The attribution of responsibility in a global economy
What power division between State and Corporations?
Claske Dijkema, 07 January 2010
- corporate accountability
- Corporate Social Responsibility
This article has been written for the course « Corporate Social Responsibility in the Global Economy » at Grenoble Ecole de Management with the financial support of the regional authorities in Rhône-Alpes.
As a result of globalisation and in the absence of a clear international framework regulating the rights and responsibilities of corporations, their responsibility in today’s world is above all a debate. It leads to the question of the relationship between corporations and the State and feeds into a much larger societal and philosophical debate about the organisation of society. The fact that no easy answers are given is logic if we realise that the essence of the debate is the distribution of power. The article focuses on the question of corporate social responsibility in cases where the State fails to protect the interest of the population.
« Corporate Social Responsibility is a pragmatic response to a philosophical question” said Bertrand Collomb, the Président d’honneur of Lafarge in an interview1. This article agrees with him and points out one philosophical question and that is: What should be the division of power between State and corporations? Consequently the following question can be deduced from it: What relies of the responsibility of States and what of corporation? Answers to these questions are changing in a changing international context, that of globalisation. They are also varying according to the political context which differs from one State to the other. Bertrand Collomb makes for example a distinction between three categories of States: omni-present states, weak states and retreating states. Who has responsibility for the population when states are failing? There is a tendency among corporations to point the finger to the global political system, like the United Nations, while international citizen’s organisations campaign for a responsibility of companies in the case of failing States.
If a larger responsibility for taking social and environmental issues into account in business operations is required from companies, how can they make decisions that go against the economic interest of the company? Who is the arbiter between social and economic interests and to whom are companies accountable? To answer these questions I have used roughly 20 interviews, drawn from corporate websites, academic articles, documentaries and personal interviews carried out in July 2009.
This paper is constructed as following: 1. internationalisation and its impact on the distribution of power. This section also looks at the question in what way power is linked to the question of social responsibility 2. Who arbiters between conflicting interests? 3. The Corporate social responsibility agenda is determined in dialogue with society 4. Corporations as social actors, to whom are they accountable? 5. Perceptions of corporate and State power.
1. Internationalisation of trade and its impact on the distribution of power
Ever since the industrial revolution and the rise of corporations as new form of institutions, the question of the responsibility of business has been posed. What is new about the debate is the increasing international character of the question and the changing relationship between business organisation, State and civil society since the end of the Cold War against the backdrop of globalisation and new technology. Globally, corporations and civil society have increased their power position, in many cases at the detriment of the State.
The 20th century saw the rise of the multinational business corporation, a company that has within its own organisation multiple offices abroad. The first sector that was concerned was the extractive industry. While the state’s sovereignty ends with its boundaries, multinationals increasingly cross these boundaries from the 1960’s onwards, which demands rethinking power relations and thus world politics. An early example of tensions that result from the contradiction between nation-States and multinational corporations was the export of Berliet trucks to China. In the 1960’s, at the height of the Cold War, the extraterritorial jurisdiction of the United States became an issue of debate, as American companies at that time, could not deliver to communists. When the French truck manufacturer, Berliet, dealt with Frauhauf, a daughter of an American company, it received an order from China. This raised conflict with the US because it contradicted American jurisdiction.2
Internationalisation of trade or economic globalisation has challenged the State’s role as an institution « above » companies and as a regulator of the interactions between them. Corporations are both allies and enemies. They collectively have to face the conditions in which they operate, but they are also competitors in the market. To regulate competition, the State has put in place common rules like contract law, private property law, a guaranteed currency, an available work force and the conditions under which labour can be bought. Knieper points out that (1976) only within its national territory, the State is « above » competition to exercise collective will. Internationally, the State is partly in competition with other States.
As a result of the increased power of multinational corporations, many voices argue for a larger social engagement of these organisations. One of those voices comes from Sam Gibara, CEO of Goodyear Tire who said in an interview that: “Corporations need to become more trustworthy, because there has been a trend of authority from the government to the corporation.” There is a “need to assume responsibility and a need to become corporate citizens of the world. [..] A corporation needs to respect the communities in which it operates and needs to assume the self-discipline that in the past governments required from it.”3 Another of those voices comes from the British NGO International Alert, who also argues that the context of business is changing as a result of post-cold war developments. They identify key trends like privatisation, liberalisation, emerging markets, technological change, increased societal expectations, global competitiveness and changing ‘governance structures’ which result in a weakened power position of States at the benefit of private actors4. The table below describes these seven trends and points out its consequence for the distribution of power between State and private actors.
