Creating Alternative Systems of Law Making in the 21st Century: Multinationals, NGOs, the Media, and Private Network Systems of Law.

On October 20-21, 2006, the University of Connecticut School of Law sponsored a conference—WAL-MART MATTERS—co-sponsored by the very able students of the Connecticut Law Review and the Connecticut Journal of International Law. My congratulations to the Dean of the University of Connecticut Law School, Kurt A. Strasser, Sherrie Armstrong Tomlinson (Editor in Chief, Connecticut Law Review), James C. Goodfellow, Jr. (Editor in Chief, Connecticut Journal of International Law), and the student symposium co-editors—Kent Michael Harper, Jennifer L. Paradee, Jirsten S.P. Rigney and Sally Welch, for putting together this well organized and important conference on Wal-Mart and the phenomenon of the giant economic enterprise in the world today.

There were a number of important contributions made during this conference that will be worth reading in the symposium issue to be jointed produced by both journals. I will use this space here to outline the parameters of my own contribution—Multinationals and the Rise of Global Systems of Private Lawmaking: The Example of Wal-Mart as Global Legislator.

This presentation focused on Wal-Mart as a great exemplar of an important emerging phenomenon: the construction of global systems of private law making spearheaded by an important group of large multinational corporations. This system of private global lawmaking by multinationals is rising in the shadow of, and parallel with, less successful attempts by national and international bodies to develop a system of public law rules to govern multinational behavior. I used as my focus the system of rules that find expression in supplier or supply chain agreements, its effects on conduct of small businesses worldwide, and the relationship between Wal-Mart as legislator and the global civil society apparatus as monitors and stakeholders. In some ways, Wal-Mart appears to be leading the way in effective corporate legislation, the effects of which can at times be more powerfully felt at the local level than national legislation. Other times this private legislation competes less successfully with developed systems of statutory law. More importantly, modern global law making of the kind engaged in by Wal-Mart relies on the participation of key elements of civil society to help determine the content of these provisions and to act as monitors of supplier conduct. It also relies on the participation of the media (print and visual), both to publicize breaches of Wal-Mart's conduct norms by its suppliers and the efforts of Wal-Mart to correct these breaches.

Wal-Mart and its global systems of supplier agreements evidences how large multinational corporations, elements of civil society and the media increasingly perform powerful quasi governmental roles, roles encouraged by the human rights establishment in Geneva and loathed by most Western states, at least as official policy. A recent example nicely illustrates the character and extent of this rising system of law—the controversy over labor and human rights violations by clothing manufacturers in the Kingdom of Jordan, and principally one of Wal-Mart’s suppliers. This episode nicely illustrates law making, enforcement and sanctions within a network of multinational corporation, the NGO community and the media. Within this system the corporation legislates uniform standards among its suppliers, these standards are developed with the cooperation (or at least with input or an eye to standards advanced by) elements of the NGO community, the NGO community monitors compliance with these (or its own parallel) standards) and violations are reported to the media, which by publicizing breaches of standards to the corporation’s consumer, investors and the financial community, places great pressure on the corporation to act to correct the deficiencies. In this way and within this focused area of relationships, these actors substitute for the state in virtually all respects.

Let’s look at how this system works in a little more detail. When we think about the effect of multinational corporations like Wal-Mart, we usually think in public law terms. One large area of public law traditionally concerned with the regulation of corporate behavior is national law. The traditional fields of such regulation are well known to lawyers and the political class. These include : (i) Company law (for the regulation of the relationships between statutory identified critical actors in the corporate enterprise, usually shareholders, directors and officers, but sometimes also lenders, labor and others); (ii) Competition law (for the regulation of conduct that produces unfair competitive advantage); (iii) Labor law (for the regulation of the relationship between the corporation and people who hire themselves out to the corporation, including the right to collective action on the part of pabor and the terms of the employment of labor); (iv) Money laundering (for the regulation of unfair practices with respect to capital); (v) Criminal law (for the regulation of bad behavior severe enough to require the imposition of the state through penal statutes—that is bad behavior affecting the political community beyond those primarily interested in the enterprise); (vi) Tort law (for the regulation of civil wrongs committed by the corporation through its agents); and (vii) Environmental law (for the regulation of wrongs with specific effects on the environment).

