International Corporate Responsibility: The Problem of Enforcing Liability on Multinational Corporations

By Atty. Mary Antonette P. Yalao-Villegas

Globalization is the thing of the present. It is the powerful and ubiquitous force in the contemporary world. Its influence can be felt in both developed nations, who desire to extend their economic boarders to transverse the globe, and in the developing world, whose natural and human resources are often exploited to serve a growing global demand for affordable goods.

Of significant role in globalization are multinational corporations (MNCs) or multinational enterprises (MNEs). The corporate sector has become extremely influential with national governments. While they have not replaced the state as the international power, MNCs’ activities hold considerable sway over the state’s policy-making process. MNCs have grown considerable in terms of economic and political might that they have come into a position to be able to use this influence to coerce governments to become “more competitive” by implementing national policy conducive to attracting international business. This position can be used to promote or undermine the realization of economic, social and cultural rights (ESCR), which will either enhance or inhibit the development of an international community based on stable local communities. Policies by international economic institutions like the International Monetary Fund (IMF), World Bank, and the World Trade Organization (WTO), have allowed MNCs to gain a position of considerable influence on the economic, social and cultural rights (ESCR) agenda of states.

Increasing MNC involvement in the public domain has focused the public’s attention on their activities. The public, who are the shareholders, employees, consumers and local populations, usually suffer the environmental and social impact of the operations by MNCs. However, the ability of national governments to implement policies designed to fulfill ESCR obligations has been reduced by the expansion of global trade and the race to be competitive The vast economic and geographic expansion of MNCs has presented a plethora of difficulties for regulation and accountability.

International law addresses the conduct of private corporations in various areas. With very few exceptions, however, international law regulates corporate conduct merely indirectly—that is, by requiring states to enact and enforce regulations that are applicable to corporations and other non-state actors. Only a small number of international legal norms—those relating to war crimes, crimes against humanity, and forced labor—apply directly to non-state actors.

The following section enumerates the various ways by the international community through different bodies or institutions have attempted to impose obligations on multinational corporations

Imposing Social Responsibility on MNCs
The means by which corporate responsibility had been imposed on multinational corporations may be classified into four, namely, soft laws, which may be issued either by international bodies or regional blocks, NGO Guidelines, individual business codes of conduct, and domestic legislation. Authors have collectively defined them as sources of corporate social responsibility.

The 2001 European Commission Green Paper on CSR defines corporate social responsibility (CSR) as a “concept whereby companies decide voluntarily to contribute to a better society and a cleaner environment.” Three generations of CSR are generally thought to have evolved. The first focused on short-term corporate interests and motives, the second on long-term success strategies; the present third generation is aimed at addressing the role of business in matters essentially within the public domain, such as poverty, exclusion, and environmental degradation. During the first two phases, corporations viewed CSR as a form of philanthropy. Although the application of CSR is voluntary (indeed this has been the cornerstone of the concept), the emergent “soft law” and the effort to make it part of corporate practice have emanated from public international bodies and NGO efforts.

However, the relative “force” of the various instruments has not depended on their origin from either public international or private bodies, but on their ability to elicit adherence from corporations. Thus, the responsibility accruing from each of the four types of CSR is subject to both subjective and objective variables. These sources comprise public international instruments,

1. Soft laws
Public International CSR Instruments
The growth of CSR public international instruments is a recent phenomenon. Prior to the mid 1990s, the OECD, the ILO, and certain principal and subsidiary organs of the United Nations (UN) undertook the only serious work on the subject through the examination of the impact of MNCs on LDCs. ECOSOC, at the insistence of an LDC-majority United Nations in 1972, convinced the Secretary-General to establish a Group of Eminent Persons to study the role of MNCs in development and in international relations. The group produced a report in 1974 recommending the creation of standard-setting institutions within the UN Organization and opining that although MNE investments in LDCs were generally beneficial to the latter, the unharnessed power of many MNCs could potentially harm host states. An inter-governmental working group worked on a Code of Conduct on Transnational Corporations from 1977 but the draft was shelved in 1992 as a result of disagreement between capital-exporting and capital-importing countries on the minimum standard of treatment of MNCs by host states under customary international law. There is very little conflict on whether host states have the right to determine the role of MNCs in the field of economic and social development.

