Transnational Corporate Constitutionalism: The U.N. Global Compact, the OECD Guidelines for Multinational Enterprises and the Emergence of a Constitutional Order for Economic Enterprises
Larry Catá Backer
Abstract: The convergence of public and private law has emerged as one of the great legal issues of the 21st century. It touches everything from the regulation of state activity, to the character and effect of the activities of non-state actors—and particularly those amalgamations of authority organized as juridically distinct persons. At its core, it implicates issues of the character and nature of the state, the state system, and the division of power—political, economic, religious, social and cultural—among a number of actors of which the state is only one. Economic entities are increasingly seen as state-like actors requiring regulation at a transnational level; states seek to participate in domestic and foreign markets as economic rather than as political actors. Large multinational enterprises are increasingly able to self regulate. Simultaneously, the nature of the legal order among states and the principles within which states may constitute themselves have become increasingly regularized—the community of nations has begun to move from an acceptance of constitution as a means of organizing political communities to constitutionalism as a system for the regulation of the organization of non-state communities with political authority. This paper engages emerging principles of transnational constitutionalism as a basis for the organization and integration of economic enterprises. For that purpose, the paper considers the role of two influential efforts in the construction of a global enterprise constitutionalism—the United Nations Global Compact system and the Organization for Economic Cooperation and Development Guidelines for Multinational Enterprises. The paper starts with context, examining the rise and character of the conceptual elements of transnational constitutionalism and its applicability to functionally distinct communities—like that of business enterprises. It then examines the development of and current efforts to ‘operationalize’ the Global Compact and the Guidelines for Multinational Enterprises as two related substantive regulatory frameworks for the transnational governance of economic actors. It suggests their utility as a basis for a constitution of enterprise regulation. It also sketches the constitutional elements of these efforts and their potential limitations as constitutionalist frameworks. The paper ends with an analysis of the utility and effectiveness of these related normative frameworks as a basis for the elaboration of a transnational enterprise constitutionalism and as a regulatory framework for its implementation.
The body corporate, as concept and reality, has served society well as a basis for human organization. The use of the anachronism is deliberate. It is meant to suggest the broadest possible conception of corporation as an ordering unit for all manner of social organization, from the state, to subordinate economic and civil societies, to the organization of religion. (Kantorowicz 1957). Ancient notions were brought to what became the United States, where, for example, a body corporate and politic was defined as a “collection of natural persons joined together by voluntary action, or legal compulsion, by the authority of an act of a legislature consisting of either a special charter or of a general permissive statute to accomplish some purpose, either pecuniary, ideal, or governmental. The phrase "and politic" gives it public corporation status for political purposes as an administrative agency of civil government in a defined territory, and invests it with subordinate and local powers of legislation.” (Foundations of Colonial America 1973, 3:2586).
Extremely flexible and malleable, it has provided the foundation for all efforts to reify aggregations of individuals—from religion and ethnicity, to corporations and the state. This was famously expressed in the work of Harold Berman. (Berman 1983, 215). It was assumed a century ago in the United States that
The legal nature of the ordinary corporation has been dwelt upon because it is in exactly the same sense in which legal personality is attributed to it that the State, its creator, is conceived of by the analytical jurist as a person. Both are collectivities, both are regarded as the subjects of legal powers, that is, entities which possess and have the legal right to exercise these powers. In fundamental conception they are, as persons, identical in character. They differ only in respect to the extent of their powers and the legal source whence their powers are deemed to be derived. (Willoughby 1924, 36).
Political, religious, and economic communities, especially—when organized as states, religious bodies (under a variety of names), and corporations—have defined themselves through organizing instruments that specify those rules and principles that define the community and thus define the form of the corporate body, like a skin. In the form of constitutions, these organizing instruments embody the legitimacy (legality) and supremacy of these norm systems for the communities they define. “ It is customary now to ascribe the legality as well as the supremacy of the Constitution. . . . Two ideas are thus brought into play. One is the so-called ‘positive’ conception of law as a general expression merely for the particular commands of a human lawgiver, as a series of acts of human will; the other is that the highest possible source of such commands, because the highest possible embodiment of human will, is ‘the people’”. (Corwin 1955, 3-4).
The elaboration of human communities within these corporate bodies has always faced two fundamental problems. The first relates to the scope and nature of its internal organization; the second relates to its place among other organizations, and more specifically the rules under which the larger community is governed. Over the last two centuries something of a bare consensus had formed respecting the management of those problems. The problem of internal organization became the principal issue of constitutional law. The problem of external relations became the principal issue of trans-corporate relations. Yet, neither problem could be adequately managed without acknowledging a third problem, one that became acute in the last two decades, relating to the relationship among dissimilar corporate bodies simultaneously operating within the same territory and made up of natural and corporate persons with multiple loyalties.
The traditional solution was simple, yet elegant. It relied on the elaboration of a series of principles which produced systems of hierarchies of authority, legitimacy and power within which all bodies corporate could fit. The parameters of these principles and the system it has given rise to are well known. The popular understanding of the concept of power hierarchies grounded on the state as the great nodal point between the organization of power within a defined geographic territory, and among the communities of such organized territories was well established at the beginning of the last century. (Willoughby 1924, 30). Thus, Westel Willoughby argued, that the generally accepted view was that a “State may be conceived of as itself the sole source of legality, the fons et origo of all those laws which condition its own actions and determine the legal relations of those subject to its authority.” (Id., at 30).
At the apex of authority and legitimacy was the political will of a territorially defined group of natural persons organized into states and asserting their collective authority through a governmental apparatus. Beneath this authority existed all other bodies corporate—at least those subject to the coercive power of the state. This idea was particularly strong with respect to the institutional presence of an entity, even a religious entity, within a state. In the United States, for example, the Edmunds Tucker Act of 1887, among other things sought to disincorporate the Church of Jesus Christ of Latter Day Saints. (Edmunds Tucker Act 1887). The disincorporation was affirmed by the United States Supreme Court. (The Late Corporation of the Church of Jesus Christ of Latter-day Saints v. United States 1890).
There were important exceptions and accommodations as well—principal among them were for religious bodies corporate which could exist within and beyond the state, but whose political authority was closely cabined by and expressed through state power. (Backer 2008). Within these hierarchies of authority and legitimacy, the issues of corporate organization, legitimacy and operation could be organized to minimize conflict and further efforts toward the creation of a global system of governance. As a consequence, issues of constitutionalism tended to be ordered by the corporate body’s place in the hierarchy of authority. The problem of internal organization of inferior bodies was always subject to the management of superior bodies corporate—and ultimately of the state. Among states, the issue of internal organization was a function of the will of the people thereof. In their relations with other states, the community of states appeared to be moving towards communal norms, more or less enforced among the community of nations, but all were free to deal with inferior corporate bodies in their own way. This is now manifested in principles of transnational constitutionalism (Backer 2009), through which the community of constitutional actors institutionalizes systems for self-regulation through the elaboration of communal rules to regulate constitutional legitimacy among its members. (Backer 208).
The manifestation of this ordering in the formation of aggregations of economic power organized as corporations was especially apparent. “In other words, a corporation is a constitutional arrangement in which individual choices are expressed and group decisions are made. Secondly, and simultaneously, corporations operate within a wider constitutional setting in which the state has responsibilities and powers in relation to individual citizens, groups, and organizations.” (Bottomley 2007, 54-55). As such, the “external aspect of constitutionalism deals with the relationship between the corporation, on the one hand, and the state and society, on the other.” (Id., at 55).
States were organized through a constitution that memorialized the will of the people thereof and produced a legitimate government whose scope, powers, and operations were authoritatively organized and limited through the process and substantive limits of that instrument. (Backer 2009). Other bodies corporate could exist only under the higher law represented by these political constitutions and then only to the extent that the government organized under the constitution of the state permitted it through legitimately enacted statute; the only legitimate corporation was one recognized as such by the state and organized under rules create by state law. (Blumberg 1993, 3-4). John Marshall famously suggested in an early American Supreme Court opinion that “a corporation is an artificial being, invisible, intangible, and existing in contemplation of the law.” (Trustees of Dartmouth College v. Woodward 1819). Thus, Stephen Bottomley could speak of a constitutional law for states and also of a constitutional law for other bodies corporate. “It has been suggested that “a constitution both recognises and reinforces the place of individual constituents within the institution, and also constitutes them as a group or collective. Constitutionalism therefore directs our attention to what it is that unites these individuals rather than just what separates them.” (Bottomley 1997). Melvin Eisenberg’s famous insight is oft repeated: “Corporate law is constitutional law; that is, its dominant function is to regulate the manner in which the corporate institution is constituted, to define the relative rights and duties of those participating in the institution, and to delimit the powers of the institutions vis-à-vis the external world.” (Eisenberg 1969, 4). This is an ancient concept, with echoes in Hobbes. (Hobbes 2001, ch. 22). He understood that “Some regular systems are absolute and independent, subject to nobody but their own representative; they are all commonwealths . . . . All the other regular systems are dependent ·or sub- ordinate·, i.e. subordinate to some sovereign power to which every one is subject as is also their representative.” (Id., at 103). Yet such “constitutional law” would be understood in ways distinct from that of political constitutions in its relation to superior corporate bodies, and principally the state.
However the gulf between concept and reality has always existed—and no more so than currently. Control of corporate bodies, and especially their subordination to the state has proven to be difficult. Even at the height of the golden age of state power, there was a sense that simple vertically constructed hierarchies of control among the many forms of corporate organization were impossible. Herbert Spencer’s insight about the relationship of state to aggregations of economic power within its borders remains powerful and accurate. “Our industrial organization, from its main outlines down to its minutest details, has become what it is, not simply without legislative guidance, but to a considerable extent, in spite of legislative hindrances.” (Spencer 1860, 196).
That insight is truer now than when made a century and a half ago. Janet Dine has suggested how even the concession theory can be understood as liberating the corporation from its creators. She has described a view that “sees the company as something distinct from the contracting partners' original compact but seeks to show that, in coming together and using the corporate tool, the contractors have created an instrument that has a real identity separate from and quite distinct from the original contracting partners. The company, if you like, 'floats free' from its founders and becomes a separate person with its own interests. Inherent in this approach is a distinction between the notion of the origins of a company and its dynamic existence after foundation.” (Dine 2000, 26). These problems of order, hierarchy and control have become acute over the last several decades. The framework of economic globalization, based on global private actor driven markets not impeded by the parochial regulations of states, have begun to pose challenges to the traditional state centered system—at least conceptually. David Schneiderman has noted that “Neo-liberalism and its institutional partner, the investment rules regime, aim to institutionalize model of constitutional government intended primarily to facilitate the free flow of goods, services, capital and persons unimpeded across the borders of national states.” (Schneidermann 2008, 2). This is to be accomplished through “an interlocking network of rules and rule making structures—an ‘investment rules regime’—that place substantive limits on state capacity in matters related to markets.” (Id.).
In the form of multinational enterprises, corporations now appear as bodies corporate with an authority approaching that of states within the ambit of their own powers. The largest and most geographically dispersed among them can now claim an autonomy from state power unimaginable a generation ago. (Iwai 1999; Backer 2006). These enterprises have been considered by some as serious objects of international law. (Backer 2006a). Some consider that the framework for the regulation of such enterprises, as a body, has now moved well beyond the framework grounded in the supremacy of state-based political authority to merit an autonomous constituting framework of its own. (Ruggie 2009) (hereafter RUGGIE 2009 Report A/HRC/11/13). Ruggie notes that “...most States have adopted measures and established institutions in certain core areas of business and human rights, such as labour standards and workplace non-discrimination. But beyond that, the business and human rights domain exhibits considerable legal and policy incoherence...” (Id.).
In a related vein, Gunther Teubner now speaks forcefully of an emerging regime of corporate constitutions critically distinct from Professor Eisenberg’s understanding of a generation ago. (Teubner 1988). Teubner speaks to a metamorphosis of the economic corporation and of the transformation of corporate codes of multinational enterprises from mere soft law—an appendage of the international relations of state, to first rank constitutional exercises in their own right. He suggests that “corporate codes are emergent legal phenomena in the constitutionalisation of private governance regimes. Unlike when they were first spawned, they are no longer mere public relations strategies; instead they have matured into genuine civil constitutions.” (Teubner 2009). Corporate personality now occupies a space beyond the state, one that might well permit the aggregation of these actors into a distinct body corporate, with its own supra organization constitution. We return to Professor Eisenberg’s insight in new form in which the constitutionalism of corporate actors is no longer understood as subordinate and dependent on the superior constitutionalism of the state but is instead autonomous as both its internal constitution and also as to the development and adherence to supra constitutional frameworks, a form of societal constitutionalism developed for the community of global, supra national, corporate actors. Indeed, the evolution of a regulatory framework for corporations beyond the state fits nicely into developing understandings of societal constitutionalism as a new and more flexible form of the old formalist, state referential and law based notions of constitutionalism. (Sciulli 1992).
