Overcoming the Global Governance Gap through Consensus-Driven Realism
In this essay, Tim Hagemann outlines the problems for regulating Corporate Social Responsibilities of multi-national enterprises on a global level, the established approaches to overcome this regulatory gap and his personal view of what has to be done now.
The importance for corporations to act in accordance with their responsibility towards society is an issue that by now has been discussed on the national and international stage for decades and prompted several initiatives on the private, national and international level. Nevertheless, shocking incidents such as the Rana Plaza disaster in Bangladesh or the Union Carbide incident in India that can be traced to corporations neglecting their social responsibilities for the sake of profit make us remember that in reality, it seems there is still a long way to go until this concept will be implemented on a global scale. Probably, even more shocking, there seems to be no effective mechanism to hold corporations that act on a multi-national level or at the top of an international supply-chain relationship accountable for the damages they caused. Scholars, civil-society actors and politicians alike identified the so-called “Global Governance Gap” as main factor for the current status quo and proposed several models to counter this development. In the following, this essay will establish what is commonly understood as global governance gap, introduce and assess the proposed counter-models and finally outline which approach is most promising to effectively bind corporations to their societal responsibilities.
II. The Global Governance Gap
The theory of the global governance gap is inseparable intertwined with the idea of corporate social responsibility. That is the idea, that corporations recognize the adverse impacts they may have on society and environment and address these impacts by preventing, managing and mitigating them in their corporate and contractual relationships. Indeed, the idea that corporations are not exclusively bound by the interests of their shareholders but have to consider the interests of different stakeholders is well established in the corporate legal tradition of many civil law countries. Although originally, the Anglo-American understanding of the corporation saw the management merely as agents of the stock owners, the demands of a globalized world initiated a rethinking and scholars and law makers have pushed for the idea of incorporating different stakeholders’ interests at least to some extent in the execution of corporate activities. But why is it, that even though some of the leading industrialized nations established at least some form of regulation benefitting the public good, there are incidents like Rana Plaza still happening?
The answer is, that the simple equation that domestic governmental regulation alone leads to social wealth does not work anymore in a globalizing world, where transnational relations between actors from all over the world have evolved to a point where regulating their activities overstrains the steering capacity of individual nations states. That is demonstrated thoroughly by the capability of multi-national enterprises to circumvent individual states’ legislation through concentrating their controversial and adverse activities to regions who legally or factually do not impose social responsibilities upon them. It is this circumvention of regulatory oversight by such corporations on an international level that is understood as the global governance gap. The reasons for this development are diverse, but concentrated around three main contributing factors: (a) The focus of national, regional and international legal frameworks to facilitate corporate mobility, (b) the restrictions national law imposes on regulatory statutes and tort law applying extraterritorially and (c) the rejection of multi-national corporations’ legal subjectivity by the international legal order.
1. Facilitation of corporate mobility
One main contributor to globalization was the facilitation of corporate mobility on a global level through national, regional or international legislation that conferred rights to private companies while simultaneously not imposing obligations on them. Most prominently, the TFEU gave corporations inside the European Union the right to free movement, that – without prior harmonization of the member states’ company law – led to a circumvention of domestic legal rules through officially incorporating companies in a member state with a more lenient legislation. This development is further enhanced by the international legal order that favours the incorporation theory, i.e. the theory that the “nationality” of a corporation is determined by the country of formal incorporation, and not like in some legal systems where there actual centre of business is located. Moreover, on the international level, bilateral investment agreements facilitated transnational corporate investments by conferring rights on them vis-à-vis the host state that potentially entitle them to horrendous damage claims if the host oversteps his very thin margin for regulating such investments while the corporations themselves are only very rarely the subject of any obligations under those treaties.
2. Restrictions of regulatory statutes and extraterritorial tort law applicability
Additionally, domestic legislation predominantly views corporations as separate legal entities that cannot be held liable for action by their subsidiaries. For actor-based corporate networks, that are usually dominated by one entity that exercises a certain degree of control over their subsidiaries and benefit greatly from their business activities, this means that they are factually shielded from tort liability to victims due to chronical undercapitalization of subsidiaries or factual denial of justice in the states where they operate. While such corporate networks usually act as economic entities, the legal restrictions in domestic tort law lead only in rare and very exceptional circumstances of direct control by the parent company or proven circumvention of legal provisions to piercing the corporate veil. This applies even more to network-based corporate relationships, where the major buyer on top of the supply-chain does not exercise any corporate oversight over its sellers, but where their dependency on the buyer leads to his factual exercise of control in their contractual relationships. Nevertheless, even small gateways to extraterritorial application of tort liability like the US Alien Tort Statute have very recently first been narrowed and then outright blocked due to a lack of proximity in cases where the defendant was not incorporated in the United States.
