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Article Review: Corporate Crime

7 Jul

ARTICLE REVIEW

by NG BOON SIONG


            Raymond J. Michalowski and Ronald C. Kramer, The Space between Laws: The Problem of Corporate Crime in a Transnational Context. California: University of California Press, 1987.


Introduction

This paper seeks to review the abovementioned article written by Michalowski and Kramer in 1987, with the focal point revolving around the conceptualisation of the transgressions committed by transnational corporations as corporate crime. The authors have settled to use the term ‘Transnational Corporations’ (TNCs) to describe the corporations that expand their business operations beyond their resident countries to other countries that have less stringent laws and with societies having lower economic bargaining power compared to their resident countries. The authors delved extensively on the concept of corporate crime in relation to TNCs – primarily on its definition, perception, operation & influences from the societal and legal standpoint.

The authors’ perspective on corporate crime by TNCs also sought to push the limit of the traditional framework of criminal law to the extent that the definition of crime could be further expanded beyond the common parameters of violations of criminal codes of a State, that is to criminalise the violations of civil or regulatory provisions, in order to effectively categorise the transgressions committed by corporations as crime proper. The authors were keen to shed some light on the relevance of exploring the definitional framework regarding the space between the laws of both the home and host nations which has caused both positive and negative impacts. They have segmented the article into five (5) headings with several subheadings. It is viewed that the discussions in this paper is aptly arranged in accordance to the breakdown sequence of the headings and subheadings as set by the authors in their article in order to better illustrate and appreciate the framework of the authors’ objective on the topic.

 TNCs and Relocation of Corporate Hazards

After the end of the Second World War, especially since the economic upsurge from 1960 onwards, the activities of corporations around the globe have evolved from having business operations locally to broadening their wings to other countries as well, hence making them international in status, suitably addressed as ‘transnational’ in this context. This economic boom has sparked more transgressions committed by the TNCs not only in their home nation, but also in the host nations, primarily the developing countries. This development has thus prompted the authors to undertake the observation on the issue at hand.

Generally, the authors discussed at length the trend undergone that witnessed the relocation of TNCs’ industrial operations from their home nations which are usually a developed country, such as the United States and United Kingdom, to less developed nations such as the Third World countries. Guided by the studies undertaken by various researchers as well as the United Nation in mid-1970s through the 1980s, the authors observed that in the United States alone, majority of its multimillion dollars companies – specifically those with over $100 million in sales chose to set up their operation in the developing countries. One of the obvious reasons for such relocation was due to the lower capital and operating costs as well as less stringent compliance provisions and laws compared to those in their home nations. This has caused a prominent shift of not only the manufacturing activities from the developed countries to the developing ones, but also the baggage of the industrial hazards usually resulted from the injurious corporate activities engaged by the TNCs.

The authors also stressed that the TNCs have adopted a much more relaxed attitude in observing the legal standards and provisions of the host nations, unlike when they are operating in their home nations since the laws in the host nations, especially the developing countries have less-developed regulatory provisions. The relocation of both the manufacturing activities as well as the industrial violations and production hazards brought by the TNCs has induced great sufferings to the developing nations mainly because these nations have limited or adolescent awareness and legal control on relevant issues such as the environment, employment/labour rights as well as consumer protection. The authors have further narrowed down the industrial hazards exported to the less developed countries to three (3) undeniably noteworthy issues whilst being the host nations to the TNCs, they are the i) Working Condition, (ii) Environmental Pollution and (iii) Consumer Safety, all three being inter-related to one another.

(i)      Working Condition

It has been discussed by the authors that one of the striking problems of the industrial hazards exported to the developing countries that begs our attention is the condition of the workplace provided by the TNCs in the host nation. Although the workers may be working for the same company, the working atmosphere of the manufacturing facilities both in the home nation and the host nation are contrasting. The TNCs are more sensitive and obedient in ensuring the regulatory provisions on working condition of their employees in the resident country are complied with. However, they take a rather laissez-faire attitude in providing a reasonable working condition for their employees in the host nation simply because the labour-related provisions in the host nations, being a third world country, are not always as demanding or strict as the ones in the home nation.

