LLM significant effect on almost all industries of the

LLMProgramme2017-2018InternationalCorporate Governance and Transnational Corporations  ‘As TNCs operate in countries withweak regulations and institutions, the demand for Corporate SocialResponsibility (CSR) is increasing’. Discuss the CSR concept in relation to theconduct and operations of TNCs.  Word limit: 3,500 words                To be submitted by 29th January 2018  AbstractPurpose– The purpose of this essay is to examine the concept of CSR with specialregard to the theory of Legal Vacuum. I have tried to indicate that there arestructural 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 itsdefinition. In addition the essay examines how CSR norms impact the conduct andoperation of TNCs.

 Value– The essay contributes to reassessment of some notable theories on the conceptof CSR and surveys the theory of “Legal Vacuum”.KeywordsCorporate and social responsibility, Regulation, Legal Vacuum.Papertype Descriptive EssayAbbreviations TNC: transnationalcorporationCSR: corporate social responsibility   1.   Introduction TNCs have a significant effect onalmost all industries of the increasingly globalized economy such as telecommunications,pharmaceuticals product, retailing and wholesaling.”1 They are powerful entities which have a profoundpolitical2 and social impact on every aspectof modern life.

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The political and economic power ofTNCs allows them control not only their own assets, but also the legal, socialand political climate of the societies in which they are located. TNCs’ reckless behavior, with someincidents occurring in the third world, suggests that they have least concernabout the environment, human rights and even human lives3. TNCs have committed crimes or involved inviolent actions to retain their control.4 Ttheir history is full of disastersand scandals which in some cases ended up in the deaths of thousands ofinnocent people. Knowingthese facts, vital questions arise: if an institution is so harmful forsociety, why it is still around? What capacity lets them expand withoutsignificant constraints, and why is there an increasing demand to allow them tosettle in developing countries? Part of the answer, according to someorganizational studies, can be found in the desire of developing countries tostimulate economic growth and employment despite the risks associated withTNCs’ presence.

5 They play a significantrole in producing direct and indirect employment by promoting the growth oflocal suppliers.6To control the above-mentionedeconomic, political and financial powers, MNEs must be regulated. Since eitherdetailed national or international regulations are scarce, soft law and theestablishment 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 doTNCs need to settle in more developing states and why do developing states needto invite TNCs into their societies? I believe there are two main reasons: the transferof technology and to increase employment. Apparently, the national statesbelieve these two factors can contribute to swifter economic and technologicaldevelopment. TNCs, on the other hand, wish to decrease their expenses and makemore profit for their shareholders. This essay consists of four substantivechapters. The second chapter gives a quick glance at the literature and reviewsthe concept and definition of CSR. The final chapters are focused on CSR from theperspective of host countries and TNCs. The third chapter tackles the notion ofCSR reviewing weak regulations in host countries.

Fourth chapter is devoted tothe issue of the impact of CSR on TNCs’.  1.   Concept and Definition of CSR1.1.       Literature Earlier observations on the CSR areexcessively pessimistic. However, in recent decades, TNCs’ social contributionand their growing commitment towards the host societies have changed enormously.Friedman believes that corporations should only focus on making more profit andleave social problems to the government.7 Amajor believer in shareholder primacy theory, he also argues that managersshould only be devoted to maximizing the interests of shareholders; any otheraction to further social interest can be viewed as an exaggerated gesture.

8 Asthe Stakeholder theory has evolved, observers noticed that there are tightrelationships between corporations and their context which should be consideredby decision makers.9Some scholars see this relationship as a tradeoff: “CSR isnothing but corporate in its widest sense and on many levels, to include allstakeholders and constituent groups that maintain an ongoing interest in theorganization’s operations along with the society within which it operates.”10 Someother scholars, however, are more optimistic and believe that CSR is more thanjust a compromise between mutual interests. The corporations become involved inactivities beyond its own interests but for the good of the society; ‘…wedefine CSR as situations where the firm goes beyond compliance and engages in actionsthat appear to further some social good, beyond the interests of the firm andthat which is required by law’.11 McWilliamsand Siegel also modelled CSR as a “Quality Improvement” and developed a theoryabout a kind of strategic management of the corporation which is based on CSRnorms called Strategic CSR.

12 I think CSR is developing as ameans to make sure that a corporation is capable of doing business in asustainable way. Recent trends imply that the pessimistic approach to CSR hasbeen and is being replaced by productive perspectives. 1.2.       Definition Trying to find an inclusivedefinition for CSR, one cannot be sure that a definition is equally applicableto all societies because the social responsibility has significant ethicalaspects, and the norms of ethics vary from one society to another. Although there is no globallyaccepted definition of CSR,13some scholars approach it as a matter of evolving international policy; i.e.

