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2017-2018

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International
Corporate Governance and Transnational Corporations

 

 

‘As TNCs operate in countries with
weak regulations and institutions, the demand for Corporate Social
Responsibility (CSR) is increasing’. Discuss the CSR concept in relation to the
conduct and operations of TNCs.

 

Word limit: 3,500 words             

  
To be submitted by 29th January 2018

 

 

Abstract

Purpose
– The purpose of this essay is to examine the concept of CSR with special
regard to the theory of Legal Vacuum. I have tried to indicate that there are
structural limits to the implementation of corporate social responsibility
(CSR) in developing countries.

Design/methodology/approach
– This is a conceptual essay and critically discusses the concept of CSR and its
definition. In addition the essay examines how CSR norms impact the conduct and
operation of TNCs.  

Value
– The essay contributes to reassessment of some notable theories on the concept
of CSR and surveys the theory of “Legal Vacuum”.

Keywords
Corporate and social responsibility, Regulation, Legal Vacuum.

Paper
type Descriptive Essay

Abbreviations

TNC: transnational
corporation

CSR: corporate social responsibility

 

 

 

1.   
Introduction 

TNCs have a significant effect on
almost all industries of the increasingly globalized economy such as telecommunications,
pharmaceuticals product, retailing and wholesaling.”1 They are powerful entities which have a profound
political2 and social impact on every aspect
of modern life.

The political and economic power of
TNCs allows them control not only their own assets, but also the legal, social
and political climate of the societies in which they are located.

TNCs’ reckless behavior, with some
incidents occurring in the third world, suggests that they have least concern
about the environment, human rights and even human lives3. TNCs have committed crimes or involved in
violent actions to retain their control.4 Ttheir history is full of disasters
and scandals which in some cases ended up in the deaths of thousands of
innocent people.

Knowing
these facts, vital questions arise: if an institution is so harmful for
society, why it is still around? What capacity lets them expand without
significant constraints, and why is there an increasing demand to allow them to
settle in developing countries? Part of the answer, according to some
organizational studies, can be found in the desire of developing countries to
stimulate economic growth and employment despite the risks associated with
TNCs’ presence.5 They play a significant
role in producing direct and indirect employment by promoting the growth of
local suppliers.6

To control the above-mentioned
economic, political and financial powers, MNEs must be regulated. Since either
detailed national or international regulations are scarce, soft law and the
establishment of the concept of CSR have developed in response.

In tackling this essay question,
we need to examine two perspectives: TNCs’ and developing countries’. Why do
TNCs need to settle in more developing states and why do developing states need
to invite TNCs into their societies? I believe there are two main reasons: the transfer
of technology and to increase employment. Apparently, the national states
believe these two factors can contribute to swifter economic and technological
development. TNCs, on the other hand, wish to decrease their expenses and make
more profit for their shareholders.

This essay consists of four substantive
chapters. The second chapter gives a quick glance at the literature and reviews
the concept and definition of CSR. The final chapters are focused on CSR from the
perspective of host countries and TNCs. The third chapter tackles the notion of
CSR reviewing weak regulations in host countries. Fourth chapter is devoted to
the issue of the impact of CSR on TNCs’.

 

 

1.   
Concept and Definition of CSR

1.1.       
Literature

 Earlier observations on the CSR are
excessively pessimistic. However, in recent decades, TNCs’ social contribution
and their growing commitment towards the host societies have changed enormously.
Friedman believes that corporations should only focus on making more profit and
leave social problems to the government.7 A
major believer in shareholder primacy theory, he also argues that managers
should only be devoted to maximizing the interests of shareholders; any other
action to further social interest can be viewed as an exaggerated gesture.8 As
the Stakeholder theory has evolved, observers noticed that there are tight
relationships between corporations and their context which should be considered
by decision makers.9
Some scholars see this relationship as a tradeoff:

“CSR is
nothing but corporate in its widest sense and on many levels, to include all
stakeholders and constituent groups that maintain an ongoing interest in the
organization’s operations along with the society within which it operates.”10

Some
other scholars, however, are more optimistic and believe that CSR is more than
just a compromise between mutual interests. The corporations become involved in
activities beyond its own interests but for the good of the society; ‘…we
define CSR as situations where the firm goes beyond compliance and engages in actions
that appear to further some social good, beyond the interests of the firm and
that which is required by law’.11

McWilliams
and Siegel also modelled CSR as a “Quality Improvement” and developed a theory
about a kind of strategic management of the corporation which is based on CSR
norms called Strategic CSR.12 I think CSR is developing as a
means to make sure that a corporation is capable of doing business in a
sustainable way. Recent trends imply that the pessimistic approach to CSR has
been and is being replaced by productive perspectives.

