Summary
1. The need for a corporate accountability convention
1.1 Why is FoE concerned by corporate accountability
1.2 Accountability to citizens
1.3 Corporate social responsibility?
1.4 Transnational solutions
1.5 Beyond voluntary initiatives
1.6 Who, where and when?
1.7 The objectives of corporate accountability
1.8 The present context of corporate accountability

2. Elements of a corporate accountability convention
2.1 Introduce duties on corporations
2.2 Extend liablity to corporations
2.3 Introduce rights of redress to citizens
2.4 Establish communities' rights to resources
2.5 Establish consistently high standards of behavior
2.6 Introduce sanctions
2.7 Extend role of international criminal court
2.8 Improve monopoly controls
2.9 Implementation mechanism

Summary

This briefing outlines the case for an effective legally binding international framework on corporate accountability and liability. This would secure the accountability of corporations to citizens and communities in today's globalized economy by establishing: rights for citizens and communities affected by corporate activities; duties on corporations with respect to social and environmental matters; and rules to ensure high standards of behavior wherever corporations operate. It explains why governments should collaborate to establish effective international and national law on corporate accountability, liability and transparency. This must be backed by effective sanctions and citizen and community rights to consultation, legal challenge and redress over environmentally and socially damaging corporate activities. The approach goes beyond voluntary corporate responsibility initiatives to establish corporate accountability to stakeholder citizens as a legal right. It seeks to help close the democratic deficit created by corporate globalization by underlying the principles of rights, democracy and equity demanded by communities protesting against corporate globalization.

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1. The need for a corporate accountability convention

1.1 Why is Friends of the Earth International concerned about corporate accountability?

As an international confederation of over 70 groups in both the global north and south, FoEI has a broad experience of corporate behavior. Delivering sustainable development, securing environmental justice, recognizing and acting on ecological debt and issues such as climate change will all require governments to ensure corporations play a responsible role. Given the commitment to action through communities outlined in Local Agenda 21; without corporations being accountable for their activities to the communities they affect, a fundamental pillar of action for sustainable development will be missing. In FoEI's experience the establishment of clear rights for citizens and communities is the best way of securing a just outcome. Established rules of accountability and liability meeting the principles outlined in this paper may have helped citizens and governments address and perhaps even avoid crisis such as those experienced in Bhopal with the chemicals industry, in Nigeria with the fossil fuel industry, oil spills such as the Erika and Exxon Valdez and recent concerns over the diamond mining industry for example.

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1.2 Accountability to citizens

Over many decades the duties placed on companies and expectations of how they should behave have been a topic for public debate and regulation. From the end of slavery to health and safety standards, corporations have been required to act in ways deemed to be in a wider public interest. The use of legislation to constrain corporate activity is not new, but new forms of corporate accountability are today more vital than ever:

- There is a tendency for public interest constraints to be removed or relaxed in the course of removing non-tariff barriers to trade;

- The growth of truly global companies means it has become more difficult for citizens and communities to seek redress where corporations are multinational (for example a multinational's legal "home" may be uncertain);

- The growing scale of multinationals has consolidated their power and influence while greatly increasing distance between corporate leadership and the communities and lives that their activities affect;

- Corporations are increasingly taking control of industries and services previously run by governments, without taking on the wider public interest responsibilities governments have to address; and

- The scale of corporate impacts is undiminished and those impacts are increasingly remote from both the owners and the customers of the company.

Yet presently corporations are only legally accountable to their shareholders.

FoEI recognizes the potentially positive side to business - particularly small and medium sized enterprises that form part of local economies and are accountable to local communities. There are also "sunrise" industries such as renewable energy where the skills and creativity of business are needed to deliver progress. But debate is growing over how corporate accountability to other stakeholders - as well as to shareholders - can be increased. The accountability corporations have to owners and shareholders are backed by detailed rules and regulations. FoEI believes new rules must spell out corporations' accountability to other stakeholders.

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1.3 Corporate social responsibility?

Employees, communities, consumer and public interest groups are raising concerns about the performance and impacts of corporations on employment practices, pollution, genetic engineering, product safety, essential public services and many other matters. The most serious concerns tend to be over corporate practices in poorer countries, where governance and financial constraints have made it more difficult for legal, environmental, health and safety standards to match those in developed countries. For example, environmental or social impact assessments are often poorly conducted, if at all, and may not even be publicly available.