“Aninternational policy issue that calls on corporations to be profitable in asustainable way by not harming human beings or the environment.”14I believe that, like ethicalnorms, CSR norms fluctuate from one society to another and as such, there canbe several definitions. Idowu and Leal Filho have put some definitions in atable to illustrate the multiplicity of definitions.15 One can find however, some commonthemes in all definitions: human rights, employees’ rights, environment supportand profit making. 1.3.        1.4.

       Concept1.4.1. Powercomes with monopolyTNCs are very powerful entitiesdoing business on a widespread global scale affecting nations and policymakers. The annual income of some TNCs can often surpass the GDP of developingcountries.

Their power and authority necessarily entail responsibilities.16Being aware of their power, they have always had the opportunity to use itagainst employees, human rights and the environment. These three issuesdescribe the scope of CSR. One cannot only focus on theresponsibilities 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 bythe “Triple Bottom Line” theory: people, planet, profit. Thistheory implies that a business must be judged according to three criteria: howit treats its employees, how its activity affects the environment, and how muchprofit it makes.17Friedman believes that theexistence of monopoly raises the issue of social responsibility because amonopolist “…has power and should dischargehis power not solely to further his own interests but to further sociallydesirable ends.

“18Power and greed have underpinnedsome horrible disasters against local populations or environments. In some cases,they are just accidental events19 withawful consequences to the environment and the loss of innocent lives.20 Onthe other hand, there have been evil collaborations between TNCs and their hostcountries which caused some terrible tragedies in the history. 1.4.2. SocialResponsibilityThere are lots of examples ofTNCs providing equipment or even weaponry for governments against their ownpeople.

21 Forexample, Exon Mobile and its subsidiary Mobil Oil Indonesia provided theIndonesian dictator, General Suharto with “blank shares”. In exchange, the Suhartoregime provided Mobil Oil with military units as security for the company’soperations. For nine years, the Indonesian military killed, tortured and rapedmany villagers under the pretext of security for Mobil”Mobil provided the facilitieswhere the torture, rape, and execution of villagers occurred, as well as paidthe salaries of the soldiers who burned and robbed the villagers’ homes”.22Societies, on the other hand,have their own powers to force corporations to operate in certain ways.23 This is where the concept of responsibilitycomes in because TNCs must obey both national and international law. Theproblem is that there are not satisfactory regulations to restrict TNC malpractice.This is the most important ground for formation of CSR movement in hostcountries as well as their governments’ disinclination or weakness to place andenforce strict regulations on TNCs.

However, some TNCs have beenremarkably serious in conducting their business responsibly. Recently, therehas been a growing tendency among TNCs to use their power in the interest ofsociety.  2.   Weakregulations in Host Countries2.1.

       Legal vacuumAs mentioned above, even though TNCs are getting increasinglystronger, there are not adequate national regulations to control their power. Ininternational sphere there have been efforts, but the success has been limited.By virtue of those efforts, a soft law movement has beenestablished but this is not legally binding and can be easily ignored by bothTNCs and governments. This situation is often described as a “legalvacuum” or an “accountability gap24  The problem differs in the developed and developing worlds. Mostof the TNCs are based in developed countries where they are supposed to beregulated under labour and environmental law. They are at the same time subjectto organizational supervision and must comply with codes of conduct andguidelines such as OECD’s 1976 Guidelines for Multinational Enterprises(amended 2000).The best description about the nature of this document andthe extent of its compulsory nature can be found in the Foreword:”… recommendations addressed by governments tomultinational enterprises operating in or from adhering countries. They providenon-binding principles and standards for responsible business conduct … withapplicable laws and internationally recognised standards.

… the onlymultilaterally agreed and comprehensive code of responsible business conductthat governments have committed to promoting.”25 There are other international codes and declarationssuch as ILO Declaration26 which “provides direct guidance to enterprises onsocial policy and inclusive, responsible and sustainable workplace practices”27 and TenPrinciples of UN Global Compact.Recently, TNCs tend to draft their own codes of conduct toregulate their own behaviour. It doesn’t seem realistic to me because most ofthem are just general principles and sound like slogans. Regulating somethingmeans to put detailed and specific provisions. The other problem with codes, Guidelines andprinciples is that not only they are not binding, but also there is no forcefulmonitoring mechanism for implementation and compliance.28 Anotherproblem is that there is no standards to assess whether the objectives of therespected regulations are achieved. In some cases there is even no specific andindicated objectives.

292.2.        2.3.       Weak RegulationsTNCs have increasingly been accusedof reckless behaviour to environment and violation of human rights and labourlaw in developing countries. Developing countries need to havemultinationals inside their territory.

