determined which MNCs receive international legal personality15. Furthermore, past international attempts to impose have been seen by some governments as imperialist and protectionist.

It is difficult to balance the legitimate right of governments to exploit their comparative advantages while protecting the rights of all citizens16. International regulatory systems to date have been voluntary, lacking an enforcement mechanism, government commitment to them has been weak, and there has been no easy mechanism to initiate action. Thus, like the UNGC, they have failed. Attempts at legal control by nation states have not fared much better. MNCs superior economic position allows them to ‘play countries off’ against one another.

They are uniquely positioned to exploit regulatory disparities that exist in a world where the multiplicity of countries espouse an equally diverse range of economic policies17. Furthermore, developing countries – the site of most multinational activity – are eager to attract FDI, and often resist or ignore regulations they consider detrimental to attracting such investment. A fertile investing environment is given higher priority than the promotion of law. In the cases where they do wish to enforce law, the corporation is often too powerful for the small and poor host nations to hold accountable.

Hence, MNCs typically just go where it’s most advantageous. Developed countries have moved to impose stricter legal control. Australia and the U. S introduced Code of Conduct Bills for consideration in 2000, and the Netherlands passed corporate activities guidelines in 2003. But these acts fail to reach the real violator, providing only superficial justice, and in any case, corporations simply relocate if they encounter regulatory issues in a country of operation.

MNCs have long outgrown the legal structures that govern them, reaching a level of transnationality and economic power that exceeds the power of domestic laws alone to impose basic legal and human rights norms18. Private internal codes of conduct have been touted as a possible regulatory solution. Internal codes are popular with MNCs in the textiles and clothing industries, including Gap, Levi Strauss and Nike, as a means of addressing labour rights in developing countries. In fact over 60 per cent of the top 500 companies have codes19. Internal codes offer a number of advantages.

Firstly, in countries where law enforcement mechanisms are weak, self-regulation may be more persuasive and effective. Secondly they are efficient, as they avoid time-consuming negotiation processes inherent in national and international instruments. They are also flexible, allowing customisation to individual companies and countries. The key issue with internal codes relates to the weakness of enforcement provisions and compliance mechanisms. Usually the enforcement, compliance and monitoring provisions are either inadequate or simply non-existent20.

The codes are not legally binding, so in effect flimsy. Furthermore, the codes often don’t apply to subcontractors or subsidiaries, or universally across all operations, and they are costly to implement21. The elaborate rhetoric of company codes are often no more than a public relations tool. Internal codes lack bite. As UK Foreign Secretary Jack Straw said, “we must do what we can to encourage corporate responsibility, but we cannot leave companies to regulate themselves globally any more than we do in our national economies”22.

Non-Government Organisations (NGOs) offer another avenue of regulation. However like an internal code, NGO regulation would be voluntary, and thus legally impotent. So to the second dilemma: what are the exact areas or activities which are to be regulated? This question is important because MNCs, nation states and NGOs, for example, may not concur on the precise parameters of regulation. The classic concept of corporate activity is profit-maximising. In fact, corporate managers owe a fiduciary duty to their shareholders to provide ever-increasing returns.

Milton Friedman went as far as to pronounce that the social responsibility of business is to increase profits, subject only to respect for some laws and some ill-defined ethical principles23. This sentiment is out of touch with current attitudes, however no one could reasonably assume to burden corporations with an overarching responsibility for national welfare. So exactly what activities need to be regulated? Human rights activists demand extensive regulation in all matters affecting public interest.

They believe there is a need for social and political activity to be controlled, as it is undeniable that MNCs have a dubious history of ignoring the ‘greater good’ in search of greater profits. They argue it isn’t possible for private actors whose actions have such a strong impact on the enjoyment of social standards by the larger society to be absolved from a duty to uphold international human rights standards. MNCs, on the other hand, would expect all-pervasive deregulation, and plead for regulation only in those areas where there is a direct conflict between the interests of the company and the state.

They would fervently oppose any suggestion of an obligation to uphold social, cultural, political or labour standards to any persons besides those employed by the enterprise, citing such duties as the responsibility of the national government, not an entity for profit maximisation. A simple human rights standard ignores not only the influence MNCs can exercise in the political arena, particularly, but not exclusively, in developing countries, but also their adeptness at manipulating jurisdictional rules and regulatory differences between states.

Obviously there is significant divergence in the expectations of the role of MNCs, and it remains highly unlikely that the opinions of MNCs, states and human rights activists will converge in the near future24. The third major dilemma is how should regulations be enforced, that is, how should those MNCs that fail to respond to regulatory initiatives be dealt with? At present the responsibility of corporations is defined by norms of sustainability, accountability and transparency, not by rules of law. MNCs are technically obliged to uphold international law, but major problems arise in regard to enforcement.

The role of law is crucially important if legal control is to be effective. “Kicking asses” and “damning consciences”, says one critic, are compelling deterrents in the power of the criminal law to be effective against individual behaviour, but not that of the corporation25. The question of enforcement would need to be analysed differently depending on the answer to the first question of who provides regulation. We’ve already seen that States and NGOs are often unable to control MNCs alone, so for the purposes of brevity we’ll exclude them, leaving us with the how of international enforcement.

International law can seriously undermine the sovereignty of national law, which is a huge barrier to universal enforcement. For example, what would happen if a national law compelled discrimination on grounds of gender or religion, or prohibited trade unions? To what extent should a corporation be legally obliged to break a countries domestic law to avoid penalty from international law, and would they have just cause in escaping penalty if they refused to break the national law?

In a similar way the intermediary role of governments could seriously undermine international law, as some governments may be deliberately ineffective in enforcing regulation for their own selfish reasons. Enormous resources would be needed to undertake international administrative and monitoring responsibilities, and likewise, developing countries may lack the resources and capacity to comply with any commitments required of them under an international mechanism.

In addition to the above problems, there are also difficulties relating to the spheres of shared responsibility between parent corporations and subsidiaries26, at what level of the corporate ladder are penalties to be enforced, and to the nature and extent of the punitive measures (eg. civil liability, naming and shaming, criminal sanctions, managerial sanctions etc.. ) to be applied in the event of a breach.

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