Another increasingly important area of public law with an interest in the regulation of corporate (or more generally economic) behavior is international or transnational regulation. Significant work has been attempted in a number of well-known fields: (i) Migration: the movement of people across borders for any number of reasons, including the search for economic opportunity, the assertion of a right to return to ancestral lands, the need to leave overpopulated areas, and family reunification; (ii) Transborder crime: bad behavior whose effect crosses borders, including crimes whose commission requires action in more than one state; (iii) Money laundering: a particular sort of criminal behavior focusing on the use of cash or cash equivalents to hide criminal activity; (iv) Standards for labor: minimum obligations with respect to the working conditions of labor, including the right to organize, pay, benefits, living and working conditions, and contract rights; (v) Security forces: the use of military, police or paramilitary forces by economic or other non-state enterprises; (vi) Human rights: the obligations of state and non-state actors to respect to advance and protect the human dignity of individuals in particular ways, including economic, social, cultural, religious, and political rights.

And there have been significant changes in both nation al and international law with respect to the regulation of TNCs. National law systems have seen a variety of changes meant to make it easier to control multinational corporations and the behavior of its agents. For example there have been efforts to create and impose a number of either new or substantially changed concepts and legal principles: (i) Enterprise liability (treating groups of commonly owned enterprises as a single business for purposes of liability under certain circumstances and with respect to certain types of liability); (ii) eil piercing (making it easier under traditional equity based doctrines of determining that the shareholders of a corporation may be liable for the delits of the corporation; this approach sometimes serves as a substitute for the broader concept of enterprise liability); (iii) Stakeholder model (substitution of stakeholder welfare maximization for the traditional shareholder welfare maximization policy underlying corporate law; (iv) Jurisdictional changes (expansion of jurisdiction of courts to make it easier for litigants to bring actions in the courts of the TNC’s home country for host country injuries); (v) Civil confiscations (expansion of power of the state to confiscate the goods of corporations alleged to have engaged in certain criminal activity); (vi) Criminal prosecutions (expansion of bases for prosecution of corporate agents (and the corporation itself) for criminal activity); and (v) Transparency (broadening requirements for reporting by corporations and corporate groups).

At the international level, there have been increasing efforts to regulate corporations or corporate behavior, especially those behaviors with effects that cross borders and are difficult for any single state to control. Among other activities, these include the (i) development of international conventions for the regulation of transnational corporations; (ii) the vesting international organization with regulatory authority over issues of corporate governance; (iii) direct application of international conventions to TNCs; (iv) international regulation of jurisdictional issues to make it easier to bring actions against TNCs or related groups of enterprises; (v) use of TNCs to make customary international law through mandatory contract provisions; and (vi) development of aspirational norms for corporations and corporate behavior (voluntary codes including codes of corporate social responsibility).

But while the focus has been on the structures and contents of formal law making by political communities another system of rule making, from legislation to monitoring to enforcement has been rising.

How does this private system work?

The characteristics of this emerging system are substantially different from the traditional public law based system derived from the activities of political communities:
A. The system is based on private law making;
B. The principle actors are
(i) corporations and other enterprises
(ii) NGOs
(iii) Media
(iv) Customers/Investment Community/Financial Markets
C. These actors have interests fundamentally adverse interests, are all dependent on each other, and derive authority from their respective interactions.
D. Together, these actors produce a complete systems of regulation, from legislation to enforcement that are
(i) focused and limited in scope
(ii) but dynamic and effective within its limits
(iii) and growing
E. Within these systems, grounded in the relationships in individual TNCs with NGO, media, customer and investor communities, the role of the state and other public bodies becomes secondary rather than primary, and it becomes difficult to determine, at the international level, whether law is being sourced from consensus in private behavior or legal norms developed through the deliberative political process.

