The following paper, still in rough form, will be presented at the upcoming Symposium sponsored by the Georgetown Journal of International Law, Global Responsibility: Myth or Reality, to be held at Georgetown University Law School on Feb. 5, 2008. The podcast fo the event can be accessed here.
From Moral Obligation to International Law: Disclosure Systems, Markets and the Regulation of Multinational Corporations Through International Hard Law
The topic of the 2008 Georgetown International Law Journal’s symposium is how international law can influence international business to work toward “public” goals, for example reducing corruption and protecting the environment, when entering into international transactions. The object of the symposium is to get its participants to seek the answer to three questions: does, can, and should international law provide incentives (either positive or negative) for international business to consider “public” goals? This paper argues that, at east n one important respect, the answer is yes—international law provide an important, though limited framework for the regulation of the behavior of economic entities. The purpose is to provide a preliminary sketching out of a plausible approach to international regulation. More specifically, the paper suggests that international law has begun to provide incentives for the management of a values-based behavior structure for multinational corporations. The paper also suggests that international law can serve as a vehicle for the enhancement of a market environment in which corporate stakeholders, and principally consumers and investors, might incorporate information about corporate “social” behavior in their consumption and investment decisions. Without incorporating any particular set of “public” values, international law can make it easier for people to manage the “public” or “social” behavior of multinational corporations through a mandatory regime of global reporting. The paper will suggest that a mandatory system of transparency and disclosure may serve as the most efficient means of creating incentives for “moral” behavior without the need to incorporate any one version of appropriate manifestations of social responsibility on corporate entities. In this way international law can serve to create incentives for appropriate behavior without actually mandating any specific version of that behavior.
The paper starts by posing a problem that will serve as the basis for the analysis—the responsibility of corporate actors for the working conditions of indirect employees. This problem nicely frames the regulatory issues for both business and law. It is clear that while in the recent past there might not have been even a moral obligation extending to such employees, contemporary standards suggest otherwise—there may now be a moral obligation of some kind to indirect employees. The source of this moral obligation might be derived from a variety of sources, both secular and religious, but it is not derived from law. Yet even moral obligations can be enforced in the absence of enforceable standards written into hard law. The principal parties can bind themselves to behavior standards deemed proper under the private law of contract, or the parties may seek the help of third parties that may certify compliance with one or another standard of conduct. Those obligations may be ensured through regimes of disclosure, monitoring and surveillance. But that may be the problem. The nature and extent of that obligation may be dependent on the values of the stakeholders or the normative system under which all actors operate. Where more than one standard applies, inconsistencies and ambiguities arise.
The paper then turns to a consideration of the contemporary limitation of law in the resolution of the problem. Neither domestic nor international law has been much help. Law has taken only some very tentative steps to recognize or further the rise of this moral sense of obligation. The rise of the much-touted corporate social responsibility movement has resulted in the proliferation of a number of responses at every level of governance. But virtually all of these responses have been in the form of “soft law,” usually voluntary codes that are not enforceable by any political organization. Law thus effectively memorializes one form of moral obligation. But even as moral obligation, these codes suffer deficiencies. These voluntary codes tend to be written in the most general terms, permitting a tremendous variation of behavior that can be claimed to be consistent with the form or substance of these codes. And there is no institutionalized procedure for enforcement. Other sources of moral obligation might include human rights declarations from international organizations and supra-national human rights organizations. But, recent efforts to create mandatory legal obligations touching on corporate social responsibility in the international level have been forcefully rebuffed, principally by representatives of developed states.
The paper suggests the overlapping dimensions of the problem posed by any effort to formally regulate the behavior of economic entities across borders through law: the disjunction between moral obligations across borders in the construction of economic relationships across such borders, the multiple sources of values informing regulatory policy even within states, and the difficulties of transposing moral obligation into a substantive law of corporate social responsibility that effectively reaches across borders. Yet, despite these limits it may be possible to construct a plausible system of mandatory regulation at the international level that adds value to economic activity without threatening the contemporary system of market based globalization. The foundation of that regulator system is tied to monitoring, disclosure and reporting, enforcement mechanics common to the private law of contract. From out of the means by which moral obligations are enforced among private parties may come a framework for creating a plausible hard law at the international level. This framework would provide incentives (either positive or negative) for international business to consider “public” goals without actually mandating those goals in any specific form—the market would make that determination. These incentives can be provided through law, but in a way that retains a strong sensitivity to the current market bias of globalization—and to the privileging of private arrangements among stakeholders principally involved in economic transactions.
For that purpose the paper suggests a global system of disclosure and transparency. The object of these disclosure mandates would not be to establish a definitive set of behaviors, but rather to establish a framework within which corporate stakeholders—consumers, investors, labor, and others—could adjust their relationships on the basis of the behavior disclosed. In a sense, then, monitoring regimes can serve as a framework for incorporating moral obligations within a legal structure of relationships between economic actors, without hardwiring any particular set of ethical standards in law. For those in search of avenues for the implementation of corporate social responsibility at a transnational level, international agreements for transparency, disclosure and information dissemination might be more effective as a means of hardwiring ethical obligations in the relationships between economic enterprises, than commanding obedience to any set of such obligations.
The paper then suggests that this sort of mandatory regulatory regime is plausible as international “hard” law for five reasons. First, a mandatory global monitoring system is plausible because it only requires actions on the part of economic enterprises (the gathering and dissemination of information) that have been well internalized by the great majority of these entities. Economic entities harvest, use and report information all the time—for example to government regulators, to investors and to consumers, among others. This is not so much a new task as a modification of a core activity of business. Second, the sort of social disclosure to be targeted under international monitoring regimes are already being provided n large respect through private contract, for example in the context o supplier chain arrangement. (Backer 2007). Third, information gathering has been a task long assigned to international and transnational public actors. This sort of regulatory activity is something well suited to that sort of organization. Moreover, the activity itself is something that can be originated at the international level and enforced at the level of the nation state. It invites the sort of partnership that might make states leery of the seepage of power up to the supra national level less concerned on that score. Fourth, international instruments already contain monitoring provisions. Thus, the international community already has the skill set necessary to draft this ort of hard law (as do the nation states that must approve such endeavors). Lastly, there already exit a number of frameworks that detail the sort of information that might plausibly be gathered and disclosed that have been developed by global civil society and public actors. The global community has been doing this, they know how to do this, there is no objection in principle to the task of information gathering and disclosure.
The paper ends by a more careful look at the existing basis for the construction of a global law of monitoring and disclosure, and the possible contents of such mandatory disclosures. Hints for this sort of international arrangement have already been developed. The paper suggests that the disclosure portions of the now abandoned Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights (2003) might provide useful insights for an international law of disclosure. (See Backer 2006). The Norms suggest the structure of an international disclosure system that is market driven. That system is based on an integrated system of public and private law. Though the Norms sought to impose a global system of substantive behavior norms on economic enterprises, its enforcement mechanics could be useful in structuring an international law system of disclosure that avoids substantive or values regulation. Monitoring under the Norms was based on contractual obligations to report on certain identified performance items. Those obligations ran to a number of public and private actors that could enforce those requirements. That sort of system, limited to the provision of information—the scope and content of which to be determined in international law, might provide a basis for public regulation. The form of that reporting, and perhaps even its content, is also being developed. The paper then considers the efforts undertaken by the Global Reporting Initiative to elaborate a system of surveillance and reporting. (Global Reporting Initiative 2002-2006).
The paper ends with a critical assessment of the viability of such a system in the context of markets driven economic globalization. It suggests that such a system will work at the economic level only to the extent that it can be promoted as a mechanics to global market efficiency, avoids making substantive or values driven behavior choices, limits enforcement to the compliance with the information gathering and reporting requirements of the international framework and vests enforcement at the nation-state or private level.
I. Moral Obligation and Corporate Social Responsibility.
A. The Sources of Moral Obligation and Corporate Social Responsibility
The twenty first century has witnessed a great change in the debate about the scope of appropriate conduct in economic activity. From a singular belief in the strict separation of public and private law, and in the vesting of values (policy) objectives to public and individual (or institutional) wealth maximizing goals to the private, the old boundaries have begun to be blurred. That blurring as produced a certain tension in the regulation of behavior.
Traditionally the sole concern of academics and policy makers, the ethics of business conduct was once confined to issues of fraud and corruption. But, especially in its contemporary form as an increasingly elaborate system of behavior rules for business commonly known as corporate social responsibility, the revolution in the ethics of business conduct, and the relationship of such conduct rules to law, has become a concern at quite modest levels of economic activity. Thus, for example, recently the ethicist Randy Cohen, whose column appears weekly in the New York Times Magazine, was asked about the bounds of appropriate business conduct in the conduct of a modest business with operations across borders. (Cohen 2008). The problem posed was both simple and to some extent served as a foundation for the problem posed in this paper:
This was a problem that would not have existed even twenty years ago. Certainly, from a legal perspective, there would be no problem at all. Consider the nature of the transactions: one enterprise is seeking to buy a product from another enterprise. From the perspective of law, the focus is on the commodity and the legal documents memorializing the agreement between the parties would reflect that focus. The principal terms of a complete agreement between the parties would center on (1) the amount of product ordered, (2) the price of the good, (3) delivery terms, (4) payment terms, (5) representations and guarantees about the suitability of the product, and (6) remedies for breach. As autonomous entities responsible to their principal stakeholders (investors) and competing for larger and more profitable shares of the markets they served (firm consumers), neither would have invested much time or thought to the methods, objects or conditions through which either met their respective obligations under the contract.
Profit maximization in this narrow sense, not values, was understood as driving economic relations. And that understanding drove the law of economic relations. To the extent values mattered, they did so only at the margins. Businesses were entitled to presume that their counterparts also acted within some sort of acceptable moral parameters (at least acceptable within the society and culture in which they operated). Only when it was apparent that this was not the case—when a business knew that a potential relationship involved entanglement with a company known to have a bad reputation, would the contracting party be bound to think through the effects of entering into a relationship with that badly reputed firm. These notions were tightly bound up with the law of fiduciary duty in the United States and served as a foundation for appropriate behavior among business enterprise managers. Graham v. Allis-Chalmers Mfg. Co., 188 A.2d 125 (Del.1963) (“absent cause for suspicion there is no duty upon the directors to install and operate a corporate system of espionage to ferret out wrongdoing which they have no reason to suspect exists.” (Id., at 130).
And so, a quarter century or so ago, the ethical answer might have been simple: there is no positive moral obligation to ensure that the parties with which one enters into contractual relations treat their own workers decently. Indeed there is a moral obligation, grounded in respect for the autonomy of individuals and the entities they create, to avoid interfering with the affairs of people to entities with which one has only a limited and specific relation—in this case to purchase goods. The limits of their economic relations define and limit the extent of their moral obligations. However, were the contracting parties to become aware of conditions that violated standards of conduct that were meaningful to that party—for example, were the person seeking to manufacture good through another entity to know that a particular entity treated their workers so badly that the workers sickened—then, acting on that knowledge, action might be required. But there was no positive obligation to find out, nor an obligation to broaden the scope of contractual relations in contracts for goods to include this social component.
But today, the answer is different—both as a matter of values, and increasingly, as a matter of law. Mr. Cohen suggests that change, and also its limitations, in his response.
And so, the ethical answer to the question is different in 2008. Economic relationships may now be judged by a different standard. This standard rejects the traditional basis of decision—that economic decisions must be based on welfare maximization tied to a maximization of the value of the objects produced by the enterprise. Such a view of the economics of a transaction may be rejected now as overly narrow. Instead, the economics of the transactions must be understood in the context of all of the factors of the production of objects (labor and capital) and measures efficiency and wealth production from the perspective of individual stakeholders. Under this framework, the business of actors may not be disregarded by outsourcing any aspect of production. Moral obligation, understood within the framework of one or another source of a values based economics, suggests not only the appropriate conduct, but also points to the economic value of that conduct for both parties. Ensuring the labor conditions of the supplier’s employees increases the welfare of the primary stakeholders in the production of the goods. That this result is not compelled by public law should be of little effect. It intimates, instead, that private values maximizing choices might have to be memorialized in contract rather than in law. This is a result that has been recognized in recent attempts in international law to provide a framework for the regulation of the conduct of multinational corporations. (Backer 2006). And in this case, private obligation and advantage converges in the requirement that the purchaser ensure the labor conditions of his supplier’s operations.
But why is it immoral, that is, from where can a business legitimately draw a conclusion of the immorality of a particular action? The answer is not necessarily self-evident. Nor is the answer susceptible to a single answer. Still, in contemporary discourse, there are several potential sources of an answer to the question. In the non-Muslim world, for instance, Jews and Catholics, for example, might suggest faith grounded reasons. For Jews it might be based on moral ramifications of Godliness elaborated in Leviticus, Numbers and Deuteronomy and implemented through the Talmud. Catholics might understand this obligation through a different elaboration of Godliness, grounded in the meaning of the Incarnation, Passion and Resurrection. (Backer 2008 and sources cited therein). Both might extract from faith in a particular vision of God and God’s relationship with humanity a set of precepts and conduct norms inherent in people seeking a closer relation to God—love of neighbor as the grundnorm of a values maximizing social and economic order. (Id.). Under these regimes, it is almost self evident that there is a “moral obligation to see that those who work for you even indirectly” (Cohen, supra) are treated morally. And, indeed, Catholic social thought has suggested that economic entities have a moral obligation to indirect employees. (Backer 2008, supra).
Yet, one does not need the comfort of faith to arrive at a similar conclusion. The last half of the 20th century has seen the rise of values based economics. Socio-economics, and particularly so-called binary economics, would infuse economic analysis with social justice values. (Backer 2008, supra). From either it might be possible to derive the idea that an economics that privileges objects (in the form of wealth or production or consumption) subordinates people to things in the way it understands the meaning of welfare maximization. That privileging distorts both the understanding and measurement of welfare maximization. To correct that distortion, the focus of analysis must either focus on people rather than the objects of their consumption or must at least privilege labor and capital equally. In either case, economic relationships that take no account of the conditions of labor used to produce objects (or render services) would not be welfare maximizing in the sense in which such terms ought to be understood, and thus would be inefficient.