On the other hand, they have the historicalexperience of colonialism and don’t want to surrender the control over theirprofitable assets. This is a paradoxical situation.Lack or weakness of regulations pavesthe 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, manipulatenational legal systems or hire lawyers to find loopholes in the law. Forinstance, TNCs locate or relocate their activities in countries with the least restrainingregulations in the area of concern.30 Some governments have enacted domesticcodes and made TNCs to obey them inside host countries. For example, UnitedStates adopted the Foreign Corrupt Practices Act 1977 to prevent Americancorporations from bribery or collusion with government officials.

It ishilarious to know that at the same time in Japan, Germany and the UnitedKingdom, foreign bribes were both legal and tax-deductible.31 Enactment of new codes to controlTNCs doesn’t guarantee the enforcement. It is also doubtful if there werestrong regulations in host countries, the evasion of law or corruption wouldnot happen. Because government officials are ready to collude with TNCs or evenaccept bribe for ignoring the breach of law.

Some argue that problems such aschild labour cannot be solved by regulations because developing countries have theculture of child labour but Foreign Direct Investment is less than 100 yearsold.32 Thisargument is obviously wrong because the similar imperfections can be easilyseen in the history of developed countries. Braithwaite argues that two centuriesearlier, commercial and political apparatuses of Western capitalist democracieswere as corrupt as those of most contemporary Third World countries.33  3.    Impact of CSRon Operation and Conduct of TNCs’ Does CSR really affect how TNCsconduct in the market? And if the answer is in affirmative, how? Some arguethat CSR norms not only are effective on the way of doing business but also, itcan turn into a business strategy for corporations.34Before beginning this module, Ibelieved that (and I was not alone)35 CSR is only abody of gestures and TNCs pretend to comply with CSR norms for economic reasons.

Theywant to boost their reputation with their costumers and commercial partnershence. A good reputation can increase the sales and cause more profit. I changed my opinion writing thisessay and now I share with Idowu and Leal Filho the idea that “CSR is about business putting the interests of others beforetheir own. CSR is about being concerned with the welfare of the all an entities’stakeholders … everyone who would be affected either directly or indirectly byits actions including its competitors. CSR is about decency in the conduct ofthe affairs of the entity with all stakeholders including the naturalenvironment.

… The belief that economic and social goals must always conflictis laid to rest by the principle of CSR. CSR advocates that economic and socialgoods must co-exist.”ConclusionItseems to me implementation of CSR in TNCs has become inevitable and they needto comply their conduct and operation with CSR norms. It, not only is a way to contributein generating interest for the public moreover, if it is well calculated, atthe 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 anideal specific level of CSR for any firm which can be determined bycost-benefit analysis.

“By doing so, the firm meets the demands of relevantstakeholders – both those that demand CSR (consumers, employees, community) andthose that “own” the firm (shareholders).”36     1 . Cristina Baez,Michele Dearing, Margaret Delatour, and Christine Dixon, MultinationalEnterprises And Human Rights, 8 U. Miami Int’l & Comp.

L. Rev. 183 (2015),p. 193Availableat: http://repository.

law.miami.edu/umiclr/vol8/iss1/52 . Scherer, AndreasGeorg 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 UniversityPress, 2008. Available at SSRN: https://ssrn.com/abstract=9895653 . Taylor, K. M.

(2004). Thicker than blood: Holding Exxon Mobil liable for human rightsviolations committing abroad. Syracuse Journal of International Law andCommerce, 31, 273-297.4 . Baez, Dearing, Delatour,and Dixon (n 1) 191.

Availableat: http://repository.law.miami.edu/umiclr/vol8/iss1/55 . Sanjaya Lall,’The indirect employment effects of multinational enterprises in developingcountries’, 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 employmentcreation: 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. 111-1148 . F. Friedman,Milton, New York Times Magazine, The Social Responsibility of Business Is toIncrease Its Profits, 19709 . Brandt, Fabianand Georgiou, Konstantinos, “Shareholders vs Stakeholders Capitalism”(2016). Comparative Corporate Governance and Financial Regulation. Paper 10.

10 . Bhaduri SaumitraN., Selarka Ekta, Book Section, Corporate Social Responsibility Around theWorld—An Overview of Theoretical Framework, and Evolution—Corporate Governanceand Corporate Social Responsibility of Indian Companies, 2016, SpringerSingapore, P. 11-3211 . Ibid, Abagail McWilliams, Donald S. Siegel, PatrickM.

Wright, Corporate Social Responsibility: Strategic Implications, Journal ofManagement Studies 43:1 January 2006,12 . Ibid, AbagailMcWilliams, Donald S. Siegel, Patrick M. Wright, Corporate SocialResponsibility: Strategic Implications, Journal of Management Studies 43:1January 2006, 13 . Abagail McWilliams, Donald S. Siegel, Patrick M.Wright, Corporate Social Responsibility: Strategic Implications, Journal ofManagement Studies 43:1 January 2006,14 .

