Saturday, October 16, 2010

The Power of Soft Law in Japan: Voluntary Codes, The Power of Non-State Based Authority and the Regulation of Business Behavior in Japan

 I have written about the evolution of corporate social responsibility in Japan.  See, Larry Catá Backer,  Japanese Approaches to Corporate Social Responsibility (企業の社会的責任) and Global Human Rights--Between the Law-State and Corporate Culture, Law at the End of the Day, September 14, 2010.  I have suggested that while the Japanese domestic legal order tends to avoid governance understood to embrace corporate social responsibility issues, corporations have increasingly adopted autonomous regulatory  frameworks that comport with substantive notions of expected conduct among major stakeholders in corporate activities.  My research Assistant Shing Kit Wong (Penn State  School of International Affairs Masters candidate '11) recently summarized it as follows:
Corporate Law (会社法 ) in Japan is established under the Commercial Laws ( 商法). The Corporate Law classifies four types of corporations: Corporation, General Partnership Company, Limited Partnership, and Limited Liability Company. It also establishes the duties of each type of corporation and to ensure proper operations.
Companies Law Enforcement Ordinance (会社法施行規則) is one of the regulations under the Corporate Law in Japan. The objective of the ordinance matters as assigned by the Companies Law and matters for execution of the Law when necessary. It consists of seven books: the definition of terms in the Corporate Law, information provided in the document and each member company, bonds, reorganization, merger, demerger, transfer of shares and share exchange, regulations for foreign company, and miscellaneous such as litigation, and registration. There is a large portion of the ordinance regarding share transfers and bond administrator, and the procedures for new establishment for different type of stock companies.
However, the content of corporate social responsibilities such as corporate philanthropy, product excellence, human rights are not mentioned in the Ordinance nor in any of the Corporate Laws. Such content is only in the Charter of Corporate Behavior ( 企業行動憲章) established by the Japanese Business Federation ( 日本経済団体連合会).
会社法施行規則 (Company Law Enforcement)
In Japan, the Japan Business Federation Charter of Corporate Behavior is influential. My Research Assistant Shing Kit Wong has provided a very nice summary of that "soft law" framework in Shing Kit Wong, "Japanese Charter of Corporate Behavior" (Sept. 2010) reproduced here:
The Charter of Corporate Behavior ( ) is established by the Japanese Business Federation ( ). The objective of the federation is to accelerate the growth of both Japanese and global economy and to strengthen the corporations in order to transform the Japanese economy into a system that is sustainable. In order to achieve such society, corporations are essential to recognize their social responsibility beyond legal compliance, and actively working to resolve various issues. The charter has conducted a review of guidance regarding corporate social responsibility. The main idea of the charter states that the existing purpose of corporations is contributive to the society through fair competition, responsible economic and social development with creation of employment. Corporations should operate base on respecting human rights, laws and regulations, while compliance with the international rules for the creation of a sustainable society, and keeping high ethical standards fulfilling responsibilities. There are ten principles in the Charter of Corporate Behavior, focusing on the following area: customer satisfaction, moral operational behavior, environmental protection and social contrition, human rights, and implementation of the charter.
In September 2010, the federation revised and published a new version of the charter. Compare to the last version, the new charter emphasizes on various revised legal systems, the environmental changes over the domestic and international corporations, and most significantly, globalization of corporate activities with respect to the international standard ISO 26000 corporate social responsibility, which will be released by the International Organization for Standardization (ISO) in the same year. ISO 26000 will add value to existing initiatives for social responsibility by providing harmonized, globally relevant guidance based on international consensus among expert representatives of the main stakeholder groups and so encourage the implementation of best practice in social responsibility worldwide. Such idea is emphasized in the eighth principle of the revised charter, which will be discussed later on.

The first three principles focus on earning the confidence of customers and consumers by providing safe and beneficial goods to the society in additional with the development and provision in a safe and responsible manner. Meanwhile, Corporations must promote fair, transparent, and free competition, as well as develop a system necessary to ensure compliance with export control laws and regulations on security. They must also ensure proper relationships and contacts with government agencies and political bodies. On the other hand, corporations shall engage in communication with the society as well as to their shareholders including active and fair disclosure of corporate information while taking necessary measures to protect personal data and customer related information.