The rise of transnational corporate constitutionalism represents a return, as well, to a world order in which positive law can again be effectively and legitimately separated from organic law. Positive law remains the province of the state. While organic law assumes a different character. It can represent the aggregated norms under which the affected community governs its affairs. The difference is better understood in languages other than English as between derecho (direito, droit) and ley (lei, loi). “a lei régia liga-se somentante à vontade do rei, não tendo relevo o seu conteúdo substancial; o direito é, ao contrário, o fruto da experiència de vida de uma comunidade e registra em si soluções mais équas que, cotidianamente, a comunidade fez suas.” (Grossi 2004, 49). It suggests in new form the great argument of the 18th century between notions of the legitimacy of constitutional expression as “the conscious formulation by a people of its fundamental law . . . and the older traditional view in which the word was applied only to the substantive principles to be deduced from a nation’s actual institutions and their development.” (McIlwain 1940, 3).
The thesis proposed here is that economic entities are increasingly seen as state-like actors requiring regulation at a transnational level. Large multinational enterprises are increasingly less dependent on states for their internal regulation. Simultaneously, the nature of the legal order among states and the principles within which states may constitute themselves have become increasingly regularized—the community of nations has begun to move from an acceptance of constitution as a means of organizing political communities to constitutionalism as a system for the regulation of the organization of non-state communities that are distinct from and exercise authority over their members. As a consequence, it is now possible to speak of two new and distinct constitutional phenomena, both of which will be sketched out in what follows. The first is the development of principles of transnational corporate constitutionalism that mimic those of state centered constitutionalism. The second is the elaboration of an institutional framework for transnational corporate constitutionalism, which posits both an autonomous community of corporations and the institutional mechanisms for the development of rules for their organization and behavior. The internal constitutions of corporations are increasingly sourced from outside the state, both as to its internal corporate governance and its external relations with other actors. The external constitution of corporations is increasingly tied to supra-national systems as corporations become the subjects of an international regulatory community existing alongside that of managing states. This is the essence of transnational corporate constitutionalism, whose form is only hinted at today.
I. Internal Governance: Principles of Transnational Corporate Constitutionalism.
A. From Public to Corporate Constitutionalism.
There was a time when international law played little role in the way in which a sovereign nation-state ordered its constitutional system, and then applied that ordering internally. That was especially the case with respect to the application of the process rules of a nation’s constitution, and the division of authority between the two principal elected branches of state—the executive and legislative—and the judicial power to oversee that division. To some extent that idea is still true—the United States Congress would have found it incomprehensible had its proceedings against President Clinton in 1999 been interpreted as in violation of either some supra-constitutional norm or a set of international norms and treaties with paramount authority over the matter, or, for that matter, whether the decision in Bush v. Gore (2001), which decided the 2000 U.S. Presidential election in favor of George H.W. Bush, amounted to a usurpation of constitutional power. (Discussed in Backer 2002).
But times have changed. I have argued that since the end of the Second World War, a new transnational legal order has been seeking both authority and legitimacy with respect to control over the normative framework and limitations within which nation-states may elaborate their national constitutional systems. (Backer 2008). Constitutionalism has, for the last century or so, sought to provide a basis in theory for legitimating certain forms of state organization within territorially based political communities. (Backer 2009). Constitutionalism serves as a basis for classifying the form of state systems of governance. (Henkin 2004). Its object is twofold—to develop an ideal of governance forms and to judge the legitimacy of a constitutional system against this ideal. (Okoth-Ogendo 1993). As such, as a legal and political subject, constitutionalism can be understood as a worldview. That worldview produces an ideology that can be divided into five parts:
Constitutionalism is: (1) a system of classification, (2) the core object of which is to define the characteristics of constitutions (those documents organizing political power within an institutional apparatus), (3) to be used to determine the legitimacy of the constitutional system as conceived or as implemented, (4) based on rule of law as the fundamental postulate of government (that government be established and operated in a way that limits the ability of individuals to use government power for personal welfare maximizing ends), and (5) grounded on a metric of substantive values derived from a source beyond the control of any individual. (Backer 2009).
An example of the extent of that change was observable in 2009, when the international community condemned the ouster of the Honduran President by its Legislature and Judiciary on grounds that their interpretation of their own constitution was flawed, and thus flawed, also illegitimate. (Cassel 2009).
Much of the substance of the great debates between constitutionalist systems now tends to center on the framework of substantive values that ought to be incorporated in legitimate constitutional systems. Indeed, much of the great variations in constitutionalism currently arise from great differences in constitutionalist ideology, in those metrics of substantive values on which classifications are understood, the characteristics of constitutions are assigned values, legitimacy is understood and rule of law is framed.
The substantive values represented within a constitutionalist system can be grounded on any number of legitimating value systems—each competing with the others for the allegiance of the greatest number of states. (Backer 2008a). Nationalist constitutionalism focuses on traditional sources of constitutional values within territorially constituted and distinct states, with the United States as an important example. (Rubenfeld 2004). Transnational constitutionalism, in contrast, sources legitimating constitutionalist values in transcendent values originating outside of, but still binding states. (Backer 2008). The predominant source of such transnational values is derived from the consensus of the community of nations, understood as common constitutional traditions of the community of nations or as the expression of international consensus in international conventional law or customary international law (Hirschl 2004), and as such can be described as secular transnational constitutionalism. (Backer 2008). But it may be understood as derived from a divine source, and in this form understood as theocratic constitutionalism. (Backer 2008a) Alternatively, it might be grounded in rational universalism, as were constitutional systems grounded in Marxist Leninist theories. (Backer 2009a).
Still, these value systems of constitutionalism are all grounded on the fundamental postulate of rule of law—that states ought to be organized to avoid tyranny or despotism by grounding state action in law and by limiting the reach of such lawful state action on the basis of values reflecting the values of the political collective. (Coomaraswamy 1993). “’Constitutionalism is thus a written constitution per se surrounded by a cloak of unwritten principles, values, ideals, procedures, and practices.’ But not all values are constitutionalist. The racist values of fascism, the militarism of Imperial Japanese constitutionalism, and the despotism of ‘big man’ African dictatorships grounded in some sort of values ideology are not legitimately constitutionalist. The key to values in constitutionalism, like that of rule of law in constitutionalism, is to avoid despotism or tyranny.” (Backer 2009a, quoting in part Vlasihin 1989 and citing Gregor 1969, 241-82; Biney 2008, 129-159).
Thus, constitutionalism is more than the sum of internal efforts to memorialize any old governance framework, but instead provides a disciplining ideology the purpose of which is to constrain the choices available to any “body corporate” that seeks to operate as a “legitimate” state within both its own community of members and also the community of nations. Legitimacy is a critical component of the constitutionalist ideology, determining the scope of action permitted other states under international law or the rights of its citizens to rebel against an illegitimately constituted state. “Constitutions are distinguished from constitutionalism—the latter serving as a means of evaluating the form, substance, and legitimacy of the former.” (Backer 2009). Constitutionalism, then, provides an important normative framework against which a “body corporate” may be judged by its peers and overturned by its subordinates.
The late 20th century has seen the migration of these ideas from the realm of public corporate bodies—states—to other corporate entities, principally those organized to engage in economic activity. Globalization has thrust corporations out from within the borders of the states that have sought sole rights to their regulation. It should be remembered that a century ago, influential commentators suggested that there was no reason to believe that corporations licensed in one state of the United States might be able to operate within the borders of another. (Willoughby 1904). He could observe without reservation that “the interstate comity clause of the federal Constitution which we have been discussing does not necessitate the recognition by the several States of corporations created by any of the other States.” (Id., at 282).
A century later it is common to speak of a corporation substantially impeded by national borders. “Corporate governance is a problem area that is discussed today globally. The word—and indeed the concept—is Anglo-Saxon. In the European continent, both the word and the concept were more or less unknown until the middle of the 1990s.” (Hopt 2007, 81). The contours of this phenomenon and its most important values contours—that is its constitutionalization above the state level—is in its infancy. Yet, the outlines of its principles can be discerned. For Marxist theory a similar result is possible—grounded in an insight that capital has been liberated from the state by modern globalization, and with it the regulatory power of the state—now outsourced and elaborated in new forms. (Robinson 2004, 75).
Like states, corporations were traditionally assumed to be the sole regulatory province of those political entities within whose jurisdiction they operated. As the state served as the source of the public character of the entity, only that law could be said to impose general obligations on the stakeholders intimately connected with the governance of the organization. Specific obligations, of course, remained a vital part of private law (through contract). But these specific obligations gave no rights as against the entity to others. Nor was the corporation obligated to comply with behavior norms with respect to its conduct or governance beyond those mandated by the state through law. All of this was in accord with the core notions of rechtstaat notions and substantive constitutional law principles that flared out like a sort of legal supernova for a brief burst at the conclusion of the last World War in 1945. Moral obligations, better understood as either corporate social responsibility, were consigned to marketing departments or understood as charity. (Described in Backer 2006a). Just as states had no obligation and little incentive to comply with hortatory international declarations, corporations and other juridical persons had little incentive to comply with norms that were not imposed by law, nor to acknowledge the power of purported stakeholders with no legal connection to the entity. Governance, in effect, was firmly grounded in government.
Within states, the normative foundations of the regulation of corporations, the substantive rules limiting the scope of corporate constitutionalism, is dependent, in turn, on the nature of the relationship between superior entity (the state) and its corporate subordinates:
Justifications for regulation closely follow the theories underpinning companies. The concept of correction of market failures follows the transaction cost economics theories, which share with legal contractual theories a call for minimum interference with contractual decision making. Concession and communitaire theories make companies open to state regulation and permit a conceptualisation of the company with a 'social conscience'. Thus both types of theory have significant regulatory consequences. It is noticeable that only the latter theories permit the use of companies as a direct social engineering tool or a method of distributive justice. The absence of such a direct use is replaced in the contractualist theories by the notion that profit maximisation for shareholders involving economic growth will best serve the world; 'To address poverty, economic growth is not an option: it is an imperative.’ (Dine 2000, 107).
The view was confined to internal governance. The possibility of external relations of corporations was either considered the object of state regulation, or a matter to be determined between states in the course of their international relations. There was no notion of the possibility of a community of corporations subject to a set of autonomous global values that might limit their power to organize themselves or to act. There was only the notion of corporations as sub-constitutional constructs of a constitutionally superior body corporate—the state.
Global regimes of free movement of capital, services, goods, and to some extent, labor, have changed all that. Left to themselves, corporations could become global self regulators, moving operations and assets to suit their aggregate taste for regulation. States conversely, would become manufacturers of regulation for consumption by corporations interested in these wares. (Backer 2006). Or corporations could become an autonomous source of their regulation within the confines of their activities and relationships with other enterprises. (Backer 2007). Li-Wen Lin has suggested some reverse leakage of these governance norms, from enterprise back to the states in which they may be effective. (Li-Wen Lin 2009). Once corporations are understood as not merely (or principally) property in the hands of shareholders, the dynamics of institutional self-consciousness and autonomy serve to liberate these entities—not only from their shareholders (that own them) but also from the state (that purports to regulate them exclusively).
But the global effects of corporate self regulation, especially among the largest multinational corporations, grounded only in conformity to applicable rules of organization, produced a reaction (Muchlinski 2007) in some ways as significant as that produced by the lawful but unpalatable activities of Germany and Japan under their respective pre-War constitutions. (Backer 2008). As such, global economic activity called for the construction of a globally harmonized framework for the organization of corporations as well as for their behavior within the community of corporations operating across borders. These internal and external drivers effectively moved the issue of corporate governance up from the state and produced a number of principles that now can be said to serve as the foundations of corporate constitutionalism.
B. Toward Principles of Corporate Constitutionalism.
What are the values that might be understood as having constitutional effect for corporations? The values themselves echo those that have arisen within transnational constitutionalism applied to states. Transnational constitutionalism stresses a set of basic values. These include popular sovereignty, mass democracy, rule of law, due process, and human dignity. Vlasihin thus argued that
“Constitutionalism is thus a written constitution per se surrounded by a cloak of unwritten principles, values, ideals, procedures, and practices. Without attempting to list the entire file of attributes of American constitutionalism, let me single out the key ones. Making up the core of constitutionalism are the ideas of “popular sovereignty” and a social contract as the source of the government; the principles of republicanism, federalism, separation of powers, and government limited by law; respect for the rights and liberties of citizens and the protection of private property; the rule of law and the supremacy of the Constitution; and independence of the judiciary and judicial review.” (Vlasihin 1989, 258).
Michel Rosenfeld suggested that “in the broadest terms, modern constitutionalism requires imposing limits on the powers of government, adherence to the rule of law, and the protection of fundamental rights.” (Rosenfeld 1994, 3). Put another way, “Constitutionalism is a political ideology that consists of various principles and assumptions about the dual nature of the individual as private person and public citizen, the nature of the state, and the nature of the complex set of relationships between the individual and the state.” (Harris 1991, 986).
The foundational ideal is the drawing of principled limits to the assertion of governmental power. Among the most influential theorists of this project is Louis Henkin, who suggested a list of principles substantive and procedural rights and organizational frameworks that distinguished constitutionalist states from states with constitutions. (Henkin 1993; Henkin 1990). Another influential author in this vein is András Sajó (2008) and Hannah Arendt (1977). Others privilege one or another element of the Henkin list. Daniel Lev (1993) privileges process as the basis of constitutionalism. Frank Michelman (2005) looks to what he describes as the values of freedom, individual rights, limited government and rule of law). These expand the general consensus reached after the Second World War that constitutions served a limiting purpose. (McIlwain 1947, 21-22). Charles McIlwain famously noted that “constitutionalism has one essential quality: it is a legal limitation on government.”
