“Over the past 25 years, large multinational corporations (MNCs) have been under increasing pressure from capital markets, consumers and governments to contribute to the Millennium/Sustainable Development Goals, firstly by improved performance on environment, social/labour and governance (ESG) issues and secondly by reporting their performance more effectively. An earlier example of this pressure led to the codes of conduct for MNCs to report on their labour practices in apartheid South Africa,” said Stephen Gelb of the Heilbroner Center for Capitalism Studies at the New School for Social Research. “There are now a myriad of regulatory guidelines setting performance standards and reporting requirements on different ESG issues, some voluntary others mandatory, and developed by private companies, business associations, other civil-society organisations, or government regulators, both nationally and internationally. But this decentralised market-like process provides little clarity for corporations themselves, or for other stakeholders – workers and labour unions, communities, consumers, suppliers, financial institutions and investors, or host governments.”
“Governments are under pressure to increase performance on these issues,” he added. “However, there is little collaboration on standards and reporting guidelines.”
“Even before Trump’s Presidency there was pressure on corporations’ about their support for sustainability. The last month has accelerated this − especially the shutdown of USAID funding. It’s all up in the air right now.”
Gelb’s book project, still in the early draft stage but which will bring together project work he has done in the past five to seven years, addresses specific social and governance development challenges in specific sectors and countries, and examines MNC performance and potential oversight mechanisms.
He explained that his interest in multinationals started with work on South Africa in the 1970s and 80s. “Disinvestment due to apartheid was the issue. There were two views – one that disinvestment would bring about democracy and potentially socialism, and the other liberal view that foreign investment could be an important change agent to help bring about democracy.”
This second view underscored the 1977 Sullivan Principles for US multinationals emphasising the need to improve employment and working conditions for black workers. By 1985 about half of the US MNCs operating in South Africa were signed up to the Sullivan Principles. There were also similar codes in the United Kingdom, European Union and Canada. (Ironically Leon Sullivan later shifted his own views to favouring disinvestment.)
“However, US corporates did little in the areas they controlled, like promoting black managers or black suppliers – their activities mostly centred on corporate social responsibility – like building schools and health clinics,” said Gelb.
But the Sullivan Principles held important lessons including the need for independent monitoring which separated assessment and auditing.
Gelb then turned to his more recent work, explaining that he uses value chains and ‘economic rent’ as key theoretical concepts to analyse the impact on incomes and their distribution from regulatory reforms in a specific sector and country, shaping interests for and against reform.
“We also need to understand how corporate strategy is shaped, as different companies operate differently,” he said.
Gelb provided detailed information on four case studies looking at how MNCs, collectively or individually, as well as host- and home-country private and public actors, have addressed specific social/labour and governance problems: poor factory and residential water, sanitation and hygiene (WASH) facilities for women workers in the Bangladesh garment sector; low product prices leading to poverty incomes for Ghanaian cocoa farmers; poor access to accounting and auditing services affecting access to credit for Tanzanian small and micro enterprises; and, endemic corruption by senior employees at a South African IT MNC, affecting economic growth and public trust in the economy.
Garment production in Bangladesh
He explained that the production of ready-made garments in Bangladesh involves nearly 4000 factories and 3.6 million workers, 53% of whom are women. Following a fire and hundreds of worker deaths in 2013 there were new agreements on factory safety including producers and buyers. Inspections showed the need for remediation work totalling $929 million but only about a half of that has been undertaken. “Although the agreements were regarded as pathbreaking they didn’t achieve their objectives across the whole industry,” he said.
In addition, the underlying health issues affecting the mostly female workforce – including inadequate access to food and water, long working hours, poor ergonomics and gender-based violence in the workplace – were perhaps more serious and had greater impact than the fire safety issues. “By 35 most of the workers are crippled and ready to retire. The health issue is probably greater than the fire safety issues on which large amounts of money were spent,’ said Gelb. “The fire was a big shock which galvanised action while the ongoing health issues are much slower moving.”
He pointed to the lack of quantitative data on the issue of worker health and productivity; the need to establish models for who should pay for health and safety across the industry (including buyer responsibility and coordinated responses); and, the need for agreed standards.
“Muhammad Yunus – winner of the 2006 Nobel Peace Prize and now the de facto Prime Minister of Bangladesh – has suggested a small consumption (Tobin) tax on garments to contribute to health and safety,” said Gelb.
