COVID-19, large corporations and states: Time for change?

The health crisis linked to the COVID-19 leads to an interesting opportunity from states: pushing large corporations to design a different economy built on the idea of sustainability. A health crisis that originated in Asia, COVID-19 has since become a global economic, financial and social crisis constraining states to close their borders, confine their citizens and massively support their companies in order to avoid the collapse of the economy. One of the responses of several states is to grant public cash aid to corporations. In times of COVID-19 crisis, states have an opportunity to take back the reins and finally make large corporations (especially multinationals) social responsible. A “good” corporation is not one that only generates profits (O’Boyle et al., 2011). However, a comparison of the position of states shows a crucial point: the idea of making this type of public aid conditional on virtuous and ethical behaviour by corporations is not self-evident. It may be a missed historic rendez-vous…

The large corporation cul-de-sac

Over time, multinational corporations have imposed themselves as competitors to states with a particularity: by relying on globalization, they have evolved in areas without borders that are beyond the control of state law (Mandel, 1972). Most of the largest corporations undertake activities in multiple countries (Brüls, 2013). They use the strategic and business form of “multinational”. This strategic form of expansion allows them to benefit from soft regulation. No hard law regulation applies to her. The academic literature is vast on the questioning surrounding the control of large corporations by the state; and the work of international organizations is also numerous on this subject (from United nations Human Right Council, ILO or OECD). So large corporations are an authentic challenge for a legal perspective (Lazarus et al., 1977), which it must try to resolve, since their power has become considerable (recently: Chavagneux et al., 2018) and the negative consequences of their activities are denounced in various forums. However, this challenge is considerable and the law is at a cul-de-sac (Özden, 2016; Lizée, 1985). All lawyers know that one of the limits of law is the territory of the application. If projects exist such as the new international treaty on business and human rights (here), it is only a project. Although international law experts have made proposals to make business a genuine subject of international law (Ijalaye, 1978, at p. 221 and seq.; Friedmann, 1964, at p. 230), these proposals have so far remained a dead letter.

Corporate social responsibility (CSR) concept has become an inevitable cornerstone of corporate and governance law. At the beginning, CSR has taken on the face of codes of conduct (and soft law). Going beyond the borders of states, CSR has placed corporations in front of their responsibilities (and liabilities) based on an essentially voluntary approach. Based on management practices and soft law, CSR seeks to make large corporations aware of their responsibilities (Herbel, 2013), far from Milton Friedman’s words restricting companies to making a profit (Friedman, 1962, at p. 133).

The opportunity for a counter-power

With volunteerism too long idealized and states leading a “race to the bottom” to attract Western multinationals and foreign investors, large corporations have enjoyed impunity and corporate accountability has proven to be a pipe dream. In this field, large corporations have had primacy in international or national discussions and negotiations on societal issues (environmental matters, social issues, climatic problems) for a long time. However, COVID-19 changed that. The global pandemic is putting the survival of large corporations at risk and forcing them to seek state help. Governments now have the possibility to exert a positive societal impact by combining the provision of public cash aid with terms that can ensure a sustainable economic recovery. While the solution is obvious, the implementation is not. A comparison shows that states are moving forward in a dispersed order and without coherence in their legislative policy despite similarly political announcements.

Thus, several states (including Denmark and Poland) have decided to refuse to help large corporations that practise tax evasion or that have their headquarters or subsidiaries in tax havens. Others that had taken such a position backed down under pressure from several groups (here). Such is the case of France. On the afternoon of April 23, a joint committee deleted the provision defended by the Minister for the Economy (here). Although the French position was still open to criticism (see the press release from the NGO Oxfam), it was a signal that the rules of the game may have changed. In the United States and in France, it should be added that companies that pay dividends, buy back their shares or whose senior executives increase their remuneration are not eligible for government aid. While such corporate commitments are not without serious reservations (nature or legal value), they nevertheless carry a strong symbolic value.

