ethical transnational corporate activity at home and abroad

80 Pages·2016·10.57 MB·English

ETHICAL TRANSNATIONAL CORPORATE
ACTIVITY AT HOME AND ABROAD:
A PROPOSAL FOR REFORMING
CONTINUOUS DISCLOSURE OBLIGATIONS
IN AUSTRALIA AND THE UNITED STATES
SANDEEP GOPALAN* AND KATRINA HOGAN**
ABSTRACT
Multinational Corporationse stablish operations in states with
lower legal and ethical standardsi n areas including the environment,
wages, labor standards, human rights, corruption, and company
taxation.
Corporate law scholars cannot be indifferent to the horrific
consequences of these lax standards. From contributing to rapes and
violent incidents stemming from trade in conflict minerals in the
Congo to the killing of workers due to poor conditions in garment
manufacturing units in Bangladesh, multinational corporations
exploit conditions in developing countries abroad without disclosing
their actions at home. We advance a normative argument to clarify
and strengthen the existing model of disclosure-based regulation to
hold MNCs accountable. We argue that, since the core expectations
held by shareholders of companies are the same whether they are
operating within our borders or externally, a harmonization of
disclosure obligations imposed by law would be a more flexible and
less costly solution. We posit that a broader reading of the
disclosure obligations of companies under existing legislation like the
Reg. S-K in the United States, the continuous disclosure rules under
* Dean and Professor of Law, University of Newcastle Law School.
Sandeep Gopalan would like to thank Terrie Troxel, Jack Tatom, Professor Bill
Wilhelm, and the Networks Financial Institute at Indiana State University
College of Business for their valuable support in conducting research for this
article. We are also grateful to Audrey Son, Bassam Khawaja, and the editorial
staff of the Columbia Human Rights Law Review for their excellent editorial
work.
** Solicitor and doctoral candidate, University of Newcastle Law School.
COLUMBIA HUMAN RIGHTS LAW REVIEW [46.2:1
the Australian Corporations Act 2001, and listing rules such
as those adopted by the Australian Securities Exchange and the
New York Stock Exchange would require the disclosure
of material corporate practices outside our national borders.
I. THE ETHICAL DILEMMA: DOUBLE STANDARDS
Globalization has created a web of interconnected domestic
markets. Multinational corporations ("MNCs") routinely locate parts
of their supply chain and production processes in various countries to
maximize profits for shareholders by lowering organizational costs.
This goal creates incentives to establish operations in states with
lower legal and ethical standards in areas including the environment,
wages and labor standards, human rights, corruption, and company
taxation. In turn, developing states engage in competition for foreign
direct investment by deregulating the above areas of their economies,
thereby creating a favourable business climate for MNCs. The
consequence is a "race to the bottom."' Going against the grain, the
"home" legal climate for MNCs continues to become more complex
due to a steady progression of new legislation aimed at better
corporate behavior, whether it is in the form of increased disclosure
obligations, greater empowerment of shareholders, mandatory codes
of ethics, or the protections conferred on employees, consumers, and
the environment. While this heightened regulatory attention and
enforcement-both private and public-has broadly improved
corporate conduct, it has also imposed significant costs. The result is
a double standard whereby MNCs uphold higher ethical and legal
standards in their own developed home state but barely comply with
less restrictive legal regimes abroad.2 To make a bad situation worse,
even the attenuated laws existing in developing states are not
enforced appropriately because of poor resources and institutional
capacity.3 Adding to the problem is the general culture of corruption
1. See Nita Rudra, Globalization and the Race to the Bottom in Developing
Countries: Who Really Gets Hurt? (2008).
2. S. Prabakaran, Business Ethics and Corporate Governance 258-59
(2010).
3. See Special Representative of the Secretary-General on the issue of
human rights and transnational corporations and other business enterprises,
Business and human rights in conflict-affected regions: challenges and options
towards State responses, U.N. Doc. A/HRC/17/32 (May 27, 2011) (by John Ruggie).
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and the capture of economic opportunities by powerful domestic elites
whose interests are aligned with those of foreign MNCs.