In the fossil fuel sector concerns have been raised about pollution, resource expropriation and human rights abuses. Cases include Exxon in Indonesia, Shell in Nigeria and Premier in Burma and Pakistan. In the forestry sector, much trade is illegal - more than half the tropical timber entering the EU is likely to be illegally sourced. Logging on indigenous peoples' lands, corruption, and felling primary forests by companies such as Asia Pulp and Paper in Indonesia are all common concerns. In the garment and toy trades sweatshop conditions, poor health and safety and use of child labor have been documented in suppliers for Nike and others. These multinationals are exploiting natural resources in the South to feed (primarily) Northern demands. This accumulates an "ecological debt" as Northern countries consume more than a fair and sustainable share of the world's resources.

Corporations' production costs are reduced by imposing (sometimes apparently non-financial) costs on the environment or society - in the jargon "externalizing" costs. They have an incentive to do this because they are judged by shareholders on how well they have maximized financial returns, be this within or (for example with corporations profiting from retailing illegally-sourced timber) outside the law.

A few corporations make a virtue of internalizing costs believing this voluntary "corporate social responsibility" enhances their brand and provides a competitive edge. Such a strategy works for corporations that have become relatively accountable to their customers, but it works almost as well for some as a veneer of marketing hype disguising a grim reality.

Voluntary corporate social responsibility has been supported by governments, some of whom even have ministers with duties to promote it. However, such voluntary action is not common to all companies. Unless all corporations are made equally accountable for their environmental and social impacts there remains little incentive for a general improvement in behavior. What is more, those corporations, which want to become more socially responsible, are being held back by competitors who can undercut them by continuing to externalize costs and by demonstrating no responsibility. There is an emerging ethical investment sector in some regions, but it remains small and many corporations report limited progress in becoming more socially responsible because they are not receiving support from mainstream investors. Substituting regulation with voluntary initiatives, therefore has failed to deliver sufficient progress in practice.

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1.4 Transnational solutions

Corporations are active across national boundaries, and often their production, sales and ownership are in different legal jurisdictions with inconsistent regulations. Corporations are often listed on stock markets or have a "home" base in countries remote from where they operate and are "hosted." Changes in the legal framework in any one country can have real or perceived impacts on the short-term competitiveness of companies in that country. Some governments, to remain competitive in the international marketplace, have become reluctant to unilaterally introduce rules corporations might consider unattractive. It is sensible, therefore to devise a multilateral binding framework that provides a level playing field. A framework convention would allow signatory governments to deliver the agreement in the context of their own legal tradition.

To balance corporate globalization, accountability to stakeholders must be through a multilateral agreement.

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1.5 Beyond voluntary initiatives

Recent progress on corporate accountability has been dominated by the development of voluntary initiatives. The UN Global Compact has been established to create a process to support the voluntary socially responsible behavior of corporations. The OECD has recently revised its more established mechanism the OECD Guidelines for Multinational Enterprises. The European Code of Conduct for European Enterprises Operating in Developing Countries is a further voluntary approach which incorporates a platform for public airing of cases. Many other bodies and industry groups have devised sectoral codes of conduct. So far these have failed to prevent continued abuses of corporate power. There are a number of reasons why:

- They do not provide strong incentives for compliance to counterbalance the financial incentives for non-compliance - because for example sanctions are absent or weak;

- They rely on the "appearance of compliance" through "self-regulation," without even independent verification let alone enforcement; and

- They fail to empower citizens and stakeholders. Instead, even where "stakeholder dialogue" approaches are used, they present the issue of corporate responsibility as "top-down" - as defined by the company.

Accountability requires going beyond voluntary approaches and establishing mechanisms, which provide adequate legal and financial incentives for compliance. It must also empower stakeholders to challenge corporations. Above all, while voluntary initiatives can in themselves be positive or deceptive, they can not be seen as a substitute for mandated rules, which establish a baseline of rights, duties and consistent behavior.

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1.6 Who, where and when?

