The Evolution of Corporate Social Accountability

These are interesting times in the realm of corporate social accountability. Recently, in the United States Supreme Court, the case of Kiobel vs. Royal Dutch Shell challenged long held beliefs regarding the boundaries of international corporate accountability. In the case, Nigerian citizens accused Royal Dutch Shell of being complicit in the torture and extrajudicial killing of protesters who opposed the company’s environmental practices in the Ogoni region of Nigeria in the 1990s. Plaintiffs seek damages under the Alien Tort Claims Act which may recognize corporate liability for breaches of international customary law such as those relating to human rights violations in foreign countries. This may signal a key turning point in the evolution of corporate social accountability and the written and unwritten rules that define the corporation’s obligations to the greater society. At this juncture in history, let’s take this opportunity to examine the evolution of corporate social accountability and what may be in store for us in the future.

The emergence of the corporation as a societal actor can be traced back to the British East India Company, the world’s first limited liability corporation and multinational, which was formed with a mandate that was as much political as commercial. This entity, which would later become the prototype for the modern corporation, had core motivations that went well beyond the maximization of profit, as their major objectives included the serving of greater political, societal and national interests through the expansion of the empire for the sovereign crown.

In the United States, during the beginning of the nineteenth century, each act of incorporation required an act of the state legislature and as such, corporations were viewed as an instrument of the state to carry out its duties to the public. They were kept in check by the ultra vires doctrine which prevented them from engaging in activities beyond their original charter. Following the shift to general incorporation, corporations grew massively and were granted greater freedom with regard to their activities. However, as corporations grew and expanded beyond the scope of the public charter enterprise, capital became the primary factor of production and the shareholder became king, both figuratively and in a more disconcerting literal sense as corporations grew in power and emerged as a societal participant comparable in scale and significance to the citizen and the state, with the essential ability to provide for society’s needs in more efficient ways as a master of innovation in management and technology.

Due to the massive appetite for capital for the newly emerging corporations in the age of industrialization, providers of capital were given special rights and privileges. Thus, capital became the primary language of articulating the corporation’s obligations to the greater society. The age of shareholder primacy was marked by key intellectual developments in the form of “The Modern Corporation and Private Property” by Berle and Means in 1932 and “The Nature of the Firm” by Coase in 1937. This was further fortified by key verdicts in Anglo- American common law such as Dodge vs. Ford Motor Company in 1919. These legal developments may be claimed to have impeded the further evolution of corporate social accountability for in spite of changing circumstances and the emergence of intellectual capital as arguably the predominant factor of production of our time, shareholder primacy remains largely unchallenged and the rules of the game remain largely the same.

The 20th century saw changes in corporate social accountability in the form of increased restrictions and the acknowledgement of several key stakeholders. This occurred in the form of anti-trust legislation, increased regulation of capital markets, environmental, workplace and product safety standards, anti-discrimination legislation, employee health care coverage, severance pay, employee pension funds etc. all illustrating a necessary shift in corporate social accountability and an expansion of the corporation’s obligations to stakeholders such as employees and consumers as well as the environment.

In the U.S. and the U.K., the pace of such change was mired by government liberalization policies by both the Reagan and Thatcher administrations in the post-1970s. The dissolution of the Soviet Union and the political and ideological decline of communism added further clout for the case of market capitalism and liberalization and the Washington Consensus defined the dominant ideology for most major multilateral agencies, thus resulting in the almost global adherence and transmission of these principles.

The increased significance of the civil society added much needed dynamism to the discourse surrounding corporate social accountability. Corporations became exposed to greater levels of scrutiny than any other time in history. Furthermore, civil society is in a unique position to act as a mediator between the corporation and the state, thus providing a forum for the verbalization and legitimization of new principles and generating productive dialogue.

The process is further facilitated by the actions of multilateral organizations such as the United Nations that provide a forum for the legitimization of voluntary norms and principles as illustrated by initiatives such as the UN Global Compact , the OECD Guidelines for Multinational Enterprise etc. These initiatives provide useful guidance regarding corporate social responsibility although their overall effectiveness in changing corporate behaviour is limited by their “soft” nature.

Thus, the evolution of corporate social accountability can be considered in terms of an expanding universe of recognized stakeholders and participants, one that may one day incorporate future generations as issues of intergenerational equity gain greater prominence in development and legal discourse.

The evolution of corporate social accountability has historically occurred in a largely piecemeal manner.  Whether the current public outcry for improved corporate accountability and governance as exemplified by the Occupy Wall Street movement will yield a substantial turning point, only time will tell.