Law has taken a few short steps to privilege—or at least has acknowledged—this position shift. Corporate social responsibility has exploded as a regulatory issue in the 20th century. Starting as an issue of the extent of the charitable obligations of economic entities—effectively an issue tied to the extent to which juridical entities might be able to act like natural persons—corporate social responsibility now serves as a proxy for a dynamic set of norms governing the way in which economic entities may engage in economic transactions. (Backer 2006). That transformation has paralleled the debates within economics over its own scope and character. Just as values economics has shifted the basis for understanding the nature and measurement of economic value for welfare maximization purposes, so has corporate theory begun to suggest an alternative to the traditional view that economic entities are inward looking institutions with obligations running only to its shareholders. Corporate social responsibility suggests a theory of enterprise operation grounded in the treatment of economic entities as institutional individuals with obligations to all other individuals with which it engages in transactions or interactions. Enterprise liability, piercing the corporate veil theories, extended jurisdictional theories, and extended notions of fiduciary duty are all tentative legal steps in the direction of extended obligation. But these are tentative steps indeed. (Id.).
For Mr. Cohen, the mechanics of morality is monitoring. Mr. Cohen suggests that at a minimum, proceeding with this sort of business relationship would require monitoring—implementing the purchaser’s duty to participate in the development of the legal and economic relationships between the product supplier and the purchaser. For this purpose, monitoring might be done directly, or as Mr. Cohen suggests through certain middlemen—government or elements of civil society—to ensure fairness in hiring and working conditions. If that is not viable, it might make most sense to avoid foreign entanglements and hire labor domestically. Mr. Cohen summarizes the consequences of this approach to the problem: “What you may not do is simply throw up your hands at working conditions overseas or fob off this duty on those with whom you contract. You must strive to learn whose sweat provides your equity and how it is extracted.” Id.
Mr. Cohen’s reply implies correctly that the extent of the moral obligation to monitor is broader than the legal obligation—extending to at least some entities with which an actor engages. Mr. Cohen, though, rightly understands that, for the moment at least, the moral obligation he identifies can be effectuated only through extra legal means. Cohen identifies the growing and increasingly powerful networks of social actors who monitor economic activity. These entities can share the fruits of their monitoring to economic enterprises to help them meet their ethical obligations. That was the point of Mr. Cohen’s advice. At the same time they can be used against economic enterprises that fail to meet their moral obligations. That is a point I have made elsewhere with respect to both the suppliers of Gap, Inc. (Backer Oct. 29, 2007), Apple, Inc. (Backer June 16, 2006), and Walmart (Backer 2007a)).
This turn to information as a proxy for moral choice in law is being reflected, if somewhat tepidly, in the courts. The Delaware courts have suggested that the extent of the legal obligation is inward looking—economic entities have an obligation to monitor the conduct of their own agents. Thus, for example, the law of fiduciaries has moved from a basis in presumptions of goodness and moral conduct to its opposite. As a consequence, the corporate law, at least, has begun to construct a series of positive obligations on economic entities in connection with certain conduct. The touchstone of this set of positive obligations is surveillance. The Delaware Supreme Court has most recently articulated the standard as follows:
And indeed, the obligations to monitor for bad conduct are being extended to the agents of economic enterprises. (Backer 2003). Simultaneously, law is beginning to impose monitoring, reporting and disclosure requirements more generally. (Backer 2007).
The key to the shift, then, is not the elaboration of a particular morality. It is information. Information can force choices (for individual action) even when the moral foundation of those choices remains contested (in the community). The contemporary issue is not whether an entity has an obligation, moral and legal, to monitor; the question is, what is the scope and nature of that monitoring obligation. If under the traditional standards, all entities were to mind their own business, under the new regime all people serve appear to serve as each other’s keepers. That new basis of relationship suggests that personal autonomy is less important as a value governing social and economic relationships. An implication of that change in the value of personal autonomy in social ordering may be that moral obligations are communal and not individual. The more important implication, however, is that moral obligations, as communal obligations that may trump individual desire, impose an obligation on individuals to monitor compliance with those communal obligations. (Backer 2003).
It follows that the connection between moral and legal accountability is never entirely consistent. There is an obligation to know, and that obligation may be effected through the ordering of private relations, that is through the law of contract. Yet law does not prejudge the choices made form knowledge. Thus moral accountability should affect economic choices, even where legal constraints are indifferent to the outcome of those choices. But the choice itself is not specifically predetermined through law. Still, even this sort of moral obligation, grounded in a legally cognizable obligation to monitor, when not backed by consequences, tends to be easier to evade—or postpone. Thus, the person who sought Cohen’s advice was reported to have eventually “hired an outfit in Uttar Pradesh [India] whose labor conditions are unknown to him. If the project advances he vows to travel to India to inspect the manufacturing facilities.” (Cohen 2008). This is an interesting result. On the one hand, the purchaser chose to adhere to the traditional model—he hired a supplier whose labor practices are unknown to him. Because the practices are unknown the purchaser can, under traditional models, assume the best until he knows otherwise. On the other hand, the purchaser appears (by implication) to have avoided hiring any outfit that might have been known to him to have labor policies that resulted in physical injury to the supplier’s workers. That advances the broadly understood social responsibility project, but within the traditional framework of economic relationships. Yet the most important aspect of the purchaser’s conduct was the last—that the purchaser intended to go to India at some point and inspect the operations of the supplier for himself. This represents a deviation from the traditional model. It is more than an acknowledgement of moral obligation—it is a suggestion that moral obligation will be imposed as a basis for arranging the relationships between supplier and purchaser.
B. The Difficulties of Transposing Moral Obligation into a Substantive Law of Corporate Social Responsibility
It was not for nothing that the ethicist suggested moral rather than legal obligation as the basis of the suggested behavior. One of the great problems of translating values into positive law is the lack of consensus of both a particular system of values that ought to be transposed into law, and an understanding of the meaning of corporate social responsibility as the policy rubric through which such transposition is to be measured. As a consequence, the ethical insights of the problem posed above has given rise to the institutionalization of a wide variety of approaches to the problem of the responsibility of corporate actors beyond the narrow group of direct financial stakeholders. Soft law, the private law of contract, and the private choices of groups of stakeholders, more broadly defined, as served as the foundation of the regulation of corporate social responsibility. Moral obligation not directly tied to the political infrastructure of global governance. But the leap from soft to hard law, at either the domestic or international level has been difficult.
In working through the basis of moral obligation, it became clear that there are a number of competing, and not necessarily consistent, frameworks for the elaboration of values systems governing moral conduct. There is no consensus on the legitimacy of moral obligation, even in its form as values-based economics, in either its secular or theological forms, as a basis for domestic, much less international legislation. There is still a strong element that rejects the idea of values in economic theory and in its use to justify any sort of imposition of non-profit maximizing obligations (narrowly confined to direct participants in the economic enterprise) on such enterprises. Even among those for whom values economics is legitimate, there is a wide range of views about the constitution of the values to be applied.
Moreover, there is no consensus on the extent of the obligations of economic entities. The traditional position in the West, solidified over the last half century, is that a corporation has an obligation to its principal stakeholders. In the United States, that includes shareholders; in other countries it may be expanded to include other actors closely connected with ownership stakes in the company. Beyond that circle of privileged actors, the corporation is believed to have no obligation, unless that obligation is specially defined by law or contract. But law ought not to extend the obligations of corporations beyond the requirement to maximize the wealth of its shareholders except in special circumstances. The law of fiduciary duty in the United States recognizes both this duty and its limits. Shareholder welfare maximization is mandatory; the welfare interests of others is permitted as long as it can be justified in terms of shareholder welfare interests. The progressive position has a number of variations. One important variation posits that corporations ought to be legally obligated to maximize the welfare of a broadly defined group of stakeholders. These can include any number of groups—from labor, to consumers, local residents near corporate operational sites, trade partners, suppliers and others. Another suggests that economic entities have social obligations at least co extensive with their social, political and policy effects on the places where they operate or where their actions can be felt. At its broadest, adherents of this perspective posit very little distinction between public and private collectives, and their respective obligations to individuals.
Given these foundational differences in a theory of corporate responsibility, it comes as no surprise that there appears to be no consensus on the framework for transposition. The website of the Australian Prime Minister’s Community Business Partnership correctly notes the common understanding in this respect:
They note a cluster of related commonly used definitions. One is "The commitment of business to contribute to sustainable economic development, working with employees, their families, the local community and society at large to improve their quality of life.” (The World Business Council on Sustainable Development). Another is "Operating a business in a manner that meets or exceeds the ethical, legal, commercial and public expectations that society has of business.” (Business for Social Responsibility). Yet another is "A set of management practices that ensure the company minimises the negative impacts of its operations on society while maximising its positive impacts.” (Canadian Centre for Philanthropy). Related to the Canadian effort is that of a well-known NGO, “The integration of business operations and values whereby the interests of all stakeholders including customers, employees and investors, and the environment are reflected in the company’s policies and actions.” (The Corporate Social Responsibility Newswire Service). Boston College’s Carol School of Management provides an even wider range of alternative definitions from multinational corporations (http://www.bcccc.net/index.cfm?fuseaction=Page.viewPage&pageId=596&parentID=477 accessed Jan. 28, 2008). The World Economic Forum has also advanced its own definition of corporate social responsibility as corporate citizenship: (World Economic Forum, Global Corporate Citizenship: The Leadership Challenge for CEOs and Boards, available http://www.weforum.org/pdf/GCCI/GCC_CEOstatement.pdf accessed Jan. 26, 2008).
But differences even at the margin can translate into substantial differences in an enterprises approach to its corporate social responsibility as a matter of institutional practices. The definition of stakeholders, the articulation of the relationship between these stakeholders (among each other and between them and the enterprise), or the formulation of the objectives of the enterprise itself can produce significant variation in the implementation of corporate social responsibility programs. Consider by way of example an obligation to adhere to labor standards. If corporate social responsibility s understood to mean a strict adherence to local law, then in states where labor protections are weak, the obligations of corporations are correspondingly small, and vice versa. If the corporate social obligation also includes an obligation to refrain from interference in the political affairs of a host country then the multinational corporation would have a positive obligation to avoid any action that might contribute to the strengthening of host country labor laws. But if the obligation is to adhere to a standard to provide a living wage to local employees, then several questions arise—does that require the corporation to ignore the local legal structure and import its own notions of wages? Does the obligation then extend to a duty on the part of the corporation to lobby for higher legal wages with the host country government? Can that lobbying obligation be harmonized with the non-interference duty? Does the obligation with respect to wages extend to indirect employees? Moreover, the definitions are general enough to produce a multitude of ambiguity—a charge often leveled by social and human rights NGOs. For example, it is not clear whether the social obligations suggest local or global standards of society, and it is less clear how the standards apply where there may be conflicts among equally privileged stakeholders.
Even if there were consensus on the value of corporate social responsibility in general and its particular manifestation, there is no consensus on the locus of regulatory power. Many states continue to adhere to the view that states ought to remain the privileged site for economic regulation. Though they might come together for the purpose of effecting conventions and other forms of particular purpose positive international law, they have little stomach for the creation of an autonomous government like institution at the supra national level to which might be conveyed executive, legislative and judicial authority. The United States in particular, has been reluctant to cede to any supra national entity any sort of mandatory regulatory power over economic entities. And it is likely that the Americans would be hostile to the idea of the creation of an autonomous governmental apparatus at the international level charged with the development and enforcement of substantive corporate behavior standards. Ironically, the People’s Republic of China might share the same concerns, though from a different framework—the fear of decolonization from abroad by devolution of power away from Beijing. Lack of consensus thus marks the core of the critical components of any substantive global regulatory framework for corporate social responsibility. Without a sense of the nature of the values to be incorporated into governance structures there can be little direction in law. Without a sense of the scope or nature of the obligations of economic entities there can be no confidence in the legitimate boundaries of corporate regulation. Without consensus on the locus of legitimate regulatory power at the supra-national level, it is difficult to successfully construct a unified system of law consistently applied across borders.
Yet, the lack of consensus on these critical points of legislative legitimacy need not doom the project of corporate social responsibility as a matter of international legal regulation. The absence of public consensus on substance may permit a certain margin of appreciation on individual choice. (Backer, Margins of Appreciation). And, indeed, in two critical respects there is a consensus of sorts that might point in the direction of regulatory plausibility at the international level. First, there is something of a consensus on the use of markets to express such individual choice collectively, at least among powerful elites within the developed world. This rough consensus guides and reinforces even the soft law efforts of domestic and international organizations—from the Organization for Economic Development and Cooperation to the United Nation’s Global Compact Program.
Second, there is a rough consensus that markets work best on the basis of a constant set of useful information. This, certainly, is the animating notion of the American Securities laws (Loss--). The scholarship of the relationships between properly functioning markets and information is well established and authoritative. In the financial markets, information serves to assure fairness and opportunity—to preserve the integrity of that form of activity. More generally, information serves as a means of monitoring the objects of market activity, and serving as a basis for the expression of individual judgment through changes in the relationship between the actor and the object. Information permits the investor to make investment decisions, or for the consumer to make purchasing decision. For those investors and consumers, the information received produces judgment on the basis of the application of the actor’s own set of moral and values judgments. In the aggregate, those moral or values judgments then have an effect on the object—the economic enterprise. In this way, information and the effects it produces at both the micro level (individual choice) and the macro level (aggregate action), can serve as a basis for social and values based control of economic activity. For this purpose, the role of the state—or of the community of states seeking to act with global effect—would focus on regulation through surveillance rather than through the imposition of a single site of values or a particular framework of substantive governance.
This consensus, built around the legitimacy of markets as a site for individual choice, and information as the lubricant that contributes to the functioning of markets, may provide the grounding on which a mandatory international system of regulation can be built—as a mechanism to enhance markets and market based choices by all stakeholders in economic transactions. Effectively, a successful (and plausibly necessary) regulatory approach at the international level may lie in exploiting the substantively “soft” hard law of surveillance. It is to the possibilities of using international law as the framework for the creation of global systems of monitoring, and through monitoring, regulating corporate social responsibility, that this paper turns to next.
II. Surveillance as the Basis of an International Law of Economic Regulation in a Market Driven Globalized World Order.
The paper has sought to identify the elements that might contribute to a plausible international regulatory framework for economic activity. Building from thos elements it will try to make a case for such a mandatory global regulatory framework for monitoring and disclosure. There is little question that the global order has been moving toward the realization of regimes founded on the principles of free movement of capital, open borders for investment, and reduced barriers for the movement of goods, people and services between states. Economic actors that operate among more than one territorially bounded state have proliferated. The acceptance of the autonomous legal personality of economic actors operating in certain forms—corporations, certain partnerships, limited liability companies, joint ventures or business trusts—has strengthened the legitimacy and authority of these actors. Multinational economic enterprises, especially those with separate juridical personality, have begun to operate independent of the jurisdiction in which they were chartered. Taking advantage of the power to own other economic enterprises, themselves autonomous and independent, global business enterprises have begun to regulate themselves, treating national regulation as a factor in their production and as an item affecting their aggregate objectives—wealth maximization.