Table: Trends in economic globalisation and their consequences on power of Private versus Public actors.
|Privatisation||Privatisation of state-owned enterprises has become a central feature of economic and political transformation in countries all over the world, following the fall of the Berlin Wall and the end of the Cold War.||Public sector’s share and direct control of national economy is shrinking, while the influence of the private sector has increased.|
|Liberalisation||Under the influence of the international organisations (WTO, IMF) at the end of the cold war, countries around the world have opened their markets to foreign investment, resulting in dramatic increase in cross-border flows of private capital, people, technology and products.||Less protection for local economies, who are supposed to compete with global markets. Some have been able to protect their markets to a better extent than others. (East Germany <=> China)|
|Emerging markets||In relation to those phenomena and as a result of political transformation, there is a growing private investment-both foreign and domestic- in many developing and transition economies. They represent growing share in world trade. Economies are opening up their infrastructure, energy, mining, manufacturing, banking and agribusiness industries to private investors=> strategic industries. As such their transfer to partial or full private ownership has important political, as well as economic implications.||Few companies with global aspirations can ignore emerging markets. Yet, challenges and risks of operating in these fragile contexts, culture, governance: ancient cultures that have a different relation to land and have been highly hierarchical. Potential for conflict, based on strategic resources|
|Technological change||New technologies have increased the reach and scope of the private sector=> dramatic growth in information and communication technology: New market opportunities; Competitive pressure; Biotechnology, patenting genomes, changing drug and seed industry for example.||Creates new social challenges and expectations by underpinning the blossoming of civil society, better connecting them allowing for mass mobilisation on a global scale.|
|Increased societal expectations||Privatisation and liberalisation =>power to private sector; Technological advancements=> empowerment to civil society organisations and citizens.||Increasing organisation global civil society => strong focus: greater accountability on the part of both governments and business. ‘Networked world’ offers few hiding places for companies deemed to operate unethically or irresponsibly, especially multinationals.|
|Global competitiveness||Increased competition in global economy. Failure to deliver=> board upheavals, market erosion and take-overs.||Companies must be responsive AND to growing social agenda AND to commercial agenda. Some argue that the two are positively linked but there are numerous examples where those can clash.|
|Changing ‘governance structures’||For some 70 years nation-states have been the most important institutions in international relations, holding final sovereignty about actors. When national actors have become increasingly international, governments have lost some of their power since they are limited by national frontiers. International organisations have somewhat filled this gap but they have no power to impose.||Role of governments has changed, they are no longer imposing institution but become increasingly one actor among others. Their role nowadays exist much more of balancing the roles, responsibilities and capabilities of different levels of government, different actors and different sectors|
The changing relations between actors have a consequence for the allocation of responsibility. In the post Cold War period at the end of the 20th century, the phenomenon of failing states reinforced the absence of adequate national laws to limit the power of corporations. At the dawn of the 21st century the US defined weak states as the most important threat to international security. The aftermath of the wars in Iraq and Afghanistan demonstrates however that States cannot easily be built, which requires us to rethink the State as principle regulator of social and economic interactions. Betrand Collomb (Lafarge) therefore understands that corporations are looked at for taking responsibility for situations where States fail to do so “since the corporation is the driver of globalisation, it is also blamed for some of its consequences”.5 Today, few CEO’s publicly dare to defend Milton Friedman’s credo that « the social responsibility of business is to increase its profits»6. When Friedman continues to argue that the principle objective of a company is to optimize its profits and therefore its returns to shareholders, many others like to portray themselves as social investors and philanthropists. The internationalisation of trade and the absence of univocal regulation play a large role in this trend.
#2. Who arbiters between conflicting interests?
While most actors will agree that companies have some responsibility for the social well-being of their stakeholders7, they do not agree on how to shape this responsibility. The translation from an idea(l) to an implementable policy arouses considerable debate. One of the issues of debate is whose interests are prioritized if business interests contradict citizen’s interests and who should be the arbiter?
While in principle it is the role of the State to manage these situations and to make laws that regulate the actions of companies that can deal with these conflicts, in reality states do not play this role in numerous cases. For example, when the State itself is a corporate actor and therefore not “above” companies and in case of a collusion between the economic and political elite, or when State power is too weak to implement its laws. I will present two opposing voices of corporate actors in response to the question whose interests should be prioritized if business interests contradict citizen’s interests 8. Firstly, Milton Friedman insists on the primacy of shareholders’ interests in choosing between economic or social interests. Secondly, Sam Gibara, the CEO of Goodyear Tire stresses that it is the role of the CEO to arbiter between economic and social interests, between shareholders and stakeholders.
