I have suggested that corporate regulation, and especially the regulation of multinational corporations, is no longer substantially dependent on the state. More precisely, corporate regulation especially with respect to the larger entities, is no longer subject to--or a function of the operation of--traditional public rule of law systems, of which public (political) institutions (national or supra national governments) represent the highest sources of authority.
In some cases, the traditional hierarchical relationship between private economic entity and public political institutions becomes inverted. See Backer, Larry Cata, "The Autonomous Global Enterprise: On the Role of Organizational Law Beyond Asset Partitioning and Legal Personality," Tulsa Law Journal, Vol 41, 2006. In those cases, free movement of capital combined with an increasingly open global system of capital and production, permit corporations to shift resources and operations to maximize its wealth creation potential. In that environment, regulation is reduced to a thing--another factor of production--for which a global market exists. Just as corporations shift operations to lower costs of production by taking advantage of differences in local labor markets, corporations also can shift operations in response to regulatory environments. As a consequence, these corporations effectively regulate themselves.
Increasingly, however, the regimes of "hard" rule of law systems--statutes and other forms of regulation--are becoming less relevant. Instead, "soft" rule of law systems have begun to arise within global frameworks of economic activity. These private and contractually based systems, have helped create structurally autonomous subsystems of regulatory activity beyond the regulatory framework of "hard" rule of law systems. See Backer, Larry Cata, "Economic Globalization and the Rise of Efficient Systems of Global Private Lawmaking: Wal-Mart as Global Legislator" . University of Connecticut Law Review, Vol. 39, No. 4, 2007. Within these private and self referencing systems, contract serves as the memorialization of law and investors and consumers are the "citizens," whose consumption and investment decisions serve as a constant system of voting preferences.
It is no surprise, then, that large corporations have finally come to understand that "public perceptions affect a company's stock price," Pete Engardio and Michael Arndt, What Price Reputation?, Business Week, July 9 & 16, 2007 at 70. "More and more are finding that the way in which the outside world expects a company to behave and perform can be its most important asset. Indeed, a company's reputation for being able to deliver growth, attract top talent, and avoid ethical mishaps can account for much of the 30%-to-70% gap between the book value of most companies and their market capitalizations." Id. at 72. This perception has given rise to an emerging market for the services of professionals able to communicate perceptions to the investor community. Id. Two sorts of businesses have stepped into this market. The first include data mining and analysis companies.
Id., at 74. The second include consulting and modeling firms, which can interact with data on a more proactive basis. "A host of small consulting firms including CCW, a subsidiary of Omnicom Group's (OMC ) Fleishman-Hillard PR agency (OMC ), and KDPaine & Partners, a Durham (N.C.) boutique, mine this data with remarkable precision to steer client corporations to the most effective messages and away from those that should be ignored. " Id. As in politics, then, the intangibles of taste and values, can be modeled by econometric tools. "Call it the new science of reputation management. . . . But a company's reputation among investors, consumers, and the general public traditionally has been regarded as too squishy to measure with hard numbers or manage with any precision, let alone to prove cause and effect." Id., at 70, 72.
In modeling corporate behavior for United Technologies Corp., for example, the consultants from CCW
Investor expectation rather than government regulation, then, appears to be a more efficient engine driving corporate behavior. And this is not the simple sort of investor expectation analyzes of the past. It is clear, now, that such expectations now have a critical social dimension. To that extent, investor expectations can begin to substitute for legislation. Of course, that is the rub. For those who believe that private choice in consumption markets serve as the most democratic expression of public choice, this system conforms both the efficiency and democratic reinforcing effects of markets. And it makes the case for governmental restraint in intervention. On the other hand, those who value the legitimacy of political institutions--assuming that state apparatus better represents a political community (that is the entire community affected by corporate activity) than a portion of that political community (the investors)--might suggest that the only form of legitimate control of corporate behavior must originate in hard law. To some extent, then, the issue of markets and corporate social responsibility is an issue of law, and the space for law in the regulation of human activity. And this issue is in a sense a restatement of the more fundamental question--to what extent must/should/may the political community serve as the major/only/another source for the genesis and control of such behavior. The old ideological battle between the appropriate definition of private space--a conflict that gave rise to the human rights structure of the last century--is likely to be replayed over the extent of private space reserved for economic activity.
In some cases, the traditional hierarchical relationship between private economic entity and public political institutions becomes inverted. See Backer, Larry Cata, "The Autonomous Global Enterprise: On the Role of Organizational Law Beyond Asset Partitioning and Legal Personality," Tulsa Law Journal, Vol 41, 2006. In those cases, free movement of capital combined with an increasingly open global system of capital and production, permit corporations to shift resources and operations to maximize its wealth creation potential. In that environment, regulation is reduced to a thing--another factor of production--for which a global market exists. Just as corporations shift operations to lower costs of production by taking advantage of differences in local labor markets, corporations also can shift operations in response to regulatory environments. As a consequence, these corporations effectively regulate themselves.
