Masters of the universe?

Martin Wolf Sophia Tickell Malini Mehra Tom Burke
9 April 2003

Part I: Enron – the aftermath
What does the case of Enron reveal about the relationship of major corporate players to the levers of power?

Topics discussed:

  • Creative destruction versus state protection of industry
  • The scale of Enron’s impact on people and markets
  • Results of near-term investor pressure on companies

Part II: Corporate responsibility in developing countries
Where does the buck stop in Africa? China and India: is democracy bad for business?

Topics discussed:

  • Corporations and social policy issues
  • Negotiations with local communities and the accountability of interest groups
  • Comparison of multinational and domestic corporations
  • Points of friction – access to medicines in South Africa, labour markets in India and China
  • Possible solutions – fair trade movement and the Chad pipeline debacle

Part III: The search for solutions
Should there be more, or less, or different regulations for corporations on a global level?

Topics discussed:

  • International laws and the problems of implementing them
  • Corporate influence at government summits
  • The role of corporations in raising standards in poorer countries
  • No logo or more logo? Identifying corporate offenders
  • Cultural norms versus the social agenda of government and business

Part I: Enron – the aftermath

openDemocracy: What, if anything, do the collapse of Enron and other recent high-profile corporate scandals have to teach us about corporate governance?

Martin Wolf: The collapse of Enron showed us that unprofitable businesses are destroyed. Enron was trying something new in the trading of energy. It turned out to be unprofitable. Because it was unprofitable it became fraudulent and then it failed. Its strong political influence failed to rescue it. A lot of people were disappointed, but failure is an essential element of the competitive process.

That said, the story of Enron has raised a number of questions about the appropriate regulation of business. By and large people are addressing these – most importantly, in the pivotal area of accounting standards. But it is important to remember that the market destroyed this bad company. I only wished that governments like Saddam’s and Mugabe’s could be disposed of as easily.

Malini Mehra: I don’t think the pensioners and the workers of Enron would take the view Martin does. The “creative destruction” of Enron left a number of catastrophic economic consequences for ordinary people in its wake.

“Why this debate matters to me” – participants in the openDemocracy roundtable on corporate power and responsibility introduce themselves.

Tom Burke: I think it’s a more complicated question than Martin suggests. There is no doubt that attempts in countries like Britain in the sixties and seventies to prop up failing companies were really stupid. There must be some way to stop companies staying in business when they are no longer viable. On the other hand you can’t just stand back and let any company fail. There are all sorts of businesses that must be kept going. Take for instance Railtrack. If it had gone out of business there would have been not just economic consequences, but enormous social consequences as well.

The question is how do you make those judgements rationally and on a good basis? You don’t do that in a business culture like the one in the United States, or for that matter Indonesia, where politics and business have become so merged you can’t distinguish them.

The core issue that Enron raised is about how you manage the overall relationship between business and government. And that speaks to some of the increasingly difficult issues about financing democracy.

Martin Wolf: If a company, like Enron, that has no valuable assets goes bust there is nothing to reallocate. That is the fundamental difference with Railtrack. Railtrack did go bust. The assets were redeployed in another form because the assets were deemed valuable.

Once a company goes bust, obviously people who have jobs will lose them. The more fundamental issue was the insider allocation of pension funds. Employees were not forced to buy Enron shares, but were encouraged to do so. That is immensely undesirable, and should be prevented. Interestingly, such insider pension funds are more common in Rhineland states (like France and Germany) than in the US and UK. Most German corporate pensions are heavily invested in the shares of their own companies. So do not assume this is an Anglo-American story. There is a very important regulatory point there, but it does not really get to the Enron story at all. Nobody really denies that the company had to go out of business and it was a good thing it did.

Sophia Tickell: Martin started off by saying that people over-exaggerate the scale of companies. Well, isn’t Enron a perfect example of a very large company, whose collapse was felt right across the globe? It did take a lot of people with it, and one of the reasons people feel companies have undue influence is because the impact of a company like Enron going under is felt so widely by so many who are powerless to do anything about it.

Martin Wolf: The astonishing thing about the Enron collapse is the lack of effect it had. It did not employ a colossal number of people like General Motors or anything like it. It had no impact on energy trading. It had no significant direct effect on markets; they have gone down for other reasons.

Let’s put this into context. The world’s top one hundred companies generate about four per cent of world GDP. You can assess that as being as huge or small as you wish, I would take the view that it is significant, but surely not overwhelming. It makes all corporations together about the size of the British economy.

Tom Burke: These companies create 4% of GDP. They don’t control 4% of the GDP.

