Asymmetric Paternalism in Corporate Governance

 Asymmetric Paternalism in Corporate Governance

The necessary intervention in supply chain protection.

Abstract

Corporate governance is the complex mechanism which allocates and constrains the internal strategy choices of a business corporation. Corporate Social Responsibility (CSR) is by definition the responsibilities of enterprises for their impact on society. Despite the multitude of unethical practices, values and standards unearthed along the value chains of many multi-national enterprises causing harm to suppliers; CSR is yet to be fully incorporated into the United Kingdom (UK) corporate governance framework. Consequently corporations are unconstrained by the disastrous implications of their decisions on the lives of the workers in supplying factories.  

The current UK corporate governance objective is focused on compelling shareholder wealth maximisation within a non-interventionist framework. The current objective fails suppliers. This research project proposes the restructuring of corporate governance through enforcing a corporate objective that obligates consideration of the interests of all stakeholders and thus protects suppliers. This objective departs from the current liberal attitude toward corporate choice and imposes asymmetrically paternalistic policies for the benefit of global society via the creation of a socially responsible corporation.

This piece uniquely propositions a deviation from libertarian economic policies towards an unashamedly paternalistic policy. It is a bold step, but entirely necessary to guard the currently unprotected suppliers being harmed by the irresponsible supply-chain decisions of multi-national enterprises.  
 

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Introduction [i.]

Setting the Scene [ii.]

 Layout [iii.]

Methodology [iv.]

Chapter One: The Corporate Social Responsibility Framework [v.]

Codes of Conduct [vi.]

Companies Act 2006 [vii.]

Multi-stakeholder Initiatives [viii.]

Summary [ix.]

Chapter Two: Account of the Garment Industry in Bangladesh [x.]

Unsatisfactory Wages [xi.]

Poor Working Conditions [xii.]

Factory Fires [xiii.]

Rana Plaza Collapse [xiv.]

Summary [xv.]

Chapter Three: Proposing a New Framework [xvi.]

A Critique of Liberalism [xvii.]

Proposing Asymmetric Paternalism [xviii.]

Reframing the Corporate Objective [xix.]

Enforcing the Corporate Objective [xx.]

Final Thoughts and Speculative Remarks [xxi.]

Conclusion [xxii.]

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Introduction

The time has come to stop Multinational Enterprises’ (MNE) ignorance towards their supply chain responsibilities. Global society is discontent with the poor ethical values, standards and practices that have been, and continue to be, unearthed in many factories situated in less economically developed countries that supply to international buyers. Inadequate working conditions[1]; low pay[2], child labour[3]; inferior health and safety standards[4] and; job insecurity[5] on many global chains have all been brought to public attention. This research project argues that the resolve of these issues can be realised through reforming corporate governance in the United Kingdom (UK).

A global supply chain[6] is a system strategically adopted to add value to an MNE’s commercial activity.[7] Corporate governance functions to facilitate strategy by enabling engagement in commercial activity through effective management. It is the complex of legal rules and social practices that allocate and constrain power over the internal strategy choices of a business corporation.[8] Any integrated corporation strategy falls within the ambit of corporate governance[9] and businesses are held responsible for the internal choices that they make.

Yet the poor practices mentioned above are ethical and social responsibilities of businesses. ‘The responsibility of enterprises for their impacts on society’ is by definition corporate social responsibility[10] (CSR), which is traditionally seen as subordinate to conventional corporate governance. For example, if a corporation makes less money than is expected for shareholders[11], corporate governance intervenes to find out how this has occurred and if any action should be taken. However, if a corporation makes supplying factory workers ill because they work eighteen hours a day in poor conditions, corporate governance simply requires company decision makers to show that they considered this could possibly happen. But social discourse has changed and companies now find themselves pilloried for the practices in global chains which are not their legal responsibility[12]. The sole corporate responsibility is no longer to ‘make as much money as possible’ for shareholders.[13] ‘Bottom line’ corporate governance, that provides little consequence for social responsibility non-compliance, is no longer socially acceptable.

Global society is aware of the appalling conditions in supplying factories and corporations must recognise the above concerns as real responsibilities in value chain management to provide the MNE that global society desires. While operating enterprises in a socially responsible manner is encouraged[14] and CSR has ‘become a much talked about element in corporate governance.[15] CSR remains voluntary[16] and for the most part it has remained just ‘talked about’. CSR encompassing a wider range of stakeholders through ‘triple bottom line’[17] analysis acknowledges the above concerns as real corporate responsibilities and businesses should be compelled to adopt and integrate CSR policies.

This research project argues that the interest of suppliers will be considered and shielded from abusive MNE practices by coupling reform of the shareholder orientated focus of corporate governance with a departure from the lack of governmental interference in corporate decision making. An unashamedly paternalistic interference with a corporation’s freedom to choose which CSR policies to abide by is strongly encouraged. Paternalistic policies are selected with the goal of influencing the choices that affected parties make[18], in order to make those affected parties better off. The proposed paternalistic interference recognises that corporation’s do not always make the best choices under the current corporate governance framework in the UK which is heavily influenced by the liberal policies associated with globalisation. As actors in global society MNE’s are ‘better off’[19] when they carry out their activities in an ethically and socially responsible manner. Reframing the corporate governance framework and enforcing the uptake of the new framework is a bold but necessary interference with the decision making processes of corporations which will achieve the supplier protection that global society needs. Corporate governance, incorporating CSR, must be a compelling mechanism to bring those harmed by socially unacceptable behaviour to the forefront of MNE’s minds when making corporation decisions. Until this happens corporate governance cannot claim to allocate and constrain business corporation power.

