[By John Gerard Ruggie. Part of the series “Global Challenges in 2030” (Goldstein & Pevehouse), January 2010.]
The international community is still in the early stages of adapting the human rights regime to provide more effective protection to individuals and communities against corporate-related human rights abuses—sweatshop conditions in factories supplying branded global firms; communities forcibly displaced for the benefit of oil and mining companies’ installations; food and beverage firms found with seven-year-old children toiling on their plantations; or collaboration with paramilitary forces accused of killing labor organizers.
Business is the major source of investment and job creation, and markets can be highly efficient means for allocating scarce resources. They constitute powerful forces capable of generating economic growth, reducing poverty, and increasing demand for the rule of law, thereby contributing to the realization of a broad spectrum of human rights. But markets work optimally only if they are embedded within rules, customs, and institutions. Indeed, history teaches us that markets pose the greatest risks—to society and business itself—when their scope and power far exceed the reach of the institutional underpinnings that allow them to function smoothly and ensure their political sustainability. This is such a time, and escalating charges of corporate-related human rights abuses are the canary in the coal mine signaling that all is not well.
The root cause of the business and human rights predicament today lies in the governance gaps— between the scope and impact of economic forces and actors, and the capacity of societies to manage their adverse consequences—created by globalization. These governance gaps provide the permissive conditions for wrongful acts by companies of all kinds without adequate sanctioning or reparation.
Thus, the legal rights of transnational corporations have been expanded significantly over the past generation. This has encouraged investment and trade flows, but it has also created instances of imbalances between firms and states that may be detrimental to human rights. The more than 3,000 bilateral investment treaties currently in effect are a case in point. While providing legitimate protection to foreign investors, these treaties also permit those investors to take host states to binding international arbitration, including for alleged financial damages resulting from the implementation of legislation to improve domestic, social, and environmental standards—even when the legislation applies uniformly to all businesses, foreign and domestic. A European mining company operating in South Africa recently challenged that country’s black economic empowerment laws on these grounds.
At the same time, the legal framework regulating transnational corporations operates much as it did long before the recent wave of globalization. A parent company and its subsidiaries continue to be construed as distinct legal entities. Therefore, the parent company is generally not liable for wrongs committed by a subsidiary, even where it is the sole shareholder, unless the subsidiary is under such close operational control by the parent that it can be seen as its mere agent. Furthermore, despite the transformative changes in the global economic landscape generated by offshore sourcing, purchasing goods and services even from sole suppliers remains an unrelated party transaction in which the buyer is not legally liable for acts conducted by the supplier. Factors such as these make it exceedingly difficult to hold the extended enterprise accountable for human rights harm.
Each legally distinct corporate entity is subject to the laws of the countries in which it is based and operates. Yet states, particularly some developing countries, may lack the institutional capacity to enforce national laws and regulations against transnational firms doing business in their territory even when the will is there, or they may feel constrained from doing so by having to
compete internationally for investment. Home states of transnational firms may be reluctant to regulate against overseas harm by these firms because the permissible scope of national regulation with extraterritorial effect remains poorly understood, or out of concern that those firms might lose investment opportunities or relocate their headquarters. To attract investments and promote exports, governments may exempt national firms from certain legal and regulatory requirements or fail to adopt such standards in the first place.
And what is the result? A study I have conducted surveyed allegations of the worst cases of corporaterelated human rights harm. They occurred, predictably, where governance challenges were greatest: disproportionately in low-income countries; in countries that often had just emerged from or still were in conflict; and in countries where the rule of law was weak and levels of corruption high.
How to narrow and ultimately bridge these global and national governance gaps in relation to human rights is a fundamental governance challenge for the 21st century.
JOHN GERARD RUGGIE is the Berthold Beitz Professor in Human Rights and International Affairs at Harvard’s Kennedy School of Government; Affiliated Professor in International Legal Studies, Harvard Law School; and Special Representative of the United Nations Secretary-General for Business and Human Rights.