In 1983 the World Commission on Environment and Development (WCED) was established by the UN General Assembly leading to the 1992 Rio UN Conference on Environment and Development (UNCED). The idea behind the Rio principles is that long-term economic progress must be linked to environmental protection, requiring a new and equitable global partnership involving governments, people and key sectors of society, including corporations. The 2002 Johannesburg Declaration on Sustainable Development and Implementation Plan was the culmination of the UN’s efforts on sustainable development, where the role of MNEs was viewed as paramount.

The most influential public international CSR instruments are the OECD Guidelines, the UN Global Compact, and the 1998 ILO Declaration on Fundamental Principles and Rights at Work.

The ILO Conventions and the Declaration of Principles concerning MNEs
The International Labor Organization (ILO) has developed 184 conventions on various aspects of work and employment including the core ILO conventions and the ILO’s Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy (Tripartite Declaration). All these, however, rely on individual governments to ratify and then implement their provisions. They do not operate directly on MNCs at all. Even if the governments of developing nations were to ratify them, the conventions still have to be implemented through domestic legislation for corporations to be bound.

The problem of international law’s application to governments rather than directly to private actors is a dominant theme throughout international law. This feature of international law has repeatedly halted several lawsuits filed against MNCs for violations cognizable under the Alien Tort Claims Act (ATCA).

In conjunction with the problem of application, the ILO is limited in its effectiveness by its lack of enforcement authority. This lack of enforcement power, coupled with the basic limitation imposed by the conventions’ application to governments and not to private actors, means that the ILO Tripartite Declaration did not have much direct effect. But it did lay the groundwork for later international efforts.

The United Nations Global Compact
The UN Global compact was formally launched in September 2000 by the UN Secretary-General, who called on world business leaders to voluntarily “embrace and enact” nine compact principles on individual corporate practice and to support complementary public policy initiatives. It is hailed as the “most significant initiative” in promoting industry self-regulation in the area of human and labor rights conduct. It “attempts to persuade business leaders to adopt and apply the basic principles in the fields of human rights, labor standards, and the environment.” These principles are derived from bedrock documents of international human rights law, including the Universal Declaration of Human Rights (UDHR), the ILO’s Declaration of Fundamental Principles and the Rio Principles on Environment and Development.

The UN Global Compact is accompanied by a so-called follow-up mechanism. It requires companies to publicly endorse its principles and “pledge to work with the UN in partnership projects, either at the policy or at the operational levels.”

But like the ILO conventions and the Tripartite Declaration, the Global Compact is not a regulatory instrument. It does not contain any enforcement provisions to monitor the behavior or compliance of MNCs. Instead, the Global Compact “relies on public accountability, transparency and the enlightened self-interest of companies, labour and civil society to initiate and share substantive action in pursuing the principles upon which the Global Compact is based.” MNCs shall deliver information to civil society through a website, which will provide a report of corporate achievements. As the entire mechanism is voluntary, however, there can be no guarantee as to the quality or quantity of the information posted. Thus, the Global Compact has been criticized for its “failure… to set reasonable and well-defined limits on the human rights responsibilities of companies.”

The Organisation for Economic Cooperation and Development (OECD) Guidelines
The Guidelines are similar in object to the Global Compact as it aims to create a global code of conduct for businesses. More specifically, the Guidelines are concerned with public disclosure of information by MNCs about their structure and activities, the rights of workers to organize and bargain collectively, and environmental protection.

Unlike other soft laws that are addressed by particular bodies of international organizations to their member states, the OECD Guidelines are recommendations addressed by governments to MNCs. Although they are not legally binding on MNCs, OECD states agreed to adhere to the Guidelines and encourage their companies to observe them wherever they operate. The Guidelines were first published in 1976 and most recently updated in 2000. They contain recommendations on human rights, employment and industrial relations, environment, bribery, consumer interests, science and technology, competition and taxation.