The academic literature is littered with studies of the failure of any one or group of territorially bounded nation states to regulate the activity of economic actors in a world order that privileges the free movement of capital. The nature and scope of the failures are easy enough to summarize. Current political, ideological, cultural and historical differences between states have tended to impede the construction of consensus on the meaning of corporate social responsibility or even the values framework within which such corporate social responsibility might be elaborated. States with a recent history and vivid memory of a colonial experience may be suspicious of values frameworks or corporate regulatory movements that may effectively deny them the power to establish and protect local values, methods, understandings, or even the privilege of newly empowered local elites. Political values among developing states have imbued notions of corporate responsibility with the development obligations of developed states for prior exploitation. And economic entities have been able to take advantage of these tensions to liberate themselves from adherence to a globally consistent, politically legitimate, set of conduct norms.
But the lack of political consensus ought not to be regarded as the failure of values, or even of the futility of defining corporate social responsibility at the global level. Rather, it might indicate that political institutions might not be the appropriate vehicle for the elaboration of regulatory systems based on such substantive notions. As such, the absence of political regulation does not mean the absence of action with regulatory effect. Rather it might suggest the possibility of substantive regulation devolving to non-political actors. Especially with respect to economic decisions—even economic decisions with significant collateral effects in the social, political. And cultural sectors—the contemporary governing ideology privileges markets. Markets in this sense can be conceived of as spaces within which organized individual decision-making may be effectuated and from which its aggregate effects can be felt among all of the decision-makers participating in the market. While markets privilege the values on which individuals act, states can play a critical role in the management of markets. States play a crucial role in maintaining the integrity of markets by providing a framework within which individual decisions can be made with confidence. A successful regulatory scheme, then, might seek to move regulatory power up to the international level and simultaneously out to the market (private choice).
Among the most important integrity-maintaining functions for markets is the provision of information. This is understood by even the more conservative elements of the organized transnational business community. The fourth Principle of the World Economic Forum’s Framework for Action on corporate social responsibility is transparency.
But information is itself a complex subject. (Backer 2007). It is both a thing and a choice. It is a fact and a determination of privileged focus. (Id.). Information has to be produced, its truthfulness and completeness verified, and it must be delivered to those who can make use of it. The state is in a unique position to ensure these three objectives. That, indeed, is the basis for the system institutionalized through the federal securities laws in the management of financial markets in the United States. The ideology and value of disclosure is well known. The benefits of disclosure are easily translated to the global stage. International systems of disclosure avoid the territorial limitations of domestic law. And by its appearance of neutrality, it avoids the difficulties of legislating in substantive areas over which there is little consensus and little hope of future consensus.
But for our purposes, regulating disclosure at the global level may have substantial substantive value as well. The technical focus of surveillance is on information—but choices about the kind of information that ought to be gathered, the form to be taken for information gathering, the persons or institutions to which information is to be reported, and the judgments to be made from the information gathered, can have a significant effect on those involved in the process. (Backer 2007 Surveillance). Control of the framework of information gathering, itself, can indirectly further a values based governance program. The choices about what sorts of information is important enough to gather and what sort of information is not, the kind of stakeholders given rights with respect to information gathered and those excluded, the authority to punish failures to gather or distribute information and the private consequences of such failures (for example civil suits or delisting from national exchanges), all can significantly shape behavior and define the scope of corporate social responsibility as actually practiced. The regulation of disclosure thus permits international political involvement in the development of understanding about the values that ought to be furthered and the framework within which economic enterprises ought to behave, while avoiding the difficulties of substantive legislation in a world community deeply divided about those issues. At the same time, the international community, like states and civil society actors, remain free to compete for the advancement of their values agenda among those individuals and entities who constitute the principal stakeholders of economic enterprises.
For example, where an enterprise is required to disclose the labor conditions affecting its suppliers, it may have a greater incentive to focus on issues of supplier labor conditions than it would if it were only required to report on matters of the condition of directed employed labor. The choice to require such reporting also suggests a judgment—that there is an obligation between an employer and indirectly employed labor. It also permits the use of that information to convince critical stakeholders—investors and consumers—to care about the information and based their own purchasing decisions on an assessment of that information. Information, thus, can serve as a source of behavior regulation. But only the obligation to report is legally required. Only that obligation can be enforced by the state. For some, that is fatal to any use of indirect regulatory devices to change business behavior. For others, the shifting of substantive power to the market (that is to the aggregate investment and consumption decisions of stakeholders) is also a fatal flaw—the political collective ought to be making those choices. But in a world in which, as I have suggested, there is no consensus on either values choices are made or the political will to concede power to a global authority to make and enforce such values choices effectively, then indirect regulation, leveraging the incentives of the market, may serve as the only effective means to a regulatory framework for corporate social responsibility on a global scale.
What might be plausible, then, by way of regulation is both modest and dependant on substantial inter connection with both the private (market) and national regulatory spheres. But the important thing is that international hard regulation is plausible; it is attainable; and it might do some good to all of the actors that fall within it. It is plausible because the principle actors have already internalized both the value and process of monitoring, disclosure and communication; economic enterprises have begun to harvest and disclose a large amount of information on their corporate behavior so that the focus of information gathering is also something with respect to which these entities have become familiar; governments have been expanding the breadth of their information harvesting and disclosure regimes; international organizations have long been tasked with the management of information; there is experience in the crafting of international instruments that have as their object a monitoring and disclosure element; and elements of both civil society and business have begun to develop quite sophisticated systems of disclosure. As a consequence, the idea of regulation, even hard regulation, of the type proposed is not so implausible as to be impossible to conceive. Let me expand briefly on these points.
The first point, that the principle actors have already internalized both the value and process of monitoring, disclosure and communication is well known and hard to dispute. Regimes of financial reporting and disclosure are basic to the regulatory regimes of virtually every state. Privately held companies are usually required to report information as well, to shareholders, lenders and the state.
The second point, that economic enterprises have begun to harvest and disclose a large amount of information on their corporate behavior, well beyond what is required by domestic law has become an important basis in the explosion of the business of voluntary corporate social responsibility. The regulatory effects of indirect regulation, and of moral obligation, tied to aggregate market behavior, are increasingly well known. Economic actors have also come to understand the profit maximizing value of such regimes, when appropriately deployed. I have suggested, for example, the construction of elaborate systems of supplier regulation that have been developed by large multinationals in the apparel and consumer products sectors, and the way those systems have been used by the multinationals, NGOs, the media, consumers and investors for their respective benefit. (Backer 2007; 2006a).
The third point, that governments have been expanding the breadth of their information harvesting and disclosure regimes has been the subject of increasing attention for its economic and human rights consequences. (Backer 2007). Especially since the events of September 11, 2001 in the United States, and the Irish Republican terror campaigns in London earlier, states have been expanding the scope of their monitoring activities. As new behaviors requiring regulation are targeted, monitoring and reporting are expanded in the service of that substantive regulation. Thus, for example, monitoring has become an integral part of the fight against money laundering, and bribery, producing sophisticated regimes of information harvesting and disclosure. The fight against pedophilia has generated its won forms of surveillance.
Two key points, that international organizations have long been tasked with the management of information, and that there is experience in the crafting of international instruments that have as their object a monitoring and disclosure element, are less well developed but important. The techniques for such a system of surveillance are already available at the international level. The global political community has started thinking about the ways in which monitoring can be institutionalized through law. The focus on information management at the international level affects all sectors, from the management of information in the fight against terrorism, crime and corruption (Duncan B, Hollis, Why States Need an International Law for Information Operations, 11(4) Lewis and Clark Law Review) to the regulation of financial markets and financial actors. Information management has been a key feature of the construction of global efforts at combating financial fraud, without compromising the ability of states to set their own peculiar versions of the substantive rules of finance. Unlike those efforts, the United Nations had sought to regulate the substantive behavior of multinational corporations. That effort produced the now abandoned Norms (2003) in favor of the voluntary and broadly conceived Global Compact project. (Global Compact). A short walk through the monitoring mechanics of the Norms provides useful insights for creating global disclosure structures.
The Norms in its substantive and monitoring aspects would have made use of the market aspects of contemporary globalization. It would have been grounded in private contract—the obligation of economic entities to incorporate into their contracts with stakeholders a large group of international norms. “Each transnational corporation or other business enterprise shall apply and incorporate these Norms in their contracts or other arrangements and dealings with contractors, subcontractors, suppliers, licensees, distributors, or natural or other legal persons that enter into any agreement with the transnational corporation or business enterprise in order to ensure respect for and implementation of the Norms.” (Norms 2003, at ¶ 15). Those contract obligations are then made enforceable by a large group of actors, and are subject to an ongoing responsibility to disclose performance information relating to their contractual obligations. The obligations are public, the performance is private and the enforcement is shared among a group of private and public actors. Yet the governance project represented by the Norms contained what might be the seeds of a method of internationalizing the management of information about corporate conduct, and through that management, bringing some discipline to the regulation of economic behavior on a global scale. As such, it may serve as a useful template for thinking about the framework for a global law of disclosure and transparency. (Backer 2006).
Although the Norms focused on the development of a substantive framework of regulation, it also contained a series of provisions on disclosure, the structure of which might prove useful as the basis for developing an international disclosure system that enhances the power of global actors to seek to maximize the power of individual actors to influence corporate behavior. The Norms sought to create a system of self monitoring and reporting similar to that which serves as the basis for financial reporting among publicly held corporations. “Transnational corporations and other business enterprises shall enhance the transparency of their activities by disclosing timely, relevant, regular and reliable information regarding their activities, structure, financial situation and performance.” (Commentary 2003, at ¶ 15 cmt. (d)). But the concept was substantially expanded in scope—both as to the information to be disclosed, and the actors who might rely on such disclosures. For that purpose, the Norms relied on the construction of a fused system of public and private law. Public law created the framework of the obligation to report. Private law created a specific web of obligation between private actors with respect to the obligations.
The Norms would have regularized monitoring of the activities of multinational corporations as a critical method for enforcing the substantive behavior norms imposed on such entities through the Norms. Monitoring would have been based on the creation of a web of reporting and observing involving states, international actors, and elements of civil society. (Norms 2003 ¶ 16). The Commentary suggests the broad scope of this provision, and the critical role it was meant to play. Monitoring and implementation of the Norms would have required “amplification and interpretation of intergovernmental, regional, national and local standards with regard to the conduct of transnational corporations.” (Commentary 2003, at ¶ 16 cmt. (a)). For this purpose, the United Nations would have taken the leading role through its treaty bodies and specialized agencies (Commentary 2003 at ¶ 16 cmt. (b)). When originally conceived, this portion of the monitoring regime sparked substantial criticism from developed states, which suggested that international organizations in general, and the United Nations in particular, were incapable of serving effectively in any enforcement role. (Backer 2006). But the Commentary also suggested that much of the information gathering could be delegated to “non-governmental organizations, unions, individuals and others” (Commentary 2003 ¶ 16 cmt. (b)). A system of mutual private monitoring and reporting is the object, one that focuses on the economic entity and that also permits relevant stakeholders broad authority to gather information related to compliance with the Norms.
Like the Sarbanes Oxley Act’s monitoring systems (SOX 2002), a monitored enterprise would have been responsible for the construction of monitoring systems that would have provided “legitimate and confidential avenues through which workers can file complaints with regard to violations of these Norms.” (Commentary 2003 ¶ 16 cmt. (e)). The monitored entity would have been given “an opportunity to respond.” (id., cmt. (d)). The results of the annual assessments of Norm compliance, which serves as the principal method of transmission of the information gathered, would have to be “made available to stakeholders to the same extent as the annual report of the transnational corporation or other business enterprise.” (Commentary 2003 ¶ 16 cmt. (g)). The similarity to financial reporting under national securities laws was quite conscious. And, like the environmental reporting regimes of many jurisdiction, the Norms would have imposed a further obligation to provide impact statements prior to the commencement of any “major initiative or project.” (Commentary 2003, ¶ 16 cmt. (i)).
A broadly defined group of stakeholders would have had a privileged position with respect to this information system. “The term “stakeholder” includes stockholders, other owners, workers and their representatives, as well as any other individual or group that is affected by the activities of transnational corporations or other business enterprises.” (Norms 2003 at ¶ 22) For the benefit of these stakeholders, “Each transnational corporation or other business enterprise shall disseminate its internal rules of operation or similar measures, as well as implementation procedures, and make them available to all relevant stakeholders.” (Commentary 2003, ¶ 15 cmt. (a))
Enforcement was to be effected at either under the public law of state actors or pursuant to private enforcement. Paragraph 17 of the Norms would have required states to “establish and reinforce the necessary legal and administrative framework for ensuring that the Norms . . . are implemented” by covered economic enterprises. (Norms 2003 ¶ 17). The Commentary suggested that states would have been required to disseminate the Norms to the populace “and using them as a model for legislation or administrative provisions.” (Commentary 2003, ¶ 17 cmt. (a)). Paragraph 18 of the Norms envisioned a global system of private enforcement elaborated through contract actions the remedies for which would be provided under state law. (Norms 2003, ¶ 18). “In connection with determining damages, in regard to criminal sanctions, and in all other respects, these Norms shall be applied by national courts and/or international tribunals, pursuant to national and international law.” (Id.). The model would have been the European Union’s jurisprudence for the provision of national remedies for violations of Community Law. (e.g., Rewe Zentralfinanz EG v. Landswirtschaftskammer Fur das Saarland 1989)).
The monitoring provisions of the Norms suggest the plausibility of writing an international hard law of global disclosure. Its critical insight was the construction of a form of governance sharing—private parties through contract, the international community through framework legislation, and member states through their court systems and their obligation to enforce international law norms and contracts. Still, the Norms failed—and the Norms failed for a number of reasons. First, the Norms focused on the imposition of a values based system of behaviors at the international level when no international consensus existed with respect to such values or behaviors. Second, the lines of authority and enforcement were not clear. The lines of authority were blurred. It was not clear whether states or the United Nations organs were to have authority over the standards. It was also not clear the extent to which states could apply their own law. Because much of the behaviors were to be regulated through contract, the regulatory power of enterprises themselves were enhanced but in an undefined way. Better put, the Norms appeared to vest virtually everyone with an ambiguously defined right to seek monetary and equitable remedies against economic actors all over the world. In any case, it was not clear whether or to what extent the Norms would have conflicted with strongly legitimate and deeply held notions of corporate governance in the developed world. (Backer 2006).