3. Rejection of corporate legal subjectivity by the international order
Finally, there is no global regulatory framework that obliges multi-national enterprises directly to comply with third party interests such as Human and workers’ rights or environmental and health protection. While generally strengthening the position of the individual in international legal frameworks, international law is still based on the Westphalian system that – with very limited exceptions – does not confer any obligations on private actors but is governed by states. If only states are directly obliged to follow those international legal frameworks and thus to indirectly oversee the conduct of corporations acting in their sovereign dominion, existing international frameworks are limited where states cannot or will not enforce their populations’ rights against adverse business practices.
III. Approaches for overcoming the global governance gap
As the global governance gap forms the cornerstone of every debate on global corporate social responsibility, scholars, civil society organizations and politicians have framed several unique approaches to overcome the lack of global governance that each target different actors and suggest various measures.
1. Private Self-Regulation
For the last decades, approaches to close the global governance gap have been mainly focused on private self-regulation of corporations. Be it through civil regulation by encouraging corporations to introduce corporate wide codes of conduct that bind parent and subsidiary companies alike, through manifestation of technical standards in contractual supply-chain relations or by committing to state or NGO sponsored voluntary frameworks like the UN Global Compact or private product certificate programs. Some scholars like Andreas Scherer and Guido Palazzo have claimed that building on the concept of private self-regulation, multi-national corporations should be the main actors to fill the global governance gap. They argue, that in the course of globalization the Westphalian order that relied on state regulation is outdated and multinational enterprises should instead become the major political actors for governing international business activities. As multinational corporations would not only strive for profit maximization anymore but are also guided by societal responsibilities, self-regulation would be the most effective and promising approach. Therefore, proponents of private regulation support the creation of a new theory of the firm incorporating new forms of democracy and corporate governance instead of relying on state-based regulatory efforts.
2. Classical State Regulation
In view of the shortcomings of corporate self-regulation, some scholars and civil society actors proposed a revival of classic domestic state governance in regulating multinational corporations. Against the background of an UNHRC working group, the Human Rights NGO “FIAN International” proposed an approach that is centred around the states’ duty of respecting, protecting and enabling the enjoyment of human rights within and outside their territories. This shall be accomplished by implementing internationally corresponding domestic legislature that effectively prevents companies from breaching human rights that states have committed to protect through international treaties. In this regard, proponents of classical state regulation are vehemently opposed to increase the reliability on corporations for self-regulation and as subjects of international law as this would potentially replace the state as sovereign and as only constitutionally legitimate law-maker. This so-called “market capture” as Joel Bakan describes it would subject public interests to the market and hence undermine democratic processes. Accordingly, proponents of classical state regulation strive for a revitalization of states’ steering capacity and champion classical top-down domestic regulation of corporations that is preferably underscored by an international mechanism assuring that states will indeed enact such legislature. As according to Jean-Philippe Robé corporations are “legal creatures” that inherently rely on the rights and capacities conferred to them by law, domestic corporate law has been identified as especially promising to redefine a corporation’s purpose and the underlying legal framework in which a company may exercise its business activities on a global level including proper liability mechanisms.
3. Internationally Binding Mechanism
Another approach likewise outlines the deficiencies of private self-regulation but is sceptical if states have the capacities and indeed the will to properly regulate their companies on a national level. This is underscored by the reserved attitude towards business regulation especially from leading actors such as the United States. Therefore, several scholars and initiatives have favoured the development of an internationally binding instrument on corporate regulation and liability that argues around two main lines. First, David Bilchitz argues that considering their state-like influence and extensive rights conferred to them by international treaties, states should develop an instrument which confers international legal subjectivity to multinational corporations that directly obliges them under international Human Rights Treaties. Fearing the erosion of the states’ role to act on an international level and critically questioning the possibility of enforcing violations by states, scholars like Surya Deva and intergovernmental initiatives such as the Zero Draft by the UNHRC have directed their focus on binding states to exercise their steering capacity in a way that corporations will comply with the obligations outlined in an international instrument.