This is a challenging agenda and must be discussed in the most appropriate forum. It requires the engagement of the World's governments which means exclusive organizations such as the OECD (despite their experience in this area) would be inappropriate. It cannot be under an organization with a mandate to promote economic liberalization, so that excludes the WTO. Only the UN offers the right level of inclusiveness. However, the agenda cuts across present UN organizations and processes, such as the UN Environment Programme and the UN Human Rights sub-committee.

There is one clear opportunity: the World Summit on Sustainable Development in Johannesburg in August 2002. It offers an ideal opportunity to initiate a negotiation on a corporate accountability and liability convention, to establish relevant institutional arrangements to back corporate accountability and strengthen present initiatives working in the same direction.

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1.7 The objectives of corporate accountability

A corporate accountability convention must:

- Establish mechanisms for adversely affected stakeholders to obtain redress through exercising rights;

- Establish social and environmental duties for corporations;

- Establish rules for consistent high standards of behavior of corporations;

- Create a market framework in which progressive companies can thrive, and governments respond fairly to the demands of their citizens rather than to the lobbying of corporations;

- Establish sanctions;

- Ensure the ecological debt owed by corporations to the South is repaid; and

- Secures environmental justice for communities threatened with or exposed to environmental injustice - north and south.

FoEI advocates accountability for publicly traded corporations. Often it is the economic power of these corporations which drives smaller private companies to operate to lower standards - either to compete or as suppliers required to meet prices and timescales inconsistent with high operating standards. Furthermore, large corporations can more easily meet higher standards more quickly. Securing accountability of publicly traded companies must therefore seek to ensure private companies improve their operating behavior too. It also addresses the primacy of the legal duty to maximize shareholder returns which drives short term profiteering and the externalization of costs onto the wider community.

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1.8 The present context of corporate accountability

One major failing of the 1992 Earth Summit was the abandonment of the UN Center on TNCs and of the UN Code on TNCs. The resulting lack of an international framework has been recognized in the decade since despite efforts to build up voluntary mechanisms as alternatives to binding rules. A number of fora have made progress on specific aspects of corporate accountability and responsibility. However, these do not yet amount to a coherent response to widespread public and governmental concerns over those elements of globalization relating to corporations:

- The UNDP concluded in its Human Development Report 1999: "multinational corporations are too important and too dominant a part of the global economy for voluntary codes to be enough. Globally agreed principles and policies are needed for: human concerns - to ensure compliance with labor standards and human rights; economic efficiency - to ensure fair trade and competitive markets; environmental sustainability - to avoid degradation and pollution." The report also stated: "Multinational corporations are already a dominant part of the global economy - yet many of their actions go unrecorded and unaccounted. They must, however, go far beyond reporting just to their shareholders. They need to be brought within the frame of global governance, not just the patchwork of national laws, rules and regulations."

- Following the adoption of the International Labor Organization Declaration of Fundamental Principles and Rights at Work and its Follow-up in 1998, the ILO has devised the Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy as a framework for action by governments, workers, employers, and multinational enterprises to address the labor and social difficulties that may arise in the context of foreign direct investment and the activities of corporations. It is backed by the Multinational Enterprises Department, which can interpret the principles and conduct surveys.

- The UN Commission on Human Rights Sub-Commission on the Promotion and Protection of Human Rights is presently discussing Draft Fundamental Human Rights Principles for Business Enterprises, which outline obligations for corporations and legal accountability for human rights abuses. It has identified a raft of conventions and international instruments where corporations have obligations, but the principles are being devised because these obligations have hitherto not been set out systematically enough to amount to a legal framework for corporate accountability on human rights matters.

- The UN General Assembly special session to review progress since the 1995 Copenhagen World Summit for Social Development identified the need to support corporate social responsibility by setting a legal framework. In General Assembly resolution S-24/2 of 1 July 2000 it called for: "encouraging corporate social responsibility by fostering awareness about the relationship between social development and growth, by providing a legal, economic and social policy framework to promote corporate social responsibility."

- The 1999 Fancourt Commonwealth Declaration on Globalization and People-Centred Development also considered that the private sector must be accountable stating: "Recognizing that good governance and economic progress are directly linked, we affirm our commitment to the pursuit of greater transparency, accountability, the rule of law and the elimination of corruption, in all spheres of public life and in the private sector."

- The EU is presently devising a liability directive to clarify some elements of corporate and other liability. This, however, is a regional initiative that would have the potential to be more wide reaching if it were part of an international liability framework. UNEP and a number of governments have also raised the idea of a framework convention on liability.