Martin Wolf: Of course. I simply wanted to point out: Enron is capitalism. If you don’t like that, then you just have to use another system. We tried. It didn’t work.

openDemocracy: Some people call for reform in the way that the current system works. For example, there are said to be conflicts between short-term shareholder value and broader concerns, such as social and environmental issues. Do you agree?

Sophia Tickell: Yes. There are undoubtedly short-term investor pressures that hold companies from thinking in the longer-term. While they may be difficult to manage they are not irreconcilable.

Oxfam has been talking with pharmaceutical companies about rethinking their approach to developing country markets – to segment the North and South, to vary the price of medicines according to ability to pay and the opportunities within a given market.

But the proposal has been met with a degree of concern by investors, fearful about how to protect their most important markets from leakage. Some of them are persuaded that such changes might be in the long-term interests of the industry, but aren’t convinced enough to take the risk. And this is from an industry that completely relies on research and innovation, that is by definition ‘long-term’.

In a recent meeting that I went to with a pharmaceutical firm in Switzerland, I found it striking that it was an investor trying to persuade the company that investors are tolerant of the need for trial and error. Clearly, if he needed to say that, managing the short-term challenges of quarterly returns is felt acutely in a long-term industry like pharmaceuticals.

Finding a balance between these interests is not only an obvious social agenda – e.g. for the development of new drugs – but is essential to core business practices.

What are the key events in the rise of modern corporations? Why do these institutions matter? Are they more powerful now than before, better behaved or worse? openDemocracy’s corporate timeline explores the long, complex and controversial history of this engine of capitalism.

Malini Mehra: I couldn’t agree more. I think it goes back to one of the problems with the Enron scandal. Enron was locked into a system where the investment communities, in particular shareholders, expect progressive returns; it had to show quarter-on-quarter improvement. In the end it choose to mask its poor performance.

The problem is there is not much scope for risk-taking, for saying, okay, we didn’t do too well this quarter, but hey, we’re on to a winner for the next.

Martin Wolf: It’s helpful to distinguish at least two things. The first is whether shareholder value maximisation, deemed as short-term maximisation, makes it impossible for companies to pursue long-term ends. The answer to that must be no. In many cases, because of the nature of their businesses, companies engage in extraordinarily long-term planning. This is true of very, very few governments. But, if you think of energy companies, mining companies, pharmaceutical companies, the major car companies for that matter, they are all engaged in planning cycles which stretch anything between five and 25 years from now. They have to be, since otherwise they are out of business. The same is true of General Electric, which is stuck with businesses of that kind even though it is a classic shareholder maximising company.

I disagree with Malini’s point that the quarter-on-quarter view discourages risk-taking. Unfortunately the reverse is the case. We saw it with Enron – it is accelerated. If you look at the history of business over the last 25 to 100 years, successful businesses have taken long-term decisions and they have had to do so, as John Kay said very well in his article for openDemocracy.

But a different issue, absolutely central to this, that was raised with the environmental question, is the distinction between “internalities” and “externalities”. Namely, can you reasonably expect a profit-seeking business to provide social goods with social benefits from which it is not going to gain anything? This is after all external to the business. The answer, in my view, is only to a very limited degree. That’s why we have regulations and subsidies. That’s why we have politics and governments.


For a full list of articles in openDemocracy’s debate on corporate power and responsibility click here

Part II: Corporate responsibility in developing countries

openDemocracy: Do corporations have responsibilities in developing countries beyond the minimum required by law? Sophia, in Oxfam’s experience do corporations in regions like Southern Africa live up to what you see as their responsibilities?

Sophia Tickell: Some companies with large work forces in Southern Africa – mining firms are a good example – have done hard-nosed calculations about the future productivity of their workers being affected by HIV/AIDS. And some are doing remarkable things. They are actively involved in prevention and treatment programmes, extending through family networks.

But the issue of whether the corporations that make anti-retrovirals to treat HIV/AIDS have behaved well is a different one. Oxfam has been campaigning hard for these firms to do much more to promote greater accessibility of these drugs at affordable prices. A major stumbling block though is the global patent system that many of these firms lobbied so hard to put in place. It is our view that the global intellectual property regime needs to be revised.

This is about being fair. Developing countries in Africa and elsewhere need to have the same discretion about how to use patents to develop their basic industries as the rich western countries did. Then they will be able to compete on a level playing field as members of a global intellectual property regime.

But the way to do this is not through some barmy pan-global intellectual property regime. The solution is to permit countries to make their own decisions based on health and industrial development needs.

Martin Wolf: The role of corporations in developing countries is incomparably the most difficult question. The reason is that these are countries in which, virtually by definition, governance problems are very deep. The environment which one would take for granted in Britain, America or Germany simply doesn’t exist. Corporations therefore must decide what their responsibilities are.

