rights, responsibilities and regulation of international … · web viewsol picciotto* this essay...

Rights, Responsibilities and Regulation of International Business

SOL PICCIOTTO*

This essay discusses the paradox of the emergence of corporate codes of conduct in the 1990s, following pressures from consumer and labor activism, in a period of more general liberalization of international investment leading to deregulation. It suggests that the advantages of flexibility and adaptability to specific circumstances offered by such codes are counterbalanced by their self-selected content and inadequate enforcement. Rejecting the assumption that there is a sharp distinction between voluntary standards and binding law, the essay analyzes various ways of grounding codes in legal obligations. It proposes that a safer and more dependable environment for international investment could be provided by a framework agreement, which would link binding standards for corporate social responsibility in key areas, such as combating bribery and cooperation in tax enforcement, with traditional investor rights based on investor protection and liberalization rules.

* * Sol Picciotto is Director of Research and of the postgraduate programme in International Business and Corporate Law at the Lancaster University Law School. He has previously taught at the University of Warwick School of Law and the Faculty of Law, Dar es Salaam, and has been a visitor at Nagoya University and the European University Institute, Florence. He is a member of the editorial committee and was a founding editor of Social & Legal Studies, and the author of International Business Taxation, and numerous edited books and journal articles on various aspects of international business regulation.

132 COLUMBIA JOURNAL OF TRANSNATIONAL LAW [42:131

I. INTRODUCTION

Over the past decade, there has been an intriguing dual movement in the development of the forms of regulation of business in the global economy. Since the 1980s the dominant trend has been liberalization, i.e., the relaxation or removal of national controls on international capital movements. It seemed to many that business firms and investors were close to attaining the goal of a world market, in which they could be free to manage their assets and activities globally without hindrance from state legal requirements. This neo-liberal form of economic globalization was hailed by its advocates and excoriated by its critics.

However, by at least the mid-1990s, it was becoming apparent that the processes at work were more complex. Although liberalization has generally entailed the removal of barriers to market access and the ending of direct forms of state intervention, it has frequently been accompanied or succeeded by the development of new forms of regulation or regulatory reform. The result has been the creation of a complex and multi-layered regulatory framework for the governance of global economic activity. As I have argued elsewhere,1 these new forms of management of the world economy signal the breakdown of the classical liberal internationalist system, based on national sovereignty and coordinated by a loose framework of international rules and intergovernmental organizations. There has been a transition to denser and more fragmented regulatory networks with new types of linkages, including combinations of formal and semi-formal legal arrangements (“hard” and “soft” law). Yet, far from constituting a smooth transition to a neo-liberal order, these forms are contested and conflict-ridden processes. The institutional and legal frameworks for managing and legitimating economic 1 ?. See Sol Picciotto, Networks in International Economic Integration: Fragmented States and the Dilemmas of Neo-Liberalism, 17 NW. J. INT’L L. & BUS. 1014 (1996/97); Sol Picciotto, Linkages in International Investment Regulation: The Antinomies of the Draft Multilateral Agreement on Investment, 19 U. PA. J. INT’L. ECON. L. 731 (1998) [hereinafter Picciotto, Linkages].

2003] INTERNATIONAL BUSINESS 133

activities are an important focus of this contestation.This Essay analyzes the interaction between the

development of international legal provisions for investment protection and liberalization and the emergence of codes of conduct for international business. The recent proliferation of corporate social responsibility (“CSR”) codes and standards has been matched only by the boom in writings on the subject.2

This Essay will focus mainly on the interaction between these codes and formal legal requirements, at national and international levels. It starts from the perspective that the recent spate of voluntary corporate codes for transnational corporations (“TNCs”) must be understood in the context of the changing environment for foreign direct investment (“FDI”), including shifting patterns of national and international regulation. Hence, although corporate codes have a legitimate place in helping to ensure compliance with standards through corporate networks, this Essay suggests that they should be more firmly anchored within a broader regulatory framework that establishes obligations as well as rights for business. Such a framework could be based on new approaches to combining binding hard law with non-binding soft law standards through a framework convention.3

2 ?. See, e.g., VIRGINIA HAUFLER, A PUBLIC ROLE FOR THE PRIVATE SECTOR: INDUSTRY SELF-REGULATION IN A GLOBAL ECONOMY (2001); CORPORATE RESPONSIBILITY AND LABOUR RIGHTS (Rhys Jenkins et al. eds., 2002) [hereinafter CORPORATE RESPONSIBILITY].3 ?. The author does not discuss here the appropriate institutional location for the negotiation or implementation of such a convention. The World Trade Organization (“WTO”) Working Group on the Relationship between Trade and Investment has conducted some initial discussions on a possible investment treaty, although many developing countries consider the WTO to be an inappropriate forum for such a treaty. They have also pointed out:

The proponents of a multilateral framework on investment in the WTO have been seeking binding rights of foreign investors that the host member governments should agree to provide. However, not much discussion has taken place in the Working Group on what could be the obligations on the part of foreign investors or the home governments.

See Working Group on the Relationship between Trade and Investment, Communication from China, Cuba, India, Kenya, Pakistan and Zimbabwe, para. 10, WT/WGTI/W/152 (Nov. 19, 2002). It would certainly go far beyond the mandate of the WTO as it now stands to take responsibility for the more comprehensive framework proposed here.


II. TRANSNATIONAL CORPORATIONS AND INTERNATIONAL LAW: A BRIEF REVIEW

International business has a long history, and even the currently dominant form of the TNC goes back to the end of the nineteenth century. However, it is only since the 1960s that there has been an increasing tension between the global reach and visibility of TNCs and the dualist hierarchy of national and international law established in the classical liberal period. This dualism regards corporations as formally private legal persons, and hence subjects of national law, but not international law, which directly binds only states. However, the size and importance of TNCs made them a prime target for regulation, in both home and host states. This prominence exposed them to multiple and sometimes conflicting regulatory requirements, which came to the fore in the 1960s. In a period of lively debate, a variety of proposals were advanced. Perhaps most radically, George Ball, formerly a U.S. Under-Secretary of State and United Nations (“U.N.”) representative and currently the Chairman of Lehman Brothers International, proposed the “denationalization” of TNCs.4 He argued that a supranational citizenship for TNCs should be provided by treaty, since, in his view, the pragmatic policy followed by TNCs of obeying local laws in each country where they operate would not resolve the “inherent conflict of interest between corporate managements that operate in the world economy and governments whose points of view are confined to the narrow national scene.”5

Ball’s proposal remained an abstract one, and instead, a more piecemeal approach was adopted through international organizations. Pressures to adopt global standards of responsibility for TNCs were generally channeled into the formulation of non-binding 4 ?. George W. Ball, Cosmocorp: The Importance of Being Stateless, 2 COLUM. J. WORLD BUS. 25, 28–29 (1967) [hereinafter Ball, Cosmocorp]. See generally GLOBAL COMPANIES: THE POLITICAL ECONOMY OF WORLD BUSINESS (George W. Ball ed., 1975); CHARLES P. KINDLEBERGER, A GATT FOR FOREIGN INVESTMENT: FURTHER REFLECTIONS (1980).5 ?. Ball, Cosmocorp, supra note 4, at 28.


