Tuesday, June 08, 2010

Corporate Governance and the Social License to Operate: Foxconn and the Limits of Legal Formalism in Corporate Governance

An important emerging framework of transnational governance for corporations in the context of their human rights obligations has sought to elaborate the sources of an autonomous set of corporate obligations with respect to its stakeholders.  These obligations arise independently of a corporation’s legal obligations under the laws of the state of their incorporation or operation.  Instead, they arise from the set of customary norms that define the expectations of corporations and their stakeholders—investors, employees, customers, local populations where corporations operate and the like.  In developing the Protect-Respect-Remedy framework for th governance of corporate human rights obligations, John Ruggie has referred to these autonomous governance obligations as a corporation’s “social license.”

Governments define the scope of legal compliance, but the broader scope of the corporate responsibility to respect human rights is also defined by social expectations—as part of what is sometimes called a company’s social license to operate.
What does this mean? . . . .
A few years ago, the Peruvian partner of a major US mining company said this in a TV interview about their troubled operation: “I don’t understand the social license to operate. I get my license to operate from the Ministry of Mines in Lima.” A little while later the local community successfully blockaded the only access road to the mine, out of frustration at not having their grievances dealt with. Then he understood what a social license to operate was.
Here is another example.
A large commodity mining company in Africa, a subsidiary of a transnational firm, reports to its parent that all is well because it has won six of the seven lawsuits brought against it by local communities around one of its major operations. But executives at the parent company are deeply puzzled, because with each lawsuit won the local dispute seems to escalate, not decline, while the parent company’s international reputation is taking ever bigger hits. How can this be?
The answer may lie in a third example. A company negotiates a contract with the government of a developing country where it is investing. There are few regulatory requirements regarding the social impacts of its proposed activities, and the company’s legal department is assiduous in minimizing the contractual requirements placed on the company in this regard. The company is in a strong negotiating position—and its lawyers are more numerous, probably better trained, and certainly much better resourced than those representing the government. When the impacted communities later mount a campaign for alleged abuses of their rights and adverse impacts on their welfare, the company’s legal department says: We’re in compliance with the law; we’ll see you in court.
. . . . The lesson to be drawn from these cases is this: a serious misalignment exists in each instance between legal requirements and prevailing social expectations, and companies need to realize that they are subject not only to the first but to both.
Remarks by SRSG John Ruggie, International Institute for Conflict Prevention & Resolution Corporate Leadership Award Dinner, New York, 2 October 2008, at 2-3. This represents a substantial deepening and broadening of the traditional understanding of social licensing, which has tended to have a rather narrower, quid pro quo quality. Consider this recent statement from a representative of Export Development Canada:
 The need for companies to have a “social licence, that is, to gain support of the communities where they operate, is integral to doing business today. Let me give you an example of what I’m talking about, from a Brazilian pipeline company with whom I shared a panel in Rio de Janeiro last fall. Before the company started construction, it spent years learning about the land and the people who lived on the planned pipeline route.  They had countless meetings and detailed discussions with indigenous groups.  Once they got started, the inevitable happened – something went wrong.  Huge flooding damaged the pipeline and caused  negative repercussions in several communities. But what could have turned into a flood of negative media and “scape-goating” of the company, turned into local support and speedy rebuilding of the pipeline. The trust the company had built at the front end of the project paid off many times over. As this example shows, firms need to gain community support to mitigate social impacts. 
Jim McArdle, Sustainability and Natural Resources Sector: How to Acquire and Maintain your Social Licence to Operate, 25 March 2010 - Vancouver (CANADA) (Jim McArdle is Senior Vice-President, Legal Services & Secretary of EDC).
The social license to operate, as a source of governance, has recently acquired an enhanced importance in global corporate governance.   The recent experience of the C Chinese enterprise, Foxconn (http://en.wikipedia.org/wiki/Foxconn)  provides a valuable illustration of the relationship between a corporation’s legal and its social license to operate, as well as a demonstration of the autonomy and importance of the latter in the global context.  In its own words, and focusing on the anchor company of the Foxconn Group-- Hon Hai Precision Industry Co., Ltd. (traditional Chinese: 鴻海精密工業股份有限公司):
Guided by a belief that the electronics products would be an integral part of everyday life in every office and in every home, Terry Gou founded Hon Hai Precision Industry Company Ltd, the anchor company of Foxconn Technology Group in 1974 with US$7,500, a devotion in integrating expertise for mechanical and electrical parts and an uncommon concept to provide the lowest "total cost" solution to increase the affordability of electronics products for all mankind.