Setting the Scene

International trade developments towards the end of the twentieth century[20] encouraged trade liberalisation and export. For multinational enterprises (MNE)[21] this, along with advancements in technology and communication, facilitated a relocation of production processes away from the high-priced labour and manufacturing costs of the North, to the lucrative industrial possibilities of the South.[22] Being an industry, where localised production was unnecessary, the garment industry was well equipped to outsource production and take advantage of the globalisation period. Through the rise of “cut-make-trim” stages of garment manufacturing taking place in lower income regions of the world[23], the processes of garment industry MNE’s became global. The produced global chain reduced the price at which an MNE could offer its finished product to the customer.[24] In return, the international investment in developing countries considerably contributed to the welcomed economic progress of these countries.[25]

However the liberal world of global trade, welcomed by MNE’s and developing-country governments alike, was accompanied with the acquiescence of ‘alien’ values associated with the new global chain.[26] Cheaper prices were welcomed by MNE’s and their customers[27], but the advancements in technology and communication that aided MNE’s in their globalisation pursuit are now a platform for worldwide negative publicity.[28] The global stage of free trade where businesses and corporations operate under neoliberal institutional frameworks[29] has a wide audience.[30] What was a profitable use of the cheap labour on offer by poorer countries is now an area of reputational and insurance risk.[31] Yet the ‘risk’ has done little to motivate MNE’s to change their practices and improve standards in supplier factories.

Layout

Chapter one sets out and critically assesses the current liberal framework for corporate social responsibility observed by multinational enterprises incorporated in the United Kingdom (UK). Focusing in particular on codes of conduct, the obligations outlined in the Companies Act 2006 and multi-stakeholder initiatives, to highlight their attainable potential if enforced.

Chapter two establishes that although the UK CSR framework displays potentials to benefit suppliers, atrocities are continuously exhibited in Bangladesh. The framework is thus concluded to fail suppliers and leave global society dissatisfied.

Chapter three proposes a move towards a reformed CSR framework in the UK. The new framework departs from the liberal metric presently used and realigns the focus of corporate governance towards the needs of all stakeholders, thus incorporating the consideration of suppliers. A compulsory ‘stakeholder objective’ agreement is proposed as an introduction to a corporations constitution. This clause clarifies the expectations of TNC’s in relation to ethical supply chain practice whilst constituting a legally binding agreement between a TNC and its stakeholders. The recommended CSR restructuring is assessed using an asymmetrically paternalistic framework.

Methodology

This research project is concerned with how MNE’s should be instructed and held accountable for their corporate activity along supply chains.[32] The core approach is doctrinal legal research, with the predominant focus being legislation, codes of practice and internationally recognised principles and guidelines. As the research project concerned the lack of legal accountability in the field of corporate responsibility, the legal and quasi-legal sources were limited. This significantly informed the chosen theoretical framework[33] for the project[34] and the supplementation of doctrinal research with socio-legal research.[35]  A comprehensive body of academic opinion was available and availed of. It was unnecessary to carry out any empirical research. This project has been provided with approval from the Law School Ethics Committee. It is a low risk project, it does not involve interviews or contact with individuals.

One developing country which since the early 1980’s witnessed ‘phenomenal [garment industry] growth’[36] and concomitantly a proliferation of labour and health and safety concerns[37], is Bangladesh. Bangladesh will be used as a case study in this research project in order to give a holistic account of the current state of corporate accountability and the benefits of proposed modifications.[38] The account of experiences in Bangladesh is applied to focus attention on the interrelationships between all the factors[39] which are affected by corporate decisions.[40]

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Chapter 1: The Corporate Social Responsibility (CSR) Framework

It is the aim of this section to expand the evolution of corporate governance and the means by which it is presently imposed upon UK incorporated MNE’s, in order to highlight the failings of a liberal framework and encourage the introduction of paternalistic policies. The traditional focus of corporate responsibility is the wealth maximisation of a corporation’s shareholders within the obligations of the law.[41] By 1980 neoliberal theory[42] had established itself in the political economy and policy making landscape of Britain. Deeply opposed to state interventionism on matters of investment and capital accumulation it was deeply committed to ideals of business and corporate freedom. Neoliberal theory holds that corporations must be at liberty to operate business as they wish, as this is the key to wealth creation. For generations it has been instilled that the business of business is the creation of economic value[43], this is the only corporate obligation and corporate governance catered to this view.  The economic liberal doctrine of the 1980’s which welcomed deregulation and corporate freedom was confined solely by the obligation to maximise shareholder wealth. Yet throughout the same generations’ scholars, nongovernmental organisations and social movements alike have been conscious proponents in support of wider company obligations.[44] Societal awareness of the demand for greater social responsibility towards business activities has thoroughly increased.[45] It is this rationale that calls for a critique of the current approach to CSR. Social discourse is demanding greater social responsibilities to be imposed on MNE’s but the current means to impose those greater responsibilities has not departed from the libertarian ideal and therefore does not achieve the potential that CSR is capable of achieving.

