Birgit Spiesshofer on "Global Financial Crisis, Corporate Responsibility and Poverty GFC Taskforce Phase II"

Dr. Birgit Spiesshofer M.C.J. (New York), Attorney at Law, has been an Of Counsel in the Berlin office of Salans since 1 April 2010 and works mainly in the area of public law.

(Birgit Spiesshofer)

Birgit established the “Gaemo Group – Corporate Responsibility International” in June 2009. She is chair of the CSR Committee of the Council of Bars and Law Societies of Europe (CCBE), Co-Chair of the CSR Committee of the International Bar Association and a member of the Constitutional Law Committee and of the Human Rights Committee of the German Lawyers Association. Birgit Spiesshofer has often been named by JUVE and other publications as one of the leading practitioners in the area of public law. She publishes and speaks on the topic extensively.

This post considers an excellent  recent publication "Global Financial Crisis, Corporate Responsibility and Poverty GFT Taskforce Phase II," to be published by the International Bar Association as Phase II of its Global Financial Crisis Project.

Spiesshofer starts with a very specific framework for approaching the framework of the global financial crisis--a failure of the financial system that, while it produced direct subsidizing responses by governments, left substantially unaddressed negative social and ecological effects.  (Spiesshofer, "Global Financial Crisis" supra, 1).  But these effects unaddressed in the public sector, may have produced a response in the private sector.

Despite all these (and more) negative impacts, the GFC also had a cathartic effect insofar as it made the systemic failures, the misguiding incentive schemes, the conflicts of interest and the disastrous consequences of the lack of efficient regulation and control transparent, and triggered a broad international discussion on Corporate (Social) Responsibility (CSR), not confined to the financial sector and the First World, but encompassing business operations worldwide, in particular the supply chains in less developed countries. (Ibid). 

Just as the state appears to have become the principal object of financial sector subsidies, the CSR project appears to be the method through which transnational society--including consumer and investor stakeholders--may produce a structure for response, and accountability, in the aftermath of the GFC.  This where the state proves negligent, the market itself may make them irrelevant. "The upside of market economies and competition is, however, the immense creative potential which should be challenged in an intelligent way to enhance the social and ecological conditions at a global level." (Ibid., 1-2). In that context, Spiesshofer considers "Ethics and Economics" (Ibid., 2-7), and CSR (ibid., 7-16) as alternative bases of governance. 

A.  Ethics: Spiesshofer starts with a a clearheaded premise: "in a competitive market economy moral behaviour is not only a matter of individual character, virtue and strength, but requires an institutional and regulatory framework that warrants that moral behaviour does not entail a severe (competitive) disadvantage, neither for the individual employee nor for the enterprise as such, but rather an advantage in the inner-company and market place competition." (Ibid., 2).  While she appreciates gesture as much as the rest of us, she finds them less effective for naturalizing behaviors within large institutions that are driven by crosscutting stakeholder interests.  The fundamental question then is simple: how to translate ethics into economics; "what are the economic and legal categories and instruments, taking into consideration the mechanisms of competition and the rules of modern market economies, which warrant ethical behaviour in an efficient and sustainable way." (Ibid).

To this end, ethics must be incorporated into systems of welfare maximization at the heart of the principles on which markets and economic actors operate.  (Ibid., 3).  This, she argues quite correctly, applies even within emerging stakeholder models of enterprise activity.  If stakeholder welfare is not maximized, if moral standards are not, to some extent translatable into welfare maximizing termms, then its power to affect the core operations of enterprises grounded on the wealth maximization premise will be doomed to failure.

Moral standards will be effective (only) if they are connected - by operation of law, technology, or, in the internet age, by reputational impacts - with economically measureable negative or positive consequences, with losses, cost or liability on one hand, or competitive advantages, ultimately translateable into profits, risk or cost avoidance, on the other. Moral appeals and condemnation of greed will be ineffective as long as the system allows, incentivises or even requires to cut corners. The conscience of an individual cannot compensate for the failure of the institution. (Ibid., 3).

