Corporate governance and the global social void.

• Author: Tavis, Lee A.

ABSTRACT

This Article argues that the components of globalization--economic integration, democratization, and global governance networks--are changing the nature of corporate governance and the prospects for peace. Multinational enterprises are the instruments of economic integration. As such, multinationals as a group deserve credit for the positive productivity-related wealth effects of the process. As the implementing institutions, these enterprises are also inextricably related to the inequality--the social void--resulting from globalization that threatens peace.

Hyper competition in the global product markets and the demands of the financial markets determine, to a large extent, the activities of the multinational. Alternatively, there is an evolving opportunity for management to participate in a socially positive way with global governance networks that are gradually assuming the regulatory role from national governments. Within these market and governance constraints, individual firms have an opportunity to mitigate the negative pressures on their various constituencies, thus contributing to development and the prospect for peace. The Article includes a model for balancing the productive, social, and environmental role of the enterprise.

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The dominant forces shaping both corporate governance and peace in today's world are those associated with globalization. Prospects for peace and the potential role for corporations in that milieu are a function of three components of globalization--economic integration, democratization, and global governance networks. These forces have led to major, technologically-enhanced advancements in productivity across the world and provided new opportunities for people in developing as well as developed countries. At the same time, the process has contributed to the massive global social void of inequality and insecurity.

Corporate governance is framed by the changing markets and regulatory mechanisms associated with globalization. The increasing efficiency of product and financial markets presses enterprise management against the regulatory representation of social and environmental needs. The regulatory power of the nation-state, particularly in developing countries, is eroding while a loose web of global governance networks is evolving. Multinational enterprises are involved with many of the global governance networks and, increasingly, are the target of others. The balance of globalization pressures and the activities of multinational firms will encourage more peace or greater conflict in our world.

This Article will trace the connectors in this process--the linkage among global markets, global governance, and the prospects for peace, with multinational enterprise management in the middle. Part I considers the global trends of the twenty-first century--the global integration of markets, a new wave of democracy, and the evolving transfer of regulatory control from the nation-state to global governance networks. Part II raises the issue of the global social disconnect associated with globalization. Part III analyzes how these trends are affecting corporate governance: the external constraints imposed by the global system as well as the internal direction provided by corporate boards and management, and a model for analyzing the economic, social, and environmental tradeoffs. Part IV focuses on the ultimate goal of peace, how its prospects are affected by globalization, and the role of the multinational enterprise in that process.

1. GLOBALIZATION COMPONENTS

   1. Globalization Drivers

      Globalization is a series of international integrating factors that have swept the world since the Second World War. Led by economic integration, political and cultural globalization are extensive. This integration, unparalleled in history, is driven by dramatic technological advancement in

      three interrelated areas: information, communications, and transportation.

      Information

      The technology of the storage, access, and transmission of information is nothing short of astounding. The power of a computer chip, the foundation of this technology, doubles every eighteen to twenty-four months, without any increase in cost. (1) The cost of a megabit of storage has fallen from a 1970 cost of $5,257 to $0.17 in 1999. (2)

      Communications

      Technology has been increasing the speed, quality, and reliability of communication at a decreasing cost since the introduction of the first telegraph in 1837. A doubling of communications power every six months is predicted. (3)

      Transportation

      Dependability, quality, and cost of material transport, has fundamentally changed. "Intelligent Transportation Systems" incorporate information and communication technology with sensing devices to control the transport of components and products. (4) Global air transport has improved dramatically, especially in terms of speed and price.

      These developments tie people and markets together across national boundaries in organic networks with interrelationships that are much tighter and deeper than those of historic trade regimes and empires. Citizens from warring countries visit with each other on Internet chat rooms. People know what is happening in the far corners of the world. Business enterprises accumulate information about product availability and quality, as well as production costs and conditions, simultaneously in many locations. In this kind of an electronically enhanced, information-integrated world, national governments have found cultural, political, and economic isolation to be impossible. The most measurable results of these technologies are in economics--the integration of national financial, service, and product markets.

   2. Economic Integration

      Financial markets across the world are tightly integrated as a result of governmental deregulation as well as technological advancement. These same factors have energized the integration of product markets at a slower but sure pace. Multinational firms--enterprises and financial institutions--are implementing this integration.

      Powered by the competitive drive of financial institutions to expand worldwide, financial markets are now virtually unbounded. As Longworth puts it, "[t]he global economy is powered by global financial markets, spinning nearly $2 trillion a day around the world in a blinding flow of electronic cash." (5) Bond yields are based upon the London Inter-Bank Offer Rate. Money center banks are all international lenders. In the integration process, these markets have become remarkably efficient on an international basis.

      The best measure of integration in the product markets is the relationship between national production and international trade, measuring the amount of global output traded among countries. Between 1960 and 1990, Krugman estimated that for industrial countries, trade in goods and services as a share of production--measured by Gross Domestic Product--rose from 12.5 percent to 18.6 percent--an increase of almost fifty percent. (6) When the data are adjusted to include services, trade's share of output grows to about eighty percent. (7)

      An integrating factor of economic globalization is the separation of the production process over several sites. Developments in production technology have allowed the geographic decoupling of the production process in which parts and components are produced in one location, assembled in another, and offered for sale in a third. When these parts and components cross national boundaries, they enter the trade statistics. When measured as "vertical integration, the parts and components have increased to 35 percent of trade and grown by roughly 115 percent compared to the overall growth of trade estimated at 80 percent." (8)

      In the process of economic integration, the key enabling factor for both product and financial market integration has been the decision of national governments to open their markets for foreign competition and the privatization of state-owned enterprises as a means of competing in the global marketplace. (9) From economies that relied basically on markets for the allocation of resources to the implosion of the command economies of the former Soviet Union, all have turned to the market in a greater degree as the means of competing in the world economy. While the decisions to open markets are complex and unique to each country and the degree of openness covers a vast spectrum from Chile to Russia, virtually all countries are more market oriented now than a decade ago.

      Economic globalization has surely not exhausted the possibilities. National borders still matter. For example, Toronto's trade with Vancouver is ten times more than its trade with Seattle. (10) With the technological drivers in place, the economic globalization process will continue.

      Multinational firms form the institutional structure through which most of the global economic integration takes place. Financial institutions provide the core of national and international financial services. The commercial, investment, and trust banking functions are central to the operation of the international exchange, credit, bond, and national equity markets. Multinational enterprises--transnational enterprises and multinational corporations--are production networks that spread across the developed and developing world.

      The opening of markets, so important to international trade, has been matched by deregulation and laws creating a more favorable foreign direct investment climate. From 1991 through 1999, ninety-four percent of the 1,035 changes in national laws were directed toward more favorable climates. (11) Bilateral investment treaties increased from 181 in 1980 to 1,856 by the end of 1999. (12)

      The flow of foreign direct investment (FDI) reflects these new, more open, regulatory regimes. FDI inflows as a percentage of global gross domestic capital formation have grown from two percent in 1979 to an impressive fourteen percent in...