guidelines or codes by intergovernmental organizations.6 Some had a broad scope, such as the International Labor Organization (“ILO”) Tripartite Declaration of 1977,7 the 1976 Guidelines of the Organisation for Economic Co-operation and Development (“OECD”),8 and the aborted U.N. Code of Conduct for TNCs.9 Others had a more specific regulatory focus, such as the Set of Principles for the Control of Restrictive Business Practices of 198010 or the World Health Organization’s (“WHO’s”) International Code of Marketing of Breast-Milk Substitutes of 1981,11 which was aimed at specific industry practices.12

Not surprisingly, the impact of these instruments greatly depended on the effectiveness of the mechanisms for monitoring and ensuring compliance, and especially on the strength of social pressures brought to bear mainly through civil society organizations, such as trade unions and other social movements. Too often the fact that these codes were not legally binding was used to justify failure or even refusal to back them up with adequate procedures for 6 ?. Many of these are conveniently gathered together in UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT, INTERNATIONAL INVESTMENT INSTRUMENTS: A COMPENDIUM (1996).7 ?. International Labour Organization, Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy, 17 I.L.M. 422 (Nov. 16, 1977).8 ?. The OECD Guidelines for Multinational Enterprises have been reissued and amended following reviews in 1979, 1982, 1984, 1991 and 2000. See Organisation for Economic Co-operation and Development, Directorate for Financial, Fiscal and Enterprise Affairs, Committee on International Investment and Multinational Enterprises, The OECD Declaration and Decisions on International Investment and Multinational Enterprises: Basic Texts at 20, OECD Doc. DAFFE/IME/(2000) (2000).9 ?. Draft United Nations Code of Conduct on Transnational Corporations, U.N. ESCOR, Spec. Sess., Supp. No. 7, Annex II, U.N. Doc. E/1983/17/Rev.1 (1983).10 ?. The Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices, U.N. Conf. on Restrictive Business Practices, 35th Sess., U.N. Doc. TD/RBP/CONF/10 (1980).11 ?. World Health Assembly, International Code of Marketing of Breast-milk Substitutes, U.N. Doc. A34/Vr/15 (1981).12 ?. See JUDITH RICHTER, HOLDING CORPORATIONS ACCOUNTABLE: CORPORATE CONDUCT, INTERNATIONAL CODES AND CITIZEN ACTION ch. 4 (2001). For a collection of articles on codes for international business, see generally REGULATING INTERNATIONAL BUSINESS: BEYOND LIBERALIZATION (Sol Picciotto & Ruth Mayne eds., 1999) [hereinafter REGULATING INTERNATIONAL BUSINESS].


monitoring compliance or dealing with alleged violations.13 Thus, “non-binding” was assumed to mean “aspirational,” which is not at all the same thing.14

In the meantime, states sought to define and assert their sovereignty to regulate economic activities taking place within their national jurisdiction. Capital-importing host states, especially developing countries (many of which had recently gained political independence), sought to attain economic independence by asserting their right to control foreign investment.15 This desire was most clearly expressed in the Charter of Economic Rights and Duties of States (“CERDS”) of 1974.16 Article 2(a) of the CERDS asserts the primacy of national jurisdiction and denies the existence of any obligation to grant preferential treatment to foreign investment.17 This Charter expressed the formal right of states to assert total 13 ?. Despite pressures from its Trade Union Advisory Committee (“TUAC”), the OECD’s Committee on International Investment and Multinational Enterprise (“CIIME”) insisted that the OECD Guidelines should remain non-binding and that the CIIME should not reach conclusions on the conduct of individual enterprises. The CIIME wanted to avoid being seen as a “judicial or quasi-judicial forum.” See ORG. FOR ECON. CO-OPERATION & DEV., INTERNATIONAL INVESTMENT AND MULTINATIONAL ENTERPRISES: REVIEW OF THE 1976 DECLARATION AND DECISIONS para. 84 (1979) [hereinafter REVIEW OF THE 1976 DECLARATION AND DECISIONS]. At most, the CIIME was willing to use the details of specific cases as illustrations of problems arising under the OECD Guidelines and issue “clarifications” where appropriate. Id. For an account and discussion of the early operation of the OECD Guidelines, see R. BLANPLAIN, THE OECD GUIDELINES FOR MULTINATIONAL ENTERPRISES AND LABOUR RELATIONS 1976–1979: EXPERIENCE AND REVIEW (1979) [hereinafter EXPERIENCE AND REVIEW]; R. BLANPLAIN, THE OECD GUIDELINES FOR MULTINATIONAL ENTERPRISES AND LABOUR RELATIONS 1979–1982: EXPERIENCE AND MID-TERM REPORT (1983).14 ?. The CIIME described the OECD Guidelines as “an efficient and realistic framework for further encouragement of the contribution which multinational enterprises can make to economic and social progress and for the reduction and resolution of the difficulties to which the operations of multinational enterprises may give rise.” REVIEW OF THE 1976 DECLARATION AND DECISIONS, supra note 13, para. 7.15 ?. See, e.g., Rahmatullah Khan, The Right of a State to Choose Its Social and Economic System, in INTERNATIONAL LAW AND DEVELOPMENT 31 (Paul De Waart et al. eds., 1988); Subrata Roy Chowdhury, Permanent Sovereignty over National Resources: Substratum of the Seoul Declaration, in INTERNATIONAL LAW AND DEVELOPMENT, supra, at 59.16 ?. Charter of Economic Rights and Duties of States, G.A. Res. 3281, U.N. GAOR, 29th Sess., Supp. No. 31, at 50, U.N. Doc. A/9631 (1975) [hereinafter CERDS].17 ?. Id. art. 2(a).


regulatory power over economic activity within their borders, including acquiring or limiting ownership rights.18

Not surprisingly, international investors and their home states became wary of the intentions of host states. Bilateral investment treaties (“BITs”) emerged as a means of providing basic guarantees.19 However, on the whole, they did not restrict the direct regulatory powers of host states. Most BITs permit the host state to regulate entry, to impose ownership limitations or conditions, and to specify performance requirements.20

Indeed, one analyst has described them as embodying “nationalism behind the liberal façade.”21 Hence, developing countries, including many in East Asia, have been willing to negotiate such agreements, even though these countries continued to consider controls over inward investment important to ensure that it contributed to economic development.22

However, during the 1980s, pressure grew for countries wishing to attract investment to adopt a completely “open-door” policy, and to abandon access controls, ownership restrictions, and performance requirements.23 This stance was embodied in the U.S. model BIT,24 which required pre-entry national treatment, although this was subject to specific