 

1.2.       
Definition

Trying to find an inclusive
definition for CSR, one cannot be sure that a definition is equally applicable
to all societies because the social responsibility has significant ethical
aspects, and the norms of ethics vary from one society to another.

Although there is no globally
accepted definition of CSR,13
some scholars approach it as a matter of evolving international policy; i.e. “An
international policy issue that calls on corporations to be profitable in a
sustainable way by not harming human beings or the environment.”14

I believe that, like ethical
norms, CSR norms fluctuate from one society to another and as such, there can
be several definitions. Idowu and Leal Filho have put some definitions in a
table to illustrate the multiplicity of definitions.15

One can find however, some common
themes in all definitions: human rights, employees’ rights, environment support
and profit making.

 

1.3.       
 

1.4.       
Concept

1.4.1. Power
comes with monopoly

TNCs are very powerful entities
doing business on a widespread global scale affecting nations and policy
makers. The annual income of some TNCs can often surpass the GDP of developing
countries. Their power and authority necessarily entail responsibilities.16
Being aware of their power, they have always had the opportunity to use it
against employees, human rights and the environment. These three issues
describe the scope of CSR.

One cannot only focus on the
responsibilities of a TNC without considering its main reason for existence:
profit making. That is why I think the whole concept of CSR can be explained by
the “Triple Bottom Line” theory: people, planet, profit. This
theory implies that a business must be judged according to three criteria: how
it treats its employees, how its activity affects the environment, and how much
profit it makes.17

Friedman believes that the
existence of monopoly raises the issue of social responsibility because a
monopolist

“…has power and should discharge
his power not solely to further his own interests but to further socially
desirable ends.”18

Power and greed have underpinned
some horrible disasters against local populations or environments. In some cases,
they are just accidental events19 with
awful consequences to the environment and the loss of innocent lives.20 On
the other hand, there have been evil collaborations between TNCs and their host
countries which caused some terrible tragedies in the history.

1.4.2. Social
Responsibility

There are lots of examples of
TNCs providing equipment or even weaponry for governments against their own
people.21 For
example, Exon Mobile and its subsidiary Mobil Oil Indonesia provided the
Indonesian dictator, General Suharto with “blank shares”. In exchange, the Suharto
regime provided Mobil Oil with military units as security for the company’s
operations. For nine years, the Indonesian military killed, tortured and raped
many villagers under the pretext of security for Mobil

“Mobil provided the facilities
where the torture, rape, and execution of villagers occurred, as well as paid
the salaries of the soldiers who burned and robbed the villagers’ homes”.22

Societies, on the other hand,
have their own powers to force corporations to operate in certain ways.23 This is where the concept of responsibility
comes in because TNCs must obey both national and international law. The
problem is that there are not satisfactory regulations to restrict TNC malpractice.
This is the most important ground for formation of CSR movement in host
countries as well as their governments’ disinclination or weakness to place and
enforce strict regulations on TNCs.

However, some TNCs have been
remarkably serious in conducting their business responsibly. Recently, there
has been a growing tendency among TNCs to use their power in the interest of
society.

 

2.   
Weak
regulations in Host Countries

2.1.       
Legal vacuum

As mentioned above, even though TNCs are getting increasingly
stronger, there are not adequate national regulations to control their power. In
international sphere there have been efforts, but the success has been limited.

By virtue of those efforts, a soft law movement has been
established but this is not legally binding and can be easily ignored by both
TNCs and governments. This situation is often described as a “legal
vacuum” or an “accountability gap24  

The problem differs in the developed and developing worlds. Most
of the TNCs are based in developed countries where they are supposed to be
regulated under labour and environmental law. They are at the same time subject
to organizational supervision and must comply with codes of conduct and
guidelines such as OECD’s 1976 Guidelines for Multinational Enterprises
(amended 2000).

