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January 2002
Summary
This paper examines the case for an effective
legally binding international framework to
deliver corporate accountability (including
liability). This binding agreement would need
to incorporate legal rights for citizens and
communities affected by corporate activities
incorporating the direct liability of
‘foreign’ multinationals; duties on
corporations with respect to social and
environmental matters; and rules to ensure
improved practices wherever corporations
operate. The approach recognises the
development and inherent limits of voluntary
codes such as the OECD Guidelines for
Multinational Enterprises which cannot be
seen as an alternative to a binding and
enforceable framework. FoEI is calling on
governments to commit to develop a framework
(such as a convention or other mechanism) to
secure corporate accountability (including
liability) by 2005.
Part 1 The need for binding corporate
accountability
Why is FoEI concerned about corporate
accountability?
As an international confederation of 70
groups from many of the richest and poorest
countries of the World, FoEI has a broad
experience of corporate practices. Delivering
sustainable development, securing
environmental justice, recognising and acting
on ecological debt and issues such as climate
change will all require governments to ensure
corporations play a responsible role. Given
the commitment to action through communities
outlined in Local Agenda 21; without
corporations being accountable for their
activities to the communities they affect, a
fundamental pillar of action for sustainable
development will be missing. In FoEI’s
experience the establishment of clear rights
for citizens and communities is the best way
of securing a just outcome. Established rules
of accountability and liability meeting the
principles outlined in this paper may have
helped citizens and governments address and
perhaps even avoid crisis such as those
experienced in Bhopal with the chemicals
industry, in Nigeria with the fossil fuel
industry, oil spills such as the Erika and
Exxon Valdez and recent concerns over the
diamond mining industry for example.
The present context of corporate
accountability
One major failing of the 1992 Earth Summit
was the abandonment of the UN Center on TNCs
and of the UN Code on TNCs. The resulting
lack of an international framework has been
recognised in the decade since despite
efforts to build up voluntary mechanisms as
alternatives to binding rules. A number of
fora have made progress on specific aspects
of corporate accountability and
responsibility. However, these do not yet
amount to a coherent response to widespread
public and governmental concerns over those
elements of globalisation relating to
corporations:
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The UNDP concluded in its Human
Development Report 1999: “multinational
corporations are too important and too
dominant a part of the global economy for
voluntary codes to be enough. Globally
agreed principles and policies are needed
for: human concerns - to ensure compliance
with labour standards and human rights;
economic efficiency - to ensure fair trade
and competitive markets; environmental
sustainability - to avoid degradation and
pollution.” The report also stated:
“Multinational corporations are already a
dominant part of the global economy - yet
many of their actions go unrecorded and
unaccounted. They must, however, go far
beyond reporting just to their
shareholders. They need to be brought
within the frame of global governance, not
just the patchwork of national laws, rules
and regulations.”
-
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Following the adoption of the
International Labour Organisation
Declaration of Fundamental Principles and
Rights at Work and its Follow-up in 1998,
the ILO has devised the Tripartite
Declaration of Principles Concerning
Multinational Enterprises and Social Policy
as a framework for action by governments,
workers, employers, and multinational
enterprises to address the labour and
social difficulties that may arise in the
context of foreign direct investment and
the activities of corporations. It is
backed by the Multinational Enterprises
Department which can interpret the
principles and conduct surveys.
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The UN Commission on Human Rights
Sub-Commission on the Promotion and
Protection of Human Rights is presently
discussing Draft Fundamental Human Rights
Principles for Business Enterprises which
outline obligations for corporations and
legal accountability for human rights
abuses. It has identified a raft of
conventions and international instruments
where corporations have obligations, but
the principles are being devised because
these obligations have hitherto not been
set out systematically enough to amount to
a legal framework for corporate
accountability on human rights
matters.
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The UN General Assembly special session
to review progress since the 1995
Copenhagen World Summit for Social
Development identified the need to support
corporate social responsibility by setting
a legal framework. In General Assembly
resolution S-24/2 of 1 July 2000 it called
for: “encouraging corporate social
responsibility by fostering awareness about
the relationship between social development
and growth, by providing a legal, economic
and social policy framework to promote
corporate social responsibility”.