This bring us to the last point, that elements of both civil society and business have begun to develop quite sophisticated systems of disclosure takes us from conception to implementation. What would an internationally mandated system of disclosure look like? The Norms do not provide much help in that regard. Though no specific form of regulation is proposed, the major features of such an international framework can be sketched out. A few of the key features of an international law of disclosure might include the following: a limited framework for international law, disclosure that parallels disclosure regimes established for the financial markets, remedies provided under domestic law, remedies limited to compelling disclosure (and possibly the awarding of attorneys fees, and universal jurisdiction.
A limited framework for international hard law follows from the nature of the failure of the Norms. For any international law approach to be viable, in light of the failure of the Norms, it must avoid any attempt to legislate values or behavior expectations. The last twenty years has seen the proliferation of a large number of voluntary codes of behavior. All of them are similar but differ in substantial enough respects to indicate that even among like-minded people there is no consensus with respect to behavior. And a significant number of states do not believe that it is the role of public organizations to mandate what they would characterize as moral rather than legal behavior or values. Information ought to appear neutral. That will require some sensitivity to the choice of information privileged. But the wealth of disclosure suggestions elaborated by elements of civil society can provide a basis for benchmarking what sorts of information might be extracted from economic entities. To gather information, or to mandate its collection and dissemination, does not suggest or mandate behavior, even behavior implied by the sort if information privileged with collection. An information regulatory regime also is similar to a pattern of regulation that is well within the comfort levels of most developed states. All such states have developed disclosure and transparency system with respect tot he regulation of their financial markets. International law here would merely seek to broaden the regulatory patterns already a well established and legitimate method of market regulation within domestic law. But of course, control of information gathering is hardly neutral. (Backer 2007). And the determination to privilege the dissemination of information in addition to the traditional information related to financial performance—a disclosure geared to the narrowly defined interests of shareholders and creditors—will have a tendency to influence corporate behavior so that the information disclosed would make it appear in a bad light. However, the measure of that bad light would not be determined by the state. Instead, that determination would be made by the company in relation to its assessment of the desires of its stakeholders. Though law would not directly compel behavior, the effect of disclosure should have that effect.
The real substantive contribution in international law, and it is by no means a small one, would be with respect to the content of the information required. There are several models that can be followed. The simplest is to require information on the basis of one or another form of disclosure already developed as “soft law” by the international community or elements of civil society. Mandatory disclosure would be limited to a discussion of the election and compliance with the system chosen. Alternatively, the content of information could be devolved to an organization—either a public/private entity (for example the OECD, the International Organization of Securities Commission, or some other entity) with the necessary legitimacy within the global community, to develop standards and maintain standards. The European Union has undertaken this form of framework legislation with respect to certain technical directives elaborating the internal market. The last alternative is the most elaborate—the information scheme could be elaborated by something similar to the American Securities and Exchange Commission. The benefit would be that regulatory authority would be unified. The detriments might include the creation of too elaborate a bureaucracy at the international level and too great a devolution of power up. There is also a danger that what might start as a simple disclosure rules system could become as Byzantine as those under modern financial disclosure rules, when such power is devolved to a public body. But much more research needs to be done.
International legislation might also consider a number of other important areas of legislation. One would touch on the relationship of states to the international disclosure regime. Again, importing a practice of the European Union, it might be prudent to construct a system in which national courts would be solely responsible for enforcing the international law of disclosure as part of their national law. In that context, national courts could provide national remedies as long as they are wholly effective. (Marshall v. Southampton and South West Hampshire Area Health Authority 1993). Indeed, the utility of national courts in transnational litigation has become a subject of greater scholarly interest, especially on their role in addressing global harms. (Buxbaum 2006). That would permit some flexibility in domestic law within the international framework that limits remedies to an obligation to disclose. Thus, for example, where a national court orders disclosure as a remedy for violation of the global disclosure norm, such disclosure might reveal a substantive violation. That substantive violation would be subject to domestic law and domestic remedies, but not under the international law based monitoring framework itself. The hope, of course, in some quarters, might be that a uniform global disclosure system can provide an incentive for domestic legislation on corporate social responsibility and ultimately help create a consensus on universal norms for the regulation of the social responsibility of international economic actors.
Universal jurisdiction might merit consideration as well. One of the great impediments to the private regulation of transnational economic enterprises has been the difficulty sometimes of obtaining a competent court to hear a case against an enterprise. Universal jurisdiction might serve to ameliorate that concern. In return, of course, the stakes would have to be quite focused. Remedies might have to be limited to compliance with discourse requirements. Damages might be available, but only as a matter of domestic law. Some states might provide for such damages, other might not. But those differences might have to be tolerated in order to obtain consensus on the creation of an international information disclosure framework in positive law.
Universal jurisdiction and limited remedies to be available only through national courts may be critical to the acceptability of any international law effort. Business is leery of additional legal regulation of is substantive conduct. But business is accustomed to providing information. A uniform system of information (beyond financial disclosure would reduce their transaction costs. A system of universal jurisdiction would permit stakeholders to make use of the most effective forum for the vindication of their rights—to information. But the national courts would be limited under the international law scheme to orders requiring the provisions of information and ancillary enforcement powers. These remedies could be applied only under national law rules. That avoid substantial international intrusion into the judicial function f national courts and avoids the need to construct another international judicial instrumentality (both of which might be substantially objectionable to the global business community). National governments, of curse, would be free to enact additional remedies. But that would be a matter of domestic substantive law.
The direct and indirect aims of such a reporting system become clear. International law can serve to build a single framework for a global system of information monitoring and disclosure by economic entities. Multinational economic actors cannot be required to report on their global activities, nor is it likely that a uniform system of reporting on matters other than those narrowly required under traditional models of financial reporting, unless the power to regulate such disclosure is shifted up to the international level. But the absence of consensus on the nature of the norms of behavior that should apply to economic actors beyond profit maximization for shareholders and truthful and complete financial disclosure, suggests a narrow framework for international lawmaking. Information production is both narrow and neutral enough. But it does provide a significant advance—requiring entities that would otherwise not disclose to become more transparent. Though that would be the extent of formal legal obligation, the provision of information could have significant effects in the market. Information can be used to affect the actions of an enterprises stakeholders—consumers, investors, suppliers, lenders and the like. Each of them would respond to the information produced on the basis of the values that dictate their own conduct. Information, then, might broaden the sensitivity of enterprises to socially responsible behavior, not because the state or another level of public governance demands it, but because the market does. (Backer 2007a).
John Ruggie recently noted that
He noted that in a world order that still is attached to the primacy of the state system, enforcement at the international level is still a concern to any legitimate law making at the supa-national level. (Id.). He reminds us that no less than Amartya Sens has warned of the limitations of legislating values and behavior (Id.; Sens). This leads Ruggie to a defense of a system of private networks of voluntary codes of behavior norms. (Ruggie 2007). There is still room at the international law making level for systems that might help to foster communities of shared responsibility. While private networks may be the appropriate basis for values behavior norm making, what Ruggie calls legal compliance at the international level may be indispensable for the further elaboration of those private market and collective based systems.
III. Conclusion.
It seems, then, that the initial intuition (Cohen 2008) about the most effective form of enforcing moral obligations can serve as the basis for an international framework for the positive regulation of multinational corporations that both respects the principle of market primacy and the necessity of international regulation. Moral perspective is most likely to successfully find some expression in law through the construction of legally enforceable monitoring systems rather than through direct regulation of ethical obligations. (Backer 2007). American lawmakers understood this implicitly in the construction of the federal securities laws in the 1930s. The great idea under-girding those statutory systems was surveillance—systems of mandatory disclosure to both the state and to principal stakeholder communities (in the case of the federal securities law the investor community). Indeed, that system has become extremely useful in molding behavior beyond the original scope of those statutes. It has become a means through which disclosure is used to indirectly legislate behavior. (Backer Dec. 21, 2007) For example, under the Sarbanes Oxley Act (2002), publicly held companies were not obligated to adopt an ethics code for senior financial officers, but rather were required to disclose whether or not they had adopted such a code (Sarbanes Oxley Act of 2002, § 406). The object was not to impose ethics codes but to create a legal framework within which stakeholders could negotiate the extent and terms of such codes. (Backer 2002). The state chose the objective—ethics codes—but private actors were free to use the information as they liked in arranging their relationships. In a sense, then, monitoring regimes can serve as a framework for incorporating moral obligations within a legal structure of relationships between economic actors, without hardwiring any particular set of ethical standards in law. For those in search of avenues for the implementation of corporate social responsibility at a transnational level, international agreements for transparency, disclosure and information dissemination might be more effective as a means of hardwiring ethical obligations in the relationships between economic enterprises, than commanding obedience to any set of such obligations.
This short paper has suggested that the path to the attainment of socially positive goals might not always be reached by what appears to be the most direct method. Legislating corporate social responsibility, even in the context of a values-based understanding of economic theory, is problematic. There is no consensus on the legitimacy of values-based economics, in either its secular or theological forms. There is still a strong element that rejects the idea of values in economic theory and in its use to justify any sort of imposition of non-profit maximizing obligations (narrowly confined to direct participants in the economic enterprise) on such enterprises. Even among those for whom values economics is legitimate, there is a wide range of views about the constitution of the values to be applied.
Even if there were consensus on the value of corporate social responsibility in general and its particular manifestation, there is no consensus on the locus of regulatory power. Many states continue to adhere to the view that States ought to remain the privileged site for economic regulation. Though they might come together for the purpose of effecting conventions and other forms of particular purpose positive international law, they have little stomach for the creation of an autonomous government like institution at the supra national level to which might be conveyed executive, legislative and judicial authority. For that reason alone, for example, the latest and fairly mild version of international regulation of multinational corporations was successfully opposed by a large number of nation-states. Moreover, the imposition on a global basis of any one substantive value system (as international law) would be inconsistent with the markets and private choice orientation of the current framework for global economic regulation. On the other hand, imposition of substantive value systems as economic regulation resulting in regimes of corporate social responsibility when imposed by a territorial state would be consistent with the global economic order. In that context, regulation serves as a commodity that might attract or repel inbound business or might produce an exodus of economic activity. (Backer 2007a).
But substantive regulation is not the only method for meeting the objective of imposing social responsibility obligations on economic enterprises whose business crosses national borders. Surveillance has risen as an increasingly effective method of indirect regulation. The technical focus of surveillance is on information—but choices about the kind of information that ought to be gathered, the form to be taken for information gathering, the persons or institutions to which information is to be reported, and the judgments to be made from the information gathered, can have a significant effect on those involved in the process. The effect on behavior would not be controlled by the state (or the international community as substantive legislator). Instead, information would provide the principal direct and indirect stakeholders of economic entities—shareholders, lenders, suppliers, customers, trade creditors, labor and others—with the opportunity to act on their own values in their relationship with economic entities. The market, effectively, would impose values on all participants. Values-based behavior would be dependent on what the principal participants think is important. And control of the content of the values that are privileged would depend on the power to convince the critical stakeholders of the correctness of a value system put forward. In this context, values, like law, would be subject to the market, in this case the market for ideas (of values). In this market, private actors—churches, philosophers, social scientists, ethicists, and others—would have a primary role in seeking to offer product (values systems touching on matters of corporate social responsibility) and to market those products to the critical stakeholders. Domestic and international organizations can continue to play the traditional roles—memorializing consensus norms and putting forward articulations of those norms for greater distribution and consumption in the elaboration of the contemporary system of customary international law. But to move beyond that role would not likely be successful. And, of course, these ideas have served as the cornerstone of the highly successful financial markets regulation in the United States since the early 1930s.
The techniques for such a system of surveillance are already available at the international level. Much of the form of such a system can be extracted from the recently proposed Convention on the regulation of multinational enterprises. The methodology and framework for reporting within the general parameters of understandings of the meaning of “corporate social responsibility” have begun to be addressed in significant detail by the NGO community, and prominently among them the Global Reporting Initiative (Global Reporting Initiative, About Us 2008).
It suggests that such a system will work at the economic level only to the extent that it can be promoted as a mechanics to global market efficiency, avoids making substantive or values driven behavior choices, limits enforcement to the compliance with the information gathering and reporting requirements of the international framework and vests enforcement at the nation-state or private level. The feasibility of such a program of reporting can be evidenced by the encouragement of such programs in places like Australia. The self-enforcing character of these monitoring systems can be deepened by the imposition of national rules requiring national exchanges to enact rules making compliance with such international reporting programs mandatory. Enforcement can be delegated to national securities law agencies—like the American Securities and Exchange Commission and its counterparts—or to the international association of securities regulatory agencies. Templates for public and private enforcement are already well established in developing countries. With the critical addition of worldwide jurisdiction for the enforcement of the reporting requirements, and an international system of penalties, the system is complete. The rest can be left to the market.
Preliminary References:
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Cheryl L. Wade, Racial Discrimination and the Relationship Between the Directorial Duty of Care and Corporate Disclosure, 63 U. PITT. L. REV. 389, 403–20 (2002).
The topic of the 2008 Georgetown International Law Journal’s symposium is how international law can influence international business to work toward “public” goals, for example reducing corruption and protecting the environment, when entering into international transactions. The object of the symposium is to get its participants to seek the answer to three questions: does, can, and should international law provide incentives (either positive or negative) for international business to consider “public” goals? This paper argues that, at east n one important respect, the answer is yes—international law provide an important, though limited framework for the regulation of the behavior of economic entities. The purpose is to provide a preliminary sketching out of a plausible approach to international regulation. More specifically, the paper suggests that international law has begun to provide incentives for the management of a values-based behavior structure for multinational corporations. The paper also suggests that international law can serve as a vehicle for the enhancement of a market environment in which corporate stakeholders, and principally consumers and investors, might incorporate information about corporate “social” behavior in their consumption and investment decisions. Without incorporating any particular set of “public” values, international law can make it easier for people to manage the “public” or “social” behavior of multinational corporations through a mandatory regime of global reporting. The paper will suggest that a mandatory system of transparency and disclosure may serve as the most efficient means of creating incentives for “moral” behavior without the need to incorporate any one version of appropriate manifestations of social responsibility on corporate entities. In this way international law can serve to create incentives for appropriate behavior without actually mandating any specific version of that behavior.
