The problem of poverty presents the
opportunity of labour exploitation. Opportunities to profit
out of the misery of others occur in a variety of trades,
1
including flowers,
2 textiles,
3
oil,
4
and diamonds.
5 *104
Multinational companies can make a
killing on their investments-literally.
6
Often, as in the case of conflict diamonds,
7
the source of the commodity resulting from exploitation cannot
be traced.
8
Not only are labour exploitation patterns
recurrent in several industries, human rights violations occur
throughout the third world in places as diverse as Saipan,
9
Ecuador,
10 Papua New Guinea,
11
Indonesia,
12 Myanmar (formerly
Burma),
13 and Nigeria,
14
and often implicate first-world multinational corporations.
15
The violations of human rights are just as
wide-ranging. Indentured servitude,
16 child labour,
17
and slave labour
18 are typical
violations;
*105
however, even charges of murder or
genocide are sometimes alleged.
19 Quite simply the
fact is that consumers want cheap goods, and third-world
labour, particularly child and slave labour, is cheap.
Companies exploit third-world labour because exploitation is
profitable.
20
These facts, and the instability of local
governments,
21 often put
corporations doing business in the third world into
questionable positions. Usually these ethical problems are
resolved quickly by looking to whether profit is hindered or
aided.
22 While we may expect
a corporation to behave ethically when it costs nothing, we
should realistically expect the corporation to maximise its
profits when behaving ethically will reduce profits, even when
that means exploiting sweatshop labour, for example.
23
Partially, this is because the company will become less
competitive with other businesses that do not renounce
exploitative profits.
24 The fact that
competition, whether among corporations or states, can lead to
sub-optimal outcomes explains why law rightly imposes limits
on market transactions.
25
This Article explores market forces that
may contribute to controlling corporate behaviour and the
internal regulatory structure of the corporation. The Article
particularly looks at nonbinding regulation of the corporation
via codes of conduct and guidelines established
*106
by the company itself,
26
the industry,
27 pressure groups,
28
the state, or by international organisations,
29
such as the International Labour Organisation (ILO)
30
and the Organisation for Economic Co-operation and Development
(OECD).
31 The corporate
social responsibility movement seeks to influence directly or
indirectly or control corporate behaviour through a
combination of (1) marketplace activism (influence over or via
capital structure and sales of the corporation), (2) internal
self-regulation (codes of conduct),
32 and (3) shareholder
activism. Accordingly, this Article examines indirect
influ-ence via market forces affecting capital and sales, and
direct control or influence via the corporation's internal
organisation through codes of conduct and shareholder
activism.
Individually the soft-law norms explored
here are generally not very effective.
33
However, in concert with other regimes, they can encourage
improved human rights protection.
34 Thus, although the
state still plays a key role in the spectrum of international
legal entities, it is increasingly supplanted by sub-state and
supra-state normative regimes.
1. Multinational Corporations
Multinational corporations (MNCs) are
progressively more influential on the world stage,
35
and are only one of several nonstate actors challenging the
role of the state in international law.
36
Multinational corporations are extremely influential in world
politics.
37 They are loyal only
to profit and engage in business activity on several
continents. Multinational corporations undermine the hermetic
model of Westphalian sovereignty, which saw states as isolated
from each other and as the principle object of loyalty of
their subjects.
38 Capital mobility
also undermines the state as the primary and ultimate object
of power and loyalty on the international stage because it
defies the power of the state to regulate its own currency and
interest rates.
39 It is hardly
surprising that some commentators have gone so far as to ask
whether multinationals are or should be subjects of jus
gentium.
40 In fact,
corporations, like other nonstate actors, do have directly
applicable duties and rights under international law.
41
Thus, to that extent, corporations may be said to have limited
international legal personality.
42
Individuals also increasingly possess human
rights and duties under national law and international
treaties. Evidence of the limited international legal
personality of nonstate actors includes the U.N. Declaration
on the Elimination of All Forms of Racial Discrimination,
43
the U.N. Declaration on the Elimination of All Forms of
Intolerance and of Discrimination Based on Religion or Belief,
44
and the Rio Declaration on the Environment and Development,
45
inter alia. These conventions state explicitly (or sometimes
implicitly) that "private actors have both negative and
positive duties in respect of socio-economic rights,"
46
and recognise the limited international legal personality of
multinational corporations.