Corporate law scholars cannot be indifferent to the horrific
consequences of this double standard-ranging from contributing to
rapes and violent incidents associated with trade in conflict minerals
in the DRC, to the killing of workers due to poor conditions in
garment manufacturing units in Bangladesh, to environmental
destruction in many resource rich countries. Recent legislative
activity-such as the "conflict minerals rule" issued by the U.S.
Securities and Exchange Commission ("SEC")-has sought to
penalize some consequences of corporate conduct affecting human
rights outside domestic borders.4 However, resistance from industry
groups and the recent decision by the D.C. Circuit invalidating a
portion of the conflict minerals rule on First Amendment grounds has
threatened such intervention.5
Developed states like the United States and Australia should
not allow the prevailing double standard to continue. If the legal
systems of these nations have committed themselves to a core set of
norms applicable to businesses incorporated or listed within their
borders, those basic norms must apply when such businesses conduct
operations abroad. There is no principled basis for exempting
corporations from such norms when their actions have significant
consequences for domestic constituencies, including shareholders,
consumers, and employees. This is supported by a recent report by
Deloitte noting that
4. The SEC adopted Rule 13p-1 and Form SD, 17 C.F.R. §§ 229.448,
240.13p-1 (2012) (the "conflict minerals rule," requiring reporting companies to
provide annual disclosures regarding conflict minerals) under the Securities
Exchange Act, 15 U.S.C. 78a et seq., to implement Dodd-Frank Wall Street
Reform and Consumer Protection Act, Pub. L. No. 111-203, § 1502, 124 Stat. 1376
(relevant parts codified at 12 U.S.C. § 78m(p) (2010)).
5. National Association of Manufacturers, et al. v. SEC, 748 F.3d 359 (D.C.
Cir. 2014). The SEC has issued guidance on the effect of this decision, which
states, "No company is required to describe its products as 'DRC conflict free,'
having "not been found to be 'DRC conflict free,'" or "DRC conflict
undeterminable." If a company voluntarily elects to describe any of its products as
"DRC conflict free" in its Conflict Minerals Report, it would be permitted to do so
provided it had obtained an independent private sector audit (IPSA) as required
by the rule." Statement on the Effect of the Recent Court of Appeals Decision
on the Conflict Minerals Rule, Keith Higgins, Director, SEC Division
of Corporate Finance (Apr. 29, 2014), available at http://www.sec.gov/
News/PublicStmt/DetailPublicStmt/1370541681994#.U4Vq8uvPVS8.
COLUMBIA HUMAN RIGHTS LAW REVIEW [46.2:1
[niews on human rights issues associated with a
company have triggered an average $892 million drop
in market value, and boycotts and other forms of
protest can and do impact stock prices. Public protests
on labor and consumer issues, such as product
quality, can cause a one percent drop in stock prices
in the days around the event.6
Therefore, rather than being content with piecemeal reactive
legislation, we argue that, because the core expectations held by
shareholders of companies are the same whether they are operating
domestically or overseas, a harmonization of disclosure obligations
imposed by law would be a more flexible and less costly solution.
Our argument-built upon a comparison of the existing legal
regimes in the United States and Australia-is novel because it does
not necessarily require the enactment of any costly new statutory
provision or regulation. Rather, it is based on clarifying and
strengthening the existing model of disclosure-based regulation to
reduce agency costs by harmonizing disclosure expectations, whether
the activity occurs domestically or in other countries. We posit that a
broader reading of the disclosure obligations of companies under
existing legislation like Reg. S-K in the United States, the continuous
disclosure ("CD") rules under the Australian CorporationsA ct 2001
(Cth) ("CA"),7 and listing rules ("LRs") such as those adopted by the
Australian Securities Exchange ("ASX") and the New York Stock
Exchange ("NYSE"), would require the disclosure of material
corporate practices outside national borders. It is likely that
contractors and employees in the supply chain possess knowledge
about the veracity of relevant business practices in foreign locations.
Therefore, we propose that enforcement should largely rely upon a
system of rewards for whistleblowers who provide information about
breaches.