The paper starts by posing a problem that will serve as the basis for the analysis—the responsibility of corporate actors for the working conditions of indirect employees. This problem nicely frames the regulatory issues for both business and law. It is clear that while in the recent past there might not have been even a moral obligation extending to such employees, contemporary standards suggest otherwise—there may now be a moral obligation of some kind to indirect employees. The source of this moral obligation might be derived from a variety of sources, both secular and religious, but it is not derived from law. Yet even moral obligations can be enforced in the absence of enforceable standards written into hard law. The principal parties can bind themselves to behavior standards deemed proper under the private law of contract, or the parties may seek the help of third parties that may certify compliance with one or another standard of conduct. Those obligations may be ensured through regimes of disclosure, monitoring and surveillance. But that may be the problem. The nature and extent of that obligation may be dependent on the values of the stakeholders or the normative system under which all actors operate. Where more than one standard applies, inconsistencies and ambiguities arise.
The paper then turns to a consideration of the contemporary limitation of law in the resolution of the problem. Neither domestic nor international law has been much help. Law has taken only some very tentative steps to recognize or further the rise of this moral sense of obligation. The rise of the much-touted corporate social responsibility movement has resulted in the proliferation of a number of responses at every level of governance. But virtually all of these responses have been in the form of “soft law,” usually voluntary codes that are not enforceable by any political organization. Law thus effectively memorializes one form of moral obligation. But even as moral obligation, these codes suffer deficiencies. These voluntary codes tend to be written in the most general terms, permitting a tremendous variation of behavior that can be claimed to be consistent with the form or substance of these codes. And there is no institutionalized procedure for enforcement. Other sources of moral obligation might include human rights declarations from international organizations and supra-national human rights organizations. But, recent efforts to create mandatory legal obligations touching on corporate social responsibility in the international level have been forcefully rebuffed, principally by representatives of developed states.
The paper suggests the overlapping dimensions of the problem posed by any effort to formally regulate the behavior of economic entities across borders through law: the disjunction between moral obligations across borders in the construction of economic relationships across such borders, the multiple sources of values informing regulatory policy even within states, and the difficulties of transposing moral obligation into a substantive law of corporate social responsibility that effectively reaches across borders. Yet, despite these limits it may be possible to construct a plausible system of mandatory regulation at the international level that adds value to economic activity without threatening the contemporary system of market based globalization. The foundation of that regulator system is tied to monitoring, disclosure and reporting, enforcement mechanics common to the private law of contract. From out of the means by which moral obligations are enforced among private parties may come a framework for creating a plausible hard law at the international level. This framework would provide incentives (either positive or negative) for international business to consider “public” goals without actually mandating those goals in any specific form—the market would make that determination. These incentives can be provided through law, but in a way that retains a strong sensitivity to the current market bias of globalization—and to the privileging of private arrangements among stakeholders principally involved in economic transactions.
For that purpose the paper suggests a global system of disclosure and transparency. The object of these disclosure mandates would not be to establish a definitive set of behaviors, but rather to establish a framework within which corporate stakeholders—consumers, investors, labor, and others—could adjust their relationships on the basis of the behavior disclosed. In a sense, then, monitoring regimes can serve as a framework for incorporating moral obligations within a legal structure of relationships between economic actors, without hardwiring any particular set of ethical standards in law. For those in search of avenues for the implementation of corporate social responsibility at a transnational level, international agreements for transparency, disclosure and information dissemination might be more effective as a means of hardwiring ethical obligations in the relationships between economic enterprises, than commanding obedience to any set of such obligations.
The paper then suggests that this sort of mandatory regulatory regime is plausible as international “hard” law for five reasons. First, a mandatory global monitoring system is plausible because it only requires actions on the part of economic enterprises (the gathering and dissemination of information) that have been well internalized by the great majority of these entities. Economic entities harvest, use and report information all the time—for example to government regulators, to investors and to consumers, among others. This is not so much a new task as a modification of a core activity of business. Second, the sort of social disclosure to be targeted under international monitoring regimes are already being provided n large respect through private contract, for example in the context o supplier chain arrangement. (Backer 2007). Third, information gathering has been a task long assigned to international and transnational public actors. This sort of regulatory activity is something well suited to that sort of organization. Moreover, the activity itself is something that can be originated at the international level and enforced at the level of the nation state. It invites the sort of partnership that might make states leery of the seepage of power up to the supra national level less concerned on that score. Fourth, international instruments already contain monitoring provisions. Thus, the international community already has the skill set necessary to draft this ort of hard law (as do the nation states that must approve such endeavors). Lastly, there already exit a number of frameworks that detail the sort of information that might plausibly be gathered and disclosed that have been developed by global civil society and public actors. The global community has been doing this, they know how to do this, there is no objection in principle to the task of information gathering and disclosure.
The paper ends by a more careful look at the existing basis for the construction of a global law of monitoring and disclosure, and the possible contents of such mandatory disclosures. Hints for this sort of international arrangement have already been developed. The paper suggests that the disclosure portions of the now abandoned Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights (2003) might provide useful insights for an international law of disclosure. (See Backer 2006). The Norms suggest the structure of an international disclosure system that is market driven. That system is based on an integrated system of public and private law. Though the Norms sought to impose a global system of substantive behavior norms on economic enterprises, its enforcement mechanics could be useful in structuring an international law system of disclosure that avoids substantive or values regulation. Monitoring under the Norms was based on contractual obligations to report on certain identified performance items. Those obligations ran to a number of public and private actors that could enforce those requirements. That sort of system, limited to the provision of information—the scope and content of which to be determined in international law, might provide a basis for public regulation. The form of that reporting, and perhaps even its content, is also being developed. The paper then considers the efforts undertaken by the Global Reporting Initiative to elaborate a system of surveillance and reporting. (Global Reporting Initiative 2002-2006).
The paper ends with a critical assessment of the viability of such a system in the context of markets driven economic globalization. It suggests that such a system will work at the economic level only to the extent that it can be promoted as a mechanics to global market efficiency, avoids making substantive or values driven behavior choices, limits enforcement to the compliance with the information gathering and reporting requirements of the international framework and vests enforcement at the nation-state or private level.
I. Moral Obligation and Corporate Social Responsibility.
A. The Sources of Moral Obligation and Corporate Social Responsibility
The twenty first century has witnessed a great change in the debate about the scope of appropriate conduct in economic activity. From a singular belief in the strict separation of public and private law, and in the vesting of values (policy) objectives to public and individual (or institutional) wealth maximizing goals to the private, the old boundaries have begun to be blurred. That blurring as produced a certain tension in the regulation of behavior.
Traditionally the sole concern of academics and policy makers, the ethics of business conduct was once confined to issues of fraud and corruption. But, especially in its contemporary form as an increasingly elaborate system of behavior rules for business commonly known as corporate social responsibility, the revolution in the ethics of business conduct, and the relationship of such conduct rules to law, has become a concern at quite modest levels of economic activity. Thus, for example, recently the ethicist Randy Cohen, whose column appears weekly in the New York Times Magazine, was asked about the bounds of appropriate business conduct in the conduct of a modest business with operations across borders. (Cohen 2008). The problem posed was both simple and to some extent served as a foundation for the problem posed in this paper:
To afford to start a new business, I must use low cost foreign manufacturers, some of whom likely maintain unsafe working conditions. It is difficult to be certain from here. In the relevant country, many workers doing the tasks I’ll require receive low wages and face serious health problems including chronic colds, fever, stomach disorders, chest pains, and tuberculosis. Is it wrong to start my business in this way? (Name withheld New York). Id.
This was a problem that would not have existed even twenty years ago. Certainly, from a legal perspective, there would be no problem at all. Consider the nature of the transactions: one enterprise is seeking to buy a product from another enterprise. From the perspective of law, the focus is on the commodity and the legal documents memorializing the agreement between the parties would reflect that focus. The principal terms of a complete agreement between the parties would center on (1) the amount of product ordered, (2) the price of the good, (3) delivery terms, (4) payment terms, (5) representations and guarantees about the suitability of the product, and (6) remedies for breach. As autonomous entities responsible to their principal stakeholders (investors) and competing for larger and more profitable shares of the markets they served (firm consumers), neither would have invested much time or thought to the methods, objects or conditions through which either met their respective obligations under the contract.
Profit maximization in this narrow sense, not values, was understood as driving economic relations. And that understanding drove the law of economic relations. To the extent values mattered, they did so only at the margins. Businesses were entitled to presume that their counterparts also acted within some sort of acceptable moral parameters (at least acceptable within the society and culture in which they operated). Only when it was apparent that this was not the case—when a business knew that a potential relationship involved entanglement with a company known to have a bad reputation, would the contracting party be bound to think through the effects of entering into a relationship with that badly reputed firm. These notions were tightly bound up with the law of fiduciary duty in the United States and served as a foundation for appropriate behavior among business enterprise managers. Graham v. Allis-Chalmers Mfg. Co., 188 A.2d 125 (Del.1963) (“absent cause for suspicion there is no duty upon the directors to install and operate a corporate system of espionage to ferret out wrongdoing which they have no reason to suspect exists.” (Id., at 130).
And so, a quarter century or so ago, the ethical answer might have been simple: there is no positive moral obligation to ensure that the parties with which one enters into contractual relations treat their own workers decently. Indeed there is a moral obligation, grounded in respect for the autonomy of individuals and the entities they create, to avoid interfering with the affairs of people to entities with which one has only a limited and specific relation—in this case to purchase goods. The limits of their economic relations define and limit the extent of their moral obligations. However, were the contracting parties to become aware of conditions that violated standards of conduct that were meaningful to that party—for example, were the person seeking to manufacture good through another entity to know that a particular entity treated their workers so badly that the workers sickened—then, acting on that knowledge, action might be required. But there was no positive obligation to find out, nor an obligation to broaden the scope of contractual relations in contracts for goods to include this social component.
But today, the answer is different—both as a matter of values, and increasingly, as a matter of law. Mr. Cohen suggests that change, and also its limitations, in his response.
It is your moral obligation to see that those who work for you even indirectly—those from whose labor you profit, receive decent treatment. While wages and working conditions vary internationally, nobody’s idea of “decent” encompasses “chronic colds, fever, stomach disorders, chest pains and tuberculosis,” even in developing nations even where people badly need jobs. . . . (Id.).
And so, the ethical answer to the question is different in 2008. Economic relationships may now be judged by a different standard. This standard rejects the traditional basis of decision—that economic decisions must be based on welfare maximization tied to a maximization of the value of the objects produced by the enterprise. Such a view of the economics of a transaction may be rejected now as overly narrow. Instead, the economics of the transactions must be understood in the context of all of the factors of the production of objects (labor and capital) and measures efficiency and wealth production from the perspective of individual stakeholders. Under this framework, the business of actors may not be disregarded by outsourcing any aspect of production. Moral obligation, understood within the framework of one or another source of a values based economics, suggests not only the appropriate conduct, but also points to the economic value of that conduct for both parties. Ensuring the labor conditions of the supplier’s employees increases the welfare of the primary stakeholders in the production of the goods. That this result is not compelled by public law should be of little effect. It intimates, instead, that private values maximizing choices might have to be memorialized in contract rather than in law. This is a result that has been recognized in recent attempts in international law to provide a framework for the regulation of the conduct of multinational corporations. (Backer 2006). And in this case, private obligation and advantage converges in the requirement that the purchaser ensure the labor conditions of his supplier’s operations.
But why is it immoral, that is, from where can a business legitimately draw a conclusion of the immorality of a particular action? The answer is not necessarily self-evident. Nor is the answer susceptible to a single answer. Still, in contemporary discourse, there are several potential sources of an answer to the question. In the non-Muslim world, for instance, Jews and Catholics, for example, might suggest faith grounded reasons. For Jews it might be based on moral ramifications of Godliness elaborated in Leviticus, Numbers and Deuteronomy and implemented through the Talmud. Catholics might understand this obligation through a different elaboration of Godliness, grounded in the meaning of the Incarnation, Passion and Resurrection. (Backer 2008 and sources cited therein). Both might extract from faith in a particular vision of God and God’s relationship with humanity a set of precepts and conduct norms inherent in people seeking a closer relation to God—love of neighbor as the grundnorm of a values maximizing social and economic order. (Id.). Under these regimes, it is almost self evident that there is a “moral obligation to see that those who work for you even indirectly” (Cohen, supra) are treated morally. And, indeed, Catholic social thought has suggested that economic entities have a moral obligation to indirect employees. (Backer 2008, supra).
Yet, one does not need the comfort of faith to arrive at a similar conclusion. The last half of the 20th century has seen the rise of values based economics. Socio-economics, and particularly so-called binary economics, would infuse economic analysis with social justice values. (Backer 2008, supra). From either it might be possible to derive the idea that an economics that privileges objects (in the form of wealth or production or consumption) subordinates people to things in the way it understands the meaning of welfare maximization. That privileging distorts both the understanding and measurement of welfare maximization. To correct that distortion, the focus of analysis must either focus on people rather than the objects of their consumption or must at least privilege labor and capital equally. In either case, economic relationships that take no account of the conditions of labor used to produce objects (or render services) would not be welfare maximizing in the sense in which such terms ought to be understood, and thus would be inefficient.
Law has taken a few short steps to privilege—or at least has acknowledged—this position shift. Corporate social responsibility has exploded as a regulatory issue in the 20th century. Starting as an issue of the extent of the charitable obligations of economic entities—effectively an issue tied to the extent to which juridical entities might be able to act like natural persons—corporate social responsibility now serves as a proxy for a dynamic set of norms governing the way in which economic entities may engage in economic transactions. (Backer 2006). That transformation has paralleled the debates within economics over its own scope and character. Just as values economics has shifted the basis for understanding the nature and measurement of economic value for welfare maximization purposes, so has corporate theory begun to suggest an alternative to the traditional view that economic entities are inward looking institutions with obligations running only to its shareholders. Corporate social responsibility suggests a theory of enterprise operation grounded in the treatment of economic entities as institutional individuals with obligations to all other individuals with which it engages in transactions or interactions. Enterprise liability, piercing the corporate veil theories, extended jurisdictional theories, and extended notions of fiduciary duty are all tentative legal steps in the direction of extended obligation. But these are tentative steps indeed. (Id.).
