2014 Kellogg School of Management/Aspen Institute Business and Society Leadership Summit
Filling the Governance Gap: Aligning Enterprise and Advocacy #CorpGovGap
Going Beyond the Letter of the Law: Lessons from Europe on Corporate Accountability
By Caroline Kaeb
It is no exaggeration to say that, in one way or another, all multinational corporations (MNCs) are struggling to make sense out of the patchwork of laws and regulations among the various countries in which they operate. The conduct of foreign subsidiaries and vendors is a particularly thorny issue, and one on which Europe and North America are sharply divided.
While the Europeans defy traditional ownership structures and recognize an enterprise-wide concept of responsibility, the North American attitude confirms the status quo, where a parent company assumes liability for its own conduct and goes no further. These contrasting approaches are exemplified in corporate responses to the Rana Plaza tragedy: major European retailers took unprecedented legal responsibility for the safety of their contracted supplier factories overseas, while their North American counterparts took a more traditional "soft law" approach to self regulation, by simply making a voluntary commitment, refusing to source from noncompliant supplier factories.
As companies seek to manage the sometimes opaque legal risks of global commerce, they face an added wrinkle: the public increasingly expects companies to go above and beyond regulations to demonstrate that they are being good corporate citizens. Raised expectations with regard to corporate social responsibility (CSR) have deep implications that extend beyond legal departments, into strategy and operations. Therefore, global executives must take steps now to adopt a global mind-set on regulation and understand the role that CSR strategies can play in safeguarding their company’s reputation and addressing public concerns that fall beyond the letter of the law.
Those who succeed in both adhering to laws and conforming to society’s heightened expectations will better distinguish themselves from competitors, build a strong consumer brand, and bolster the resilience of their income streams in the global economy.
Mind the Accountability Gap
When it comes to differences in corporate thinking between North America and Europe, the roots run deep—the dissonance is systemic and engrained in the DNA of their respective legal systems, societal norms, and history.
North American firms hold fast to traditional corporate philosophy that, however tragic the situation in Bangladesh, legal and financial responsibility for ensuring safety standards lies primarily with the direct owners of local supplier factories. Though many subtleties exist, the decisive difference is that they assume no direct legal responsibility for the actions of their contracted suppliers. This traditional corporate thinking is in line with the current state of the law, specifically the doctrine of "corporate separateness," which considers the different entities of multinational corporate groups as legally separate in terms of their liabilities and responsibilities.
In contrast, many European countries have a long tradition of corporate models and governance structures that are more attuned to the needs of stakeholders, including workers and society in general. Further, the recent rise of the "enterprise entity" theory in European circles has reinforced corporations’ responsibilities to their stakeholders. Under that doctrine, which was first employed by the European Court in an antitrust context, MNCs are treated as economically integrated enterprises that comprise a complex, worldwide network of subsidiaries, affiliate entities, and business relationships. The European reaction to the Rana Plaza tragedy closely reflects this doctrine—and the North American reaction very much sticks to its corporate separatist roots (Figure).
These differences also extend to how the courts handle corporate accountability. The highest court in Europe has applied (in the context of anti-trust law and at a jurisdictional level) an enterprise entity test that can hold non-European parent companies accountable for the behavior of its European subsidiaries. This suggests an increasing awareness that the traditional model of single-unit, limited-liability companies may no longer be relevant in an era of complex corporate group structures—particularly when it comes to questions of CSR. European retail companies have recognized that the public’s expectations for global corporations have raised the bar beyond archaic legalistic compartmentalization. It is time for their North American counterparts to do the same.
Steps to Legal and Social Accountability
North American executives would be wise to pay close attention to the consequences of the gap between European and American CSR expectations. After all, Europe remains a key market for American MNCs, and the European branches and subsidiaries of American companies are bound by the laws of the European Union and its member states, even if the European affiliate entities operate outside of the EU territory. It is clear that legal developments on both sides of the Atlantic—such as the 2012 California Supply Chain Act—extend the legal responsibility of parent companies to subsidiaries and contracted supplier factories. The strict notion of corporate separateness is giving way, and new legal risks are emerging.
There is also the danger that public sentiment, either at home or in foreign markets, will change rapidly. North American companies that fail to take a global approach to CSR may be blindsided by these sudden shifts. And MNCs working with contract supplier factories that endanger workers face clear and potentially disastrous reputational risks. Executives should take four steps to help retain customers’ business and their good will and to prepare for the inevitable shift in legal responsibilities heading their way.
Take a global perspective to regulation. Legal standards are often highly divergent from country to country. Management and business strategists must find the sweet spot. Companies are already dealing with this on matters of privacy protection, so executives might be able to adapt successful strategies in this area to CSR. The paradigm of "thinking globally and acting locally" holds true, and collaborations with local experts are instrumental to understand the legal but also the socioeconomic landscape on the ground. Executives must keep in mind that, despite their best efforts, it remains a significant challenge to completely meld internationally accepted standards and best practices of CSR with local customs and law.
Adopt a CSR mindset and integrate it throughout the organization. Many companies have not yet achieved clarity on how to treat CSR within the firm—executives do not know or have differing opinions on whether to frame CSR issues as functions of ethics, philanthropy, crisis, law, or business opportunity. In reality CSR issues are best understood as a cross-section of all of these factors. Executives should therefore integrate CSR horizontally across all relevant business functions within the firm, rather than having each of these factors siloed in a specialized unit within the corporate structure.
Actively monitor consumer expectations. The Internet leaves almost no stone unturned. Companies must assume that noncompliance will always be found—sometimes immediately and often throughout the value chain—and consumers may react badly. A proactive stance is a better strategy: prevent the problem in the first place rather than relying on mitigation after the fact. (For suggestions on how to de-risk your supply chain, read Sunil Chopra’s article, "Protect Your Global Supply Chain from Costly Disruptions.")
Foster collaboration across industries. Industry-centric standards of conduct, with some degree of collaboration and cooperation among corporations in similar fields, can make good business sense—especially given the possibility of a tarnished reputation in one industry bleeding over into other industries. (For a discussion of an informed approach to implementing private regulation, read Brayden King’s article, "Can Private Politics Effectively Replace Government Regulation?")
The imminent sea change in public sentiment and legislative treatment of responsibility for supplier relationships will affect companies on both sides of the Atlantic. By addressing these changes early, North American firms can distinguish themselves from foreign competitors and benefit from a first-mover advantage in shaping relevant industry standards and building good will with customers, government leaders, and regulatory agencies.