18 ?. Id.19 ?. See Jeswald Salacuse, BIT by BIT: the Growth of Bilateral Investment Treaties and their Impact on Foreign Investment in Developing Countries, 24 INT’L LAW. 655, 659–60 (1990).20 ?. For a general analysis, see R. DOLZER & MARGRETE STEVENS, BILATERAL INVESTMENT TREATIES (1995). For coverage of more recent growth, see UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT, BILATERAL INVESTMENT TREATIES IN THE MID-1990S (1998) [hereinafter UNCTAD].21 ?. Kenneth J. Vandevelde, The Political Economy of a Bilateral Investment Treaty, 92 AM. J. INT’L L. 621, 635 (1998). See generally Kenneth J. Vandevelde, Investment Liberalization and Economic Development: The Role of Bilateral Investment Treaties, 36 COLUM. J. TRANSNAT’L L. 501 (1998).22 ?. See UNCTAD, supra note 20, at 6.23 ?. See Andrew T. Guzman, Why LDCs Sign Treaties that Hurt Them: Explaining the Popularity of Bilateral Investment Treaties, 38 VA. J. INT’L. L. 639, 641–42, 655–56 (1998).24 ?. United States Prototype Treaty concerning the Reciprocal Encouragement and Protection of Investments, in U.N. CENTRE ON TRANSNATIONAL CORP., BILATERAL INVESTMENT TREATIES 123 (1988).


exclusions in the actual treaties.25 Capital-importing countries continued to resist these pressures and rejected suggestions that a multilateral investment treaty be included in the Uruguay Round of trade negotiations, which resulted in the establishment of the World Trade Organization (“WTO”).26 However, the negotiation of BITs gathered momentum in the 1990s, and some of these countries conceded pre-entry national treatment.27

In the meantime, the attempt to develop a 25 ?. Thus, for example, the BIT signed by the U.S. with Egypt provided that:

Notwithstanding the preceding provisions of this Article, each Party reserves the right to maintain limited exceptions to the standard of national treatment otherwise required concerning investments or associated activities if such exceptions fall within one of the sectors listed in the Annex to this Treaty. Both Parties hereby agree to maintain the number of such exceptions to a minimum. In addition, each Party shall notify the other Party of any specific measures which constitute exceptions to the standard of national treatment provided herein. In no event, however, shall the treatment to be accorded pursuant to any exception be less favorable than that accorded in like situations to investments and associated activities of nationals or companies of any third country. Moreover, no exception, within the sectors contained in the Annex, introduced after the date of entry into force of this Treaty shall apply to investments of nationals or companies of the other Party existing in that sector at the time the exception becomes effective.

Treaty Concerning the Reciprocal Encouragement and Protection of Investments, Sept. 29 1982, Egypt-U.S., art. II(3), 21 I.L.M. 927, 932 [hereinafter Egypt-U.S. BIT]. An Annex to the Egypt-U.S. BIT specifies that:

Consistent with Article II paragraph 3, each Party reserves the right to maintain limited exceptions in the sectors it has indicated below:The United States of AmericaAir transportation, ocean and coastal shipping; banking; insurance; government grants; government insurance and loan programs; energy and power production; use of land and natural resources; custom house brokers; ownership of real estate; radio and television broadcasting; telephone and telegraph services; submarine cable services; satellite communications.The Arab Republic of EgyptAir and sea transportation; maritime agencies; land transportation other than that of tourism; mail, telecommunication, telegraph services and other public services which are state monopolies; banking and insurance; commercial activity such as distribution, wholesaling, retailing, import and export activities; commercial agency and broker


multilateral agreement on investment (“MAI”) shifted from Geneva to Paris, where the negotiations were hosted by the OECD, only to be abandoned in failure after three years in 1998.28 It was apparently a surprise to some that even developed countries, which account for the bulk of international investment, and are generally both exporters and importers of capital, failed to agree on a strong investment liberalization and protection standard.29 However, a major reason for the difficulties encountered between the negotiating governments, exacerbated by criticisms from an internationally-organized campaign and articulated by their increasingly concerned domestic constituencies, was the realization of the potentially far-reaching deregulatory impact of this type of treaty.30 This resulted in growing lists of national exclusions, as well as more general carve-outs in the agreement itself, negating its intended purpose of establishing a high level of market access and investment protection.31 At the same time, the eruption of the financial crisis in Asia in 1997, which spread to Russia the following year, drew attention to the dangers of rapid liberalization of

activities; ownership of real estate; use of land; natural resources; national loans; radio, television, and the issuance of newspapers and magazines.

Id. at 946–47.26 ?. 2 Trade-Related Investment Measures, in THE GATT URUGUAY ROUND: A NEGOTIATING HISTORY 2070 (T. P. Stewart ed., 1993).27 ?. As of December 2000, the U.S. had negotiated forty-one BITs, although only thirty-one had been ratified. Russia had not yet ratified the BIT signed in 1992, and among the rapid-growth economies in East Asia and Latin America, only Argentina had ratified a BIT with the U.S. See U.S. DEP’T OF STATE, OFF. OF INV. AFF., LIST OF U.S. BILATERAL INVESTMENT TREATIES THROUGH DECEMBER 2000 (2001), at http://www.state.gov/e/eb/rls/fs/1139.htm (last visited Aug. 3, 2003). An updated list of ratified BITs is available at http://www.tcc.mac.doc.gov/cgi-bin/doit.cgi?219:64:223581734:0:TOVR!!Bilateral%20Investment%20Treaties!-!QuickLink!-!BILATERAL (last visited Aug. 3, 2003).28 ?. DAVID HENDERSON, THE MAI AFFAIR: A STORY AND ITS LESSONS 1–2 (1999). For the arguments of some of the MAI’s critics, see Nick Mabey, Defending the Legacy of Rio: The Civil Society Campaign against the MAI , in REGULATING INTERNATIONAL BUSINESS, supra note 12, at 60.29 ?. See Sol Picciotto, A Critical Assessment of the MAI, in REGULATING INTERNATIONAL BUSINESS, supra note 12, at 99.30 ?. Id.31 ?. See Picciotto, Linkages, supra note 1, at 763–64.


investment flows.32

The slogan “No Rights without Responsibilities,” adopted by campaigners against the MAI,33

encapsulated the criticisms leveled by many observers of the emerging regulatory framework for international investment. They pointed out that the pressures towards economic globalization were resulting in legally binding restrictions on state regulatory powers. These requirements entailed not only the removal of border controls on the admission of investments, but also the granting of legal rights to foreign investors who challenge domestic laws by alleging de facto discrimination or the infringement of a property right. The increase in these legal challenges, brought under both BITs and Chapter 11 of the North American Free Trade Agreement (“NAFTA”),34 demonstrated the willingness of some investors to devote large resources to block or overturn state actions by resorting to international law.35