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The 1999 Fancourt Commonwealth
Declaration on Globalisation and
People-Centred Development also considered
that the private sector must be accountable
stating: “Recognising that good governance
and economic progress are directly linked,
we affirm our commitment to the pursuit of
greater transparency, accountability, the
rule of law and the elimination of
corruption, in all spheres of public life
and in the private sector.”
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The EU is presently devising a
liability directive to clarify some
elements of corporate and other liability.
This, however, is a regional initiative
that would have the potential to be more
wide reaching if it were part of an
international liability framework. UNEP and
a number of governments have also raised
the idea of a framework convention on
liability.
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The Commission on Sustainable
Development Sixth Session (22 December 1997
and 1 May 1998) Decision 6/2 on Industry
and sustainable development stated that the
foundation for sustainable development was
good regulation: “The Commission emphasized
that it was important for the achievement
of sustainable development for Governments
to develop and maintain an enabling policy
framework based on a sound regulatory
foundation complemented with a judicious
mix of economic instruments, voluntary
initiatives and agreements and
public-private partnerships.”
FoEI believes that the WSSD must deliver
on this ‘judicious mix’ of measures by making
progress through the establishment of a
‘regulatory foundation’ in a framework
convention on corporate accountability and
liability or similarly robust mechanism.
Drawing together initiatives such as the
proposed liability convention with the Draft
Fundamental Human Rights Principles for
Business Enterprises would ensure
coherence.
The need for accountability
Many governments have recognised the need to
make globalisation support sustainable
development. A legal framework for corporate
accountability is a necessary pillar of such
an approach. A number of changes, therefore
are driving the demand for corporate
accountability:
-
the growth of truly global companies
means it has become more difficult for
citizens and communities to seek redress
where corporations are multinational (for
example a multinational’s legal ‘home’ may
be uncertain);
-
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there is a tendency for public interest
constraints to be removed or relaxed in the
course of removing non-tariff barriers to
trade;
-
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the growing scale of multinationals has
consolidated their power and influence
while greatly increasing distance between
corporate leadership and the communities
and lives that their activities
affect;
-
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corporations are increasingly taking
control of industries and services
previously run by governments, without
taking on the wider public interest
responsibilities governments have to
address; and
-
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the scale of corporate impacts is
undiminished and those impacts are
increasingly remote from both the owners
and the customers of the company.
Yet presently corporations are only
legally accountable to their
shareholders.
FoEI recognises the potentially positive
side to business - particularly small and
medium sized enterprises that form part of
local economies and are accountable to local
communities. There are also ‘sunrise’
industries such as renewable energy where the
skills and creativity of business are needed
to deliver progress. But debate is growing
over how corporate accountability to other
stakeholders - as well as to shareholders -
can be increased. The accountability
corporations have to owners and shareholders
is backed by detailed rules and regulations.
FoEI believes new rules must spell out
corporations’ accountability to other
stakeholders.
Corporate social responsibility?
Employees, communities, consumer and public
interest groups are raising concerns about
the performance and impacts of corporations
on employment practices, pollution, genetic
engineering, product safety, essential public
services and many other matters. The most
serious concerns tend to be over corporate
practices in poorer countries, where
governance and financial constraints have
made it more difficult for legal,
environmental, health and safety standards to
match those in developed countries. For
example, environmental or social impact
assessments are often poorly conducted, if at
all, and may not even be publicly available.
In the fossil fuel sector concerns have
been raised about pollution, resource
expropriation and human rights abuses. In the
forestry sector, much trade is illegal - more
than half the tropical timber entering the EU
is likely to be illegally sourced. Logging on
indigenous peoples’ lands, corruption, and
felling primary forests are all common
concerns. In the garment and toy trades
sweatshop conditions, poor health and safety
and use of child labour have been
documented.
Some corporations have made welcome
improvements to their ethical performance.
