Corporate Accountability: Is Self Regulation the Answer?

Implementation Issues

Despite the recent proliferation of codes, their actual implementation and monitoring remain problematic. Information about codes is generally not available to workers and consumers. Researchers have found that labor codes have often been introduced in companies without the prior knowledge or consent of the workers for whom they are intended. A key issue regarding the implementation process is the independence of the monitoring body. Since large auditing and consultancy firms usually carry out the monitoring of company codes with little transparency or public participation, whether the codes are actually being implemented or not remains a closely guarded secret. Besides, auditing firms may not reveal damaging information since they get paid by the company being audited.

Recent voluntary initiatives, such as Multi-Stakeholder Initiatives (MSIs), are considered more credible because NGOs and labor unions are involved as external monitors. But the authenticity of such monitoring cannot be guaranteed by the mere involvement of NGOs and civil society.

Researchers have found that the development of standards by some MSIs has taken place in a top-down manner without the involvement of workers at the grassroots level [1]. For instance, concerns of workers in India and Bangladesh were not taken into account in the standards created by MSIs such as the Ethical Trading Initiative and Social Accountability International [2].

If recent experience is any guide, the struggle to implement codes could be frustrating, time-consuming, and ultimately futile. It dissipates any enthusiasm to struggle for regulatory controls on TNCs. This was evident in the case of the decade-long campaign in India on a national code to promote breast-feeding and restrict the marketing of baby food by TNCs along the lines of WHO code [3]. Therefore, voluntary codes require serious rethinking on the part of those who consider them as a cure-all to problems posed by TNCs.

The unveiling of corporate scandals (from Worldcom to Enron to Parmalat) underlines the important role of strong regulatory measures. One cannot ignore the fact that all these corporations were signatories to several international codes while some of them (for instance, Enron) had developed their own codes.

Why State Regulation?

The proponents of neoliberal ideology argue that states should abdicate their legislative and enforcement responsibilities by handing them over to NGOs and civil society organizations which should develop voluntary measures in collaboration with business. Without undermining the relevance of such voluntary approaches, it cannot be denied that the primary responsibility of regulating corporate behavior of TNCs remains with nation states. It is difficult to envisage the regulation of TNCs without the active involvement of states. State regulations are the primary vehicle for local and national government and international institutions to implement public policies. National governments have the primary responsibility of protecting and improving the social and economic conditions of all citizens, particularly the poorer and more vulnerable ones.

There is no denying that all states are not democratic and that supervisory mechanisms are often weak, particularly in developing countries. Despite these shortcomings, however, states remain formally accountable to their citizens, whereas corporations are accountable only to their shareholders. National regulatory measures are also necessary to implement international frameworks. The additional advantage of national regulatory measures is that they would be applicable to all companies, domestic or transnational, operating under a country’s jurisdiction, thereby maximizing welfare gains.

The national regulatory framework is very important and it will not wither away under the influence of globalization. On its own, transnational capital lacks the necessary power and ability to mould the world economy in its favor. Rather, it strives for the support of nation-states and inter-state institutions to shape the contemporary world economy. State policies are vital for the advancement and sustenance of transnational capital on a world scale. Investment decisions by TNCs are not always influenced by the degree of national liberalization but are also governed by state regulations in areas as diverse as taxation, trade, investment, currency, property rights, and labor.

A stable economic and political environment is also an important determinant. Transnational capital looks upon legislative, judicial, and executive institutions not merely to protect and enforce property rights and contract laws, but also to provide social, political, and macroeconomic stability. In the absence of such a policy framework, contemporary globalization would not have taken place. Social and political conflicts are also resolved primarily through state mechanisms. The fact that a strong and stable state is a prerequisite for the development and sustenance of the market economy is evident from the failure of economic reforms in transition countries. In addition, state intervention is also necessary to prevent and correct market failures. There are innumerable instances of market failures with huge economic, social, and environmental costs throughout the world. Pollution and monopoly power are the most popular examples of market failure. The government can introduce pollution taxes and regulate monopolies to correct the distortions created by market failure. Besides, the government is expected to provide public goods and services (for example, schools, hospitals, and highways) to all citizens because the market has failed to do so.

