Friday, June 04, 2010

Christine Bader on Responsible Business and Governance: Polycentricity and Inter System Coherence in Business and Human Rights Governance Frameworks

One of the great insights of recent efforts to develop transnational governance frameworks for business has been the need to broaden the understanding of sources of governance beyond the state. The territorially bounded state may remain central to any effort to extend governance frameworks to economic enterprises that operate across states. However, it is no longer possible to think of states as the only source of governance or the law of domestic legal orders as the only form of governance of entities and activities that cross borders without much impediment. Much of the best work on governance over the last decade has drawn on these insights to explore additional sources of governance—including private and international actors. They have also focused on emerging governance methodologies—from disclosure and surveillance to the development of customary law and practice among functionally distinct governance communities. This work is not merely theoretical. It has produced a tremendously influential effort, sourced in John Ruggie’s work as Special Representative for the U.N. Secretary General, for the elaboration of a principles based governance system (the Protect-Respect-Remedy framework) touching on business and human rights. For a discussion of the history of that effort see, Backer, Larry Catá, On the Evolution of the United Nations’ “Protect-Respect-Remedy” Project: The State, the Corporation and Human Rights in a Global Governance Context (June, 03 2010). Santa Clara Journal of International Law 9:1 (forthcoming 2010).

A recent opinion essay by Christine Bader, an Advisor to the UN Special Representative of the Secretary-General for business and human rights, Harvard professor John Ruggie, nicely brings home these ideas in a way that is accessible, subtle and insightful. Christine Bader, BP, Goldman Sachs, and Massey could learn a lot from ultimate frisbee, Christian Science Monitor, June 2, 2010. Bader starts with a reminder of the limitations of law and state action to respond to regulatory challenges that may seep beyond its borders.

BP's ruptured oil well. Goldman Sachs's financial risk-taking. Massey's mine explosion. With each new corporate calamity, we call for stronger government intervention. But that's like seeing a basketball player throw a punch and demanding more vigilant referees. We shouldn't absolve athletes of responsibility, encouraging them to push the boundaries of acceptable conduct until they get caught.

Id. She also reminds us that the usual instrument of public governance—formal lawmaking—may also not serve successfully as the only instrument of regulatory response. “Likewise, we shouldn't depend on government to make business act in the best interests of society.” Id. Instead, she posits, regulatory efforts ought to include the most significant stakeholders within transnational entities that are the object of regulatory activity. “We need to cultivate in corporate executives respect for not just the letter but the spirit of the law.” Id. That requires not merely commands from states but the cultivation of a strong customary “law” and practice of the participants in any governance project.

To drive home both the necessity and plausibility of this approach, Bader offers a simple yet powerful institutional-behavior metaphor—the games humans organize and play, and in particular the game of “ultimate Frisbee”.

The fast-growing sport (with some 700 college teams in the US alone) is like soccer with aerial passing but without referees. Players are expected to call their own fouls – and do. Even at collegiate and world championships, players hand the Frisbee to the other team if they've had unnecessary contact with an opposing player or held the disc for longer than the allowed 10 seconds – whether or not someone else calls them on it.

This ethos is known as the "spirit of the game." I've played ultimate throughout the US, Europe, and Asia, and can confirm that the spirit of the game reigns everywhere. Business would do well to learn from it.

Id. The application to business regulation is then nicely drawn—the rules under which entities operate are similar to the rules of the game of ultimate Frisbee. They each originate among the stakeholders who directly participate in the game and assume the character of law, in that their dictates must be observed if the player (or entity) wishes to continue to operate in the “game.”
Some have argued that the sole responsibility of business is to maximize profits, the more enlightened among them conceding that they should do so within the bounds of applicable law.

But this, too, is misguided. From boycotts of Nike over their Asian sweatshops 20 years ago to community blockades of oil and mining installations from Ecuador to Zambia today, it's clear that companies can't just sit back and watch the cash flow in once they've obtained their legal license to operate.

Rather, to ensure their own sustainability, companies also have to secure a social license to operate from the people their business touches. This requires ethical behavior, whether or not it is required or enforced by government regulators.
Id. This, of course, is law sourced outside the state and its formal rule making apparatus—legislature, courts, etc. Yet it functions nonetheless as law—as legitimate and binding as any statute produced for and enforced through the apparatus of a territorially constituted political state. Its character is organic and customary—and to that extent is also stakeholder driven and consensual. And the values and behaviors it develops are internalized and thus become self-enforcing to an extent that parallels similar effects of state made law or regulation. The SRSG, John Ruggie, has elaborated these ideas as the core of the second pillar of the business and human rights governance framework. For a discussion, see, e.g., Larry Catá Backer, On Challenges to Operationalizing a Transnational Framework for Business and Human Rights--the View From Geneva, Law at the End of the Day, Oct. 13, 2009.