For Mr. Cohen, the mechanics of morality is monitoring. Mr. Cohen suggests that at a minimum, proceeding with this sort of business relationship would require monitoring—implementing the purchaser’s duty to participate in the development of the legal and economic relationships between the product supplier and the purchaser. For this purpose, monitoring might be done directly, or as Mr. Cohen suggests through certain middlemen—government or elements of civil society—to ensure fairness in hiring and working conditions. If that is not viable, it might make most sense to avoid foreign entanglements and hire labor domestically. Mr. Cohen summarizes the consequences of this approach to the problem: “What you may not do is simply throw up your hands at working conditions overseas or fob off this duty on those with whom you contract. You must strive to learn whose sweat provides your equity and how it is extracted.” Id.
Mr. Cohen’s reply implies correctly that the extent of the moral obligation to monitor is broader than the legal obligation—extending to at least some entities with which an actor engages. Mr. Cohen, though, rightly understands that, for the moment at least, the moral obligation he identifies can be effectuated only through extra legal means. Cohen identifies the growing and increasingly powerful networks of social actors who monitor economic activity. These entities can share the fruits of their monitoring to economic enterprises to help them meet their ethical obligations. That was the point of Mr. Cohen’s advice. At the same time they can be used against economic enterprises that fail to meet their moral obligations. That is a point I have made elsewhere with respect to both the suppliers of Gap, Inc. (Backer Oct. 29, 2007), Apple, Inc. (Backer June 16, 2006), and Walmart (Backer 2007a)).
This turn to information as a proxy for moral choice in law is being reflected, if somewhat tepidly, in the courts. The Delaware courts have suggested that the extent of the legal obligation is inward looking—economic entities have an obligation to monitor the conduct of their own agents. Thus, for example, the law of fiduciaries has moved from a basis in presumptions of goodness and moral conduct to its opposite. As a consequence, the corporate law, at least, has begun to construct a series of positive obligations on economic entities in connection with certain conduct. The touchstone of this set of positive obligations is surveillance. The Delaware Supreme Court has most recently articulated the standard as follows:
We hold that Caremark articulates the necessary conditions predicate for director oversight liability: (a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention. In either case, imposition of liability requires a showing that the directors knew that they were not discharging their fiduciary obligations. Where directors fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities, they breach their duty of loyalty by failing to discharge that fiduciary obligation in good faith. Stone v. Ritter, 2006 WL 3169168, Supreme Court of Delaware (Nov. 6, 2006) (discussing In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 969 (Del. Ch. 1996)).
And indeed, the obligations to monitor for bad conduct are being extended to the agents of economic enterprises. (Backer 2003). Simultaneously, law is beginning to impose monitoring, reporting and disclosure requirements more generally. (Backer 2007).
The key to the shift, then, is not the elaboration of a particular morality. It is information. Information can force choices (for individual action) even when the moral foundation of those choices remains contested (in the community). The contemporary issue is not whether an entity has an obligation, moral and legal, to monitor; the question is, what is the scope and nature of that monitoring obligation. If under the traditional standards, all entities were to mind their own business, under the new regime all people serve appear to serve as each other’s keepers. That new basis of relationship suggests that personal autonomy is less important as a value governing social and economic relationships. An implication of that change in the value of personal autonomy in social ordering may be that moral obligations are communal and not individual. The more important implication, however, is that moral obligations, as communal obligations that may trump individual desire, impose an obligation on individuals to monitor compliance with those communal obligations. (Backer 2003).
It follows that the connection between moral and legal accountability is never entirely consistent. There is an obligation to know, and that obligation may be effected through the ordering of private relations, that is through the law of contract. Yet law does not prejudge the choices made form knowledge. Thus moral accountability should affect economic choices, even where legal constraints are indifferent to the outcome of those choices. But the choice itself is not specifically predetermined through law. Still, even this sort of moral obligation, grounded in a legally cognizable obligation to monitor, when not backed by consequences, tends to be easier to evade—or postpone. Thus, the person who sought Cohen’s advice was reported to have eventually “hired an outfit in Uttar Pradesh [India] whose labor conditions are unknown to him. If the project advances he vows to travel to India to inspect the manufacturing facilities.” (Cohen 2008). This is an interesting result. On the one hand, the purchaser chose to adhere to the traditional model—he hired a supplier whose labor practices are unknown to him. Because the practices are unknown the purchaser can, under traditional models, assume the best until he knows otherwise. On the other hand, the purchaser appears (by implication) to have avoided hiring any outfit that might have been known to him to have labor policies that resulted in physical injury to the supplier’s workers. That advances the broadly understood social responsibility project, but within the traditional framework of economic relationships. Yet the most important aspect of the purchaser’s conduct was the last—that the purchaser intended to go to India at some point and inspect the operations of the supplier for himself. This represents a deviation from the traditional model. It is more than an acknowledgement of moral obligation—it is a suggestion that moral obligation will be imposed as a basis for arranging the relationships between supplier and purchaser.
B. The Difficulties of Transposing Moral Obligation into a Substantive Law of Corporate Social Responsibility
It was not for nothing that the ethicist suggested moral rather than legal obligation as the basis of the suggested behavior. One of the great problems of translating values into positive law is the lack of consensus of both a particular system of values that ought to be transposed into law, and an understanding of the meaning of corporate social responsibility as the policy rubric through which such transposition is to be measured. As a consequence, the ethical insights of the problem posed above has given rise to the institutionalization of a wide variety of approaches to the problem of the responsibility of corporate actors beyond the narrow group of direct financial stakeholders. Soft law, the private law of contract, and the private choices of groups of stakeholders, more broadly defined, as served as the foundation of the regulation of corporate social responsibility. Moral obligation not directly tied to the political infrastructure of global governance. But the leap from soft to hard law, at either the domestic or international level has been difficult.
In working through the basis of moral obligation, it became clear that there are a number of competing, and not necessarily consistent, frameworks for the elaboration of values systems governing moral conduct. There is no consensus on the legitimacy of moral obligation, even in its form as values-based economics, in either its secular or theological forms, as a basis for domestic, much less international legislation. There is still a strong element that rejects the idea of values in economic theory and in its use to justify any sort of imposition of non-profit maximizing obligations (narrowly confined to direct participants in the economic enterprise) on such enterprises. Even among those for whom values economics is legitimate, there is a wide range of views about the constitution of the values to be applied.
Moreover, there is no consensus on the extent of the obligations of economic entities. The traditional position in the West, solidified over the last half century, is that a corporation has an obligation to its principal stakeholders. In the United States, that includes shareholders; in other countries it may be expanded to include other actors closely connected with ownership stakes in the company. Beyond that circle of privileged actors, the corporation is believed to have no obligation, unless that obligation is specially defined by law or contract. But law ought not to extend the obligations of corporations beyond the requirement to maximize the wealth of its shareholders except in special circumstances. The law of fiduciary duty in the United States recognizes both this duty and its limits. Shareholder welfare maximization is mandatory; the welfare interests of others is permitted as long as it can be justified in terms of shareholder welfare interests. The progressive position has a number of variations. One important variation posits that corporations ought to be legally obligated to maximize the welfare of a broadly defined group of stakeholders. These can include any number of groups—from labor, to consumers, local residents near corporate operational sites, trade partners, suppliers and others. Another suggests that economic entities have social obligations at least co extensive with their social, political and policy effects on the places where they operate or where their actions can be felt. At its broadest, adherents of this perspective posit very little distinction between public and private collectives, and their respective obligations to individuals.
Given these foundational differences in a theory of corporate responsibility, it comes as no surprise that there appears to be no consensus on the framework for transposition. The website of the Australian Prime Minister’s Community Business Partnership correctly notes the common understanding in this respect:
It is not possible to define corporate social responsibility precisely. The language surrounding the concept of CSR is still evolving and can be confusing – especially when reduced to acronyms! For example, CSR is linked to (and in some cases used interchangeably with) related terms and ideas such as corporate sustainability (CS), corporate citizenship (CC), corporate social investment (CSI), the triple bottom line (TBL), socially responsible investment (SRI), business sustainability and corporate governance.” (The Prime Minister’s Community Business Partnership, Australia, available at http://www.partnerships.gov.au/csr/index.htm (accessed Jan. 25, 2008).
They note a cluster of related commonly used definitions. One is "The commitment of business to contribute to sustainable economic development, working with employees, their families, the local community and society at large to improve their quality of life.” (The World Business Council on Sustainable Development). Another is "Operating a business in a manner that meets or exceeds the ethical, legal, commercial and public expectations that society has of business.” (Business for Social Responsibility). Yet another is "A set of management practices that ensure the company minimises the negative impacts of its operations on society while maximising its positive impacts.” (Canadian Centre for Philanthropy). Related to the Canadian effort is that of a well-known NGO, “The integration of business operations and values whereby the interests of all stakeholders including customers, employees and investors, and the environment are reflected in the company’s policies and actions.” (The Corporate Social Responsibility Newswire Service). Boston College’s Carol School of Management provides an even wider range of alternative definitions from multinational corporations (http://www.bcccc.net/index.cfm?fuseaction=Page.viewPage&pageId=596&parentID=477 accessed Jan. 28, 2008). The World Economic Forum has also advanced its own definition of corporate social responsibility as corporate citizenship: (World Economic Forum, Global Corporate Citizenship: The Leadership Challenge for CEOs and Boards, available http://www.weforum.org/pdf/GCCI/GCC_CEOstatement.pdf accessed Jan. 26, 2008).
But differences even at the margin can translate into substantial differences in an enterprises approach to its corporate social responsibility as a matter of institutional practices. The definition of stakeholders, the articulation of the relationship between these stakeholders (among each other and between them and the enterprise), or the formulation of the objectives of the enterprise itself can produce significant variation in the implementation of corporate social responsibility programs. Consider by way of example an obligation to adhere to labor standards. If corporate social responsibility s understood to mean a strict adherence to local law, then in states where labor protections are weak, the obligations of corporations are correspondingly small, and vice versa. If the corporate social obligation also includes an obligation to refrain from interference in the political affairs of a host country then the multinational corporation would have a positive obligation to avoid any action that might contribute to the strengthening of host country labor laws. But if the obligation is to adhere to a standard to provide a living wage to local employees, then several questions arise—does that require the corporation to ignore the local legal structure and import its own notions of wages? Does the obligation then extend to a duty on the part of the corporation to lobby for higher legal wages with the host country government? Can that lobbying obligation be harmonized with the non-interference duty? Does the obligation with respect to wages extend to indirect employees? Moreover, the definitions are general enough to produce a multitude of ambiguity—a charge often leveled by social and human rights NGOs. For example, it is not clear whether the social obligations suggest local or global standards of society, and it is less clear how the standards apply where there may be conflicts among equally privileged stakeholders.
Even if there were consensus on the value of corporate social responsibility in general and its particular manifestation, there is no consensus on the locus of regulatory power. Many states continue to adhere to the view that states ought to remain the privileged site for economic regulation. Though they might come together for the purpose of effecting conventions and other forms of particular purpose positive international law, they have little stomach for the creation of an autonomous government like institution at the supra national level to which might be conveyed executive, legislative and judicial authority. The United States in particular, has been reluctant to cede to any supra national entity any sort of mandatory regulatory power over economic entities. And it is likely that the Americans would be hostile to the idea of the creation of an autonomous governmental apparatus at the international level charged with the development and enforcement of substantive corporate behavior standards. Ironically, the People’s Republic of China might share the same concerns, though from a different framework—the fear of decolonization from abroad by devolution of power away from Beijing. Lack of consensus thus marks the core of the critical components of any substantive global regulatory framework for corporate social responsibility. Without a sense of the nature of the values to be incorporated into governance structures there can be little direction in law. Without a sense of the scope or nature of the obligations of economic entities there can be no confidence in the legitimate boundaries of corporate regulation. Without consensus on the locus of legitimate regulatory power at the supra-national level, it is difficult to successfully construct a unified system of law consistently applied across borders.
Yet, the lack of consensus on these critical points of legislative legitimacy need not doom the project of corporate social responsibility as a matter of international legal regulation. The absence of public consensus on substance may permit a certain margin of appreciation on individual choice. (Backer, Margins of Appreciation). And, indeed, in two critical respects there is a consensus of sorts that might point in the direction of regulatory plausibility at the international level. First, there is something of a consensus on the use of markets to express such individual choice collectively, at least among powerful elites within the developed world. This rough consensus guides and reinforces even the soft law efforts of domestic and international organizations—from the Organization for Economic Development and Cooperation to the United Nation’s Global Compact Program.
Second, there is a rough consensus that markets work best on the basis of a constant set of useful information. This, certainly, is the animating notion of the American Securities laws (Loss--). The scholarship of the relationships between properly functioning markets and information is well established and authoritative. In the financial markets, information serves to assure fairness and opportunity—to preserve the integrity of that form of activity. More generally, information serves as a means of monitoring the objects of market activity, and serving as a basis for the expression of individual judgment through changes in the relationship between the actor and the object. Information permits the investor to make investment decisions, or for the consumer to make purchasing decision. For those investors and consumers, the information received produces judgment on the basis of the application of the actor’s own set of moral and values judgments. In the aggregate, those moral or values judgments then have an effect on the object—the economic enterprise. In this way, information and the effects it produces at both the micro level (individual choice) and the macro level (aggregate action), can serve as a basis for social and values based control of economic activity. For this purpose, the role of the state—or of the community of states seeking to act with global effect—would focus on regulation through surveillance rather than through the imposition of a single site of values or a particular framework of substantive governance.
This consensus, built around the legitimacy of markets as a site for individual choice, and information as the lubricant that contributes to the functioning of markets, may provide the grounding on which a mandatory international system of regulation can be built—as a mechanism to enhance markets and market based choices by all stakeholders in economic transactions. Effectively, a successful (and plausibly necessary) regulatory approach at the international level may lie in exploiting the substantively “soft” hard law of surveillance. It is to the possibilities of using international law as the framework for the creation of global systems of monitoring, and through monitoring, regulating corporate social responsibility, that this paper turns to next.
II. Surveillance as the Basis of an International Law of Economic Regulation in a Market Driven Globalized World Order.
The paper has sought to identify the elements that might contribute to a plausible international regulatory framework for economic activity. Building from thos elements it will try to make a case for such a mandatory global regulatory framework for monitoring and disclosure. There is little question that the global order has been moving toward the realization of regimes founded on the principles of free movement of capital, open borders for investment, and reduced barriers for the movement of goods, people and services between states. Economic actors that operate among more than one territorially bounded state have proliferated. The acceptance of the autonomous legal personality of economic actors operating in certain forms—corporations, certain partnerships, limited liability companies, joint ventures or business trusts—has strengthened the legitimacy and authority of these actors. Multinational economic enterprises, especially those with separate juridical personality, have begun to operate independent of the jurisdiction in which they were chartered. Taking advantage of the power to own other economic enterprises, themselves autonomous and independent, global business enterprises have begun to regulate themselves, treating national regulation as a factor in their production and as an item affecting their aggregate objectives—wealth maximization.
