Corporate accountability: why?

Published by MAC on 2003-01-15

Corporate accountability: why?

by Richard Meeran

The ever increasing worldwide influence of corporations on society has been accompanied by the diminishing influence of governments. But the fact of the matter is that many multinationals ("MNCs") are wealthier than many countries. Globalisation has also increased the penetration of multinationals worldwide. According to the UN in 1999, there were 60,000 multinationals.

So it was perhaps not that surprising that in August last year, the UK Government nearly dropped its own Environment Minister from its team of delegates to the World Summit in Johannesburg - a team that includes representatives from Anglo American and Rio Tinto, two of the worlds largest mining MNCs.

My objective here is not to denigrate corporations but rather to focus on the importance of corporate accountability to society. The lack of proper accountability has been a significant factor in the detrimental effects of corporations on society. Proper corporate accountability is fundamental to ensuring the right balance between development, on the one hand, and the protection of the well being of people and our environment, on the other.

History is replete with examples of untrammeled corporate power: consider industrial disasters such as Thor Chemicals, Cape Plc, the explosion at Union Carbide's chemical plant in Bhopal, the environmental damage caused by the mining operations of Rio Tinto in Bougainville; the dumping of obsolete drugs in Asia; the intensive promotion by Nestle, of powdered baby milk as a substitute for breast feeding in regions where water required to mix the powder is contaminated; the forceful promotion by other food companies such as Monsanto, of genetically modified products, and their attempts to acquire ownership of the genetic code of food - eg turmeric and basmati rice - and herbal medicines, that have been cultivated in developing countries for thousands of years.

A particularly controversial feature has been the exploitation of people living under oppressive regimes and of people living in countries where health and safety and environmental protection standards are less stringent or less stringently enforced.

Allegations of such "double standards" have arisen in relation to: the activities; of Unocal and Shell in Burma and Nigeria; of Thor Chemicals and Cape Plc in South Africa. Ask yourself whether such conduct would have been tolerated in the UK and the US? Why was it that Cape closed its UK asbestos factories in 1968, but continued operating in South Africa for a further 20 years?

But such events are not merely a phenomenon of the past. Last year I was in Djibouti where the port had been polluted by a spillage of hazardous toxic wood preservatives. These had been produced by a UK company. 9 months later the chemicals are still there. The UN Food Programme had to suspend distribution of grain from a nearby silo destined for Ethiopia, because they were concerned it might have been contaminated. The UK company did nothing.

Similarly, some 12 years after it was imported from the US and Europe by Thor Chemicals, thousands of drums of toxic waste still remains on the Cato Ridge site in Natal.

Nor are these issues confined to corporations or industries which are traditionally regarded as bad: Clothing companies such as Nike, Reebok and Adidas, that depend on a responsible public image have been badly stung by allegations surrounding the use of child labour and unacceptable working conditions in the Far East factories which supply them with their products.

It implicit from this state of affairs that MNCs have not been subjected to a proper system of accountability. The root causes are various but include the following specific factors:

First, the conventional attitude among most corporations that their primary, indeed sole duty, is to further the interests of their shareholders.

Secondly, the failure of governments and international organisations to control the conduct of corporations sufficiently.

Thirdly, deficiencies in the legal mechanisms for holding corporations to account.

Fourthly, the absence of practical access to justice for those on the receiving end of corporate wrongdoing.

Dealing with each of those issues in turn:-

Primary duty to shareholders

Of primary concern is the fact that unlike democratically elected governments which are accountable to the electorate, companies have been regarded as accountable only to their shareholders.

Corporations do however increasingly claim to recognise their responsibilities as "corporate citizens" in society and not just to their shareholders. And as noted by Sir Geoffrey Chandler, a former Chair of Amnesty International UK's Business Group;

"..there is an emerging consensus within society that companies should be held responsible for the impact on their stakeholders of the operations over which they can exercise legitimate influence"

As long ago as 1954, Anglo American's founder stated:-

"The aim of the group is, and will remain, to make profits for our shareholders, but to do it in such a way as to make a real and lasting contribution to the communities in which we operate".