This has been supported by governments, some
of whom even have ministers with duties to
promote corporate social responsibility.
However, such voluntary action is not common
to all companies. Unless all corporations are
made equally accountable for their
environmental and social impacts there
remains little incentive for a general
improvement in behaviour. What is more, those
corporations which want to become more
socially responsible are being held back by
competitors who can undercut them by
continuing to externalise costs and by
demonstrating no responsibility. There is an
emerging ethical investment sector in some
regions, but it remains small and many
corporations report limited progress in
becoming more socially responsible because
they are not receiving support from
mainstream investors. Substituting regulation
with voluntary initiatives, therefore has
failed to deliver sufficient progress in
practice.
Transnational solutions
Corporations are active across national
boundaries, and often their production, sales
and ownership are in different legal
jurisdictions with inconsistent regulations.
Corporations are often listed on stock
markets or have a ‘home’ base in countries
remote from where they operate and are
‘hosted’. Changes in the legal framework in
any one country can have real or perceived
impacts on the short-term competitiveness of
companies in that country. Some governments,
to remain competitive in the international
marketplace, have become reluctant to
unilaterally introduce rules corporations
might consider unattractive. It is sensible,
therefore to devise a multilateral binding
framework that provides a level playing
field. A framework convention would allow
signatory governments to deliver the
agreement in the context of their own legal
tradition.
Beyond voluntary initiatives
Recent progress on corporate accountability
has been dominated by the development of
voluntary initiatives. The UN Global Compact
has been established to create a process to
support the voluntary socially responsible
behaviour of corporations. The OECD has
recently revised its more established
mechanism the OECD Guidelines for
Multinational Enterprises. The European Code
of Conduct for European Enterprises Operating
in Developing Countries is a further
voluntary approach which incorporates a
platform for public airing of cases. Many
other bodies and industry groups have devised
sectoral codes of conduct. So far these have
failed to prevent continued abuses of
corporate power. There are a number of
reasons why:
-
they do not provide strong incentives
for compliance to counterbalance the
financial incentives for non-compliance -
because for example sanctions are absent or
weak;
-
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they rely on the ‘appearance of
compliance’ through ‘self-regulation’,
without even independent verification let
alone enforcement; and
-
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they fail to empower citizens and
stakeholders. Instead, even where
‘stakeholder dialogue’ approaches are used,
they present the issue of corporate
responsibility as ‘top-down’ - as defined
by the company.
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br>
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Accountability requires going beyond
voluntary approaches and establishing
mechanisms which provide adequate legal and
financial incentives for compliance. It
must also empower stakeholders to challenge
corporations. Above all, while voluntary
initiatives can in themselves be positive
or deceptive, they can not be seen as a
substitute for mandated rules which
establishes a baseline of rights, duties
and consistent behaviour.
The objectives of corporate
accountability
A corporate accountability convention must:
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establish mechanisms for adversely
affected stakeholders to obtain redress
through exercising rights;
-
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establish social and environmental
duties for corporations;
-
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establish rules for consistent high
practices of corporations;
-
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create a market framework in which
progressive companies can thrive, and
governments respond fairly to the demands
of their citizens rather than to the
lobbying of corporations;
-
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ensure the international direct
liability of corporations;
-
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establish sanctions;
-
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ensure the ecological debt owed by
corporations to the South is repaid;
and
-
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secure environmental justice for
communities threatened with or exposed to
environmental injustice - north and
south.
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FoEI advocates accountability for publicly
traded corporations. Often it is the economic
power of these corporations which drives
smaller private companies to operate to lower
standards - either to compete or as suppliers
required to meet prices and timescales
inconsistent with high operating standards.
Furthermore, large corporations can more
easily meet higher standards more quickly.
Securing accountability of publicly traded
companies must therefore seek to ensure
private companies improve their operating
behaviour too. It also addresses the primacy
of the legal duty to maximise shareholder
returns which drives short term profiteering
and the externalisation of costs onto the
wider community.