What do you do in a country in which your workforce is seriously damaged by malnourishment or disease? Well, just as it is in the company’s interest to train its workforce, to keep it happy and committed to the company, one would hope that it would do something about these problems too.

But it is important to remember that the proportion of the potential workforce that is actually employed by large companies is really quite small. In South Africa, for example, it is around 4 million out of a total workforce of well over 20 million. So the role of government remains central.

As for the global intellectual property regime, I have always felt that it was an error. But making a differential pricing system work – Oxfam’s proposal – also presents real difficulties. The truth is, no solution is going to be deliverable if you have a government that refuses to face up to the problem, as was the case in South Africa for a long time with HIV/Aids.

Everybody who has looked at this question closely – and I have a lot of friends who are actively involved – knows that selling retrovirals cheaply is a necessary but very far from a sufficient condition to tackle the Aids problem. A solution can only come about with active collaboration between governments and aid agencies, agencies like Oxfam, on an enormous scale. Corporations have a role to play. But let us not exaggerate that role.

Sophia Tickell: Oxfam’s position is that governments have the central role in providing healthcare. That’s one of the reasons we have been doing the campaigning we have.

18 April 2001 was a turning point. On that day thirty-nine global drug companies, faced with public perception that they were prepared to put profits before the lives of dying HIV/AIDS victims, backed out of an immensely damaging court case against the South African Government. It became very clear then that the government did in fact have a responsibility. Now they were out of the equation it was no longer possible to blame the pharmaceutical industry for the fact that treatments were not available. Responsibility fell to the South African government to act.

This brings me back to my very first point: the debate is actually about the interface between the responsibilities of governments and those of companies.

Tom Burke: There are no specific answers at the level of generality we are having in this discussion. Countries, and circumstances are extremely varied.

What are the boundaries of responsibility? It depends on particular circumstances. Also, this is not something companies can decide for themselves. They have to decide in the process of negotiation, not just with the governments and not just with their shareholders and other direct stakeholders, but also with non-governmental organisations, with communities and with almost anybody wants to play in the game.

There has been a marked shift here over the last two decades. Many more people have decided that they want to join in that game of negotiating where these boundaries should be.

Unfortunately, too much discussion takes place with the assumption that business is a zero-sum game – that business wins when others lose. But no business succeeds in a zero-sum game. What businesses do is identify zones of mutuality with a large number of players, and negotiate within each of those zones. There is a zone of mutuality with employees, for example, and within it you negotiate for advantages. There’s nothing wrong with that, so long as there is some level of at least equivalence in capacity. A business that gets outside of the zone of mutuality loses its customers or its employees, and may lose its social, if not its legal, license to operate.

openDemocracy: What would be the zone of mutuality for, say local people in Papua New Guinea (PNG) and Rio Tinto where the company has operations? Is there not a very unequal negotiation going on there?

Tom Burke: But at least there is negotiation that goes on. You might argue it’s unequal, but I think that is pretty unlikely. These days the government of PNG and Rio Tinto will both have professional financial advisors to help with negotiations over access to resources in an area – there is an enormous amount of regulation in a country like Papua New Guinea to make sure level negotiations take place. And it has led to a very elaborate process, since all kinds of people will have a part to play in the granting of access. On top of that there are a whole lot of third parties who will want to free-ride on the back of the process. I don’t just mean foreign NGOs campaigning. I mean other communities inside Papua New Guinea who will suddenly decide they have traditional rights in that area because there is a mining operation going to bring in money and they want a piece of the action. But the company cannot rule these people out. It has to sit down and do some very painstaking, detailed negotiation.

With any operation there will be costs in terms of disruption of traditional patterns of life, but there will also be benefits in terms of access to health or education, access to revenue flows, creation of markets for local business and so on. This is where you find the zone of mutuality. Now I can’t decide in abstract what those balances are, and nor can anybody else. You have to sit down and negotiate them.

Lots of the difficult legacy for the extracting industries comes from a time when companies assumed the government was speaking on behalf of its citizens, giving you a licence to operate in that place, and so you went and operated in that place. I don’t think many companies would assume that any more. You have to get a ‘social licence to operate’ from the community as well as a legal licence to operate with whoever is the governmental authority in that area.

Now, one could raise loads of questions about the legitimacy of the government of Indonesia, or the legitimacy of the government in Papua New Guinea, or any other government. American citizens, farmers in the Midwest are pretty annoyed about the fact the American government allows people to extract coal-bed methane from under their land without them having any say in the matter. So these issues are not specific to poor or to rich countries.