Like the UN Global Compact it is accompanied by a follow-up mechanism. It involves the creation of National Contact Points (NCPs) responsible for encouraging observance in the national context and for ensuring that the Guidelines are known and understood by the domestic business community.

Again, like the Global Compact, the Guidelines are voluntary and there is neither an enforcement mechanism currently in place nor one envisioned in the near future. Instead, the Guidelines rely on the commitment by governments and the eventual passage of implementing legislation in member states. Unlike the Global Compact, however, the Guidelines suffer from the additional handicap of being particularly vague in their enunciation of corporate duties and in their identification of the intended beneficiaries of responsible corporate behavior. Thus, the likelihood that governments would pass implementing legislation creating codes of conduct under the Guidelines is further diminished. However, the value of the OECD Guidelines is not in their practical utility but in their influence on later documents and movements.

The UN Norms on the Responsibilities of Transnational Corporations
The recently adopted Norms emphasizes that MNEs “have the obligation to promote, secure the fulfillment of, respect and ensure respect of and protect human rights recognized in international as well as national law.” This instrument does not seem to be as influential as its counterparts; business organizations have objected to its somewhat unrealistically broad scope and binding references.

Instruments Issued by Regional Blocks
The European Code of Conduct for European Enterprises Operating in Developing Countries
The Code of Conduct is voluntary, but the strategy it adopts “focuses on ‘objective evaluation methods and validation tools such as social labels’ as well as social and environmental reports.” By using more concrete evaluation techniques, the Code of Conduct aims to attract the participation of more businesses. As an added inducement, the Code of Conduct “is also designed to promote socially responsible investing (SRI).” Businesses who hope to benefit from the social labeling endorsement of the European Union (EU) would therefore have an incentive to give more serious consideration to the Code of Conduct.

The North-American Free Trade Agreement (NAFTA)
Lending further support to the idea that “smaller groups of states have been able to negotiate and implement rules governing corporate behavior, the side agreements to the NAFTA deal specifically with social and environmental issues associated with free trade between Mexico, Canada, and the United States. Like the EU’s Code of Conduct, the NAFTA side agreement on labor—the North American Agreement on Labor Cooperation (NAALC)—represents but a modest improvement on the model developed at the international level.

The most serious criticism leveled at the NAALC relates to the fact that the instrument created no new obligations for member countries. Each member state is obligated to implement its own laws but is not held to a higher legal standard. For example, of the eleven rights protected under the NAALC, only violations of prohibitions on child labor, minimum wage requirements, or occupational safety and health requirements can result in arbitration and sanctions against member states. The question is whether a violation of any one of these three rights by, for instance, the United States, would result in remedies to the victim which are superior to those already provided by the United States’ Labor Relations Board.

2. NGO Guidelines on CSR
This type of CSR source is broken down into three categories, namely, those that simply provide a set of CSR guidelines (most often entailing reporting standards), those that serve as CSR indicator self-assessment mechanisms (self-performance standards), and those that are a combination of the two.

Reverend Leon Sullivan launched the oldest initiative in 1977 by providing for guidelines to companies doing business in South Africa during the apartheid. The Sullivan Principles were reformulated in 1999 (and are currently known as the global Sullivan Principles) with the input of several MNCs focusing on eight broad directives on labor, business ethics, and environmental practices of MNCs and their business partners. Companies publicly pledge to integrate the standards into their operations and provide an annual letter to the Reverend Sullivan restating their commitment and progress.

3. Corporate Codes of Conduct
Corporate codes of conduct are policy statements that outline the ethical standards of conduct to which a corporation adheres. This may take the form of a general policy statement or be inserted in the corporation’s contracts with suppliers, buying agents, or contractors, in the sense that they must agree to abide by the company’s ethical standards. While not corporations possess such codes, recent years have witnessed a proliferation that is due in large part to corporate scandals in a number of industries and the growth of public awareness and concern.