For its part, the constitutional principles of corporate governance reflect these broad normative approaches. These principles are constitutional, or have constitutional effect in the same sense that governance principles have that effect in contemporary Marxist Leninist systems; “[w]hat is new is the way in which ideological campaigns have been transformed into a means of legal discourse.” (Backer 2006b). There are a large number of sources for these principles. Thus, for example, the International Standards Organization has sought to develop a framework for understanding the limits and nature of corporate power within the scope of their activity. (ISO 26000). Religious institutions have also participated in the detachment of the organizing principles of corporate governance from the state. One of the most active in recent years has been the Catholic Church. (Benedict XVI 2009; Backer Aug. 15, 2009).
Despite a large number of sources, a consideration of which is left for later in this essay, many of the values frameworks generated by these sources overlap to a considerable extent. The foundational values track the core values of political constitutions: inclusion, democracy, rule of law, and human rights. They cover both the process and values rules within which corporate government can be legitimately organized and operated. They also specify the appropriate division of authority between corporations and the state. An excellent conceptual exposition can be found in the work of the Special Representative to the U.N. Secretary General on the issue of human rights, transnational corporations and other business enterprises and the formulation of the “protect, respect, and remedy” framework. (Ruggie 2009). This effort does not provide a definition of the scope of the substantive norms which corporations are bound to respect, which are focused on human rights. Instead, it defines the nature of those norms (social norms), and their effect (universal baseline norms for all companies in all situations). (Ruggie 2009).
Despite their number, some insight might be gained by a more detailed consideration of one iteration of these principles. For that purpose it is useful to examine the work of the Organization for Economic Cooperation and Development. The OECD is an intergovernmental organization representing most developed states. (OECD, About OECD). It has developed three principle sets of norms for corporations that might be understood usefully in their constitutive role. These have become “an international benchmark for policy makers, investors, corporations and other stakeholders worldwide. (OECD 2004, at 3 (Forward)). The three include the Principles of Corporate Governance (OECD 2004), the Guidelines for Multinational Enterprises (OECD 2000), and the Guidelines on Corporate Governance of State-Owned Enterprises. (OECD 2005). The Principles of Corporate Governance have assumed an important role as a model for state legislation on the internal constitution of corporations. The Guidelines provide voluntary principles of business behavior covering virtually every aspect of the operations of an economic enterprise. “Although many business codes of conduct are now available, the Guidelines are the only multilaterally endorsed and comprehensive code that governments are committed to promoting.” (OECD Policy Brief 2001). The Guidelines have been increasingly used by civil society elements. (Backer 2009a). The Guidelines are likely to be updated in 2010. (OECD 2009). These revisions are likely to strengthen their provisions and make enforcement more uniform and effective. The Guidelines for SOEs are said to build on the Principles of Corporate Governance. The OECD has expressed its opinion that these Guidelines are compatible with its Principles of Corporate Governance but oriented to the special issue of state owned enterprises as they were understood within OECD states (not including China) in the early 21st Century. “These Guidelines are also based on a comparative survey of SOE corporate governance practice in OECD countries.” (OECD 2005; but criticized in Backer Sept. 1, 2009).
Together, these provide a comprehensive set of principles for the governance of economic enterprises in the organization of their government and in the rules limiting the range of their behaviors with other actors. These establish the sort of constitutional limits customary in the drafting of modern constitutions establishing a governance framework for states—from the construction of the apparatus of government to the limits on governmental power, its rules of behavior to its citizens and generally within the community of states. Indeed, the constitutional character of these rules is expressed in the form in which they were developed—as principles rather than as rules.
One of the keys to success of the Principles is that they are principles-based and non-prescriptive so that they retain their relevance in carrying legal, economic and social context. However, the institutional and legal/regulatory frameworks are required to support effective corporate governance. The text (the Principles) includes principles for developing such a framework and addresses the need for laws and regulations which are both enforceable and are backed by effective enforcement agencies. In this sense they incorporate an ancient understanding of the construction of constitutions—as opposed to statutes. (McColluch v. Maryland 1819). McCulloch v. Maryland, 17 U.S. 4 Wheat. 316 316 (1819) In that case, John Marshall explained the concept nicely. “A Constitution, to contain an accurate detail of all the subdivisions of which its great powers will admit, and of all the means by which they may be carried into execution, would partake of the prolixity of a legal code, and could scarcely be embraced by the human mind. It would probably never be understood by the public. Its nature, therefore, requires that only its great outlines should be marked, its important objects designated, and the minor ingredients which compose those objects be deduced from the nature of the objects themselves.” (Id., at 17 U.S. 407).
To understand the constitutive element of these three efforts it is necessary to work through them in some detail. Each is considered in turn below. In the section that follows, the three are analyzed specifically for their constituting elements.
1. Constitutional Principles for the Organization of the Government of a Corporation: The OECD Principles of Corporate Governance as a Model. The OECD Principles of Corporate Governance are divided into six sections, covering the basis for an effective corporate governance framework, the rights of shareholders and key ownership functions, the equitable treatment of shareholders, the role of stakeholders, disclosure and transparency, and the responsibilities of the board of directors. (OECD Improving Corporate Governance Standards). Each includes official commentary and explanation of the principles. (Id. at 2).
a. Ensuring the Basis for an Effective Corporate Governance Framework. The basic presumptions for the construction of effective corporate governance are covered here. (OECD 2004, at 3). These include the basic building block principles of corporate governance applicable to all aspects of creating a government for a corporation. These include that the corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law, and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities; that the corporate governance framework should be developed with a view to its impact on overall economic performance, market integrity, and the incentives it creates for market participants; and that supervisory, regulatory and enforcement authorities should have the authority, integrity and resources to fulfill their duties and their rulings should be timely, transparent and fully explained.
b. The Rights of Shareholders and Key Ownership Functions. The OECD Principles expressly recognize the ownership of private property as a key means by which resources are used efficiently, and the need to protect those property rights under differing legal and political regimes. (Sarra , 208-09). They specify that basic shareholder rights include: the right 1) to secure methods of ownership registration; 2) to convey or transfer shares; 3) to obtain relevant and material information on the corporation on a timely and regular basis; 4) to participate and vote in general shareholder meetings in person, by proxy, or other forms of voting in absentia; 5) to elect and remove members of the board; and 6) to share in the profits of the corporation. (OECD 2004, 33). This includes the right to be sufficiently informed and participate in decisions regarding fundamental corporate changes, such as amendments to corporate charter documents, authorization of additional shares, and extraordinary transactions. (Id.).
The annotation of the Principle stated that for the election of the board members to be effective, shareholders should be able to participate in the nomination of board members and vote on individual nominees or on different lists of them. With respect to nomination of candidates, boards in many companies have established nomination committees to ensure proper compliance with established nomination procedures and to facilitate and coordinate the search for a balanced and qualified board. It also mentioned that it is increasingly regarded as good practice in many countries for independent board members to have a key role on this committee. OECD (2004), Principle V.A.4 c of the Methodology (28) also calls for full disclosure of the experience and background of candidates for the board and the nomination process. In addition, a consistency check is important in implementing the Principles. Thus, the Methodology states “where there is not adequate disclosure, the assessment of II.C.3 (one of the cross reference of V.A.4) might need to be adjusted accordingly.” Shareholders should be given the opportunity to ask questions of the board, place items on the agenda at general meetings subject to reasonable limitations, make their views known about remuneration policies and any equity component such as share options should be subject to their approval. Id. The annotation of the Principles sometimes provides good examples of the sub-principle. In the Principles II. C.2., it noted that there were some companies that have improved the ability of shareholders to place items on the agenda by simplifying the process of filing amendments and resolutions. Improvement also has been made in order to make it easier for shareholders to submit questions in advance of the general meeting and to obtain replies from management and board members.
The OECD Principles also suggest that markets for corporate control should be allowed to function in a transparent manner. Rules and procedures that govern the acquisition of corporate control in capital markets should be clearly articulated so that investors can make informed decisions based on their rights and remedies. According to the Principles, some capital structures such as pyramid structures, cross shareholdings, and shares can affect control over the corporation. In addition to ownership relations, other devices such as shareholder agreements are a common means for groups of shareholders to act in concert so as to constitute an effective majority, or at least the largest single block of shareholders. The annotation states that some countries have found it necessary to closely monitor such agreements and to limit their duration. The Principles mentioned voting caps in its annotation (OECD 200, Principles, 35). It also noted that voting caps limit the number of votes a shareholder may cast thereby redistributing control and affecting the incentives for shareholder participation in shareholder meeting. (Id., Principles, 36).
Shareholders should be able to obtain information regarding voting rights attached to all classes of shares prior to purchasing shares, and changes to voting rights should be subject to shareholder vote. Insider trading and abusive self-dealing should be prohibited and those prohibitions enforced because such acts involve manipulation of capital markets. Directors and officers should be required to disclose any material interest in matters affecting the corporation. Transactions should occur at transparent prices and under fair conditions that protect the rights of all shareholders according to their class. Anti-takeover devices should not be utilized to shield managers from accountability or to impede the functioning of the market for corporate control. (Sarra, 209). There is also a nod to the wealth maximization principles of traditional corporate governance: the Principles provide that in considering the costs and benefits of exercising the ownership rights, many investors are likely to conclude positive financial returns and growth can be obtained by undertaking a reasonable amount of analysis and by using their rights. (Id.).
Special provisions are suggested for large institutional investors with the object of strengthening the legitimacy of the governance system. (Id., 37). The general approach the Principles take is that the decision to exercise voting rights in an informed manner is related to both the costs and benefits of voting. The Principles do not oblige institutional investors to vote their shares but they do call on them to disclose their voting policies and how they implement the policies including the resources they set aside for this purpose. (Id. OECD 2004, Principle II. F. 1). Institutional investors acting in a fiduciary capacity should disclose their overall corporate governance and voting policies with respect to their investments, including the procedures that they have in place for deciding on the use of their voting rights. The Principle emphasized in its annotation that individual shareholders should be allowed, and even encouraged, to co-operate and co-ordinate their actions in nominating and electing board members, placing proposals on the agenda and holding discussions directly with a company in order to improve its corporate governance. (Id., at 38-39). A complementary approach to participation suggested by the annotation is to establish a continuing dialogue with portfolio companies and such a dialogue should be encouraged, the annotation stated, especially by lifting unnecessary regulatory barriers. (Id.).
c. The Equitable Treatment of Shareholders. The Principles call for equitable treatment of all shareholders, including minority and foreign shareholders. An important determinant of the degree to which shareholder rights are protected is the existence of cost effective legal mechanisms for dispute resolution and remedies. (OECD 2004, 40). The annotation says that the provision of such enforcement mechanism is a key responsibility of legislators and regulators. The Methodology explained the redress methods more specifically by stating that “The reviewer will also need to examine the experience with methods of enforcement other than litigation by shareholders. Many jurisdictions are based on the view that alternative adjudication procedures, such as administrative hearings, or arbitration procedures that are organized by securities regulators or other regulatory bodies, are an efficient method of dispute settlement, at least in the first instance.” (Id., Methodology 37).
This is balanced with numerous devices to protect corporate officers from excessive litigation, particularly deference to business judgments. Corporate boards, managers and controlling shareholders may have the opportunity to engage in activities that may advance their own interests at the expense of non-controlling shareholders. (OECD 2004, 40). Once purchased, the rights represented by securities ought not be changed unless those holding voting shares have had the opportunity to participate in the decision. (Id., 41). Proposals to change the voting rights of different series and classes of shares should be submitted for approval at general shareholders meetings by a specified majority of voting shares in the affected categories. (Id.).
The Principles also seek to avoid abuses by controlling shareholders. (Id. at 42). The Principles emphasize the potential for abuse of other shareholders by the controlling shareholders where the legal system allows controlling shareholders to exercise a level of control which does not correspond to the level of risk they assume as owners. In addition to disclosure, a key to protecting minority shareholders is a clearly articulated duty of loyalty by board members to the company and shareholders. (Id.). Other common provision includes pre-emptive rights in relation to share issues, qualified majorities for certain shareholder decisions and the possibility to use cumulative voting in electing members of the board. Still other means are derivative and class action lawsuits. However, the ultimate design of provisions to protect minority shareholders necessarily depends on the overall regulatory framework and the national legal system. (Id.). In regard to cross-border chain issues, the legal and regulatory framework should clarify who is entitled to control the voting rights in cross border situations and where necessary to simplify the depository chain. Moreover, notice periods should ensure that foreign investors in effect have similar opportunities to exercise their ownership functions as domestic investors. (Id. at 44). To further facilitate voting by foreign investors, the use of modern technology should be allowed by laws, regulations and corporate practice. (Id.).