Increasingly, however, the regimes of "hard" rule of law systems--statutes and other forms of regulation--are becoming less relevant. Instead, "soft" rule of law systems have begun to arise within global frameworks of economic activity. These private and contractually based systems, have helped create structurally autonomous subsystems of regulatory activity beyond the regulatory framework of "hard" rule of law systems. See Backer, Larry Cata, "Economic Globalization and the Rise of Efficient Systems of Global Private Lawmaking: Wal-Mart as Global Legislator" . University of Connecticut Law Review, Vol. 39, No. 4, 2007. Within these private and self referencing systems, contract serves as the memorialization of law and investors and consumers are the "citizens," whose consumption and investment decisions serve as a constant system of voting preferences.
It is no surprise, then, that large corporations have finally come to understand that "public perceptions affect a company's stock price," Pete Engardio and Michael Arndt, What Price Reputation?, Business Week, July 9 & 16, 2007 at 70. "More and more are finding that the way in which the outside world expects a company to behave and perform can be its most important asset. Indeed, a company's reputation for being able to deliver growth, attract top talent, and avoid ethical mishaps can account for much of the 30%-to-70% gap between the book value of most companies and their market capitalizations." Id. at 72. This perception has given rise to an emerging market for the services of professionals able to communicate perceptions to the investor community. Id. Two sorts of businesses have stepped into this market. The first include data mining and analysis companies.
To get a fix on how companies are seen publicly, they are hiring firms like Factiva and Delahaye that use powerful search engines to track databases of all print, broadcast, and Internet coverage and to search for trends. For around $100,000, for example, Factiva can plow through a database that includes 10,000 mainstream media sources from 150 countries and 14 million blogs and tell clients whether their press is positive or negative on key issues. . . .
Id., at 74. The second include consulting and modeling firms, which can interact with data on a more proactive basis. "A host of small consulting firms including CCW, a subsidiary of Omnicom Group's (OMC ) Fleishman-Hillard PR agency (OMC ), and KDPaine & Partners, a Durham (N.C.) boutique, mine this data with remarkable precision to steer client corporations to the most effective messages and away from those that should be ignored. " Id. As in politics, then, the intangibles of taste and values, can be modeled by econometric tools. "Call it the new science of reputation management. . . . But a company's reputation among investors, consumers, and the general public traditionally has been regarded as too squishy to measure with hard numbers or manage with any precision, let alone to prove cause and effect." Id., at 70, 72.
In modeling corporate behavior for United Technologies Corp., for example, the consultants from CCW
spent months processing a bewildering amount of assorted data UTC had amassed over the years. It included studies tracking consumer perceptions of its brands, employee satisfaction, views of stock analysts and investors, corporate press releases, thousands of newspaper and magazine articles, and two years' worth of UTC financial information and daily stock movements. After feeding the data into an elaborate computer model, Cohen and Low concluded that 27% of UTC's stock market value was attributable to intangibles like its reputation.Id. at 70. The power of this focus is particularly strong on issues of corporate behavior--or at least on the appearance of corporate behavior. "Companies also realized their shares were increasingly vulnerable to negative publicity over employee and social practices." Id., at 76. This drives corporate attention, and action. Thus, for example, in its modeling, CCW considers whether corporate social responsibility factors play a role in stock price. "Do messages about the company's employee relations, governance, or environmental effects have impact, for example? If so, how many cents per share can be explained that way?" Id. at 76.
Investor expectation rather than government regulation, then, appears to be a more efficient engine driving corporate behavior. And this is not the simple sort of investor expectation analyzes of the past. It is clear, now, that such expectations now have a critical social dimension. To that extent, investor expectations can begin to substitute for legislation. Of course, that is the rub. For those who believe that private choice in consumption markets serve as the most democratic expression of public choice, this system conforms both the efficiency and democratic reinforcing effects of markets. And it makes the case for governmental restraint in intervention. On the other hand, those who value the legitimacy of political institutions--assuming that state apparatus better represents a political community (that is the entire community affected by corporate activity) than a portion of that political community (the investors)--might suggest that the only form of legitimate control of corporate behavior must originate in hard law. To some extent, then, the issue of markets and corporate social responsibility is an issue of law, and the space for law in the regulation of human activity. And this issue is in a sense a restatement of the more fundamental question--to what extent must/should/may the political community serve as the major/only/another source for the genesis and control of such behavior. The old ideological battle between the appropriate definition of private space--a conflict that gave rise to the human rights structure of the last century--is likely to be replayed over the extent of private space reserved for economic activity.
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