Malini Mehra: In my experience with campaigning groups there are very few that are actually asking for a “one size fits all” model of the ideal corporation. And I do agree with Tom that over the last decade there has been an explosion of demands. Everyone wants to get in on the act and has something to say.

Going back to Martin’s point about the central importance of good governance you are now beginning to find very different constituencies fighting with one another. Let me give you an example from India.

Jamshedpur is one of the oldest company towns in India. It’s run by one of the TATA group companies – still arguably the most respected industrial house in India. The town is fashioned according to Victorian reformist ideals. TATA took some land in one of the most backward, godforsaken parts of the country and created a model company town. They provided everything from health and education to proper sewerage systems and power supplies. So there have been generations of Jamshedpurians who have got accustomed to the excellence of service and the high standards in this company town, which are really second to none anywhere else in India.

Now, however, the company is beginning to retrench because it no longer enjoys monopoly protection and is finding that in the wider world the boundaries of duties and responsibilities are shifting. TATA is beginning to retreat from many of the public welfare and service provisions that people became dependent on. Many locals are unhappy about this retreat because they have no trust in the government to provide the same quality of public services and infrastructure. But in the end TATA will have to withdraw out of economic necessity and the state will have to step in.

This raises a number of important questions regarding the role of state and central governments versus the role of private service providers and the private sector. These are some of the issues that communities all over the world, where company towns were the norm, are now being challenged by.

Martin Wolf: This issue also arises throughout the former communist world, where companies perform – or used to perform – large welfare functions. The more protected companies were from competition, the easier it was for them to provide what we in the west would consider to be predominantly government functions.

The reason that, in the west, welfare became a government function (by the way, in the nineteenth century it was a company or a trade union function) was that the more competitive the world became, the more difficult it was for any organisation to bear the considerable costs of that welfare. Developing countries have now got to that stage.

China faces this issue writ very, very large at the moment. And, as the Chinese move towards an ever more competitive market economy, they will go in the direction that western governments went. That is to say governments in China and other developing countries will, increasingly, have to provide welfare services.

Unfortunately in a country like India, many of the state governments are extremely poor and cannot at present afford to provide effective welfare systems. But companies can’t solve this problem. That is what democracy is about. India is a democratic country. It is, of course, like many countries, imperfectly so. But it will have to develop new ways of supporting primary and secondary education and other essential welfare functions.

Resource extraction companies have learnt to cope with the demands – partly because they have to stay where the resources are. But it is a different situation for manufacturing. I am worried about this enormous increase in activism in which people, NGOs, everybody says “We’ve got this efficient little company here, let’s take as much out of it as we possibly can.” They will end up chasing all this investment away.

“China is not a very democratic place. India is a rather democratic place. China gets more than ten times as much inward investment as India.”

Let me put it crudely. China is not a very democratic place. India is a rather democratic place. China gets more than ten times as much inward investment as India. That seems to me quite important.

So there are costs associated with the negotiating process Tom described. You have to go where the oil wells are. You have to go where the minerals are. But you don’t have to go where the labour is. You can always go somewhere else, because labour is abundant in many places.

Malini Mehra: There are many different determinants for foreign direct investment into countries like India and China, ranging from the educational level of the workforce, to infrastructure and political stability. It is not just one thing. But government policy is also key. For example, the Chinese government, unlike the Indian government, made it a priority to attract foreign investment from overseas Chinese many years ago. This is why, according to some estimates, overseas Chinese account for up to 70% of the total foreign direct investment going into China. So, it is important to remember that we are not just talking about western multinationals investing but other groups who may have different motivations and incentives.

Sophia Tickell: Surely, any dirth of investment in India has much more to do with how the Indian economy is being run than the fact that NGOs are jumping up and down saying that they expect all kinds of things from companies.

We should look at the larger picture. The world economy is in transition right across the board – in commodities and services as well as extractives and manufacturing.

Take coffee. The market has totally changed over the last ten years. It used to be quite tightly regulated. There was a quota system, and a whole range of intervention mechanisms. Now, we have more or less a free market, and world coffee prices have plummeted.

The result has been unspeakable human suffering in the coffee communities in over 40 countries including Ethiopia who depend on coffee for their livelihoods. That’s why many people and organisations are calling upon coffee companies to play a more constructive role through measures like ‘fair trade’. The question is how do you address the fact that there are very large numbers of losers in this process of moving to a market economy?