This system of law is developing side by side with that of traditional public law sources in national and international law. It evidences a functional differentiation among law making bodies. It is based on a division of authority that no longer distinguishes categorically between public and private entities in terms of capacity or authority to make and enforce binding norms.

Private law making and private enforcement form the fundamental framework within which these systems are elaborated. The state assumes a role as a marginal player—passive and reactive at best, a tool of powerful local forces at worst. Private law making and private enforcement are possible because the system is built on the following basic characteristics:
(i) essential role of private law through contract;
(ii) transparency, disclosure and its use by elements of civil society;
(iii) connection between civil society and media;
(iv) connection between media and public, consumers, public law enforcement institutions;
(v) connection between public, etc. and internal corporate investigation and sanction apparatus.

There is emerging a private market for law making., As economic actors become more global in operation, systemic inefficiencies in law making and enforcement become economic as well as political and social problems, but with greater global dimension. Like other commodities, law tends to be subject to market forces. Where law does not exist, or where markets in law break down or are inefficient, other competitors will enter the field. Where these competitors can deliver a better product—rules that are fair, consistent, predictable and stable—these competitors may well displace the territorial law making monopolies of nation states. I want to look at the contours, nature and characteristics of this rising system in the context of Wal-Mart’s relationships with its suppliers.

The system in action: Wal-Mart and its supplier legislation in Jordan.

The rising system of private lawmaking is nicely evidenced by a series of events that took place in the kingdom of Jordan in 2006. In May, 2006, the National Labor Committee, a human rights NGO based in New York, published a report that detailed a number of violations of Jordanian labor law and international human rights norms by a number of apparel factories in the Kingdom of Jordan. These factories were under contract with a number of well-known retailers in the developed world, to supply apparel to Western Markets. Among them were factories supplying Wal-Mart with a apparel for its “George” line of clothing.

The National Labor Committee based its report on a number of interviews with current and former workers of these factories, most of who were Bangladeshi, Indian or other foreign workers. Many of these workers had spent over $1,000 for work permits in Jordan. The workers alleged that many of them had their passports confiscated by the employer or by agents of the Kingdom at the behest of employers, that they were made to work shifts far in excess of that permitted by law, that they were not paid either for the hours they actually worked or that they were not provided with the overtime compensation to which they ought to have been entitled. When they protested, the employers sometimes relented but then began to illegally deduct from their salaries amounts for food and accommodations in excess of the additional moneys granted them as a consequence of the protests. When some sought to protest, the employers had them arrested, beaten and deported. In one instance, the workers reported that the Bangladeshi ambassador to Jordan told them to accept the conditions under which they worked without protest. Ironically, these allegations might not have come to light so quickly but for the deportations. Once in Bangladesh, the affected workers were able to seek ot the international human rights organizations and make their claims.

Once published, the National Labor Committee sought the greatest exposure for its report. They are successful. The New York Times published a story about the report on May 3, 2006 detailing the findings of the advocacy group. Steven Greenhouse and Michael Bararo, Jordan: An Ugly Side of Free Trade—Sweatshops, THE NEW YORK TIMES, May 3, 2006. The preparation of the New York Times story produces action on the part of some of the multinationals for which these factories made products. In particular, the authors of the New York Times story report, “After the New York Times asked about the accusation on Monday, Wal-Mart dispatched two inspectors to Jordan” to review. Id.

But the story does not end there. The National Labor Committee, in its role as monitor, decided to follow up on its report. Additional violations found by the National Labor Committee in September. An additional report was produced in September, 2006. Again, the media decides to run a story on the report. This time it is in the Los Angeles Times. Evelyn Iritani, Group Accuses Jordan of Failing to Enforce Labor Rights, LOS ANGELES TIMES, October 18, 2006.