However, this issue may not be as cut and dry ‘criminal’ as the authors implied it to be. It is felt that the TNCs should not be bombarded with criticisms merely because the working conditions in their manufacturing facilities may not match up to those in the home nation. This situation must be analysed objectively with other factors as well, such as the fact that the conditions of the workplace of both TNCs as well as the local companies may not be that much different after all. Furthermore, the workers of the TNCs are reasonably compensated with a much higher wages, at least twice as much, such as in Vietnam, compared to their fellow friends working in the local based companies in equally criticised working conditions[1].

(ii)      Environment Pollution

Many high-pollution industries prefer to have their manufacturing facilities in countries that have lower environmental standard and lower pollution control cost. This has caused the emergence of a new phenomenon that is the pollution export. The TNCs seem rather reckless in complying with the environmental standards in the host countries, unlike when they are in their resident countries which have stricter regulations. The authors highlighted that this attitude has resulted that the hazardous wastes produced in the developed countries were being exported to less developed countries. Pepsi, Nestle and Panasonic were among other giant TNCs, who have been found guilty of violating the water pollution control in China[2]. In Malaysia, one of many examples of hazard exports caused by TNCs was the case of Woon Tan Kan & 7 Ors v. Asian Rare Earth (1992) where the residents in Bukit Merah, Ipoh who were threatened by the dangers of radioactive wastes produced and stored by a Japanese-owned factory located nearby. Only after persistent efforts by the residents, a court injunction was granted to stop the hazardous operation.[3] The environmental pollution at hand is further aggravated by the inaptitude of the environmental authorities in the host nations in supervising the TNCs. Consequently, it has only caused more damages to the already alarming scenario.

However, the authors may have missed out in clarifying why should the TNCs be doing more than what they are expected to comply with when the host nations themselves do not even have strict regulations on environmental protection to embark on. Even when the TNCs are complying with the lax regulations of the host nations, some argued that it would still seem to be insufficient as the TNCs, having more financial stability and stronger economic leverage, ought to be expected to go an extra mile in ensuring that their profit-driven operation do not harm the society and the environment and at the same time to be the exemplary model for all the smaller enterprises to look up to in achieving sustainable development[4].

(iii)     Consumer Safety

The authors have associated TNCs with unsafe products exported to the consumers such as the sale of non-prescription drugs, which would have been illegal in the US due to its dangerous content but sold to a significant market elsewhere. Other examples were dangerous chemically-treated products, shoddily made mechanical objects, inadequate information on the use of products that may lead to injuries or even fatalities were some of many examples that can be related to insensitive profit-crazed TNCs who put the safety of the consumer as last in their priority list.

Concerns over consumer safety is one issue, but what is more alarming is the prosecution against these TNCs as the culprits of these injurious corporate actions has created another dilemma. More often than not, these violations do not fall under the category of crime in the host nations, again, due to the lax regulations on product safety. This was aggravated by the consistent efforts by the TNCs to find markets elsewhere, for the sale of products prohibited in their home nations. As such, it is understandable that some researchers are keen advocates for a higher level of supervision and control mechanism, to which these TNCs should succumbed to, that acts both as an umbrella to cover the no man’s land i.e. the space between laws, with guidelines and compliances as well as the referee to penalise any foul play amongst the corporate players. The authors have made a good attempt tapping on this issue under the subheading: U.N Code as International Politics, in the later part of the article.

TNCs and Regulatory Climates

Direct and Indirect Influence

The authors suggested that the TNCs have to a certain extent, direct and indirect influences on the host countries relating to regulatory denominator. Various strategies and incentives have been lined up by the developing nations who are competing with each other to attract foreign investments into their country such as the offering of lax regulations on environmental standards, limited labour rights, lower costs on labour and pollution control, imposition of lower tax and many more. The authors even suggested that there may be a double standard approach taken by the host nations at the expense of the workers, environment and consumers.

