Multinational Corporate Reform

Joseph E. Stiglitz argues for corporate reform in his book Making Globalization Work. Two main plan objectives are changing multinational incentives by increasing their liability, thus decreasing externalities inflicted on society and the environment, and expanding the scope of the legal system to protect international society and ecological systems.

The Multinational Corporation
With corporations at the center of globalization, they can be blamed for much of its ills as well as given credit for many of its achievements. Just as the issue is not whether globalization itself is good or bad but how we can reshape it to make it work better, the question about corporations should be: what can be done to minimize their damage and maximize their net contribution to society?

Before answering that question, I want to dispose of one charge that is largely, though not totally, unfair. Corporations are often blamed for the materialism that is endemic in developed societies. For the most part, corporations simply respond to what people want—for instance, the need to get from one place to another, which cars and motorbikes make easier; if cars and motorbikes are fancier or larger than they need to be, it is mainly because consumers like ones that are fancier or large, and buy them. Still, it must be admitted that corporations have sometimes worked to shape those desires in ways that enhance their profits, and at least some materialistic excesses can be attributed to their efforts. If advertising did not enhance desire, they would not spend billions of dollars on advertising every year. Food companies teach children to want sugary cereals that are bad for their teeth; auto companies campaign against public transportation—and in some cases actively removed it—regardless of the effect on the environment. Los Angeles once had the world’s largest urban rail system (1,100 miles of track), until a group led by General Motors bought it out, dismantled it and replaced it with GM buses.

One or two instances of corporate misbehavior might be overlooked, but the problems are clearly systemic. Whenever there are systemic problems, economists look for systemic causes. The primary one is obvious: corporations are in the business of making money, not providing charity. Therein lies both their strength and their weakness. Money is a powerful incentive, and the desire to make it can bring enormous benefits to everyone. When things go well, international corporations can marshal enormous resources, spread the most advanced technology, and increase available markets exponentially. But too often they are encouraged to do the wrong thing. Corporate incentives can be reshaped. If we are to make globalization work, they will have to be.

Here again, the eminent eighteenth-century economist Adam Smith has often been misunderstood. He argued that individuals, in pursuing their self-interests, would advance the broader interests of society: that incentives to out compete rivals would lead to lower costs and to the production of goods consumers wanted, and that consumers, and society more generally, would benefit from both. In Smithian economics, morality played no role (though Smith himself was intensely concerned about moral issues, as evidenced in The Theory of Moral Sentiments, a work that preceded Wealth of Nations). Individuals did not have to think about what was right or wrong, only about what was in their own self-interest; the miracle of the market economy was that, in doing so, they promoted the general welfare. Building on this logic, many economists believe that the first—some go so far as to say the only—responsibility of corporations is to their shareholders. They should do whatever it takes to maximize stock market value or profits. In this extension of Smithian economics, if morality enters the picture at all, it does so only to enjoin firms to think about the interests of shareholders above all else—in fact, to think only of shareholders.

Sometimes, markets do work in the way that Smith argued—the large increases in living standards over the past two centuries are, in part, testimony to his insights. However, even Smith realized that in an unfettered market economy private incentives are often not aligned with social costs and benefits—and when that happens, the pursuit of self-interest will not result in the well-being of society. Modern economists call these misalignments “market failures.” Market failures arise whenever there are externalities, consequences of an individual’s or a firm’s actions for which they do not pay the cost or receive the benefit. Markets, by themselves, lead to too little of some things, like research, and too much of others, like pollution.

Much of public policy and economic theory in the last hundred years has been directed at identifying major market failures and analyzing the most efficacious and least costly ways of correcting them, for instance through regulations, taxes, and government expenditures. Modern economics has shown, similarly, that social welfare is not maximized if corporations single-mindedly maximize profits. For the economy to achieve efficiency, corporations must take into account the impact of their actions on their employees, on the environment, and on the communities in which they operate.