Codes of Conduct

The need to embrace socially responsibly practice has become apparent to companies, but the focus on wealth creation as part of the liberal reign granted to corporate practice is not conducive to a responsible revolution. Companies that embraced the discourse of corporate social responsibility did so through what appeared to be an eruption of published codes of conduct.[46] The major impetus for many companies in adopting codes focused on conditions along their value chains.[47] Codes of conduct were adopted by leading corporations in the clothing field[48] and continue to be implemented and publicised, in abundance, today.[49] The abundance of codes demonstrates that companies are aware that social discourse is calling for recognition of wider responsibilities in the corporate world.  Nonetheless codes of conduct are voluntary self-regulation, failure to comply with a published code might result in criticism, but codes do not shift corporate focus away from shareholder wealth maximisation and toward behaving in a socially responsible manner. Companies appear willing to openly commit to CSR policies but the policies are adopted on their terms. A company retains total flexibility to make corporate decisions. The positive values concretised in companies’ codes of conduct are indeed capable of permeating national boundaries and securing conditions in supplying countries where the laws are lacking, yet as the next chapter will demonstrate this is rarely realised. Many corporate codes are not integrated into business strategy and exist simply as a mechanism to bolster corporate image.

Companies Act 2006

Recognition that the focus of business operations was adjusting to incorporate the interests of a wider group was further evidenced by the adoption of the Company Law Review Steering Group (CLRSG) in 1998.The CLRSG felt the law on directors duties’ needed refined.[50] The first issue on their agenda encouraged hopes of wider company obligations being specified in law; it was posed ‘‘in whose interests should companies be run?’’.[51] This was a welcomed opportunity to bring extra-shareholder interests to the attention of company directors; with the possibility of steering a director’s focus towards the interest of suppliers. The CLRSG’s clarification of the law on director’s duties was supported and formally recommended by the Law Commission[52] and the elucidated version is now provided in the Companies Act 2006.[53] Section 172 of the Act states that directors must act, ‘in good faith’; in a way they consider ‘most likely to promote the success of the company for the members as a whole’.[54] This requires a director to take into account relevant factors, other than shareholder interest, in the decision making process. Directors must comment on how they have performed their s172 duties in their annual report.[55]

Unfortunately this is not the bold reform of corporate social responsibility that could have been accomplished by the Act. As long as a director can demonstrate consideration of the relevant factors s172 is fulfilled. The decision making processes of corporations, that could have been positively influenced and steered by the Act, is unaffected by a timid and lacklustre encroachment on corporate freedom. The Companies Act 2006 merely codifies existing law and best practice[56] it imposes no new social responsibility on directors. The legal view remains that shareholders’ interests prevail. This is additionally fostered in the undertone of the UK Corporate Governance Code.[57] Hopes that the provisions of s172 would encourage directors to seek advice and consider the long term consequences of their decisions on suppliers have come of little avail. The act is an ‘enabling act’[58]; it reinforces a director’s decision making liberty. It permits directors who want to consider non-shareholder interests, to consider those interests without facing litigation.[59] It has minimal interference with the way corporations consider supply chain issues, where relying on corporate conscience is not enough.[60] A greater influence on the minds of all directors, not only those who want to consider non-shareholder interests, needs to be attained.

Multi-stakeholder Initiatives

The growing criticism towards Trans-National Corporations (TNC) activity in developed countries initiated a wave of voluntary self-regulation; it also spurred the development of multilateral and international standards for corporate behaviour.[61] Multi-stakeholder initiatives have attempted to address many of the inherent limitations with voluntary self-regulation in corporate codes of conduct. Led by civil society organisations, multi-stakeholder initiatives  set out to harmonise what has now become a proliferation of global CSR policies and engage a broader range of stakeholders in the corporate decision making process.

The two major international agreements to remain from the 1970’s are the OECD Guidelines for Multinational Enterprises and the ILO’s Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy. The ILO principles offer guidelines on such areas as employment, training, conditions of work and life, and industrial relations.[62] The OECD Guidelines are recommendations of non-binding principles and standards addressed to multinational enterprises, operating in or from adhering countries, and are promoted by the countries governments. An updated version of the guidelines included a new approach to responsible supply chain management requiring attention to be paid to stakeholder interests.[63] To further the effectiveness of the guidelines National Contact Points have been set up in adhering countries to investigate and mediate complaints under the guidelines.

The ILO principles and OECD Guidelines are rife with positive policies and objectives, but they are non-binding guides. Corporations can read the guidelines and discover exactly what CSR requires, but there remains no obligation to change their irresponsible ways.