The Los Angeles Times story is carried by another NGO on its website: Business and Human Rights Resource Centre. This group sends information to Wal-Mart seeking a reaction to the reports. Wal-Mart quickly responds explaining that the factory at issue was audited immediately upon receiving the NGO report and that as a result significant improvements were made in working conditions. Letter to Chris Avery from Rajan Kamalanathn, Wal-Mart Ethical Standards, October 17, 2006. This response is reported on the NGO website. Id. Wal-Mart is able to respond quickly because it has in place a system of supplier norms that it has imposed on its global supplier base. These uniform international standards specify certain basic conduct norms imposed on all suppliers. These norms are made part of the contractual relationship between Wal-Mart and its suppliers. Failure to comply with the behavior norms could lead to contractually imposed sanctions, from suspension of the contract to its termination. In addition, the contract permits Wal-Mart to require suppliers to undergo training in business conduct and ethics, and requires all suppliers to conduct their operations with a certain large degree of transparency—permitting Wal-Mart to audit and inspect the supplier. As a consequence, Wal-Mart is able to report that substantial improvements have been made, at least at the factories producing apparel for Wal-Mart. Id. These events will then be reported to the investment community by Wal-Mart through its communications department and might serve as a basis for consumer education in advertising as well.

The story highlights the way in which new systems of law making—global, targeted, functionally differentiated, and private—are arising. The critical actors include economic entities (like Wal-Mart) and its network of relationships with suppliers, elements of civil society (principally human rights NGOs), the media (in this case especially the global print media), and the consumer and investment communities. Notice, too, what is significant by its absence in it is story: the state and elements of the legislative, enforcement and judicial organs of the political community. This is not a story where governmental investigation uncovers violations of law through systems of reporting or enforcement and then vigorously investigates and enforces the law through the administrative and judicial process subject to well-established national law. It is not even a story of the way in which the state pursues investigation of allegations made by individuals or members of civil society. Neither the National Labor Committee nor the Business and Human Rights Resource Centre limited its actions to the state (if they interacted with state elements at all). Instead they went to the media and the multi national enterprises to publicize, investigate, and remedy allegations determined to have merit. To the extent that the state played a role at all in this drama, it was either as the tool of local employers seeking to violate the law (the local Jordanian police) or to collude with local authorities in the violation of law (the Bangladeshi Ambassador to Jordan).

Elaborating the Relationships Between the Components of this New System.

What exactly are the characteristics of this emerging system illustrated by the story of worker rights violations in Jordan’s export apparel industry? What role does each of the principal actors play in making this system work, and in defining its character and boundaries? It is to those questions that I turn next. My focus will be on the principal actors in this law making system: (i) multinational corporation as legislator and enforcer of norms, (ii) civil society organization (principally human rights NGOs) as system monitors and intermediaries, (iii) the media (as the vehicle through which monitoring efforts are legitimated and communicated to consumers, investors, the financial community and government), (iv) consumers, investors and the financial markets as the target audience for all this activity (acting as a proxy for a democratic publicity in a political community); and (v) national and international political communities providing baseline standards from which multinationals and civil society elements derive their more focused rules of conduct.

A. Multi-national corporations and other enterprises:

--create standards applied uniformly throughout the production, transport and retail system through contracts and agreements with individual suppliers.
--Statement of Ethics
--Supplier Standards

--standards are stakeholder oriented. Focus on
-consumers
-investors (financial markets)
-NGOs (for example through “stakeholder engagement programs” NGO Business for Social Responsibility)
-governments
-international organizations

--system has internal enforcement mechanisms
-certifications
-participation in TNC training programs
-consent to audit (scheduled and unscheduled)
-contract sanctions (from suspension of payments through termination of contract and loss of business)
-may involve reporting company to local or international authorities
-results of auditing available to national authorities to the extent permitted by law.