But, she notes, the calls for reform of the financial sector sound more like hortatory exhortations than hard headed and pragmatic approaches to changing business behavior.  In particular, recent calls to change culture and business that attacks the welfare maximization premise of business behavior are highlighted.   She warns:

  the quantity of regulation is not decisive, the goal cannot be to suffocate or abolish competition, but to create smart rules, coherent with and embedded in the market economy, which curb, control and reduce the mechanisms with negative impacts on one hand, and support and utilize the positive potentials of competitive behaviour on the other, ensuring at the same time that compliance with these rules cannot be reduced to lip service or green, white or blue washing, but is integrated into the core strategies and internal rules and cultures of the various industry sectors and the individual companies. (Ibid).

Spiesshofer notes that what the GFC has managed is to stress enterprises, especially those in the financial sector, enough that they now must either accept the possibility of reform, including reform in the ethical basis of behavior choices, or lose their public privileges as protected sectors of the economy. Spiesshofer points to the McKinsey and Co. report (2nd McKinsey Annual Reviewon the banking industry October 2012). The report called for a triple transformation of the banking sector--touching on their economic, business and culture models.  These add a value element to the adverse consequences of bank decisions on important stakeholders.  That, Spiesshofer, suggests, sounds in CSR as an ethics of business decision making, but one which at lits core is inimical to the welfare maximization model of business (Ibid., 3-4). She adds: "Rainer Neske, member of the board of Deutsche Bank, played the same tune, stating that the shareholder value does not suffice as (sole) legitimation any more, but that measurable customer value has to become a fixed component of an integrated business strategy to legitimize the business model and to regain the trust of society." (Ibid., 5). 

But are these proposals reasonable; is it possible, she asks, to reconcile stakeholder and shareholder wealth maximization models? (Ibid., 5).

Issues that need to be addressed in that context are, in particular, the transparency of products and services regarding cost and risks, conflicts of interest between customer value and profitability interests of banks and rating agencies, adequate and efficient due diligence and risk assessment methods both for internal and external evaluations, incentive schemes for bank employees that effectively change their position from seller of products (with the highest yield for the bank and for themselves) to customer advisor. An effective and credible turnaround would require that these and other key issues are addressed through a substantial alteration of the schemes, and, that the top management sends a clear message to the staff that the new rules will be enforced without exception. This message will be credible and successful only when there are no substantial economic incentives or constraints maintained or created that work against the new rules. It will be a challenge to reconcile profit maximization interest of the bank on one hand and the customer value on the other within the organisation. (Ibid., 6)

Thus, in the end, Spiesshofer emphasizes that the singular focus on ethics and hortatory objectives is alone unlikely to produce anticipated results in companies that continue to embrace an economics of welfare maximization. Ethics must be intertwined with the core mission of business--to generate profit.  Thus the issue should not be a moral one but a pragmatic one with respect to profits--"how it is generated." (Ibid, 6).  Thus, at the foundation of economics, ethics and CSR is the fundamental characteristic of the economic enterprise. "The cynical standpoint is that ethics is about words, economics is about results; Corporate Responsibility, well-understood, means that ethics is about results. Ethical claims will become effective (only) when they are translated and integrated into the framework within which businesses (may) operate. " (Ibid., 7).  Cynical, perhaps; pragmatic, absolutely.

B. CSR--Escape or Effective Remedy? Spiesshofer then turns to the issue of CSR in this context. Here she looks at two issues.  First, whether CSR is possible beyond profit maximization.  The second, whether CSR standards can close the governance gap opened by the supra-national structures of economic globalization.

Spiesshofer starts with Milton Friedman.  She  notes that Friedman himself held a view that enterprises might have a social obligation.  But that this social obligation was not eleemosynary--"His view on discrimination is logical and modern: a business man who discriminates because of race, religion or the like does not only impose disadvantages on the discriminated person, but also upon himself. An entrepreneur who applies such preferences which are not economically motivated imposes on himself more disadvantages than an entrepreneur who does not discriminate. In a free market there will be a tendency to eliminate him." (Ibid., 7, citing Capitalism and Freedom at 139-145 (German edition)).  From this she suggests that if these social obligations have economically positive values, can states or markets "hard wire" them into rules for business behavior?  (Ibid., 8).  To the extent that social obligation is incorporated into law, then one approaches the Friedman idea. (Ibid., 8 citing to The European Commission stated in its Communication of 25 October 2011, called "A renewed EU strategy 2011 - 14 for Corporate Social Responsibility"COM(2011) 681 final ). But CSR appears to go beyond that, the E.U. Commission, Spiesshofer notes, now suggests CSR as a mechanism for imposing remediable responsibility of enterprises for the social impacts of their activities. (Ibid., 8). She explains

