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February 4, 2013

Why Horizontal Governance Matters

By Spear's

Global Localism
Companies can no longer simply export their values and practices to their international arms, says Robert Amsterdam: the global is now local. Or is the local now global?
IN LATE OCTOBER, as Hurricane Sandy pounded the Eastern seaboard of the United States, causing billions of dollars in damages, one of the first questions being asked was who was to be blamed. Just a week earlier in Italy, a court convicted six scientists and a government official, sentencing them to six years in prison for failing to predict the magnitude and damage of the 2009 L’Aquila earthquake.

Meanwhile, in the UK the Ministry of Justice is considering a bold expansion of the Corporate Manslaughter Act, making it extra-territorial, which would cause a dramatic shift in how people conduct business abroad.

Of course, the UK is not alone. In the United States, the Alien Torts Claim Act (which allows US courts to hear lawsuits filed by non-US citizens for violations of international law) continues growing in many respects. The US is also seeing a growth in cases under the Foreign Corrupt Practices Act, while new anti-bribery and anti-money-laundering legal mechanisms are being put into effect in Europe.

In a world of extraterritorial accountability, where what is done abroad may come to hurt them at home, foreign investors and organisations must adopt a new culture of self-governance and responsibility in line with the values, principles and expectations of the local community.

As more and more corporations become involved in catastrophic environmental disasters, such as BP and Deepwater Horizon, questions of horizontal governance, adapting business practices to those local customs and laws, begin to come into play.

Following the spill in the Gulf of Mexico, BP has made some bold moves to partner with a minority stake in Russia’s state-owned oil company Rosneft, creating the world’s largest publicly traded energy company. But before we all applaud, BP’s latest Russia move comes laden with risk, including but not limited to expropriations of private property, complex and capital-intensive projects in the Arctic, and a poor record of shareholder rights.

Rosneft accepted BP’s bid in order to take advantage of its technical expertise, but it is much less clear if Rosneft’s partners in the Russian government will respect BP’s internal regulatory standards and overall vision of how to manage the portfolio of assets.

One of the things that BP would have to ensure is that its values and norms are internalised in a company where it only has a minority interest, even though it may become exposed to considerable political and environmental risk.
WHETHER IT IS an accident, a violation or simply a trumped-up case, liability for events in foreign jurisdictions can now relate to corporate culture, opening up new risks. For example, in the Corporate Manslaughter and Corporate Homicide Act 2007, the law states that a jury may consider ‘the extent to which the evidence shows that there were attitudes, policies, systems or accepted practices within the organisation that were likely to have encouraged any such failure… or to have produced tolerance of it’. 

The need for horizontal governance is further underscored by the UK Bribery Act, which considers ‘facilitation payments’, which may not necessarily constitute anything unlawful or improper, as potential violations.

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What all this means is that the well-intentioned rhetoric of corporate social responsibility (CSR) programmes will no longer be sufficient, as law enforcement bodies are riding a wave of a popular discontent that is demanding to see individual executives prosecuted and punished in addition to the companies.

A whole new body of thought is being advanced which one day may be reflected in law. A seminal report written by Harvard University professor John Ruggie, who serves as the UN secretary-general’s special representative on business and human rights, mirrors the thinking of the Corporate Manslaughter Act in terms of the ‘attitudes, policies, systems or accepted practices’ as determinants for liability.

However, foreign investors have to go beyond just controls in order to implement a fundamental and meaningful shift in corporate culture to avoid problems in foreign jurisdictions. The formation of a ‘corporate foreign policy’, which takes into account the management of relations not only with the government of the day but also with civil society groups and stakeholders, provides for a second line of defence and a more predictable framework to anticipate and negotiate conflicts.

Sometimes doing the right thing is not enough, and hoping that your local partners will follow suit is dangerously short-sighted. It’s time for business leaders and investors to become leaders on rights and values, instead of the usual suspects. There is no shortcut to the new world of extraterritorial accountability, except to embrace its principles beyond the states that claim to exercise it.
Read more by Robert Amsterdam

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