6. Dinah Koehler & Eric Hespenheide, Finding the Value in
Environmental, Social, and Governance Performance, Deloitte Review (2013),
available at http://www.deloitte.com/assets/DcomLithuania/Local%20
Assets/Documents/Straipsniai/Finding%20the%20value.pdf (citing Vivien Kappel
et al., Human rights abuse and corporate stock performance - an event study
analysis (Dec. 21, 2009), available at http://feemdeveloper.net/
attach/Peter%20Schmidt.pdf; Brayden G. King & Sarah A. Soule, Social
Movements as Extra-InstitutionalE ntrepreneurs: The Effect of Protests on Stock
Price Returns, 52 Admin. Sci. Q. 413 (2007)).
7. All section references contained in this paper refer to the Corporations
Act 2001, unless otherwise specified.
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To be sure, any increased disclosure obligation has the
potential to impose additional expenses on companies.' But this is
balanced by the generation of a number of potential positive benefits.
First, the publication of better information allows the market to
properly price stocks, thereby enabling shareholders to make better
investment decisions. Second, it empowers shareholders to better
engage with management in line with the nexus of contracts theory.
Third, it has the potential to improve the reputation of the company
and enhance the brand value of its products.9 Fourth, it increases
trust across a range of constituencies, including consumers and
communities.1" Fifth, it can play a significant role in attracting high
caliber prospective employees and contribute to better productivity
among existing employees. " Sixth, firms can benefit from both
improved access to funding and enhanced financial performance from
such disclosure.12 Finally, it enables principals to reduce agency costs
by deploying the provided information to constrain the actions of
management and to control adverse selection and moral hazard. At
the systemic level, the added expenses imposed by our model can be
reduced by limiting disclosure to operations by companies meeting a
8. The conflict minerals rule adopted by the SEC by way of Rule 13p-l,
supra note 4, was initially expected to impose a cost of $3 billion to $4 billion and
$207 million to $609 million annually thereafter. See National Association of
Manufacturers,7 48 F.3d at 364.
9. See generally John Mahon, Corporate Reputation: A Research Agenda
Using Strategy. and Stakeholder Literature, 41 Bus. & Soc. 415-45 (2002)
(exploring the role reputation plays in the interactions between a firm and its
stakeholders); Charles Fombrun & Mark Shanley, What's in a Name? Reputation
Building and Corporate Strategy, 33 Acad. of Mgmt. J. 233-58 (1990) (proposing a
model of reputation-building as a competitive process in which stakeholders
evaluate corporate performance according to multiple economic and non-economic
criteria).
10. See generally Marc Orlitzky & J.D. Benjamin, Corporate Social
Performance and Firm Risk: A Meta-Analytic Review, 40 Bus. & Soc. 369-96
(2001) (arguing that the relationship between corporate social performance and
risk is one of reciprocal causality).
11. See Sandra Waddock & Samuel B. Graves, The Corporate Social
Performance Financial Performance Link, 18 Str'gic Mgmt. J. 303-19 (1997)
(suggesting that firms with good corporate social performance ratings may find it
easier to recruit high quality employees, which may result in increased
productivity).
12. Marc Orlitzky et al., Corporate Social and Financial Performance: A
Meta-analysis, 24(3) Organization Studies 403, 423 (2003) ("Based on this
meta-analysis integrating 30 years of research, the answer to the introductory
question posed by Business Week is affirmative. The results of this meta-analysis
show that there is a positive association between CSP and CFP across industries
and across study contexts.").
COLUMBIA HUMAN RIGHTS LAW REVIEW [46.2:1
triad of factors: significant operations in a high-risk country; 13
production of high-risk products;14 and the satisfaction of a pecuniary
threshold.
Disclosure is not required of all information or from all
companies acting overseas. It is only when conduct meets certain
threshold criteria that disclosure obligations arise. These proposed
thresholds are adapted from market instruments such as the
FTSE4Good criteria, and from other initiatives such as the European
Union's directive on non-financial disclosure.5 They are appropriate
for use in this context because they reflect a broad consensus on what
constitutes good corporate responsibility practice globally.16 They are
also normatively rooted in a number of international instruments
endorsed by major developed states including the UN Global Compact
and the International Labour Organization Conventions.17 Moreover,
13. See FTSE4Good Index Inclusion Criteria: Thematic Criteria and Scoring
Framework, FTSE The Index Company 12 (Aug. 2013) http://www.ftse.coml
products/downloads/FTSE4GoodInclusionall copy.Aug20l3.pdf [hereinafter
FTSE4Good Index] (listing countries that pose a risk of exposing businesses with
significant involvement in those countries to complicity in human rights abuses).