The academic literature is littered with studies of the failure of any one or group of territorially bounded nation states to regulate the activity of economic actors in a world order that privileges the free movement of capital. The nature and scope of the failures are easy enough to summarize. Current political, ideological, cultural and historical differences between states have tended to impede the construction of consensus on the meaning of corporate social responsibility or even the values framework within which such corporate social responsibility might be elaborated. States with a recent history and vivid memory of a colonial experience may be suspicious of values frameworks or corporate regulatory movements that may effectively deny them the power to establish and protect local values, methods, understandings, or even the privilege of newly empowered local elites. Political values among developing states have imbued notions of corporate responsibility with the development obligations of developed states for prior exploitation. And economic entities have been able to take advantage of these tensions to liberate themselves from adherence to a globally consistent, politically legitimate, set of conduct norms.
But the lack of political consensus ought not to be regarded as the failure of values, or even of the futility of defining corporate social responsibility at the global level. Rather, it might indicate that political institutions might not be the appropriate vehicle for the elaboration of regulatory systems based on such substantive notions. As such, the absence of political regulation does not mean the absence of action with regulatory effect. Rather it might suggest the possibility of substantive regulation devolving to non-political actors. Especially with respect to economic decisions—even economic decisions with significant collateral effects in the social, political. And cultural sectors—the contemporary governing ideology privileges markets. Markets in this sense can be conceived of as spaces within which organized individual decision-making may be effectuated and from which its aggregate effects can be felt among all of the decision-makers participating in the market. While markets privilege the values on which individuals act, states can play a critical role in the management of markets. States play a crucial role in maintaining the integrity of markets by providing a framework within which individual decisions can be made with confidence. A successful regulatory scheme, then, might seek to move regulatory power up to the international level and simultaneously out to the market (private choice).
Among the most important integrity-maintaining functions for markets is the provision of information. This is understood by even the more conservative elements of the organized transnational business community. The fourth Principle of the World Economic Forum’s Framework for Action on corporate social responsibility is transparency.
“BE TRANSPARENT ABOUT IT: Build confidence by communicating consistently with different stakeholders about the company’s principles, policies and practices in a transparent manner, within the bounds of commercial confidentiality. One of the most consistent demands that companies are facing from different stakeholders, ranging from institutional investors to social and environmental activists, is to be more transparent about their wider economic, social and environmental performance.” (World Economic Forum, Global Corporate Citizenship: The Leadership Challenge for CEOs and Boards, available http://www.weforum.org/pdf/GCCI/GCC_CEOstatement.pdf accessed Jan. 26, 2008).
But information is itself a complex subject. (Backer 2007). It is both a thing and a choice. It is a fact and a determination of privileged focus. (Id.). Information has to be produced, its truthfulness and completeness verified, and it must be delivered to those who can make use of it. The state is in a unique position to ensure these three objectives. That, indeed, is the basis for the system institutionalized through the federal securities laws in the management of financial markets in the United States. The ideology and value of disclosure is well known. The benefits of disclosure are easily translated to the global stage. International systems of disclosure avoid the territorial limitations of domestic law. And by its appearance of neutrality, it avoids the difficulties of legislating in substantive areas over which there is little consensus and little hope of future consensus.
But for our purposes, regulating disclosure at the global level may have substantial substantive value as well. The technical focus of surveillance is on information—but choices about the kind of information that ought to be gathered, the form to be taken for information gathering, the persons or institutions to which information is to be reported, and the judgments to be made from the information gathered, can have a significant effect on those involved in the process. (Backer 2007 Surveillance). Control of the framework of information gathering, itself, can indirectly further a values based governance program. The choices about what sorts of information is important enough to gather and what sort of information is not, the kind of stakeholders given rights with respect to information gathered and those excluded, the authority to punish failures to gather or distribute information and the private consequences of such failures (for example civil suits or delisting from national exchanges), all can significantly shape behavior and define the scope of corporate social responsibility as actually practiced. The regulation of disclosure thus permits international political involvement in the development of understanding about the values that ought to be furthered and the framework within which economic enterprises ought to behave, while avoiding the difficulties of substantive legislation in a world community deeply divided about those issues. At the same time, the international community, like states and civil society actors, remain free to compete for the advancement of their values agenda among those individuals and entities who constitute the principal stakeholders of economic enterprises.
For example, where an enterprise is required to disclose the labor conditions affecting its suppliers, it may have a greater incentive to focus on issues of supplier labor conditions than it would if it were only required to report on matters of the condition of directed employed labor. The choice to require such reporting also suggests a judgment—that there is an obligation between an employer and indirectly employed labor. It also permits the use of that information to convince critical stakeholders—investors and consumers—to care about the information and based their own purchasing decisions on an assessment of that information. Information, thus, can serve as a source of behavior regulation. But only the obligation to report is legally required. Only that obligation can be enforced by the state. For some, that is fatal to any use of indirect regulatory devices to change business behavior. For others, the shifting of substantive power to the market (that is to the aggregate investment and consumption decisions of stakeholders) is also a fatal flaw—the political collective ought to be making those choices. But in a world in which, as I have suggested, there is no consensus on either values choices are made or the political will to concede power to a global authority to make and enforce such values choices effectively, then indirect regulation, leveraging the incentives of the market, may serve as the only effective means to a regulatory framework for corporate social responsibility on a global scale.
What might be plausible, then, by way of regulation is both modest and dependant on substantial inter connection with both the private (market) and national regulatory spheres. But the important thing is that international hard regulation is plausible; it is attainable; and it might do some good to all of the actors that fall within it. It is plausible because the principle actors have already internalized both the value and process of monitoring, disclosure and communication; economic enterprises have begun to harvest and disclose a large amount of information on their corporate behavior so that the focus of information gathering is also something with respect to which these entities have become familiar; governments have been expanding the breadth of their information harvesting and disclosure regimes; international organizations have long been tasked with the management of information; there is experience in the crafting of international instruments that have as their object a monitoring and disclosure element; and elements of both civil society and business have begun to develop quite sophisticated systems of disclosure. As a consequence, the idea of regulation, even hard regulation, of the type proposed is not so implausible as to be impossible to conceive. Let me expand briefly on these points.
The first point, that the principle actors have already internalized both the value and process of monitoring, disclosure and communication is well known and hard to dispute. Regimes of financial reporting and disclosure are basic to the regulatory regimes of virtually every state. Privately held companies are usually required to report information as well, to shareholders, lenders and the state.
The second point, that economic enterprises have begun to harvest and disclose a large amount of information on their corporate behavior, well beyond what is required by domestic law has become an important basis in the explosion of the business of voluntary corporate social responsibility. The regulatory effects of indirect regulation, and of moral obligation, tied to aggregate market behavior, are increasingly well known. Economic actors have also come to understand the profit maximizing value of such regimes, when appropriately deployed. I have suggested, for example, the construction of elaborate systems of supplier regulation that have been developed by large multinationals in the apparel and consumer products sectors, and the way those systems have been used by the multinationals, NGOs, the media, consumers and investors for their respective benefit. (Backer 2007; 2006a).
The third point, that governments have been expanding the breadth of their information harvesting and disclosure regimes has been the subject of increasing attention for its economic and human rights consequences. (Backer 2007). Especially since the events of September 11, 2001 in the United States, and the Irish Republican terror campaigns in London earlier, states have been expanding the scope of their monitoring activities. As new behaviors requiring regulation are targeted, monitoring and reporting are expanded in the service of that substantive regulation. Thus, for example, monitoring has become an integral part of the fight against money laundering, and bribery, producing sophisticated regimes of information harvesting and disclosure. The fight against pedophilia has generated its won forms of surveillance.
Two key points, that international organizations have long been tasked with the management of information, and that there is experience in the crafting of international instruments that have as their object a monitoring and disclosure element, are less well developed but important. The techniques for such a system of surveillance are already available at the international level. The global political community has started thinking about the ways in which monitoring can be institutionalized through law. The focus on information management at the international level affects all sectors, from the management of information in the fight against terrorism, crime and corruption (Duncan B, Hollis, Why States Need an International Law for Information Operations, 11(4) Lewis and Clark Law Review) to the regulation of financial markets and financial actors. Information management has been a key feature of the construction of global efforts at combating financial fraud, without compromising the ability of states to set their own peculiar versions of the substantive rules of finance. Unlike those efforts, the United Nations had sought to regulate the substantive behavior of multinational corporations. That effort produced the now abandoned Norms (2003) in favor of the voluntary and broadly conceived Global Compact project. (Global Compact). A short walk through the monitoring mechanics of the Norms provides useful insights for creating global disclosure structures.
The Norms in its substantive and monitoring aspects would have made use of the market aspects of contemporary globalization. It would have been grounded in private contract—the obligation of economic entities to incorporate into their contracts with stakeholders a large group of international norms. “Each transnational corporation or other business enterprise shall apply and incorporate these Norms in their contracts or other arrangements and dealings with contractors, subcontractors, suppliers, licensees, distributors, or natural or other legal persons that enter into any agreement with the transnational corporation or business enterprise in order to ensure respect for and implementation of the Norms.” (Norms 2003, at ¶ 15). Those contract obligations are then made enforceable by a large group of actors, and are subject to an ongoing responsibility to disclose performance information relating to their contractual obligations. The obligations are public, the performance is private and the enforcement is shared among a group of private and public actors. Yet the governance project represented by the Norms contained what might be the seeds of a method of internationalizing the management of information about corporate conduct, and through that management, bringing some discipline to the regulation of economic behavior on a global scale. As such, it may serve as a useful template for thinking about the framework for a global law of disclosure and transparency. (Backer 2006).
Although the Norms focused on the development of a substantive framework of regulation, it also contained a series of provisions on disclosure, the structure of which might prove useful as the basis for developing an international disclosure system that enhances the power of global actors to seek to maximize the power of individual actors to influence corporate behavior. The Norms sought to create a system of self monitoring and reporting similar to that which serves as the basis for financial reporting among publicly held corporations. “Transnational corporations and other business enterprises shall enhance the transparency of their activities by disclosing timely, relevant, regular and reliable information regarding their activities, structure, financial situation and performance.” (Commentary 2003, at ¶ 15 cmt. (d)). But the concept was substantially expanded in scope—both as to the information to be disclosed, and the actors who might rely on such disclosures. For that purpose, the Norms relied on the construction of a fused system of public and private law. Public law created the framework of the obligation to report. Private law created a specific web of obligation between private actors with respect to the obligations.
The Norms would have regularized monitoring of the activities of multinational corporations as a critical method for enforcing the substantive behavior norms imposed on such entities through the Norms. Monitoring would have been based on the creation of a web of reporting and observing involving states, international actors, and elements of civil society. (Norms 2003 ¶ 16). The Commentary suggests the broad scope of this provision, and the critical role it was meant to play. Monitoring and implementation of the Norms would have required “amplification and interpretation of intergovernmental, regional, national and local standards with regard to the conduct of transnational corporations.” (Commentary 2003, at ¶ 16 cmt. (a)). For this purpose, the United Nations would have taken the leading role through its treaty bodies and specialized agencies (Commentary 2003 at ¶ 16 cmt. (b)). When originally conceived, this portion of the monitoring regime sparked substantial criticism from developed states, which suggested that international organizations in general, and the United Nations in particular, were incapable of serving effectively in any enforcement role. (Backer 2006). But the Commentary also suggested that much of the information gathering could be delegated to “non-governmental organizations, unions, individuals and others” (Commentary 2003 ¶ 16 cmt. (b)). A system of mutual private monitoring and reporting is the object, one that focuses on the economic entity and that also permits relevant stakeholders broad authority to gather information related to compliance with the Norms.
Transnational corporations and other business enterprises shall ensure that the monitoring process is transparent, for example by making available to relevant stakeholders the workplaces observed, remediation efforts undertaken and other results of monitoring. They shall further ensure that any monitoring seeks to obtain and incorporate input from relevant stakeholders. Further, they shall ensure such monitoring by their contractors, subcontractors, suppliers, licensees, distributors, and any other natural or legal persons with whom they have entered into any agreement, to the extent possible. (Commentary 2003 ¶ 16 cmt. (d)).
Like the Sarbanes Oxley Act’s monitoring systems (SOX 2002), a monitored enterprise would have been responsible for the construction of monitoring systems that would have provided “legitimate and confidential avenues through which workers can file complaints with regard to violations of these Norms.” (Commentary 2003 ¶ 16 cmt. (e)). The monitored entity would have been given “an opportunity to respond.” (id., cmt. (d)). The results of the annual assessments of Norm compliance, which serves as the principal method of transmission of the information gathered, would have to be “made available to stakeholders to the same extent as the annual report of the transnational corporation or other business enterprise.” (Commentary 2003 ¶ 16 cmt. (g)). The similarity to financial reporting under national securities laws was quite conscious. And, like the environmental reporting regimes of many jurisdiction, the Norms would have imposed a further obligation to provide impact statements prior to the commencement of any “major initiative or project.” (Commentary 2003, ¶ 16 cmt. (i)).
A broadly defined group of stakeholders would have had a privileged position with respect to this information system. “The term “stakeholder” includes stockholders, other owners, workers and their representatives, as well as any other individual or group that is affected by the activities of transnational corporations or other business enterprises.” (Norms 2003 at ¶ 22) For the benefit of these stakeholders, “Each transnational corporation or other business enterprise shall disseminate its internal rules of operation or similar measures, as well as implementation procedures, and make them available to all relevant stakeholders.” (Commentary 2003, ¶ 15 cmt. (a))
Enforcement was to be effected at either under the public law of state actors or pursuant to private enforcement. Paragraph 17 of the Norms would have required states to “establish and reinforce the necessary legal and administrative framework for ensuring that the Norms . . . are implemented” by covered economic enterprises. (Norms 2003 ¶ 17). The Commentary suggested that states would have been required to disseminate the Norms to the populace “and using them as a model for legislation or administrative provisions.” (Commentary 2003, ¶ 17 cmt. (a)). Paragraph 18 of the Norms envisioned a global system of private enforcement elaborated through contract actions the remedies for which would be provided under state law. (Norms 2003, ¶ 18). “In connection with determining damages, in regard to criminal sanctions, and in all other respects, these Norms shall be applied by national courts and/or international tribunals, pursuant to national and international law.” (Id.). The model would have been the European Union’s jurisprudence for the provision of national remedies for violations of Community Law. (e.g., Rewe Zentralfinanz EG v. Landswirtschaftskammer Fur das Saarland 1989)).