The question, poignantly raised by Amnesty International, is whether such statements "should be perceived as a genuine aspiration or as a disingenuous attempt to pull the wool over the eyes of an increasingly discerning and critical public?"

Indeed it is often hard to reconcile stated intention with actual practice. Extensive criticism was directed at the environmental, health and social impact arising from the manner in which Anglo American conducted copper mining activities in Zambia. It was reported that its Environmental Management plans for the mines, stipulated levels of dust exposure which contravened Zambian regulations but which were passed on the grounds that this was the best that could be achieved if profits were to be maintained at an acceptable level. For instance the idea of installing a state of the art flash furnace to reduce hazardous emissions down to safe levels, was rejected on the grounds of cost. As noted by OXFAM:

"Corporate socially responsible behaviour is heavily circumscribed by BATNEEC principles - "best available technology not entailing excessive cost". In other words the company's financial health takes precedence over the physical health of the work force and local residents"

Even so at the very least, corporate social responsibility statements are a recognition of moral responsibility by the corporations that make them. As such they may provide a valuable indicator in a legal context of how a corporation ought to have behaved or what it ought to have known. Thus they might also be viewed as a stepping stone towards imposition of
legal liability on corporations which fail to observe such principles.

A high profile corporation which claims to subscribe to such principles and is then exposed for failing to observe them, could also be badly damaged. In that sense for certain corporations, endorsement of principle of good corporate practice may provide a powerful incentive to comply.

But are such statements of business principles - noble though they undoubtedly are - sufficient to ensure accountability? The fact that they are voluntary, unspecific and not legally binding provides the answer.

Control of the conduct of corporations by governments and international organisations

Governments

The only really effective way for governments to control the conduct of corporations is through internationally binding regulations, national legislation and importantly, law enforcement. These are aspects which I shall discuss in a later section.

Here I wish to give some illustrations of government policy, how corporations have influenced this and also of the principled stance taken by some governments in the opposite direction.
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In the case of MNCs, one needs to consider the approach taken by the home country governments eg .Europe and the US and the host country governments and also the role of international organisations.

One might be forgiven for asking rhetorically, why when so much criticism has been directed against the eviction of farmers in Zimbabwe, multinational operations that have caused widespread human rights abuses of local communities and destruction of their environment, have not been similarly criticised?

For instance, what did the US government do or say regarding the Unocal pipeline in Burma? What did the UK government do or say in relation to Shell's operations in Nigeria ?

What about the US government's decision not to ratify the Kyoto Protocol on Climate Change, that would have forced US corporations like Exxon to reduce greenhouse gas emissions? In global terms it is hard to imagine a more blatant alignment with the interests of big business against the world community and our environment.

The confrontation between the US and South African governments over the generic manufacture of AIDS drugs was a powerful reflection of the determination of developed countries to protect the intellectual property interests of multinationals, and the equally dogged determination of a developing country to protect the right to life and health of its citizens.

Ultimately the World Trade Organisation decided that in certain circumstances countries should be permitted to override the patent protection of large pharmaceutical companies by allowing the manufacture of cheap generic drugs in order to protect health.

The Connelly v RTZ case involved a throat cancer victim employed at a mine in Namibia. We represented Mr Connelly, contending that he ought to be allowed to proceed with his case in England where he had been granted legal aid, whereas there was effectively no legal aid in Namibia. In July 1997 in a landmark ruling, the House of Lords agreed with us.

Shortly afterwards, following lobbying by the multinationals, the UK Lord Chancellor proposed legislation to reverse the ruling in the Connelly case. He expressed concern that the ruling might cause multinationals to shift their operations from the UK.

In its review of UK company law, the government advisory committee barely referred to the issue of corporate accountability.

In a unique feat of resistance, the Guatemalan government specifically enacted legislation designed to frustrate the power exercised by the US courts of refusing to deal with cases brought in the US courts against US companies, on the grounds that it was more appropriate for them to be dealt with locally.

The general picture that emerges is one where developing countries desperate for investment have felt compelled to accept the situation and Western governments have either positively encouraged or turned a blind eye to the exploitative conduct of their MNCs.