- The Commission on Sustainable Development Sixth Session (22 December 1997 and 1 May 1998) Decision 6/2 on Industry and sustainable development stated that the foundation for sustainable development was good regulation: "The Commission emphasized that it was important for the achievement of sustainable development for Governments to develop and maintain an enabling policy framework based on a sound regulatory foundation complemented with a judicious mix of economic instruments, voluntary initiatives and agreements and public-private partnerships."

- FoEI believes that the WSSD must deliver on this "judicious mix" of measures by making progress through the establishment of a "regulatory foundation" in a framework convention on corporate accountability and liability or similarly robust mechanism. Drawing together initiatives such as the proposed liability convention with the Draft Fundamental Human Rights Principles for Business Enterprises would ensure coherence.

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2. Elements of a corporate accountability convention

2.1 Impose duties on publicly traded companies, their directors and board-level officers to:

- Report fully on their environmental and social impacts, on material risks and on breaches of environmental or social standards (such reports to be independently verified);

- Ensure effective prior consultation with affected communities, including the preparation of Environmental Impact Assessments (EIA) for significant activities and full public access to all relevant documentation; and

- Take the negative environmental and social impacts of their activities fully into account in their corporate decision making.

Duties on directors

Targeting directors ensures objectives can be delivered through existing mechanisms of corporate governance and there are directly responsible individuals to deliver them. In most regimes directors take their legal responsibilities seriously because they can be debarred from holding directorships if they breach them.

Focusing on those corporations traded on stock exchanges (e.g. UK Public Limited Companies (Plcs), German Aktiengesellschaft (AG) and French Societe Anonyme (SA)) is less ambitious than Governmental codes of conduct such as the UN Commission on Human Rights initiative, and the OECD Guidelines which capture all business entities (as "juridical persons"). While it may act as an disincentive for companies to issue shares, it nevertheless offers several advantages:

- It captures both the majority of impacts of public concern, and the majority of transnational companies. Although the regime we are proposing is not foreseen as imposing a heavy regulatory burden, it deliberately excludes unlisted small and medium sized enterprises which have impacts of public concern, but are of great significance to local economies and livelihoods in many countries, and have limited capacity to deal with regulatory requirements.

- The legal foundation of the publicly traded corporation model is the duty to maximize shareholder returns. It is this duty which drives the externalization of costs onto the environment and society.

- There are existing mechanisms established in law in many countries that could be adapted to implement these measures for public companies. Moreover, the benefits of publicly traded status are effectively a substantial subsidy from society to these corporations - for which society can legitimately expect some return.

Reporting

The aim here is to establish the principle of reporting issues that are of interest and concern to the public, rather than simply those of financial interest to shareholders. Reporting serves two basic purposes. It ensures a corporation's attention to the things that must be reported (for example how it is performing against standards). It also provides a mechanism for the public, including investors, to identify the corporation's impacts. Such information is fundamental for active investor and other stakeholder participation.

Reporting on risks is particularly important for investors as it ensures they have the same level of knowledge as the corporation does about its business. The definition of "material" in this case must include not only what are conventionally recognized as financial risks, but also risks of damage to environmental or social interests.

Corporate reporting and disclosure are presently subject to wide debate. The Global Reporting Initiative format may prove adequate in terms of coverage, but must also require verification - preferably by affected stakeholders through some form of independent assurance. Robust reporting helps ensure investors are supplied with the same information as executives and ensures markets are based on "real" values of corporations.

Prior consultation

Prior consultation is a leading demand from communities in Southern and East European countries. They have experienced the disruptive impact of inward investment and have had limited or no opportunity to participate in decision-making (on planning applications for example) in ways considered normal practice in many Northern countries. Similarly EIA is expected by some authorities (e.g. the EU) and public finance mechanisms (e.g. the World Bank) but is not a minimum requirement elsewhere. A useful precedent is the ILO Indigenous and Tribal Peoples Convention of 1989. Failure to undertake meaningful assessments and consultations should result in enforcement.

This demand requires a higher degree of disclosure, transparency and prior notice about corporate activities. It is equivalent, for example, to the requirement in some European countries for notification of workforces of changes planned by management. High standards for implementation will also be needed as the experience in developing countries is often of selective consultation and misleading use of data.