Cocoa in Ghana
Gelb explained that cocoa constitutes a quarter of all Ghanaian exports, but the global value chain is controlled in what he described as a bipolar way, by multinational cocoa bean grinders and by chocolate manufacturers. “Although cocoa is a high-value product the 800 000 cocoa farmers operate at a small scale, competing with one another and living in poverty. It’s a paradoxical sector for Ghana – at macro-level it’s successful producing high-quality beans and bringing in a lot of foreign exchange (about 25% of Ghana’s exports) but at micro-level it’s a big problem – the farmers have low productivity and earn low incomes.”
“The dominant actors – including foreign corporations and the government – have no incentive to disrupt the equilibrium which works in their favour and change the way economic rents are distributed. And this is enforced by politics – when the governing party changes all companies change their management to party loyalists.”
“There are no specific compliance mechanisms, review processes, or reporting. The income of the farmers is not even included as a key performance area.”
He pointed to the need to increase farmers’ productivity; which meant fewer farmers on larger land areas with a transition plan for the others to find other livelihoods; as well, the government wants to increase domestic processing and manufacture. He also emphasised the need for consensus-driven sustainability targets including government and civil society in producer and consumer countries, and the need for political pressure – ideally including rich-country consumers.
Accounting and access to credit in Tanzania
Gelb explained that there is little credible public information on most firms in Tanzania and that improved accounting and auditing would expand credit extension, tax revenues and lower market transaction costs. Auditing and accounting services are segmented into three tiers – the Big Four global firms (PriceWaterhouseCoopers, Deloitte, Ernst & Young and KPMG), medium-sized firms some of which are also internationally linked, and small local firms.
Small and micro enterprises are disadvantaged in their access only to the small local firms.
“Obviously there is much better training from the Big Four firms. They must open their ‘club’ to smaller firms. Tier 1 and 2 firms should play a leadership role but currently won’t engage – they worry about IP (intellectual property) with collective training, as each of the Big Four produces their own software and other materials. There is also very little attempt to domesticate international standards and codes, and information is only available in English, which many clients can’t read.”
“Most non-corporate business accounts are constructed simply for tax compliance and so not helpful for business information. This affects tax revenues, access to credit and corporate governance standards. There’s a need to raise the bar on accounting and auditing standards.”
Corruption in an ICT corporate in South Africa
EOH which was established in 1995 is one of South Africa’s largest technology services companies servicing private- and public-sector entities. However, problems began to emerge publicly from 2017 about issues around procurement of South African government contracts. Incoming BEE partners insisted on a new CEO who was appointed in 2018, and immediately identified problems around governance, auditing and compliance. Investigation showed that corruption in the company was rife. Gelb identified four streams, including defrauding the capital market via fraudulent accounts; public-sector bid-rigging; defrauding foreign suppliers and the public sector via false invoicing; and, many incidents of petty corruption. The new CEO overhauled the management and the staffing over the next five years.
Gelb emphasised that personal loyalties, financial rewards and bullying brought some staff into the corruption and prevented most others from talking, until one whistleblower complained to the US authorities about a contract with Microsoft.
“The corruption strategy was broken down by new CEO, ironically in part by using the US Foreign Corrupt Practices Act which has just been scrapped by Trump.”
The company also appeared before the Zondo Commission. Fortunately, it did not collapse as this would have caused too many IT problems for the country. However, the case highlights the need for new regulatory approaches.
“Government regulation of corporations remains challenging,” said Gelb. “We need to recognise the distinctiveness of corporations and shape strategies accordingly.”
In discussion, he pointed to the challenges in a field that straddles economics, law and political science. “Many legal issues need to be addressed,” he said. “It’s a combination of private, public, national and transnational law.”
“But there must be legal weapons to punish transgressions. Voluntary standards don’t work because there are no consequences. However, the legal instruments must vary depending on the sector and country. As one example, it’s hard to impose legal standards on the Big Four accounting firms because they are bigger than the regulatory authorities in most countries. We must look at how we can give teeth to international laws.”
“One must look at the context carefully. Many problems start from the wrong premise being generalised across sectors,” he concluded.
Michelle Galloway: Part-time media officer at STIAS
Photograph: SCPS Photography