47 Thus, international
human rights laws can be enforced against corporations.
48
*109
3. Limits on the International Legal
Personality of Nonstate Actors
There are limits, however, on the
international legal personality of nonstate actors. Although
corporations certainly have great de facto influence in
international relations, they do not have a constitutive power
in the formation of international law. Even so, nonstate
actors such as individuals, corporations, and the World Bank
49
can at least contribute to the formation of customary
international law.
50 This is
accomplished by aiding in the process of elaborating norms,
51
even if sometimes only as observers.
52
Market forces encourage corporations to
exploit third-world labour. Is there any way to harness those
same forces to encourage corporations to work for better
labour standards in the third world? The answer to this
question is a qualified yes: market forces alone will probably
not suffice to improve human rights; but when market forces
are linked to legal regimes they may encourage improved
working conditions for third-world labour. We reach this
conclusion by examining disincentives and incentives for
corporate action in both capital and consumer markets.
*110
1. Disincentives for Unethical Action
Law controls behaviour in capitalism by
making the undesirable unprofitable and the desirable
profitable. We thus examine disincentives and incentives in
capital markets and sales in order to determine where pressure
can be successfully brought to influence corporate behaviour.
When looking at capital markets, it is
noteworthy that churches, pensions, universities, and
foundations oppose human rights abuse in principle, and yet
invest funds in companies.
53 Corporate behaviour
can thus be influenced by threatening to disinvest these
funds.
54 The change in
corporate behaviour is induced indirectly by the threat that
investors will disinvest and that institutional lenders will
make loans contingent, or even stop lending entirely, on the
corporation changing its behaviour to better respect human
rights. Activists can therefore seek to reduce the credit
rating of corporations by demonstrating their poor human
rights records.
55 Bankers are prudent
and may be more reluctant to invest in companies that tolerate
or even encourage human rights abuses because the violation of
human rights generates political instability, increases the
risk of war (with attendant property destruction), and risks
nationalisation of the investment.
56
As for their sales, corporations that
violate or tolerate violations of human rights risk not only
capital flight as individual and institutional investors
(usually in equities and debt instruments respectively)
disinvest, they also risk consumer boycott,
57
protests,
58 or being denied
local or national procurement contracts.
59
It may be counterintuitive, but market-based remedies may have
some effect on changing corporate behaviour because a business
with no capital and no sales has no future.
*111
2. Incentives to Act Ethically
Not only can negative disincentives
discourage human rights abuse, but positive incentives can
also encourage companies to behave ethically. In capital
markets, there is a segment of investors that is more
interested in investing ethically than in maximising the
profitability of their investments. Ethical investment funds
exist to serve this market.
60 One possible reform
proposes to create an ethical stock index.
61
As to consumer markets, just as there are ethical investors,
there are also ethical consumers. Some consumers prefer
ethically manufactured goods.
62 Therefore, product
labelling is another practical way to encourage companies to
act ethically by making it profitable to do so. Labelling
consists of affixing a mark to a product so that the user
knows that the product was manufactured or produced according
to certain norms of labour. For example, "Rugmark" indicates
that luxurious rugs from the Indian subcontinent were not
produced with child labour.
63 Similarly, the FIFA
mark indicates that child labour has not been used in the
manufacture of soccer balls.
64
Thus, there are some market-based
incentives and disincentives in both the capital and consumer
markets that should encourage corporations to act ethically.
Market-based remedies alone probably will not solve the
problem of human rights, but in combination with binding
measures, they may help to improve the standard of living of
all people. However, one might wonder what legal remedies
exist to discourage corporate misfeasance and encourage good
corporate citizenship.
Market-based remedies alone may not fully
address human rights issues, but if we look at the internal
structure of the corporation, we may be able to discover other
ways to discourage corporate misfeasance and encourage good
corporate citizenship. One way to change corporate behaviour
is through the corporation's own internal governance.
*112
This argument asserts that if you want
to change the corporation's behaviour, take control of the
corporation. Other ways to change corporate behaviour are
through nonbinding codes of conduct, shareholder resolutions,
and proxy contests. Corporate governance may also be
influenced by changing securities regulation laws and by
including a voluntary or mandatory section in the
corporation's annual report that addresses the corporation's
human rights obligations and actions.