Corporate codes differ substantially from industry to industry and also from company to company. The codes in the OECD inventory address the whole gamut of economic, social, and environmental issues identified above as enshrined in the OECD Guidelines and some even go further.

Corporate codes have limited legal enforceability. With the exception of domestic legislation that perceives a breach of the code as affecting the contractual relationship between the consumer and the corporation, no other legal effect may be cited. At the same time some codes may be termed as “safe” in the sense that the ethical standards they contain are circumscribed by law of host states. A notable example is the extraterritorial bribery prohibited under the 1977 United States’ Foreign Corrupt Practices Act (FCPA).

Similarly, little if any extraterritorial environmental legislation is binding on subsidiaries abroad. Although the operational policies of the World Bank as well as the other lending institutions would make it impossible to secure a loan without proper environmental assessment and sustainable operations, multiplicity of operations, pervasive outsourcing, and endless chains of suppliers and agents by MNCs tend to make the most reliable compliance mechanism only one that is internal to them.

4. Domestic Legislation
In the United States, the Sarbanes-Oxley Act of 2002 requires subject companies to disclose whether or they not they have adopted a code of ethics and made it publicly available to investors and to promptly disclose amendments to and waivers from the code. It also requires, among others that CEOs of US reporting companies certify that their companies annual and quarterly reports comply with specified disclosure standards and that companies report material changes in their financial situation on a real-time basis, prohibits with few exceptions the making, arranging, or renewing of personal loans to CEOs and directors and transactions by executive officers and directors during blackout periods under issuer individual account and profit sharing plans, and accelerates the due date of filing of change of stock ownership reports by CEOs, directors and more than 105 shareholders of the company’s equity shares.

In the United Kingdom, the 2003 Corporate Responsibility Bill is in some sense a response to the British government’s perceived failure in its White Paper on Modernising Company Law to specify transparency rules or hold corporations accountable to their stakeholders. The Bill provides for extraterritorial application of all major CSR areas of concern, demanding the corporations consult with stakeholders and further imposing a duty to prepare and publish reports. It stresses the social and environmental duties of directors as well as their responsibilities. It establishes the liability of parent companies with regard to their subsidiaries’ operations, mergers, disposals, acquisitions and other restructurings “irrespective of whether the injury to persons or harm to the environment occurred within the United Kingdom.” The impact of this provision could potentially revolutionalize litigation claims against MNE operations abroad by a large range of claimants.

In France, the newly amended Nouvelles Regulations Economiques (NRE) imposes reporting obligations (public disclosure) on all nationally listed companies pertaining among others to the environment, domestic and international labor relations, local community and others.

There is increasing pressure from society in all developed countries to impose legally enforceable public disclosure requirements upon corporations. This trend is in line with and closely connected with recent litigation concerning CSR issues thus opening the way for further regulation in the near future.

Suits against MNCs and Forum Non Conveniens
Traditionally, suits against subsidiaries were not entertained in the forum of the parent company. Initially, the issue was one of jurisdiction but it also concerns the forum’s foreign policy. In suits against subsidiaries in the United Kingdom and the United States respondents have requested for the stay of proceedings on the ground of forum non conveniens, according to which the disputed case should be brought before a more natural and appropriate forum, i.e., that of the subsidiary.

The House of Lords in the Spiliada accepted this doctrine into English law setting out a two-pronged test in determining forum non-conveniens requests. The defendant is first required to demonstrate that another forum is more appropriate in the interest of the parties and the dictates of justice. Once this burden has been discharged, the court will grant a stay and declare itself an inappropriate forum unless the plaintiff can show that special circumstances exist whereby substantial justice cannot be pursued in the foreign jurisdiction.

Examples of special circumstances raised against the application of forum non conveniens that have been accepted include time bars and the lack of appropriate legal aid and contingency fee arrangements in other jurisdictions. The Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters allowing MNCs to be sued in the forum of the parent company makes the forum non-conveniens claim redundant in the European Community.

