Bring big business
to account

Martin Khor calls on WSSD to rectify the Rio Earth Summit’s failure to place binding obligations on transnational companies

The behaviour of big companies, and the need to make them more accountable, has captured public attention and interest like no other issue in recent discussions on sustainable development. Many citizen groups have made corporate accountability their prime concern in the process leading to the World Summit on Sustainable Development (WSSD). They want the Summit to establish a global system to regulate the practices of corporations – to prevent them further damaging the environment; from manipulating currencies, profits and markets; and from violating the human rights of their workers or local communities.

Dubious practice
In the past few months, the issue has sprung into the forefront of public consciousness through the revelations, one after another, of fraudulent or misleading accounting practices in big-name companies. It is now clear that several companies had been ‘dressing up’ their bottom lines to show healthy profits when they were in fact making losses. When the true situation was exposed, confidence plunged both in these companies and in the stock markets generally. Investors doubt the accuracy of the corporations’ accounts, undermining the basis of investing in stocks. Thousands, even millions, of workers and investors lost much of their life savings as the value of stocks fell. Overnight, the stature of many corporate chief executives descended to record low levels. Once lauded as icons and role models, they are now seen as grossly overpaid, manipulative and even plain crooked.

This has very significant implications for sustainable development. Maximizing short-term profits had been the most important corporate operating principle in many developed countries. Companies’ announcements caused their stock price to rise or fall dramatically and, to avoid being taken over, they had to show high profits. But the rise of ‘shareholder capitalism’, and its obsession with short-term performance judged by profitability, has led the entire market system to the brink of worldwide economic slowdown. Some analysts even predict financial meltdown.

The recent financial scandals are only one facet of the crisis in corporate accountability. The dominant trend of deregulation and liberalization has increasingly allowed companies to do much as they like, as already inadequate controls over them are lifted. Perhaps the 1992 Rio Summit’s biggest error was its decision not to create a mechanism to regulate corporations. Even then, non-governmental organizations (NGOs) like Third World Network and Greenpeace had identified the leading role of transnational companies (TNCs) in damaging the environment, pointing out that:

  • Their activities generate more than half the greenhouse gases emitted by industrial sectors with the greatest impact on global warming.

  • They dominate trade in – and often also the extraction of – natural resources and commodities, thus affecting forests, soils, water and marine resources. They dominate mining, for example, and control about four fifths of the land cultivated worldwide for export crops.

  • They similarly dominate global and national industry and transport, and their activities result in pollution, industrial and occupational hazards, toxic wastes and unsafe products.

  • They are major transmitters of environmentally unsound production systems and hazardous materials to the South – including unsafe pesticides, polluting industries and hazardous wastes. They also promote unsustainable consumption patterns in both North and South.

The Earth Summit, however, decided that these companies could be trusted to change themselves and failed to place obligations on them to behave in an environmentally or socially responsible way. Since then, the trend of handling TNCs with kid gloves has accelerated. They are seen by the United Nations Secretariat not as powerful forces that need to be brought under control, but as responsible partners who would actually lead the world to sustainability. The UN now treats companies a s part of ‘civil society’, as partners in a ‘Global Compact’ with the UN itself, and as a vital component in the so-called Type Two Partnerships that are supposed to be a major part of WSSD. These increasingly close links are bound to bring embarrassment to the UN if, for example, many of these ‘partners’ turn out to have engaged in fraudulent accounting and other unethical practices.

The record of the last ten years has confirmed that sustainable development loses when governments give up their task of regulating companies. The accounting scandals have again exploded the myth that voluntary action or self-regulation by industry will take care of corporate responsibility. Case studies of the performance of many TNCs show that there has been little change – despite public relations claims of greater corporate responsibility, and more voluntary industry codes of conduct – as they continue with environmentally harmful activities. Environmental concerns have fallen down many notches on national and international agendas as globalization has placed each country and company under intense pressure to compete.

Urgent task
WSSD thus has the urgent task of placing the regulation of corporations back onto the international agenda. It is impossible to expect self-regulation by companies in the present highly competitive economic circumstances. Public regulation is needed, through setting industry-wide standards backed up by law and effective enforcement.

Individual governments, however, cannot be expected to control TNCs on their own. Faced with the fierce competition between countries, governments will be reluctant to legislate standards higher than those of their competitors. Besides, TNCs are now so huge in terms of assets, turnover, employment and investment that they dwarf many countries. Most governments, by themselves, are unable even to begin adequately to monitor – let alone regulate or control – the TNCs operating within their territories, due to lack of information, absent or inadequate corporate disclosure, and their sheer lack of clout or influence in the face of immense TNC power.
Sustainable development loses when governments give up their task of regulating companies
Thus monitoring and regulation of TNCs is at least as important at the international or multilateral level as at that of individual governments. Without it, there would be no adequate or effective means to monitor and check the environmentally harmful activities of the world’s major economic agents – and there would be no movement towards effective solutions to the global environment and development crises.

WSSD should thus begin a process towards a binding framework on corporate accountability. This should contain provisions for public regulation and monitoring such matters as public disclosure of information, health and safety, environmental effects, and social and developmental implications. It should set up activities to monitor, to analyse, to develop criteria and principles for ethical and environmentally sound behaviour, and to regulate the activities of TNCs. Among the areas to be covered are: environmental, health and safety aspects; social and developmental aspects; and restrictive trade and business practices that deprive states and the public from gaining their full benefits. TNCs should also be made liable for compensation for the harmful effects of their operations on the environment, safety and health.

The WSSD and post-WSSD process should reaffirm the principle that states have the right to regulate the entry, establishment and operations of TNCs – and that TNCs have the duty to respect national sovereignty, to respect the public’s health and environmental rights, and to refrain from financial, pricing or technological activities that cause socioeconomic difficulties to the host countries. These principles were contained in the draft Code of Conduct on TNCs that unfortunately was abandoned in the early 1990s.

WSSD should send a clear message – that the rights and freedoms of TNCs and other businesses must take second place to the rights of the public and states to subject them to regulations, laws and guidelines that can reduce the environmental and development problems threatening to engulf both Earth and humanity 

Martin Khor is the Director of Third World Network.


This issue:
Contents | Editorial K. Toepfer | Agenda of hope | Changing the paradigm | Only one Earth | Beyond brackets | African renaissance | Unmissable opportunity | At a glance: GEO-3 | Asking the people | Recapturing momentum | Taking the measure of unsustainability | Breaking the grid lock | Training for transformation | Bring big business to account | Out of the changing room | ‘Dear delegates...’ | We need a dream | Two sides of the same coin: before and after Johannesburg| Quality environmental data for all

Complementary articles in other issues:
Issue on Transport and Communications, 2001
Issue on
Disasters, 2000
Issue on Energy, 2001

AAAS Atlas of Population and Environment:
Population and Land Use

AAAS Atlas of Population and Environment:
Population and natural resources