An insight into corporate accountability
Written by Pro Bono Group member and volunteer Aakriti Pasricha.
BLS Pro Bono Group would like to thank Professor Lorraine Talbot for her contribution and guidance to the writer of this blog.
Key terms for this blog
The following definitions have been provided by the author of this blog.
- Multinational Corporations (MNC): a company which is located in many jurisdictions or countries but manages its offices from one central branch.1
- Parent Company: a company which owns all or most of the shares in the subsidiary company and as a result can control the activities of the subsidiary. The parent company can claim profits from the subsidiary while outsourcing to the subsidiary.2
- Subsidiary Company: a company which is owned by a parent company, of which has significant control of the subsidiary company’s operations.3
- Outsourcing: this occurs when corporations enter a contract with a third party, who is not part of their corporate network, to have a service performed or product manufactured.4
- Transaction costs: the cost of entering into transactions in the market place, including buying, selling, transferring ownership of goods and services.5
- Negative Externalities: the negative and indirect costs associated with an activity which does not get factored into the cost of production or market price because it externalised and borne by third parties. 6
- Corporate veil: the idea that a company is seen as a separate legal entity from its shareholders and owners, even if the company is run by a single person. 7
- Forum non conveniens: the argument that a case should be heard in the jurisdiction where the harm occurred.8
- Shareholders: Public bodies or private individuals who legally own shares in a company. Shareholders have voting rights to vote on big decisions regarding the company and receive a share of the profits produced by the company.9
- Directors: Directors are agents of a company. Directors are appointed by shareholders, and they have an obligation to act in the best interests of the company and to generate profits. Directors have power to enter into transactions for the company, and can be held accountable by shareholders, for example, they can be removed from their position if they abuse their powers.10
The basis and development of corporations
According to Ronald Coase and his ground breaking theory of transaction costs, the presence of multinational corporations are a sign of market failure.11 Since it is expensive for companies to buy products and services in the market place.12 Thus, they have brought those services in house in order to reduce transaction costs.13 As a result of bringing those services in house, businesses got larger in size.14 Bigger businesses doing things in house allow for close monitoring of employees in order to get the most value out of them.15 The ability to monitor employees’ working day is what ultimately creates profit.16 For instance, if a company is in the retail business and they purchase T-shirts, they will have to pay the market price for them.17 However, if they buy the raw materials and employ workers to make the T-shirts, they have the potential to make profit over time.18 The main reason employers make a profit off of a commodity, such as a £5 t-shirt, is precisely because labour produces more value than it is paid.19 Furthermore, because there is an asymmetry in power and knowledge between employers and employees, corporations are able to extract much more value from their labour than they are paid.20 Thus, one could argue that the inherent nature of corporations is to exploit their workforce in order to create value and generate maximum profit.
However, this exploitative tendency of corporations is no surprise when considering that modern employment law stems from the law of master and servant.21 Historically, employment relationships were considered private contracts between the master and servant in which the uncooperative worker who breached the contract could be punished through whipping, forced labour, imprisonment, fines and through forfeiting all the wages they had earned. 22 Nonetheless, trade unions have the ability to protect workers’ interests through collective bargaining and can bring about workplace democracy.23 Unfortunately, from the 1970s, there has been a decline in the power of trade unions within the UK along with a decrease in union membership, brought on the Thatcher government in the late 1970s and by successive consecutive governments.24 Ultimately, the decline of union strength due to decreased membership further decreases their ability to bargain for and represent workers. 25 This highlights the striking power imbalance between employers and the labour force, as there is less advocacy for workers’ rights, which in turn may further perpetuate the power imbalance, as workers may not be aware of their rights in employment, and thus are unaware of how to get support if they experience any wrongs or harm in the workplace.
How do multinational corporations organise themselves?
