Saturday, January 19, 2008

Values Morality and the Regulation of Transnational Economic Activity

The ethicist Randy Cohen, whose column appears weekly in the New York Times Magazine, recently wrote on the ethics of transborder economic transactions. Both the problem and the advice suggest the radical changes that have been occurring below the level of formal regulation in the development of “community standards” for expected behavior amongst business enterprises. (Cohen 2008).

The problem posed was simple:
To afford to start a new business, I must use low cost foreign manufacturers, some of whom likely maintain unsafe working conditions. It is difficult to be certain from here. In the relevant country, many workers doing the tasks I’ll require receive low wages and face serious health problems including chronic colds, fever, stomach disorders, chest pains, and tuberculosis. Is it wrong to start my business sin this way? (Name withheld New York). Id.

This was a problem that would not have existed even twenty years ago. Certainly, from a legal perspective, there would be no problem at all. Consider the nature of the transactions: one enterprise is seeking to buy a product from another enterprise. From the perspective of law, the focus is on the commodity and the legal documents memorializing the agreement between the parties would reflect that focus. The principal terms of a complete agreement between the parties would center on (1) the amount of product ordered, (2) the price of the good, (3) delivery terms, (4) payment terms, (5) representations and guarantees about the suitability of the product, and (6) remedies for breach. As autonomous entities responsible to their principal stakeholders (investors) and competing for larger and more profitable shares of the markets they served (firm consumers), neither would have invested much time or thought to the methods, objects or conditions through which either met their respective obligations under the contract.

Profit maximization in this narrow sense, not values, was understood as driving economic relations. And that understanding drove the law of economic relations. To the extent values mattered, they did so only at the margins. Businesses were entitled to presume that their counterparts also acted within some sort of acceptable moral parameters (at least acceptable within the society and culture in which they operated). Only when it was apparent that this was not the case—when a business knew that a potential relationship involved entanglement with a company known to have a bad reputation, would the contracting party be bound to think through the effects of entering into a relationship with that badly reputed firm. These notions were tightly bound up with the law of fiduciary duty in the United States and served as a foundation for appropriate behavior among business enterprise managers. Graham v. Allis-Chalmers Mfg. Co., 188 A.2d 125 (Del.1963) (“absent cause for suspicion there is no duty upon the directors to install and operate a corporate system of espionage to ferret out wrongdoing which they have no reason to suspect exists.” (Id., at 130).

And so, a quarter century or so ago, the ethical answer might have been simple: there is no positive moral obligation to ensure that the parties with which one enters into contractual relations treat their own workers decently. Indeed there is a moral obligation, grounded in respect for the autonomy of individuals and the entities they create, to avoid interfering with the affairs of people to entities with which one has only a limited and specific relation—in this case to purchase goods. The limits of their economic relations define and limit the extent of their moral obligations. However, were the contracting parties to become aware of conditions that violated standards of conduct that were meaningful to that party—for example, were the person seeking to manufacture good through another entity to know that a particular entity treated their workers so badly that the workers sickened—then, acting on that knowledge, action might be required. But there was no positive obligation to find out, nor an obligation to broaden the scope of contractual relations in contracts for goods to include this social component.

But today, the answer is different—both as a matter of values, and increasingly, as a matter of law. Mr. Cohen suggests that change, and also its limitations, in his response.
It is your moral obligation to see that those who work for you even indirectly—those from whose labor you profit, receive decent treatment. While wages and working conditions vary internationally, nobody’s idea of “decent” encompasses “chronic colds, fever, stomach disorders, chest pains and tuberculosis,” even in developing nations even where people badly need jobs. . . . (Id.).

Mr. Cohen then suggests that at a minimum, proceeding with this sort of business relationship would require monitoring—implementing the purchaser’s duty to participate in the development of the legal and economic relationships between the product supplier and the purchaser. For this purpose, monitoring might be done directly, or as Mr. Cohen suggests through certain middlemen—government or elements of civil society—to ensure fairness in hiring and working conditions. If that is not viable, it might make most sense to avoid foreign entanglements and hire labor domestically. Mr. Cohen summarizes the consequences of this approach to the problem: “What you may not do is simply throw up your hands at working conditions overseas or fob off this duty on those with whom you contract. You must strive to learn whose sweat provides your equity and how it is extracted.” Id.

But why is it immoral? Mr. Cohen does not suggest an answer. It seems self-evident to him that there is no other way of understanding the moral or ethical issue. There are some bases for supporting Mr. Cohen’s premise.

Jews and Catholics, for example, might suggest faith grounded reasons. For Jews it might be based on moral ramifications of Godliness elaborated in Leviticus, Numbers and Deuteronomy and implemented through the Talmud. Catholics might understand this obligation through a different elaboration of Godliness, grounded in the meaning of the Incarnation, Passion and Resurrection. (Backer 2008 and sources cited therein). Both might extract from faith in a particular vision of God and God’s relationship with humanity a set of precepts and conduct norms inherent in people seeking a closer relation to God—love of neighbor as the grundnorm of a values maximizing social and economic order. (Id.). Under these regimes, it is almost self evident that there is a “moral obligation to see that those who work for you even indirectly” (Cohen, supra) are treated morally. And, indeed, Catholic social thought has suggested that economic entities have a moral obligation to indirect employees. (Backer 2008, supra).