The fourth principle states that corporations must respect diversity, individuality and differences of their employees, and to promote safe and comfortable workplaces, plus ensuring the mental and physical well-being of their employees. Employers must comply with labor laws and regulation in labor negotiations with sincere response. Employees, on the other hand, have the right to freely choose their representatives or bargain. Moreover, child labor and forced labor is strictly disallowed.

The fifth principles of the charter focus on environmental issues. It emphasizes that environmental problems is a common issue for all people, and it is an essential requirement for corporations to act voluntarily. The charter urges to build a global low carbon and recycling oriented society. It also gives emphasis to promote conservation and sustainable use of biodiversity. The fifth principle is revised in order to increase the awareness of environmental issues, and position corporate commitment to those issues as an essential requirement.

On the other hand, the sixth principle of the Charter focuses on social contribution. Corporations shall actively engage in philanthropic activities and other activities of social benefit. It is essential to clarify the basic principles of social action to establish a corporate structure and then taking into account of the corporate management philosophy while identifying philanthropic activities as priority issues and maximizing resources on such activities. In the same contrast, the seventh principle ensures the social stability and emphasizes that corporations must thoroughly cut off any relationship and oppose with organizations that involved illegal activities or unacceptable standards of responsible social behavior, or any anti-social forces and organizations that threaten civil order and safety. The revision of the seventh principle is in response to the changes in the tactics of anti-social subject, and urges to enforce relevant blockage to anti-social forces.

As mentioned earlier, the eighth principle of the charter has the most revision in order to emphasize globalization in business activities. It urges corporations to comply with local laws of each nation as the corporate own international standards. Corporations must also observe and respect all international codes of conduct and regulation including human rights, as well as respecting the cultures and customs of each country and region-based activities in order to promote mutual trust with stakeholders, and that corporations must operate with the consideration in the interest of the stakeholders. In addition, corporations ought to promote localization of management and strive to improve the working environment that is appropriate to the environment and cultures of each country or region while having an interest in social responsibility initiatives in partner nations and regions to provide assistance for improvement if necessary. Furthermore, it strongly restricts corporations to receive gifts or commission for the purpose of illicit gain. The revision of this principle is to distinguish between domestic and international in response to globalization of business activities with respect to the ISO 26000 corporate social responsibilities including respect for human rights, a growing interest in international issues.

The ninth and tenth principles focus on the implementation of the charter, and the consequences and actions corporations must take if the charter is violated. Top management of the corporations shall take all necessary action in order to raise awareness in their corporation and inform their group companies and business partners of their responsibility, as well as heeding the voice of all their stakeholders, and promote the development and implementation of systems that will contribute to the achievement of business ethics. In addition, top management shall maximize leadership to ensure the corporate management philosophy with a clear code of conduct and promote corporate social responsibilities. If any of the principles in the charter is violated, top management must investigate the cause of the violation and develop reforms to prevent recurrence. Such information of actions for reform shall be made publicly available. Afterward, the prompt public disclosure of information regarding the incident, responsibility for the event, and its effects shall be clarified, and disciplinary action shall be taken. The revision emphasizes the corporate social responsibilities and business ethics being the promotion of work as a group of companies, with the encouragement to business partners including the supply chain.

The Charter of Corporate Behavior in Japan is very much resemblance to the United National Global Compact. The UN Global Compact poses corporations to embrace, support and enact a set of core values in the areas of human rights, labor standards, the environment and anticorruption.

For instance, the fourth principle of the Charter emphasizes on human rights. Such principle is reference to the United National Global Compact’s human rights and labor standard, in which businesses should support and respect the protection of internationally proclaimed human rights and make sure they are not complicit in human rights abuses. In addition, according to the labor standard principle, business shall uphold the freedom of association and the effective recognition of the right to collective bargaining eliminate all forms of forced and compulsory labor as well as discrimination in respect of employment and child labor. Both the charter and Global Compact have strong emphasis on corporations consisting important roles in supporting and respecting human rights, and that they should also support the enjoyment of human rights while advancing in the business.

