TWN Briefings for WSSD No.5

Making Big Corporations Accountable Should Be WSSD’s Top Priority

By Martin Khor

In discussions on sustainable development, one issue has captured public attention and interest like no other:  the behaviour of big companies and the need to make them more accountable.  In the WSSD process, citizen groups have made corporate accountability their prime concern.  The NGOs want the Summit to establish a global system to regulate the practices of corporations to prevent them from further damaging the environment; from manipulating currencies, profits and markets; violating human rights of their workers or the local communities that suffer dislocation to make way for them. 

Corporate Financial Scandals

In the past few months, this issue has amazingly sprung into the forefront of public consciousness through the revelations, one after another, of fraudulent or misleading accounting practices of such big-name companies as Enron, Worldcom and Xerox.

It is now clear that several companies had been ‘dressing up’ their bottom lines to show healthy profits when in fact they were making losses.  When the true situation was exposed, confidence not only in the specific companies but also in the stock markets generally plunged.  Investors are doubting the accuracy of the corporations’ accounts, and this is undermining the basis of investing in stocks.   Overnight, the stature of many corporate CEOs that once were icons and role leaders has now descended to record low levels.  They are now seen as grossly overpaid, manipulative and even plain crooked.  Thousands, even millions, of workers and investors have directly suffered the loss of large portions of their life savings as the value of stocks fell.

The implications are very significant for sustainable development.  The most important corporate operating principle in many developed countries had been the maximization of short-term corporate profits.  The announcement of quarterly earnings by a company causes its stock price to rise or fall dramatically.  To avoid being taken over, a company had to show high profits.  

TNCs’ Role in Eco-destruction

The rise of ‘shareholder capitalism’ and its obsession with short-term performance judged by profitability has now led the market system itself to the brink of worldwide economic slowdown.  Some analysts even predict a financial meltdown.

The recent financial scandals are only one facet of the crisis in corporate accountability.  Due to the dominant trend of deregulation and liberalization, companies have increasingly been able to do pretty much as they like, as the already inadequate controls over them were lifted.  Perhaps the 1992 Rio Summit’s biggest error was its decision not to create a mechanism to regulate corporations.  Even then, NGOs like Third World Network and Greenpeace had identified the leading role of transnational companies in environmental damage, pointing out that:

·        TNC activities generate more than half the greenhouse gases emitted by industrial sectors with the greatest impact on global warming.

·        TNCs dominate the trade and often also the extraction of natural resources and commodities, with effects on forests, soils, water and marine resources.  TNCs dominate the mining sector, and also control about four-fifths of land worldwide cultivated for export crops.

·        TNCs dominate global and national industry and transport, and their activities result in pollution, industrial and occupational hazards, toxic wastes and unsafe products.

·        TNCs are also major transmitters of environmentally unsound production systems and hazardous materials to the South, including unsafe pesticides, polluting industries and hazardous wastes.   They are also promoters of unsustainable consumption patterns in both the North and South.

However, the Earth Summit failed to place obligations on big companies to behave in an environmentally or socially responsible manner.  It decided that companies could be trusted to change themselves.  Since Rio, the trend of treating TNCs with kids’ gloves has accelerated.  They are seen by the UN secretariat not as powerful forces that need to be brought under control, but as responsible partners who would actually lead the world to sustainability.  The UN now treats companies as part of  ‘civil society’, as partners in a ÔGlobal Compact’ with the UN itself, and recently as a vital component in the so-called Type Two Partnerships that are supposed to be a major part of the WSSD.  These increasingly close links are bound to bring embarrassment to the UN.  NGOs have already collected evidence that some companies have misused their status in the Global Compact.   And imagine what will happen if many of the ‘partners’ proudly listed in the Global Compact or in the Type Two documents turn out to have engaged in fraudulent accounting and other unethical practices.

More Power to TNCs after Rio

The failure of Rio to make companies accountable was followed by developments in other areas which opened the way for companies to get more rights with less obligations.  In particular:

·        The WTO’s establishment in 1995 ushered in new global rules that made it more difficult for developing countries to set their own development policies or to regulate foreign products and firms. For example, TRIPS gives monopoly rights mainly to TNCs that own most of the world’s patents, with adverse effects for consumers, farmers and indigenous people and technology users. The services agreement enables transnational service corporations to use their governments to pressurise developing countries to give them market access, which can affect the viability of local companies.  The agriculture agreement enables large farms and giant agro-companies to profit from huge subsidies and tariff protection whilst many small farmers in the South are finding it hard to survive competition from cheap and often subsidised imported food.  Some developed countries are also trying to make use of the WTO to prevent other members from taking health, safety or environmental measures, for example the labelling of genetically modified products or the import of unsafe food.