Added to the preceding instruments were the UN Global Compact in 2000 (The Compact) and later the Guiding Principles on Business and Human Rights[64] (the Ruggie Principles) in 2005. The Compact is described as a ‘strategic policy initiative’. Companies sign up by agreeing to the 10 guiding principles of the UN Global Compact[65] which are broadly based on human rights, labour, environment and anticorruption. Signatories are encouraged to engage with their suppliers around the ten guiding principles and thereby create more sustainable supply chain practices.[66] The Ruggie Principles aim to enhance global standards and practices with regards to business and human rights. They require, amongst many other positive precepts, that businesses ‘avoid causing or contributing to adverse human rights impacts’, and ‘address such impacts when they occur’.[67] The primary weakness of the principles, like the aforementioned multi-stakeholder initiatives before them, is their non-binding nature; they do not compel businesses to report and be accountable for the human rights aspects of their activities. They are ‘more like a statement of the International Law Commission’[68], relying on ‘mounting societal pressure’ as a practical remedy.[69]

Further to this, NGO activity including The Clean Clothes Campaign[70], the Ethical Trading Initiative[71], the Fair Labour Association[72] and many more multi-stakeholder initiatives target the responsibilities of TNC’s in their global activities. By fostering incorporation of CSR policies throughout corporate structures multi-stakeholder initiatives have allowed an adjustment of business policy that can penetrate deeper into TNC value chains.[73] A broader range of stakeholders are capable of informing the corporate decision. But these positive potentials are unachieved by such initiatives because they do not reframe the corporate objective and do not influence the moral standards of decision makers. Thus CSR remains outranked by the shareholder objective of corporate governance.

Summary

Preservation of corporate freedom and an unwillingness to encroach on the liberty of business has led to an abundance of practices that ‘could’ be followed, if businesses and corporations want to follow them. Agreeing to sign up to Multi-stake holder initiatives, in the same vein as published codes of conduct, has been relegated to a public relations exercise. Without any formal sanctions the aforementioned principles in reality do nothing for the victims of irresponsible TNC activity. Until a bold step departs from the supremacy of libertarian policies towards a paternalistic policy the corporate decision making process will not be influenced. It is believed that an unashamedly paternalistic encroachment on the will of corporations who make sub-optimal decisions is the only way to obligate the positive practices currently ‘encouraged’ by CSR. Until this reform occurs the successes of any CSR policy will be confined to its present state; which as the next chapter will demonstrate is abysmal.        

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Chapter Two: Account of the Garment Industry in Bangladesh

The previous chapter detailed the CSR framework in the UK and how it should affect the global activities of MNE’s. In spite of all of the codes, principles, instruments, guidelines and even laws that have been publicly accepted by TNC’s incorporated in the UK and operating in Bangladesh, the Bangladeshi garment factory industry has continually graced the pages of newspapers and NGO websites for negative, and in some instances devastating, incidents. This chapter will describe a fraction of the supply chain issues exhibited in Bangladesh to clarify that the liberal CSR framework explained in Chapter one is not working. A proposed limitation on a MNE’s liberty and freedom of choice is legitimate and necessary in light of the harm being caused to suppliers’.[74] The current CSR framework has great potential but it does not reframe the corporate objective and thus only influences those who wish to be influenced by it. A paternalistic policy by definition influences the choices that an affected party makes. If the corporate decision making process could be influenced commonly, suppliers would be considered and accounted for[75] and these atrocities would not occur.

Given the favourable conditions afforded to the Bangladeshi garment industry under the GATT Multi-fibre Agreement (MFA)[76] Bangladesh became an attractive spot for international buyers in the 1980’s. The Bangladesh ready-made garment industry now accounts for nearly 80% of the country’s export revenue.[77] The European Union (EU) is Bangladesh’s main trading partner[78] and the United Kingdom (UK) is the third single largest destination for exports from Bangladesh with some 70 UK firms operating successfully across Bangladesh.[79] Bangladesh is party to the EU-Bangladesh co-operation Agreement concluded in 2001[80] and the subject of endeavours of the UK Trade and Investment Office to better the business environment in Bangladesh.[81] With such a strong EU and UK interaction with Bangladesh it would be imagined that the garment industry standards there exhibited would be at the very least acceptable, but this is emphatically not the case.

Unsatisfactory wages

The level of wages paid to the Bangladeshi garment Industry workers is oppressively low. Workers have been subjected to appalling wages with little aid from a Bangladesh Government that is keen to secure a competitive advantage and attract international trade from the North.[82] The low wage level, coupled with the irregularity in payments[83], has long been high on the list of tangible problems experienced by garment sector workers[84] and subsequently high on the social responsibility agenda. Explicit reference to providing ‘the best possible [wage]’ is made in the ILO conventions[85] and the OECD Guidelines.[86] Providing a wage that meets the needs of supply chain workers appears suitably in MNE codes of conduct.[87] Yet figures of ‘5pence an hour’[88], ‘£2.20 a day’[89] and ‘£13.97 a month’[90] correlated with brands such as Asda, Tesco and Primark[91] would suggest otherwise. The levels of pay are certainly not reflective of the intensive work carried out. It wasn’t until 2006 that companies sourcing from Bangladesh joined with Bangladeshi workers to support calls for a higher minimum wage[92] and put any action behind their public profession of CSR policies. Whilst the minimum wage has been raised in Bangladesh[93], wage adjustments across the garment sector in its entirety remains to be seen.[94] Further a new problem has developed with the introduction of a higher minimum wage; an increased strain on the pocket of garment factory owners. The sizeable increase in monthly minimum wages has not been defrayed by international buyers.[95] This risks the economic security of garment factories who have complied with governmental standards and the success of the export driven industry as a whole. MNE’s reluctance to pay an increased charge for goods demonstrates the perseverance of the wealth maximisation attitude to corporate activity, genuine enthusiasm to provide ‘the best possible [wage]’ to meet supply chain needs is rendered meaningless when it contradicts with a corporation’s sole objective of increasing shareholder profit. A corporation is compelled to maximum wealth, they are not obliged to seriously consider the livelihoods of Bangladeshi garment factory workers and they can therefore pay the bare minimum for items without any accountability being asked of them.