14. Id. at 15.
15. The EU directive, which has been adopted by the European Parliament,
states, "The obligation to disclose a non-financial statement in the annual report
should only apply to those companies whose average number of employees exceeds
500, and exceed either a balance sheet total of EUR 20 million or a net turnover of
EUR 40 million." Commission Proposalf or a Directive of the European Parliament
and of the Council amending Council Directives 78/660/EEC and 83/349/EEC
as regards disclosure of non-financial and diversity information by certain large
companies and groups, preamble, COM (2013) 207 final (Apr. 16,
2013), available at http://eur-lex.europa.eulegal-content/ENTXT/PDF/
?uri=CELEX:52013PC0207&from=EN.
16. FTSE4Good Index, supra note 13, at 5.
17. These include the eight ILO core conventions: Freedom of Association
and Protection of the Right to Organise Convention, adopted July 9, 1948, 68
U.N.T.S. 17 (entered into force July 4, 1950); Right to Organise and Collective
BargainingC onvention, adopted July 1, 1949, 96 U.N.T.S. 257 (entered into force
July 18, 1951); Forced Labor Convention, opened for signature June 28, 1930, 39
U.N.T.S. 55 (entered into force May 1, 1932); Abolition of Forced Labor
Convention, opened for signature June 25, 1957, 320 U.N.T.S. 291 (entered into
force Jan. 28, 1959); Minimum Age For Admission to Employment Convention,
opened for signature June 26, 1973, 1015 U.N.T.S. 297 (entered into force July 19,
1976); Prohibitiona nd Immediate Action for the Elimination of the Worst Forms of
Child Labor Convention, opened for signature June 17, 1999, 2133 U.N.T.S. 161
(entered into force Nov. 19, 2000); Equal Remuneration for Men and Women
Workers for Work of Equal Value Convention, opened for signature June 29, 1951,
165 U.N.T.S. 303 (entered into force May 28, 1953); and Discriminationi n Respect
20151 Ethical TransnationalC orporateA ctivity
the criteria have been designed to support environmental
sustainability, uphold universal human rights, ensure good supply
chain labor standards,"8 counter bribery, and mitigate the effects of
climate change19 -all of which are established ethical norms within
Australian and U.S. national borders and embodied in other
legislation.
This paper is organized as follows. Part II describes the
contemporary business landscape as being characterized by a trifecta
of factors requiring the level of disclosure we advocate: ethical
consumption, shareholder engagement, and the recognition of the
stakeholder model. Part III analyzes relevant U.S. disclosure
provisions and an outline of the conflict minerals decision. Part IV
examines Australia's CD obligations. Part V outlines our proposal for
an expanded view of materiality and makes a case for the benefits of
disclosure, both in terms of incentives for more ethical behavior and
in terms of stock market returns. Part VI outlines our proposed model
for enforcement in the light of existing statutory provisions and
practice in the U.S. and Australia. Part VII considers some objections
against our model, and Part VIII concludes.
II. THE CONTEMPORARY BUSINESS LANDSCAPE
The raison d'etre for our approach is provided by a trifecta of
factors that characterize the contemporary business environment:
ethical consumption, the rise of shareholder engagement, and the
international norm of the stakeholder-oriented corporation. Together,
these impel disclosure of business conduct overseas when it satisfies
threshold criteria.
of Employment and Occupation Convention, opened for signature June 25, 1958,
362 U.N.T.S. 31 (entered into force June 17, 1960).
18. These are based on the four International Labor Organization Core
Conventions and take into account equal opportunity, forced labor, child labor,
freedom of association, and collective bargaining. See FTSE4Good Index, supra
note 13, at 16.
19. This has been largely based on the United Nations Global Compact:
FTSE The Index Company Group, FTSE4Good Index Inclusion Criteria: Thematic
Criteria and Scoring Framework at 4, 19 (2013).