But there have been notable exceptions. I have already mentioned the South African and Guatemalan governments. As far as developed countries are concerned, there has also been some inspiration:

In considering whether UK legal aid ought to be provided to the South African asbestos victims in the Cape Plc case, the UK Legal Services Commission classified the case as one of "high/exceptionally high" public interest.

Recently Michael Meacher, the UK Environment Minister, committed the UK Government, to the cost of clean up of the chemical pollution of the port of Djibouti, on the grounds that the "polluter should pay". It is not clear whether the same principle will be applied by the UK Government in relation to the toxic waste at the Thor plant in Natal.

International organisations

Historically richer countries have been more concerned to develop a system that protects and favours their MNCs in their overseas operations, than it has with imposing responsibilities on them arising from those operations.

In the past, military force to secure these objectives was common. Later such force was recognised as incompatible with the rule of law and new principles of international law began to emerge in the practice of richer countries in disputes with developing states that hosted MNCs. The aim was to establish rules that would bind host states under international law, and in the process protect the commercial position of multinationals.

These objectives of richer states were not however universally accepted. Poorer states were anxious to retain the power to regulate the activities of multinationals in accordance with their own national objectives. These included the commercial interests of local businesses but also environmental and worker protection.

However, by and large the treaties proposed have focused on creation of favourable markets for multinationals in developing countries.

But more recently there have been negotiations regarding codes of conduct for multinationals. This led to the 1977 OECD Guidelines on Multinational Enterprises, and the 1977 International Labour Organisation Tripartite Declaration on Multinational Enterprises and Social Policy. Both of these impose an obligation on governments to protect public health and safety and the environment in a manner consistent with the goal of sustainable development. But neither are legally binding.

In July 2000, UN Secretary-General Kofi Annan proposed the "Global Compact", encouraging companies to build nine core human rights, labour and environmental principles, into their business strategies for the developing world. Several multinationals, including Shell, BP and Rio Tinto, have signed up to the Compact. (www.globalcompact.org).

Draft Fundamental Human Rights Principles for Business Enterprises have also been formulated by a working group of the UN sub-group on the Promotion and Protection of Human Rights. These are based on the Universal Declaration of Human Rights, the cornerstone of international human rights law and effectively seek to extend the international human rights obligations of countries to MNCs. The rationale was eloquently distilled by Sir Geoffrey Chandler:

"The responsibilities of transnational corporations…need to be defined by established instruments, such as the Universal Declaration of Human Rights…If companies press for multi-lateral trade and investment agreements for their financial protection, then they should be expected to accept a reciprocal international duty of care for their impact on the human, social and physical environment"

A committee of the European Parliament has come out in favour of voluntary codes of conduct for MNCs and proposed a European Directive requiring multinationals to participate in a compulsory system of "social reporting", on the social and environmental impacts of their businesses.

The drawback of voluntary, non-legally binding, codes of conduct, and international guidelines is that they are not legally binding. They are not enforceable and do not impose any sanction for non-compliance. The argument in their favour is that they are necessary stepping stone toward legally binding rules.

In any event, all this seems somewhat at variance with the following views expressed in a confidential memorandum 1991 by Dr Lawrence Summers, former Chief Economist at the World Bank, in the lead up to the Rio Summit (www.whirledbank.org/ourword/summers.html):

First, he pointed out that the life of a worker in a poor country is cheaper economically than that of a worker in a richer country;

"From this point of view, a given amount of health impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that."

Secondly, he suggested that it was logical for underpopulated and unpolluted parts of Africa to bear the brunt of pollution.

Thirdly, he suggested that people living in poor countries where the effects of poverty create a whole host of problems, including short life expectancy, were likely to be less concerned about environmental pollution, than more affluent people in developed countries.

Nevertheless, the World Bank has recently withdrawn from the controversial Sardo Sarovar dam project in Madhyapradesh in India, on environmental human rights grounds.

Corporate accountability: the legal position

International law

In general, apart from specific prescribed fundamental human rights violations, for example; genocide and forced labour, only countries are subject to international law. Claims under the US Alien Tort Claims Act have been pursued in the US under this legislation against Unocal and Shell on behalf of Burmese and Nigerian citizens respectively on the basis that the corporations allegedly conspired with the military governments to commit human rights violations.

