Beyond The Rule Of Law: The Route To Sustainability How Global Businesses Can Contribute

Friday, December 1, 2006 - 00:00

Thomas Pickering, former U.S. Ambassador to Russia and India, Roberto Danino, former Prime Minister of Peru and former Senior Vice President and General Counsel,World Bank, and currently Deputy Chairman of Hochschild Mining PLC, and Samuel P. Fried, Senior Vice President-Law, Policy & Governance, Limited Brands, Inc.

Editors Note: In this issue we emphasize how global businesses have been a driving force behind the dramatic economic growth of China. It has been a little over a year since the American Bar Association held its 2005 International Rule of Law Symposium on Advancing The Rule of Law To Solve Global Problems, which, among other things, discussed the role of global businesses in economic development and the alleviation of poverty.

This article is based upon the panel discussion at that Symposium entitled The Rule of Law and Economic and Business Develop-ment, which is particularly pertinent to what is currently taking place in China and to how businesses can play an important role in unlocking the potential of other countries. The panelists included Thomas Pickering, former U.S. Ambassador to Russia and India, Roberto Daino, former Prime Minister of Peru and former Senior Vice President and General Counsel, World Bank, and currently Deputy Chairman of Hochschild Mining PLC, and Samuel P. Fried, Senior Vice President - Law, Policy & Governance, Limited Brands, Inc.

Because of the time that has elapsed since the Symposium and the interests of our readership, we have asked the panelists to make such changes in their remarks as they thought desirable.

Because of space constraints, we have devoted this article to aspects of the discussion that are of particular interest to corporate counsel. The views of the corporate counsel who participated in a number of the panels should be of particular interest to our audience since almost all of our readers are employed by corporations that are, or soon will be, operating in a global arena. The entire Symposium can be viewed on line by going to www.pqhp.com/aba-ceeli-05/. You will find there the full remarks of each of the panelists.

This is Part III of a three-part series reflecting corporate counsels' support for the rule of law. Part I appeared in our May issue and Part II in June. In 2007, we will present highlights of the 2006 Symposium.

Predictability

The panelists established early in their discussion the importance of predictability when making a foreign investment. The importance of an independent judiciary was emphasized. Roberto Danino noted that among countries in Latin America, Costa Rica and Chile have good judicial systems and a solid rule of law, and that this is one of the reasons why Chile in particular has outperformed the rest of the region.

Thomas Pickering noted that the lack of independent judiciary in Russia rendered its "very good IP legislation" utterly useless. "You obviously can get nowhere if there is no law, but you also get nowhere if people are not observing laws they put in place."

Mr. Pickering referred to corruption in Russia and how it has continued to serve as a roadblock to foreign investment and economic growth. "Small and medium-sized foreign businesses have historically been hurt the most. Generally the process is this: a small- or medium-sized businessman finds a Russian partner, and after two years or so, the Russian partner ends up conniving with the authorities and using the legal system against the investor, who ends up with neither the initial investment nor a share of the business: the Russian partner and his friends in the local administration end up with the business." Mr. Pickering explained how in Russia, the judiciary remains tied to the government, and that historically the goal of the judiciary has been to prosecute successfully rather than to promote justice.

He noted, "In Russia changes come slowly and [the establishment of an independent judiciary] is perhaps the area of slowest change. Any who have looked at the Soviet court system understand that it was the rule of law turned on its head. One might have called it the "law of rule," in that the prosecutor was the most important functionary in the judicial system. To turn that system around, to move people from one set of concepts, attitudes, and ideas to another has taken a great deal of time and effort thus far, and we are still very far from that goal despite the fact that the United States and others have sent judicial experts, serving judges, and all kinds of people to try making a difference."

Independent Judiciary Only The Beginning

Sam Fried commented that having a judiciary system in place is only the beginning when it comes to establishment of rule of law. He said "We have been nave about the idea that just adopting a Constitution, just establishing a court system, or just holding an election is going to change things. I don't mean to say that these are negligible events; they are very important, but clearly insufficient."

Mr. Danino recounted how he (and the World Bank) learned while working with the Georgian government that governmental reforms cannot last without support from the people. "We were having a wonderful experience with the then-Minister of Justice in our Justice Reform Program. It was a fantastic program. He was an ideal counterpart: things got done on time, and we had lots of commitment. Then one day he was ousted, and our whole program came crashing down. What we learned is that in order to have effective judicial reform, society as a whole must buy in. True, you need to have the government working with you, but not only the government. The country as a whole must buy in for reform to be sustainable. In the case of Georgia, it was in the end a good experience because the former Minister of Justice became the president, and now we found ourselves working with him very happily, knowing very well that it is not enough to have his buy-in alone."

Legitimacy - Necessary Over The Long Term

The panelists agreed that while predictability may be necessary to allow foreign investment to start, legitimacy is necessary in the long run. Critics of the notion of Rule of Law point out that nowhere in the classic definition is it stated that laws must be just or legitimate, only that they be enforced.