Yet international law had developed few, if any, instruments governing the responsibilities of international business. The OECD did not adopt a treaty to combat the bribery of foreign public officials until 1997, although a draft had been developed 32 ?. JOSEPH STIGLITZ, GLOBALIZATION AND ITS DISCONTENTS 89, 236–37 (2002).33 ?. Mabey, supra note 28, at 65.34 ?. North American Free Trade Agreement, Dec. 17, 1992, Can.-Mex.-U.S., 32 I.L.M. 289 [hereinafter NAFTA].35 ?. Official documentation relating to all disputes under the NAFTA is maintained by the NAFTA Secretariat and is available at http://www.nafta-sec-alena.org/defaultsite/home/index_e.aspx (last visited Sept. 30, 2003). A comprehensive compilation of documentation relating to NAFTA claims is maintained by Todd Weiler at http://www.naftaclaims.com (last visited Sept. 30, 2003). Critics have pointed out that only forty cases were initiated with the International Center for the Settlement of Investment Disputes (“ICSID”) between its founding in 1966 and 1997. However, forty-nine cases were initiated between 1997 and 2001. The first case under a BIT was brought in 1987, and the bulk of cases under investment treaties were brought after 1997. See PUB. CITIZEN’S GLOBAL TRADE WATCH, NAFTA CHAPTER 11 INVESTOR-TO-STATE CASES: BANKRUPTING DEMOCRACY 6 (2001), available at http://www.citizen.org/documents/ACF186.PDF (last visited Aug. 29, 2003). This trend is continuing; several cases have been brought against Argentina as a result of its abandonment of the dollar peg for the peso. Details of the cases are available at http://www.worldbank.org/icsid/cases/cases.htm (last visited Aug. 29, 2003).


through the U.N. in 1979.36 The bulk of the instruments developed since the 1970s to establish standards of responsibility for international business not only remained non-binding in form, but were generally supported by weak mechanisms for monitoring compliance.37 This lacuna was the background to the emergence of corporate codes in the late 1990s.

III. CORPORATE CODES: EFFECTIVE TOOL OR PR HYPE?

The sudden adoption of corporate codes in the mid-1990s took many by surprise and raised new questions for both critics and defenders of big business. The mantra of liberalization suggested that if business were left free to pursue profit, economic growth and social development would follow. Yet, companies were voluntarily committing themselves to a wider range of social and environmental goals. It was quickly apparent, however, that this commitment did not originate from simple altruism on the part of their directors, but rather from an awakened awareness of the importance of the firm’s image to its customers, workforce, and investors.38 Reputational damage could quickly affect bottom-line profits, while investment in social responsibility could reap long-term benefits.

Some companies learned this lesson in an abrupt and dramatic manner. A notable case in point is Royal Dutch Shell (“Shell”), which in 1995 suffered a double blow. The company’s decision to end the life of its Brent Spar oil platform by sinking it in the North Sea was exposed to the media spotlight after a dramatic stunt by Greenpeace, although denunciation of Shell’s environmental irresponsibility by activists was later felt

36 ?. Draft International Agreement on Illicit Payments, U.N. ESCOR Comm. on an International Agreement on Illicit Payments, 2d Sess., Agenda Item 6, at 5, U.N. Doc. E/AC.67/L.3/Add. 1 (1979).37 ?. See RICHTER, supra note 12, at ch. 10.38 ?. Haufler’s study of corporate codes concludes that their adoption was driven by activist pressure and the risk of government regulation. She also argues that corporate responses were shaped by concerns for reputation, economic competition, and learning processes. HAUFLER, supra note 2, at ch. 5.


to have been exaggerated.39 On the other side of the world, a campaign by the Ogoni people in the Niger delta, which culminated in the Nigerian government’s execution of nine national leaders, including the writer Ken Saro-Wiwa, drew the world’s attention to Shell’s apparent indifference to the environmental damage and social deprivation that its highly profitable activities did nothing to alleviate, and instead seemed to exacerbate.40 By April 1998, the firm produced the pioneering Shell Report 1998, subtitled Profits and Principles—Does There Have to be a Choice?, which stated that the corporation was “about values. It describes how we, the people, companies and businesses that make up the Shell Group, are striving to live up to our responsibilities—financial, social and environmental.”41 These were the three dimensions of the so-called “triple bottom line” of sustainable development, against which Shell proclaimed that all companies would soon be expected to account for their activities. Shell went even further in recasting its annual report for 2000 entirely in terms of social responsibility by addressing issues of health, safety, and the environment.42

Shell’s experience showed that it was not enough for a firm, especially a large TNC, to manage its operations simply in compliance with the law and leave it to governments to deal with social issues and the public interest. The decision to sink the Brent Spar complied with all the regulations agreed among the states bordering the North Sea. The failure of oil wealth to benefit ordinary people, especially in the oil-producing regions of Nigeria, could be attributed to the distribution formula which allocated the bulk of revenues to the central government, where it was 39 ?. Robin Grove-White, Brent Spar Rewrote the Rules, NEW STATESMAN, June 20, 1997, at 17. See generally GRANT JORDAN, SHELL, GREENPEACE AND BRENT SPAR (2001).40 ?. Bronwen Manby, The Role and Responsibility of Oil Multinationals in Nigeria, 53 J. INT’L AFF. 281, 287 (1999).41 ?. THE SHELL REPORT 1998: PROFITS AND PRINCIPLES—DOES THERE HAVE TO BE A CHOICE? (1999).42 ?. Bob Williams, Comment, Is Shell Report 2000’s Sustainable Development Focus an Anomaly or Sign of the Future? 98 OIL & GAS J. 74, 74 (2000).


dissipated in corruption.43 Neither of these facts protected the company from consumer boycotts and the loss of employee morale resulting from the damage to its reputation. As one commentator stated, “close observers of Shell have said the company’s reaction to those crises was not that they were temporary unpleasantries to be weathered but truly corporate culture-altering events that shook the staid old giant to its core.”44

Shell’s experience was replicated by other companies that are sensitive to consumer concerns and reliant on brand-names. For example, in the apparel industry and retailing, high-profile campaigns on U.S. college campuses targeted firms, such as Nike and the Gap, for their use of supply-chain sub-contractors, employing under-age workers in sweatshop conditions.45 Incidents such as the 1993 fire at the Kader toy factory in Thailand, which supplied major toy companies, and videos showing children in Sialkot, a city in Pakistan, stitching footballs with a FIFA label prior to the 1998 World Cup, were used by international trade union organizations to highlight breaches of international labor standards.46 Firms found that trusted brand-names, which were often their most significant asset, could quickly be endangered by campaigns that revealed the “labor behind the label.”47

Within a short time span, many companies and industrial associations adopted voluntary codes. An OECD study collected 246 codes, about half of which were issued by individual firms, some forty percent by associations, and the remainder primarily by stakeholder coalitions and non-governmental