In 1997, in a landmark decision against Unocal corporation, the US courts concluded that the Act did potentially cover claims brought against oil companies which were alleged to have tacitly accepted, if not conspired with, the military regime of Burma in connection with human rights violations, such as forced labour and torture, surrounding the construction of a pipeline. The case is set for trial next month.

The US Supreme court also gave the go-ahead for the claim brought by the relatives of Ogoni opponents of Shell's oil operations in Nigeria who were executed by the Abacha regime. The relatives include the brother of Ogoni leader, activist and writer, the late Ken Saro-Wiwa.

Civil liability under national law

Corporations are obviously subject to the domestic law of the countries in which they are based. But MNCs - whose operations straddle national boundaries have invariably been able to elude legal responsibiltiy; the parent company is based in one country and the operating subsidiary is based in another. The parent company contends that it is only a shareholder and can't be held responsible for the wrongdoing of its subsidiaries.

The concept of "corporate veil" is thus used to protect the parent. The subsidiaries are probably virtually insolvent and uninsured.

The Thor Chemicals and Cape Plc cases were pursued against the UK parent companies, by South African workers, in the English courts. It was contended on behalf of the claimants that the parent companies were directly liable for their own wrongdoing; In the Thor Chemicals case, for negligent design, set-up and monitoring of hazardous technology and system of work; In the Cape case, for negligence in relation to a whole process from mining of asbestos to production of asbestos products.

Claims on behalf of 30,000 Papua New Guinean landowners were pursued in Australia against Australian based mining company BHP. The claims arose from the collapse of a tailings dam around the OK Tedi river and were settled for substantial compensation.

The legal approach to these cases was designed to circumvent the "corporate veil" obstacle. It could be regarded as analogous to the principle of "product liability", by which a manufacturer of a defective product is liable for injury to its consumers.

Civil cases brought against parent companies face the additional obstacle "forum non conveniens" - the doctrine applied by US and UK courts to shift cases brought within their jurisdiction to a more "appropriate" forum. The delay in resolving the Cape and Thor cases was mainly due to a series of protracted legal arguments over the venue of the cases. Indeed these cases made no less than 9 full appearances in the UK Court of Appeal and 2 in the House of Lords. But this was not a total waste of time since, in the process, significant progress in developing the law was achieved.

Liability of directors

The spectre of multinationals avoiding their responsibilities has led to demands that directors should be held liable. The conceptual obstacle here is again "corporate veil": assigning liability on directors personally is objectionable to the commercial world because it penalises the very people who are meant to profit from the limited liability of corporations.

Having said that, directors may be held personally liable where there has been direct specific involvement in a particular issue. The possibility of extending this liability is under review in the UK and no doubt elsewhere.

In the Thor case, we sued the Chairman Cowley personally, as well as the parent company. He himself had designed the Thor technology and had played a key role in the operations.

The Turin State Prosecutor charged the Italian subsidiary of Cape Plc and its Managing Director with manslaughter. The charge against the MD was suspended when he was diagnosed with Alzheimer's Disease. Alzheimer's Disease has also occurred in other cases brought against Directors. In one case, the Director made a miraculous recovery from this irreversible disease some years later!

The impact and role of civil compensation claims on multinational accountability

The Cape and Thor Chemicals cases are unique examples of multinationals being held accountable for injuries in a developing country, despite the corporate veil.

The dissenting judgment of Lord Hoffmann in the the 1997 ruling of the House of Lords in the Connelly case, warned of the risks of the ruling for other MNCs.

Following one of the rulings in the Thor case, a City lawyer told me that one of his commercial clients was reconsidering whether or not to invest in South Africa. My response was that his client had nothing to fear if it was a responsible corporation.

Following the House of Lords' decision in the Cape case, a commercial lawyer was quoted by Lloyds of London and saying that;

"It is not that this decision has suddenly increased everyone's liabilities, it has just made it more likely that the cases will be heard in England".