1. Nonbinding Codes of Conduct
A code of conduct is an internal or
external declaration of principles generally adopted by the
corporation as a guide to its managers and employees. The
corporate social responsibility movement seeks to persuade
corporations to internalise human rights standards by inciting
the corporation to adopt voluntary, nonbinding codes of good
conduct.
65 Essentially, the
hope is that by establishing standards, the corporation will
be encouraged to meet them. Codes of conduct may be created by
a corporation itself, an industry, national administrative
bodies, or international organisations.
Codes of conduct may seem only to be a
propaganda exercise. However, even where not obeyed and
existing only on paper, codes can be used to embarrass and
shame the corporation, or even as evidence of action ultra
vires if the corporation violates its own code or bylaws.
Further, such violations may be presented as evidence against
the corporation in the event of lawsuits against the company.
If a corporation has expressly stated that it will respect
human rights, even in a voluntary and nonbinding code of
conduct, it will have greater difficulty defending itself
credibly in court when it does not do so.
66
On the other hand, while codes of conduct
are not completely useless, believing that corporate
self-regulation alone will prevent human rights abuses in the
name of profits requires either naiveté or disingenuity.
Corporate social responsibility is usually nothing more
*113
than a public relations exercise, at
best intended to improve the image of the corporation and at
worst to whitewash corporate exploitation and delay the
establishment of binding legal norms.
67
Corporate social responsibility is not always merely a
smokescreen, however. Sometimes, as in the case of generic
drugs used to hinder HIV, pressuring corporations to act
ethically works--although such victories are clearly the
exception,
68 given that codes of
conduct generally do not influence corporate behaviour.
69
For example, the nonbinding and voluntary Sullivan Code of
Conduct touted in South Africa during the apartheid era,
70
and the MacBride principles in Eire,
71
had only limited and uncertain impact on their targets.
72
Empirical studies have shown that there is a weak correlation
or no correlation at all between profitability and social
responsibility;
73 however, no study
has shown that social responsibility decreases profit.
74
For these reasons, codes of conduct should
be viewed with scepticism. Corporations will not regulate
themselves into competitive disadvantage. Codes of conduct,
however, are not the only corporate governance remedy for
human rights violations; the shareholder activism
*114
model also seeks to influence
corporate behaviour by encouraging the corporation or its
shareholders to renounce profitable exploitation.
2. Shareholder Activism Through Shareholder
Proposals
The principle legal vehicles of shareholder
activism are shareholders' proposals (also known as
shareholder resolutions), which are introduced into proxy
statements and placed before the shareholders for approval or
disapproval.
75 Shareholder
proposals seek to induce corporate change from within by
proposing and implementing resolutions that will prohibit the
company from abusing human rights.
76 A shareholder
proposal is a "recommendation or requirement that the company
and/or its board of directors take action, which you intend to
present at a meeting of the company's shareholders."
77
Shareholder resolutions can be used to amend a corporation's
bylaws,
78 and to propose
action for the corporation to take or forgo. Shareholder
resolutions can be used like a plebiscite recommending
policies to management, or like a referendum presenting
actions that management must undertake. Ideally, a shareholder
resolution will influence management to change its practice
and may even result in the selection of at least one member of
the corporate board of directors who will represent the
interests of the activists.
Shareholder resolutions and proxy contests
to cause disinvestment, for example, can sometimes, but not
always,
79 generate results.
Rodman demonstrates this fact and documents in detail the
exact intricacies of bank and corporate disinvestment in South
Africa. There, bank disinvestments not only failed to inspire
government initiatives, they in fact only followed government
initiatives.
80 The private sector
*115
was simply less responsive than the
public sector--although private sector disinvestments did
ultimately occur. Rodman then compares these ambiguous facts
with failed activism in Burma/Myanmar and Nigeria with at best
a mixed record as to South Africa.
81 Successful
shareholder resolutions to cause corporate change are the
exception. Other empirical studies have also concluded that,
like codes of conduct, shareholder activism is generally not
very effective at encouraging corporate social responsibility.
82
In sum, the empirical evidence is against corporate codes of
conduct as a meaningful reform.
Another remedy against a corporation that
violates the principles of human rights is to seek revocation
of its corporate charter.