Abusive self-dealing occurs when persons having close relationships to the company exploit the relationships to the detriment of the company and investors. As insider trading entails manipulation of the capital markets, it is prohibited by securities regulations, company law and/or criminal law in most OECD countries. The Principles reaffirm it is reasonable for investors to expect the abuse of insider power be prohibited. In cases where such abuses are not specifically forbidden by legislation or where enforcement is not effective, it will be important for governments to take measures to remove any such gaps. (Id., 44-45).
d. The Role of Stakeholders in Corporate Governance. “The Principles are unique in having a separate chapter devoted to stakeholders and in recognizing that a productive relationship is necessary to create value, and that this might involve some form of stakeholder participation in the corporate governance process.” (OECD 2004, forward, 4). The competitiveness and ultimate success of a corporation is the result of teamwork that embodies contributions from a range of different resource providers including investors, employees, creditors, and suppliers. (Id., 46). The stakeholder chapter breaks with the earlier version in explicitly recognizing the role and rights of creditors. In a number of countries, the experience has been that poorly defined and ineffectively enforced creditor rights have distorted corporate governance, particularly in the presence of controlling shareholders. A new principle states that the corporate governance framework should be complemented by an effective, efficient insolvency framework, and by effective enforcement of creditor rights. (Id.). According to the annotations, in all OECD countries, the rights of stakeholders are established by law (e.g. labor, business, commercial and insolvency laws) or by contractual relations. It also states that even in areas where the interests are not legislated, many firms make additional commitments to stakeholders. Concern over corporate reputation and corporate performance often requires the recognition of broader interests. In addition, the legal framework and process should be transparent and not impede the ability of stakeholders to communicate and to obtain redress for the violation of rights. (Id.).
It is to the advantage of the company and its shareholders to establish procedures and safe-harbors for complaints by employees. (Id. at 47). “Particularly important is a new principle to ensure protection for whistleblowers, including institutions through which their complaints/allegations might normally be registered. The chapter on the duties of the board also makes provisions for confidential access to someone on the board.” When there is an inadequate response to a complaint regarding contravention of the law, the OECD Guidelines for Multinational Enterprises encourage them to report their bona fide complaint to the competent public authorities and the company should refrain from discriminatory or disciplinary actions against such employees or bodies. (OECD, Policy 4).
e. Disclosure and Transparency. The OECD grounds this principle on the assumption that a strong disclosure regime that promotes real transparency is a pivotal feature of market-based monitoring of companies and is central to shareholders’ ability to exercise their ownership rights on an informed basis. It also can help to attract capital and maintain confidence in the capital markets. By contrast, weak disclosure and non-transparent practices can contribute to unethical behavior and to a loss of market integrity at great cost.
The OECD Principles recommend that the corporate governance framework should ensure timely and accurate disclosure on all material matters regarding the corporation. (OECD 2004, 49-50). These include the financial situation and operating results, corporate objectives, performance, ownership structure and voting rights, membership of the board, key executives and their remuneration, governance structure and policies of the corporation. (Id.). Transparency includes the disclosure of information such as self-interested transactions and cross-shareholders, where there is potential for conflicts of interest. Information preparation should be undertaken by independent auditors in accordance with international accounting standards. (Id., 56). The Principles recommend that there be channels for fair, timely and cost-efficient dissemination. (Sarra, 212-213).
Disclosure and transparency requirements allow shareholders to monitor the use of their equity capital, enhancing board accountability mechanism. Institutional investors, such as pension funds, are increasingly likely to use these transparency guarantees to monitor performance, and then influence corporate governance by voice or exit, signaling to other investors failures in governance. Mutual funds and other institutional investors are likely to take advantage of reduced barriers to information exchange through the Internet. As a result, transparency and disclosure may be necessary to effectively compete in global capital market. (Id.). The quality of information substantially depends on the standards under which it is compiled and disclosed. The Principles support the development of high quality internationally recognized standards, which can serve to improve transparency and the comparability of financial statements and other financial reporting between countries. High quality domestic standards can be achieved by making them consistent with one of the internationally recognized accounting standards. (Id.).
f. The Responsibilities of the Board. The Principles recommend that boards should fulfill key functions such as reviewing and guiding corporate strategy, risk policy, annual budgets and business plans. Board should also set performance objectives, monitor corporate and managerial performance, oversee major capital expenditures, be engaged in the recruitment and selection of key executives, and overall succession planning. (OECD Policy Brief). Board should monitor a number of functions, including: board remuneration policies; board nomination process; potential conflicts of interest of managers, board members and shareholders; integrity of the corporation’s accounting, financial and audit reporting systems; the process of disclosure and communications; and effectiveness of the governance practices. (Sarra 220). The Principles embrace a general notion of board independence and objectivity, grounded in the board’s fiduciary duty to the company and its shareholders. This is manifested in a number of structural ways well understood under traditional principles of corporate law. For example, Independent non-executive board members or establishment of specific committees might provide additional assurance where there is a potential for conflict of interest among market participants. (Id., Principle, 65). The Board should also review related party transactions using independent board members. (OECD Asian Roundtable, Conclusions and Key Findings Note 5). It should also provide confidential access for whistleblowers who may be in a position to identify unethical conduct and abusive transactions. (Id.). In the controversial area of the separation of the CEO and chairman posts, the annotations note that this is increasingly regarded as good practice. (OECD 2004, 41).
2. Constitutional Principles of Substantive Values and Corporate Behavior in the Market: The OECD Guidelines for Multinational Enterprises as a Model. To these principles of internal organization, the OECD’s Guidelines for Multinational Enterprises adds a critical set of principles describing the behavior norms of corporate enterprises in their operation with other constituencies. If the Principles of Corporate Governance sought to adduce constitutional principals touching on the organization of the apparatus of corporate government, the Guidelines for Multinational Enterprises suggests the substantive values of corporate behavior that such legitimately organized government must follow. These are organized around principles of disclosure, employment and industrial relations, sustainability, bribery, consumer protection, science and technology, engaging in competition, and taxation. Each is briefly addressed in turn.
a. Disclosure. The Guidelines states that “to improve public understanding of the operations of multinational enterprises and their interaction with society and the environment, enterprises should be transparent in their operation.” (OECD 2000, 41-42). This information may be a supplement to the disclosure required under the national laws of the countries in which the enterprise operates. In other words, the scope in the Guidelines might be broader than that of the national laws and regulations.
The Guidelines addressed disclosure in two areas: The first set of disclosure recommendations is identical to disclosure items outlined in the OECD Principles of Corporate Governance such as timely and accurate disclosure on all material matters regarding the corporation (financial situation, performance, ownership, governance of the company, remuneration policy). The second set is in areas where reporting standards are still emerging such as social, environmental, and risk reporting. The Guidelines states that many enterprises provide information on a broader set of topics than just financial performance because such disclosure can be used to demonstrate their commitment to socially acceptable practices. As the OECD Secretary put it: “Ethics brings profits”! (OECD Secretary).
Financial audits conducted by independent auditors provide external and objective assurance on the way in which financial statements have been prepared and presented. In addition, transparency and effectiveness of non-financial disclosure may be enhanced by independent verification and the techniques for this are emerging. However, disclosure requirement are not expected to place unreasonable administrative or cost burden on enterprises and, thus, the balance between transparency and confidentiality is required in this matter.
b. Employment and Industrial Relations. The International Labor Organization (ILO) is the competent body to set and manage compliance with international labor standards, and to promote fundamental rights at work as recognized in its 1998 Declaration on Fundamental Principles and Rights at Work and 1977 Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy. (OECD 2000, 43). The Guidelines, as a non-binding instrument, have a role to play in promoting observance of these standards and principles among multinational enterprises. The freedom of association and right to collective bargaining, the effective abolition of child labor, the elimination of all forms of forced or compulsory labor, and non-discrimination in employment and occupation are all contained in the ILO’s 1998 Declaration and the Guidelines. Concerning the child labor issue, the Guidelines states that it is important to acknowledge the role of multinational enterprises in searching for a lasting solution to this problem and in raising the education standard of children living in host countries.
The Guidelines recommends that enterprises contribute to the elimination of all forms of compulsory labor while the 1998 ILO Declaration requested that governments “suppress the use of forced or compulsory labor in all its forms within shortest possible period.” The Guidelines also encourages the enterprises to raise the level of performance with respect to occupational health and safety in all parts of their operation even where this may not be formally required by existing regulations in countries in which they operate. (OECD 2000, 22). In addition, the Guidelines recommends that enterprises provide reasonable notice to the representatives of employees and relevant government authorities of changes in their operations which would have major effect upon the livelihood of their employees. They also noted that it is appropriate if, in light of specific circumstances, management were able to give such notice prior to the final decision. (Id. at 46). This is indeed a feature of industrial relations laws and practices in a number of adhering countries along with other means such as the laws and practices providing defined periods during which consultations must be undertaken before decisions may be implemented.
c. Sustainability/Environment. The Guidelines state that environmental management system provides the internal framework necessary to control an enterprise’s environmental impacts and to integrate environmental considerations into business operations. (Id., 47). Enterprises often carry out appropriate environmental impact assessments, even if they are not required by law. These assessments also examine alternatives and mitigation measures to avoid or redress adverse impacts.
The Guidelines made it clear in its Commentary that they are not intended to reinterpret any existing instruments or to create new commitments on the part of governments – they are intended only to recommend how the precautionary approach should be implemented at the level of enterprises. The Guidelines also recognized that some flexibility is needed in its application, based on the specific context in which it is carried out. It is also recognized that governments determine the basic framework in this field with the responsibility to periodically consult with stakeholders. The Guidelines encourage enterprises to raise the level of environmental performance in all parts of their operations by using, for example, technologies or operating procedures, even where this may not be formally required by the countries in which they operate. They emphasize the “demonstration effect” of the Guidelines. (Id.).
d. Combating Bribery. The Guidelines mentioned that heightening enterprises’ awareness of bribery as a management issue has been significant. (Id., 48). The OECD Convention of Combating Bribery of Foreign Public Officials (the Convention) which has been signed by 34 countries and entered into force on February 1999, the 1997 revised Recommendation on Combating Bribery in International Business Transactions and the 1996 Recommendation on the Tax Deductibility of Bribes to Foreign Public Officials are the core instruments through which the members of the anti bribery group co-operate to stop the flow of bribes for the purpose of obtaining or retaining international business. (Id., 49).
The business community, NGOs, governments and inter-governmental organizations have all co-operated to strengthen public support for anti-corruption measures and to enhance public awareness of the problems of corruption and bribery. The Guidelines states that adoption of appropriate corporate governance practices is a complementary element in fostering a culture of ethics within the enterprises.
e. Consumer Interests. In recognition of the increasing importance of consumer issues, a substantial percentage of enterprises, in their management systems and codes of conduct include references to consumer interests and protections. Varieties of consumer protection laws (already) exist that govern business practices. (Id., 50). The emerging framework is intended to protect consumer interests and foster economic growth while placing more emphasis on the use of self-regulatory mechanisms. Ensuring these practices provide consumers with effective and transparent protection is essential to help build trust that encourages (in turn) consumer participation and market growth. The complaints should be resolved in a fair and timely manner without undue cost or burden to the customers.
f. Science and Technology. MNEs are the main conduit of technology transfer across borders. (Id.). They contribute to the national innovative capacity of their host countries by generating, diffusing, and even enabling the use of new technologies by domestic enterprises and institution. (Id.). The R&D activities of MNEs, when well connected to the national innovation system, can help enhance the economic and social progress in their host countries. (Id., 50-51). In turn, the development of a dynamic innovation system in the host country expands commercial opportunities for MNEs. (Id. at 51). The Guidelines states that they aim to promote, within the limits of economic feasibility, competitiveness concerns and other considerations, the diffusion by MNEs of the fruits of R&D activities among the countries where they operate, contributing to the innovative capacities of host countries. (Id.) In addition, the Guidelines emphasized that MNEs can call attention to the importance of local scientific and technological infrastructure, both physical and institutional. In this regard, MNEs can usefully contribute to the formation by host country governments of policy frameworks conducive to the development of dynamic innovation systems. (Id.) This part assumes a proactive role for MNEs, which are assumed to be capable of putting effective pressure on and eventually convincing governments to develop an appropriate policy framework.
g. Competition. The term “competition” law is used to refer to laws, including both “antitrust” and “antimonopoly” laws, that prohibit collective or unilateral action to: a) abusive market power or dominance; b) acquire market power or dominance by means other than efficient performance; or c) engage in anti-competitive agreements. (Id.) In general, competition laws and policies prohibit: a) hard core cartels; b) other agreements that are deemed to be anti-competitive; c) conduct that exploits or extends market dominance or market power; and d) anti-competitive mergers and acquisitions. The Guidelines in this chapter intended to emphasize the importance of competition laws and policies to the efficient operation of markets, to reaffirm the importance of compliance with those laws and policies by domestic enterprises and MNEs, and to assure all enterprise are aware of development concerning the number, scope, and severity of competition laws. (Id., 52). Such a competitive environment also rewards enterprises that respond efficiently to consumer demands.
The growth of cross-border trade and investment makes it more likely that anti-competitive conduct taking place in one jurisdiction will have harmful effects in other jurisdictions. Enterprises should therefore take into account both the law of the country in which they are operating and the laws of all countries in which the effects of their conduct are likely to be felt. The Guidelines states that enterprises should provide information and advice when governments are considering laws and policies that might reduce their efficiency or otherwise affect the competitive of markets, and ought to be conscious of their role as a nexus point among the competition authorities of various states.
h. Taxation. The Guidelines states that corporate citizenship in the area of taxation implies that enterprises should comply with the taxation laws and regulations in all countries in which they operate, co-operate with authorities and make certain kinds of information available to them. (OECD 2000, 53). However, this recognizes the need to balance the burden on business in complying with applicable tax law and the need for tax authorities to have the complete, timely and accurate information to enable them to enforce their tax laws.