The best description about the nature of this document and
the extent of its compulsory nature can be found in the Foreword:

“… recommendations addressed by governments to
multinational enterprises operating in or from adhering countries. They provide
non-binding principles and standards for responsible business conduct … with
applicable laws and internationally recognised standards. … the only
multilaterally agreed and comprehensive code of responsible business conduct
that governments have committed to promoting.”25

There are other international codes and declarations
such as ILO Declaration26 which “provides direct guidance to enterprises on
social policy and inclusive, responsible and sustainable workplace practices”27 and Ten
Principles of UN Global Compact.

Recently, TNCs tend to draft their own codes of conduct to
regulate their own behaviour. It doesn’t seem realistic to me because most of
them are just general principles and sound like slogans. Regulating something
means to put detailed and specific provisions.

The other problem with codes, Guidelines and
principles is that not only they are not binding, but also there is no forceful
monitoring mechanism for implementation and compliance.28 Another
problem is that there is no standards to assess whether the objectives of the
respected regulations are achieved. In some cases there is even no specific and
indicated objectives.29

2.2.       
 

2.3.       
Weak Regulations

TNCs have increasingly been accused
of reckless behaviour to environment and violation of human rights and labour
law in developing countries.

Developing countries need to have
multinationals inside their territory. On the other hand, they have the historical
experience of colonialism and don’t want to surrender the control over their
profitable assets. This is a paradoxical situation.

Lack or weakness of regulations paves
the way for TNCs to breach the laws or bribe the officials of host country. TNCs,
sometimes, rather than taking the risk of breaching national codes, manipulate
national legal systems or hire lawyers to find loopholes in the law. For
instance, TNCs locate or relocate their activities in countries with the least restraining
regulations in the area of concern.30

Some governments have enacted domestic
codes and made TNCs to obey them inside host countries. For example, United
States adopted the Foreign Corrupt Practices Act 1977 to prevent American
corporations from bribery or collusion with government officials. It is
hilarious to know that at the same time in Japan, Germany and the United
Kingdom, foreign bribes were both legal and tax-deductible.31

Enactment of new codes to control
TNCs doesn’t guarantee the enforcement. It is also doubtful if there were
strong regulations in host countries, the evasion of law or corruption would
not happen. Because government officials are ready to collude with TNCs or even
accept bribe for ignoring the breach of law.

Some argue that problems such as
child labour cannot be solved by regulations because developing countries have the
culture of child labour but Foreign Direct Investment is less than 100 years
old.32 This
argument is obviously wrong because the similar imperfections can be easily
seen in the history of developed countries. Braithwaite argues that two centuries
earlier, commercial and political apparatuses of Western capitalist democracies
were as corrupt as those of most contemporary Third World countries.33

 

 

3.    Impact of CSR
on Operation and Conduct of TNCs’

Does CSR really affect how TNCs
conduct in the market? And if the answer is in affirmative, how? Some argue
that CSR norms not only are effective on the way of doing business but also, it
can turn into a business strategy for corporations.34

Before beginning this module, I
believed that (and I was not alone)35 CSR is only a
body of gestures and TNCs pretend to comply with CSR norms for economic reasons. They
want to boost their reputation with their costumers and commercial partners
hence. A good reputation can increase the sales and cause more profit.

I changed my opinion writing this
essay and now I share with Idowu and Leal Filho the idea that

“CSR is about business putting the interests of others before
their own. CSR is about being concerned with the welfare of the all an entities’
stakeholders … everyone who would be affected either directly or indirectly by
its actions including its competitors. CSR is about decency in the conduct of
the affairs of the entity with all stakeholders including the natural
environment. … The belief that economic and social goals must always conflict
is laid to rest by the principle of CSR. CSR advocates that economic and social
goods must co-exist.”