83 In the common law,
this is accomplished through the writ of quo warranto,
84
or through a proxy contest in which the insurgent activists
present a resolution for adoption or rejection by other
shareholders (note here that the activists would have to be
shareholders to wage the proxy contest). At least under United
States law, shareholders must be provided with a list of
shareholders or the corporation must mail the proxy for them.
85
If the shareholders win the proxy contest, their costs will be
reimbursed.
86 If a majority of
the shareholders adopt the resolution, then management has to
implement it.
Finally, it is worth pointing out that
writing binding ethical norms into the corporation's structure
could be used as an anti-takeover strategy. Socially conscious
clauses inserted into a company's articles of incorporation
could be used as a "poison pill" to make the corporation less
attractive to hostile takeover.
87
*116
Of course, corporate governance
remedies do face a serious practical difficulty: shareholders
and directors share a common cause to enjoy the (ill-gotten)
profits of labour exploitation. Therefore, corporate
governance as a remedy for exploitation will not alone solve
the problem of labour exploitation in the third world.
4. Prohibition of Deceptive Trade Practices
Another potential remedy for corporate
misconduct is to sue the offending corporation for deceptive
trade practices when it pretends not to exploit labour.
88
Both the EU and the United States have statutes against
deceptive trade practices. For example, in Kasky v. Nike Inc.,
89
a shareholder activist sued Nike for deceptive trading
practices, essentially alleging that Nike was pretending not
to exploit third-world labour.
90 Securities
regulation also punishes fraudulent statements and deceptive
omissions. For example, the United States Securities and
Exchange Commission (SEC) punishes false statements in proxy
statements and in stock sales either in tort or by criminal
prosecution.
91 Although any award
resulting from such a suit would go to the first-world
plaintiffs and not to the third-world worker, it would still
deter the first-world company from violating human rights.
Some reforms have been proposed to increase
corporate respect for human rights in the fields of taxation,
securities regulation, and annual reporting requirements for
corporations. Reforms to encourage respect of human rights
could include preferential tax treatment
92
or investment credits
93 for ethical
companies, and penalties for companies that act unethically.
While preferential treatments exist in some jurisdictions,
penalties for unethical activities are also interesting
potential sources of revenue for the state.
94
*117
Reform proposals also look to national
securities regulation for relief. For instance, the United
States SEC requires companies to make some information
regarding their human rights practices available to their
shareholders.
95 Proposals have been
made to strengthen disclosure requirements, for example, by
increasing the amount of nonfinancial information about the
company that must be disclosed in the annual report or
proxies.
96 That is hardly
radical: United States Supreme Court Justice Brandeis
advocated increasing nonfinancial disclosure requirements.
97
Further, full disclosure will increase economic information to
investors,
98 which makes good
economic sense because it reduces transaction costs by
enabling buyers and sellers to make decisions based on
complete information. Most efforts before the SEC have focused
not on financial disclosure, but with some success on
shareholders' rights to propose resolutions for adoption by
the company.
99
In addition to reforms of the tax system
and securities disclosure requirements, another law reform
would require corporations to perform an annual social audit
along with the ordinary annual report to outline the company's
human rights policy and record.
100 Social audits
could be included in a company's annual report at little cost
and would provide investors valuable information about the
company's moral practices; a company that acts unethically
outside of United States territory is more likely to behave
unethically at home, and one
*118 that respects human rights is more
likely to be a secure longterm investment.
101
In sum, there are a variety of market
incentives that can be introduced into national law to
discourage unethical corporate behaviour. Such laws, coupled
with universal jurisdiction,
102 would be an
effective method of improving business practices and possibly
profitability, as well.
We have seen that the regulation of
corporations under either civil or criminal theories is far
from perfect. However, we have also noted that several market
incentives can be taken advantage of in practice. This has led
some to suggest that we are witnessing the rise of a new lex
mercatoria.
103
Unfortunately, attempts to analogise
corporate liability for violations of human rights law to
medieval lex mercatoria are ill founded. This is because the
analogy is factually incorrect, theoretically inapposite, and
not practically workable. Medieval lex mercatoria featured
specialised courts that served the interests of merchants, not
consumers.
104 It was
fundamentally a private law of contract and arbitration. This
is very different from contemporary human rights law. While
there has been a revolution in human rights since 1945 as a
result of the transformation of the Westphalian state system,
105
it cannot realistically be compared to lex mercatoria. Lex
mercatoria concerned only private parties, was binding, and
was a result of voluntary
*119 agreement.