3. Dealing With Hybrids: The OECD Guidelines on Corporate Governance of State-Owned Enterprises. State owned enterprises and sovereign wealth funds present a unique problem for the governance of corporation. State owned enterprises are both public and private—they are both the property of the sovereign corporation (the state) and a person in its own right (as an autonomous corporation with a sovereign owner). Traditionally the sovereign character of the enterprise was privileged. It was an agency of the state first, and an economic entity only to the extent that this role served the paramount relationship to the state. Globalization has suggested an inversion of that relationship. Corporate constitutionalism would privilege the autonomous entity as a separate body corporate from that of its sovereign corporate owner. Corporate constitutionalism presumes the autonomy of the state-owned enterprise from the sovereign owner of its shares. In this task, the OECD nicely exposes the fundamental constitutional and supra national character of the transnational corporate constitutionalist enterprise—that the normative framework for the organization and behavior of corporations is grounded in universal principals beyond the state and subject to its own autonomous logic. For that purpose, the SOE Guidelines focus on the obligation to ensure an effective legal framework for SOE operation, managing the state’s role as owner, the equitable treatment of other shareholders, relations with stakeholders, transparency and disclosure, and the responsibilities of SOE boards of directors. Each is discussed in turn.
a. Ensuring an Effective Legal and Regulatory Framework for State-Owned Enterprises. A clear division of responsibilities among authorities and a coherent regulatory framework will facilitate the improvement of corporate governance in SOEs. There should be a clear separation between the state’s ownership function and other state functions (particularly market regulation): Full administrative separation of responsibilities is a fundamental prerequisite for creating a level playing field for SOEs and private companies, while also avoiding the distortion of competition. (OECD 2005, 19).
In order to prevent conflicts of interests, separation of the ownership function from any entities within the state administration which might be clients or main suppliers to SOEs is also necessary. General procurement rules should apply to SOEs as well as to any other companies. Streamlining of the legal form of SOEs would enhance transparency and facilitate oversight through benchmarking. It would also level the playing field with private competitors in increasingly deregulated and competitive markets. (OECD 2005, 20). The Annotations of the Guidelines for SOEs stated that streamlining should primarily concern the role and authority of the company’s governance organs as well as transparency and disclosure obligation. If changing the legal forms of SOEs proves too difficult, other options could be attempted, including streamlining the SOE’s operational practices, making some specific regulations more inclusive, or requiring SOEs to fulfill requirements from these specific regulations (particularly concerning disclosure requirements). The Guidelines note that in some cases SOEs are expected to fulfill special responsibilities and obligations for social/public policy purposes and these special responsibilities may go beyond the generally accepted norm of commercial activities. In that case, such extra-enterprise responsibilities (public or quasi public duties) should be clearly mandated by laws or regulations, and preferably incorporated in the company by-laws. Disclosure is also recommended about the nature and extent of these obligations as well as overall impact on the SOEs’ resources and economic performances. Related costs and adequate compensation by the state budget on the basis of specific legal provisions should be disclosed. (OECD Dec. 28, 2005, 188).
Exemption from the general legal provisions should be avoided to the fullest extent possible in order to avoid market distortions. In addition, stakeholders should be able to challenge the state as an owner in the courts and be treated fairly and equitably in such cases by the judicial system. (OECD 2005, 21). The states as an owner should develop an overall policy and provide mechanisms that allow appropriate changes in SOE’s capital structure. (Id. at 21-22). For example, state-owned banks should grant credit to SOEs on the same terms and conditions as for private companies. However, any change in the capital structure of an SOE should be consistent with the state ownership objective and the SOE’s specific circumstances. Thus, decisions should be adequately documented to allow effective accountability through audits or scrutiny by the Parliament. SOEs should face competitive conditions regarding access to finance. Their relations with state-owned banks, state-owned financial institutions and other state-owned companies should be based on purely commercial grounds. (Id.). Mechanisms should also be developed to manage conflicts of interests. This could include limits and careful scrutiny on SOE’s board members sitting on the board of state-owned banks. (Id., 22).
b. The State Acting as an Owner. Often the multiple and contradictory objectives of state ownership lead to either a very passive conduct of ownership function or state’s excessive intervention in decisions which should be left to the company and its governance organ. Thus, in order for the state to clearly position itself as an owner, it should clarify and prioritize its objectives. (Id., 23). In developing and updating the state’s ownership policy, governments should make appropriate use of public consultation, with the relevant documents made publicly accessible.
The governments should not be involved in the day-to-day management of SOEs and allow them full operational autonomy to achieve their defined objectives. The ownership or co-ordinating entity’s ability to give direction to the SOE or its board should be limited to strategic issues and policies. In addition, it should be publicly disclosed and specified in which areas and types of decisions the ownership or coordinating entity is competent to give instructions. (Id. at 24). The relationship of the co-ordinating or ownership entity with other government bodies should be clearly defined. In particular, the ownership entity should maintain co-operation and continuous dialogue with the state supreme audit institutions responsible for auditing the SOEs. The co-ordinating or ownership entity should also be held clearly accountable for the way it carries out the state ownership function. Its accountability should be, directly or indirectly, to bodies representing the interests of the general public, such as the Parliament. However, The accountability requirements should not restrict unduly the autonomy of the co-ordinating or ownership entity in fulfilling their responsibilities. (Id.). Thus the goal of the principles become clear—to cabin state authority over subordinate entities in which it exercises ownership rather than regulatory authority. To exercise both is to displace a public for a private power, which would threaten the integrity of the system of private markets. The state as an active owner should exercise its ownership rights according to the legal structure of each company. Its prime responsibilities include: being represented at the general shareholders meetings and voting the state shares; establishing well structured and transparent board nomination processes in fully or majority owned SOEs, and actively participating in the nomination of all SOEs’ boards; setting up reporting systems allowing regular monitoring and assessment of SOE performance; when permitted by the legal system and the state’s level of ownership, maintaining continuous dialogue with external auditors and specific state control organs; ensuring that remuneration schemes for SOE board members foster the long term interest of the company and can attract and motivate qualified professionals. (Id.).
c. Equitable Treatment of Shareholders. It is in the state’s interest to ensure that, in all enterprises where it has a stake, minority shareholders are treated equitably, since its reputation in this respect will influence its capacity of attracting outside funding and the valuation of the company. The underlying principle is that a state ought to strive to set an example in the organization and operation of enterprises in which it has an ownership stake. For that purpose, it ought to follow evolving international best practices regarding the treatment of minority shareholders. (Id. at 33). It is in the interest of the co-ordinating or ownership entity and SOEs themselves to refer to the OECD Principles of Corporate Governance with regard to minority shareholders’ rights. The Principles state that “Minority shareholders should be protected from abusive action, by, or in the interest of, controlling shareholders acting either directly or indirectly, and should have effective means of redress”. The Principles also prohibit insider trading and abusive self-dealing. Finally, the annotations to the OECD Principles suggest pre-emptive rights and qualified majorities for certain shareholder decisions as an ex-ante means of minority shareholders protection. (Id.).
A crucial condition for protecting minority and other shareholders is to ensure a high degree of transparency. SOEs, including any enterprise in which the state is a minority shareholder, should identify their shareholders and keep them duly informed in a timely and systematic fashion about material events and forthcoming shareholder meetings. (Id. at 35). The OECD Principles of Corporate Governance “support simultaneous reporting of information to all shareholders in order to ensure their equitable treatment. In maintaining close relations with investors and market participants, companies must be careful not to violate this fundamental principle of equitable treatment.” (Id.). As underlined in the OECD Principles of Corporate Governance, the right to participate in general shareholder meetings is a fundamental shareholder right. These could include qualified majorities for certain shareholder decisions and, when deemed useful by the circumstances, the possibility to use special election rules, such as cumulative voting. Additional measures should include facilitating voting in absentia or developing the use of electronic means as a way to reduce participation costs. Moreover, employee-shareholder participation in general shareholders meetings could be facilitated by, for example, the collection of proxy votes from employee-shareholders. It is also important that any special mechanism for minority protection is carefully balanced. (Id.).
d. Relations with Stakeholders. SOEs should acknowledge the importance of stakeholder relations for building sustainable and financially sound enterprises. (Id., 37). Any specific rights granted to stakeholders or influence on the decision making process should be explicit. Governments, the co-ordinating or ownership entity and SOEs themselves should recognize and respect stakeholders’ rights established by law or through mutual agreements, and refer to the OECD Principles of Corporate Governance in this regard. Implementation of the OECD Principles of Corporate Governance implies full recognition of the contribution of various stakeholders and encourages active and wealth-creating co-operation with them. To this end, SOEs should ensure that stakeholders have access to relevant, sufficient and reliable information on a timely and regular basis to be able to exercise their rights. Stakeholders should have access to legal redress in the event their rights are violated. Employees should also be able to freely communicate their concerns about illegal or unethical practices to the board and their rights should not be compromised for doing that. (Id., 38).
Good practice increasingly requires listed companies to report on stakeholder issues. By doing so, SOEs will demonstrate their willingness to operate more transparently and their commitment to co-operation with stakeholders. This will in turn foster trust and improve their reputation. Reports on stakeholder relations should include information on social and environmental policies, whenever SOEs have specific objectives in this regard. It might also be advisable that SOEs have their stakeholder reports independently scrutinized in order to strengthen their credibility. The OECD Principles of Corporate Governance recommend that boards apply high ethical standards. In the case of SOEs, there may be more pressures to deviate from high ethical standards given the interaction of business considerations with political and public policy ones. Moreover, as SOEs might play an important role in setting the business tone of the country, it is also important for them to maintain high ethical standards. SOEs should develop internal codes of ethics, committing themselves to comply with country norms and in conformity with broader codes of behavior including the OECD Guidelines for Multinational Enterprises. (Id. at 39). The code of ethics should include guidance on procurement processes and develop specific mechanisms protecting and encouraging stakeholders (particularly employees) to report on illegal or unethical conduct by corporate officers. In this regard, the ownership entities should ensure that SOEs under their responsibility effectively put in place safe-harbors for complaints for employees.
e. Transparency and Disclosure. Co-ordinating or centralized ownership entities should develop aggregate reporting that covers all SOEs and make it a key disclosure tool directed to the general public, the Parliament and the media. This reporting should be developed in a way that allows all readers to obtain a clear view of the overall performance and evolution of the SOEs. Aggregate reporting is also encouraged as important for co-ordinating or ownership entities to aid in deepening their understanding of SOE performance. The aggregate reporting should result in an annual aggregate report issued by the state. It should provide an indication of the total value of the state’s portfolio, a general statement on the state’s ownership policy and information of the ownership function, an overview of the evolution of SOEs, aggregate financial information and reporting on changes in SOEs’ boards, main financial indicators including turnover, profit, cash flow operating activities, gross investment, return on equity, equity/asset ratio and dividends, and the methods used to aggregate data etc. (OECD 2005, 41).
As in large public companies, it is necessary for large SOEs to put in place an internal audit system. “Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.” To increase their independence and authority, the internal auditors should work on behalf of, and report directly to the board and its audit committee in one-tier systems, to the supervisory board in two-tier systems or the audit boards when these exist. Consultation between external and internal auditors should be encouraged. To reinforce trust in the information provided, the state should require that, in addition to special state audits, at least all large SOEs are subject to external audits that are carried out in accordance with international standards. External auditors should be subject to the same criteria of independence as for private sector companies. This generally includes limits on providing consulting or other non-audit services to the audited SOE and periodic rotation of audit partners or audit firms. (Id., 43).
In the interest of the general public, SOEs should be as transparent as publicly traded corporations. Regardless of their legal status and even if they are not listed, all SOEs should report according to best practice accounting and auditing standards. All SOEs should disclose financial and non-financial information, and large and listed ones should do so according to high quality internationally recognized standard. SOEs should disclose material information on all matters described in the OECD Principles of Corporate Governance and in addition focus on areas of significant concern for the state as an owner and the general public. This includes financial and operating results, remuneration policies, related party transactions, governance structures and governance policies. The information should include termination and retirement provisions, as well as any specific facility or in kind remuneration provided to board members. (Id., 44). Examples of such information include: (1) a clear statement to the public of the company objectives and their fulfillment; (2) ownership and voting structure of the company; (3) any material risk factors and measures taken to manage such risks; (4) any financial assistance, including guarantees, received from the state and commitments made on behalf of the SOE; and (5) any material transactions with related entities. (Id.).
f. The Responsibilities of the Boards of State-Owned Enterprises. It is important that SOEs have strong boards that can act in the interest of the company and effectively monitor management without undue political interference. (OECD 2005, 47). To this end, it will be necessary to ensure the competency of SOE boards, enhance their independence and improve the way they function. SOE boards should, in principle, have the same responsibilities and liabilities as stipulated in company law. However, in practice, board members may have a reduced liability, particularly the ones nominated by the state. Thus, the responsibilities of SOE boards should be articulated in relevant legislation, regulations, the government ownership policy and the company charters. Moreover, to underline the board’s responsibilities, a Directors’ Report should be provided along with the annual statements and submitted to the external auditors. The Directors’ Report should give information and comment on the organisation, financial performance, material risk factors, significant events, relations with stakeholders, and the effects of directions from the co-ordinating or ownership entity.