Or take the case of the tin. I was in Bolivia at the time of the opening up of that market. The experience was very much like the example Malini gave. People had lived for years in company towns. They had their food, their oil and many services provided as part of the job. They’d never had to actually work in a monetary economy, and overnight they were being asked to move out of a company town, and to learn how to make a living in the wider world. They had no tools to do so. They were not economically literate. The result was huge sense of dislocation and human suffering.

openDemocracy: In the case of coffee there is the fair trade movement. There are profits there for at least a few people in the sector. What are your thoughts on the potential of this sort of thing?

Martin Wolf: There are really deep questions of development in the case of coffee. There is clearly a chronic excess supply. Tea is in the same situation. I think you can’t raise the price for these things without having effective global supply control, and this has always failed.

The fair trade movement will raise the prices for a limited number of producers, which will therefore unfortunately encourage more production and so lower prices again. I think it will turn out that the movement will make no difference to the average prices received by growers. The campaign is understandable, but it will make no difference.

I have my own notion for how to address the problem. That is, to call on all the exporting countries to agree a common export tax. I think this is the least unlikely proposal and one which would get round some of the problems. I don’t think we can rig the world market in such commodities. Even OPEC, which is incomparably the best-positioned cartel in world history, has found it very hard to rig the oil market. In Britain, for example, I believe the oil price isn’t very different from what it would be if OPEC didn’t exist. I have a little optimism which comes from the possibility that China’s growth will transform the situation for world commodities by increasing demand and so reducing the overhang of excess supply.

Tom Burke: Martin says there is far greater foreign investment going into China than India but I would really question the reasons for this disparity. I suspect you’ll find a lot of this foreign direct investment (FDI) is portfolio investment that can be taken out overnight, not investment into kit and assets and real things on the ground.

Travelling around the world I see places where it is attractive to put in investment. They are the same places which do better alleviating poverty, and dealing with environmental problems. The common factor is that they have a better “operating system”: good governance.

Columbia illustrates how poor governance is just so crippling. How do you get enough security into Colombia without licensing the paramilitaries to run death squads? How are you going to get enough security in there so that ordinary peaceful Colombians can have a job, a normal income and start a process of real development?

I think the real focus of this debate on corporate social responsibility should be about how you create the conditions in which you can deal with these kinds of problems. One thing is absolutely sure; business does not do well when there is political, social or military instability – no more than do the environment or poor people.

Malini Mehra: The factors that create a good climate for inward investment are quite clear. You have mentioned stability. There is also infrastructure, the quality of the workforce (particularly in terms of educational qualifications), and, surprise!, the market. If you speak to Indian economic policy-makers, they all say, “hey the Chinese had ten years head start. We only liberalised in the early nineties, they have been doing it for twenty years now, so they are a bit further ahead, but in the end we will catch up”.

What they don’t point to is their neglect in creating the proper conditions for a working market. It is not enough to say India has the highest number of English-speaking engineers, second only to the United States, because that is only a faction of the economy.

Indian policy makers haven’t focused on the essentials. You talked about FDI imbalance. I could talk about the tourism imbalance. The subcontinent of India receives fewer tourists in a year than London does. The reason has largely to do with how the government creates an environment and a dialogue with investors. They need to make it very clear that we are going to cut down transaction costs, we are going to cut down on the customs cost, or the licensing permits et cetera, and we are also going to do this in consultation with all of the relevant stakeholders. This kind of engagement in the formation of trade and investment policy is simply not happening in India.

Martin Wolf: I don’t disagree. I would just point out that one of the advantages in China is by and large that you know with whom you have to make the deals.

openDemocracy: Oil extraction in Africa has often proved particularly controversial. How should corporations use their influence responsibly in similar situations?

Tom Burke: The Chad Pipeline is an interesting case. There were huge arguments about World Bank funding for the project. The core of it was that public money would be used to finance corporate activity, which would not benefit any of the people who had to pay the associated environmental and social costs of the project.

So part of the conditions on World Bank funding was that there would be some direction to the Chad government on how the money would be spent to ensure a more equitable flow of revenues. In practice it has failed in so far that the Chad government failed to keep up its end of the deal – it diverted some of the income to prohibited purposes.

This project has proved very damaging to the corporate sector and the World Bank.

Martin Wolf: The Chad example shows that when a company starts to tell a government how to behave in the interests of its people we have a real problem.

It raises something interesting and paradoxical. Say you have valuable resources in an area of the developing world and you have companies in the west that have a capacity to exploit those resources and generate income. The revenues from resources can be very large in relation to revenues being generated elsewhere in the economy. This has two dramatic effects.

The first is that it cuts the link between the governments and the people, because governments no longer depend on revenue from their people, so they no longer have to negotiate with their people.

The second thing is that politics are then largely about grabbing hold of the revenues from these big extractive industries. The whole of Nigerian politics for thirty years has been about getting hold of the revenue stream from oil.