COLUMBIA HUMAN RIGHTS LAW REVIEW (46.2:1
A. Ethical Consumption
Consumers increasingly care about the ethical consequences
of their purchasing decisions.2' The 2013 Global CSR Study, a survey
of 10,000 citizens in the ten largest economies in the world, found
that 91% of consumers believed companies had to do more than
comply with minimum legal standards to operate responsibly and
90% said they would boycott a company engaging in irresponsible
business practices.2 Research shows that consumers are "concerned
with the effects that a purchasing choice has, not only on themselves,
but also on the external world around them."22 One study found that
about 30% of sampled consumers were favorably disposed to ethical
consumption. Studies have also shown that consumers who are
aware of the ethical nature of a good are willing to pay a premium in
contrast to a lower price for known unethical goods.24 Elliott and
Freeman found that consumers would pay 28% more for a $10 ethical
20. In the UK alone, the market for ethical products has grown from about
£13.5 billion in 1999 to £36 billion in 2008. See The Co-Operative Bank, Ten
Years of Ethical Consumerism: 1999-2008 2 (2008), available at
www.co-operative.coop/PageFiles/416561607/Ethical-Consumerism-Report-
2009.pdf.
21. Additionally, 55% reported that they had boycotted a company within
the last twelve months. See Cone Communications, 2013 Cone
Communications/Echo Global CSR Study 23 (2013), available at
http://www.conecomm.com/stuff/contentmgr/files/0/fdf8ac4a95f78de426c2cb11765
6b846/files/2013_conecommunicationsecho-global-csr study.pdf [hereinafter
2013 Global CSR Study].
22. See Rob Harrison et al., The Ethical Consumer 2 (2005); Andrew Crane,
Unpacking the Ethical Product, 30 J.Bus Ethics 361, 361-73 (2001). See also
Elizabeth H. Creyer & Willaim T. Ross, Jr., The influence of firm behavior on
purchase intention: do consumers really care about business ethics?, 14 J.
Consumer Marketing 421, 428 (1997) (finding that consumers considered the
ethics when making purchases, that they expect ethical behavior, that they will
pay higher prices for ethically produced goods, and that, while they might
purchase goods produced by an unethical producer, there is an expectation that
these goods should be cheaper).
23. Iris Vermeir & Wim Verbeke, SustainableF ood Consumption: Exploring
the Consumer "Attitude Behavioral Intention Gap", 19 J. Agric. & Envtl. Ethics
169, 172-73 (2006).
24. But cf. The Guardian, Consumer Attitudes and Perceptions on
Sustainability 2 (2008), available at http://image.guardian.co.uk/sysfiles/
Guardian/documents/2010/06/llGSiJun2OlO.pdf (indicating that environmental
factors are important, but that price, availability, and quality matter more to
consumers).
20151 Ethical TransnationalC orporateA ctivity
good and 15% more for a $100 good.2' Another study found that
consumers were willing to pay over 10% extra on average for ethical
options across a wide variety of goods.26 A Belgian study received
similar results and concluded that the average price premium
consumers were willing to pay for a fair trade label was 10%. Only a
small component of consumers-10% of the sample-was prepared to
pay the current price premium of 27%.27 Similarly, a U.S. study found
that 38% of respondents were willing to pay an average premium of
20% for products that came from a supply chain they perceived as
ethical.2' Furthermore, a recent survey found that 68% of Australian
consumers are willing to pay more if their clothes are made ethically
and employees in the supply chain receive a fair wage. The same
study found that 83% of consumers wanted the supplier factories and
working conditions within those factories to be disclosed.29
Against this backdrop, it is not surprising that companies
engaging in questionable production practices have encountered a
hostile reaction, including boycotts by consumers.30 For instance,
LVMW,a company that owns Louis Vuitton and TAG Heuer, was
de-listed from the FTSE4Good Index because of noncompliance with
supply chain requirements.31 The message is clear: consumers are
concerned by the behavior of corporations abroad. The key limitations
for ethical consumption on the demand side are information
25. Kimberly Ann Elliott & Richard B. Freeman, White Hats or Don
Quixotes? Human Rights Vigilantes in the Global Economy 4 (Nat'l Bureau of
Econ. Research, Working Paper No. 8102, 2001).
26. Peter J. McGoldrick & Oliver M. Freestone, Ethical product premiums:
antecedents and extent of consumers' willingness to pay, 18(2) The Int'l Rev.
Retail, Distribution and Consumer Res. 185, 186 (2008).
27. Patrick De Pelsmacker et al., Do Consumers Care About Ethics?
Willingness to Pay For Fair-TradeC offee, 39 J. Consumer Aff. 363 (2005).
28. Jason E. Taylor & Vigdis Boasson, Who Buys Fair Trade and Why (or
Why Not)? A Random Survey of Households, J. Consumer Af. (2014).
Interestingly, a comparative study of charitable and non-charitable eBay auctions
found that charitable items commanded 6% higher prices on average than
identical non-charitable items. See Daniel W. Elfenbein & Brian McManus, A
Greater Pricef or a GreaterG ood? Evidence that Consumers Pay More for Charity-
Linked Products, 2 Am. Econ. J. Economic Policy 28 (2009).
29. Sarah Whyte & Ben Doherty, Consumers Demand End to Secrecy,
The Sydney Morning Herald, June 24, 2013, http://www.smh.com.au/business/
consumers-demand-end-to-secrecy-20130623-2oqsl.html.
30. Sankar Sen et al., Withholding Consumption: A Social Dilemma
Perspective on Consumer Boycotts, 28 J. Consumer Res., 399-417 (2001).
31. Graham Tibbets, "Unethical Luxary Brands Criticised by WWF, The
Telegraph, Nov. 29, 2007, http://www.telegraph.co.uk/earthlearthnews/
3316454/unethical-luxury-brands-criticised-by-wwf.html.
COLUMBIA HUMAN RIGHTS LAW REVIEW [46.2:1
asymmetry, price sensitivity, and consumer confidence. Conversely,
on the supply side, rational apathy by consumers, low informational
and attention thresholds, mimicry by unethical suppliers, and
monitoring constraints over foreign elements in the supply chain pose
serious challenges. Our model offers an avenue for the reduction of
challenges on both the demand and supply sides of the equation.
B. The Rise of Shareholder Engagement
Alongside the consumption-side developments, shareholders
are increasingly concerned with the ethical conduct of companies.
This has several manifestations, including the growth of socially
responsible investing 32 and investment vehicles tailored to
sustainability and good corporate citizenship, increased engagement
by shareholders in business decisions," and lobbying for enhanced
32. For instance, the UN Principles for Responsible Investment contain six
principles and claim over 1200 signatories with $34 trillion worth of assets under
investment. See About the PRI Initiative, UNPRI.org, http://www.unpri.org/about-
pri/about-pri/ (last visited Oct. 20, 2014); the U.S. SIF Foundation's 2012 Report
on Sustainable and Responsible Investing Trends in the United States showed
$3.74 trillion was invested according to SRI strategies at the end of 2011. This
represented one in every nine dollars under professional management. See SRI
Basics, USSIF.org, http://www.ussif.org/sribasics (last visited Oct. 20, 2014).
33. For instance, Victorian Funds Management Corporation ("VFMC"),
which had funds under management of $41 billion on June 30, 2013, integrates
environmental, social, and corporate governance ("ESG") criteria into its
investment decision-making process. Similarly, $34 trillion in assets owned by
over 1200 owners and others who have signed up to the Principles of Responsible
Investment are invested in companies making ESG disclosures. See Financial
Services Council and the Australian Council of Superannuation Investors, ESG
Reporting Guide for Australian Companies: Building the foundation for
meaningful reporting (June 2011), available at
http://acsi.org.au/images/stories/ACSIDocuments/esg-reporting-guide.pdf.
34. "Many investors continue to show strong attention to environmental
sustainability and human rights and labor conditions, including across a
company's global supply chain. Requests for enhanced disclosure, monitoring and
management of these sustainability-related risks are growing compared to prior
years." Ernst & Young, Let's talk: governance, 2014 proxy season preview 3
(2014), available at http://www.ey.com/Publication/vwLUAssets/EY-2014-proxy-
season-preview/$FILE/EY-Proxy-Season-2014-preview.pdf [hereinafter Ernst &
Young Proxy Report] ("Compared to the situation three years ago, not only are
overall engagement levels higher, but fewer respondents said that they do not
engage. Nearly half of issuers, and more than half of investors, initiated more
than 10 engagements; compared with around 30 percent of issuers and investors
three years ago. . .."); Marc Goldstein, Defining Engagement: An Update on the
Evolving Relationship Between Shareholders, Directors and Executives 4 (Apr.