The notion raised by the authors is also supported by an article by UNESCO stating that the Asia-Pacific countries have been noted to have lower environment standard to attract foreign investment such as Indonesia and Philippines who have compromised their environment for the sake of attracting foreign investment in the mining industry[5]. It is quite understandable for the authors to note that the people’s rights as workers were put on the sideline by the host government to accommodate the TNCs as companies have been known to dissuade from investment in countries whose government could not control its people. It is also agreeable for the authors to suggest that too much repression by the host government would trigger unrest among its people, which would then result to wise TNCs pulling out from the investment.

The authors emphasised on the gap between the wages earned by the workers in the home nation and those in the host nation, the former earning much higher than the latter for the same job. This issue raises the question whether TNCs are inclined to degrade labour conditions. This point, as discussed earlier, may not always be such an unfair treatment as the workers of multinational companies operating in the host nations are usually earning at least twice as much as the workers in the local enterprises. The authors also mentioned that the TNCs have also been known to pressure the host nations to mould its regulations in favour of the TNCs to operate their manufacturing facilities with less hassles than in their home nations.  Using the economic bargaining power and strong leverage as TNCs, they have been known to use threats against the host nations with disinvestment. A United Kingdom-based firm known as P&O operating in India was reported to have pressured the Indian government to declassify the protected land of Dahanu so that their land can be used for the construction of an international port, thus adversely affecting the livelihood of the Dahanu residents who were mostly fishermen[6].

The authors have quoted an example which took place in Malaysia whereby the United States-based electronic firms have threatened the Malaysian government that they would withdraw their investment in Malaysia should the government proceeded with their plan to allow unionization of the workers in electronic field, as this would create much complications for the TNCs to deal with the demands for better labour rights such as wages, working hours, policies on recruitment and retrenchment. Since the developing nations were dependent on foreign investments to enhance their economy, the TNCs have also exploited the situation to their advantage to influence the political movement of the host nations while favouring the friendliest ones and most accommodating to their investment aside from thwarting those which are hostile and jeopardising their interest.

The U.N. Code as International Politics

The authors moved on to raise the concern that international politics have become a vital mechanism to govern the market operation of transnational businesses amongst all the corporate stakeholders. The authors observed that the “Draft Codes of Conduct on Transnational Corporations and the Guidelines for Consumer Protection” under the auspice of the United Nation (“U.N. Code”) has transformed the cross-border businesses into international politics. Unfortunately for the authors, they may have overlooked the fact that the U.N. Code has remained in its draft form and thus, it is hard to foresee that the code itself would have any political teeth or claws to regulate the conduct of the TNCs. To regulate the conduct of TNCs, it is viewed that the U.N. Code has failed to encourage TNCs in developing countries to pursue their own policies that are shaped based on the local conditions and culture in order to produce greater economic success in accordance with the international standards.

With regards to the formulation of the U.N. Code, the authors described the roles of various entities and organisations in the process of designing the code. Basically, the authors discussed the issues in the definitional process of corporate crime from the standpoints of the developing countries, developed countries and the TNCs themselves. For instance, the trade unions in developing countries favoured more public control in the world economy whilst the developed countries are more concerned with the conservative approach of providing more flexible room for the governance of corporate conduct in the realm of international businesses. On the other hand, the TNCs, especially the International Chamber of Commerce has questioned the essential principles that go into the roots of the U.N. Code since they emphasised more on the market force over the international politics in shaping such international code of conduct.