From a socio-political point of view, a government practicing the rule of law and based on legitimate principles (human rights, justice, etc.) is far more stable for business in the long run than one built on fear. Mr. Pickering commented, "If asked to choose between predictability and legitimacy as the basis for a system of law, I would have to come out on the side of legitimacy. A set of rules which predicts the early demise of the corporation or the destruction of its employees is obviously predictable, but hardly legitimate and hardly constructive."

A Long-Term Approach To Investing Produces Long-Term Benefits

Mr. Fried noted a sea change in how companies today address decisions about making a foreign investment. "I think the worldwide economy is changing to be less transactional, and more strategic. Globalization is responsible for that. Business used to be more opportunistic: a business would make a risk-reward decision about going into, say, China, that was based on the projected returns on individual transactions." Mr. Fried noted that these "one-shot deals" were very different from the long-term decisions being made today by business people "who recognize the strategic value of global supply chains." He continued, "This in turn means that businesses require more predictability than ever because they are looking at the long, and not only the short, run. Global corporations have a much larger stake in being a socially responsible part of the civil society of the countries in which they have a long-term presence."

Mr. Danino pointed out that economic growth and the desire to sustain it can lead governments and societies to become more just. He cited two examples from China. First, when the Shanghai stock exchange was created, people were already investing in stock without a company law. They had sufficient faith in the government to invest even though they didn't know what rights they had. Second, China in March, 2005, amended their Constitution to provide guarantees of human rights and an open economy.

Mr. Fried remarked that the example of China illustrates that through a ground-up approach globalization can contribute to advancing the rule of law and a just government. "For us to think we can do a top-down wholesale reinvention of a society is quite nave on our part. I believe in trying to effect sustainable change. And you only get the power and the leverage of business if the change is good for business. The UK consultancy IMPACTT did a three-year study in China showing that more progressive labor standards in electronics and apparel factories actually improved productivity, which allowed manufacturers there to reduce hours and increase pay. By embedding these reforms in a business logic, American and other global companies are able to effect sustainable, long-lasting change in the workplace."

Corporate Social Responsibility Today

Mr. Fried observed that the shift from short-term, transaction-based decision-making to long-term, strategy-based planning enables global enterprises to improve conditions where they do business. "The whole corporate social responsibility movement has been very interesting in that it has used a carrot-and-stick approach to change business attitudes. Corporate social responsibility has become institutionalized in many instances. For the global companies in the Fortune 500, corporate social responsibility abroad - including work to advance the rule of law - is a key source of credibility and legitimacy.

"I believe corporations can go even further. In addition to being active in the trade debates, they can do more to promote economic development policies that alleviate poverty. It's not just about international capital. If we could marry the two forces of capital and social responsibility, then everybody would benefit. Amazingly, I think we have overlooked the capacity of our private sector to use its reach and depth to serve as ambassadors in this way."

What Next For Global Citizenship? Dialogue Between Governments and Corporations

Mr. Pickering observed that governments ought to become more engaged in dialogues with corporations. "My own view is that it is in everybody's common interest to move ahead. Maybe governments should take a much more serious interest than they do in working with corporations in a more formal way. "

Social Equity = Human Rights

Mr. Danino noted that, as corporations become better global citizens, the World Bank has a role to play in improving the lives of people around the world. "As environment and as corruption have been mainstreamed as issues for corporations, my focus for the Bank and the special issue I had been addressing in my last two years as general counsel was the topic of human rights. Human rights are directly linked to economic development. For a long time it has been perceived that the bank is precluded from specifically addressing a human rights agenda. I have a very different view.

"The main argument has been that the World Bank's charter says it is a financial institution, not a political one, that it cannot interfere in the political activities of its member countries, and especially that it can only make decisions based exclusively on economic conservation. My reading on the charter is that, sure, it is a financial institution, but it has a mandate to alleviate poverty. The word "poverty," by the way, is not mentioned once in our charter, but nobody will doubt that poverty alleviation is our mandate. How? Through economic growth and social equity. If human rights are not part of social equity, what is social equity?"

Capacity Building

Mr. Fried spoke of advancing the rule of law within the context of capacity building. "What I have been evangelizing for is a broader conception of the rule of law in terms of capacity building - that is, mobilizing the capacity of societies to increase transparency, fairness, and respect for workers' and owners' rights in order to attract more sustainable business and help alleviate poverty."

Mr. Fried then mentioned the evolving relationships between corporations and NGOs and the development of programs on the ground. "The good news is that, after ten years of fierce fighting between global businesses and anti-globalization NGOs and activists, a new synthesis seems to be developing. Very serious, very responsible, very credible NGOs - both international NGOs and NGOs on the ground in developing countries - recognize that business could pave the way to a better future. To that end, my company, Limited Brands, and others in many sectors (including Pfizer, Intel, Microsoft, P&G, Gap, AIG, and ExxonMobil) have created the Business Coalition for Capacity Building. The companies in the BCCB have developed projects with NGOs on the ground. We have discovered that this kind of open dialogue and collaboration can lead to real social progress, while at the same time improving business efficiency and productivity.

"Private sector actors ought to find NGOs to partner with on projects in developing countries. I believe we have a moral obligation to do this for poverty alleviation, as well as for our own security."