In order to carry out their role, SOE boards should actively i) formulate, monitor and review corporate strategy, within the framework of the overall corporate objectives; ii) establish appropriate performance indicators and identify key risks; iii) monitor the disclosure and communication processes, ensuring that the financial statements fairly present the affairs of the SOE and reflect the risks incurred; iv) assess and follow management performance; v) develop effective succession plans for key executives. (Id., 48-49). One key function of SOE boards should be the appointment and dismissal of CEOs. (Id. at 49). Without this authority it is difficult for SOE boards to fully exercise their monitoring function and feel responsible for SOEs’ performance. Regardless of the procedure, appointments should be based on professional criteria. Rules and procedures for nominating and appointing the CEO should be transparent and respect the line of accountability between the CEO, the board and the ownership entity. Any shareholder agreements with respect to CEO nomination should be disclosed. (Id.) Moreover, the appointment of different individuals to serve as board of directors chair and as CEO should be considered as a fundamental step in establishing efficient SOE boards. (OECD 2005, 50). For enhancing board independence, the OECD Principles of Corporate Governance also consider that it may be regarded as a good practice that the Chair person is separated from the CEO in single board structures. Separation of the Chair from the CEO helps in “achieving an appropriate balance of power, increasing accountability and improving the board’s capacity for decision making independent of management”.
C. The Constitutional Markers of Legitimate Corporate Governance.
From the fairly long descriptive exposition of the principles of corporate behavior distilled in the principles and guidelines produced by the OECD, the constitutional scope of transnational corporate governance becomes clear. The most important element is the least well expressed—the detachment of corporate governance from the state to the transnational level of governance. Whatever the source of constitutional principles—that source is no longer centered on or dependent on the state for its articulation or control. The principles exemplified by the OECD governance projects, and those like it that seek to elaborate a constitutional system of corporate governance and behavior, start from a presumption of universal values as a basis for the organization of corporations and their governance structures. In that context, the state retains an important role, but not the principal regulatory role. The state is expected to participate in elaborating the system of corporate governance through compatible rules, but the scope of those rules does not proceed from national idiosyncrasies. Instead, they develop from the universal values of corporate governance.
The general substantive elements follow a constitutional model as well. It is focused on the construction of a rule-of-law government and on setting substantive limits on the activities of that government both with respect to corporate insiders and all other actors with whom the corporation deals. Like political constitutions, the focus is on the demos; in the case of the corporation, its shareholders. The centrality of shareholders to the legitimacy of the organization of the government of a corporation (run through elected board members and appointed officers responsible to the Board of Directors) is emphasized. Protecting the participation rights of shareholders assumes an importance equal to that focused on the protection of citizen voting rights in political constitutions. At the same time, the position of other groups with important interests in the functioning of the corporation is also protected, though to a lesser extent. They, like individuals with social and economic but not political rights in states, are entitled to the protection of their interests but not to any rights to participate in the government of the corporation. A legitimate government, one in which the representatives of the political rights holders are protected, is dependent on the full and free flow of information from the government to those governed.
Corporate constitutionalism devotes substantial efforts in that regard. Disclosure and transparency serve as the cornerstone to the integrity of the government, and the effectiveness of the power of shareholders to control their agents—directors and officers. The connection between the obligation of government to disclose and conduct its affairs transparently is matched by the obligations of shareholders (like their agents) to monitor. The objects of that monitoring are the agents of the shareholders—directors and officers. With respect to those, the corporate constitution, like its political counterparts, seeks to establish the fiduciary role of the directors. Like elected officials, they serve the interests of the electorate for the greater glory of the institution, but to that end are expected to act independently of any individual shareholder or group of shareholders. They are also required to act in accordance with law. Procedural protections are as important in corporate as in political constitutionalism. In the aggregate, these principles lay out the sort of deep constitutionalism that mark political constitutionalism. (Peerenboom 2001). In the construction and operation of a government, higher order principles of process and substantive (values) norms are elaborated for delimiting the space within which legitimate corporate government may be actualized.
Nevertheless, corporate constitutionalism does more. It also extends corporate substantive norms, norms that establish the limits of corporate behavior that can be deemed legitimate, with respect to all of the activities of the government of the corporation. Again, the parallels to political constitutions are inescapable. The Guidelines for Multinational Enterprises and other similar efforts, seeks to establish a behavioral baseline the way that the first 20 articles of the German Basic Law attempt something similar for the governance of the German polity. (German Basic Law, arts. 1-20). Most important among these are those of the U.N. (Ruggie 2007; Ruggie, 2009). The foundation of these relationships is both an obligation to obey the local law of states in whose territories corporate activity occurs (suggesting the traditional position of corporate inferiority to the state) but also the duty to function as a partner to states as they seek to harmonize their local rules to emerging transnational norms (suggesting a more horizontal relationship). (OECD 2000, 39-40). Beyond that, the corporation owes duties similar to those imposed on governments of political states. Foremost among them are the obligations to operate transparently and in accordance with generally accepted ethical principles. The connection between the obligation to disclose the choice about what to disclose is particularly strong. (Backer 2008b). Those obligations need not be imposed by states, but may be sourced from a legitimate transitional organ that forges a consensus about particular ethical behaviors. For other approaches to transnational constitutionalism, the framing of ethical obligations assumes a greater role.
But also critical as a basic foundational cluster of behavior obligations are those relating to the relations between the corporation and employees and between the corporation and all activities that affect issues of sustainability and environmental management. In both cases, the normative framework for the protections of labor and the environment are standards developed at the transnational level—whether or not such may be legally binding obligations on states. Yet, that is the point. These norms are meant to operate independently on corporations as such. They are not dependent on the obligations of states and their ability to transpose those obligations into national law systems. Additional constraints on corporate behavior touch on corruption and bribery, and the transfer of technology across borders. Additionally the protection of the end users of corporate productivity—consumers—is also elaborated. Each of these represents a constraint on government activity to further the human and development rights of people affected by corporate activity. Likewise, ethical behavior is also protected through the emphasis on rules of fair competition and taxation. These are meant to preserve the integrity of the markets on which the community of corporations depend and the jurisdiction of states. Taxation and competition touch on matters where state and corporate interests intersect. The rules are meant to serve to maximize the collective interests of both.
Lastly, the importance of human rights incorporate constitutionalism cannot be overstated. Like political state constitutionalism, corporate constitutionalism is fundamentally tasked with the protection of human rights. This is an essential limitation on corporate conduct, both with respect to the establishment and operation of its government and in its dealing with other stakeholders. This is most apparent, not in the work of the OECD, but in that of the U.N. Special Representative of the Secretary General on the issue of human rights and transnational corporations and other business enterprises. (Ruggie 2009). His “protect, respect and remedy” framework for the protection of human rights by transnational corporations is also likely to form an important part of the framework of transnational corporate constitutionalism. “The framework rests on three pillars: the State duty to protect against human rights abuses by third parties, including business, through appropriate policies, regulation, and adjudication; the corporate responsibility to respect human rights, which in essence means to act with due diligence to avoid infringing on the rights of others; and greater access by victims to effective remedy, judicial and non-judicial.” (RUGGIE 2009 Report A/HRC/11/13 at ¶2). Ruggie assumes both the power and legitimacy of an enforceable normative framework for corporate constitutionalism above that of the state. “Companies know they must comply with all applicable laws to obtain and sustain their legal license to operate. However, over time companies have found that legal license alone may not ensure their social license to operate, particularly where the law is weak.” (RUGGIE 2009 Report A/HRC/11/13, at ¶46). He assumes the foundation of corporate constitutionalist norms, like the substantive obligation to respect human rights, as grounded in “well established and institutionalized social norms [which] exists independently of State duties and variations in national law.” (Ruggie 2009, at ¶48). As such, these norms serve as the “baseline norm for all companies in all situations.” (Id.).
Similarly, considering another voluntary corporate citizenship initiative, the UN Global Compact has also contributed. The UN Global Compact was first announced by the then UN Secretary-General Kofi Annan in an address to The World Economic Forum on January 31, 1999, and was officially launched at UN Headquarters in New York on July 26, 2000. Today the initiative boasts of more than 5000 participating organizations across the world. (U.N. Global Compact, History). Its overarching mission is to build a more sustainable and inclusive global economy. (U.N. Global Compact, Overview). Specifically, the initiative has two objectives. The first is to mainstream the ten principles in business activities around the world; the second is to catalyze actions in support of broader UN goals, including the Millennium Development Goals (MDGs). (Id.). The ten principles urge human rights, labor right, environment protection and anti-corruption upon companies. The first and second principles are dedicated to protect human rights worldwide without distinction as to race, color, sex, language, religion, political or other opinion, national or social origin, property, birth or other status. (U.N. Global Compact, After the Signature, 13). The first principle provides that “[b]usinesses should support and respect the protection of internationally proclaimed human rights.” (Id.). The second principle provides that “Businesses should ensure that they are not complicit in human rights abuses.” (Id.). The second principle is meant to prevent all forms of complicity committed by a corporation, which include direct complicity, beneficial complicity and silent complicity. UN Global Compact office further explains that “[t]here are several types of complicity.” “Direct complicity occurs when a company actively assists in human rights violations committed by others. Beneficial complicity suggests that a company benefits directly from human rights abuses committed by others. Silent complicity describes a situation where a company may not be assisting or encouraging human rights violations, nor benefiting from the actions of those that commit abuses, but is viewed as staying silent in the face of human rights abuses.” (Id.). The others mirror, in more general form, the OECD Guidelines for Multinational Enterprises.
The intersection of state and corporate interest, and their governance norms, touched on in the complicity related norms of the Global Compact, for example, comes to the fore in the form of the OECD’s state-owned enterprises. The rules of constitutionalization of that element of corporate governance are meant to effect a separation of the corporation from the state. In essence, they seek to preserve the autonomy of the corporate person from the corporate personality of the state. Here the corporate constitution works on the state as well as on the corporation. It seeks to reduce the state from a regulator to a participant. In similar frameworks for the regulation of sovereign wealth funds, the effect is more striking and more direct. (Backer 2009c). Consequently, states are urged to act like owners rather than regulators, to respect the autonomy of the corporate entity, and especially its government. Failure to do either effectively collapses the corporate government into the superior government of the state. States are also urged to treat other shareholders equitably—effectively suggesting that all shareholders, whether sovereign or private, be able to assert rights and protect their interests in similar ways. The same applies to relations with stakeholders. Where the state owned enterprise is meant to further goals specifically focused on the interests of the state shareholder, those interests and the consequences for corporate governance ought to be made known to all corporate actors. And thus, the constitution of state owned enterprises tends to focus on disclosure and transparency, as well as the power of the board of directors to act for the corporation rather than in furtherance of the interests of the state owner-shareholder—in this context it is critically important for the preservation of the autonomy of the corporate enterprise and the legitimacy of the entity as a corporation and not merely as a market participatory department of a political sovereign actor.
These values are not produced arbitrarily. They are each drawn from what is or might be eventually considered the consensus of values on each of these points. That consensus is drawn from international instruments, conventions and customary international law. (OECD Responses; Ruggie 2009). These are the same sources that have informed the value systems of transnational constitutionalism for political constitutions. (Backer 2008). In that sphere, consensus is produced through the actions of the community of nations evidenced in the instruments that they adopt (whether or not legally binding) and the conduct that they respect as a collective. The example of the recent international response to the political changes in Honduras provides a sharp case in point. (Cassel 2009; Backer July 29, 2009). Consensus for corporate constitutionalism is produced in a way that mimics the forms by which customary law is established and legitimated—from the bottom up.
John Ruggie describes the process with respect to the transnational constitutionalization of obligations to respect human rights by reference to two critical factors. First is the acknowledgement of the norm by corporate actors burdened with the obligation and the memorialization of that obligation in soft law instruments. Second is the willingness of international civil society to rely on the norm in holding corporations accountable, at least with respect to their social license to operate. Ruggie explains:
By near universal is meant two things. First, the corporate responsibility to respect is acknowledged by virtually every company and industry CSR initiative, endorsed by the world’s largest business associations, affirmed in the Global Compact and its worldwide national networks, and enshrined in such soft law instruments as the ILO Tripartite Declaration and the OECD Guidelines. Second, violations of this social norm are routinely brought to public attention globally through mobilized local communities, networks of civil society, the media including blogs, complaints and procedures such as the OECD NCPs, and if they involve alleged violations of the law, then possibly through the courts. (Ruggie 2009, at ¶47).
Note however, the incidental role of formal law making and the state in the construction, elaboration and enforcement of these norms. In this framework, governing corporate conduct, the sources of law lies well outside states and traditional law making. A similar approach was taken under the abandoned efforts to adopt an international set of norms of corporate behavior focused on the multinational corporation. (United Nations ECOSOC 2003; Weissbrodt and Kruger 2003). There, the normative framework was to be reinforced by a requirement that all entities covered by its provisions adopt the standards as the internal rules of their operation, that is, incorporate the norms as a basis for organizing their governments, and that the normative framework was to form the basis of all contractual relations involving affected enterprises. (Backer 2006a, 343). The substantive provisions of the Norms were, like that in the “protect, respect and remedy” framework, broadly scoped but grounded in international consensus. In the case of the Norms, that consensus was to be reflected in civil, cultural, economic, political, and social rights “within the United Nations system.” (United Nations ECOSOC 2003, at ¶ 23).