It is doubtful as to whether the political definition of corporate crime contained in the U.N. Code serves any significant impact upon the legislations governing the corporate conduct in developing nations as envisaged by the authors. Pilon (1987) opined that the U.N. Code was “designed to force Western companies to operate according to the New International Economic Order for mandatory resource transfers from the West to the developing world”[7]. Furthermore, it seems that no unanimous understanding on the U.N. Code was reached during the consultations convened at the United Nations General Assembly in 1992 due to the reasons that the changing “international economic environment and the importance attached to encouraging foreign investment requires that a fresh approach should be examined”.[8]

 The Search for Alternative Frameworks

That said, the authors recognised the fact that there were attempts by criminological researchers to reach alternative definitions of crime with the aim to create a proper regime for the research on the corporate misconducts of TNCs. This effort has eventually culminated in the notions of “human rights” as an alternative definition of crime. The author further observed that it has been a norm for the criminological researchers to distinguish the behavioural standards from the intervention of law. Baucus and Dworkin (2008) argued that “corporate crime” should not be confused with the words “illegal corporate behaviour” which denotes a different phenomenon in the context of corporate misconduct.[9] This contention strikes a perfect consonance with the arguments of Shapiro cited by the authors that it is inappropriate to conduct the studies on corporate crime based on considerations other than the element of illegality as far as the definition of corporate crime is concerned. Although the authors somehow agreed with the contention that law may cover moral choice in defining corporate transgression, they questioned the need to opt for one specific framework rather than the other framework in defining the appropriate boundaries of study on corporate crime.

Be that as it may, the argument that law should be utilised as a means to control corporate behaviours since it relates to the “moral agenda” of transnational corporations has thus invited vast criticisms against its practicality and application due to the gaps between the international law and the national law in governing corporate crime. As Stone (1975) augured well that:

Those who trust to the law to bind corporations have failed to take into account a whole host of reasons why the threat of legal sanction is apt to lack the desired effects when corporate behaviour is its target – for example, limited liability, the lack of congruence between the incentives of top executives and the incentives of “the corporation,” the organisation’s proclivity to buffer itself against external, especially legal threats, and so on.[10]

Conclusion

In a nutshell, it is noted that the issue of substantial gap between the laws of the home and host States pertaining to the examination of corporate crime has been persistently thorny in the field of criminological research. In this regards, the authors have also observed that there are different approaches adopted by researchers in the studies of the definitional crime of TNCs. However, to date, there is still no one conclusive definition and satisfactory evidence that may lead to the setting up of an appropriate framework for the purpose of criminological analysis. Nevertheless, it is opined that there is some relevance to the issue at hand which cannot be ignored, that the violation of corporate responsibility should no longer be seen as mere violation of moral responsibility since there are damages and harm done not to oneself but to other entities such as the society and the environment. As such, it is vital for research efforts to march on cogently in high spirit beyond the boundaries of conventional criminal law in order to experiment and explore the aforesaid subject with an open mindset since at the rate the world is evolving, both economically and environmentally, we cannot afford to go on being unintelligent and oblivious, as the damages done, will soon take its toll on all of us.


[1] Flanagan, R. J. (2006). Globalization and labour conditions: Working conditions and workers rights in global economy. United Kingdom: Oxford University press.

[2] French, P. (2006). Pollution in China – Big foreign knuckles rapped. Retrieved from http://www.ethicalcorp.com/content.asp?ContentID=4748

[3] Woon Tan Kan & 7 Ors v. Asian Rare Earth, 4 CLJ 2299 (1992).

[4] Jianqiang, L. (2006). Multinational corporations violating China’s environmental laws and regulations. Retrieved from http://www.worldwatch.org

[5]  Jones, T. & McNally, R. (1998). Pollution for Export? Retrieved from http://www.unesco.org/courier/1998_12/uk/planete/txt1.htm

[6] Jones, T. & McNally, R. (1998). Pollution for Export? Retrieved from http://www.unesco.org/courier/1998_12/uk/planete/txt1.htm

[7] Pilon, J. G. (1987). The centre on transnational corporations: How the U.K. injures poor nations. Retrieved from http://www.heritage.org/research/internationalorganizations/bg608.cfm

[8] United Nations. General Assembly, 46th Session. (15 September 1992). Report by the President of the forty-sixth session of the General Assembly [United Nations document, A/47/446]. Available: http://unctc.unctad.org/aspx/index.aspx [Accessed on 9 September 2009].