Taking account

At present directors of publicly traded corporations have a duty to account to shareholders and maximize financial returns. This new provision would require them also to account to other stakeholders such as communities, and to balance financial returns with the interests of these other affected stakeholders.
Corporations will argue that such a requirement would be confusing and impractical for directors. But directors are already subject to legal challenge from investors and customers in certain circumstances. They must also balance the short and longer-term interests of investors, for example in deciding how much profit to distribute as a dividend. This provision extends those circumstances to include a wider range of public interests. It deepens the concept of due diligence and applies it to all corporations, (including investors). It implies that due diligence incorporates social and environmental effects and assessment of whether governments have met relevant international standards or requirements.

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2.2 Extend legal liability to directors for corporate breaches of national environmental and social laws and to directors and corporations for breaches of international laws or agreements.

Directors' liability

Beyond new duties for directors outlined above, there are responsibilities relating to existing national environmental and social laws. Directors should be personally responsible for company compliance with applicable laws, including breaches thereof. Precedents include the Environmental Protection Act 1990 in the UK that holds directors liable for corporate pollution offences. Such liability must survive corporate mergers.

International agreements and laws

Extending directors and corporate liability to activities that breach international agreements is already under consideration as a Framework Convention on Liability. A number of governments have raised this issue as a priority in the course of regional preparatory meetings for the WSSD. This would ensure that many existing agreements on the environment and human rights, which currently apply, only to states could now be applied directly to corporations.

Ecological debt

Liability questions must also address compensation for ecosystem degradation and restoration.

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2.3 Guarantee legal rights of redress for citizens and communities adversely affected by corporate activities, including:

- Access for affected people anywhere in the world to pursue litigation where parent corporations claim a "home" are domiciled or listed;

- Provision for legal challenge to company decisions by those with an interest; and

- A legal aid mechanism to provide public funds to support such challenges.

Access to justice

Access to justice is essential for securing accountability. Our proposal ensures that individual citizens, communities and third parties, such as pressure groups representing environmental or social interests, can pursue cases in a company's "home" country courts where necessary.

Action where listed

Presently there are highly variable opportunities for stakeholders, even employees, to seek redress where ultimate ownership may be remote - a typical situation with most transnationals. Companies domiciled in the US may face actions under the US Alien Tort laws. The Brussels convention on jurisdiction, states that for EU-based parent companies the country of domicile is the place of jurisdiction. Yet few, if any, "foreign direct liability" actions have been brought. Cases are often defeated or discouraged by the problems of access to relevant and fair courts. The time cases take is a disincentive - for example, the Cape Asbestos case has taken several years to be heard, and in the meantime some of the workers made ill by exposure to asbestos have died.

There is also a strong case for states having legal responsibility for the actions of corporations domiciled or which have a home there - including for example, where they are listed. In situations where redress would otherwise not be available, such as after bankruptcy, citizens and communities would then still be able to pursue their case. A precedent is the assumption of state responsibility for outside pollution caused by anyone within its jurisdiction.

Challenge to decisions

If corporations and directors have new duties, rights are needed for those who have cause to challenge the decisions they have taken. This would give legal force to new duties and to corporate environmental and social reporting. Rights of legal challenge would need to prevent vexatious cases, while ensuring real concerns are not excluded by loopholes. Third party stakeholders might be expected to demonstrate an interest or show damage to be able to pursue a case.

Legal aid

Citizens in the developing World are daunted by the costs involved and most potential litigants by the risk of a corporation's costs being charged to them if a case is lost. Therefore a legal aid mechanism is necessary.

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2.4 Establish human and community rights of access to and control over the resources needed to enjoy a healthy and sustainable life, including rights:

- Over common property resources and global commons such as forests, water, fisheries, genetic resources and minerals for indigenous peoples and local communities;

- To prior consultation and veto over corporate projects, against displacement; and

- To compensation or reparation for resources expropriated by or for corporations.

