Friday, June 3, 2011

The Appearance of Reality: Globalization & the Corporation

This is the eighth post in my effort to clarify corporate governance terms and concepts that now seem misleading to me. We all know what these words mean in a literal sense but in the context of governance, of business and of our post-crash world do they still mean the same thing?
I look forward to your comments.
Globalization and the Corporation
Global corporations have outgrown the limited boundaries of regulating domicile states and countries. Their reach and power are such that, for the time being, there is no regulation, oversight or even penalty effective enough or far-reaching enough to have true impact on how multinational corporations operate.
Corporations have always been creatures of the sovereign state. There has always been an accepted “domicile” for corporations – in the U.S. it is the state which issued their charter. But while they operated under the aegis of one state, corporations have long manipulated their revenue sources between nation states so as to optimize their own net profit. Hence, what is arguably the most profitable company in the World – General Electric – pays no taxes in its country of origin. Now, we’re seeing the practice of “regulatory arbitrage” become more widespread as companies locate their activities so as to avoid or minimize the impact of labor, environment and human rights regulations. What does nationality (or state of incorporation) mean to corporations now – or in the future?
When corporations incur or cause damages– see British Petroleum in the Gulf of Mexico 2010 – it is clear that the nation in which the harm occurred is the place where damages will be adjudicated and enforced. BP has previously – Texas City 2007 – been involved in negligent/criminal activity to the level of requiring a special investigation – James A. Baker – and a kind of consent decree from the appropriate federal regulator. The question will arise with respect to the spills in the Gulf in 2010 whether the provisions of the consent decree were complied with.  There were specific requirements for the company to incur a culture of safety at all levels up to the board of directors. It would appear as if this did not in fact occur. Will the determining factor be UK law, pursuant to which the board of directors of BP is selected, or will it be US law where the incidents occurred and the settlements were negotiated? And, can the law of any one sovereign country have the teeth necessary to enforce change in a global corporation?
What is the “nationality” of a global corporation?  For example, it was quite surprising to many to discover the BP had a larger American ownership than British; and, of course, an American has recently been elected CEO. Exxon generates 30% of its earnings from the US; probably a minority of its employees works here. Clearly, it has obligations with respect to the places where facilities are located and employees live. But to what country does it owe loyalty and what shape does that loyalty take?  Is the concept of national loyalty misplaced? Doesn’t the corporation owe a good faith undertaking to optimize its value to its owners, irrespective of the place where its headquarters or operations are located? Is it realistic to think of Exxon as a US corporation or BP as a British one? What are the implications if it is not?  
Japanese kereitsu corporations are explicitly creatures of public policy and undertake projects in the “national interest.”  The government makes the funds available for approved projects and, informally, holds the corporation without loss in situations like Mitsui’s in Iraq. This technique allows entrepreneurial energy to be used for the national interest and the corporate shareholders are not harmed.
There are specific rules governing foreign ownership of communications, banking and transportation facilities. How do we determine what makes a foreign owner or foreign corporation?   Both the Business Roundtable and the Chamber of Commerce expressed horror at the notion of shareholders’ having access to the company’s proxy statement for the purpose of nominating directors – imagine the scene if foreign shareholders are able to take advantage of this, as well. In 2008, Senator Schumer led the opposition to a Dubai company taking control in operating major ports along the U.S. east coast.  But very soon after that he was an enthusiastic supporter of Sovereign Wealth Funds investing in Manhattan banks.
Here are my questions:
  1. Is the management of an American company in any way inhibited from pursuing global objectives because of being chartered in an American state?
  2. What makes a corporation American? Or British. Or French. Or Japanese…
  3. Is there any restriction on non-American corporations lobbying US politicians?
    1. Are there laws in other countries restricting American lobbyists?
    2. Is the device of foreign chartered subsidiaries considered an adequate fig leaf?
  4. There seems to be nothing stopping foreign corporations from having the same Constitutionally-protected right to participate in American politics. Is something is wrong with this?

  5. What institutions should be initiated to provide global supervision of multinational enterprises?
    1. Or, are any existing NGOs or regulatory agencies suited for global supervision (regulation?) of global corporations?
June 3, 2011 in Disinformation  |  5 comments  | 

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Posted by Bob Monks on Jun 13, 2011 at 3:33 PM
Thanks everyone for your comments. A few quick replies:

To Khosrow -- Nothing will be possible in the absence of the conviction by the preponderance of inhabitants of this earth that they exist for a purpose.

To Harry -- Plainly, some international vocabulary, rules, institutions, enforcement capability will be essential to the optimal functioning of global corporations

To Thornton -- There is an absence of mention of “corporations” in the Constitution. It is certain that courts with a predisposition to corporate power have interpreted the Constitution and its Amendments so as to extend rights to corporations. The extent of federal constitutional authority over corporate governance is a continuing source of confusion which has resulted in the current circumstance of autocratic power in the Chief Executive with only nominal accountability.
Posted by Khosrow Djahanbani on Jun 11, 2011 at 9:09 AM
The International corp is today the new sovereign state. It's existence is not defined by national boundaries, but rather by its ability to wield power.
In an age where national boundaries are a fading mirage doing away with all the laws, regulations and morals that used to govern its constituents, we need to look at another system that can curb and regulate man's greed and thirst for power and wealth.
This new system can only be based on reviving his awareness of his place in creation. No longer can man made laws govern man. His accountability can only come into play when he is before the immensity of that which created him....
And whether he likes it or not, that eventuality will come to pass.
Posted by Harry Blutstein on Jun 9, 2011 at 8:47 PM
While once corporations were expected to promote national interests, with the most spectacular being the East India Company, through which Great Britain outsourced many of its imperial projects, the nature of corporations has changed and they now have diffuse ownership and management, such that many are truly citizens of the world. There may be some nostalgia for the days of charter companies, when the corporate mission was approved by government, but such level of control is neither good for the market or politics. I have some sympathy with Milton Friedman's dictum that the "business of business is business". And the business of politicians is to regulate business behavior, but not direct businesses on what to do or not to do in the national interest. But how to regulate transnational business? The solution was offered by George W Ball (former partner at Lehman Brothers) in 1967, who suggested an international body to incorporate and regulate transnational corporations. This would eliminate regulatory arbitrage and reduce the ability of corporations to force governments to compete in a race to the bottom (eg corporate tax). Let's just accept that they are now global citizens and create international institutions to manage them rather than try to use clearly antiquated institutions associated with the nation-state to do the job.
Posted by Thornton Parker on Jun 9, 2011 at 7:12 PM
In the U.S., I think two more fundamental questions are:

1. Where in the Constitution is there any mention of corporations, much less any provision for them to have the same rights as human citizens, such as free speech which has been stretched to include advertising and campaign contributions.

2. What is the Constitutional basis for federal corporate law, and is it not primarily the result of decisions and statements by "activist" courts that stretched the Amendments that were intended to guarantee the rights of former slaves?
Posted by Lauren Kinsey on Jun 3, 2011 at 4:34 PM
1. I don't think so.
2. Nothing.
3. No. The do it through the US Chamber of Commerce at least.
a. I don't know.
b. ?
4. Yes.
5. I don't know.
a. I don't think so.
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