4. Polycentric Governance
According to the proponents of polycentric governance like John Ruggie, the global governance gap has not been created by states giving up their steering capacity but is based on the natural fragmentation of global world order in times of globalization. Instead of focusing solely on one specific actor like states, corporations or the international community, Ruggie argues, that the most effective and feasible approach is one that incorporates both private and public actors and encourages measures on all available levels. Accordingly, instruments of polycentric governance aimed at safeguarding CSR like the UN Guiding Principles are addressing states to entering into regulating treaties with producer states, to regulate companies in their home territories and to encourage states to reward CSR conformity by creating policy incentives. At the same time, civil society shall exert social pressure on non-confirming corporations and companies themselves shall introduce self-regulatory due diligence mechanisms in its supply-chain and comply with its duty of care towards employees and third parties. As an approach that is driven by pragmatism and consensus building, it aims for a constructive alignment strategy that incorporates binding regulation, soft law incentives and corporate self-regulation.
IV. Enhancing Consensus-driven Realism
Though all approaches have their particular strengths and weaknesses, it must be finally determined which at the present stage seems to be the most promising to effectively enhance the compliance of multi-national corporations with societal interests.
While corporate self-regulation has the advantage of being voluntary which entails that it does not need a multinational accord addressing all state interests and being more flexible regarding business or sector specific risks for Human Rights, it must be doubted if such an approach can be efficient on its own. While soft law frameworks such as for example the UN Global Compact on Business and Human Rights were received favourably by the business community, studies have shown that due to lenient entry and supervision mechanisms, the effectiveness of such self-regulatory frameworks are worse than expected. Accordingly, scholars such as Katharina Pistor have repeatedly warned that relying on self-regulatory market mechanisms would lead to global anarchy that will not only fail in overcoming the global governance gap, but actually weakens regulatory oversight.
Therefore, an international law approach could be more promising. However, as has been rightfully outlined, it must be doubted that a single unifying treaty on the international level has the capability of addressing all the manifold issues associated with CSR. Moreover, given the extremely reserved attitude towards corporate regulation, it is more than questionable if states like the United States or the United Kingdom whose companies are essential drivers of modern globalization would subject their corporations to oversight by a non-domestic body. Even the more lenient approach by the Zero Draft to formulate state obligations to regulate its companies has been met by harsh criticism by the states of the Global North. Despite the efforts of the UNHRC, the chances of newly creating a binding mechanism in international law that addresses all CSR related issues in a major coup on which every state can agree are close to zero. However, the situation may change when it is based on rules of customary international law that generally all states can agree on. As Jochen v. Bernstorff has outlined, states could be already held responsible, where they do not exercise their domestic steering capacity to prevent foreseeable human rights abuses by nationally incorporated corporations on grounds of the principles on state responsibility.
This could also be the connecting factor to classic state regulation. Where states vigorously impose due diligence obligations on corporations and mandatorily require the subsequent publication of all findings, this would not only serve as a tool to establish a duty of care that could eventually result in an international corporate liability scheme, but would likewise oblige states to adopt all means to prevent identified human rights impacts themselves. Still, domestic regulatory efforts necessitate the actual will of states to exercise its regulatory power in the first place. Hence, where states have willfully neglected their obligations towards their own population in order to attract investments, appealing to the good will of states is most likely bound to fail.
Therefore, the most promising approach would be one that incorporates the principle of polycentric governance. Although frameworks such as the UNGP have been criticized by some governments and civil society organizations as being not far-reaching enough, it is the interplay of revitalizing states efforts to protect human rights abuses especially in the form of imposing corporate due diligence obligations, creating fora for victim’s remedies and at the same time encouraging corporate self-regulation and civil society pressure which most effectively and swiftly enhances the current state of CSR. While the idea of a major international coup miraculously solving all CSR related issues on a global scale is extremely appealing, one must realize that it is equally unlikely and could eventually frustrate reform efforts for decades. We should therefore not repeat the failures of ambitious projects like the UN Draft Norms and try to revolutionize an entire form of business without incorporating its most important actors on all possible levels. Instead, we should keep in mind, that even small reformatory steps that point in the right direction will accumulate and eventually lead to a sustainable improvement of the situation for those most affected by adverse business practices.
 Cf. European Commission (2011), ‘Communication, A Renewed Strategy 2011-14 for Corporate Social Responsibility’, COM(2011) 681, p. 6 and European Commission (2019), ‘Staff Working Document, Corporate Social Responsibility, Responsible Business Conduct and Business & Human Rights: Overview of Progress’, SWD(2019) 143, p. 3.