Poor Working Conditions

Of even greater concern is the likely depletion in working conditions, which are already worryingly low, across the sector. Long hours often in excess of eighty hours per week, no rest breaks, the inability to take ‘sick days’, lack of washing or sanitary facilities and the non-existence of protective clothing typify too correctly the working conditions in garment factories.[96] These garment factories are supplying to companies in the UK, companies with strong codes of conduct[97] that are incorporated in an OECD and ILO member country. These companies should be well aware of the minimum conduct expected of them, certainly their published codes of conduct and multi-stakeholder initiative affiliation would suggest so, but scrutinising their activities in supplying factories displays total disregard for any CSR obligations. Corporations operating under the current liberal framework are free to choose whether or not to behave in an ethically responsible way and clearly even though they are aware of how they should behave they do not always seem to do so. Promoting wealth maximisation and encouraging corporate liberty invites a temptation to experiment with opportunities for exploitation. This must be interfered with to influence the choices of corporations persistently making sub-optimal choices. Unfortunately the poor practices aren’t capped with the above account.

Factory Fires

The aforementioned rapid growth of the garment Industry in Bangladesh had to be accommodated for not only by workforce but also through workplace. There is now upwards of 5600 garment factories in Bangladesh, well over ten times the number of garment factories existent in 1984.[98] The marked expansion has led to the quick establishment of factories or the conversion of factories which are not adequately fit for purpose. Widespread safety problems such as faulty electrical circuits, unstable buildings, inadequate escape routes and unsafe equipment have all been identified[99], often disregarded until it is too late. Poor safety standards have been ignored. What cannot be ignored is the fact that since 1990 over 1000 garment factory workers have been killed in factory fires in Bangladesh.[100] 80% of all factory fires in Bangladesh are reportedly due to faulty wiring.[101] Between 2006 and 2009, 414 garment workers were killed in an estimated 213 factory fires[102]; 165 workers have been killed since 2009 in four separate incidents.[103] The deadliest factory fire to date occurred in November 2012 at the Tazreen Fashions factory, killing over 100 people and leaving 150 injured.[104] Amongst the wreckage, evidence of connections between many buyers and Tazreen Fashions factory was found including labels from Scottish company the Edinburgh Woollen Mill.[105] Edinburgh Woollen Mill has to date not offered any recognition or compensation to those injured in the Tazreen factory fire or to the families of the deceased[106], whilst the corporation have not openly proclaimed to adopting ethical codes of conduct[107] they must still comply with the legal obligations imposed upon them.[108] Presumably if the legal obligations are to deliver even a minimal floor of obligations toward suppliers it is envisaged that they would secure a working environment that did not run the risk of serious injury or death. Yet not only did the legal obligations not compel consideration of the interests of suppliers when deciding to operate in unsafe conditions, they did not provide any redress for victims. Edinburgh Woollen Mill has since the factory fire agreed to sign the Bangladesh Accord on Fire and Safety[109], a major initiative adopted by the global textile sector in an attempt to take control of one of its major sourcing countries.[110] The Accord is a legally binding contract focusing mainly on the safety at supplier factories in Bangladesh. However, the lack of compensation and unwillingness to admit responsibility induces real fears that agreeing to be bound by the terms of the Accord will fall victim to the same fate as the self-regulatory CSR policies preceding it and be relegated to a public relations exercise to bolster corporate image. Additionally focusing safety reforms on Bangladesh as a country, rather than on a global scale, risks the stability of the Bangladeshi garment industry. International buyers can simply move to other manufacturing countries which are not subject to such requirements.[111]

The Rana Plaza Collapse

The devastation witnessed at Tazreen Fashions Factory had barely been processed by global consumers[112] when in April 2013 the eight storey Rana Plaza building in Savar, Bangladesh collapsed killing (at least) 1138 garment workers and leaving 2500 injured.[113] The image of onlookers gathered around the subsided factory, one day after the collapse[114], irreversibly exposed the hazardous working conditions of the Bangladeshi garment workers across the world. Social discourse has conclusively rendered social responsibilities as equivalent to wealth maximisation on the corporate agenda, and now the liberal framework is entirely insupportable in its lack of interference with the moral will of the corporation.

The immediate cause of the Rana Plaza disaster was poor construction.[115] The building had originally been a six storey building intended for purely non-industrial purposes. Use of the original building as a garment factory was not properly approved and the two additional storeys were built without planning permission.[116] Cracks in the walls of the building the day before the collapse had caused the building to be shut down, yet garment factory workers were called back to work the very next day.[117] UK Companies that produced at Rana Plaza included Primark, Matalan, Bon Marche, Premier Clothing and Store Twenty One.[118] All of which publicly proclaim a commitment to a strong ethical code of conduct.[119] Yet not only did their open commitment to CSR policies fail to prevent the disaster occurring, any hint of ethically responsible attitudes towards supplying factories was firmly eradicated by retailers failure to offer any compensation to victims.[120] A proportion of the UK retailers that sourced from the factory have since contributed to a ‘Rana Plaza Fund’ to aid the victims of the disaster, but in most instances contributions were trivial.[121] Without a compelling reporting and accountability mechanism the current CSR framework offers no practical remedy. When social responsibilities are clearly imposed on a corporation and they no longer have free choice over whether or not to adopt CSR policies then definite obligations will be placed on MNE’s. Until clear obligations are in place no calculable redress mechanism exists for people harmed by MNE activity and any discussion of such is nonsensical[122] and quickly reverts back to relying on mounting societal pressure.[123] With clear corporate objectives and accountability mechanisms responsible behaviour will be a clear obligation and a discussion of predictable and determined remedies in the event of a disaster would be an appropriate and realistic next step.[124]