What is a company to do about this? What we seem to be proposing, peculiarly, is a highly paternalistic vision of what western companies should do. We are recommending – in the Chad case at least – that they control how governments get the money.

The important point is that this is a massive violation of democratic sovereignty in the conventional sense. Essentially, it says that this money is going to corrupt the government and we had better make sure that this does not happen.

Don’t ignore the profound implications of statements like that. Our government in Britain would find it deeply offensive if it couldn’t do what it wanted with North Sea oil revenue.

“NGOs want companies to be responsible for publishing payments they make to governments so that civil society in African countries will be able to hold their governments to account.”

Sophia Tickell: I don’t think people are saying that companies should be controlling those revenues. But NGOs do want companies to be responsible for publishing payments they make to governments – how much those payments are and when they take place – so that civil society in African countries will be able to hold their governments to account. How to strengthen civil society is perhaps a bigger problem and the NGO community must do all it can to help here.

But let’s be clear. We are not saying that, for example, BP should decide how the money from oil flows in Chad, Angola or at Casanare in Columbia are spent in these countries, we want simply to avoid misappropriation of these funds [for more on Oxfam’s position, and that of a coalition of 70 NGOs, see Publish What You Pay].

This relates to a broader debate about the accountability of government and how to make poverty reduction strategies work. The question here is how do you ensure governments will handle revenues in a transparent way and actually apply them to poverty reduction?

It is important that initiatives do not overstep the bounds of national sovereignty. But so long such initiatives are undertaken in a considerate manner, they are surely to be welcomed and have some chance of delivering practical progress.

Malini Mehra: It is extremely important to have disclosure on payments made by firms to governments for licenses, concessions, or in the form of taxes. It is the kind of anti-corruption measure that BP insisted on in Angola and I hope it becomes standard practice.

While you cannot necessarily set conditions on how government revenues from companies are spent, the way you can with aid agreements between states, companies can and should be more transparent about how much money they are contributing to public coffers and elsewhere. This information should be in the public domain so that citizens know – and can claim – the revenues that are rightfully the nation’s and should be used for public benefit.

Martin Wolf: Nobody is going to disagree with the need for transparency!

Tom Burke: A key differences between an advocacy NGO and a business is that if you are a business and you take a political position there is a comeback to your business. It is not the same for an advocacy group.

Martin Wolf: Advocacy NGOs can be pretty irresponsible.

Malini Mehra: Well, it is not as if there is no comeback for activists and NGOs who expose corruption or wrong-doing or human rights violations. NGOs can and do face direct threats to personal safety. Activists around the world have been thrown in jail or killed by repressive regimes. Some advocacy NGOs face these kind of political conditions every day.

Martin Wolf: Don’t get me wrong. Many NGOs perform vital functions, but it concerns me when NGOs push for negotiations with companies over their social responsibilities because the end result is often an ill considered compromise. For example, there was tremendous pressure on a company in Pakistan to stop employing a number of children. It immediately responded by getting rid of all of the children. When people went back to look they discovered in a lot of the cases, because nothing else was done to help the children, the families were thrown into the most dire poverty. The company did this because it satisfied a western pressure group that said child labour was a very bad thing. Obviously we would all agree in principle that it is a bad thing, but it so happens that there are parts of the world where people are actually dependent on it. Simply stamping out child labour is not the answer; there must be an alternative.

This sort of thing really worries me. There are no doubt other examples of companies being forced by NGOs to change in ways that are actually not in the interest of the people they are supposed to help. It undermines the whole notion of corporate social responsibility.

Quite frankly, discussion on this subject is unbalanced, irrational and often very ignorant in western countries. Particular companies are doing things just to get pressure groups off their back. The Brent Spar platform issue is another famous example; Shell did the wrong thing because Greenpeace forced it to do so. This is very worrying.


“Nowadays most campaigning NGOs and others concerned about child labour issues, are very aware of the mistakes of the past when companies panicked and pulled out, leaving people destitute and child workers in danger.”

Part III: The search for solutions

openDemocracy: Should there be more or less or different regulations for corporations on a global level?

Tom Burke: Let’s get this straight. The idea of regulating companies on the global level is nonsense. What happens at the global level is negotiation between countries, this may involve agreements on how countries regulate companies within their jurisdiction, but as to any suggestion that we need some extra body just to deal with corporations, I reject that straight away.

Malini Mehra: We already have an international architecture of law and treaty obligations governing the role of private corporations. The problem is that we don’t quite understand how it works and how all the bits fit together.