[9] Baucus, M.S & Dworkin, T.M. (2008). What is corporate crime? It is not illegal corporate behaviour. Law & Policy, 13 (3), 231–244.

[10] Stone, C.D. (1975). Where the law ends. New York: Harper and Row.

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Comments: “Still a long way to go in substance over form?” (Part I)

27 Jan

Recently, the Business Times Online has published an article “Still a long way to go in substance over form?” which reported the excerpts from the discussion amongst the prominent market players and regulators at the Securities Commission-Business Times Roundtable on Corporate Governance.  The discussion quickly captured my serious attention as it has drawn me closer to the thorny issues on corporate governance in Malaysia.  I could not agree more but to add that most of the directors of public-listed companies (PLCs) in Malaysia have tried their level best to adhere to the “comply or explain” rule on corporate governance. However, such conformance to the corporate governance statement which is required under the Bursa’s Listing Requirements is of no useful purpose if the form is emphasized over the implementation of the substance.

Although efforts of the regulatory authorities in providing a “Corporate Governance Guide”  and Malaysian Code on Corporate Governance to the directors are commendable, it is believed that most directors still have some long distance to travel before even reaching the desired full implementation of the corporate governance best practices. I do not wish to undermine the mental capabilities or professional skills that a director has, rather I would like to point out the importance for the proper establishment of corporate governance mechanisms in order to effectively carry out the best practices adopted. It remains a daunting task as the directors may have no or little time to meticulously craft out a comprehensive corporate governance mechanism or system due to their onerous responsibilities in managing and overseeing the operations and business activities of a corporation.

Most often than not, the duty to comprehend and comply is left with the company secretaries, compliance officers or legal executives who may have no power or authority to implement the corporate governance practices even if they wish to do so. Hence, the Corporate Governance Guide or the Malaysian Code on Corporate Governance would at most serve as letters carved on the stone unless the directors have the initiatives to transform the letters into real corporate actions for the best interest of the company.

To illustrate such box-ticking approach, the Malaysian Alliance of Corporate Directors’ deputy president Paul W. Chan. rightly raised the concern that:

“I sit on some of the boards as well, and when it comes to application, the board is usually advised by the company secretary on corporate governance issues. The company secretary will photocopy the guide and say this is what you should be doing. This are of course some guidelines, but I think the board may not be so sophisticated to device a mechanism of how to apply the guidelines.”


Does The Peacock Deserve Better Recognition Than The Satyam?

1 Feb
satyam scandal

Satyam Scandal in India

A recent post by the Livemint mentioned that Satyam Computer Services will be stripped off the Golden Peacock Award. It was stated that the said Award was the very laurel it used for trumpeting its corporate governance norms when the controversy broke out.

The question that springs into our minds is the effectiveness of corporate governance. Why has Satyam been awarded such a prestigious award of good corporate governance when the dark side of the Satyam corporate practice remained hidden at the time of the bestow of such award?

This begs further serious doubts upon the sanctity of the Golden Peacock Award. After the fall of Satyam, one starts to wonder what are the best corporate governance yardstick employed by the World Council for Corporate Governance before deciding the recipient of such award.

Perhaps, it is merely a matter of trust confided upon Satyam to prove that it did deserve the Peacock Award. However, it was sad to say that Satyam has clearly gone beyond a matter of trust. As quoted from the Times of India:

“What do the two hot topics in business the global economic crisis and the Satyam swindle have in common? At the bottom of both are failures of business institutions leading to an erosion of trust in the economy. The collapse of Lehman Brothers in the US, and weaknesses in AIG, Fannie Mae, Citibank, GM, and many other large firms, have created panic extending beyond the US.

Similarly, the shenanigans of Satyam’s promoters have created widespread reverberations in India and abroad. It is not just the governance of these firms, but also the institutions set up to ensure the integrity of the corporate system auditors, credit rating agencies, etc, many of which are also business institutions which have failed in their duties to society. Recent polls show a dramatic erosion of faith in business. Three out of four Americans trust business less than they did one year ago.