Together, they now form a coherent framework for the constitutionalist project—to be able to distinguish between legitimate and illegitimate corporate government and activity, to articulate the core characteristics of legitimate corporate governance and behavior grounded in the substantive values derived from sources beyond the control of any individual corporation. (Backer 2009). But this is hardly to suggest that the project of corporate constitutionalism is either well established or now firmly rooted as a legitimate framework for global governance. States remain reluctant participants in this endeavor, and the largest among them wary of any effort to undermine their at least formal supreme control of the normative framework and legal basis for managing corporate behavior within their borders. That wariness doomed the recent effort to establish a formal set of unified norms for multinational enterprises at the international level. (Recounted in Backer 2006a, 374-80). Indeed the more powerful among state actors continue to pursue internationalizing policies through the application of their own legal frameworks extraterritorially. (Zerk 2006, 145-197). Zerk concludes, though, that “there is no real evidence to suggest that extraterritorial CSR initiatives are being introduced out of any sense of legal compulsion; rather it is a result of a mixture of political and economic self interest. (Id., at 196). And, as John Head recently reminded us in his effort to extract general principles of corporate governance (a global common law of corporations, in a sense), “[m]ost law is national law. That is, the rules that govern behavior, including economic activity, exist at the level of a particular country.” (Head 2008, xvii). This draws a stark contrast to the elaboration of a corporate transnational constitutionalism, grounded in soft law and in the organs and activities of a variety of shifting non-state actors, in which states play, at best, an indirect and ultimately subsidiary role. For many, this is not law, much less constitutionalism. (Dibadj 2008; Le Goff 2006).
Yet, this essay has suggested the outlines of a very real system that can be discerned. There is evidence here that though law and the state system that legitimates it remain “the preeminent political actor on the global stage; but the aggregation of states—what has been called a ‘state system’—is no longer consistently in control of the global policy process.” (Falk 1999, 35). The emerging outlines of corporate constitutionalism beyond the state represents, in a very real sense, the possibilities of a “polycentric process in which simultaneously differing areas of life break through their regional bounds and each constitute autonomous global sectors of themselves.” (Teubner 2004, 13). But this corporate constitutionalization requires more than the identification of norms; it requires an institutional grounding that can serve as both a legitimating structure for such norms, the gatekeeper for emerging norms and the authentic source of interpretation of those norms. An autonomous community requires an autonomous and self-conscious institutional framework to reify itself in opposition—or at least in contradistinction—to the state.
This requires the constitution of government without a state organized around the community of corporate actors subject to its norms. This refers not merely to commodity chains (Gereffi and Korzeniewicz 1994), or stakeholder communities built around supply chain governance (Backer 2007), but to autonomous organs capable of generating authentic and legitimate norms authoritative within the regulatory community. Thus, “the intermeshing of networks of multinationals with networks of states. The model of the state and the multinational as the basic and default binary foundation of analysis may no longer be as relevant as it once might have been. Just as Multinationals have congregated within networks, so too have states. It is those functionally differentiated networks of states--either formally or informally constituted--that might best serve the interests of helping corporate codes reach escape velocity.” (Backer June 25, 2009). “That result is not a product of altruism. But instead it might flow naturally form the value to groups of states of a consolidated and autonomous community with which it might negotiate for more efficient global relationships. Here, globalization is a crucial factor.” (Id.). It is to the possible institutionalization of those normative sources that the essay turns to next.
II. The Normative Structure of Transnational Corporate Constitutionalism: Sources and Institutions.
This essay has spoken of the rise of supra national principles of corporate governance, principles that serve as a basis for the constitutional regulation of the corporate enterprise beyond the state. But where do these principles come from? How are they managed? This section considers the institutional framework within which the principles of constitutional limitations are fashioned and the glimmerings of what appear to be the rise of a global set of autonomous framework for the construction of global constitutionalism.
In a simpler time, about a generation ago, the fictional divisions into which social, cultural and legal life were segmented, were both simple and powerful methods for organizing communal life. It was especially straightforward with respect to the construction and control of fictional persons, and especially fictional actors organized for the purpose of conducting economic activity.
Like Athena born fully formed from out of the head of Zeus, these juridical persons were said to be given form by the state under whose rules these entities were "organized". While some might argue that these corporate or entity charters gave these fictive entities life, it might be more useful to think of state charters as granting economic entities certain rights and obligations in the public sphere. These entities exist in the form of their internal organization and connections among its principle stakeholders, but can claim the public rights of natural persons only to the extent that the public authorities permit it. In the absence of those permissions, these entities exist only as private arrangements (through contract) rather than as public juridical persons (through law).
But this simple notion of state, law and juridical persons, of governance and government, has been undergoing substantial changes over the last quarter century. (Recounted in Backer 2006a; Zerk 2006). Governance is no longer purely the province of government, though it hasn't abandoned the state entirely. Contract, moral obligations, and communal consensus expressed in otherwise non-binding instruments have begun to assert a regulatory power far in excess of the extent of their formal effect in law within a system in which only legitimately enacted state measures are vested with a power to demand conformity and which may be enforced through the instrumentalities of the state. This is a complicated process; it is messy and may not be clearly headed toward "success" in the conventional sense. Gunther Teubner recently reminded us of the complexity and Tentativeness of the process. (Teubner 2009).
But in a global regulatory context in which “no one is in charge,” (Friedman 1999, 112) the regulation of large multinational corporations has become as complex a subject as the regulation of states within a transnational or international framework—and as contested. Currently, among the CSR community, there are three principal approaches to the deployment of CSR in the context of corporate regulation—the extraterritorial application of the (favored) laws of certain jurisdictions (usually created by developed states); the development of substantive rules of corporate responsibility as international law (usually reflecting the position of developing states though serving the policy objectives of portions of developing state elites) and privatization of corporate regulation beyond the traditional scope of corporate governance. (Backer 2008c).
Though much talked about, none of these have been successful. Instead, a complex system of “effective governance is achieved through multi-level cooperation and through decentralized soft mediation based implementation.” (Schuler 2008).
This section examines the development of and current efforts to ‘operationalize’ transnational constitutionalism outside of the state through the establishment of a network of actors that together might oversee, at least in a loose way, an autonomously constituted sector of stakeholders, consisting of economic enterprises, civil society elements, intergovernmental organizations, the media, investors and consumers. (Backer 2008c). Together they serve as a critical source of legitimating norms applicable to corporations above state law within the “protect, respect, and remedy” framework. (Ruggie 2009). This is a framework whose outlines are already visible in the regulation of the relationships among multinational corporations and their suppliers. (Backer 2007). Yet it is perhaps best understood as an amorphous, but in outline at least substantially distinct, “network of power relations . . . forming a dense web that passes through apparatuses and institutions without being exactly localized in them.” (Foucault 1978, 96).
The elaboration of an institutional framework through the OECD and the “protect, respect and remedy” framework nicely demonstrates this new form of institutionalization above and beyond the state. It examines two aspects of the institutional framework of transnational corporate constitutionalism. The first is the framework for the development of norms. The second is the framework for their implementation. Both will suggest the importance of multi-actor networks and a consensus based governance model. Yet they also hint at the institutional forms of that consensus methodology and the systems being developed for legitimating the actions of these actors, both among themselves and within the greater community of actors with an interest in economic regulation and management.
A. Standard Setting.
The differences between the processes of law making by states (even constitutional lawmaking) and norm making by non-state actors is great. But the differences in the system does not necessarily suggest the absence of institutionalized decision making in a way that produces an authoritative outcome, at least within the community producing it. In reviewing the process for formulation of a global standard for corporate social responsibility by the International Organization for Standardization (ISO 26000), known as ISO 26000, Craig Murphy and JoAnne Yates remind us of a long development of legitimating regulatory forms distinct from those employed to produce law or regulation through the organs of state government, grounded in a voluntary consensus standard setting (VCSS) process. (Murphy and Yates 2009, 5-25; Schmidt 1998, 167-71; Murphy 1999, 84-104). This was a process born out of both the need for effective alternatives to stymied efforts at more formal international regulation and the movement to privatize regulation that became fashionable in the 1970s. (Murphy and Yates 2009). “Recall that the late-1970s marked the beginning of a period when some governments throughout the industrialized world became champions of deregulation and the self-policing of industry, ironically, shortly after a burst of increasing governmental regulation of TNCs (the post-Watergate-era reform legislation) and the earliest comprehensive environmental legislation. In the context of the new era of deregulation, governments promoted private schemes to carry out some of what had been their very recent new legislative agenda, things like increasing consumer and workplace safety and reducing air and water pollution. At the same time, the deregulated world created a niche for companies that wanted to demonstrate a higher than average level of social responsibility as part of their business strategy.” (Murphy and Yates, ISO 26000, 2009, 13).
Its cultural origins suggested organizations of people in functionally differentiated communities that aspired to a self knowledge as “practical, internationalist, modest, democratic, and process oriented people who served the common good.” (Murphy and Yates 2009, 14). These entities, built around different and highly malleable bodies of interest created a space for legitimating the work of non-governmental organizations of persons for developing norms that are then accepted as authoritative by other stakeholders—and the state. These now serve as a bridge between regulable communities and the state. Its most dramatic effect was on the regulatory framework of the European Union when in the 1980s it privatized technical regulation to industrial standardization bodies. (Technical Harmonization Standards, Bull. EC 1-1985). Thus, by the time global standards of transnational actors became important, states and non-state actors had already developed an institutional framework and methodology for producing norms and standards outside of the state but authoritative within it. That culture of consensus in norm production from the ground up and fashioned by the community of stakeholders in a process-protected manner now can serve as the basis for governance of transnational actors as well. Thus, the mechanics of norm generation for transnational corporate constitutionalism—stakeholder based and bottom up—is based on a form of standard setting that has deep roots in the developed world. It represents, in a sense, incremental rather than revolutionary change.
It is this process, of course, that links the “protect, respect, and remedy” framework developed through the work of John Ruggie as Special Representative of the U.N. Secretary General, and derived from what many recognize as his path breaking and influential work on ‘embedded liberalism’ (Ruggie 1982) with regulatory standard setting beyond the state. Ruggie’s initial position was relatively conservative from that perspective—requiring a reliance on a framework whose boundaries was protected by a consensus among states of sufficient economic and military strength to permit activity within those protective walls, a commitment to a multilateral framework for common issues preserving national autonomy. (Bernstein 2008). And to some extent that still pervades the grounding of “protect, respect, and remedy.” At the same time, it does two things—expanding the scope of norms binding on actors beyond the narrow group of obligations that form legally binding commitments under international law (Ruggie 2009), and extending the breadth of those covered by these obligations from states to all corporate actors. “Finally, companies need to know the substantive content of this due diligence process, or which rights it should encompass. The answer is simple—in principle all internationally recognized human rights.” (RUGGIE 2009 Report A/HRC/11/13, ¶ 52). Indeed, the Report notes the advances made to refashion the formal legal language of such instruments evidencing the scope of international human rights obligations from its state to state framework to one in which the effect on corporate behavior becomes clearer. (Id., at ¶57). That substantially extends the autonomy of corporate actors and their duties beyond the umbrella provided by states. “Discharging the responsibility to respect human rights requires due diligence whereby companies become aware of, prevent, and mitigate adverse human rights impacts of their activities and relationships. The responsibility to respect is not intended to carry the entire burden of the business and human rights agenda: it is bracketed by the State duty to protect on one side and access to effective remedy on the other.” (RUGGIE 2009 Report A/HRC/11/13, ¶ 85).
These standard setting communities are not necessarily organic, arising naturally from a spontaneous communion of actors seeking to organize a community for the regulation of a particular set of norms. Increasingly, these communities are consciously created and guided to their tasks not merely by critical stakeholders in the community but by others—states and international organizations—seeking to make more pointed used of their instrumental characteristics. The construction of standard setting communities, and their importance as authoritative and legitimating sites for the production of norms above the state, is especially well evidenced in the U.N.’s Global Compact project. This project serves as an example of an influential example of a self-consciously constructed community of corporate actors operating at a supra-national level to serve as an authoritative site for the production of behavior norms deemed legitimate not only within the served community but between its members and outsiders. The United Nations Global Compact is an initiative to encourage international businesses to adopt sustainable and socially responsible business practices and policies and to report back on their development and implementation. As defined on the UN Global Compact website, it “is a strategic policy initiative for businesses that are committed to aligning their operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption.” (U.N. Global Compact, Brochure, at 2). The Global Compact is an initiative that seeks to promote social and environmental principles in the new global economy by engaging the private sector directly, in cooperation with international labor and NGOs. (Ruggie 2001).
The UN Global Compact (GC) [FS1] was launched in 2000 as “a policy platform and a practical framework for companies that are committed to sustainability and responsible business practices.” (Global Compact Brochure). The GC seeks to align business operations and strategies with ten universally accepted principles which are based in the areas of human rights, labor, environment and anti-corruption. Through special programs, resources and management tools, the GC aims to advance to objectives which complement each other. (Id.).
The UNGC is a voluntary initiative, not a regulatory instrument like other initiatives. It relies on public accountability, transparency and disclosure to complement the other regulation, while at the same time allowing for innovation and adaptation. (Id.). The idea of the Global Compact is to combine the moral authority and convening power of the UN with the efficient solution-finding strengths and resources of the private-sector; it also involves the expertise and capacities of other key stakeholders. The culmination of all these elements makes the initiative global and local, public and private, and voluntary while simultaneously being accountable. (Id., at 3). Within this community, the U.N. describes its role as passive role, serving as a neutral facilitator and a platform for dialogue so companies can improve globalization and make the world a better place through the implementation of policies related to human rights, labor, environment and anti-corruption. (Id., at 5). The UNGC also provides great support and resources for participants to demonstrate leadership and to aid in the advancement of the ten principles. One major resource of the GC is the use of Local Networks which are self-run organizations by the companies in the area which provide support to companies in the network with issues within each regional area and cultural context. These Local Networks are mostly to assist in the implementation of the GC for local firms and for subsidiaries of transnational companies. They also assist companies with their Communications on Progress which are to outline to the governing body of the GC what they are doing and how they are improving their implementation of the ten principles. (Id.).