43 ?. J. G. FRYNAS, OIL IN NIGERIA: CONFLICT AND LITIGATION BETWEEN OIL COMPANIES AND VILLAGE COMMUNITIES 53 (2000). See generally D. H. Wheeler et al., Paradoxes and Dilemmas for Stakeholder Responsive Firms in the Extractive Sector: Lessons from the Case of Shell and the Ogoni, 39 J. BUS. ETHICS 297 (2002).44 ?. Williams, supra note 42, at 76.45 ?. See NAOMI KLEIN, NO LOGO: TAKING AIM AT THE BRAND BULLIES 327 (2000).46 ?. Dwight W. Justice, The International Trade Union Movement and the New Codes of Conduct, in CORPORATE RESPONSIBILITY, supra note 2, at 90.47 ?. See KLEIN, supra note 45, at 369–77.


organizations (“NGOs”).48 These codes generally dealt with matters of concern to consumers, such as labor and environmental standards, compliance with the law, and issues of potential risk to the firm, such as bribery and corruption.49 There were, however, considerable variations both of subject matter and of style, especially in the degree of specificity found in the codes’ standards.50

This revival of interest in establishing global standards of corporate responsibility once again attracted the interest of intergovernmental organizations (“IGOs”). Thus, U.N. Secretary-General, Kofi Annan, in a speech to the World Economic Forum in Davos on January 31, 1999, challenged world business leaders to “embrace and enact,” in their individual corporate practices and by supporting appropriate public policies, nine universally agreed-upon values and principles derived from U.N. instruments, which were embodied in a U.N. Global Compact.51 However, this initiative was criticized by activists as no more than an attempt to lend the legitimacy of the U.N. to corporate public relations hype.52 The ILO has also become involved, especially with regard to labor standards, and has established a business and social initiatives database.53

The private and voluntary nature of these initiatives raised two central issues: the rather haphazard and selective content of the codes and the 48 ?. Organisation for Economic Co-operation and Development, Working Party of the Trade Committee, Codes of Corporate Conduct: An Expanded Review of their Contents, paras. 10–11, OECD Doc. TD/TC/WP(99)56/FINAL (2000) [hereinafter Expanded Review].49 ?. Id. paras. 14–39.50 ?. Id. para. 22.51 ?. Secretary-General Kofi Annan, Address to the World Economic Forum in Davos, Switzerland (Jan. 31, 1999). For an account of the development of the U.N. Global Compact by its Executive Head, see G. Kell, The Global Compact: Origins, Operations, Progress, Challenges, 11 J. CORP. CITIZENSHIP 35 (2003).52 ?. See, e.g., TRANSNAT’L RES. & ACTION CTR., TANGLED UP IN BLUE: CORPORATE PARTNERSHIPS AT THE UNITED NATIONS (2000) available at http://www.corpwatch.org/upload/document/tangled.pdf (last visited Sept. 30, 2003).53 ?. The database is available at www.ilo.org/basi (last visited Aug. 3, 2003).


lack of effective implementation mechanisms or procedures for monitoring compliance. Thus, an analysis by the ILO of labor-related content in approximately 215 codes, focusing on enterprise-drafted codes, showed that the majority used self-defined standards.54 Reference to national law was relatively frequent, especially in relation to wage levels. No more than one-third of the codes referred to international labor standards even in general terms, and only fifteen percent (almost exclusively those developed with trade union or NGO involvement) referred to freedom of association or collective bargaining.55 A similar OECD study found that only thirteen percent of the codes referred to labor issues or mentioned ILO standards, and only thirty percent mentioned freedom of association.56

As regards implementation, the bulk of corporate codes rely on internal follow-up and monitoring.57 Even where there is a provision for external involvement, as in third-party or industry-association codes, critics have raised serious doubts as to whether such third parties are genuinely independent.58 Lack of effective implementation was the main reason for refusal of trade unions and some NGOs to join the U.S. Fair Labor Association.59 Of course, private management consultants have been quick to offer their services for compliance auditing, but doubt has been cast on both

54 ?. International Labour Office, Working Party on the Social Dimensions of the Liberalization of International Trade, Overview of Global Developments and Office Activities Concerning Codes of Conduct, Social Labeling and Other Private Sector Initiatives Addressing Labor Issues, para. 50, ILO Doc. GB.273/WP/SDL/1(Rev.1) (1998) [hereinafter Overview of Global Developments]; see also International Labour Office, Working Party on the Social Dimensions of the Liberalization of International Trade, Further Examination of Questions Concerning Private Initiatives, Including Codes of Conduct, ILO Doc. GB.274/WP/SDL/1 (1999) [hereinafter Further Examination].55 ?. Further Examination, supra note 54, paras. 52–56.56 ?. Expanded Review, supra note 48, paras. 18–19.57 ?. Id. para. 85.58 ?. Dara O’Rourke, Monitoring the Monitors: A Critique of Corporate, Third-Party Labor Monitoring, in CORPORATE RESPONSIBILITY, supra note 2, at 196.59 ?. See Rhys Jenkins, The Political Economy of Codes of Conduct, in CORPORATE RESPONSIBILITY, supra note 2, at 24.


their independence and competence.60 On the other hand, NGOs have been wary of being drawn into this role, for fear of becoming co-opted and merely lending their legitimacy to corporate public relations.61

Although the ILO’s survey document raised the possibility of the ILO adopting a proactive role towards both specification of the content of codes and the verification procedures,62 the organization has instead adopted the minimalist alternative of providing advice and information.63

The self-selected nature of the content and the lack of independent external implementation or monitoring mechanisms inevitably generate skepticism about the value and effectiveness of corporate codes. Although serious study of the effects of codes is still in its infancy, there is evidence that firms adopting a code do not perform any better against benchmarks relevant to that code’s standards.64

Public skepticism of corporate codes has been further fuelled by the startling revelations of unscrupulous behavior by senior managers following the dramatic collapses of corporate giants such as Enron and WorldCom and the stock-market crash which followed the dot-com bubble. Inquiries into Enron, for example, revealed that a combination of financial engineering and sophisticated tax avoidance enabled the company to declare net income of $2.3 billion between 1996 and 1999, while sustaining a tax loss of $3 billion.65 Significantly, only one of the codes 60 ?. LABOUR RIGHTS IN CHINA, NO ILLUSIONS: AGAINST THE GLOBAL COSMETIC SA8000 4–7 (1999); O’Rourke, supra note 58, at 196.61 ?. For a discussion of one such debacle, see Neil Kearney, Corporate Codes of Conduct: The Privatized Application of Labour Standards, in REGULATING INTERNATIONAL BUSINESS, supra note 12, at 215.62 ?. Overview of Global Developments, supra note 54, para. 138.63 ?. See, e.g., International Labour Office, Working Party on the Social Dimension of Globalization, Information Note on Corporate Social Responsibility and International Labour Standards, ILO Doc. GB286/WP/SDG/4 (2003).64 ?. For a study of the chemical industry’s Responsible Care program, see Andrew King & Michael Lenox, Industry Self-Regulation Without Sanctions: The Chemical Industry’s Responsible Care Program, 43 ACAD. MGMT. J. 698 (2000).65 ?. STAFF OF JOINT COMM. ON TAXATION, REPORT OF INVESTIGATION OF ENRON CORPORATION AND RELATED ENTITIES REGARDING FEDERAL TAX AND COMPENSATION


analyzed in the OECD study mentioned taxation.66 The loss of public confidence in corporate management has led mainly to proposals to strengthen corporate governance mechanisms, especially in the United States.67