In the United States, even if non-residents establish jurisdiction under federal due process rules, particularly the Alien Tort Claims Act, the defendant may still object on the ground of forum non-conveniens. Ideally, citizens of the United States who are connected with a subsidiary in another country are best suited to institute a case in the United States. The determination of forum non conveniens in the United States is similar to that in Spiliada. Much depends on the discretion of the court, which must decide whether an alternative forum exists and then balance public and private interest factors. The second part of the test requires the court to assess whether the defendant is amenable to process in the foreign jurisdiction. Thus, in the Bhopal case, the New York court stayed the proceedings because it held that India was a capable forum in every sense.

In the sub judice case of Bowoto v ChevronTexaco, a California court refused in April 2000 to stay proceedings on the assertion that Nigeria was the appropriate forum in respect to allegations that Chevron had authorized the shooting of protestors at its Parabe offshore platform in Nigeria and the destruction of two adjacent villages. The case clearly indicates that courts in the United States will not readily stay proceedings against the acts of subsidiaries in the basis of forum non-conveniens. As earlier mentioned, this conclusion is reinforced in the European context in the light of the Brussels Convention.

The Racketeer Influenced and Corrupt Organizations Act (RICO)
Lawsuits against MNCs for violations of RICO are not the principal tools for activists in the United States in their attempts to impose liability on corporations. Nevertheless, the statute presents a creative and expansive alternative to those seeking to sue corporations for alleged misconduct. Example of RICO actions include the 1999 action against Wal-Mart, the Gap, Limited, Inc., Sears Dayton Hudson, and other clothing retailers accusing them of “a racketeering conspiracy to use indentured labor to produce clothing in Saipan.”

Another example is the case of Sinaltrainal and Gil v. The Coca-Cola Company. The court commented that “RICO is an expansive statute, broadly construed to reach a wide array of activity…” Although courts have ruled that this broad construction does not include international schemes largely unrelated to the United States, these cases do not prohibit all extraterritorial application of RICO.

In determining whether RICO applies extraterritorially, allegations must meet either the “conduct test” or the “effect test.” Conduct test will be satisfied when conduct within the United States directly causes a foreign injury, while the effect test will be met where foreign conduct has substantial effects within the United States.

The Alien Tort Claims Act (ATCA)
The ATCA was passed in 1789. It grants district courts “original jurisdiction of any civil action by an alien for torts committed in violation of the law of nations or a treaty of the United States. The law was first tested in Filartiga v. Pena-Irala in 1980. Filartiga filed suit against the former Inspector General of Police in Asuncion, Paraguay for the torture and killing of Joelito Filartiga on March 29, 1976. The court found Pena liable and in the process encouraged numerous lawsuits bases on the ATCA.

Among those encourage by Filartiga in bringing ATCA claims against multinational corporations for their alleged complicity in human rights abuses committed in connection with their operations outside the United States was the lawsuit involving the Unocal Corporation for alleged complicity in the forced labor imposed by the Burmese military on villages surrounding Unocal’s oil pipeline in Myanmar. However, the Unocal case led to settlement between the oil corporation and the Myanmar villagers who sued it.

The main problem facing ATCA claimants is that the law of nations cited in the statute “does not reach private non-state conduct” although federal courts in the United States have held that private companies can be held liable for violation of the law of nations where they acted in complicity with individuals or groups operating under a color of law.

The Supreme Court clarified the circumstances under which the ATCA creates a private cause of action for foreigners in the United States in Alvares-Machain. While the Court ruled that aliens may sue in courts in the United States for wrongs committed abroad, it cautioned that ATCA would provide an avenue only for those who were victims of serious human rights abuses. In addition, the court noted that the human rights at issue in a particular ATCA case must be clearly defined and broadly accepted. In Alvares-Machain, the plaintiff, though complaining of abduction and unlawful detention, did not prevail before the court.