The monitoring provisions of the Norms suggest the plausibility of writing an international hard law of global disclosure. Its critical insight was the construction of a form of governance sharing—private parties through contract, the international community through framework legislation, and member states through their court systems and their obligation to enforce international law norms and contracts. Still, the Norms failed—and the Norms failed for a number of reasons. First, the Norms focused on the imposition of a values based system of behaviors at the international level when no international consensus existed with respect to such values or behaviors. Second, the lines of authority and enforcement were not clear. The lines of authority were blurred. It was not clear whether states or the United Nations organs were to have authority over the standards. It was also not clear the extent to which states could apply their own law. Because much of the behaviors were to be regulated through contract, the regulatory power of enterprises themselves were enhanced but in an undefined way. Better put, the Norms appeared to vest virtually everyone with an ambiguously defined right to seek monetary and equitable remedies against economic actors all over the world. In any case, it was not clear whether or to what extent the Norms would have conflicted with strongly legitimate and deeply held notions of corporate governance in the developed world. (Backer 2006).
This bring us to the last point, that elements of both civil society and business have begun to develop quite sophisticated systems of disclosure takes us from conception to implementation. What would an internationally mandated system of disclosure look like? The Norms do not provide much help in that regard. Though no specific form of regulation is proposed, the major features of such an international framework can be sketched out. A few of the key features of an international law of disclosure might include the following: a limited framework for international law, disclosure that parallels disclosure regimes established for the financial markets, remedies provided under domestic law, remedies limited to compelling disclosure (and possibly the awarding of attorneys fees, and universal jurisdiction.
A limited framework for international hard law follows from the nature of the failure of the Norms. For any international law approach to be viable, in light of the failure of the Norms, it must avoid any attempt to legislate values or behavior expectations. The last twenty years has seen the proliferation of a large number of voluntary codes of behavior. All of them are similar but differ in substantial enough respects to indicate that even among like-minded people there is no consensus with respect to behavior. And a significant number of states do not believe that it is the role of public organizations to mandate what they would characterize as moral rather than legal behavior or values. Information ought to appear neutral. That will require some sensitivity to the choice of information privileged. But the wealth of disclosure suggestions elaborated by elements of civil society can provide a basis for benchmarking what sorts of information might be extracted from economic entities. To gather information, or to mandate its collection and dissemination, does not suggest or mandate behavior, even behavior implied by the sort if information privileged with collection. An information regulatory regime also is similar to a pattern of regulation that is well within the comfort levels of most developed states. All such states have developed disclosure and transparency system with respect tot he regulation of their financial markets. International law here would merely seek to broaden the regulatory patterns already a well established and legitimate method of market regulation within domestic law. But of course, control of information gathering is hardly neutral. (Backer 2007). And the determination to privilege the dissemination of information in addition to the traditional information related to financial performance—a disclosure geared to the narrowly defined interests of shareholders and creditors—will have a tendency to influence corporate behavior so that the information disclosed would make it appear in a bad light. However, the measure of that bad light would not be determined by the state. Instead, that determination would be made by the company in relation to its assessment of the desires of its stakeholders. Though law would not directly compel behavior, the effect of disclosure should have that effect.
The real substantive contribution in international law, and it is by no means a small one, would be with respect to the content of the information required. There are several models that can be followed. The simplest is to require information on the basis of one or another form of disclosure already developed as “soft law” by the international community or elements of civil society. Mandatory disclosure would be limited to a discussion of the election and compliance with the system chosen. Alternatively, the content of information could be devolved to an organization—either a public/private entity (for example the OECD, the International Organization of Securities Commission, or some other entity) with the necessary legitimacy within the global community, to develop standards and maintain standards. The European Union has undertaken this form of framework legislation with respect to certain technical directives elaborating the internal market. The last alternative is the most elaborate—the information scheme could be elaborated by something similar to the American Securities and Exchange Commission. The benefit would be that regulatory authority would be unified. The detriments might include the creation of too elaborate a bureaucracy at the international level and too great a devolution of power up. There is also a danger that what might start as a simple disclosure rules system could become as Byzantine as those under modern financial disclosure rules, when such power is devolved to a public body. But much more research needs to be done.
International legislation might also consider a number of other important areas of legislation. One would touch on the relationship of states to the international disclosure regime. Again, importing a practice of the European Union, it might be prudent to construct a system in which national courts would be solely responsible for enforcing the international law of disclosure as part of their national law. In that context, national courts could provide national remedies as long as they are wholly effective. (Marshall v. Southampton and South West Hampshire Area Health Authority 1993). Indeed, the utility of national courts in transnational litigation has become a subject of greater scholarly interest, especially on their role in addressing global harms. (Buxbaum 2006). That would permit some flexibility in domestic law within the international framework that limits remedies to an obligation to disclose. Thus, for example, where a national court orders disclosure as a remedy for violation of the global disclosure norm, such disclosure might reveal a substantive violation. That substantive violation would be subject to domestic law and domestic remedies, but not under the international law based monitoring framework itself. The hope, of course, in some quarters, might be that a uniform global disclosure system can provide an incentive for domestic legislation on corporate social responsibility and ultimately help create a consensus on universal norms for the regulation of the social responsibility of international economic actors.
Universal jurisdiction might merit consideration as well. One of the great impediments to the private regulation of transnational economic enterprises has been the difficulty sometimes of obtaining a competent court to hear a case against an enterprise. Universal jurisdiction might serve to ameliorate that concern. In return, of course, the stakes would have to be quite focused. Remedies might have to be limited to compliance with discourse requirements. Damages might be available, but only as a matter of domestic law. Some states might provide for such damages, other might not. But those differences might have to be tolerated in order to obtain consensus on the creation of an international information disclosure framework in positive law.
Universal jurisdiction and limited remedies to be available only through national courts may be critical to the acceptability of any international law effort. Business is leery of additional legal regulation of is substantive conduct. But business is accustomed to providing information. A uniform system of information (beyond financial disclosure would reduce their transaction costs. A system of universal jurisdiction would permit stakeholders to make use of the most effective forum for the vindication of their rights—to information. But the national courts would be limited under the international law scheme to orders requiring the provisions of information and ancillary enforcement powers. These remedies could be applied only under national law rules. That avoid substantial international intrusion into the judicial function f national courts and avoids the need to construct another international judicial instrumentality (both of which might be substantially objectionable to the global business community). National governments, of curse, would be free to enact additional remedies. But that would be a matter of domestic substantive law.
The direct and indirect aims of such a reporting system become clear. International law can serve to build a single framework for a global system of information monitoring and disclosure by economic entities. Multinational economic actors cannot be required to report on their global activities, nor is it likely that a uniform system of reporting on matters other than those narrowly required under traditional models of financial reporting, unless the power to regulate such disclosure is shifted up to the international level. But the absence of consensus on the nature of the norms of behavior that should apply to economic actors beyond profit maximization for shareholders and truthful and complete financial disclosure, suggests a narrow framework for international lawmaking. Information production is both narrow and neutral enough. But it does provide a significant advance—requiring entities that would otherwise not disclose to become more transparent. Though that would be the extent of formal legal obligation, the provision of information could have significant effects in the market. Information can be used to affect the actions of an enterprises stakeholders—consumers, investors, suppliers, lenders and the like. Each of them would respond to the information produced on the basis of the values that dictate their own conduct. Information, then, might broaden the sensitivity of enterprises to socially responsible behavior, not because the state or another level of public governance demands it, but because the market does. (Backer 2007a).
John Ruggie recently noted that
Legal compliance is the third path for the social articulation of human rights, including by setting legal standards of corporate responsibility for human rights. Legal compliance may be seen as the apex of a pyramid that has standards of appropriateness as its broad social base, and the calculus of consequentialism as the middle layer. Causal arrows can move in both directions, from the bottom up and from the top down. Moreover, the balance between the three spheres can shift over time, depending on circumstances. (Ruggie 2007)
He noted that in a world order that still is attached to the primacy of the state system, enforcement at the international level is still a concern to any legitimate law making at the supa-national level. (Id.). He reminds us that no less than Amartya Sens has warned of the limitations of legislating values and behavior (Id.; Sens). This leads Ruggie to a defense of a system of private networks of voluntary codes of behavior norms. (Ruggie 2007). There is still room at the international law making level for systems that might help to foster communities of shared responsibility. While private networks may be the appropriate basis for values behavior norm making, what Ruggie calls legal compliance at the international level may be indispensable for the further elaboration of those private market and collective based systems.
III. Conclusion.
It seems, then, that the initial intuition (Cohen 2008) about the most effective form of enforcing moral obligations can serve as the basis for an international framework for the positive regulation of multinational corporations that both respects the principle of market primacy and the necessity of international regulation. Moral perspective is most likely to successfully find some expression in law through the construction of legally enforceable monitoring systems rather than through direct regulation of ethical obligations. (Backer 2007). American lawmakers understood this implicitly in the construction of the federal securities laws in the 1930s. The great idea under-girding those statutory systems was surveillance—systems of mandatory disclosure to both the state and to principal stakeholder communities (in the case of the federal securities law the investor community). Indeed, that system has become extremely useful in molding behavior beyond the original scope of those statutes. It has become a means through which disclosure is used to indirectly legislate behavior. (Backer Dec. 21, 2007) For example, under the Sarbanes Oxley Act (2002), publicly held companies were not obligated to adopt an ethics code for senior financial officers, but rather were required to disclose whether or not they had adopted such a code (Sarbanes Oxley Act of 2002, § 406). The object was not to impose ethics codes but to create a legal framework within which stakeholders could negotiate the extent and terms of such codes. (Backer 2002). The state chose the objective—ethics codes—but private actors were free to use the information as they liked in arranging their relationships. In a sense, then, monitoring regimes can serve as a framework for incorporating moral obligations within a legal structure of relationships between economic actors, without hardwiring any particular set of ethical standards in law. For those in search of avenues for the implementation of corporate social responsibility at a transnational level, international agreements for transparency, disclosure and information dissemination might be more effective as a means of hardwiring ethical obligations in the relationships between economic enterprises, than commanding obedience to any set of such obligations.
This short paper has suggested that the path to the attainment of socially positive goals might not always be reached by what appears to be the most direct method. Legislating corporate social responsibility, even in the context of a values-based understanding of economic theory, is problematic. There is no consensus on the legitimacy of values-based economics, in either its secular or theological forms. There is still a strong element that rejects the idea of values in economic theory and in its use to justify any sort of imposition of non-profit maximizing obligations (narrowly confined to direct participants in the economic enterprise) on such enterprises. Even among those for whom values economics is legitimate, there is a wide range of views about the constitution of the values to be applied.
Even if there were consensus on the value of corporate social responsibility in general and its particular manifestation, there is no consensus on the locus of regulatory power. Many states continue to adhere to the view that States ought to remain the privileged site for economic regulation. Though they might come together for the purpose of effecting conventions and other forms of particular purpose positive international law, they have little stomach for the creation of an autonomous government like institution at the supra national level to which might be conveyed executive, legislative and judicial authority. For that reason alone, for example, the latest and fairly mild version of international regulation of multinational corporations was successfully opposed by a large number of nation-states. Moreover, the imposition on a global basis of any one substantive value system (as international law) would be inconsistent with the markets and private choice orientation of the current framework for global economic regulation. On the other hand, imposition of substantive value systems as economic regulation resulting in regimes of corporate social responsibility when imposed by a territorial state would be consistent with the global economic order. In that context, regulation serves as a commodity that might attract or repel inbound business or might produce an exodus of economic activity. (Backer 2007a).
But substantive regulation is not the only method for meeting the objective of imposing social responsibility obligations on economic enterprises whose business crosses national borders. Surveillance has risen as an increasingly effective method of indirect regulation. The technical focus of surveillance is on information—but choices about the kind of information that ought to be gathered, the form to be taken for information gathering, the persons or institutions to which information is to be reported, and the judgments to be made from the information gathered, can have a significant effect on those involved in the process. The effect on behavior would not be controlled by the state (or the international community as substantive legislator). Instead, information would provide the principal direct and indirect stakeholders of economic entities—shareholders, lenders, suppliers, customers, trade creditors, labor and others—with the opportunity to act on their own values in their relationship with economic entities. The market, effectively, would impose values on all participants. Values-based behavior would be dependent on what the principal participants think is important. And control of the content of the values that are privileged would depend on the power to convince the critical stakeholders of the correctness of a value system put forward. In this context, values, like law, would be subject to the market, in this case the market for ideas (of values). In this market, private actors—churches, philosophers, social scientists, ethicists, and others—would have a primary role in seeking to offer product (values systems touching on matters of corporate social responsibility) and to market those products to the critical stakeholders. Domestic and international organizations can continue to play the traditional roles—memorializing consensus norms and putting forward articulations of those norms for greater distribution and consumption in the elaboration of the contemporary system of customary international law. But to move beyond that role would not likely be successful. And, of course, these ideas have served as the cornerstone of the highly successful financial markets regulation in the United States since the early 1930s.
The techniques for such a system of surveillance are already available at the international level. Much of the form of such a system can be extracted from the recently proposed Convention on the regulation of multinational enterprises. The methodology and framework for reporting within the general parameters of understandings of the meaning of “corporate social responsibility” have begun to be addressed in significant detail by the NGO community, and prominently among them the Global Reporting Initiative (Global Reporting Initiative, About Us 2008).
It suggests that such a system will work at the economic level only to the extent that it can be promoted as a mechanics to global market efficiency, avoids making substantive or values driven behavior choices, limits enforcement to the compliance with the information gathering and reporting requirements of the international framework and vests enforcement at the nation-state or private level. The feasibility of such a program of reporting can be evidenced by the encouragement of such programs in places like Australia. The self-enforcing character of these monitoring systems can be deepened by the imposition of national rules requiring national exchanges to enact rules making compliance with such international reporting programs mandatory. Enforcement can be delegated to national securities law agencies—like the American Securities and Exchange Commission and its counterparts—or to the international association of securities regulatory agencies. Templates for public and private enforcement are already well established in developing countries. With the critical addition of worldwide jurisdiction for the enforcement of the reporting requirements, and an international system of penalties, the system is complete. The rest can be left to the market.
Preliminary References:
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