Interview 1. Milton Friedman: “the company’s mission is to serve its shareholders”
According to Friedman the idea of an “ethical company” is an oxymoron, since the corporation is by its nature compelled to maximize its own interest, whatever the external price. . He states that corporations have only one duty: to promote their own and their owner’s interests. They have no capacity and their owners no authority to act out of a genuine sense of responsibility to society, to avoid causing harm to people and the environment, or to work to advance the public good in ways that are unrelated to their self-interest.
Interview 2. Sam Gibara, CEO Goodyear Tire: corporation broader than shareholders
“The Government relinquished some of its responsibilities that the corporation is picking up in relation to globalisation.” (..) “ The corporation is much broader than its shareholders. They are vital to the organisation because they fund its growth but the organisation has customers, the organisation employs people. The organisation has many more constituencies with various needs that it all has to address.” Occasionally these constituencies have conflicting interests. It is the role of the CEO to manage these conflicts.”
Both men recognise a possible tension between economic and social interests. While Friedman says that shareholders’ interests should be prioritized over other stakeholders, Gibara refuses to give a general rule in dealing with these conflicts. When he insists on the role of the CEO in managing conflicts of interest, he stresses the power of the CEO in decision-making and prioritises relationships over rules in dealing with conflicts of interest. But what does is mean if the CEO’s role is to manage these conflicts. Isn’t that what the State was about with the legal framework it provides? In principle, governments set, through their laws, the framework for conflict settlement in case of clashing interests among corporate, public and civil actors. Increasingly, these problems surpass State regulation. The outcome of dispute settlement is the result of negotiations between actors, based on power relations and mutual dependence among actors. The fact that power is an important element in dispute settlement can be illustrated by the following examples of companies having changed their position as a result of campaigns organised by civil society organisations. Firstly, the international campaign against blood diamonds resulted in the Kimberly process that makes diamonds traceable from the mine to the retailer. Hereby diamonds from areas where conflicts rage can be excluded in the trade and their capacity to fund wars becomes limited9; Secondly, the French branch of Amnesty International campaigned against the insurer AXA for its investment in the weapon industry, or more precisely in the production of cluster bombs. Its action existed of sending 40.000 cards to AXA’s president. After one and a half year, the company stopped investing in these munitions 10; Finally Nike took the decision to improve worker’s conditions in “sweatshops” in Asia after being pursued in court as a result of a Class Action11.
These decisions of corporations in favour of social interests and at the cost of economic benefits have been the result of mass mobilisation by civil society organisations rather than a sudden awakening among corporations about their responsibility. The capacity to mobilise power and resources is essential in determining the distribution of responsibility among actors.
#3. The Corporate social responsibility agenda is determined in dialogue with society
If many companies provide services, undertake development and take care of the waste they produce, it is not because one day they woke up and felt it was their responsibility to do so, but because enough citizens felt it was so and made their voice heard in public fora. Bertrand Collomb (Lafarge) confirms this process when he explains that: « As long as nobody was interested in the dust that produces cement factories, we were very happy to make dust! When people began to find that it was unbearable, we said to ourselves that we should respond to this demand.”
In 1928, the sociologist William Thomas formulated a theorem that stated that ‘if men define situations as real, they are real in their consequences’. What men judge to be true or false, good or bad, is a cultural process, a debate between different actors and its outcome is influenced by power relations. Public opinion is fashioned by the media and is quite volataile. The following anecdote about VCFI12, working on a construction project in Africa, demonstrates the functioning of this theorem and illustrates the power of new media.
Interview: power of the media 13
One day, we were looking to hire 500 employees for a certain construction projet. That day, 2500 men came. So when we hired 500 of them, there were 2000 disappointed. That same day, a journalist on holiday was passing in the area. He wrote a press article, saying something like « 2000 people demonstrating before VINCI country headquarters [in Africa]». As a result of the rapid information transfer through internet, Agence Presse Française had picked up on the article in the 10 minutes that followed. It made drop the price of our shares and this was just at the time when we were buying another company with the exchange of shares. Internet is fast and it may hurt.]]
