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Soft Law

Published on 18 December 2021

SOFT LAW by Gerry van der Linden

18 December 2021

Should companies treat their employees fairly? Should they avoid damaging the environment? Should they refrain from paying bribes? The simple answer to questions like this is: companies should not break the law, and if they do, they should be prosecuted.

But is the law the only constraint on corporate behavior? Should companies refuse to buy from suppliers that employ children or heavily pollute the environment? Almost everyone will feel that they should. But companies are currently in most cases not legally obliged to do so and are not legally liable for the behavior of any part of their supply chain.

The last decades have seen a big shift in the thinking about these matters. For a long time, the view of the Nobel-prize winning economist Milton Friedman held sway: the “one and only social responsibility of business” is to make “as much money as possible,” A major trigger in the changing views was the 2008 financial crisis. As a result of the irresponsible behavior of financial companies with their unbridled greed, the world paid a heavy price in terms of income and jobs lost. A growing sense is taking root that corporations have broader social responsibilities not only towards their shareholders, but also their employees, other ‘stakeholders’ and society at large.

An interesting example occurred this year in Holland when a court ruled that Shell was obliged to adhere to the Climate Treaty of Paris which requires that greenhouse gas emissions should be reduced by 42% in 2030. Shell understandably argued that this was a treaty among nations that did not apply to corporations or individuals, but the judge ruled otherwise; Shell has appealed. An important document in this court case were the UN Guiding Principles on Business and Human Rights of 2011. These state that corporations have a responsibility to respect human rights. It was argued that these include the human rights of future generations which would be violated by the behavior of oil companies.

The Oslo Principles on Climate Change Obligations, the OECS Guidelines for Multinationals are other examples of attempts to influence corporate behavior . The term ‘soft law’ has been coined for these kinds of agreements. ‘Soft’ because they are not part of a country’s law and corporations can usually not be legally obliged to follow them. This makes the Shell case particularly interesting as the judge ruled that companies can be obliged to follow them. From time-to-time parts of soft law make the transition to ‘hard law’ for instance a Dutch law that requires companies to check companies whether child labor is being used by any part of their supply chain.

There is a growing momentum in support of demanding more responsible behavior from companies. It often starts with public exposure of some perceived wrong that leads companies to change their behavior because of reputational risks. This ‘public shaming’ combined with the growing body of soft law and isolated examples of soft law getting incorporated into hard law, give hope that tangible results in terms of better corporate behavior will come out of this. The legislation (parliaments, etc.) have an important role in updating laws, but so have the courts in applying existing laws as they interpret social concerns. The Dutch lawyer in the Shell case has shown the way!

 

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Gerry van der Linden is a former Vice President of ADB and is now active in microcredit and governance NGOs in the Philippines

 

 

Comments from Readers

Indeed, there have been changes in the perception of the general public regarding the moral, if not the legal, responsibilities of corporations towards their communities. Societal values, especially in the West, are shifting and unethical companies are being punished by consumers. Many private banking clients, for example, instruct their managers to refrain from investing in companies that deal with tobacco, armaments, or are known abusers of human rights. Another multinational oil and gas company, British Petroleum, has had such a bad image for repeatedly causing environment catastrophes including oil spills that they changed their name to BP plc. Samsung is likewise known to hire and overwork underage employees in China, including using children as young as seven years old to mine cobalt for their smartphone batteries. Nestles is called out for tax avoidance, animal rights abuses, participating in human trafficking, and taking clean drinking water from areas that sorely need it. Coca-Cola has been accused of anti-competitiveness and harassing union workers, whilst Abercrombie & Fitch pays its CEO more than 4,000 times the average employee earnings. At the same time, it is one of a number of fashion brands benefitting from forced labor in Uyghur.

The Philippines has its own offenders. The Philippine Department of Labor (DOLE) has a list of twenty household names to include Philippine Airlines, Philippine Long Distance Telephone, Magnolia, and Jollibee. Additionally, China tops the list as the heaviest polluter of the world’s oceans.

To counter these bad publicities, many unethical corporations indulge in such practices as “greenwashing”, that is, spending lots of money in promotions and advertisements falsely claiming that their goods or services are environmentally friendly. This includes the fashion brand Zara which has been implicated in the use of migrant workers from Bolivia and Peru in sweatshop conditions, whilst linking it to the deforestation of the Amazon. Their lack of transparency makes it difficult to disprove their claim of “cruelty-free” clothes.

On the other side of the spectrum are companies like Starbucks--widely known for its products to have been sourced in a responsible and environmentally sustainable way. To give back to the local communities where it operates, it has donated more than a million free meals to various soup kitchens. The Ethisphere Institute, an independent research center that promotes best business practices, has named Starbucks one of the most ethical companies in the world. The Institute has moreover honored thousands of such companies in its years of existence. In 2021, 144 companies were selected, representing 41 industries in 22 countries. Among them is Costco, a retailer noted for its low prices and quality goods, with fair wages and benefits for its workers, resulting in low turn-over. Other household names include 3M, Accenture, BlueCross BlueShield, Colgate-Palmolive, Eaton, eBay, Henkel AG, L’Oréal, Marks and Spencer, Shiseido, SingTel, TATA, UPS, Visa, Westpac Banking Corporation, Time Warner, Texas Instruments, and Safeway.

These companies are profitable whilst at the same time they are known for their ethical practices, which implies that companies can be both, perhaps even that ethical behavior contributes to profitability, if only because a good reputation creates goodwill among stakeholders. As the automotive executive Lee Iacocca once said: some companies think that their prime objective is to make a profit. They forget that profit is a reward, not an objective. Their objective is to be good in what they do. Victoria Hoffarth