Part 2 Elements of binding corporate
accountability
A framework for binding corporate
accountability would (directly or
indirectly):
introduce duties on corporations
1. Impose duties on publicly traded
companies, their directors and board-level
officers to:
-
report fully on their environmental and
social impacts, on material risks and on
breaches of environmental or social
standards (such reports to be independently
verified);
-
ensure effective prior consultation
with affected communities, including the
preparation of Environmental Impact
Assessments (EIA) for significant
activities and full public access to all
relevant documentation; and
-
take the negative environmental and
social impacts of their activities fully
into account in their corporate decision
making.
duties on corporations and directors
Including directors as recipients of
specific duties ensures objectives can be
delivered through existing mechanisms of
corporate governance and there are directly
responsible individuals to deliver them.
reporting
Improved reporting supports developments
such as the Global Reporting Initiative but
add the important step of requiring
independent verification. Robust reporting
helps ensure investors are supplied with the
same information as executives and ensures
markets are based on ‘real’ values of
corporations.
prior consultation
EIA and prior consultation allow for
improved participation of affected
communities and a wider understanding of the
mutual risks and benefits of investments. A
useful precedent is the ILO Indigenous and
Tribal Peoples Convention of 1989. Failure to
undertake meaningful assessments and
consultations should result in
enforcement.
taking account
At present directors of publicly traded
corporations have a duty to account to
shareholders and maximise financial returns.
This new provision would require them also to
account to other stakeholders such as
communities, and to balance financial returns
with the interests of these other affected
stakeholders.
Extend liability of corporations
2. extend legal liability to directors
for corporate breaches of national
environmental and social laws and to
directors and corporations for breaches of
international laws or agreements.
directors’ liability
Beyond new duties for directors outlined
above, there are responsibilities relating to
existing national environmental and social
laws. Directors should be personally
responsible for company compliance with
applicable laws, including breaches thereof.
Precedents include the Environmental
Protection Act 1990 in the UK which holds
directors liable for corporate pollution
offences. Such liability must survive
corporate mergers.
international agreements and
laws
Extending directors and corporate liability
to activities that breach international
agreements is already under consideration as
a Framework Convention on Liability. A number
of governments have raised this issue as a
priority in the course of regional
preparatory meetings for the WSSD. This would
ensure that many existing agreements on the
environment and human rights which currently
apply only to states could now be applied
directly to corporations.
ecological debt
Liability questions must also address
compensation for ecosystem degradation and
restoration.
Introduce rights of redress for
citizens
3. guarantee legal rights of redress for
citizens and communities adversely affected
by corporate activities, including:
-
access for affected people anywhere
in the world to pursue litigation where
parent corporations claim a ‘home’ are
domiciled or listed;
-
provision for legal challenge to
company decisions by those with an
interest; and
-
a legal aid mechanism to provide
public funds to support such
challenges.
access to justice
Access to justice is essential for securing
accountability. The proposal would ensure
citizens, communities and affected third
parties could pursue cases in a parent
company’s ‘home’ country courts where
necessary - for example where they are listed
on a stock exchange. The Cape asbestos case
and others, for example, have identified the
need for such a mechanism as corporations
have been able to avoid accountability by
claiming a particular court is not the
relevant place to hear a case.
challenge to decisions
If corporations and directors have new
duties, rights are needed for those who have
cause to challenge the decisions they have
taken. This would give legal force to new
duties and to corporate environmental and
social reporting. Rights of legal challenge
would need to prevent vexatious cases, while
ensuring real concerns are not excluded by
loopholes. Third party stakeholders might be
expected to demonstrate an interest or show
damage to be able to pursue a case.
legal aid
Citizens in the developing World are daunted
by the costs involved and most potential
litigants by the risk of a corporation’s
costs being charged to them if a case is
lost. Therefore a legal aid mechanism is
necessary.