At the World Economic Forum in Davos this year, economists from the IMF and global think tanks painted a dismal picture of the world economy. They described a global economic edifice shaken by an unexpected earthquake with its epicentre in the US subprime loan market. There is no safe haven in it they said and warned of further after-shocks, in Europe, the US, and Asia, for which India too must be prepared. The immediate solutions offered for central banks to release more money and for governments to spend more money seem inadequate. Whereas what the global economy needs is a new architecture to prevent such catastrophes and to restore trust in free-market capitalism.

Business leaders, who until 2008 had urged governments to stay out of business, are now urging governments to vigorously save businesses. They want governments to intervene in the markets but at the same time to keep markets free. This raises questions in the public’s mind about what they want markets to be free from. Freedom only from barriers to trade? Or also freedom from government regulations? Or even freedom from responsibility for their actions?

The freedom to succeed and to fail is the essence of the system of free enterprise. However, with these economic freedoms, entrepreneurs and managers cannot be given freedom from responsibility towards others. When top executives in Enron and WorldCom found ways to beat the systems then in place, Sarbanes-Oxley followed. Corporations doing business in the US complained that it was an overreaction to isolated deviant acts for which everyone was being inconvenienced. Satyam is turning out to be a case of criminal fraud, which overwhelmed systems of corporate governance. Businessmen fear that the reaction to the corporate failures in the US and Satyam in India will be more controls which could stifle business freedoms. Therefore, the architectural challenge is to shape institutions and systems of corporate governance that give business managers freedom to innovate with safeguards to ensure that they also fulfil society’s requirements.

If one used the metaphor of a house, trust in institutions is the solid roof that we all need above us. It gives us security to live without fear of bad things falling upon us. Structures are necessary to uphold this roof. When the roof begins to cave in, architects may propose more vertical pillars to support it. Thus, when problems of malfeasance appear in economies and societies, there is demand for more rules and more agencies that will regulate and control. The multiplication of such structures reduces the room to move around within the house, thus reducing the freedom of enterprises. Therefore, the architect must conceive of other ways to strengthen the structure that do no require this plethora of top-down controls. These could be well-placed horizontal beams, which strengthen the integrity of the structure while giving space within it.

These horizontal structures are the values by which people relate to each other and business conducts itself. Economists say that incentives must be aligned to induce people to behave properly. Economists tend to think of incentives in terms of improvement of measurable financial outcomes for individuals and investors. Therefore, they emphasise the creation of financial wealth, and measure ‘value’ in financial terms. And when societies are in trouble, economists will concentrate on improving the flow of money and investments. Whereas the present crisis of confidence in the free-market system requires that leaders also focus on moral and ethical values.

Like Arjun on the battlefield at Kurukshetra who asked Krishna a moral question, not advice on how to fight the battle, business leaders fighting the recession must also ask what they must change in their approach to business to regain society’s trust if they want more freedom in future. Therefore, corporate boards should introspect from time to time about the values that guide their decisions. Independent directors on boards are not expected to merely provide functional expertise, in finance, law, business management, etc or knowledge of the industry. These directors must also be a moral check, built into the system of corporate governance, to sense when promoters and managers are failing in their responsibilities to society and to correct them. How many independent directors are prepared to fulfil this role? And how often does the board candidly introspect into the values guiding its work?”

Hence, I strongly urge that companies must strictly adhere to the international best practices in corporate governance and disclosure standards since these benefits the companies. Transparency and good corporate governance practices provide additional comfort to stakeholders and enhance the long-term value of the company for its shareholders. It fosters and maintains investor and stakeholder confidence.

The companies’ annual reports should talk about their risk management policies, which include the institutionalization of an enterprise-wide risk management system, as well as the creation of on oversight board committee on risk management. Their annual reports should also feature the attendance of directors in board meetings, corporate governance scorecard, and code of conduct and ethics, among other things. This can also be ensured via the independence of board directors besides meeting the expectations of shareholders.