·        The developed countries are now pushing hard to establish new agreements in the WTO on investment, competition policy and government procurement.  If they succeed, the TNCs will have even more rights to operate around the world and have access to sectors and spheres (for example, government purchases, contracts and concessions) where local firms now enjoy advantages.  Correspondingly, governments would be more and more constrained by international law from regulating foreign companies, or imposing obligations on them, or from assisting local firms.

·        In the decade since Rio, financial globalisation and liberalisation has continued at a rapid pace, enabling financial institutions (including speculative investment funds) greater freedom and access to markets worldwide.  The deregulation process enabled the greater inflow and outflow of funds, which has destablised many developing countries  and caused crises in Asia and Latin America.  Governments in most affected countries are unable to take get out of the spiral of debt, devaluation and capital flight as they have been committed not to regulate the free flow of funds.

With the institutionalisation of this particular brand of globalisation, each country and each company is under intense pressure to compete with the others.  Under such conditions, environmental concerns have fallen down many notches in the national and international agendas.  Business interests which have gained much ground in political influence have also persuaded certain governments not to be party to multilateral environmental rules such as the Kyoto Protocol on climate change or the Cartagena protocol on biosafety.  The global climate situation continues to deteriorate, whilst the safety and ecological risks arising from genetic engineering are growing much faster than the capacity to monitor or regulate.

The last ten years’ record has confirmed that when governments give up their task of regulating companies, sustainable development is the loser.  The myth that voluntary action by companies or self-regulation by industry will take care of corporate responsibility has now been exploded again by the accounting scandals of major companies.  Case studies of the performance of many TNCs (for example by Jed Greer and Kenny Bruno in their book, ‘Greenwash: the reality behind corporate environmentalism’) also show that despite the public relations exercise claiming greater corporate responsibility, and despite more voluntary industry codes of conduct, there has been little change and much ‘business as usual’, with the corporations continuing with environmentally harmful activities.

Proposals to Regulate the TNCs

Thus, WSSD has the urgent task of placing the regulation of corporations back onto the international agenda.   Self-regulation by companies is impossible to expect in the present highly competitive economic environment. circumstances. Public regulation, through the setting of industry-wide standards backed up by law and effective enforcement, is thus required. 

However, it is also not enough to expect individual governments to control TNCs on their own. Firstly, there is fierce and intense competition between countries; the government of a country would be reluctant to legislate standards higher than its competitor countries. Secondly, TNCs are now so huge in economic size (in terms of assets, turnover, employment, investment) as to dwarf many a country.  Most governments, by themselves, are unable to even begin to adequately monitor (let alone regulate or control) the TNCs operating within their countries, due to lack of information, absent or inadequate corporate disclosure, and sheer absence of clout or influence in the face of immense TNC power.

Thus, not only must there be monitoring and regulation of TNCs at the level of individual governments, but at least just as important at the international or multilateral level. Otherwise there would be no adequate or effective means to monitor and check the environmentally-harmful activities of the world’s major economic agents, and there would be no movement towards effective solutions to the global environment and development crises.

The WSSD should thus begin a process towards a binding framework on corporate accountability.  This framework should contain provisions for public regulation and monitoring, in relation to such aspects as public disclosure of information, health and safety, environmental effects, and social and developmental implications.  It should set up activities to monitor, analyze, develop criteria and principles for ethical and environmentally-sound behaviour, and regulate the activities of TNCs.  Areas to be covered include: environmental, health and safety aspects; social and developmental aspects; and restrictive trade and business practices that deprive states and the public from their full benefits. TNCs should be made liable for compensation for the harmful effects caused by their operations on the environment, safety and health.

The WSSD and post-WSSD process should reaffirm the principle that states have the right to regulate the entry, establishment and operations of TNCs; and that TNCs have the duty to respect national  sovereignty,  respect  the health and environmental rights of the public, and refrain from financial, pricing or technological activities that cause socio-economic difficulties to the host countries.  These are principles contained in the draft Code of Conduct on TNCs that unfortunately was abandoned in the early 1990s.

WSSD should send a clear message that the rights and freedoms of TNCs and other business enterprises are secondary compared to the primary rights of the public and of states to subject their operations and behaviour to regulations, laws and guidelines that can ensure the reduction of environmental and development problems that threaten to engulf both Earth and humanity.