What is the difference between the two definitions? Why did the EU Commission see a necessity to claim corporate responsibility beyond the requirements and limitations spelled out in applicable laws? And, does this claim conflict with shareholder value centered national company laws?

The original CSR approach, developed in the EU Commission's 2001 Green Paper, promoting "voluntary" social and environmental initiatives (beyond legal requirements), proved to be of limited effectiveness. Certain companies embraced CSR as a tool to differentiate themselves in a positive way in the market competition, others experimented with internal codes of conduct, with or without implementation, enforcement, auditing and certification schemes, an increasing number of companies signed up to the ten CSR principles of the United Nations Global Compact, the Business Social Compliance Initiative or published sustainability reports according to the guidelines of the Global Reporting Initiative. In spite of this progress, CSR remained an issue for a small, select group of forerunners, mainly larger companies, and niche players. (Ibid., 8-9).

Spiesshofer suggests that the result was not surprising.  Most enterprises viewed CSR in this guise as bureaucratic and more political gesture than real policy. Moreover, companies rightly tended to want to avoid any standard that might broaden their liability. (Ibid., 9).

In addition, the line between voluntary and mandatory commitments was never a sharp one, taking into consideration the multitude of hybrid instruments, such as emission trading schemes, corporate governance codes, legislation stipulating objectives without prescribing the instruments, and other guidelines and interpreting communications. The cacophony of guidance standards, codes and sustainability reportings did not help either as it could not provide certainty that a company was doing the right or even the best thing when it embraced one of the various concepts. Finally, the old approach focused only on the negative aspects of entrepreneurial activities and requested additional commitments and limitations, it disregarded the positive side of the competitive market economy, that is that enterprises can also contribute to society in a creative and positive way, for example by developing new, environmentally friendly technologies, creative employment schemes, and sustainable business strategies. (Ibid., 9).

On contrast, a standard based on corporate responsibility for negative impacts had the value of simplicity and coherence.  (Ibid., 10).   But for economic enterprises, this is not a good thing.  It is relatively easy to avoid hortatory and symbolic ethically based norms.  It is quite another to avoid something as simple as responsibility for negative impacts. Spiesshofer explains that this approach now may serve as the cornerstone for the E.U action plan for hard wiring CSR beyond ethics.

The action package contains a mix of instruments, in particular, CSR aspects shall be integrated into binding public procurement and other directives, states shall develop simultaneously CSR-strategies and instruments and report on their progress, large businesses shall adopt international standards like the UN Global Compact, the ISO 26000 Guidance Standard on Social Responsibility, or the OECD Guidelines for Multinational Enterprises, all business shall respect human rights as spelled out in the UN Guiding Principles for business and human rights.(Ibid., 10).

Business, Spiesshofer notes, is fighting back. Their preference for soft law is not irrational, especially if they can retain control of its content and implementation. (Ibid.).  But beyond capture and the avoidance of remedial measures (or the fabrication of transaction costs that daunt civil society or stakeholder resorting to soft law CSR), there is the problem of public law incompetence.  In effect, Spiesshofer subtly suggests that the public law cure m,ight be as bad as the enterprise disease (costless activity that adversely affects social, cultural, human or environmental rights of others). " It is another question that the EU Commission's plans require intensive and detailed discussions in order to develop realistic and manageable guidance and to avoid that business is suffocated by bureaucracy, or, that already existing legal standards are paraphrased as CSR or human rights requirements." (Ibid., 10).