Summary

Codes of conduct, company law and multi-stakeholder initiatives have such great potential to positively influence corporate decision makers but the above account displays that they do nothing to influence the decision making processes of corporations disinclined to behave in a responsible manner. The liberal framework cannot break down the wealth maximisation corporate objective whilst remaining heavily committed to corporate freedom. Harm is being caused to workers of supplying factories and an allegiance to libertarian policies cannot justify this. Corporations must be forced to consider the impact of their decisions on suppliers, as clearly ‘allowing’ or ‘encouraging’ them to consider the impact of their decisions on suppliers is not achieving the behaviour desired by global society. The next chapter proposes how influencing the will of a corporation through paternalistic policies is to be achieved.    

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Chapter 3: Proposing a New Framework

Since the 1980’s the United Kingdom (UK), like all countries involved in globalisation, has been required to reshape their legislation, principles and practices in order to make them consistent with economic liberalism.[125] Businesses and corporations are given the freedom to operate within an institutional framework of free markets and free trade where state intervention is limited.[126] A corporation is required to create wealth and is given wide flexibility to conduct its affairs in order to achieve this end. This history of economic liberalism has saturated the UK approach to corporate governance and corporate social responsibility (CSR). State intervention is limited, self-governance is maximised and engagement with CSR practice is voluntary. Corporations can think and act within a profit maximising strategy independent of any CSR duty. Profit maximisation is an obligation, whilst CSR remains optional. CSR enforcement has received strong recognition from external and social market forces[127] that are unsurprisingly not satisfied that the conduct of TNC’s along their supply chains is meeting society’s ethical standards.[128]  But this recognition has not successfully counteracted the fact that ultimately corporations have freedom over their decisions, caveated solely by the obligation to increase shareholder profit.

A Critique of Liberalism

Corporate decision makers should be ‘no more and no less morally responsible (rational, self-interested, altruistic) than ordinary persons’.[129] But alas, like all human beings, corporate decision makers do not always behave in the way, that society believes, they ought to behave.[130] The liberal institutional framework explained in the preceding chapters therefore fails to protect suppliers from harm in its lack of interference with a corporation’s choices. TNC’s must achieve the goal of wealth maximisation, they can do this in a socially responsible manner[131], which may require a more demanding strategy to achieve their objective, or they can cut corners in supply chains to save money. Repeatedly the latter is the adopted path. Corporation’s faced with a goal that they must achieve, and alternative ways to achieve that goal, often adopt the least taxing but not most rational course. The liberal policies do nothing for unacknowledged suppliers as they do not influence a corporation’s choice. The reverence of corporate freedom allows corporations to deliberate over whether or not to pay slightly more for garments sourced from Bangladesh, which would enable workers to live a better life.[132] Emphasizing shareholder wealth maximisation allows corporations to mull over whether or not to invest in supplier factories to aid the provision of sanitary facilities.[133] Lack of compulsion regarding CSR policies permits corporations to receive garments produced in unsafe Bangladeshi factories that lack building and fire approval. The globalisation process brought with it corporate liberalisation giving TNC’s freedom of choice, but as has been demonstrated in chapter three; corporations do not always make the optimal choice for the welfare of global society. This should not be allowed to continue.

Proposing Asymmetric Paternalism

The failure of liberal policies strongly encourages a shift towards an asymmetrically paternalistic CSR framework. When adequately incorporated into business strategy CSR has the potential to transcend national boundaries and infiltrate deep into supply chains. But the current voluntary nature of CSR is flawed in that it lacks any real interference with a MNE who has freedom to choose whether or not to insist upon ethically responsible behaviour as a fundamental element of business. Paternalists emphasize the inability of the individual to choose what is intrinsically good in the light of the proper goals an individual or society should pursue.[134] ‘Paternalism’, in the narrow sense is defined as ‘protection of persons against themselves’[135]; this would justify an interference with the will of a corporation using the long term benefit derived for the corporation themselves. This could be developed as a feasible justification for the shift in ideals detailed below.[136] But it is a broad paternalistic definition which is relied upon in this project. A broad definition of paternalism utilises the position of TNC’s as actors in global civil society. The interference with a corporation’s liberty is justified, using this definition, through the generated articulation of corporate ethical wealth[137] which benefits global society, of which a TNC is a member. The relationship between the economy and society [would no longer be] schizophrenic[138], instead the enterprise that the global society collectively wants and needs, where supply chain practice is socially responsible, would be possible.[139]

Paternalism would encroach on corporate liberty, championing instead a policy that is targeted at the enhancement of the welfare of the global society via the interference with the freedom of one or more corporations.[140] A paternalistic framework proclaims that the current rationality of corporations in adopting supply chain decisions is fundamentally the wrong starting point if global social responsibility is to be achieved.[141] This project focuses on a specific type of paternalistic policy; asymmetric paternalistic regulations. Such regulations would impose little harm on those that make fully rational supply chain decisions already[142], yet create large benefits for global society by their interference with corporation’s that make sub-optimal decisions regarding suppliers.[143] Applying asymmetric paternalism in the design of a new CSR framework retracts from adopting liberalism as the metric for evaluating policies, instead gauging the success of a framework through the losses and benefits incurred for corporations’ and global society respectively. When the losses for corporations ordinarily acting in a rational manner are minimal and the benefits generated for global society via the interference with corporations that make sub-optimal choices are large, analysed through an asymmetrically paternal lens the policy would be regarded successful.