Conclusion

It
seems to me implementation of CSR in TNCs has become inevitable and they need
to comply their conduct and operation with CSR norms. It, not only is a way to contribute
in generating interest for the public moreover, if it is well calculated, at
the meantime it can be financially profitable for the firm. This is managers’
duty to determine how to conduct to achieve such level of CSR.  As McWilliams and Siegel explain there is an
ideal specific level of CSR for any firm which can be determined by
cost-benefit analysis. “By doing so, the firm meets the demands of relevant
stakeholders – both those that demand CSR (consumers, employees, community) and
those that “own” the firm (shareholders).”36

 

 

 

 

 

1 . Cristina Baez,
Michele Dearing, Margaret Delatour, and Christine Dixon, Multinational
Enterprises And Human Rights, 8 U. Miami Int’l & Comp. L. Rev. 183 (2015),
p. 193

Available
at: http://repository.law.miami.edu/umiclr/vol8/iss1/5

2 . Scherer, Andreas
Georg and Palazzo, Guido, Globalization and Corporate Social Responsibility
(2008). THE OXFORD HANDBOOK OF CORPORATE SOCIAL RESPONSIBILITY, A. Crane, A.
McWilliams, D. Matten, J. Moon, D. Siegel, eds., pp. 413-431, Oxford University
Press, 2008. Available at SSRN: https://ssrn.com/abstract=989565

3 . Taylor, K. M.
(2004). Thicker than blood: Holding Exxon Mobil liable for human rights
violations committing abroad. Syracuse Journal of International Law and
Commerce, 31, 273-297.

4 . Baez, Dearing, Delatour,
and Dixon (n 1) 191.

Available
at: http://repository.law.miami.edu/umiclr/vol8/iss1/5

5 . Sanjaya Lall,
‘The indirect employment effects of multinational enterprises in developing
countries’, Employment Effects of Multinational Enterprises, Oxford University,
Institute of Economics and Statistics, Working Paper No. 3 (Geneva:
International Labour Office, 1979).

6 .
Lim, Linda Y. C. and Pang Eng Fong, ‘Technological choice and employment
creation: a case study of three multinational enterprises in Singapore’,
Multinational Enterprises Programme Working Paper No. 16, (Geneva:
International Labour Office, 1981).

7 . Milton Friedman,
Rose D. Friedman, Capitalism and Freedom, University of Chicago Press, 1962,
pp. 111-114

8 . F. Friedman,
Milton, New York Times Magazine, The Social Responsibility of Business Is to
Increase Its Profits, 1970

9 . Brandt, Fabian
and Georgiou, Konstantinos, “Shareholders vs Stakeholders Capitalism”
(2016). Comparative Corporate Governance and Financial Regulation. Paper 10.

10 . Bhaduri Saumitra
N., Selarka Ekta, Book Section, Corporate Social Responsibility Around the
World—An Overview of Theoretical Framework, and Evolution—Corporate Governance
and Corporate Social Responsibility of Indian Companies, 2016, Springer
Singapore, P. 11-32

11 . Ibid, Abagail McWilliams, Donald S. Siegel, Patrick
M. Wright, Corporate Social Responsibility: Strategic Implications, Journal of
Management Studies 43:1 January 2006,

12 . Ibid, Abagail
McWilliams, Donald S. Siegel, Patrick M. Wright, Corporate Social
Responsibility: Strategic Implications, Journal of Management Studies 43:1
January 2006,

 

13 . Abagail McWilliams, Donald S. Siegel, Patrick M.
Wright, Corporate Social Responsibility: Strategic Implications, Journal of
Management Studies 43:1 January 2006,

14 . Leyla Davarnejad, In the Shadow of Soft Law: The
Handling of Corporate Social Responsibility Disputes under the OECD Guidelines
for Multinational Enterprises, 2011 J. Disp. Resol. (2011)

15 . Samuel O Idowu, W­­­­alter Leal Filho, Global
Practices of Corporate Social Responsibility, Springer Science & Business
Media, 2008, p. 15

16 . Mafessanti,
Miriam (2010) “Corporate Misbehaviour & International Law: Are There
Alternatives to Complicity,” South Carolina Journal of International Law
and Business: Vol. 6: Iss. 2, Article 2.

17 . R Clavet and Others, Governance, International Law
&Corporate Social Responsibility, International Institute for Labour
Studies 116, 2008.