If that is the case, Spiesshofer then queries whether CSR is necessary at all. She takes it as a given that CSR may be less necessary--or at least its transposition less acutely needed--in developed states like the U.S. and E.U. members states because of the high degree of development of law there. (Ibid., 11). I am less sure of that precisely because, as Spiesshofer argues convincing earlier, even developed states are bound, in their enterprise law, to principles of shareholder welfare maximization, which at its core would to the extent permissible, require enterprises to externalize all adverse effects on stakeholders other than investors.

Yet, reflecting a European and U.S: consensus that soft law in general, and CSR in particular, is meant to fill governance gaps, where the gaps are external to the developed states (see my series on the OECD (see, e.g., Introduction; The U.S. National Contact Point--Corporate Social Responsibility Between Nationalism, Internationalism and Private Markets Based Globalization), Spiesshofer agrees that "new instruments are required to answer the challenges of globalisation and to reduce the divide between developed countries with high social, safety and environmental standards on one hand and poor countries with low or non-existent standards, or the lack of efficient enforcement due to the lack of robust institutions or corruption on the other."  (Spiesshofer, supra., 11). Thus CSR is needed as a means of reducing governance gaps and bringing global standards up--up as measured by the standards of developing states.  To my mind, though, that harmonization is itself deficient, precisely because the domestic legal orders of developed states are still not sufficiently responsive to the externalities caused by a shareholder welfare maximization model.

And it is to the question of the compatibility of shareholder welfare maximization and CSR grounded in a "responsibility standard" that Spiesshofer turns to next.  Spiesshofer states again with Friedman and his well known premise that the only social responsibility of enterprises is to maximize profit (Ibid., 11-12). Spiesshofer notes, quite correctly, the rest of Friedman's premise--that welfare maximization is generalizable to all stakeholder sin enterprises--trade unions, consumers and the like have a social obligation to maximize their own welfare as well. This is the starting point, of course, of globalized private governance systems centered on supply chain production (see, e.g., Backer, Larry Catá, 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). But Spiesshiofer goes in another direction--one that suggests public law efforts to reconcile shareholder and stakeholder models of governance, and in so doing, to make CSR principles compatible with domestic corporate law principles. (Spiesshofer, supra., 12-13).  For the difficulties of compatibility in the U.S., see Backer, Larry Catá, Multinational Corporations, Transnational Law: The United Nation's Norms on the Responsibilities of Transnational Corporations as Harbinger of Corporate Responsibility in International Law. Columbia Human Rights Law Review, Vol. 37:287-389 (2006)).  Spiesshofer starts with the "usual suspects"--Section 172 of the UK Companies Act 2006 (Spiesshoifer, supra, 12), the ethics and monitoring provisions of the Sarbanes-Oxley Act of 2001 (Ibid., 12-13), and the Dutch Governance Code of 2009 which includes CSR principles in internal risk management and control systems (Ibid., 13). Spiesshofer than tales a broad reading of the OECD's Principles of Corporate Governance and the EU Commission's CSR Strategy to suggest the way in which the governments and IOs of developed states have been opening a space within which enterprises may accommodate the detrimental effects of corporate activity on stakeholders other than shareholders. From this she extracts a hardening giovernance premise of CSR in developed states:

In general it can be said, that, even when it is not explicitly spelled out, it is part of a director's duty to protect the shareholder value against reputational and financial risks, cost and liabilities, also in the long run, and to take into consideration also the interests of other stakeholders because recklessness in that regard may result in financial downsides, or, in the loss of chances and competitive advantages. (Ibid., 13-14).

 For Spiesshofer, the trend is clear:

Summarizing, it can be confirmed that corporate responsibility reaches way beyond profit maximisation and encompasses social, environmental and ethical concerns, partly explicitly spelled out by laws, partly implicitly contained as integral elements of the framework in which companies operate; corporate responsibility encompasses both the request to do no harm and the expectation that entrepreneurial creativity will be used to improve social, environmental and community conditions. (Ibid., 14). 