What he was effectively acknowledging was that whilst MNCs operating in developing countries may have been legally liable in theory, this theoretical liability had previously been ignored with impunity, as the victims had no means of enforcing their rights in practice.

Bear in mind that these positive effects on the commercial world arose from rulings that simply meant that MNCs could be sued in England for alleged overseas wrongdoing. They were not the result of any ruling on the merits of the cases.

The Cape litigation provided the impetus and model for similar cases against other mining companies, in particular the recent case against Gencor in the South African Courts.

MNC accountability is very much on the international political agenda, as is clear from the plethora of economic and legal conferences and publications worldwide on this topic. The Cape, Thor & Connelly cases have been a central aspect of the debate.

Whatever principled objections one may have to the concept of compensation claims, it is a fact that the payment of substantial compensation and legal costs in these cases, constitutes a salutary warning to MNCs. They may undoubtedly be a powerful deterrent against bad practice and therefore a crucial instrument in the quest for MNC accountability.

In achieving their deterrent effect, civil compensation claims utilise the mechanism of shareholder accountability: the threat of a costly legal claim will cause shareholders to use their influence to ensure responsible behaviour on the part of a company.

But the limitations of compensation claims must be understood:

Compensation claims are primarily for the benefit of the individuals who pursue the claims. The asbestos mining devastation caused by Cape Plc affected communities and their environment generally, as well as victims of asbestos-related disease. But the compensation settlement was for the ARD victims only.

A poignant illustration of the individual focus of civil compensation claim arose in the Cape Plc case: from the perspective of establishing a legal principle, winning at trial would have been the preference. But this would not have been in the Claimants' interests because; Cape would have become insolvent; the Claimants might have lost the trial; the UK legal aid authorities would not have funded a trial given the offer that had been made.

Criminal liability

Criminal proceedings eg for breaches of health & safety and environmental pollution are brought too infrequently and are often ineffectual. This is due to a variety of factors including;

the high standard of criminal proof required to secure a conviction;

the lack of resources allocated to regulators;

the inadequacy of criminal fines posing no deterrent. In the light of the R13,000 fine of Thor by the Pietermaritzburg Magistrates' Court, another MNC commented that it was hard to justify high expenditure on health & safety to shareholders;

In the case of MNCs: the parent companies are beyond the criminal jurisdiction of the local courts;

Access to Justice

A key obstacle to practical legal accountability of MNCs is access to justice. Up until recently MNCs have virtually avoided justice altogether when it comes to their developing country operations.

It is primarily due to the vast disparities in access to justice that MNCs now want cases heard in developing country local courts, whereas victims want cases heard in the MNC home base courts.

The key factor is funding. In many developing countries there is no legal aid system and public interest lawyers operate on "shoe-string" budgets. It would simply be impossible to run a difficult case on that basis, on anything like a "level playing field" against a well-resourced multinational.

Whilst, as in South Africa for instance, it may be lawful for lawyers to act on a "no-win no fee" basis, there is little incentive for lawyers to take on a complicated, expensive and protracted legal action against a multinational - defeat could ultimately lead to financial ruin.

The funding problem is exacerbated by the corporate veil obstacle. If it was possible, in practice, to sue multinational local subsidiaries, then these would be the obvious target for legal action.

Since, in most legal systems, an employer owes a legal duty of care to ensure the safety of its worker, a claim by a worker against the subsidiary company employer, would be relatively straightforward. All that would need to be established is that the worker had a work-related injury that had arisen from the employer's failure to take appropriate safety precautions.

It could well be feasible for local, under-funded, public interest lawyers to run such simpler, and hence less costly, cases.

However multinationals invariably arrange their corporate structures so that the subsidiaries are asset-less and uninsured, and hence not worth suing.

Further in countries such as South Africa and Namibia, workmens' compensation legislation probably precludes claims against a local subsidiary company "employer".

It is for this reason (rather than to advance the principle that a parent company should be held legally accountable at home) that the Cape Plc and Thor Chemicals Claimants.

Establishing legal liability against a multinational parent company however, is a novel, complicated and hugely expensive challenge.