 Cf. A F Verdam (2014), ‘The Obligation of Dutch Company Directors to Be Guided by ‘the Interests
of the Company’ Compared to the Concept of ‘Enlightened Shareholders Value’ in the English Company Act’, 11 European Company Law, p. 159.
 M Friedman (1970), ‘The Social Responsibility of Business is to increase its profits’, New York Times Magazine, 13 September 1970.
 Cf. L Stout (2011), ‘Why We Should Stop Teaching Dodge v Ford’, UCLA School of Law, Law & Econ Research Paper Series, p. 07-11.
 Cf. Fn. 2, p. 161.
 Cf. K Pistor (2019), ‘Capital’s Global Rule’, 26 Constellations, p. 431.
 Cf. J Heymann & R Bismuth (2019), ‘Freedom of Establishment: One Step Closer to Making a European Delaware Possible?’ in H Muir Watt et al. (eds), Global Private International Law: Adjudication without Frontiers, Cheltenham: Edward Elgar, p. 439.
 Cf. Barcelona Traction, Light and Power Company, Limited (Belgium v. Spain); Second Phase, International Court of Justice (ICJ), 5 February 1970.
 Cf. Y Levashova (2018), 'The Accountability and Corporate Social Responsibility of Multinational Corporations for Transgressions in Host States through International Investment Law', 14 Utrecht Law Review, p. 41.
 Alien Tort Statute, 28 U.S.C. § 1350.
 Cf. Kiobel v Royal Dutch Petroleum, 569 US 108 (2013).
 Cf. Jesner v. Arab Bank, PLC, No. 16-499, 584 US ___ (2018).
 Cf. D Vogel (2010), ‘The Private Regulation of Global Corporate Conduct’, 49(1) Business & Society, p. 74.
 Cf. A. G. Scherer and G. Palazzo (2011), ‘The New Political Role of Business in a Globalized World: A Review of a New Perspective on CSR and its implications for the Firm, Governance, and Democracy’, In Journal of Management Studies, Vol. 48 Issue 4, p. 901.
 Cf. id., p. 905.
 Cf. id.
 Cf. id., p. 920 f.
 Cf. FIAN (2018), ‘Written Contribution for the 3rd session of the OEIGWG on transnational corporations and other business enterprises with respect to human rights: Comments on the elements document presented by the Chairperson-Rapporteur’, 2018.
 Cf. id.
 Cf. J Bakan (2015), ‘The Invisible Hand of Law: Private Regulation and the Rule of Law’, In Cornell International Law Journal, Vol. 48, Issue 2, p. 299.
 Cf. J-P Robé (2012), ‘Being Done With Milton Friedman’, In Accounting, Economics, and Law, Vol. 2, Issue 2, Article 3, p. 9.
 Cf. D Bilchitz (2016), 'The Necessity for a Business and Human Rights Treaty' 1 Business and Human Rights Journal, p. 207.
 Cf. S Deva (2019), The Zero Draft of the Proposed Business and Human Rights Treaty, Part I: The Beginning of an end? and Part II: On the right track, but not ready yet, Business and Human Rights Resource Centre, Reflections on the Zero Draft, Blog Series.
 Cf. Updated Zero Draft Treaty on Business and Human Rights (2019).
 J. G. Ruggie (2014), ‘Global Governance and "New Governance Theory": Lessons from Business and Human Rights’, In Global Governance, Vol. 20, p. 7 f.
 Cf. id. p. 9.
 Cf. id.
 Cf. UN Joint Inspection Unit, ‘United Nations corporate partnerships: The role and functioning of the Global Compact’, JIU/REP/2010/9.
 Cf. Fn. 6, p. 433.
 Cf. J G Ruggie (2019), ‘Keynote Address’, Conference ‘Business & Human Rights: Towards a Common Agenda for Action’, organized by Shift and the Finnish Presidency of the Council of the EU, 2019, p. 8.
 Cf. J v. Bernstorff (2010), 'Die völkerrechtliche Verantwortung für menschenrechtswidriges Handeln transnationaler Unternehmen. Unternehmensbezogene menschenrechtliche Schutzpflichten in der völkerrechtlichen Spruchpraxis‘, INEF Forschungsreihe Menschenrechte, Unternehmensverantwortung und Nachhaltige Entwicklung 05/2010, Duisburg: Institut für Entwicklung und Frieden, Universität Duisburg‐Essen, p. 26.
 International Law Commission, Draft Articles on Responsibility of States for Internationally Wrongful Acts, November 2001, Supplement No. 10 (A/56/10), Art. 16.