IV. EMBEDDING VOLUNTARY CODES IN LAW

Much of the discussion of corporate codes is based on the assumption that, by definition, they exist outside or beyond the law. On the one hand, their advocates stress that the strength of the codes lies in their voluntary character,68 as opposed to the rigidity and instrumentalism of externally-imposed and bureaucratically-enforced law. This characteristic gives them the flexibility to be tailored to the characteristics and circumstances of the business and to raise standards by encouragement and self-generated commitment. On the other hand, corporate critics and skeptics challenge the effectiveness of self-selected and self-monitored standards, and have suggested that competitive equality requires generally-applicable rules rather than self-selected codes.69

On closer examination, the sharp distinction between voluntary codes and binding law is inaccurate, undesirable, and unnecessary. Codes entail a degree of formalization of normative expectations and practices. Even if they are not laws, they may have indirect legal effects. The challenge is to design a framework or architecture that can combine the strengths of corporate codes and formal law.

ISSUES, AND POLICY RECOMMENDATIONS 6 (2003). For a study of federal corporate income taxes, see R. S. MCINTYRE & T. D. C. NGUYEN, CORPORATE INCOME TAXES IN THE 1990S (2000).66 ?. Expanded Review, supra note 48, para. 29.67 ?. See, e.g., Sarbanes-Oxley Act of 2002, Pub. L. No. 107–204, 116 Stat. 745.68 ?. “A few corporations [believe] this voluntary ‘corporate social responsibility’ enhances their brand and provides a competitive edge.” FRIENDS OF THE EARTH, TOWARDS BINDING CORPORATE ACCOUNTABILITY § 1.3 (2002), available at http://www.foe.org/WSSD/positionpaper.html (last visited Aug. 29, 2003).69 ?. See HAUFLER, supra note 2, at 4–5.


Codes may have legal effects in a number of ways.70 First, corporate codes may be enforceable through private law. They may constitute or form part of contractual agreements, such as when a firm formulates a code for its business networks. Thus, a brand-name retailer may establish a code for its sub-contractors and suppliers, or a major oil company, such as Shell, may establish one for its retail outlets. Companies have preferred to avoid such effect by specifying that such codes are not intended to be legally binding. However, it is also generally made clear that if identified breaches of the code are not remedied, they would lead to non-renewal of commercial contracts.71 In addition, obligations to facilitate the monitoring of compliance may form part of the formal commercial contract. Associational and third-party codes are also likely to have effect as contractual arrangements under which participating firms may be entitled to certification which can be used in their product and brand-name marketing, provided the agreed-upon monitoring mechanisms verify that the companies comply with the provisions of the code.

This flexible relationship between binding legal obligations and more specific standards, which in practice determines when to invoke the law, is a familiar concept. It has long been known that breaches of formal contractual obligations in business agreements are often dealt with flexibly.72 Hence, the non-legal status of supply-chain codes should not in itself be a concern, unless this status is a signal that the code is not intended to be taken seriously.

70 ?. For a literature survey focusing on the relationship between codes and national laws, see R. JÜLICH & H. FALK, THE INTEGRATION OF VOLUNTARY APPROACHES INTO EXISTING LEGAL SYSTEMS: LITERATURE SURVEY (1999), available at www.cerna.ensmp.fr/Progeuropeens/CAVA/Literature/Surveys.html (last visited Feb. 16, 2003). See also HALINA WARD, LEGAL ISSUES IN CORPORATE CITIZENSHIP 5–24 (2003), available at http://www.iied.org/docs/cred/legalissues_corporate.pdf (last visited Sept. 30, 2003) (focusing on enforcement through litigation).71 ?. Petrina Fridd & Jessica Sainsbury, The Role of Voluntary Codes of Conduct and Regulation: A Retailers View, in REGULATING INTERNATIONAL BUSINESS, supra note 12, at 231. See also Expanded Review, supra note 48, para. 20.72 ?. The seminal study is Stewart Macaulay, Non-Contractual Relations in Business: A Preliminary Study, 28 AM. SOC. REV. 55 (1963).


Codes may also lead to legal enforcement by private parties based on state regulatory law. For example, firms proclaiming their adherence to a code create expectations which may be legally enforceable by their customers or other stakeholders. Thus, the California Supreme Court has allowed an action to be brought against Nike for false advertising and unfair competition.73 The action challenges the accuracy of the report74 commissioned by Nike on compliance with its corporate code by suppliers. This report, which was used in Nike’s corporate publicity, had found no evidence of illegal or unsafe working conditions at Nike factories in China, Vietnam, and Indonesia.

At the level of international law, voluntary standards or codes also can be given a legally binding status. For example, the WTO agreements on Technical Barriers to Trade (“TBT”) and on Sanitary and Phytosanitary Measures (“SPS”)75 establish an obligation on states to use relevant standards developed by appropriate international organizations “as a basis for” national regulations affecting internationally-traded goods. This obligation has the effect of converting standards developed by organizations such as the Codex Alimentarius Commission, which the organizations themselves do not regard as binding, into mandatory obligations for WTO members.76

73 ?. Kasky v. Nike, 45 P.3d 243 (Cal. 2002). Overturning decisions of lower courts, the Supreme Court of California held that since Nike’s statements were representations of fact about the company’s commercial operations, they were commercial speech, and thus not protected by the First Amendment. Kasky, 45 P.3d at 247. On June 26, 2003, the U.S. Supreme Court dismissed a writ of certiorari, relying in part on the fact that the California court had yet to decide on the substance of the case. Nike v. Kasky, 123 S. Ct. 2554, 2555–57 (2003).74 ?. THE NIKE CODE OF CONDUCT: A REPORT ON CONDITIONS IN INTERNATIONAL MANUFACTURING FACILITIES FOR NIKE, INC. (1998). The Report was produced by GoodWorks International, LLC, a consulting group chaired by Andrew J. Young, based on Mr. Young’s investigations. Id.75 ?. Agreement on Technical Barriers to Trade, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, LEGAL INSTRUMENTS—RESULTS OF THE URUGUAY ROUND vol. 1 (1994); Agreement on the Application of Sanitary and Phytosanitary Measures, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, LEGAL INSTRUMENTS—RESULTS OF THE URUGUAY ROUND vol. 1 (1994).76 ?. See Sol Picciotto, Private Rights vs. Public Standards in the WTO,


Thus, there is no rigid separation between soft and hard law, between totally voluntary codes and strictly binding laws. The interesting and important question therefore is how to construct an “architecture” of normative arrangements that can combine and integrate the two categories of law in the most fruitful manner. To design such an arrangement requires an analysis of the strengths and shortcomings of each and then an evaluation of the different forms of combination.