In comparison, Canada and Quebec have long remained silent (here). However, Canada broke this silence on May 11, 2020 through the voice of its Finance Ministry (Bill Morneau). Mr. Morneau announced a cash assistance plan for the benefit of large corporations (Canada’s largest employers) to provide bridge financing to, whose needs during the pandemic are not being met through conventional financing, in order to keep their operations going: the Large Employer Emergency Financing Facility. Control of certain short-term financial strategies (significant executive compensation, payment of dividends, share buybacks, job maintenance), exclusion of corporations found guilty of tax evasion and strengthened disclosure on climate change accompanied the Canadian financial aid.

Since a few weeks, an interesting debate in France confirms the complexity of the emerging puzzle of state financial aid regulation. Several members of Parliament want to make state aid conditional on good environmental and social practices. An amendment to a Bill has even been introduced to that end. The amendment calls on the French participation agency to ensure that the corporations receiving assistance “fully and exemplarily integrate social, societal and environmental responsibility objectives into their strategy, particularly with respect to the fight against climate change”.

State and responsible hard law in large corporations

Through its role as a creditor, states can translate CSR into hard law regulations that constrain large corporations to work for the common good (Family, 2013). In this current globalized economy, corporations must be fully aware of the consequences that their actions or lacks thereof have on various stakeholders. Nevertheless, a lesson can be learned from COVID-19 crisis: a comparison of national reactions shows that it is difficult for politics to leave behind their old attitude and to control large corporations even when public funds are at stake.

However, introducing CSR terms in public financial aids linked with COVID-19 would be in line with the contemporary movement toward a responsible corporate and governance law. The development of a duty of care in France, United Kingdom (Vedanta Resources PLC and anor v. Lungowe v and ors and Chandler v. Cape) and Canada (Choc v. Hudbay Minerals Inc.); the creation of corporations with a social mission (“Benefit corporation” in the United States, “entreprise à mission” in France, “Community Contribution Company” in British Columbia…)(see: Tchotourian et al. 2019); and the different definition of the best interests of the corporation (for example in Canada with the new section 122 of Federal company law; and see also the Business Roundtable) illustrate this trend.

Ivan Tchotourian (Professor of corporate law and corporate governance – Codirector of the Centre d’études en droit économique (CÉDÉ)

Faculty of law, Laval’s University – ivan.tchotouriand.ulaval.ca)

References

Brüls, C (ed.) 2013, Les multinationales : statut et réglementations, Bruxelles, Larcier, 2013.

Chandler v. Cape, [2011] EWHC 951 (QB).

Chavagneux, C & Louis, M (eds.) 2018, Le pouvoir des multinationales, Paris, La vie des idées et PUF.

Choc v. Hudbay Minerals Inc., 2013 ONSC 1414.

Family, R 2013, ‘La responsabilité sociétale de l’entreprise : du concept à la norme’, Recueil Dalloz, no. 23, pp. 1558-1564.

Friedman, M 1962, Capitalism and Freedom, Chicago, University of Chicago Press.

Friedmann, W 1964, The Changing Structure of International Law, New York, Columbia University Press.

Herbel, P 2013, ‘La responsabilité sociétale de l’entreprise en tant que vecteur pour faire avancer les droits de l’homme par l’entreprise’, Recueil Dalloz, no. 23, pp. 1570-1574.

Ijalaye, D 1978, The Extension of Corporate Personality in International Law, New York, Oceana.

Lazarus, C, Goldman, B & Francescakis, P (eds.) 1977, L’entreprise multinationale face au droit, Paris, Librairies techniques.

Lizée, M 1985, ‘Le droit des multinationales : une impasse juridique ?’, Revue québécoise de droit international, vol. 2, pp. 271-283.

Mandel, E 1972, ‘Face à la puissance des sociétés multinationales l’État contemporain ne fait plus le poids’, Le Monde diplomatique, April, p. 15.

O’Boyle, EJ, Solari, S & Marangoni, GD 2011, ‘The Good Company’, Corporate Governance – The International Journal of Business in Society, vol. 11, no. 1, pp. 64-76.

Özden, M 2016, Impunité des sociétés transnationales, Genève, CETIM.

Tchotourian, I & Morteo, M 2019, L’entreprise à mission sociétale : analyse critique et comparative du modèle, Cowansville, éditions Yvon Blais.

Vedanta Resources PLC and anor v. Lungowe v and ors, [2019] UKSC 20.

Picture Credit: Ivan Tchotourian