--harmonization across national boundaries.

B. NGOs

--standards formation
-help shape community consensus on appropriate corporate behavior
--standards implementation at TNC level
-help convey those behavior norms to TNCs and translate them into “action items” and the like that can be implemented through contract.
--monitoring
--source of news to media (with respect to NGO activity and results of their monitoring and lobbying activities) convey consumer sentiments to TNC (act as a means of communication)
--lobbying
-help seek to translate private norms into law at local, national and international levels.

C. Media

--used by NGOs to publicize information gathered by NGO in monitoring capacity
--used by NGO to publicize and advance their view of appropriate conduct standards that ought to be adopted by TNCs
--help shape consumer taste in corporate behavior.
--authoritative/legitimate source of communication between NGO community and TNCs.

D. Customers/Investment Community/Financial Market

--the object of private norm making (customers, investors and financial markets are the key elements of the ability of corporations to succeed on their own terms as economic entities with the primary objective of maximizing its own wealth and thus the aggregate wealth of its financial stakeholders (security holders) and less directly other stakeholders in the continuing operations of the businesses operated by the TNC).
--behavior norms are targeted to satisfy these markets and thus to maximize customer, investor satisfaction and market confidence.
--customers/investors/markets are essentially passive (or rather reactive); they react to TNC behavior.
--control of customer/investor/markets information critical
-information management becomes as important as development, implementation and enforcement of behavior norms through contract).

E. Government and the political communities on a local, national and international level. How is this private system connected to the system of public law?

i. Formal connection
--standards grounded in law of state
--standards grounded in international hard and soft law

ii. Informal connection
--use of contract law
--use of courts and public dispute resolution mechanisms to enforce (this is a two way street—the state facilitates the use of its dispute settling mechanisms by adjusting its laws to make its for a more attractive)


Consequences

The consequences and implications of this new system are complicated. They don’t all cut in the same direction. Moreover, there is a certain robustness in the process. I have been looking at something entirely new—new because technology and economic concentration, and the effects of globalization only now have made it possible for such systems to emerge. As such the system is dynamic, and it is fragile. It may evolve in ways we cannot predict, and evolve quickly. Effective threats to globalization may substantially stunt the system. On the other hand, the power of efficiency as a motivating force may broaden and deepen the system.

The immediate consequences are apparent. There is a greater conflation of economic and political power. States lose their monopoly power to make and enforce behavioral rules—the trends toward state totalitarianism, that began in the 17th century may be weakened. But the conflation of economic and political power is not complete. Other multinational groups will also step in to assert more overt rule making authority over members of their community—the great religious institutions all over the world have already begun. But conflation does not necessarily reproduce monopoly. Multinational corporations may have authority and power as never before to legislate, but legislation is not made in a vacuum. Authority must be shared. Authority is shared with other emerging powers: the great institutions of civil society and the great institutions of information diffusion (that is those institutions that can acquire and maintain a certain legitimacy in their reportage). And Authority has an object—the people and institutions on whim the legislator is dependent for its continued life—consumers, investors and the financial markets. And the political community is not reduced to oblivion. It remains a vital part of the equation, though no longer the whole of it. For this new system to work, adversaries are locked in positive relationships—the multinationals need the institutions of civil society, both of whom need the media, all of whom are dependent on consumers, investors and the financial markets, all of which in turn are dependent on the economic enterprises for their individual and institutional wealth maximization. Circles within and among circles.

Above all else, one should not think of this emerging system as a substitute to the old law making systems of political communities. There is no effort here at acquiring a monopoly power over legislation, monitoring or enforcement. The system is porous and significantly functionally differentiated. In the absence of monopoly power, legislation becomes fragmented. That may be the most positive contribution of the emerging world order to the ability of individuals to avoid subordination by singular systems with monopoly power over all aspects of life. In a functionally differentiated system in which alternative sources of law making compete, the individual may far better, in the long run.