Today, Foxconn Technology Group is the most dependable partner for joint-design, joint-development, manufacturing, assembly and after-sales services to global Computer, Communication and Consumer-electronics ("3C") leaders. Aided by its legendary green manufacturing execution, uncompromising customer devotion and its award-winning proprietary business model, eCMMS, Foxconn has been the most trusted name in contract manufacturing services (including CEM, EMS, ODM and CMMS) in the world.
Foxconn, About Foxconn, Group Profile.  Foxconn’s vision consists of three parts, all of which together emphasize a commitment to harmony for the profit of the company and the benefit of its stakeholders:
  Through the most efficient "Total Cost Advantages" to make comfort of electronic products usage an attainable reality for all mankind;
Through the proprietary one-stop shopping vertical integrated eCMMS model to revolutionize the conventional inefficient electronics outsourcing model;
Through the devotion to greater social harmony and higher ethical standards to achieve a win-win model for all stakeholders including shareholders, employees, community and management.
Foxconn, About Foxconn, Business Philosophy. It has been reported that “Among other things, Foxconn produces the Mac mini, the iPod, the iPad, and the iPhone for Apple Inc.; Intel-branded motherboards for Intel Corp.; various orders for American computer manufacturers Dell and Hewlett-Packard; motherboards for UK computer manufacturer Zoostorm; the PlayStation 2 and PlayStation 3 for Sony; the Wii for Nintendo; the Xbox 360 for Microsoft, cell phones for Motorola, the Amazon Kindle, and Cisco equipment.”  Foxconn (http://en.wikipedia.org/wiki/Foxconn) . 
 In its 2008 CSR Report, Foxconn noted that
Foxconn Group provides a series of programs to help employees keep a balance between their work and personal life. Several courses and consultations are offered, free of charge, on topics such as caring for newborn babies and children and managing family finances. Our human resource department also sponsors and actively organize various social activities for single employees.

FOXCONN Technology Group, 2008 Corporate Social and Environmental Repsonsibility Report (2008) at 28.  The 2008 Report recognized the importance of CSR issues in the organization of corporate operations and the critical role that social actors played in the development of CSR structures and operations.  “In 2007, Foxconn Technology Group established the Foxconn Global SER Committee (FGSC) to proactively work with stakeholders including customers, non-governmental organizations (NGOs), and other interested groups on CSER issues. As a result of the committee's work, we have implemented a wide range of initiatives to improve our performance across the spectrum of corporate responsibility issues. Our progress on these issues is outlined in this report.”  Id.
It must therefore have come as something of a surprise when Foxconn’s employees in China started committing suicide in noticeable numbers. 
A Foxconn Technology worker tried to kill himself Thursday, becoming the 13th person to commit suicide or attempt to do so this year at the company, which makes high-tech products for industry giants such as Apple, Dell and Hewlett-Packard, state media said.
Police said the man survived after cutting himself in his dormitory room at the factory, the official Xinhua News Agency reported. It said the 25-year-old man, surnamed Chen, migrated from central Hunan province and began working at Foxconn two months ago.
Foxconn officials and police did not immediately answer calls by The Associated Press.
The 12 previous suicide attempts at Foxconn Technology Group's operations in southern China involved workers who jumped from buildings. Two survived. Another worker killed himself in January at a factory in northern China.
On Wednesday night, a 23-year-old worker from the northwestern province of Gansu killed himself by leaping from a dormitory balcony. Hours earlier, Foxconn Chairman Terry Gou had led a media tour of the industrial park and promised to work harder to prevent more deaths.
William Foreman, 13th Foxconn worker reportedly attempts suicide, AP, Yahoo News, May 27, 2010 (http://news.yahoo.com/s/ap/20100527/ap_on_hi_te/as_china_foxconn_deaths).   
As a matter of law and legal compliance, Foxconn suggested it has acted without fault.  It has complied with all the legal requisites applicable to its operations in China.  But not all agree.  A civil society actor, China Watch, reported on the death of another worker:
At 2AM on May 27th 2010, Foxconn worker Yan Li died suddenly at his home. Before his death, he had been working the night shift for more than a month straight, sometimes working 24 hours non-stop. His family and colleagues suspect he died from exhaustion due to overwork.
An engineer at the CNC producing office in the Hongzhun iPEG producing department, Yan Li was 27 years old when he died. He lived in Dashuikeng, Third Village in Guanlan. His ID number at Foxconn is F3839667.
According to his sister, Yan Li had no history of any medical ailments. He worked every night for the month prior to his death, well beyond the maximum overtime hours allowed by law.
At 2: 40 AM on May 27, Yan Li suddenly experienced shortness of breath. He was given artificial respiration and chest compression, to no avail. The paramedics who reached him later confirmed his death. A police who investigated and concluded on May 30 ruled out homicide or suicide, and concluded that that Yan Li’s death was not a criminal case.
According to Yan Li’s family and Foxconn colleagues, because of the rapid turnaround time for many production orders, Yan Li often worked throughout the night. At one point, according to his family, Yan Li worked for almost 35 hours non-stop, from 7AM on May 24, to 5:47 PM on May 25. Even after leaving work on May 25, he still received calls from his superiors, making it impossible for him to rest.