I might suggest instead, the the trend is toward a willingness to permit enterprises to adopt something like a "corporate responsibility for adverse social impacts" principle in its operations, but that this movement will not be made mandatory,.  To that extent, it will still be necessary to develop a robust soft law (that is private law based) CSR system as an additional source of regulatory obligation.  While states might be persuaded top permit such a governance regime, and provide directors protection against liability for exercising business decisions on this basis, states will not mandate this precisely because the shareholder welfare maximization principle remains both strong and robust.   The consequence is inevitable--globalization will produce a necessary governance polycentricity--enterprises will be subject to multiple centers of governance simultaneously as a mechanics for filling governance gaps in globalized economic regulatory systems.  (e.g.,  Backer, Larry Catá, The Structure of Global Law: Fracture, Fluidity, Permeability, and Polycentricity, Tilburg Law Review 17(2):177-99 (2012); Inter-Systemic Harmonization and its Challenges for the Legal-State (March 17, 2011). THE LAW OF THE FUTURE AND THE FUTURE OF THE LAW, Sam Muller, Stavros Zouridis, Laura Kistemaker and Morly Frishman, eds., Torkel Opsahi Academic Editor, 2011).

Spiesshofer turns to this issue in the last section of her essay.   She acknowledges the focus of developed states civil society actors in fashioning the substance of CSR--to bring conditions and culture in non-Western states to Western standards. (Ibid., 14 "A central claim of the CSR discussion is that multinationals should not abuse the weak governance structures in poor regions but adhere basically to the same standards in their conduct worldwide, thereby raising the standard of living for the poor and avoiding environmental damages in the less developed countries.").  For this purpose, Spiesshofer correctly notes, multinational enterprises have used the OCED's Guidelines for Multinational Enterprises and the U.N. Global Compact as templates of sorts, along with other more specifically  targeted frameworks. (Ibid., 14-15). Critics form developing states have correctly noted both the blindness of these frameworks to the realities in the host states, and its suggestion of a neo-colonialist enterprise.  (Ibid., 15).

At the International Bar Association's annual conference in Dublin in October 2012, representatives of African countries claimed that CSR is a convenient escape for multinationals from facing their real responsibilities as they only voluntarily adhere to certain standards (or not) and assume that they fulfill their social responsibility by building schools and hospitals for the communities they operate in without addressing the core requests for better working conditions, higher wages and environmental and community protection. It was also pointed out that in a lot of countries subsidiaries of multinationals are public-private-partnerships, such as Shell in Nigeria. It was stated that in these situations, where the state is at the same time entrepreneur and regulator, the state faces an inherent conflict of interest which is often solved at the expense of regulatory enforcement.  Others reject CSR as a paternalistic approach of Western companies and would prefer to see an empowerment of local trade unions and civil society groups to claim and fight effectively for their own rights and environmental protection as they define it. (Ibid., 15).

The consequence is more complexity, and a greater reliance on governance contracts to develop supra-national regulatory regimes that incorporate CSR values. Spiesshofer points to the simultaneous governance affecting work of the World Bank and the International Finance corporation (Ibid., "are important trendsetters as their financing is usually contingent on the adherence and implementation of a whole body of social, safety, environmental and corporate governance rules which form part of the financing agreements and become thereby "hard", contractually enforceable law. "). She also notes the importance of corporate regulation of its supply chains, and the taste for extraterritorial application of (usually) U.S. law, noting in particular the Koibel case.  (Ibid., 15-16). The consequences are clear:

We will see an increasing integration of ethical, social and environmental concerns into the framework allowing and steering business conduct, and more discussion about extraterritorial application or effect of national laws and about standing of third world citizens in first world courts who aspire to hold parent companies liable for alleged environmental or human rights violations of their subsidiaries in third world countries.(Ibid., 17).

For lawyers, the lessons are even clearer. CSR is both compulsory, but often is not grounded in the domestic legal orders of states. For lawyers practising in traditional ways, it will be easy to miss the regulatory center confrointinung corporate clients. Worse, an anachronistic approach to regulation that focuses solely on the state will tend to make the work of people so focused irrelevant. That is a lesson not merely for lawyers but for those elements of civil society, including its currently most influential, that continues to assert a need for focus almost entorely on the state, even as the regulatory center of CSR moves beyond the state and put of the public and into private governance regimes,.