Research Findings

Is A Global Framework for Regulating Transnational Corporations Possible?

November 19, 2020

Should governments mandate corporate social responsibility worldwide so that businesses can be held legally accountable for their social and environmental commitments? International organizations seriously considered this question in the 1970s but the proposal for a global framework to regulate transnational corporations collapsed in spectacular fashion, only to be resurrected in the 1990s in a much different form.

Corporate social responsibility (CSR) – the notion that businesses should address their social and environmental impacts – is largely a voluntary affair today, where businesses have much discretion to decide if and how they want to practice CSR.

In a recent historical study, I show how the relative power of state and private actors within global institutions determines the fate of regulatory frameworks.

Historical United Nations (UN) documents and personal practitioner accounts reveal that, in the 1970s, a group of Latin American governments began organizing within the UN to propose a New International Economic Order. This was a broad-based movement within the UN Conference on Trade and Development (UNCTAD) to reorient economic globalization to benefit developing countries.

The main part of this proposal was to have a global framework to regulate transnational corporations, such that those corporations would be barred from interfering with domestic politics, and that the profits from foreign investment would also go towards developmental purposes.

Developed countries in the UN, led by the United States, however, opposed these efforts by blocking attempts to enact a legally-binding code of conduct for transnational corporations. This group of developed countries viewed the global legal regulation of transnational corporations to be antithetical to free market policies that they believed were more fundamental to development.

Over two decades of wrangling, their representatives stalled the various negotiations in UNCTAD and finally dismantled any agencies within the UN, such as committees and research centers, that were established to study the regulation of transnational corporations.

Developed countries viewed the New International Economic Order as akin to a “socialist takeover” of the UN and sought to protect the interests of First World corporations, whose access to the developing world would be restricted by a global legal framework. By the 1980s, more developing countries, such as the East Asian economies, became more receptive to foreign investment, and the developing bloc in the UN lost much solidarity in their efforts.

Why were the developing countries’ efforts unsuccessful? A major reason is that the UN was very much a state-centered international organization, where major powers could dominate agendas, even as there was considerable latitude for developing countries to push forward issues such as regulating powerful corporations.

Despite the failure of the New International Economic Order proposal, the issue of the impact of economic globalization was resurrected again in the 1990s, this time not by developing countries, but by the leadership of the UN itself.

In 1999, then-Secretary-General Kofi Annan, backed by the UN Secretariat proposed a Global Compact framework, which was a UN-sponsored framework where corporations could commit to uphold human rights, labor, and environmental principles. The Global Compact was crafted as a voluntary framework and a learning platform for corporations around the world and has become the most popular global CSR framework in the world today.

The Global Compact framework was seminal in several respects. It was a UN initiative that involved private actors, rather than state actors. The framework also signaled the growing autonomy of the UN (and its leadership and agencies) and the growing influence of nongovernmental organizations within the UN. It reflected the now-established trend where organizations of different sorts would work collaboratively (but flexibly and voluntarily) to solve global issues, rather than just rely on the actions of governments.

According to the crafters of the framework, the Global Compact was an experiment in learning among the different corporate, governmental, and nongovernmental actors involved in the UN system. Its collaborative but voluntary character was designed to explicitly bypass the acrimonious debates between governments in the 1970s.

Ironically, the issue of regulating transnational corporations had returned to the UN in the new millennium, not with the direct participation of governments but with non-state actors like the UN, corporations, and nongovernmental organizations. Unlike the New International Economic Order, the Global Compact was more successfully instituted because the UN was now a system in which non-state actors opened up different avenues of ideas and action.

The Global Compact remains a global CSR milestone today and its influence is felt in the many local networks it has in over 100 countries. Its voluntary nature and lack of legal enforcement are still points of contention among critics, although its success reflects the trend in global regulation where frameworks are a mix of hard and soft regulation and collaborations between state and non-state actors.

Is a global framework for regulating transnational corporations possible? A legally-binding global framework is unlikely not only because of the diversity of CSR applications but also because the global institutions in which such frameworks are constructed are increasingly domains of flexible collaboration rather than top-down, centrally-administered solutions.

The UN Global Compact and other global CSR frameworks that are voluntary are likely to be the more influential platforms moving forward and CSR regulation remains diverse across countries, industries, and even within corporations themselves.

Read more

Alwyn Lim. “Global Fields, Institutional Emergence, and the Regulation of Transnational Corporations” in Social Forces 2020.

Image: Gerd Altmann via Pixabay (CC BY 2.0)

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