Yet, one does not need the comfort of faith to arrive at a similar conclusion. The last half of the 20th century has seen the rise of values based economics. Socio-economics, and particularly so-called binary economics, would infuse economic analysis with social justice values. (Backer 2008, supra). From either it might be possible to derive the idea that an economics that privileges objects (in the form of wealth or production or consumption) privileges things over people. That distorts both the understanding and measurement of welfare maximization. To correct that distortion, the focus of analysis must either focus on people rather then the objects of their consumption or must at least privilege labor and capital equally. In either case, economic relationships that take no account of the conditions of labor used to produce objects (or render services) would not be welfare maximizing in the sense in which such terms ought to be understood, and thus would be inefficient.

Law has taken a few short steps to privilege—or at least acknowledge—this position shift. Corporate social responsibility has exploded as a regulatory issue in the 20th century. Starting as an issue of the extent of the charitable obligations of economic entities—effectively an issue tied to the extent to which juridical entities might be able to act like natural persons—corporate social responsibility now serves as a proxy for a dynamic set of norms governing the way in which economic entities may engage in economic transactions. (Backer 2006). That transformation has paralleled the debates within economics over its own scope and character. Just as values economics has shifted the basis for understanding the nature and measurement of economic value for welfare maximization purposes, so has corporate theory begun to suggest an alternative to the traditional view that economic entities are inward looking institutions with obligations running only to its shareholders. Corporate social responsibility suggests a theory of enterprise operation grounded in the treatment of economic entities as institutional individuals with obligations to all other individuals with which it engages in transactions or interactions. Enterprise liability, piercing the corporate veil theories, extended jurisdictional theories, and extended notions of fiduciary duty are all tentative legal steps in the direction of extended obligation. But these are tentative steps indeed. (Id.).

And so, the ethical answer to the question is different in 2008. Economic relationships may now be judged by a different standard. This standard rejects the primacy of the object and a narrow understanding of scope of economic relations even at the level of discrete transactions (for example, transactions for the purchase of goods in return for payment). Instead, it suggests a model that looks at the effects of economic transactions in the context of all of the factors of the production of objects (labor and capital) and measures efficiency and wealth production from the perspective of individual stakeholders. Under this framework, the business of actors may not be disregarded by outsourcing any aspect of production.

But the connection between moral and legal accountability is never entirely consistent. And moral obligation not backed by consequences tends to be easier to evade—or postpone. Thus, the person who sought Cohen’s advice “hired an outfit in Uttar Pradesh [India] whose labor conditions are unknown to him. If the project advances he vows to travel to India to inspect the manufacturing facilities.” (Cohen 2008). This is an interesting result. On the one hand, the purchaser chose to adhere to the traditional model—he hired a supplier whose labor practices are unknown to him. Because the practices are unknown the purchaser can, under traditional models, assume the best until he knows otherwise. On the other hand, the purchaser appears (by implication) to have avoided hiring any outfit that might have been known to him to have labor policies that resulted in physical injury to the supplier’s workers. That advances the broadly understood social responsibility project, but within the traditional framework of economic relationships. Yet the most important aspect of the purchaser’s conduct was the last—that the purchaser intended to go to India at some point and inspect the operations of the supplier for himself. This represents a deviation from the traditional model. It is more than an acknowledgement of moral obligation—it is a suggestion that moral obligation will be imposed as a basis for arranging the relationships between supplier and purchaser.

There are certain implications from this conclusion that are worth drawing out.

First, the contemporary issue, then, is not whether an entity has an obligation, moral and legal, to monitor; the question is, what is the scope and nature of that monitoring obligation. If under the traditional standards, all entities were to mind their own business, under the new regime all people serve appear to serve as each other’s keepers. That new basis of relationship suggests that personal autonomy is less important as a value governing social and economic relationships. An implication of that change in the value of personal autonomy in social ordering may be that moral obligations are communal and not individual. The more important implication, however, is that moral obligations, as communal obligations that may trump individual desire, impose an obligation on individuals to monitor compliance with those communal obligations. (Backer 2003).

The Delaware courts have suggested that the extent of the legal obligation is inward looking—economic entities have an obligation to monitor the conduct of their own agents. Thus, for example, the law of fiduciaries has moved from a basis in presumptions of goodness and moral conduct to its opposite. As a consequence, the corporate law, at least, has begun to construct a series of positive obligations on economic entities in connection with certain conduct. The touchstone of this set of positive obligations is surveillance. The Delaware Supreme Court has most recently articulated the standard as follows:

We hold that Caremark articulates the necessary conditions predicate for director oversight liability: (a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention. In either case, imposition of liability requires a showing that the directors knew that they were not discharging their fiduciary obligations. Where directors fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities, they breach their duty of loyalty by failing to discharge that fiduciary obligation in good faith. Stone v. Ritter, 2006 WL 3169168, Supreme Court of Delaware (Nov. 6, 2006) (discussing In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 969 (Del. Ch. 1996)).