Whatever the merits of the claims of civil society elements, Fozconn’s employees continue die.  The latest as a result of exhaustion.    And that is where the social license obligations play a role.  My research assistant Siyu Zai reports from China that
People from different background started to investigate and comment on the tragedy. (See 解剖富士康员工频繁跳楼事件,http://www.huanqiu.com/zhuanti/tech/fushikang/.) Even though every tragedy has its unique cause, the twelve suicides can all be attributed to the overall working condition provided by the employer, Foxconn, including low salary, long working hours, mechanized assembly line work, etc. Especially, most employees on the assembly line are from rural areas. Representing migrant labor in nowadays China, these people’s mental hardship and psychological health are also worth attention.

In China, legal minimum wage standard provided by the government almost forces employees to work overtime in order to make a living. Further, China does not allow independent labor unions, therefore employers do not have to face collective negotiation. Furthermore, China’s urban and rural account system bars those migrant employees from gaining social security (台湾资本与中国模式, http://blog.caijing.com.cn/expert_article-151390-7036.shtml.), which further weakens these employees’ leverage in bargaining with employers.

Part of the tragedy can be attributed to the society. The economy has been developing along a path, where capital, with privilege granted by the government, squeezes employees through uneconomic and unreasonable way. In this way, migrant workers merely get to earn basic salary, while investors get a huge amount of money. As a result, this phenomenon accelerates polarization of rich and poorpolarization of rich and poorpolarization between rich and poor in China. To slow down this process, or to ease the conflict between rich and poor, entrepreneurs do not only play their economic role, they also play a role in shaping the society. In nowadays China, a new generation of employees has stronger self-esteem and consciousness of rights. Therefore, entrepreneurs shall create new corporate culture and organization in response to the change. (See期待企家的自, http://blog.caijing.com.cn/expert_article-151330-7034.shtml.)

Foxconn had to react—not because the law required it, or as a consequence of legal action, but as a result of the social context in which it operated.  Foxconn was failing to meet its obligations, the evidence was measured in the deaths of its employees, eventually too numerous to be explained away, and public opinion (and especially its expression in global media outlets) was being turned against it, potentially affecting Foxconn’s relationships with its principal customers—all of which are sensitive to shifts in public opinion as those might have significant effects of sales of end products.  Civil society elements, well aware of this relationship, sought to exploit it through a noisy letter writing campaign:

Take action! Write a letter using the template below or draft your own to reflect your concerns over the recent spike in suicide rates at Foxconn Electronics Inc. Let your voice be heard by those with the power – Foxconn purchasers including Dell, Apple Inc. and Hewlett-Packard Development Company, L.P. – to put a stop to the circumstances that have led to these horrifying and needless deaths:

To Whom It May Concern Regarding the Recent Suicides at Foxconn:
It has recently come to my attention that a string of suicides has taken place at Foxconn over the last year. Through its extensive reporting on Foxconn, the humanitarian non-governmental organization China Labor Watch (CLW) has uncovered the deplorable work conditions at Foxconn and shed light on its militarized management style. I am horrified by these discoveries. As a loyal customer of your company, I demand that this problem be addressed with urgency.
CLW reports that Foxconn is guilty of the following labor law offenses:
·        Low basic monthly salaries
·        Excessive mandatory overtime hours
·        High labor intensity
I expect you to take immediate steps to ensure that Foxconn, your supplier, increases its basic monthly salaries, decreases factory work hours and labor intensity, and amends its operation philosophy and execution. Foxconn must turn away from its strict profit-driven policies to emphasize dignity, meet the basic physical and material needs of its labor community and to value its workers as human beings with inalienable rights under China’s Labor Contract Law and Labor Law.
The deaths that have occurred at Foxconn have alerted the world to Foxconn’s failure to appropriately manage its employees. As the largest manufacturer of electronics and computer components, worldwide, Foxconn has both the ability and responsibility to clean up its sweatshop abuses, create a respectful working environment and work to protect its mainland laborers.
Foxconn needs your help. Rather than abandon Foxconn in attempts to negate any bad press, I instead urge you to implement remediation plans in cooperation with Foxconn management. This is truly the only way to ensure full cooperation between Foxconn and labor laws set forth in China.
Your concerned consumer,
(Signature)            (Date)