18. Milton Friedman,
Rose D. Friedman, Capitalism and Freedom, University of Chicago Press, 1962, p.
102

19 . Lubbe and Others
and Cape Plc. and Related Appeals 2000 UKHL 41 (20th July 2000)

20 . In Re Union
Carbide Corporation Gas Plant Disaster at Bhopal, India in December, 1984, 634
F Supp 842 (SDNY 1986)

21 . In a letter to
Caterpillar CEO James Owens, The Office of the UN High Commissioner on Human
Rights said:

“allowing
the delivery of your … bulldozers to the Israeli army … in the certain
knowledge that they are being used for such action, might involve complicity or
acceptance on the part of your company to actual and potential violations of
human rights…”Peace activist Rachel Corrie was killed by a Caterpillar
D-9, military bulldozer in 2003. She was run over while attempting to block the
destruction a family’s home in Gaza. Her family filed suit against Caterpillar
in March 2005 charging that Caterpillar knowingly sold machines used to violate
human rights. Since Corrie’s death at least three more Palestinians have been
killed in their homes by Israeli bulldozer demolitions.

22 . Taylor, K. M.
(2004). Thicker than blood: Holding Exxon Mobil liable for human rights
violations committing abroad. Syracuse Journal of International Law and
Commerce, 31, 273-297.

23 . Bhaduri Saumitra
N., Selarka Ekta, Book Section, Corporate Social Responsibility Around the
World—An Overview of Theoretical Framework, and Evolution—Corporate Governance
and Corporate Social Responsibility of Indian Companies, 2016, Springer
Singapore, P. 11-32

24 . Leyla Davarnejad, In the Shadow of Soft Law: The
Handling of Corporate Social Responsibility Disputes under the OECD Guidelines
for Multinational Enterprises, 2011 J. Disp. Resol. (2011)

25 . The OECD Guidelines for Multinational Enterprises,

26 . Tripartite declaration of principles concerning
multinational enterprises and social policy (MNE Declaration) – 5th Edition
(March 2017)

27 .
http://www.ilo.org/empent/Publications/WCMS_094386/lang–en/index.htm

28 . Kinley, David and Tadaki, Junko, From Talk to Walk:
The Emergence of Human Rights Responsibilities for Corporations at
International Law. Virginia Journal of International Law, Vol. 44, No. 4, pp.
931-1023, 2004. Available at SSRN: https://ssrn.com/abstract=923360

29 . Scheltema,
Martijn, Assessing Effectiveness of International Private Regulation in the CSR
Arena (April 23, 2014). Richmond Journal of Global Law and Business, Vol. 13,
issue 2 (2014). Available at SSRN: https://ssrn.com/abstract=2442715

30 .
John Braithwaite, ‘Transnational Corporations and Corruption: Toward Some
International Solutions’ International Journal of the Sociology of Law 7,
(1979), 125-142.

31 .
Avi-Yonah, Reuven S. “National Regulation of Multinational Enterprises: An
Essay on Comity, Extraterritoriality, and Harmonization.” Colum. J.
Transnat’l L. 42, no. 1 (2003): 5-34.

32
Avi-Yonah, Reuven S. “National Regulation of Multinational Enterprises: An
Essay on Comity, Extraterritoriality, and Harmonization.” Colum. J. Transnat’l
L. 42, no. 1 (2003): 5-34.

33 .
Braithwaite John, “Transnational Corporations and Corruption: Towards Some
International Solutions”, International Journal of the Sociology of Law (
1979) 7, 125–142

34 . O’Riordan Linda, Fairbrass Jenny, Corporate Social
Responsibility (CSR): Models and Theories in Stakeholder Dialogue, Journal of
Business Ethics (2008) 83:745–758 Springer 2008

35 . Thomas F. MCINERNEY, PUTTING REGULATION BEFORE
RESPONSIBILITY: THE LIMITS OF VOLUNTARY CORPORATE SOCIAL RESPONSIBILITY, Voices
of Development Jurists • Volume II No. 3, International Development Law
Organization (2005), pp. 22-3

36 . McWilliams, Abagail, and Donald Siegel.
“Corporate Social Responsibility: A Theory of the Firm
Perspective.” The Academy of Management Review 26, no. 1
(2001): 117-27.