The participants of the Global Compact are companies around the world, which may include both SMBs (small/medium businesses) and larger corporations. They are all required to have a “commitment” signed by the CEO of the company, and where applicable, endorsed by the highest-level governance body within the organization. The barriers to entry into the Global Compact are set low, making it relatively easy for virtually any economic enterprise to join the community. The reasons are fairly clear. Joining permits participation in the normative work of the community, but it also requires an active commitment to advancing the ten principles as are other much larger companies. (Id at 4). Thus, a member company must 1) Make the UN Global Compact and its principles an integral part of business strategy, day-to-day operations, and organizational culture; 2) Incorporate the UN Global Compact and its principles in the decision-making processes of the highest-level governance body (i.e. board); 3) Engage in partnerships to advance broader development objectives (such as the Millennium Development Goals); 4) Integrate in its annual report (or in a similar public document, such as a sustainability report) a description of the ways in which it implements the principles and supports broader development objectives (also known as the Communication on Progress); and 5) Advance the UN Global Compact and the case for responsible business practices through advocacy and active outreach to peers, partners, clients, consumers and the public at large. Additionally, it is suggested that participants give donations to run the GC, though they are not significant as the largest suggested annual contribution is only $10,000 USD for companies with annual sales of over $1 billion USD, while the smallest is $500 USD for companies with sales under $250 million. (Id., at 4).
The work of the Global Compact is heavily centered on policy dialogue, which takes place at the global, regional and local levels in order to achieve that goal. (Id.). Additionally, the Global Compact has launched what it calls specialized workstreams on critical issues such as climate change, water, management education, or responsible investment. (Id.). The UNGC also asks its participants to seek partnerships in support of broader UN goals. (Id.). The comprehensive effort then produces a system that creates a community of actors around a functionally distinct set of regulatory objectives which the community members are meant to produce, internalize, and spread to other potential members. In this, the system works like a religion, both outside and within systems of political governance with which it may share members but not functions.
Likewise, OECD standard setting suggests a similar legitimating institutional process, grounded in consultation, participation and consensus among the principal actors within the regulated community. Thus, for example, the 2004 revisions to the Principles of Corporate Governance, were legitimated through an elaborate process of stakeholder consultation. (OECD Policy Brief 2004). The essence of the process duplicates the political process rules for democratic authority within many developed states. But the critical factor is that the old direct connection between territory-state-regulation has been broken. The effective site of regulation or at least norm creation has been moved to a different plane of governance in which, though in some instances states take a leading role, they are one of any number of constituencies within a new community in which they share regulatory space with corporations and those other stakeholders participating in the community of corporate governance. The most significant characteristic of standard setting institutionalization, then, is its movement away from the state, and its adoption of process rules for the production of norms grounded in consultation and consensus. This reverses the usual relationship of governance to object—here soft law produces hard effect.
The greater innovation lies in the area of enforcement. It is here, rather than in norm setting, that will see the greatest effect on the extent of state power. It is one thing to devolve standard setting—even constitutional standard setting—to others for naturalization within national legal orders, or for harmonization in some other way. It is quite another to cede the power to settle disputes on the basis of standards over which the state no longer has effective singular control. But again, this is an area where the state has been ceding ground for some time and the effects, though ultimately significant, may appear incremental rather than revolutionary.
The most significant characteristic of enforcement is diffusion. Unlike standard setting, which requires the location of standard pronouncement within organized groups (irrespective of their number and membership), enforcement of transnational norms appears quite capable of piecemeal and unstandardized regulation. Like directives within European Union regulation, enforcement and the effectuation of remedies appears capable of devolution to all sorts of state and non-state organs. What is required, however, is action that approaches uniformity in the application of the standards that are the subject of enforcement. The outline of this emerging system is hinted at in recent work. John Ruggie has noted that “judicial and non-judicial mechanisms sometimes are thought of as mutually exclusive, and in some circumstances, they may be. . . But typically the two mechanisms are more interactive, and may be complementary, reinforcing, sequential or preventive.” (Ruggie 2009, at ¶ 91). Enforcement mechanisms exist at the company, national and international level. (Ruggie 2009, at ¶ 99-114). They may be private, public or mixed.
The Special Representative’s 2008 report included six grievance mechanism principles for all non-judicial mechanisms: legitimacy, accessibility, predictability, equitability, rights-compatibility, and transparency. He has included a seventh principle for company-level mechanisms; that the company should operate through dialogue and mediation as opposed to the company serving as adjudicator. (Ruggie 2009, at ¶ 99). At the company level, effective grievance mechanisms play an important part in the corporate responsibility to respect. They complement monitoring or auditing for human rights compliance and also provide a channel that the company can use for early warning signs. (Ruggie 2009, ¶ 100). By tracking complaints, companies can identify systemic problems and develop ways to prevent future harms. Moreover, the scale and complexity of company mechanisms will depend on the extent of the potential impacts. Mechanisms do not need to be cumbersome to be effective, and they can also be outsourced or shared with other operations within a company. (Id., at ¶101). At the national level, NHRIs and NCPs of states that adhere to OECD Guidelines are potentially important avenues for remedies at the national level. The SRSG has contributed to various meetings of NHRIs and has addressed annual meetings of NCPs. (Id., at ¶ 102). Although some NHRIs preclude them from working on business and human rights issues, it is mostly an issue of choice, tradition or capacity. It is hoped by the SRSG that more NHRIs consider ways in which they can address business and human rights issues. (Id., at ¶ 103). NCPs stress the need for flexibility in its operation that reflects circumstances. To ensure credibility in these systems, this flexibility should be limited by certain performance criteria outlined by the SRSG which should be adhered to. Examples of NCPs in the UK and Netherlands have developed governance structures including transparency measures and mediation capacity. Additionally, governments should find ways which give more weight to NCP findings against companies. (Id., at ¶104). These have recently shown a willingness to be more assertive in enforcing the Guidelines against entities. (Backer 2009a). Other bodies such as issue or sector-specific actors can help to provide remedies at the national level. The SRSG is continuing to look at some models in this area. (Ruggie 2009, at ¶ 105). Lastly, at the international level, many “industry codes, multi-stakeholder initiatives and investor-led standards have established grievance mechanisms.” Though many do not have a grievance mechanism, which erodes their perceived level of legitimacy. (Id., at ¶ 106). One major barrier to victims accessing grievance mechanisms is the lack of information about them. Victims do not know of the avenues for remedy and cannot seek it out. Also, the lack of information makes it difficult to improve the mechanisms and learn from past disputes to avoid them. (Id., at ¶ 107).
But note the method used to broaden the effectiveness of enforcement—not through the intervention of the state, but by expanding the engagement of individuals and civil society actors within the diffuse enforcement mechanisms available. To address these barriers, the SRSG has launched a global wiki entitled “Business and Society Exploring Solutions-A Dispute Resolution Community.” Known as BASESwiki. This wiki is an interactive forum for sharing, accessing and discussing information about non-judicial mechanisms that address disputes between companies and their external stakeholders. The wiki is to be built over time by its users which the SRSG urges all stakeholders to help develop this resource. (Id., at ¶ 108).
Some proposals for improved access to non-judicial remedies include: a clearing house to direct those with disputes to appropriate mechanisms, a capacity building entity to help those use the mechanisms effectively, an expert body to aggregate and analyze the outcomes of disputes to aid in learning about the potential remedies, and a grievance mechanism for when local or national mechanisms do not succeed. The SRSG believes that the first three of these proposals are promising, but the BASESwiki resource is needed as well to spread information. (Id., at ¶ 109). “Creating a single, mandatory, non-judicial but adjudicative mechanism at the international level” poses great difficulty. Dealing with complex disputes that involve diverse and economically unequal parties based only on written submissions are unlikely to meet fairness standards. These will raise evidentiary, practical, financial, and political challenges while at the same time offering only limited prospects of remedies. (Id., at ¶ 111). An alternate option would be to look at an existing body with international standing that could offer mediation of human rights disputes. Though these mediation processes would have to meet standards and principles set out by the SRSG for grievance mechanisms. This would also require providing advice and support, including a funding model so complainants could avoid facing prohibitive costs. ( Id.). Arbitration is also an option which should be accepted by many companies in conflict affected areas in the event that there are disputes with communities. As with other methods of remediation, arbitration would be subject to the other caveats as above, as well as not preclude judicial recourse. (Id., at ¶ 113).
Ruggie concludes by noting two effects. First, “[g]rievance mechanisms, judicial and non-judicial, form part of both the State duty to protect and the corporate responsibility to respect. They are essential to ensuring access to remedy for victims of corporate abuse.”( Id., at ¶ 115). Second, “[t]oo many barriers currently exist to access judicial remedies, and there are too few non-judicial mechanisms exist that meet the minimum standards of effectiveness. (Id.).
Thus, enforcement appears on the horizon. It is still forming. It may exist more as a whisper than as an established reality, but its institutional parameters are already visible. They are grounded in multiple venues for the vindication of rights, under a singular rights framework originating in sources outside the state. What they appear to share is a grounding in legitimation based on cooperation, consultation, mediation and consensus. The OECD enforcement of its Guidelines for Multinational Enterprises is based on a complex quasi judicial procedure that eventually produces a quasi judicial report where mediation fails. (Backer 2009a). For some, this “governance mechanism constitutes an exercise of public authority. The fact that the OECD Guidelines for MNEs and their implementation mechanism are soft law instruments does not contradict this supposition, because the Guidelines’ mechanisms generate considerable reputational effects on actors outside the OECD.” (Sculer 2008).
Enforcement has another aspect as well. In a norm framework setting based on inclusion within norm making communities, an important vehicle for disciplining bad behavior is exclusion from the group. The elaboration of the now abandoned Norms provides a useful illustration. (Backer 2006a). The Global Compact system follows a similar approach. The notion is that membership in the community is valuable, and that the reputational costs of losing that membership might be significant. In a sense, one could argue that this represents a nascent form of policing political rights within a norm setting and enforcing community—one loses political rights within that community by failing to comply with communal norms.
Isaiah Berlin reminds us that “What the age calls for is not (as we are so often told) more faith, or stronger leadership, or more scientific organization. Rather it is the opposite. . . . What is required is a less mechanical, less fanatical application of general principles, however rational or righteous, a more cautious and less arrogantly self confident application of scientifically tested, general solutions to individual cases.” (Berlin 1969, 39-40). The rise of a corporate constitutionalism beyond the state suggests the wisdom of that insight. But it also suggests the connection between values, autonomy and institutionalization. In effect, the "harder" the regulatory institutionalization the "harder" the governance produced, whatever its form.
Transnational Corporate Constitutionalism is not a revolutionary concept. Although the existence of that term may be new, the idea has been developing for years. The body corporate has served for a long time as an important vehicle for social organization. So it is no surprise that corporate bodies are beginning to adopt human organizational concepts to advance their interests in a new emerging global economy. This concept is not new either. It has been around for centuries as the basis for national law in countries around the globe – the constitution. This corporate constitution has been developing from a number of sources, mostly initiatives with an international scope.
Two significant participants that have set the tone for future development and adoption of transnational corporate constitutions have been the Organization for Economic Cooperation and Development – with its Guidelines for Multinational Enterprises, Guidelines on Corporate Governance for State-Owned Enterprises, and the Principles of Corporate Governance – and the United Nations Global Compact and its Ten Principles. The work of the OECD and the UN Global Compact has led to the transformation of corporate codes through the implementation of these principles, resulting in a form of constitutionalism that can be adopted by other corporations around the world hoping to improve their actions. These principles have become a model for how corporations can create a self-governing structure that will ensure compliance with internal and external goals.
But these two actors are not the only parties involved in this newfound constitutionalism. Although it was believed that this system was separate from national government, they are incidentally included in the creation of this constitution as states’ representatives are involved in the creation of these voluntary principles currently being adopted by transnational corporations.
The reason for the development of this corporate constitutionalism is founded on large Multinational Enterprises becoming less dependent on states for their internal regulation. As such, corporate constitutionalism must to take the place in this void created from the waning dependency on state regulation. Combined with the lack of transnational law that can govern across borders, the self-regulation of corporations is much preferred to the piecemeal regulation that must be adopted from several states that a transnational corporation would conduct business in.
Although transnational corporate constitutionalism has the potential to develop into something very important, even at this early stage, its contours may still be barely discernable. Yet its form and scope are not entirely invisible. What remains to be seen, and is most exciting, is the extent to which these principles are going to be adopted by transnational corporations and the effect that it will have on the global economy. The system of corporate constitutionalism is not completely developed or vertically integrated either. The process of institutionalization, of the bureaucratization of the norms of a self regulating community defined by its specific function, and differentiated from other groups, including that state, by the markers of that differentiation, is in its earliest stages. For all that, transnational corporate constitutionalism is vigorously growing, both as norms building and as autonomously institutional. It is the constitution of government without a state, rather than the deepening of governance without government, that is the real object of these constructions.
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