Ultimately, business functions due to public consent and its fundamental purpose is to meet the needs of society in an efficient manner. However, the disconnect between corporations and the society still remain. Approaches involving market and government regulation induced shifts have not been sufficient. Considering the urgency of major environmental problems we are currently facing,  it is evident that meaningful dialogue and negotiation regarding corporate social accountability should be prompted, systematic and purposefully induced rather than relying on the piecemeal approach of the past.

Considering the scale, complexity and multinational nature of corporations today, international law provides us with the most promising arena for the development and negotiation of truly universal actionable norms and principles.

This too presents certain limitations, specifically with regard to the realistic level of representation and participation of certain parties as well as the general lack of accountability of corporate bodies in international law.

The lack of corporate liability in international law segregates corporations from the most promising and comprehensive forum that is available for discourse. Furthermore, the lack of corporate accountability in international law insulates corporations from the consequences of their actions thus impeding a necessary evolution of internalization and introspection which could otherwise lead to a more self-regulated consideration of stakeholder needs. A possible solution to this may be to bring corporations under the jurisdiction of international law, thus creating a forum sufficiently large enough to internalize the interests of a greater number of stakeholder groups.

Generally, with the exception of a few multilateral treaties, corporations as non-state actors are not directly party to international law and as such do not bear rights or duties and cannot be held directly responsible for wrongful acts. During the Rome Conference in 1998, the Statute of the International Criminal Court came close to incorporating legal persons such as corporations under its jurisdiction. However, the proposal was later omitted due to complexities of procedures and principles. Thus, corporations cannot currently be directly prosecuted by the Court.

International legal instruments address corporations either through binding multilateral instruments such as International Labour Organization (ILO) conventions which individual states are obligated to enforce or in the form of non-legally enforceable soft law such as the 1992 Rio Declaration on Environment and Development.

Thus, it is expected that host nations will implement and enforce these laws and codes of conduct upon corporations operating within their country. However, states are often unable or unwilling to hold corporations accountable if, for example, they are in dire need of foreign investment or if they have vested interests that are contrary to the welfare of their people or the environment such as in the case of corrupt regimes. For binding instruments, failure to comply will mean that action can be taken against the state that has ratified the instrument but not directly the corporations that have violated it.

As mentioned previously, a few multinational treaties such as the 1969 Convention on Civil Liability for Oil Pollution and the 1982 UN Convention on the Law of the Sea do impose direct obligations upon corporate actors. However, such examples are quite rare.

A major barrier to direct enforcement is the issue of complementarity. One of the reasons that legal persons were not brought under the jurisdiction of the ICC is that the international court was intended to be complementary to national jurisdictions so as not to undermine the sovereignty of individual nations. Thus, there was concern that extending international legal obligations to corporations and creating enforcement mechanisms to oversee compliance would compromise the authority of individual states to decide for themselves which norms they choose to follow.

As remarked by noted lawyer and academic Jonathan Charney in 1983, “the continued viability of the international legal system depends upon the close conformity of public international law to international realities”. The failure to recognize the need for direct corporate accountability under international law is to neglect such realities and impede the evolution of a more harmonious relationship between corporations and the greater society.

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A novel way to help women in the workplace

Yesterday, I attended the Global Social Responsibility Conference organized by the Bangladesh German Chamber of Commerce and Industry. One story of corporate social responsibility that I found particularly compelling was that of Aboni Knitwear, the 2012 winner for Most Innovative Idea at the Social and Environmental Excellence Awards held in Dhaka, Bangladesh.

The factory has a workforce that’s 60% female so the management created a daycare center and produces and distributes sanitary napkins to employees below cost at less than 50% of their market value to reduce employee absenteeism so that female employees do not have to needlessly forgo career and income. I think this is a wonderful idea and I would love to see more employers in the developing world replicating it.

It’s a great example of an intervention that seems relatively small but is immensely impactful. For men who may be confused by this, sanitary napkins equal mobility and reproductive health and are financially out of reach for the majority of the world’s female population.

CSR in Bangladesh: Untapped Potential

During my Masters, one of my major areas of interest was Corporate Social and Environmental Accountability, which opened my eyes to the true untapped potential of Corporate Social Responsibility (CSR). When implemented shrewdly and strategically, CSR must take into account the competitive context of each individual business to specifically tackle those issues for which it is particularly well suited and aim to maximize synergy between the business and the greater society within which they are embedded.

CSR in Bangladesh is usually implemented in a rather superficial manner wherein the activities undertaken are not strategically linked to the business organization’s activities and operations but are limited to isolated cases of corporate philanthropy with little planning with regard to the maximization of positive impacts.

Businesses must actively work to identify how their activities may be aligned to maximize positive social and environmental outcomes through interventions that are cost-effective and in their long term best interest. I highly recommend the work of Michael Porter and Mark Kramer to anyone who is interested in making the most of their company’s CSR programs.