Large successful corporations have a large corporate network. Such companies, termed Multinational corporations (MNCs), have flexible organisational forms such as the Parent-Subsidiary model, in which a one larger company has control over the activities of another.26 Additionally, MNCs can also enter contracts for the purpose of outsourcing work to suppliers outside of their network.27 MNCs organise themselves in either the Parent-Subsidiary model or contractual outsourcing model. While neither of these organisational forms are wrong per se, as they can, as previously mentioned, increase the profits of companies. However, it is how they can be used which is potentially problematic, potentially scathing liability for harms. Companies may be committing harms against their employees, such as low wages, poor working conditions, which may jeopardize employee health, and violating environmental laws. For instance, in the 2013 Dhaka tragedy in Bangladesh, in which five garment factories collapsed, it was found that the producers had bribed officials to approve of unsafe buildings to keep the cost of production low.28 Furthermore, the labour was paid low wages, worked long hours, and assigned to do low skilled tasks which ensured they were easy to replace.29 However, MNCs in this instance may fall back on contractual outsourcing relationships in order to protect and distance themselves from liability in jurisdictions with looser regulations, thus potentially less accountability.30
The law is unable to properly hold MNCs accountable for these negative externalities due to jurisdictional issues and the difficulty of establishing enough proximity between parent and subsidiary companies, but the company law principle of the corporate veil is also problematic in holding MNCs accountable.31 The corporate veil is the idea that the company is separate legal entity from its shareholders and owners.32 Even in cases where a company is run by a sole owner who owns all the shares, that person and the company are separate legal personalities.33 Thus, neither the owners nor the shareholders can be held liable for all of the company’s debts or wrongdoings.34 Previously, the case of Adams established that unless a parent company expressly agrees to take on the liability of the subsidiary, the corporate veil will not be pierced.35 Additionally, the case of Prest articulated that the corporate veil may be pierced if the defendant is using it to escape an existing obligation.36 However, veil piercing can only be done to strip the defendant of the advantage gained from the veil and is only used as a last resort.37 Cumulatively, this means that MNCs who set up their corporate network to evade future liabilities are legally permitted to hide behind the veil.38 Therefore, the above judgements have made it difficult to hold MNCs accountable for the future liabilities that might arise from their activities. The ability for companies to effectively distance themselves from misconduct creates an obstacle for workers trying to access justice for harms committed against them in the workplace, such as low wages and poor working conditions, as it makes it difficult and more complex to establish liability.
Is tort law the answer?
Since then, the law established that parent companies can owe a duty of care to the employees of its subsidiary, but jurisdictional issues can impede claims.39 Firstly, where the subsidiary company is located in a developing nation (the host country) and the parent company is located in a developed country, there are issues around where to pursue the action.40 Courts in the developing country do not have jurisdiction over the parent company’s assets, so plaintiffs are required to sue the parent multinational in their own jurisdiction.41 Generally, MNCs will push for the case to be heard in the host country where the corporation has a greater chance of succeeding due to less strict legal rules and lower compensation for claimants if they do win their case.42 Through the doctrine of forums non conveniens, defendant MNCs can delay the court proceedings by arguing that it is more appropriate to hear the case where the harm was caused, in the host country.43 Even if such an argument fails, the corporation can settle the claim out of court for a moderate sum because plaintiffs are eager to settle after awaiting compensation for years.44 Nevertheless, Article 4 of the Brussels I Recast Regulation45 and the decision in Owusu v Jackson prevents EU courts from delaying claims due to a forums argument in cases brought against EU based corporations (including those based in the UK). 46 However, there are other difficulties in protecting employees of subsidiaries, which we will come onto to look at next.
In recent years, tort law has been used to hold MNCs liable for their behaviour. However, when attempting to show that parent companies owe a duty of care towards employees of the subsidiary, it can be difficult to establish a proximate relationship between the parent and subsidiary.47 Where there is sufficient integration between the two, proximity will be established.48 Nonetheless, the link of proximity is easily broken if the subsidiary has sufficiently independent management from the Parent MNC, who may not manage the employees of the subsidiary at all.49 Recently, Vedanta showed that it is possible to rely on a company’s soft law documentation to establish a proximate relationship between a subsidiary and the parent.50 Therefore, it seems that recent legal developments have made it easier to hold MNCs accountable under tort law 51 and proceedings can no longer be delayed under forum non conveniens in the UK.52 Even so, this is not enough to consistently hold corporations accountable, since parent companies can appoint independent management to their subsidiaries to distance themselves from the activities of the subsidiary, adding another legal loophole law which allows MNCs to deflect liability.53
A cat and mouse chase: fall back options for multinational corporations
Finally, MNCs can slip the knot because they can engage in outsourcing to avoid liability for harms committed by their suppliers.54 Traditionally, it was believed that only low skilled labour could be outsourced because outsourcing came with higher transaction costs and risks of technological theft.55 However, large multinationals are effective at minimising these costs and stabilising their foreign environments by ensuring their production costs are kept low in foreign environments despite risk of political shifts, environment shifts, and other disruptions to their commercial activity.56 Thus, they maintain high levels of control over their suppliers and essentially act as employers of those working for their suppliers.57 Furthermore, they are able to fragment their intellectual property and technology in such a way so that they are not exposing themselves to the risk of theft. 58 Thus, they can outsource highly skilled labour as well!59 It is unclear whether MNCs owe a duty of care to those who are employed by their suppliers, where a proximate relationship can be found.60 Thus, despite legal developments, MNCs can effectively fall back on outsourcing relationships in order to sidestep liability.61 Furthermore, although soft law agreements like the Bangladesh Accord and the United Nation Global Compact are helpful, these are voluntary initiatives which are not externally monitored, so corporations do not have to sign up to them, and if they do, their compliance is not monitored.62 Thus, they are not effective methods of holding large corporations accountable in international settings.63
Issues with the Company Act 2006
In the UK, the heart of the problem is that company law gives directors a wide discretion in the choices they make, as long as they maximise profit.64 Under section 172 of the Companies Act 2006, directors of companies are required to act in a way that they think will promote the success of the company, for the benefit of its members as a whole. In trying to benefit the shareholders of the company, the directors can have regard to other matters, such as the likely long term consequences of their decisions, the company’s employees, suppliers, customers and others, as well as the community and the environment, reputation of high standards, and the need to act fairly between members of the company.65 However, where there is a conflict between the interests of the company’s shareholders and the interests of any other stakeholder, the shareholders’ interests triumph due to the shareholder focused approach in companies.66 Furthermore, only shareholders can legally hold directors accountable for breaching the section 172, under company law principles.67 Thus, on a practical level, it is very difficult to use company law to protect the interests of employees, the community and other stakeholders who are impacted by exploitative corporate activities.68 Ultimately, this proves that there are issues of access to justice when employees try to hold corporations accountable.