This mesh of laws includes major international treaties like the International Labour Organisation’s conventions on worker rights and the normative guidelines of the UN’s Global Compact. For these to have any practical result they need to be translated into national legislation – and enforced. And this is where the problem lies. If we take the Sialkot example from Pakistan that Martin referred to earlier, this was a failure of the government to enforce its own laws.

Nowadays most campaigning NGOs, and others concerned about child labour issues are very aware of the mistakes of the past when companies panicked and pulled out, leaving people destitute and child workers in danger.

The Harkin Bill that passed through the US Congress confronted the transitional issues Martin describes: the need to consider what happens when you withdraw children from a particular industry, whether parents be hired, how children can be schooled and rehabilitated, what the impact will be on local labour markets and so on. We have learnt something.

In the Pakistan example, if those concerned had actually been complying with national laws there would never have been a problem, since in Pakistan the minimum legal age for working in these industries is fourteen.

Tom Burke: What are you saying? That the world community should intervene in the way in which national governments exercise their rights?

Malini Mehra: Absolutely not! The point is a simple one about complying with national laws. This should be a first rule wherever you operate.

Tom Burke: There is no argument about that.

Sophia Tickell: Wait Tom. You are being a little disingenuous. You can’t deny corporations have influence on governments in their negotiations. There is one famous government-to-government institution on which companies have a demonstrable and direct influence, the World Trade Organisation (WTO).

The WTO shows that a form of global regulation is possible but the question is can it defend the interests of the poor? Agreements at the WTO have a track record of defending the interests of the rich across the globe. And the very striking thing about the WTO is that it has inbuilt sanctions mechanisms. It is effective. It does actually work.

Martin Wolf: Everybody wants to trade. So there is a strong incentive to create a system of rules to which everyone can agree. For this reason trade agreements have built in sanctions that are not available elsewhere in order to make the system of rules effective.

There is also a great deal of hypocrisy in the rules and regulations agreed in other areas such as in the International Labour Organisation. In many countries, people know they are not going to be enforced, but they agree to them just to look good.

I have a different suggestion. Given the level of development in some countries, Bangladesh is a good example, you can’t expect to eliminate child labour, but you can go a fair way towards controlling the worst forms of it. And you can go a long way to creating institutions that give valuable alternatives. That’s where I would go. The regulatory route, by contrast, is toothless.

Tom Burke: And one of the most powerful mechanisms to reinforce the dynamic is to get as many multinational corporations employing as much child labour as you can because that pressures governments to create more of a level playing field. You want major multinational corporations in there operating to the standards required domestically and that are sanctioned and enforced informally by domestic pressures because that creates a dynamic in the host culture which is going to raise social and environmental standards.

Malini Mehra: Tom, I’m shocked. Are you suggesting that multinationals should go into countries like Bangladesh and break the law by hiring child labour? That if a multinational came and hired children who were beneath the legal age of working and showed them “this is the best way to work children”, this would raise the bar domestically?

Tom Burke: No, no, maybe I wasn’t being clear. No multinational company in my experience would knowingly operate in any way that was illegal. I’m not advocating breaking the law. I was making a point about the broader dynamic: that if you want to raise health, environment, work and employee relations standards in many countries, you must start with – if possible – multinational corporations in order to create the pressure for national legislation to be adopted and enforced.

“If you want to raise health, environment, work and employee relations standards in many countries, you must start with – if possible – multinational corporations in order to create the pressure for national legislation to be adopted and enforced.”

Sophia Tickell: But there is a danger. I mean it is not necessarily the case that these wider interests are met. In the discussions at the moment in the run-up to the WTO meeting in Cancun, Mexico in September 2003, there is pressure on developing countries to make themselves more attractive to investors by coming to agreements on issues of procurement, competition, and investment. This agenda is being pushed hard by the European Union. Some developing countries and NGOs are fearful that agreements on these issues will make it harder for developing countries to be able to compete with trans national corporations, and will prevent them from protecting domestic firms, which may be vital to the countries economic well being.

An obvious outcome of globalisation, which has become very striking over the past year, is that big firms have economies of scale to compete very successfully in the market place at the expense of domestic industries.

This takes us back to Malini’s point. What is the role of multinational companies to develop and support the capacity of domestic industry? This is an area that needs much more creative thinking.

On coffee, which we discussed earlier, Oxfam is not calling for a return to arrangements that existed in the past. Oxfam is saying to corporate leaders that responsible companies could play a much more positive role in developing domestic demand for coffee, and generating local ancillary industries for processing and packaging. This is a route that makes global economic and social sense for coffee and a range of other commodities.

openDemocracy: What do you see as the best way forward from here?