Determining the nature and extent of the parent company's involvement in key aspects of the overseas operations, and of the parent company's state of awareness of the conditions at the overseas operations, requires detailed and expensive investigations into, and analysis of the relationship between, the parent company and its subsidiaries.

Thus, the fact that the only practical target of legal action is a parent company, makes funding of a case in a developing country, and hence access to justice there, a virtually impossible prospect.

Consequently, lack of legal resources and the corporate veil obstacle are fundamental, inextricably linked components of the inability to obtain access against MNCs access to justice in developing countries.

The corporate veil obstacle will present itself wherever a case against a parent company is brought, whether in the US, UK or local courts. However, the availability, to overseas victims, of legal aid or lawyers willing to act on a contingency basis enables claimants to obtain access to justice in the US and UK.

In the US and UK the obstacle to justice has been the application by the courts of the US and UK of the doctrine of forum non conveniens. The decisions in the Connelly, Thor and Cape cases have largely eroded this obstacle.

The complexity of MNC cases and lengthy procedural arguments over jurisdiction have also resulted in another critical deficiency in access to justice namely delay.

The fact that the Cape case may have been settled will be of no value to the hundreds of victims who died while the legal arguments dragged on. But this path is likely to be smoother in the future.

In other European Union countries, Article 2 of the 1968 Brussels Convention precludes the application of forum non conveniens where a defendant is based in the EU. Consequently, French or German etc companies can be sued in France or Germany without the risk of long running disputes over venue.

A coordinated response

The US consumer lobby working in concert with US plaintiff lawyers, arguably constitutes the most formidable form of deterrence in the area of product safety. However, this is primarily in relation to products that might harm US consumers, rather than activities which might be damaging to the health or environment of people in developing countries, though they may benefit, incidentally.

Similarly, the reluctance of Europeans to consume products containing genetically modified foods, is primarily due to concern over the possible adverse health risks to the consumer, rather than the economic impact of the technology on developing world farmers.

Thus it was legal action by US and European consumers for their own injuries, and concern for their own well being, that led to the demise of the asbestos industry.

From the perspective of the corporations, termination of asbestos mining was due entirely to considerations of profit and anxiety over the financial impact of legal actions.

Concern for the well being of South African asbestos miners, hardly featured in the equation, either on the part of the industry, or on the part of consumers.

Community groups, unions, politicians, campaigners and lawyers, can however form a powerful alliance in; initial evidence gathering and evaluation; liaising between claimants and lawyers; lobbying government and shareholders; publicity.

The Cape case brought together lawyers and an array of NGOs, unions, community groups, politicians and human rights organisations including; Action for Southern Africa; International Ban on Asbestos Secretariat; Amnesty8/18/02 International; World Development Movement; One World Action; National Union of Mineworkers; Transport & General Workers Union; International Chemical Engineering & Mineworkers' Union.

Most crucially the South African Government intervened in the case on behalf of the claimants at a critical stage.

It is doubtful whether the outcome of the legal action would have been as favourable (or could even have been pursued) without the involvement of these organisations.

Conclusion

The following statement by UK Chancellor of the Exchequer, Gordon Brown, in 2001, encapsulates the key point and gives cause for optimism:

"One of the main fears of anti-globalisation campaigners is that lax regulation is a precondition of commercial engagement in developing countries, resulting in a downward spiral of poor labour and regulatory standards..where multinationals are unaccountable across borders - and sometimes seem more powerful than the developing countries in which they operate - companies and governments must do more to restore the right balance, increase stakeholder awareness and achieve cross-border accountability."

Clearly progress in this area requires significant change at a governmental and corporate level.

Voluntary codes, consumer action, criminal law and civil compensation claims provide a means of approaching the issue of MNC accountability from different angles. But they do not provide the ideal solution, either individually or collectively.

An international convention on MNC accountability, as proposed by organisations such as Friends of the Earth and Christian Aid, is the goal. In the case of MNCs, this might impose strict liability or a legal duty of care on parent companies. For a convention to be effective, it is vital that sufficient resources be committed to ensuring enforcement.

Richard Meeran
Leigh Day & Co
London
January 2003