The analysis of corporate codes briefly surveyed above suggests that they have two main advantages. First, they can be tailored to meet the specific needs of particular businesses and can be applied with awareness and sensitivity to their particular circumstances and local contexts. For example, rigid laws that are strictly applied may be a harmful way to tackle the problem of child labor in poor communities and countries. A simple prohibition against employing children below a certain age may result in their exclusion from relatively better-paid jobs in the formal sector and their employment in degrading activities that are physically and psychologically much more damaging. Thus, the U.K.’s Ethical Trading Initiative (“ETI”) Base Code requires adherents not only to end new recruitment of child labor, but also to “develop or participate in and contribute to policies and programs which provide for the transition of any child found to be performing child labor to enable her or him to attend and remain in quality education until no longer a child.”77 These provisions suggest that laws should establish minimum acceptable requirements, while codes should be aspirational and aim at significant enhancement, as well as providing constructive arrangements for achieving such improvements.

A drawback of such flexibility, however, is that the codes have patchy and uneven content, resulting from self-selection. Hence, an important function for the broader governmental and intergovernmental

10 REV. INT’L POL. ECON. 377, 383–84 (2003).77 ?. ETHICAL TRADING INITIATIVE, THE BASE CODE § 4.2, available at http://www.eti.org.uk/pub/publications/basecode/en/index.shtml (last visited Aug. 9, 2003).


codes, such as the U.N. Global Compact, is to provide a template of basic principles of CSR, which they are already performing to some extent. However, the U.N. Global Compact has not been expressed as establishing either a basic minimum or as taking the form of binding requirements.78 Thus, the flexibility and adaptability of the code format may result in firms picking and choosing from among the standards and effectively diluting them, instead of building more specific provisions and targeted programs to supplement them.

This analysis suggests that formal law can play an important role in defining minimum standards or templates for the content of codes. These templates can be amplified or specified in more detail by firms, by tailoring the standards to their own circumstances. In this way, corporate codes can provide added value, instead of diluting the applicable standards.

Legal frameworks for regulating corporate codes can be established at national, regional, and global levels. An example of a national law is the proposal submitted to the Australian Senate in 1998 for legislation to require Australian TNCs to report on their compliance with a range of defined CSR standards.79

The rejection of this proposal indicates some difficulties with the approach it adopted. First, the proposal adopted a prescriptive approach by seeking to define the CSR standards on which firms would report compliance. This would tend to result in minimalism, a least-common-denominator definition of standards. For example, although the bill did include a provision on taxation, it was limited to a duty “to comply with the tax laws in each country in which [the company] operates.”80 As suggested above, a better approach is to require firms to compose their own codes that are subject to minimum specifications. Thus, in addition to compliance with national tax laws, firms could be required to establish guidelines to prevent tax avoidance, which could be tailored to their particular 78 ?. U.N. GLOBAL COMPACT, THE NINE PRINCIPLES, available at http://www.unglobalcompact.org/Portal/?NavigationTarget=/roles/portal_user/aboutTheGC/nf/nf/theNinePrinciples (last visited Aug. 9, 2003).79 ?. Corporate Code of Conduct Bill, 2000 (Austl.). See also Corporate Responsibility Bill, 2003 (Eng.).80 ?. Corporate Code of Conduct Bill cl. 11.


type of business and their international structure. Similarly, it is better to ask firms to establish environmental impact assessment and performance standards for themselves, adapted to their own business, while requiring them to be based on required minimum specifications.

The second problem with national requirements is the issue of jurisdiction. Accusations of excessive or extraterritorial claims can be made against a home state that requires specified standards to be complied with by foreign affiliates for activities abroad. However, the law need not be blind to business reality. Obligations that extend to the worldwide activities of the firm can be placed on the parent company and its directors, to the extent that these activities are under the parent company’s de facto control.81 By requiring parent companies within their jurisdiction to establish CSR standards for the worldwide activities of the integrated firm, home countries would be encouraging such firms to spread best practices internationally.

Nevertheless, it would be easier and more desirable if there was an international consensus over these requirements so that national law can be based on international agreement. Here again, a new approach seems to be needed. Since the initial movement to develop codes of conduct for TNCs in the 1970s, intergovernmental organizations have faced a dilemma. These organizations have no power to create legal obligations that are binding on firms. For this reason, measures, such as the OECD Guidelines for TNCs, have taken the form of “recommendations addressed by governments to multinational

81 ?. This approach has been adopted by some courts in considering private law claims against a parent company for injuries caused by activities carried out through foreign subsidiaries. It is much easier to accept that home country courts should have subject-matter jurisdiction if the claim is based on the direct liability of the parent (due to the knowledge of the company and its directors and managers of the dangers involved in the activity in question), rather than on vicarious liability based on the ownership relation. See Lubbe v. Cape PLC, [1998] C.L.C. 1559, [1999] I.L.PR. 113, 1998 WL 1042398 (Eng. C.A. 1998). Compare In re Amoco Cadiz, 20 E.R.C. 2041 (N.D. Ill. 1984) (implying that if a firm is operated as an integrated whole, the parent company could be presumed to have knowledge of and involvement in the activities which caused the damage).


enterprises.”82 Furthermore, these codes have been formulated in fairly abstract and general terms. However, it is notable that codes with a more specific focus have been more detailed. A case in point is the WHO Code of Marketing of Breastmilk Substitutes. This code has been used by some states as the basis for national legislation.83 When it has been felt necessary to establish binding legal obligations, the obligations have been directed at states and tend to be expressed in minimalist terms, even if their focus is specific. Thus, the OECD’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions has a rather narrow scope, although it is backed up by a process of peer-review implementation.84

An alternative approach has been to adopt a framework convention. This approach has emerged in recent years, as a means of establishing a set of objectives and principles that are binding on states, and a set of implementation mechanisms and processes for the formulation of more specific norms. Initiated for the purposes of developing regimes for environmental protection (such as Climate Change), the concept has been adapted by the WHO for its recently adopted Framework Convention on Tobacco Control.85 Its advantages are that it can establish an organizational and procedural basis to develop new standards through deliberative processes. These deliberations involve a broad range of civil society and 82 ?. Guidelines for Multinational Enterprises, supra note 8, annex 1, para. 1.83 ?. See INT’L BABYFOOD ACTION NETWORK, STATE OF THE CODE BY COUNTRY (2001), available at http://www.ibfan.org/english/languageimages/socs/bluesoc.jpg (last visited Aug. 9, 2003).84 ?. Organisation for Economic Co-operation and Development, Committee on International Investment and Multinational Enterprises, Working Group on Bribery in International Business Transactions, Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, art. 12, OECD Doc. DAFFE/IME/BR997/ 20 (1998).85 ?. World Health Organization, Framework Convention on Tobacco Control, WHO Doc. A56/INF.DOC./2 (2003). See DANIEL BODANSKY, THE FRAMEWORK CONVENTION/PROTOCOL APPROACH (1999) (discussing framework conventions as an approach to international law-making), available at http://whqlibdoc.who.int/hq/1999/WHO_NCD_TFI_99.1.pdf (last visited Sept. 30, 2003).

http://www.lancs.ac.uk/depts/law/intlaw/ibuslaw/repository/stp41/FCTC1.pdf

http://www.lancs.ac.uk/depts/law/intlaw/ibuslaw/repository/stp41/FCTC1.pdf


governmental participants, thereby providing a stronger basis for mutual trust.