The Global Compact's principles regarding the environment can also be found in the fifth principle of the Charter, in which businesses should support a precautionary approach to environmental challenges, undertake initiatives to promote greater environmental responsibility, and encourage the development and diffusion of environmentally friendly technologies. Similar to the charter, the Global Compact urges the development of sustainability targets and economic, environmental, social indicators, as well as establishes a sustainable production and consumption program to take the corporations beyond compliance in the long-term, plus incorporating sustainability principles into business practices.

The anti-corruption principle in the Global Compact promotes businesses shall work against corruption in all its forms, including extortion and bribery, and that corporations shall introduce anti-corruption policies and programs within their organizations and their business operations. When corruption occurs, it is essential to report the work against corruption in the annual Communication on Progress, and share experiences through the submission of examples and case stories. In contrast, the Charter of Corporate Behavior urges corporations to promote fair, transparent, and free competition. In such, business activities have to be ensured fair and transparent domestically or internationally. It is restricted that customers, suppliers, business partners and other donors transfer gifts or money for the purpose of maintaining unfair advantage or preferential treatment. The principle also applies to Japanese transnational corporations abroad, even if no laws or guidelines are set forth by the foreign governments.

In sum, corporate social responsibility is conducted in the Charter of Corporate Behavior established by the Japanese Business Federation. The charter was revised in September 2010 in response to the international standard ISO 26000 corporate social responsibilities, putting a detailed emphasis on business activities in globalization. All the principles in the United Nations Global Compact including human right, labor, environmental issues, and anti- corruption are widely covered in the charter as well.


企業行動憲章 実行の手引き(第6版) 9.14.2010

企業行動憲章」 新旧対照表 9.14.2010

企業行動憲章 改定のポイント 9.14.2010


International Organization for Standardization, Guide of development ISO 26000, 9.5.2008

International Organization for Standardization, ISO and social responsibility, 2008
United Nation Global Impact

I have also suggested the way in which both public and private investment has become more politically charged, and increasingly able to affect corporate behavior through their participation in markets. See, Backer, Larry Catá, Sovereign Wealth Funds as Regulatory Chameleons: The Norwegian Sovereign Wealth Funds and Public Global Governance Through Private Global Investment (May 4, 2009). Georgetown Journal of International Law, Vol. 41, No. 2, 2009. Investors, like consumers and other stakeholders, have increasingly looke

d beyond the state for a normative framework within which non-state based forms of corporate governance regimes can be created, and enforced through the market based decisions of these stakeholders. Cf. Backer, Larry Catá, From Moral Obligation to International Law: Disclosure Systems, Markets and the Regulation of Multinational Corporations. Georgetown Journal of International Law, Vol. 39, 2008. James Brumm recently put this notion well in the Japanese context:
In Japan, in contrast, it is my impression that CSR and corporate governance are dealt with as two aspects of the same issue – how do corporations behave responsibly to society and the various stakeholders. In Japan, the recent emphasis on corporate governance has been on compliance systems development and on internal audit. Perhaps in some ways this is due to the fact that boards of directors are largely staffed by inside directors and corporate governance is carried out by executive officers. If and when boards become more independent, corporate governance may be handled in a different way. Still I think it will continue to be looked at as part of CSR, i.e. how does a company deal with its external stakeholders and how does it build and protect its reputation. James Brumm, "The Japanese Perspective," in Corporate social responsibility: the corporate governance of the 21st century 337-346 (Ramon Mullerat, Daniel Brennan, eds., Kluwer Law International 2005), at 345-46.
Brumm notes that CSR is very hot now in Japan, and perhaps more importantly, has becomean object of serious press coverage. " CSR has been given wide coverage by the press and the Nikkei Shimbun (the Japanese equivalent of the Wall Street Journal or the Financial Times) has organized conferences on CSR and has established a CSR Project. " Id.