Malini Mehra: We are all in agreement that multinational corporations by and large, over the last twenty years, have had a positive influence in raising social and environmental standards in developing countries. Now the focus should be on encouraging the same trend in the home industries of these nations.

The problem with child labour is that all the laws are in place but they’re not being enforced by developing countries because of a lack of political will, institutional capacity, and often because public habits and values do not align with the basic social goals of these regulations.

In my country, India, generations of lower to middle class families continue to rely on servants who are often below the legal age. Even those in the civil service, the very people who should be out to prevent this, are employing child labour in their homes. Nothing will change in India unless there is a value shift, which recognises “this is not the way a civilised country should behave”. Only then do we have a chance.

A more positive example, that echoes what Sophia is calling for, is Nike’s efforts in South and South East Asia to raise standards in domestic industry. I went to Nike’s factories and was astonished by the quality of the working conditions. A discovery that does not equate with the allegations still heaped on Nike nor is it simply company propaganda; this is the result of serious engagement with a largely female workforce in the contract factories of Vietnam, Thailand and Indonesia. It hasn’t happened overnight, it is an ongoing process.

But for far too long the spotlight has been on the ‘best’ and not the rest. On the iconic Nikes of the world but not on the ‘others’ – the great mass of firms that are without a recognised brand. More then 40% of shoes produced in the Asian market are coming from non-branded Chinese companies and this figure is expected to soar in coming years.

If we want to get serious about lifting labour standards then we have to deal with these companies. This is where I strongly disagree with Naomi Klein’s thesis that ‘no logo’ is the way that we need to go. In fact we might need the exact opposite; more logos, because then we will be able to identify those companies who are misbehaving, call them to account and get them to comply with local legislation.

This is absolutely crucial, until we have compliance with basic domestic legislation any international code for corporate responsibility is an illusion.

Martin Wolf: I think Naomi Klein’s thesis was one of the most stupid and damaging arguments that could have been put forward. The simple truth is that logos are the greatest point of weakness of corporations, not a strength. It’s largely because of them that they are so susceptible to pressure in different ways. Their reputations matter.

I also agree with Malini’s other point, though I would take a slightly different stance on it. By far the biggest problems in developing countries in terms of treatment of people relate to non-multinationals. Multinationals have always treated people better. They have to, and they know how to do so.

Related to that is the simple fact that a lot of countries have signed up to norms and regulations, which they had never any intention of implementing. Passing a whole lot of new ones is going to do absolutely nothing. We are not going to change the behaviour of China or India by this, nor are there any sanctions which will change them either. Nobody really believes that trade sanctions against China can make it treat labour any differently.

To conclude, domestic political pressure in developing countries can bring rewards. If the situation arises where everybody can see that children would be better off if they are educated, the children will get educated. If people see that unless they treat their workers decently they are not going to have any workers, they won’t treat them in the way they do.

But an unfortunate truth can been seen in the demography of developing countries. China, for example, has a colossal labour surplus and as long as that is the case it will be very, very difficult to enforce genuine labour regulations, just as in India it is hard to force people to treat their domestic servants well because there are simply so many potential domestic servants.

The answer in development is that multinationals play a vital, but it must be stressed not overriding, role in the development process. Companies contribute to development by generating rising incomes. Everything else is secondary at best, and damaging at worst.

Tom Burke: Our inability to manage the social consequences of very rapid population and economic growth in nineteenth century Europe left us battling the twin evils of communism and fascism, ultimately we did not accompany the nationalisation of opportunity with responsibility. This was not good for business, for people or for the environment. Now we are in the process of repeating this same mistake on a global scale. We need to ensure that globalisation of opportunity is accompanied by globalisation of responsibility.

There is enormous benefit for corporations to succeed in an environment of responsibility, but I think it is a very fine grain task, contingent on all kinds of sector-specific and local factors. It is not going to be susceptible to titanic legislation. And I agree with Martin that the endless creation of shibboleths by advocacy groups often hinders the process rather than assists it.

Sophia Tickell: Well, I would say that I think both sides of the debate, NGOs and companies, have learnt a tremendous amount, especially in the past five years. But we have to find ways of addressing serious market failures that are leaving masses of people in terrible poverty. Multinationals have a key role to play in that. They can perpetuate poverty or they can be part of the solution by helping developing countries use trade to tackle poverty.

At times, corporations lose the bigger picture because of the way they are structured and the incentive mechanisms within them, which leave self-interest to override other considerations. This has to be a debate, therefore, which involves government mechanisms to hold them to account, and other stakeholders, however annoying or risky the process may seem to corporations at times. As Tom said, the alternative could be apocalyptic.

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