A framework convention can also adopt a more flexible approach to combinations of hard and soft law codes. For example, it can establish legal requirements for participating states to lay down specifications for corporate codes in general terms, while providing that they should be based on appropriate internationally agreed-upon standards which may be subsequently developed. As explained above, the WTO agreements establish a framework convention in this sense, because they require states to ensure that national regulations do not create unnecessary obstacles to trade by basing such regulations on internationally agreed-upon standards where they exist.

V. INTEGRATING CSR MEASURES WITHIN A GLOBAL RULES-BASED FRAMEWORK

The example of the WTO can also be adapted to deal with the criticism that international investment agreements are one-sided because they grant significant rights to investors without creating any responsibilities. This concern has raised the question of how to achieve a better balance in a multilateral framework for investment. A framework convention could provide an umbrella for a number of related agreements that would deal with both investor rights and responsibilities, thereby combining liberalization and regulation.

First, the technique of related agreements could be used to clarify the impact of investment protection obligations on national law. As with the TBT and SPS agreements under the WTO, a presumption could be created that national measures based on internationally agreed-upon standards on topics such as environmental protection or human rights would be valid. Such a presumption of validity would help to prevent disputes or claims based on indirect discrimination or de facto expropriation.

Second, international agreements and standards could be associated within a multilateral investment


framework either on a required or conditional basis. Some international instruments might be considered to embody such core values and standards that they should form an essential part of the package. In the same way, the agreement on Trade Related Intellectual Property Rights (“TRIPs”) has made acceptance of basic intellectual property rights a requirement of participation in the WTO system. Such a provision might be made, for example, for the ILO Declaration on Fundamental Principles and Rights at Work of 1998. Other issues that might be regarded as an essential part of a multilateral investment framework and for which multilateral agreements already exist include combating bribery, and cooperation in tax enforcement.86 This model might also be an appropriate way to deal with the difficult problem of tax benefits and incentives, by associating a code on unfair tax competition, along the lines of the codes now being applied within the European Union and by the OECD.87

Association of such agreements within a single framework would help to create public confidence that the benefits extended to investors by globalization would be complemented by a strengthened framework of international cooperation to prevent abuse of the freedoms of the global market.

Both agreements and non-binding standards could also be associated on the basis of reciprocal conditionality, which would provide flexibility. Under 86 ?. Convention on Mutual Administrative Assistance in Tax Matters, Jan. 25, 1988, 27 I.L.M. 1160 [hereinafter Tax Convention]. While the Tax Convention provides a framework for cooperation which goes beyond the minimal provisions of bilateral tax treaties, it has only been ratified by nine states (including the United States). It has now been supplemented by the Agreement on Exchange of Information in Tax Matters. ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT, GLOBAL FORUM WORKING GROUP ON EFFECTIVE EXCHANGE OF INFORMATION, AGREEMENT ON EXCHANGE OF INFORMATION IN TAX MATTERS (2002), available at http://www.oecd.org/dataoecd/15/43/2082215.pdf (last visited Sept. 30, 2003).87 ?. See ORG. FOR ECON. CO-OPERATION & DEV., HARMFUL TAX COMPETITION: AN EMERGING GLOBAL ISSUE (1998); ORG. FOR ECON. CO-OPERATION & DEV., CTR. FOR TAX POLICY AND ADMIN., THE OECD’S PROJECT ON HARMFUL TAX PRACTICES: THE 2001 PROGRESS REPORT (2001); COUNCIL OF THE EUROPEAN CMTY., REPORT OF THE CODE OF CONDUCT GROUP (BUSINESS TAXATION) TO THE ECOFIN COUNCIL ON 29 NOVEMBER 1999 (1999), available at http://europa.eu.int/comm/taxation_customs/taxation/law/primarolo/primarolo_en.pdf (last visited Sept. 30, 2003).


this approach, states could choose to extend investment protection benefits only to investors from states participating in specified agreements. Such conditionality could also be applied to enterprises, through a denial of benefits clause. This type of clause would permit a state to deny the benefits of investment protection to enterprises breaching specified or related standards. For example, a host state could rule out bids for licenses or concessions, or cancel them, if the enterprise concerned were found to be in breach of relevant standards. Thus, a firm that breached prior informed consent procedures or provisions of the WHO Infant Formula Code could be denied the right to bid for public contracts.

Finally, relevant agreements and standards could be associated within a multilateral framework for investment on an opt-in basis. States and enterprises could be encouraged to sign a range of agreements and codes as appropriate to their activities and circumstances. This “plurilateral” association would help to provide a higher visibility for positive regulatory standards, as well as to authenticate both those standards and their monitoring and compliance mechanisms.

VI. CONCLUSION

In the increasingly competitive world economy created by globalization, it is tempting for individual states and enterprises to take a short-term view and to prioritize immediate advantages or returns. This myopia makes it all the more important to strengthen multilateral arrangements and to find ways to harness private initiatives, while ensuring that they strengthen public capacity and operate in harmony with public policies.

The various voluntary social responsibility initiatives outlined above offer opportunities for economic development, but also raise some problems. The main advantage is flexibility—the codes can be adapted to the circumstances of particular firms and industries and of different host and home countries.


Rather than binding firms in a rigid legal straitjacket, codes can establish standards that are either minimum requirements or higher aspirational targets, and can combine inducements with sanctions to encourage compliance. Their transnational operation can help ensure that economic globalization contributes to the spread of best practices of social responsibility in business, without fostering competition that disregards externalized social and environmental costs.

The danger of primarily voluntary transnational initiatives of this type are that their uneven impact may reinforce competitive disadvantages and that they may be viewed either as an imposition of foreign standards or as a mere fig-leaf. Resolving these problems calls for responsible and cooperative relationships between states, enterprises, and the wide range of civil society organizations.

rights, responsibilities and regulation of international … · web viewsol picciotto* this essay...

Documents