Leyla Davarnejad, In the Shadow of Soft Law: TheHandling of Corporate Social Responsibility Disputes under the OECD Guidelinesfor Multinational Enterprises, 2011 J. Disp. Resol. (2011)15 . Samuel O Idowu, W­­­­alter Leal Filho, GlobalPractices of Corporate Social Responsibility, Springer Science & BusinessMedia, 2008, p.

1516 . Mafessanti,Miriam (2010) “Corporate Misbehaviour & International Law: Are ThereAlternatives to Complicity,” South Carolina Journal of International Lawand Business: Vol. 6: Iss. 2, Article 2.17 . R Clavet and Others, Governance, International Law&Corporate Social Responsibility, International Institute for LabourStudies 116, 2008.

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

10219 . Lubbe and Othersand Cape Plc. and Related Appeals 2000 UKHL 41 (20th July 2000)20 . In Re UnionCarbide Corporation Gas Plant Disaster at Bhopal, India in December, 1984, 634F Supp 842 (SDNY 1986)21 .

In a letter toCaterpillar CEO James Owens, The Office of the UN High Commissioner on HumanRights said:”allowingthe delivery of your … bulldozers to the Israeli army …

in the certainknowledge that they are being used for such action, might involve complicity oracceptance on the part of your company to actual and potential violations ofhuman rights…”Peace activist Rachel Corrie was killed by a CaterpillarD-9, military bulldozer in 2003. She was run over while attempting to block thedestruction a family’s home in Gaza. Her family filed suit against Caterpillarin March 2005 charging that Caterpillar knowingly sold machines used to violatehuman rights. Since Corrie’s death at least three more Palestinians have beenkilled in their homes by Israeli bulldozer demolitions.22 .

Taylor, K. M.(2004). Thicker than blood: Holding Exxon Mobil liable for human rightsviolations committing abroad. Syracuse Journal of International Law andCommerce, 31, 273-297.23 . Bhaduri SaumitraN., Selarka Ekta, Book Section, Corporate Social Responsibility Around theWorld—An Overview of Theoretical Framework, and Evolution—Corporate Governanceand Corporate Social Responsibility of Indian Companies, 2016, SpringerSingapore, P.

11-3224 . Leyla Davarnejad, In the Shadow of Soft Law: TheHandling of Corporate Social Responsibility Disputes under the OECD Guidelinesfor Multinational Enterprises, 2011 J. Disp. Resol. (2011)25 . The OECD Guidelines for Multinational Enterprises, 26 .

Tripartite declaration of principles concerningmultinational enterprises and social policy (MNE Declaration) – 5th Edition(March 2017)27 .http://www.ilo.org/empent/Publications/WCMS_094386/lang–en/index.htm28 .

Kinley, David and Tadaki, Junko, From Talk to Walk:The Emergence of Human Rights Responsibilities for Corporations atInternational Law. Virginia Journal of International Law, Vol. 44, No.

4, pp.931-1023, 2004. Available at SSRN: https://ssrn.

com/abstract=92336029 . Scheltema,Martijn, Assessing Effectiveness of International Private Regulation in the CSRArena (April 23, 2014). Richmond Journal of Global Law and Business, Vol. 13,issue 2 (2014). Available at SSRN: https://ssrn.com/abstract=244271530 .

John Braithwaite, ‘Transnational Corporations and Corruption: Toward SomeInternational Solutions’ International Journal of the Sociology of Law 7,(1979), 125-142.31 .Avi-Yonah, Reuven S. “National Regulation of Multinational Enterprises: AnEssay on Comity, Extraterritoriality, and Harmonization.

” Colum. J.Transnat’l L. 42, no.

1 (2003): 5-34.32Avi-Yonah, Reuven S. “National Regulation of Multinational Enterprises: AnEssay on Comity, Extraterritoriality, and Harmonization.” Colum. J.

Transnat’lL. 42, no. 1 (2003): 5-34.33 .Braithwaite John, “Transnational Corporations and Corruption: Towards SomeInternational Solutions”, International Journal of the Sociology of Law (1979) 7, 125–14234 .

O’Riordan Linda, Fairbrass Jenny, Corporate SocialResponsibility (CSR): Models and Theories in Stakeholder Dialogue, Journal ofBusiness Ethics (2008) 83:745–758 Springer 200835 . Thomas F. MCINERNEY, PUTTING REGULATION BEFORERESPONSIBILITY: THE LIMITS OF VOLUNTARY CORPORATE SOCIAL RESPONSIBILITY, Voicesof Development Jurists • Volume II No. 3, International Development LawOrganization (2005), pp. 22-336 .

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