Reframing the Corporate Objective

The present primary obligation imposed on MNE’s when making supply chain decisions is shareholder wealth maximisation. A corporation with such limited focus cannot always make the choice which best protects the welfare of suppliers. Pre-setting the corporate objective provides a mechanism to reverse the primacy of wealth maximisation.[144]  The objective for TNC’s should first and foremost be to conduct business in a sustainable manner in the interest of all stakeholders. Stakeholders for this purpose would be those who affect and/or could be affected by the activities of the business[145], those ‘who have invested much (and not simply money) and who have therefore something at risk’[146] in the enterprise activity. This objective would force TNC’s to consider suppliers who have invested time to become skilled in the trade of TNC’s and whose livelihoods depend on TNC activity. Changing the UK Corporate objective would ensure that suppliers would be protected wherever they are located[147], it would obligate corporations to protect suppliers’ interests as well as shareholder interests and it would create an influence which cannot be created when corporations have shareholder wealth maximisation as a sole clarified aim. For those corporations already operating ethically successful supply chains this would impose no extra burden. Whilst for corporation’s who make sub-optimal choices, forcing the attainment of stakeholder satisfaction, would prove beneficial to supplier welfare and thus global society as a whole.

Enforcing the Corporate Objective

Encouraging a focal change is not a radical departure from what has been attempted before.[148] The above reform must be accompanied with a more severe enforcement mechanism to bring about any real change. It is proposed that the required change be brought about through the introduction of a contractual ‘stakeholder objective’ into a corporation’s constitution. Incorporated into every corporation’s constitution would be the objective stated above; to conduct business in a sustainable manner in the interest of all stakeholders, with stakeholders being defined using the above definition.[149] This would act as a legally binding agreement between a corporation and their stakeholders, and be signed by the directors of a corporation and their stakeholders. This would ensure that a director would be obliged to remain consciously aware of the needs of a corporation’s suppliers. It would not favour suppliers over employees or shareholders over suppliers; neither would it require large philanthropic donations. It would however expect that; if faced with the possibility of an unsafe building, a TNC would inspect the factory and ensure a safe working environment in the interest of suppliers or if deliberating between paying slightly more for sourced garments, a TNC would pay an increased price and improve business strategy elsewhere. If not, then suppliers would have a contractual cause of action against the corporation.

It is to be remembered that the commitments required of a corporation through the insertion of a stakeholder objective clause are commitments that many TNC’s already espouse to fulfilling. Corporations have publicly proclaimed that they practice ethically responsible supply chain behaviour in their codes of conduct and through signing up to multi-stakeholder initiative’s; if they truly have incorporated CSR practice in to their business strategy then inserting a stakeholder object clause into a TNC’s constitution should impose a minimal interference with that corporations conduct. However through incorporating a stakeholder objective clause, a corporation’s available choice is limited. The clause would go beyond requiring mere consideration of the need to foster business relationships with suppliers[150] and actually require that decisions that would detriment a supplier’s interest not be made. Corporations who make sub-optimal choices would be bounded from making a costly mistake because they would be forced to consider the contractual obligation placed upon them and ensure they are reasonably satisfying the agreement. The harms imposed on TNC directors who make rational supply chain decisions are minimal while the benefits incurred in preventing irrational supply chain decisions are large. If TNC’s provided with the requirement to make decisions in the interest of all stakeholders choose to ignore the interests of suppliers then they do so faced with the existence of contractual remedies available to suppliers. This will ensure that suppliers are consciously considered in a TNC’s decision making process and if not then they have a remedy.[151]

Final Thoughts and Speculative Remarks

“These, then, are the two points I wanted to make,

First, that human beings, all over the earth, have this curious idea that

they ought to behave in a certain way, and cannot get rid of it.

Secondly, that they do not in fact behave in that way.”

C.S. Lewis

A morally responsible TNC is one that independently underscores their judgement with the features attributed to rational decision making.[152] A morally responsible TNC does not make decisions impulsively and takes care in mapping out alternatives and consequences; they are clear on their goals and purposes and pay attention to the details of decision implementations.[153] TNC’s that behave in a morally responsible manner when making decisions exercise economic and non-economic judgement in their short- and long-term plans and operations. Social discourse is now demanding this type of morally responsible behaviour of TNC’s when making supply chain decisions. Yet the attempts to date in the United Kingdom to meet this demand have been weak and lacking any form of compulsion on corporations that make sub-optimal and irrational decisions.