Whilst the 2018 Corporate Governance Code (CGC) makes a provision for workers to be represented in company boardrooms, in the form of worker directors sitting on the board, this is generally unhelpful for the plight of workers.69 Firstly, the Code operates on a comply or explain basis so companies can either comply with the code or explain why they refuse to comply.70 Additionally, worker directors are not elected by the workforce, they are selected by the company’s management who tends to select an existing non-executive director to ‘pretend to care about workers’ interests.’71 Additionally, worker directors, even if they do wish to look out for the interests of labour, are still subject to section 172 of the Companies Act.72 Thus, when faced with a conflict of interest between benefiting the company as a whole versus the interests of employees, they will also prioritise the success of the company.73 Given that trade unions’ importance is declining thus less of a unified advocacy for employees’ rights, this leaves little support for workers if this conflicts with the company creating a profit. If companies do not care about workers’ rights, it is hard to encourage workers to think about them and stand up for them. Even if the law itself was not an obstacle for workers, and that workers were aware of their rights and how to stand up for them, it may be difficult for workers to pay for legal representation compared to multinational corporations, who have expertise in-house legal teams, again illustrating an inherent power imbalance in terms of access to justice.
Conclusion
Overall, company law principles are not designed to look after the interests of labour who are simply one of the many cogs in the large corporate machine. Additionally, there has been a problematic decline in trade union strength and size, which leaves fewer avenues to support workers’ interests in corporate settings. However, through tort law and the Corporate Governance Code, there have been developments which are paving the way for greater labour protection. Due to the power imbalances between corporations and those they employ, both outside and inside of courtrooms, it is valuable to celebrate the success of tort law in this area, recognise the support trade unions can provide, and the changing corporate culture brought about by the CGC.
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Note: If you are an LLB Law student at the University and interested in company law, there is an opportunity to take this module during your studies, as this module is offered in the third year and led by Professor Lorraine Talbot.
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References
1–4 Lorraine Talbot, Critical Company Law (2nd edition, Routledge 2016).
5 Found on the following guide by SOAS https://www.soas.ac.uk/cedep-demos/000_P538_MSA_K3736-Demo/unit1/page_16.htm
6 Thomas Helbling, ‘Externalities: Prices Do Not Capture All Costs’ (International Monetary Fund, 24 February 2020) <https://www.imf.org/external/pubs/ft/fandd/basics/external.htm> accessed 16 March 2022
7 Talbot (n 1).
8-20 Ibid.
21 Douglas Hay and Paul Craven, Masters, Servants and Magistrates in Britain and the Empire, 1562-1955 (University of North Carolina Press 2004).
22 Ibid.
23 Charlotte Villiers, ‘Corporate Governance, Employee Voice, and the Interests of Employees: The Broken Promise of a World Leading Package of Reforms’ (2021) 50 ILJ 159.
24-25 Ibid.
26 Talbot (n 1).
27-32 Ibid.
33 Salomon v A Salomon & Co Ltd (1897) AC 52.
34 Ibid.
35Adams v Cape Industries [1990] ch. 433, BCC 786.
36Prest v Petrodel Resources Ltd [2013] BCC 571. ]
37 Ibid.
38 Ibid.
39 Talbot (n 1).
40-43 Ibid.
44 Ngcobo & Ors v Thor Chemicals Holdings Ltd & Desmond Cowley Times Law Report dated November 10th 1995.
45 Talbot (n 1).
46Owusu v Jackson and Others C-281/02 [2005] IL Pr. 25.
47Caparo v Dickman [1992] 2 AC 605.
48Chandler v Cape Plc [2012] EWCA Civ 525.
49AAA & Ors v Unilever Plc & Anor [2018] EWCA Civ 1532.
50Vedanta PLC and another v Lungowe and Others [2019] UKSC 20.
51 Caparo (n 47).
52 Owusu (n 46).
53 Unilever (n 49).
54-64 Talbot (n 1).
65 Companies Act 2006, section 172.
66-68 Talbot (n 1).
69 Villiers (n 23).
70-73 Ibid.