The Thomas’ theorem is relevant for the discussion on Corporate Social responsibility because it shows that there is no objective answer to where the domain of responsibility of companies and that of States and other actors begins. It is highly a social process. Truth becomes what people consider to be true. Sometimes it happens, as in above example and in the Brent Spar case, that truth is constructed on erroneous information. With the scuttling of the obsolete oil platform Brent Spar in the North Sea, causing a boycott of its products, Shell thought to have found an excellent technical solution. Betrand Collomb (Lafarge) comments on this example, saying that: “It makes us understand that it is futile to do what you think is right if it is not recognized as such by others. So you need a dialogue on whether we understand what society expects from us. The agenda is not fixed by us, but by people who often, according to our experts, do not have sufficient knowledge of the problems. But it doesn’t matter! The agenda is set through dialogue with society. »
#4. Corporations as social actors, to whom are they accountable?
On n’a pas formellement un responsabilité de faire telle ou telle chose. Ça ne veut pas dire, loin de là, qu’on ne fait rien 14.
Should corporations become social actors, would it be a good idea to make them socially responsible? Earlier on Sir Mark Moody Stuart argued that companies do not have a democratic mandate, so what kind of mandate do they have and to whom are they accountable?
Thilo Bode, the former executive director of Greenpeace argued in The Financial Times in 1999 that multinationals are much more accountable than governments: “Multinationals are much more vulnerable than governments because they have to be accountable to the public every day, while governments only have to be accountable once every few years [during elections].” Companies that are ruled well can be better than State institutions, yet how legitimate are their leaders, how to get rid of them if they make profit but bad public policies, who exerts control over them? Shareholders, and whose interests are they serving?15
We get another impression if we listen to Jean-Claude Weil, responsible for sustainable development at VCFI. In response to the question how Sogea Satom knows what a community needs with regard to small development projects that it implements while it constructs roads across Africa, he answers: “Maybe they [chefs de chantiers, together with headquarters, responsible for the allocation of small development budgets] don’t know what they [local population] need. Maybe they simply discuss with the people and it is the most influential that will achieve in obtaining something. Maybe it is basically not fair, maybe it is not the best way to allocate the funds, but it has its own merit. [..] It is a way to help directly and not to disperse money”.16 This example shows that companies feel some responsibility towards their stakeholders. Who they are, depends from company policy. Local decision makers are accountable to company headquarters. This stands in stark contrast with States who, in principle, have an obligation to all citizens.
The reality is that many corporations contribute to development and provide social services like limited forms of health care, not necessarily because they define it as part of their responsibility, nor because it is a committed strategy but simply because they are faced with a situation. This has been the case for Lafarge in South Africa, when it was confronted with a 20% infection rate of HIV/Sida in one its factories. This is the case for Shell in Nigeria. Its country manager, Basil Omiye, explains that the company provides services like health care and education, finances development projects etc. This necessarily creates a blur between government and Shell. When asked about Shell’s motivation to do so, Omiye responds that “there was no way we couldn’t even respond to the need on the ground. [..] I think just your basic business principles require you to respond”17 Sir Mark Moody Stuart however comments in an earlier interview that one of the dilemmas that Shell, as well as other development agencies, faced is how you sense what a community actually wants rather than what you think is good for them? Here he touches on the same issues as Jean-Claude Weil raised above.
Jean-Claude Weil continues to explain the social activities of VCFI and touches on their limits: “Prendre en charge quelques ouvriers sur un grand nombre, on le fait. Si le nombre est important, et l’ouvrier dit « ma femme est aussi contaminée et mes enfants etc ». Ca veut dire ce n’est plus une personne qu’on traite mais toute la famille et là l’entreprise a ses limites. C’est là ou elle ne peut pas substituer à l’Etat pour faire certaines choses.” This is a phrase that companies repeat frequently, “we cannot replace the State”. The discussion about the distribution of power and responsibility therefore merits to be further developed.
#5. Perceptions of corporate and State power
Many business leaders, especially in the United States, share the opinion that business and government should be partners. Anne Wexler, who works as lobbyist in Washington D.C., says: “Today corporations essentially feel that they are partners with government …they are not adversaries of government …The attitude that business is a victim of government is basically disappearing….People understand now that government’s got to be a partner, and you’ve got to work with them…Essentially, the business/government relationship is a symbiotic relationship.”