And indeed, the obligations to monitor for bad conduct are being extended to the agents of economic enterprises. (Backer 2003). Simultaneously, law is beginning to impose monitoring, reporting and disclosure requirements more generally. (Backer 2007).

Mr. Cohen suggests that the extent of the moral obligation to monitor is broader—extending to at least some entities with which an actor engages. Mr. Cohen, though, rightly understands that, for the moment at least, the moral obligation he identifies is effectuated only through extra legal means. Cohen identifies the growing and increasingly powerful networks of social actors who monitor economic activity. These entities can share the fruits of their monitoring to economic enterprises to help them meet their ethical obligations. That was the point of Mr. Cohen’s advice. At the same time they can be used against economic enterprises that fail to meet their moral obligations. That is a point I have made elsewhere with respect to both the suppliers of Gap, Inc. (Backer Oct. 29, 2007), Apple, Inc. (Backer June 16, 2006), and Walmart (Backer 2007a).

Second, it is likely that Mr. Cohen’s moral perspective is most likely to successfully find some expression in law through the construction of legally enforceable monitoring systems rather than through direct regulation of ethical obligations. (Backer 2007). American lawmakers understood this implicitly in the construction of the federal securities laws in the 1930s. The great idea under-girding those statutory systems was surveillance—systems of mandatory disclosure to both the state and to principal stakeholder communities (in the case of the federal securities law the investor community). Indeed, that system has become extremely useful in molding behavior beyond the original scope of those statutes. It has become a means through which disclosure is used to indirectly legislate behavior. (Backer Dec. 21, 2007) For example, under the Sarbanes Oxley Act (2002), publicly held companies were not obligated to adopt an ethics code for senior financial officers, but rather were required to disclose whether or not they had adopted such a code (Sarbanes Oxley Act of 2002, § 406). The object was not to impose ethics codes but to create a legal framework within which stakeholders could negotiate the extent and terms of such codes. (Backer 2002). The state chose the objective—ethics codes—but private actors were free to use the information as they liked in arranging their relationships. In a sense, then, monitoring regimes can serve as a framework for incorporating moral obligations within a legal structure of relationships between economic actors, without hardwiring any particular set of ethical standards in law. For those in search of avenues for the implementation of corporate social responsibility at a transnational level, international agreements for transparency, disclosure and information dissemination might be more effective as a means of hardwiring ethical obligations in the relationships between economic enterprises, than commanding obedience to any set of such obligations.


Graham v. Allis-Chalmers Mfg. Co., 188 A.2d 125 (Del.1963)

Larry Catá Backer, Values Economics and Theology: The Contribution of Catholic Social Thought and its Implications for Legal Regulatory Systems, Law at the End of the Day, Jan. 12, 2008.

----------, The Duty to Monitor: Emerging Obligations of Outside Lawyers and Auditors to Detect and Report Corporate Wrongdoing Beyond the Federal Securities Laws, 77 ST. JOHN’S LAW REVIEW 919 (2003), reprinted 53(4) DEFENSE L.J. 671 (2004). Abstract.

----------, The Sarbanes-Oxley Act: Federalizing Norms for Officers, Lawyer and Accountant Behavior, 76 ST. JOHN’S LAW REVIEW 897 (2002). Abstract.

----------, Global Panopticism: Surveillance Lawmaking by Corporations, States, and Other Entities, 13 INDIANA JOURNAL OF GLOBAL LEGAL STUDIES – (forthcoming 2007). Abstract.

----------, The Surveillance State: Monitoring as Regulation, Information as Power, Law at the End of the Day (Dec. 21, 2007).

----------, Economic Globalization and the Rise of Efficient Systems of Global Private Law Making: Wal-Mart as Global Legislator, 39(4) UNIVERSITY OF CONNECTICUT LAW REVIEW 1739 (2007a). Abstract.

-----------, Multinational Corporations as Objects and Sources of Transnational Regulation, LAW AT THE END OF THE DAY (Oct. 29, 2007).

----------, Multinational Corporations, Transnational Law: The United Nation’s Norms on the Responsibilities of Transnational Corporations as a Harbinger of Corporate Social Responsibility as International Law, 37 COLUMBIA HUMAN RIGHTS LAW REVIEW 287 (2006). Abstract.

----------, Corporate Social Responsibility and Voluntary Codes: Apple, its Stakeholders, and its Chinese Laborers, LAW AT THE END OF THE DAY, June 16, 2006.

In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 969 (Del. Ch. 1996).

Randy Cohen, The Right Hires, The New York Times Magazine, Jan. 13, 2008, at 18.

Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745, codified at various places in 15 U.S.C.

Stone v. Ritter, 2006 WL 3169168, Supreme Court of Delaware (Nov. 6, 2006).

Cheryl L. Wade, Racial Discrimination and the Relationship Between the Directorial Duty of Care and Corporate Disclosure, 63 U. PITT. L. REV. 389, 403–20 (2002).

No comments: