Global Rules for Corporate Accountability: The Proposal to Establish a Corporate Accountability Convention

by Matt Phillips

Over many decades, the duties placed on companies and expectations of how they should behave have been a topic for public debate and regulation. From the end of slavery to health and safety standards, corporations have been required to act in ways deemed to be in a wider public interest. Global rules defining acceptable corporate conduct are today more vital than ever, as corporate globalization proceeds apace:

• There is a tendency for public interest constraints to be removed or relaxed in the course of removing non-tariff barriers to trade;
• 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);
• 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;
• 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
• The scale of corporate impacts is undiminished and those impacts are increasingly remote from both the owners and the customers of the company.

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.

A multilateral agreement on corporate accountability would work to balance the processes of corporate globalization.

A corporate accountability convention should:

• Establish mechanisms for adversely affected stakeholders to obtain redress through exercising rights;
• Establish social and environmental duties for corporations;
• Establish rules for consistent high standards of behavior of corporations;
• 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;
• Establish sanctions for violations;
• Ensure the ecological debt owed by corporations to the South is repaid; and
• Secure environmental justice for communities threatened with or exposed to environmental injustice -- North and South.

New Duties on Companies, Directors and Top Officers

The convention should 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 (with 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.

Targeting directors places responsibility on specific individuals to carry out prescribed duties. In most regimes, directors take their legal responsibilities seriously because they can be debarred from holding directorships if they breach them.

The reporting requirement would establish the principle of reporting issues which are of interest and concern to the public, rather than simply those of financial interest to shareholders. Reporting serves two basic purposes. It ensures a corporation's attention to the things that must be reported (for example how it is performing against standards). It also provides a mechanism for the public, including investors, to identify the corporation's impacts. Such information is fundamental for active investor and other stakeholder participation.

Reporting on risks is particularly important for investors as it ensures they have the same level of knowledge as the corporation does about its business. Reporting requirements must include not only what are conventionally recognized as financial risks, but also risks of damage to environmental or social interests.

Corporate reporting and disclosure are presently subject to wide debate. The format developed by the Global Reporting Initiative, a voluntary initiative now being negotiated by nongovernmental organizations and businesses, may prove adequate in terms of coverage, but must also require verification -- preferably by affected stakeholders through some form of independent assurance. Robust reporting helps ensure investors are supplied with the same information as executives and ensures markets are based on "real" values of corporations.

The prior consultation duty reflects a leading demand from communities in Southern and East European countries. They have experienced the disruptive impact of inward investment and have had limited or no opportunity to participate in decision-making (on planning applications for example) in ways considered normal practice in many Northern countries. Some authorities, including the European Union, and public finance mechanisms, such as the World Bank, require environmental impact assessments before large-scale projects may proceed, but such assessments are not required in many jurisdictions. A useful precedent is the ILO Indigenous and Tribal Peoples Convention of 1989.

This demand requires a higher degree of disclosure, transparency and prior notice about corporate activities. It is equivalent, for example, to the requirement in some European countries for notification of workforces of changes planned by management. High standards for implementation will also be needed to avoid repetition of the common developing country experience of selective consultation and misleading use of data.

The third new duty on directors would require them, in addition to obligations to shareholders, to account to other stakeholders, such as communities, and to balance financial returns with the interests of these other affected stakeholders.

Corporations will argue that such a requirement would be confusing and impractical for directors. But directors are already subject to legal challenge from investors and customers in certain circumstances. They must also balance the short and longer term interests of investors, for example in deciding how much profit to distribute as a dividend. This provision extends those circumstances to include a wider range of public interests. It deepens the concept of due diligence, incorporating social and environmental effects and assessment of whether governments have met relevant international standards or requirements.

Extend Liability of Corporations

Beyond the new duties for directors outlined above, directors should be personally responsible for their company's compliance with existing national environmental and social laws. Precedents include the Environmental Protection Act 1990 in the UK, which holds directors liable for corporate pollution offenses. Such liability must survive corporate mergers.

Extending directors and corporate liability to activities that breach international agreements is already under consideration as a Framework Convention on Liability. 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.

A new liability regime must also address compensation for ecosystem degradation and restoration.

Rights of Redress for Citizens and Communities

The corporate accountability convention should 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 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 is essential for securing accountability. Individual citizens, communities and third parties, such as pressure groups representing environmental or social interests, must be able to pursue cases in a company's home country courts where necessary.

Presently there are highly variable opportunities for stakeholders, even employees, to seek redress where ultimate ownership may be remote -- a typical situation with most multinationals. Companies domiciled in the United States may face actions under the U.S. Alien Tort Claims Act for overseas operations, though these cases are hard to bring. The Brussels convention on jurisdiction states that, for EU-based parent companies, the country of domicile is the place of jurisdiction. Yet few, if any, "foreign direct liability" actions have been brought. Cases are often defeated or discouraged by the problems of access to relevant and fair courts. The time cases take is a disincentive -- for example, the Cape Asbestos case has taken several years to be heard, and in the meantime some of the workers made ill by exposure to asbestos have died [see "Global Asbestos Justice," Multinational Monitor, September 2000].

There is also a strong case for states having legal responsibility for the actions of corporations domiciled or listed there. In situations where redress would otherwise not be available, such as after bankruptcy, citizens and communities would then still be able to pursue their case against the home country government. A precedent is the assumption of state responsibility for outside pollution caused by anyone within its jurisdiction.

To enforce corporations and directors' new duties, affected and interested parties must be given standing to sue. Rights of legal challenge should be framed to prevent frivolous cases, but must ensure 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.

To further enable effective enforcement, legal aid must be provided to potential litigants. Citizens in developing countries, as well as in industrialized nations, are daunted by the costs involved in suing corporations, especially in countries influenced by UK legal traditions, where losing parties are often required to pay the winner's legal fees.

Establish Community Rights to Resources

The corporate accountability convention should 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
• To compensation or reparation for resources expropriated by or for corporations.

Useful precedents for such provisions 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. The 1997 Indigenous Peoples Rights Act in the Philippines 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 on the corporation involved.

Establish Consistently High Standards of Corporate Behavior

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 behavior are implemented and enforced. But international minimum standards for corporate performance are necessary. Such standards should primarily be based on existing and developing multilateral environmental and social agreements (and others as necessary). It would be easy to get bogged down in the details of standards, but once effective implementation mechanisms are in place, then the development of standards can follow.

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 behavior would also need to be more stringent, for example, in areas of high biodiversity value.

Strong Sanctions

The corporate accountability convention should establish national legal provision for suitable sanctions for companies in breach of these new duties, rights and liabilities, such as:

• Suspending national stock exchange listing;
• Withholding access for such companies to public subsidies, guarantees or loans;
• Fines; and
• In extreme cases, the withdrawal of limited liability status.

The threat of robust sanctions provides an incentive for corporations to follow prescribed standards of behavior. They are necessary to protect affected people (including future generations) and non-human species. Provisions exist for suspending stock market listings in some countries, for example for breaches of reporting requirements. Such provisions need to be extended in scale to cover all countries, and in scope to cover environmental and social issues. The withdrawal of limited liability status is, more-or-less, the death sentence for a company. It should be seen as a final sanction for repeat offenders and possibly only available to the international courts.

Governments can control access to public support for corporations and this also represents an opportunity for securing corporate accountability. The principle of screening corporations for eligibility for public subsidies and benefits must be established. There are precedents: some countries are considering withholding export credit guarantees from companies in breach of the corruption convention of the Organization for Economic Cooperation and Development (OECD) Guidelines for multinational enterprises. Loans by international financial institutions such as the World Bank are similarly screened.

Extend the Role of the International Criminal Court

The International Criminal Court would provide an independent forum to try directors and corporations for environmental, social and human rights crimes, perhaps through a special tribunal for environmental abuses. Eligibility for hearing or referral to this court would need to be defined.

Improve Monopoly Controls

The growth of corporate scale has led to the consolidation of economic power and increasing political influence. At present, countries are under pressure from corporations to relax antitrust and merger controls to enhance competitiveness in global markets. 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.

Implementation Mechanism

An effective institutional structure, rigorous implementation and enforcement and an effective monitoring system are essential for a corporate accountability convention. All stakeholders would need opportunity to access the process, including citizen groups. Continuous review would allow for updating content -- for example with respect to performance standards. Effective outreach and education to increase the profile of the agreement with those who might make use of it would be essential -- not the least because this would increase its incentive effect on corporations.

Matt Phillips is senior campaigner with Friends of the Earth England, Wales and Northern Ireland. This article is based on “Towards Binding Corporate Accountability,” a Friends of the Earth International position paper released in advance of the World Summit on Sustainable Development held in South Africa in August.