What brings all of those forces together is an organizing framework through which a regulatory framework autonomous of any domestic legal order is developed to suit the governance standards of critical stakeholders in corporate activity.  One such organizing framework is the system for corporate behavior rules developed by the Organization for Economic Cooperation and Development.  The OECD's Guidelines for Multinational Corporations  provides a soft law substantive framework that can be invoked against Japanese companies through National Contact Points established as part of Japan's obligations as an OECD member.  See, OECD多国籍企業行動指針.  In 2008 Japan "established a consultative body comprised of representatives from the Japanese business and labour communities." OECD, Investment Division, Directorate for Financial and Enterprise Affairs, 2009 Annual Meeting of the National Contact Points, Report by the Chair, 16-17 July 2009, at 16.  In addition "With a view to promoting corporate responsibility and the OECD Guidelines, the Japanese NCP established the co-operation with the local office of UN Global Compact, the local office of ILO in Tokyo and an NGO engaging in the promotion of Global Reporting Initiative (GRI). As a result, in March 2008, the Japanese NCP made a presentation to Japanese CSR business representatives at a seminar organised by the local office of UN Global Compact. The presentation covered NCP activities as well as the Guidelines."  Id., at 20.  But the Japanese NCP has not proven to be particularly aggressive in embracing its mandate.  See, e.g., OECD Watch, Protest Toyota Campaign vs. Toyota, 4 arch 2004 (action involving labor issues in the Philippines, Japanese NCP refused to proceed during pendancy of related legal action in a complaint that has extended almost a decade).

Another that is likely to become a powerful focus of these governance systems is the Protect-Respect-Remedy framework developed  by John Ruggie in his role as United Nations Special Representative to the Secretary General for Business and Human Rights.  
[The framework] is based on three complementary and interdependent pillars: the state duty to protect against human rights abuses by third parties, including business; the corporate responsibility to respect human rights; and the need for greater access by victims to effective remedy, judicial and non-judicial. The Human Rights Council was unanimous in welcoming the framework, and extended my mandate by three years with the task of operationalizing it (A/HRC/RES/8/7). This marked the first time the Council or its predecessor, the Commission, had taken a policy position on business and human rights. John Ruggie, Introduction by the Special Representative, July 2009.
"The Business & Human Rights Resource Centre created a portal at John Ruggie’s request, to facilitate communication and sharing of materials related to the mandate. All materials . . . .  are now available on the portal."  Business and Human Rights, U.N. Special Representative on Business and Human Rights.  The Portal Site includes all materials published by the Special Representative and his team, as well as submissions to his mandate and commentaries on his work and is made possible by a grant from the Swiss Federal Department of Foreign Affairs. 

When all of these forces converge, it is possible to discern the effectiveness of governance of business behavior beyond the state.  That is, it is possible to begin to sketch the normative parameters and mechanics of governance systems that bind business without direct resort to the law of any state.  A recent example suggests the direction of these movements:

Investor Pressure Moves Toyota Affiliate to Divest from Joint Venture with Burmese Regime
Adam M. Kanzer, Esq.
Managing Director & General Counsel
Domini Social Investments LLC

Toyota states that it shares investor concerns about the human rights situation in Burma

In a letter to a group of investors, Toyota Motor North America confirmed that its major trading partner Toyota Tsusho (TTC) has divested its ownership stake in Myanmar Suzuki Motor. TTC jointly controlled the vehicle assembly plant with the Burmese military regime and Suzuki Motor Corp. Toyota’s announcement followed three years of dialogue with a coalition of investors, including Trillium Asset Management Corporation (“Trillium”), Domini Social Investments (“Domini”), Boston Common Asset Management and the Interfaith Center on Corporate Responsibility.

In December 2006, research by Domini Social Investments uncovered an equity partnership between Toyota Tsusho and the Burmese military regime. Investors delivered a letter shortly thereafter to Toyota Motor’s Chairman, Fujio Cho, raising concerns about the company’s business ties to the repressive regime. Toyota Motor responded by confirming it had asked Toyota Tsusho to reconsider its business activities out of concern for the current environment in Burma.

