A Firm‐Driven Approach to Global Governance and Sustainability

• DOI: http://doi.org/10.1111/ablj.12046
• Date: 01 June 2015
• Author: Gerlinde Berger‐Walliser,Stephen Kim Park
• Published date: 01 June 2015

A Firm-Driven Approach to Global

Governance and Sustainability

Stephen Kim Park* and Gerlinde Berger-Walliser**

INTRODUCTION

Transnational business entities are at the core of the increasingly com-

plex and rapidly evolving governance of the global economy. In particu-

lar, the growth of multinational corporations (MNCs) has been

accompanied by an increasing need to address the effects of their activ-

ities on a comparably global scale. Negative externalities resulting from

cross-border commerce in areas as diverse as environmental degrada-

tion, international human rights, labor, anticorruption, and migration

pose daunting governance challenges to the markets and states in which

MNCs operate. Environmental degradation, in particular, poses one of

the most pressing and urgent problems in global governance.

1

Due to

the magnitude of its costs, the number of actors with conf‌licting short-

term interests, and the enormity of collective action problems, environ-

mental regulation has proven to be uniquely vexing. Environmental

*Assistant Professor of Business Law, University of Connecticut School of Business

**Assistant Professor of Business Law, University of Connecticut School of Business

Earlier versions of this article were presented at the 2013 ABLJ Invited Scholars Collo-

quium and the 2013 Annual Conference of the North Atlantic Regional Business Law

Association. We specifically thank Robert Bird, Marisa Pagnattaro, and Jamie Prenkert, as

well as the editorial staff of the American Business Law Journal.

1

See Justin Gillis, Panel’s Warning on Climate Risk: Worst Is Yet to Come, N.Y TIMES (Mar. 30,

2014), http://www.nytimes.com/2014/03/31/science/earth/panels-warning-on-climate-risk-

worst-is-yet-to-come.html (reporting on the latest report by the United Nations Intergov-

ernmental Panel on Climate Change (IPCC) that describes the profound and wide-scale

disruptions to all aspects of human activity due to climate change); see also IPCC, CLIMATE

CHANGE 2014: IMPACTS,ADAPTATION,AND VULNERABILITY (2014), available at http://www.ipcc.

ch/report/ar5/wg2.

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protection is hindered by collective action problems such as free riding

and the underallocation of resources to international public goods.

2

Domestic regulation imposed by governments is inherently limited in its

capacity to address global regulatory problems that transcend national

borders. Global responses through international treaties and multilateral

bodies are stymied by governance gaps caused by incomplete rules,

inconsistent enforcement, and inadequate coordination.

This article analyzes the emerging role of MNCs in global gover-

nance. In contrast to traditional state-centered regulation based on a

command-and-control relationship between government enforcement

authority and market actors, MNCs participate in alternate forms of

rulemaking in two distinct realms: informal, nonbinding standards and

principles of conduct promulgated by domestic regulators in consulta-

tion with each other and with MNCs and other nonstate actors, often

referred to as international “soft law”;

3

and, self-regulation by MNCs

through private rules and standards.

4

International soft law and private

regulation permit greater speed and f‌lexibility when determining the

optimal trade-offs between the private benef‌its of f‌irm-level autonomy

and the collective benef‌its of regulatory intervention. Their growing use

ref‌lects the ongoing efforts by MNCs to bridge the governance gaps left

by traditional state-centered regulation.

These public and private forms of rulemaking, which this article col-

lectively refers to as “sustainability rulemaking” in order to distinguish

them from traditional “hard law” created through government regula-

tion or international treaties, however, raise concerns of their own. Nor-

mative social values associated with corporate social responsibility (CSR)

2

Public goods are goods that are nonexcludable (i.e., a person cannot prevent others from

benef‌iting from such good) and usually nonrivalrous (i.e., a person’s consumption of such

good does not affect consumption by others). See WALTER NICHOLSON,MICROECONOMIC

THEORY 813–15 (6th ed. 1995); see also MANCUR OLSON,THE LOGIC OF COLLECTIVE ACTION:

PUBLIC GOODS AND THE THEORY OF GROUPS 14–16 (1971). Free riding occurs when individu-

als reap the benef‌its of a public good but refuse to pay for it, thereby ensuring that collec-

tive resources are underallocated to the creation or maintenance of such public good.

NICHOLSON,supra, at 567.

3

Soft law consists of rules, standards, principles, and norms articulated in the language of

law that are not legally binding but nonetheless are treated as having some legal authority.

See infra Part II.A.

4

“Private regulation” is def‌ined in this article as a voluntary regulatory system in which

private actors formulate rules without direct government intervention. See infra Part II.B.

256 Vol. 52 / American Business Law Journal

among f‌irm managers, executives, and shareholders often motivate

MNCs to participate in sustainability rulemaking. However, the internal-

ization of CSR-based cultural values is insuff‌icient itself. Regulatory

schemes based purely on soft law or self-regulation often fail due to the

predominance of the prof‌it-making motive over commitment to social

responsibility. Furthermore, the relative lack of public accountability and

transparency of sustainability rulemaking have led to questions about its

legitimacy.

5

A conundrum becomes evident: sustainability requires

MNCs to independently participate in the process of regulation, but

MNCs cannot be trusted to regulate themselves based on CSR or

voluntarism.

To address these concerns, this article outlines a regulatory frame-

work based on the concept of corporate-regulatory feedback loops

(CRFLs). CRFLs consist of feedback loops between MNCs, regulators,

and other governmental entities that enhance the visibility, identif‌ica-

tion, and internalization of social costs and potential collective gains of

sustainability practices and policies.

6

By expressly linking the monitor-

ing of corporate environmental impacts with their reporting and assess-

ment, CRFLs facilitate the incorporation of long-term regulatory

priorities into corporate strategy. By enhancing corporate awareness of

their environmental impacts, they enhance the legitimacy, accountability,

and effectiveness of sustainability rulemaking. This article describes how

CRFLs can help MNCs monitor their environmental impacts, facilitate

the communication of impacts to regulators and stakeholders, coordi-

nate with regulators and each other to assess their impacts, provide

feedback to MNCs, and enable MNCs to learn from feedback in order

to improve sustainability rulemaking. CRFLs are not intended to sup-

plant or replace state-based regulation. Rather, governments can use

CRFLs to shape MNCs’ participation in corporate rulemaking through

noncoercive means that directly tie the observation of adverse environ-

mental impacts to self-realized changes in corporate conduct. If MNCs

that participate in CRFLs prove resistant to this collaborative form of

5

The legitimacy gap caused by the growing prevalence of soft law and self-regulation in

global environmental governance is described later in this article. See infra Part III.A.

6

A feedback loop is a cycle that is comprised of information about the result of phenomena

that causally inf‌luence other phenomena within the cycle and perpetuates the phenomena

as a loop that feeds back into itself. See infra Part III.B.

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