Establish community rights to
resources
4. establish human and community rights
of access to and control over the resources
needed to enjoy a healthy and sustainable
life, including rights:
-
over common property resources and
global commons such as forests, water,
fisheries, genetic resources and minerals
for indigenous peoples and local
communities;
-
to prior consultation and veto over
corporate projects, against displacement;
and
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to compensation or reparation for
resources expropriated by or for
corporations.
Friends of the Earth has long advocated
environmental rights and many governments
have also raised the suggestion of launching
a negotiation on an environmental rights
convention at regional prepcoms for the WSSD.
Control over resources is an elaboration of
such rights. Useful precedents include the
1975 Land Rights Act in Australia which gives
Aboriginal peoples right of veto over mining
on their land. In practice, this has allowed
them to set conditions relating to royalties,
job provision and training. Also the 1997
Indigenous Peoples Rights Act in the
Philippines which requires prior informed
consent for corporate projects in ancestral
lands and domains. The ILO Indigenous and
Tribal Peoples Convention, 1989 (number 169)
also requires respect for the rights of
communities and local populations.
Communities must be granted the right to
apply the precautionary principle in
exercising their rights and the burden of
proof concerning the potential for harm must
be placed clearly on the corporation
involved.
Establish consistently high standards of
behaviour
5. establish (and enforce) high minimum
environmental, social, labour and human
rights standards for corporate activities -
based for example on existing international
agreements and reflecting the desirability of
special and differential treatment for
developing countries.
The focus of this proposed convention is
on implementation mechanisms because of the
imperative need to develop capacities -
especially in poorer countries and
communities - to ensure relevant standards of
behaviour are implemented and enforced. Any
standards should be based in existing and
developing multilateral environmental and
social agreements. The concept of ‘special
and differential treatment’ for developing
countries is well established. It may be
appropriate to apply such an approach to this
provision giving developing countries longer
to establish standards and access to
financial support. Standards of behaviour
would also need to be more stringent, for
example, in areas of high biodiversity value
such as IUCN Category I to IV protected
areas.
Introduce sanctions
6. establish national legal provision for
suitable sanctions for companies in breach of
these new duties, rights and liabilities
(wherever the breaches occur) such as:
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suspending national stock exchange
listing;
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withholding access for such
companies to public subsidies, guarantees
or loans;
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fines; and
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in extreme cases the withdrawal of
limited liability status.
A set of appropriate legal sanctions are
needed. Governments can also control public
financial support for corporations and
therefore this also represents an opportunity
for securing accountability. The principle of
screening corporations must be established.
There are precedents: some countries are
considering with-holding export credit
guarantee from companies in breach of the
corruption convention or the OECD Guidelines
for multinational enterprises. Also loans by
international financial institutions such as
the World Bank are screened.
Extend role of International Criminal
Court
7.extend the jurisdiction of the
international criminal court to try directors
and corporations for environmental, social
and human rights crimes.
The International Criminal Court would
provide an independent forum for hearing
cases, perhaps including a special tribunal
for environmental abuses. Eligibility for
hearing or referral to this court would need
to be defined.
Improve monopoly controls
8. establish international controls over
mergers and monopolistic behaviour by
corporations.
This measure would need to reinforce
national controls while providing a robust
system to prevent the development of
monopolies at any scale or over any market,
national or international. Such measures
would address concerns over the consolidation
of economic power in corporations which has
resulted in half of the world’s 100 largest
economies being corporations. Mergers are
also important in terms of their impact on
liability which would need to be addressed
under any binding accountability and
liability mechanism.
Establish an implementation
mechanism
9. establish a continuing structure and
process to monitor and review the
implementation and effectiveness of the
convention.
An effective institutional structure,
rigorous implementation and enforcement and
an effective monitoring system are essential
for a convention such as this to work.
contacts:
Matt Phillips, FoE England Wales and
Northern Ireland +44-20-7566 1660 (
mattp@foe.co.uk
)
David Waskow, FoE US, +1 202 783 7400 (
dwaskow@foe.org
)
Daniel Mittler, BUND (FoE Germany), +49 30
275 86468 (
daniel.mittler@bund.net
)
www.foei.org/corporates
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