The environment provides one obvious instance in which private and social costs may differ, with enormous consequences. It costs more money to refine oil or generate electricity in ways that do not pollute the air. It costs more money to dispose of waste or to mine in ways that do not pollute the water supply. These are real environmental costs to society, but—at least before strong government regulations were established—they were not costs to the corporations involved. Without government regulation and pressure form civil society, corporations lack incentives to protect the environment sufficiently; they actually have an incentive to despoil it if doing so saves them money. (180-191)

Making Globalization Work
It is easy to understand why multinational corporations have played such a central role in globalization: it takes organizations of enormous scope to span the globe, to bring together the markets, technology, and capital of the developed countries with the production capacities of the developing ones. The question is how to ensure that developing countries get more benefits—and face fewer of the costs. In the following pages, I set out a five-pronged agenda that, though it will not eliminate all instances of corporate abuse, will I believe lessen them. Underlying most of these reforms is a simple objective: to align private incentives with social costs and benefits.

Corporate Social Responsibility
Though many corporations, especially in the United States, continue to argue that their sole responsibility is to shareholders, many do recognize that their responsibility goes further. There is an element of self-interest here: doing good can be good for business, and doing bad can subject companies to expensive lawsuits.

While increasingly more corporations see business (and some studies suggest that socially responsible firms have performed better in the stock market than others), for many firms, their executives and employees, social responsibility is as much a moral issue as an economic one. Companies can be thought of as communities, people working together in a common purpose­—say, to produce a product or provide a service. And as they work together, they care about each other, the communities in which they work, and the broader community, the world, in which we all live.

The BSR movement is not enough. It must be supplemented by stronger regulations. Those who are really serious about higher standards should welcome regulations that support the codes of conduct they publicly endorse, for such regulations would protect them from unfair competition from those who do not adhere to the same standards. Regulations will help prevent a race to the bottom.

Limiting the Power of Corporations
Corporations strive for profits, and one of the surest ways of garnering sustainable profits is to restrict competition—buying up competitors, squashing competitors by driving them out of business, or colluding with competitors to raise prices. When there is a lack of competition, the potential for abuses of multinationals grow much worse.

With the advent of globalization and globally traded commodities, monopolies, and cartels­—and the problems they create—often have become global in scope. While the benefits of monopolists are global, enforcement remains fragmented, with each jurisdiction looking after its own citizens—meaning in practice that no one looks after consumers in small and developing countries. Worse still, home nations frequently fight in favor of their own global monopolies. This is natural; harm done to consumers and firms abroad is not their concern. Perhaps worse are instances where governments actually help to create global cartels to advance the interests of their own national companies.

The failure to develop a global approach to global cartels and monopolies is yet another instance of economic globalization outpacing political globalization. The current piecemeal approach, with each country looking after its own citizens, is costly and inefficient, and especially ineffective in protecting those in developing countries, whose resources are no match for those of large multinationals.

Globalization of monopolies requires a global competition law and a global competition authority to enforce it, allowing both criminal prosecution and civil action in any case in which anti-competitive behavior affects more than one jurisdiction.

Improving Corporate Governance
A third set of reforms focuses on the laws governing corporations themselves. How do we make corporations, and their officers, act in way that are consistent with the broader public interest? What reforms in the legal system can help align private incentives with social costs and benefits?

One step in the right direction would be to have companies take into account all stakeholders­—employees and the communities in which they operate, not just their shareholders. It should not, for instance, be a violation of their fiduciary responsibility to their shareholders for them to pursue good environmental policies, even if profits are thereby hurt.

Limited liability law was intended to limit the liability of investors, not to absolve employees, however senior, of responsibility. But, as we have seen, sometimes that is the result. Executives should be held personally responsible for more of their actions, making it more difficult for them to hide behind the veil of their corporations.

If there is a case for making corporate officers individually responsible in the area of accountability to shareholder and other stakeholder, then there is an even stronger case in other areas. It is no less a crime to ruin the environment (stealing the heritage of the entire community) than to cheat investors by manipulating the books. Environmental damage done by corporations is longer lasting, and those injured are innocent bystanders who were neither party to any agreement nor stood to gain from investment. When a company has egregiously violated a nation’s environmental laws, the CEO and others who made the decisions and took the actions should be held criminally liable.

Another important step in achieving congruence between private and social interests is to make it easier for compensation to be obtained when damage has been done. Making firms pay for the damage they inflict—injury to workers or to the environment—provides firms with greater incentives to act more responsibly and to ensure that their employees do so.