Ruggie, like Bader, denominates these autonomous governance environments as social licensing. See, Business and human rights: Towards Operationalizing the “protect, respect and remedy” framework, at ¶ 15, U.N. Doc. A/HRC/11/13 (April 22, 2009) at ¶ 46; John Ruggie, Opening remarks by UN Special Representative John Ruggie, October 5, 2009; But it ought to be understand that the notion of social licensing is neither subordinate to nor inferior in effect to the conventional law making governance framework of states. Indeed, as Bader nicely points out in the analogy drawn to the governance universe of ultimate Frisbee, it can be even more binding and effective than law based governance asserted through territorially limited states. It is in this sense, I suspect, that one can understand the subtlety in Bader’s point that such autonomous governance frameworks are not the same as self regulation within and dependent on the law based regulatory systems of states.
This is not a call for self-regulation. This is an appeal to recognize that there is a spectrum of ways of holding actors accountable for their behavior; law is at one end and self-regulation at the other – and there is a lot between the two.

You and I don't go about our days making every move based on what is legal and what isn't: We act according to what our friends, family, peers, and colleagues expect of us; what we want to achieve; what resources we have; and the professional, religious, and other standards we've committed to.
Id. Bader, is right. The governance frameworks within which economic entities operate on a global basis, made up of a set of evolving and customary rules reflecting the values and expectations of stakeholders—companies, customers, creditors, labor, local populations, investors, customers and states—cannot usefully be understood as mere self regulation. Nor is the Protect-Respect-Remedy framework reducible to such a set of simplistic notions. Self-regulation implies a margin of discretion in action that is understood as framed solely within the regulatory context from which such discretion is delegated. The “self-regulation” of accountants in the construction of GAAP/GAAS rules is an excellent example of the concept. This understanding of “self-regulation” treats these efforts like a private form of administrative regulation—meant to serve the interests of the state in the elaboration of its domestic legal order and to privatize rule making subject always to the constraints imposed by the law maker. Indeed, self-regulation of this sort is meant to some large extent to serve the state and its regulatory projects. In the case of GAAP/GAAS rules, for example, self-regulation permits the state to privatize accounting rules that that then used as the basis for the administration of securities law disclosure rules. Where such self-regulatory efforts go bad, the state is always free to modify the arrangement or eliminate it entirely. That, of course, was the case in the context of accounting self-regulation in the context of the scandals that led to the passage of the Sarbanes Oxley Act. See, Larry Catá Backer, Backer, Larry Catá, Surveillance and Control: Privatizing and Nationalizing Corporate Monitoring after Sarbanes-Oxley. Michigan State University Law Review (2004), and The Duty to Monitor: Emerging Obligations of Outside Lawyers and Auditors to Detect and Report Corporate Wrongdoing Beyond the Securities Laws. St. John's Law Review, Vol. 77, No. 4, p. 919, 2003.

And thus Bader reveals the more profound value of the ultimate Frisbee analogy—it illustration of polycentric governance.

Companies are also driven by multiple factors. Government edicts are important in determining what companies do, but so are customer demands, investor concerns, employee desires, advocacy campaigns, industry peer pressure, and media scrutiny.

Here's a simple way to align business and societal interests: Require that bankers and other titans of industry join a weekend ultimate frisbee game in their local park. They'll spend a few hours in a world where there are no designated enforcers but everyone follows the rules – not just in letter, but in spirit. That would benefit us all.

Id. It takes multiple sources of governance to elaborate a system of behavior regulation. This old knowledge has been revitalized through efforts like those of the SRSG and the Protect-Respect-Remedy framework. That insight will be critical to the establishment of sound bases for governing stakeholders in a variety of governance groups—from multinational corporations to other communities. But the elaboration of polycentric governance is merely the start. See, e.g., See, Gunther Teubner, A Constitutional Moment? The Logistics of ‘Hit the Bottom’, in After the Catastrophe: Economy, Law and Politics in Times of Crisis (Poul F. Kjaer and Gunther Teubner (eds.), forthcoming 2010). The hard work follows. The SRSG has identified the focus of that effort as centering on the problem of regulatory coherence. Policy alignment is important where governments develop or endorse human rights commitments but do nothing to implement them (vertical incoherence); and when various institutions within government cannot work together to fulfill their obligations to protect human rights (horizontal incoherence). Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises. Protect, Respect and Remedy: a Framework for Business and Human Rights, at ¶ 3, U.N. Doc. A/HRC/8/5 (April 7, 2008) ¶33-40. Bader has also suggested that issues of policy coherence is as critical to the project of polycentric governance that is the core of the First and Second Pillars of the Protect-Respect-Remedy framework. As the SRSG has already suggested, enterprises must develop internally coherent systems that incorporate human rights sensitive behaviors within their corporate cultures and behavior rule mechanisms. But perhaps as important, mechanisms for cooperation and communication—for the structural coupling of state and enterprise governance systems—will be a critical element of any successful multi sourced governance system. It is to that task of inter-system coherence, alongside the construction of structures of horizontal coherence, that the emerging global system of enterprise governance will also depend.

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