The CEO of Pfizer, Hank McKinnell, follows this same opinion when he explains how he sees political contributions: “We hope to elect people who have supported policies which are good for the nation and are going to strive to benefit us all…who support the right kinds of policies …who can participate in the political process widely”18
Above expressed opinions ascribe to the idea that one party should not yield power over the other, because partners means equals. So they should not regulate the other and should not exert sovereignty over the other. Joel Bakan, author of “The Corporation” finds this idea problematic. He wonders how business and the government can be partners. If people ought to be sovereign, represented by state, the relationship between actors is necessarily hierarchical. “It [democracy] requires that the people, through governments they elect, have sovereignty over corporations, not equality with them; that they have authority to decide what corporations can, cannot, and must do. If corporations and governments are indeed partners, we should be worried about the state of our democracy, for it means that government has effectively abdicated its sovereignty over the corporation.19
While statements above of Anne Wexler and Hank McKinnell reflect the idea of partnership, I did not encounter this argument in Europe. A reason might be the different role the State plays in both continents. When asked about the relationship between the State and corporations, a company like Lafarge, who is at the forefront of CSR, regards its power in comparison to States as overestimated. The only moment when the company apparently has some negotiation power is at the moment of investment. Betrand Collomb says « People make themselves a lot of illusions about the power relations between the State and companies » (..) but « once we have installed somewhere, especially because our activity concerns a heavy industry, we are in between the hands of the State »20. This sentiment is shared by Jean-Claude Weil21. He doesn’t see what power a company can have over the State. « There are no links, we are there to execute what is agreed on in the contract. We work mostly with State contracts and for those, we are entirely subject to the will of a State22 » The only power a company has is not to react to a certain tender if it is considered unethical. He feels that companies are attributed a responsibility that is not theirs as a result of a lack of courage among political players.
Interview: Political rather than corporate responsibility
On veut aujourd’hui de faire porter certaines responsabilités, d’être présent ou pas dans tel ou tel pays, parce que les politiques n’ont pas le courage de prendre des décisions qui à la limite s’imposeraient s’ils allaient au bout des choses, mais on ne peut pas reprocher aux entreprises de faire ou de ne pas faire ce que les politiques ne savent pas faire. Le jour où on sera capable d’avoir un gouvernement mondial ou l’ONU qui dira « on impose le boycott du coton ouzbèke parce qu’il n’est pas pris dans les bonnes conditions ». Ce sera une politique qui va générer ça. L’entreprise là-dedans, elle n’est que la cinquième roux de la charrette. 23
The “on” about which Weil speaks are NGO’s who have, generally speaking, a perception of multinational corporations as powerful. They would like them to use their power to pressure governments to respect human rights, perform good governance and protect the environment. Lissa Tassi of Amnesty International argues that: “states are currently the ones who guarantee the respect of Human Rights. However because of the growing role of companies in today’s world, we have to redefine what the former’s responsabilitry should be in terms of « influence spheres » .24
The former chairman of Royal Dutch Shell, Sir Mark Moody Stuart, has a more complex vision on the power companies have and should exert over other States. His view is undoubtedly formed as a result of the events that lead to the execution of activist Ken Saro-Wiwa in Nigeria, for which Shell continues to be criticized. He says: “There is no doubt that it [oil revenue] was inequitably distributed in Nigeria and we spoke out about it. A corporation has some responsibility for the distribution of the wealth generated by the production of the resource. It is a very delicate question though, because we have no democratic mandate. But he concludes the interview with: “What could we have done? Nothing, you would have to change everything in Nigeria’s history, and it’s entire system of governance. Governments do not necessarily listen to corporations.”25
Changes in international relations and the internalisation of trade have changed the locus of sovereignty. While in principle States and therefore its citizens are sovereign, in reality many citizens and States feel that power is placed elsewhere, pointing the finger to multinational corporations. The distribution of power is a subject of debate. Its outcome will determine the allocation of social responsibility. We have seen in the article that the outcome of the debate might be more informed by the capacity to mobilize resources and public opinion rather than an objective assessment. Media is a powerful tool to position oneself in the debate.
Bakan, J. , The Corporation, Free Press, New York, 2004
“Entreprise, syndicat, ONG : trois points de vue sur la RSE”, Sociologies Pratiques 2009/1, N° 18, p. 7-28.
International Alert, The Business of Peace, UK, September 2000
Van der Pijl, K., Wereldorde en machtspolitiek, visies op de internationale betrekkingen van Dante tot Fukuyama, 1992, Het Spinhuis, Amsterdam
Viers J. et Brulois V., “L’évidente interpellation de la sociologie par la RSE”, Sociologies Pratiques 2009/1, N° 18, p.1-6.
Williams, O.F., Houck, J.W. (eds), Peace through Commerce, Responsible Corporate Citizenship and the Ideals of the United Nations Global Compact, 2008