Several changes would go a long way toward repairing the system. The first is to allow those in other countries to sue in the home country of the offending corporation. A complementary reform would be to allow judgments made in foreign courts to be enforced by courts in the advanced industrial countries.

Some firms are wary about being subject to foreign courts, claiming that the courts are stacked against them. This is simply one of the prices that one has to, and should, pay if one wants to do business in a country—including, in particular, extracting that country’s natural resources.

In the lore of America’s West, bandits would cross the state line to seek a safe haven. For international environmental bandits, there should be no safe haven. Any country in which the corporation (or the substantial owners of the corporation) has assets should provide a venue in which suits can be brought or in which enforcement actions to ensure payment of liabilities can be undertaken. The corporation may incorporate where it wants, but this should not make it any less accountable for its actions in other jurisdiction.

Global Laws for a Global Economy
Eventually, we should be working toward the creation of international legal frameworks and international courts—as necessary for the smooth functioning of the global economy as federal courts and national laws are for national economies.

When consumers within the United States and certain other countries are hurt by price-fixing, they can band together, file what is called a “class action” suit, and if the succeed, they receive an amount that is triple the damages they incurred. This provides a strong incentive for firms not to engage in price fixing. When a large number of individuals have been injured in a similar way, they should be able to band together to bring a single suit. We need to make it easier to pursue global class action suits, either in newly established global courts, or in national courts. And just as we recognize that access to justice for the poor requires the government to finance legal aid, this should be the case internationally as well: advanced industrial countries should provide legal assistance to those in developing countries.

Reducing the Scope for Corruption
There is now widespread recognition of the corrosive effects of corruption and the need to attack it at both the supply and demand side. The United States’ passage of the Foreign Corrupt Practices Act in 1997 was a major step in the right direction. Every government needs to adopt a foreign corrupt practices act, and penalties should be imposed on governments that do not enact of enforce such laws.

Bank secrecy aggravates the problems of corruption, providing a safe haven for ill-gotten gains. In the aftermath of the East Asian crisis, there were calls from the IMF and the U.S. Treasury for greater transparency in the Asian financial markets. When the developing countries pointed out that one of the problems in tracing the flow of funds was bank secrecy in offshore Western banks, there was a decidedchange in tone. The money is in these so-called offshore accounts not because the climate in the Cayman Islands is more conducive to banking; money goes there precisely because of the opportunities it affords for avoiding taxes, laws, and regulations. The existence of these opportunities is not an accidental loophole. The secrecy of the offshore banking centers exists because it is in the interests of certain groups in the advanced industrial countries.

There was an accord among the advanced industrial countries to do something about bank secrecy, but in August 2001 the Bush administration vetoed it. Then, when it was discovered that bank secrecy had been used to finance the terrorists involved in the September 11 attacks, the United States changed its views­—but only where fighting terrorism was involved.

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I have argued throughout this book that politics and economics are intricately interwoven: corporations have used their financial muscle to protect themselves from bearing the full social consequences of their actions. Why should we expect them to respond any more enthusiastically to these reforms than to any of the more modest attempts to temper their abuses?

One thing that makes me hopeful is the corporate social responsibility movement. There is an increasing number of firms who do not want to see a race to the bottom. It is firms like these, in the United States and other countries, that supported the Foreign Corrupt Practices Act. Civil society too is playing a more active role, by monitoring the actions of the large mining companies and of manufacturing firms that abuse their workers. The new technologies that have helped bring about globalization have been used to bring these abuses to the attention of the world, so that even those who have little moral compunction have been forced to account for their actions.

These are the realities, and they will not be easily changed: we should neither take corporations for the villains that they have often been portrayed as, or for munificent benefactors of developing countries. Limited liability has underpinned the growth of modern capitalism; but with globalization the abuses of limited liability have become global in scale; without the reforms suggested here, they could become far worse. The lesson here, as in much of the rest of this book, is simple: incentives mater, and governments and the international community must work harder to ensure that the incentives facing corporations are better aligned with those they touch, especially the less powerful in the developing world.