In the context of global capitalism, nation-states provide the legal framework within which all markets operate. The notion of a ‘free market’ is a myth because all markets are governed by regulations, though the nature and degree of regulation may vary from market to market. Even the much-claimed self-regulation or co-regulation model would lack legitimacy if it was not backed by a government decree. In fact, it is impossible to conceive of contemporary neoliberal globalization without laws, which do not exist outside the realm of nation-states. Even the global rules on trade enforced by international institutions (for instance, WTO) are not independent of nation-states.

Whither Regulatory Framework?

The first step towards regulating TNC behavior begins at the national level. Host countries in particular should adopt appropriate regulatory measures on transparency, labor, environmental, and taxation matters. At the same time, home countries should put in place regulations to ensure that the same standards are followed by their TNCs irrespective of where they operate in the world. The Foreign Corrupt Practices Act of the US, which penalizes U.S.-based corporations for their bribery and corrupt practices in foreign countries, is a case in point.

National regulatory measures could be supplemented by new forms of regulatory cooperation and coordination between states at regional and international levels. By providing the overall framework and guiding principles, regional and international efforts should enhance the policy space and powers to regulate TNCs and foreign investment in order to meet national developmental objectives.

At the domestic level, the political climate in many developing countries has drastically changed in the past two decades. Neoliberal policies now frame almost every political process and go unchallenged even among some ranks of the left. There is a strong lobby in many developing countries (for instance, India) consisting of big business, the upper middle classes and the media, which supports the entry of foreign capital and demands fewer regulatory mechanisms. Some developing countries like India and China are also witnessing the emergence of ‘Third world TNCs’ that are expanding their businesses in other countries. These developments make the task of regulating corporations still more difficult. How can such countries demand greater regulation of private capital flows? Besides, it fragments the coalitions of developing countries and weakens their collective bargaining power in international economic policy arenas such as the WTO. Nonetheless, even though the task of re-establishing the authority of states over TNCs may be difficult, it would not be impossible provided efforts were backed by strong domestic political mobilization. Herein the role of NGOs, labor unions, and other civil society organizations becomes important to strengthen domestic political processes.

It needs to be stressed here that a robust, transparent and efficient supervisory framework is also required to oversee the implementation of national regulations. Otherwise expected gains from a strong regulatory framework would not materialize. India provides a classic example of having a strong regulatory framework but poor supervisory structures. In the present world, there is a need for greater international supervision of private investment flows based on cooperation between home country and host country supervisors.

While acknowledging that voluntary approaches could be used as tools for leverage on corporate behavior and therefore are worth testing, this chapter underscores the need for enhancing the state regulatory and supervisory frameworks. Any strategy aimed at privatizing regulation is bound to fail; even the limited gains made in the past through voluntary approaches always rested on governmental backing. Voluntary codes of conduct can never be a substitute for state regulations. Nor can they substitute for labor and community rights. At best, voluntary codes can complement state regulations and provide space for raising environmental, health, labor, and other public interest issues. As rightly pointed out by Rhys Jenkins, “Codes of conduct should be seen as an area of political contestation, rather than as a solution to the problems created by the globalization of economic activity.” [4] Bulatlat

Notes and References

1. Linda Shaw and Angela Hale, “The Emperor’s New Clothes: What Codes Mean for Workers in the Garment Industry,” in Rhys Jenkins, R. Pearson and G. Seyfang, (eds.), Corporate Responsibility and Labor Rights: Codes of Conduct in the Global Economy, Earthscan Publications Ltd., London, 2002, p. 104.
2. Peter Utting, “Regulating Business via Multistakeholder Initiatives: A Preliminary Assessment,” in Voluntary Approaches to Corporate Responsibility: Readings and a Resource Guide, A UN Non-Governmental Liaison Service Development Dossier, New York, 2002, pp. 96-97.
3. Kavaljit Singh and Jed Greer, TNCs and India: A Citizen’s Guide to Transnational Corporations, Public Interest Research Group, New Delhi, 1996, pp. 39-43.
4. Rhys Jenkins, Corporate Codes of Conduct: Self-Regulation in a Global Economy, UNRISD, Geneva, 2001, p. 70.

Kavaljit Singh is Director, Public Interest Research Centre, New Delhi. He can be reached at kaval@vsnl.com. The above article is based on his latest report, Why Investment Matters: The Political Economy of International Investments (FERN, The Corner House, CRBM and Madhyam Books, 2007).

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