FoEI has long advocated environmental rights and many governments have also raised the suggestion of launching a negotiation on an environmental rights convention at regional prepcoms for the WSSD. Control over resources is an elaboration of such rights. Useful precedents include the 1975 Land Rights Act in Australia which gives Aboriginal peoples right of veto over mining on their land. In practice, this has allowed them to set conditions relating to royalties, job provision and training. Also the 1997 Indigenous Peoples Rights Act in the Philippines which requires prior informed consent for corporate projects in ancestral lands and domains. The ILO Indigenous and Tribal Peoples Convention, 1989 (number 169) also requires respect for the rights of communities and local populations. Communities must be granted the right to apply the precautionary principle in exercising their rights and the burden of proof concerning the potential for harm must be placed clearly on the corporation involved.

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2.5 Establish (and enforce) high minimum environmental, social, labor and human rights standards for corporate activities - based for example on existing international agreements and reflecting the desirability of special and differential treatment for developing countries.

The focus of this proposed convention is on implementation mechanisms because of the imperative need to develop capacities - especially in poorer countries and communities - to ensure relevant standards of behavior are implemented and enforced. But international minimum standards for corporate performance are necessary. Principally such standards should be based in existing and developing multilateral environmental and social agreements (and others as necessary). It would be easy to get bogged down in the details of standards, but once effective implementation mechanisms are in place then the development of standards can follow.

The concept of "special and differential treatment" for developing countries is well established. It may be appropriate to apply such an approach to this provision giving developing countries longer to establish standards and access to financial support. Standards of behavior would also need to be more stringent, for example, in areas of high biodiversity value such as IUCN Category I to IV protected areas.

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2.6 Establish national legal provision for suitable sanctions for companies in breach of these new duties, rights and liabilities (wherever the breaches occur) such as:

- Suspending national stock exchange listing;

- Withholding access for such companies to public subsidies, guarantees or loans;
fines; and

- In extreme cases the withdrawal of limited liability status.

The threat of robust sanctions provides an incentive for corporations to respect greater accountability. They are necessary to protect affected people (including future generations) and non-human species. A set of appropriate legal sanctions is needed. Provisions exist for suspending stock market listings in some countries ? for example for breaches of reporting requirements. Such provisions need to be extended in scale to cover all countries, and in scope to cover environmental and social issues. The withdrawal of limited liability status is more or less the death sentence for a company. It should be seen as a final sanction for repeat offenders and possibly only available to the International courts.

Governments can control access to public support for corporations and therefore this also represents an opportunity for securing corporate accountability. The principle of screening corporations for eligibility for public support must be established. There are precedents: some countries are considering withholding export credit guarantee from companies in breach of the corruption convention or the OECD Guidelines for multinational enterprises. Also loans by international financial institutions such as the World Bank are already screened.

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2.7 Extend the jurisdiction of the international criminal court to try directors and corporations for environmental, social and human rights crimes.

The International Criminal Court would provide an independent forum for hearing cases, perhaps including a special tribunal for environmental abuses. Eligibility for hearing or referral to this court would need to be defined.

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2.8 Establish international controls over mergers and monopolistic behavior by corporations.

The growth of corporate scale has led to the consolidation of economic power and increasing political influence. At present countries are under pressure from corporations with national links or based there to relax anti-trust and merger controls to enhance competitiveness in global markets. This measure would need to reinforce national controls while providing a robust system to prevent the development of monopolies at any scale or over any market, national or international.

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2.9 Establish a continuing structure and process to monitor and review the implementation and effectiveness of the convention.

An effective institutional structure, rigorous implementation and enforcement and an effective monitoring system are essential for a convention such as this to work. Clearly all stakeholders would have to have opportunity to access the process, including NGOs. Continuous review would allow for updating content - for example with respect to performance standards. Effective outreach and education to increase the profile of the agreement with those who might make use of it would be essential not the least because this would increase its incentive effect on corporations.

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Further information

A History of Attempts to Control the Activities of Transnational Corporations, Discussion paper for "Toward A Progressive International Economy: A Working Conference" Washington, November 1998. http://www.foe.org/progressive-economy/backpap.html

Controlling Corporate Wrongs: The Liability of Multinational Corporations. Legal possibilities, initiatives and strategies for civil society. IRENE conference report, Warwick, March 2000. Available from peterpennartz@irene-network.nl

Making investment work for people: An international framework for regulating corporations. World Development Movement, Feb 1999. http://www.wdm.org.uk/cambriefs/Wto/TNCs.htm