This research project builds upon the societal demand for ethical and moral responsibilities to be placed on businesses, the corporate awareness that these responsibilities are now expected and the clear observance that the conscience of corporations[154] is unaffected by the stand-alone knowledge of these responsibilities. The non-interventionist, freedom maximising attitude presently adopted toward corporations is boldly departed from and a new decision procedure for corporate managers is developed.[155]

This research project demonstrates how Corporate Social Responsibility (CSR) can be implemented in the United Kingdom (UK) through the inclusion of a stakeholder objective clause in a company’s constitution. It is speculated that, were these changes to take place, further research and discussion on realistic access to remedies could begin. This research project compels prevention of irresponsible supply chain behaviour. Remedies for suppliers in the event of a corporation’s failure to perform an obligation would be a logical subsequent development. The possible expansion of Group Litigation Orders[156] or introduction of a UK Class Action[157] regime into substantive law is a pondered area for further research building upon the findings and proposals of this project.

Conclusion

This research project sought to find a resolution to MNE’s ignorance towards their supply chain responsibilities as is now demanded by global society. It has highlighted the potential of Corporate Social Responsibility (CSR) to achieve this and proposed a mechanism for CSR implementation that will protect those at the supplying end of a global value chain.

The negative repercussions of globalisation are exhibited, to an unrivalled extent, in the proliferation of sub-optimal practices in supplier factories. The globalisation process benefits Trans-National Corporations (TNC) and developing countries alike. The outsourcing of labour-intensive production stages within the garment industry provides a cost-saving opportunity for TNC’s[158] and has led to creative ways to enhance productivity and ultimately create great economic value for shareholders.[159] The international prominence in manufacturing and to a lesser degree the economic development of supplying countries has increased in return.[160] It is entirely undesirable and ultimately unrealistic to desire to put an end to the use of global value chains. However the unethical and irresponsible behaviour resulting in harm to the workers in supplying factories is unacceptable corporate behaviour, which contrasts entirely with the morally responsible TNC which global society desires, and cannot be allowed to continue.

Corporate governance has the ability to affect the internal strategy choices of a business[161] and can thus affect the rationality of a TNC, but at present CSR is not adequately incorporated into the UK corporate governance framework. This research project has demonstrated that CSR, when fully aligned within the mechanisms which constrain corporate power, can transcend national boundaries, infiltrate supply chains and ultimately protect suppliers.

Presently the potential protection offered by CSR remains unfulfilled. Codes of Conduct contain desirable positive values and indicate awareness that social discourse is now calling for wider responsibilities to be placed on businesses.[162] Yet published codes of conduct remain voluntary self-regulation. They provide little limitation on the freedom granted to corporations to conduct business as they will. The changes to company law introduced in the Companies Act 2006 encourage a director to take account of relevant factors, other than shareholder interest, when making corporate decisions.[163] This is a welcomed departure from the bottom line shareholder interest focus of corporate governance, but in reality the departure has been insignificant. The Act cannot claim to impose even the most minimal of social responsibilities on corporations.[164] Directors retain freedom to guide corporations as they choose; if they choose to incorporate interests additional to that of shareholders they are enabled to do so through the legislative changes but are in no regard compelled to do so. Multi-stakeholder initiatives foster the incorporation of CSR policies throughout corporate structures, targeting the activities of TNC’s in their global activities and requiring attention to be afforded to stakeholders.[165] But the preservation of voluntary compliance injects no pressure to commit to the promising multi-stakeholder initiative policies. The aforementioned CSR vehicles highlight real potential but they fail in their lack of compulsion on the will of a MNE. They do not shift the focus away from the sole corporate obligation which is to create economic value for shareholders. They do not compel a commitment to sincerely consider the interest of other stakeholders, and thus, they do not protect vulnerable suppliers. This is exemplified, without further justification, in the happenings in Bangladesh. The current objectives of corporate governance remain premised on shareholder wealth maximisation within a liberal, noninterventionist framework, this must be changed to incorporate CSR and protect suppliers in global value chains.

The pursuit of morally responsible TNC’s is fundamentally unachievable without first reframing the corporate objective. A TNC cannot be clear on their goals and purpose in business, as is required in order to make a rational decision, whilst conflict remains between the sole profit making corporate obligation and the desires to incorporate non-economic judgement and wider stakeholder interest. A TNC cannot be obliged to pay attention to the consequences of decisions they implement on suppliers whenever they remain accountable only to shareholders. Paternalistic policies allow the assertion that shareholder wealth maximisation is fundamentally the wrong focal objective for corporations and permit this objective to be altered. The reformed corporate objective should be to conduct business in a sustainable manner in the interest of all stakeholders; a ‘stakeholder objective’.

This corporate objective must be compulsory and enforceable; a bold but necessary departure from the current non-binding and liberal policies framing CSR in the UK. In departing entirely from the liberal policies presently adopted in relation to corporate activity this proposed framework is unashamedly paternalistic. The new framework would measure its success through an asymmetrically paternalistic lens.[166] Concerns over an encroachment on corporate freedom would be elapsed and instead the benefits derived for global society would be weighed against the losses of those corporations whose sub-optimal supply chain decisions would be interfered with. It is proposed that the ‘stakeholder objective’ clause be incorporated into the constitution of all company’s. It will then act as a binding contract between the directors of a company and the stakeholders affected by the decisions of that company. The effect of this clause on corporations already acting in a rational manner would be minimal; whereas the benefit derived for global society by the interference with corporations making sub-optimal and irrational decisions would be great. When these changes are made MNE’s ignorance towards their supply chain responsibilities will be stopped.