In an August 12, 2010 letter to the investors, Group Vice President James Wiseman of Toyota Motor North America wrote, “[W]e are pleased to report to you that as of June 2010, TTC had sold all of its shares in its Myanmar Suzuki joint venture… TTC is now fully divested from its joint venture operations in Burma.”

Holding over 20 percent of Toyota Tsusho’s shares, Toyota Motor is Toyota Tsusho’s largest shareholder. Toyota Tsusho partnered with the Burmese government to sell motorcycles, light trucks and cars. The Burmese government, which stands accused of systematic violations of human rights and crimes against humanity, tightly restricts the domestic market for these vehicles to its wealthiest citizens and those with military connections. Burma ranks among the poorest countries in the world, with the majority of the Burmese population living in poverty.

“We commend Toyota and the role it played in persuading its affiliate to reconsider its ties to the Burmese military rulers. As long as human suffering persists in Burma at the hands of the junta, companies cannot ignore their responsibility to insure their or their affiliate operations do not aid the regime’s offenses,” commented Susan Baker, a research analyst at Trillium who studies the impact of environmental, social and governance (ESG) factors upon investment performance.  “Any link to building vehicles to aid the military government’s misrule and brutal suppression of its own people raises moral and reputational issues that present risks to the long term value of the Toyota brand,”she continued.

“Toyota Motor has taken an important step to acknowledge and address human rights concerns within its sphere of influence,” said Shin Furuya, Lead Research Analyst, Global, for Domini. Although Toyota Tsusho has ended its only known direct joint venture with the Burmese government, it continues involvement in other operations in Burma including agricultural and apparel production, which could have significant human rights impacts.

“Toyota Motor and its group needs to continue to address these concerns whether the particular operations have direct business ties with the military regime or not. All companies operating in Burma need to review their relationships with their trading partners and carefully consider whether their company’s operations could directly or indirectly contribute to human rights violations,” he continued. Domini has consistently excluded Toyota Motor from its mutual fund portfolios, partially due to its involvement in Burma.

“The corporate responsibility to respect human rights is becoming the international norm,” commented Rev. David M. Schilling, director of human rights, Interfaith Center on Corporate Responsibility. “The UN Human Rights Council adopted recommendations of the UN Special Representative for Business and Human Rights in June 2008, including the commitment that companies need to demonstrate respect for human rights, not just adopt statements. Toyota’s action to influence its affiliate to divest from Myanmar Suzuki Motor is a good example of its human rights commitment.”

Toyota’s formal acknowledgment of divestment came a day before the Burmese government announced its first elections in 20 years. News of the election drew widespread criticism as it imposes many restrictions, including barring Aung San Suu Kyi, imprisoned leader of the National League for Democracy and winner of the 1990 elections, from participating.

The investor group will continue to encourage Toyota Motor to address these issues and to develop human rights risk and impact assessment tools, particularly in countries considered to have substantial human rights risks such as Burma and Sudan.

Trillium Asset Management Corporation is a Boston-based, independent investment management firm devoted exclusively to sustainable and responsible investing.

Domini Social Investments is a New York City-based investment firm specializing exclusively in socially responsible investing. Domini manages funds for individual and institutional investors who wish to integrate social and environmental standards into their investment decisions.

Interfaith Center for Corporate Responsibility (ICCR) has been a leader of the corporate social responsibility movement for nearly 40 years. ICCR's membership is an association of 275 faith-based institutional investors, including national denominations, religious communities, pension funds, foundations, hospital corporations, economic development funds, asset management companies, colleges, and unions. Each year ICCR-member religious institutional investors sponsor over 200 shareholder resolutions on major social and environmental issues.

This again points to the reality of what John Ruggie suggested as the basic governance polycentricity inherent in global economic activity conducted within a framework of territorially limited states and freely moving capital, operations and investment activity in which corporations, investors, and civil society elements can interact  in ways that can produce harmonized approaches to behavior  over the whole of their operations and across any number of states.   Though the state remains a critically important actor in developing basic normative structures for business conduct, the state is not the only or perhaps the greatest agent, of harmonizing  emerging transnational standards of corporate behavior about which consensus is emerging.  

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