106 None of that is
true of contemporary human rights law. Although the corporate
social responsibility movement proposes codes of conduct to
govern private behaviour, these codes are voluntary and
nonbinding. The human rights system also features binding
norms; however, those norms are imposed by states or
international organisations, not by voluntary agreement. For
these reasons, the analogy between contemporary human rights
law and lex mercatoria is inexact. Further, corporations are
not the leading force of protection of human rights. We need
only look at the facts in Doe v. Unocal Corp.
107
or Wiwa v. Royal Dutch Petroleum Co.
108
to recognise that corporations can and do profit from
exploiting third-world labour. To expect them to do otherwise
in the absence of state sanction is naive or disingenuous.
Not only is the analogy between lex
mercatoria and the corporate social responsibility movement
factually incorrect, it is also theoretically inapt. Market
mechanisms based on alienable property rights cannot logically
be the foundation of a system of protection of in-alienable
human rights.
Another practical objection to the
comparison of modern human rights and medieval lex mercatoria
is that human rights guarantees are not necessary to maintain
a functioning market. Because market rights are neither in
theory nor in practice the cause of human rights, attempts to
ground, model, or analogise human rights and market rights are
inapt. There is a correlation between economic development and
human rights; however, a basic scientific error is to confuse
correlation with causation. Human rights may be a function of
a society's economic development, but they do not arise out of
individual market transactions. Although market transactions
do depend on and assign private individual property rights,
those rights are by their nature alienable. In contrast,
fundamental rights are conceived of as inalienable. Moreover,
the error of trying to ground civil rights in market or
property rights can be seen just by looking to history. There
we can note that the fascist dictatorships had nicely
functioning markets, yet offered little or no human rights
protection. Thus, if there is a correlation between human
rights and market rights it is not causal. Additionally, even
though human rights and property rights may coexist, they are
not necessarily mutually reinforcing. After all, it is the
property
*120
rights of first-world corporations
that impel them to violate the human rights of workers and
consumers in the third world.
For all of these reasons the analogy
between modern human rights law and medieval lex mercatoria is
unsuitable. Lex mercatoria concerned voluntary transactions
between private persons. Although there are some market
remedies available to human rights law, these must be seen as
the carrot in a "carrot and stick" approach, and require
active state sanctions in order to function.
As ordinary as directly enforceable rights
and duties held by non-state actors under international law
may seem today, such rights are a radical departure from the
Westphalian system.
109 The increasingly
common imputation of rights and duties to non-state actors
under international law occurs partly because of the
integration of world trade and capital mobility-- i.e.,
globalisation.
110 This shift of
rights and duties from states to nonstate and super-state
actors defines one aspect of the transformation of the
Westphalian state system. Yet the post-Westphalian system is
only beginning to develop regulatory mechanisms to govern
multinational companies' behaviour.
Codes of conduct alone are one mechanism of
governance; however, they are not the best way to prevent
human rights abuse in the third world because voluntary codes
of good conduct can be used as camouflage to delay, confuse
and conceal real reform. In addition, expecting corporations
to self-regulate is realistic only when ethical conduct and
profitability are linked. On the other hand, codes of good
conduct, in combination with binding rules--in either civil or
criminal law--can be used to promote higher standards, while
the binding rules will guarantee at least minimum standards.
The corporate social responsibility movement is thus not
necessarily a mere smokescreen, but it will not alone prevent
human rights abuses because such abuses are profitable. Still,
to some limited extent, investor, consumer, and corporate
self-interest can be harnessed to serve human rights, for
example
*121
via shareholder activism.
111
Codes of good conduct and labelling schemes are just two of
several efforts to link profitability and social
responsibility.
112 When combined
with the international law instruments, codes may encourage
higher standards, while the positive law guarantees at least
bare minimum standards. Here, as in human rights conventions,
"hard" law guarantees minimum standards, and voluntary codes
(or conventions) encourage higher standards. The fact that the
corporation has long since escaped regulation within the
Westphalian model explains why that model is transforming into
a "spectrum" of actors and a system of global governance.
Corporations are one of the new actors in the spectrum of
international actors and thus corporate social responsibility
and shareholder activism are one aspect of the
"Post-Westphalian" system.