Letters may be addressed to the following parties:

Dell Inc.: One Dell Way; Round Rock, Texas 78682; United States
Apple Inc.: 1 Infinite Loop; Cupertino, CA 95014; United States
Hewlett-Packard Development Company, L.P.: 3000 Hanover Street; Palo Alto, CA 94304; United States; Fax: +1-650-857-5518

China Labor Watch, Get Involved: Letter to Buyers Regarding the Recent Suicides at Foxconn

And, indeed, the fuss forced one of Foxconn’s most publicly exposed customers, Apple, to intervene. 

Apple boss Steve Jobs has defended conditions at a Taiwanese electronics firm that produces the firm's popular iPhone, following a spate of suicides.  "Foxconn is not a sweatshop," he told a conference in the US. Mr Jobs said that Apple representatives were working with Foxconn to find out why 10 workers had killed themselves at a factory in Shenzhen, China. An eleventh worker recently died at another factory in northern China.  In total, there have been 13 suicides and suicide attempts at Foxconn factories this year. "We're all over this," said Mr Jobs at the All Things Digital conference in California. 

“You go in this place and it's a factory but, my gosh, they've got restaurants and movie theatres and hospitals and swimming pools. For a factory, it's pretty nice," he said.Steve Jobs Apple CEO. 

Apple boss defends conditions at iPhone factory, BBC News Online, June 2, 2010 (http://news.bbc.co.uk/2/hi/technology/10212604.stm). 

The result is now evident—crude, perhaps, but more effective than the nothing that would have been produced by a mere clinging to the legal obligations of the company.

To stem an epidemic of workers leaping to their deaths, the Taiwanese electronics company Foxconn – which works with Apple, Dell and Sony – has also pledged to raise salaries by 20% and offered counselling to its 420,000 employees here.
Though far less well known than the brands it assembles, Foxconn is the world's biggest contract maker of IT goods, including iPhones and Motorola displays. Its mega-facility at Longhua, Guangdong province, so dominates the local economy that officials pay little heed to complaints by labour groups of secrecy, military discipline and low wages.
But a harsh new light has been cast on these problems in recent months by a spate of suicides and allegations of murder.
After the death of a worker in January, at least a dozen employees have jumped from buildings in and around the complex. The problem appears to be growing worse. There were two cases in March, three in April and six in May.
On Wednesday, the billionaire president of Foxconn, Terry Gou – Taiwan's richest man – said the problem was so bad that he had trouble sleeping because he feared the phone would ring with news of another death. Hours later that is exactly what happened. A day later, another worker reportedly slashed his wrists.

Foxconn offers pay rises and suicide nets as fears grow over wave of deaths, The Guardian, May 28, 2010  (http://www.guardian.co.uk/world/2010/may/28/foxconn-plant-china-deaths-suicides).   And yet, this connection must be tempered by the realities of the local wage labor market.  “But even as suicide nets were being erected, newly arrived migrants from the countryside were queueing up outside the factory to apply for jobs. "I've been waiting for three days," said Wu Zongying, 20, from Henan. "I really want a job here. It's better pay than the shoe factory where I used to work. I've heard about the suicides but I'm not worried. Nobody made those people jump. They were unhappy. They should have just left. I don't really understand it."”

But the mixed result ought not to blind one to the reality of the power of the social license.  In a world in which only law produced by the state mattered, there would be nothing of interest in the story about the stream of suicides in the Chinese manufacturing facility of a Taiwanese enterprise serving as the manufacturing site for U.S. branded products sold in developed states. But the “fuss” has had effect.  The effect is not “legal” in the sense that it results from the application of the law of a state.  Yet it has produced changes in behavior—and the perceived need to pay compensation—under the rules of corporate operation autonomous from those of the laws of either China or the United States.  The rules of the market, and the perceived preferences of important stakeholders—investors, customers, employees, and consumers—has asserted a power to affect behavior as powerful as the rules of any state.  And in the case of Foxconn, for the moment at least, perhaps the power asserted is more effective than political rules.  For a more theoretical discussion, see, e.g., Larry Catá Backer, Multinational Corporations as Objects and Sources of Transnational Regulation. ILSA Journal of International & Comparative Law, Vol. 14, No. 2, 2008; and 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. .

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