Outsourcing Corporate Accountability

• Publication year: 2021

OUTSOURCING CORPORATE ACCOUNTABILITY

Kishanthi Parella(fn*)

Abstract: This Article addresses the problem of preventing human rights violations abroad that result from the globalization of business. It specifically explores the challenge of improving labor standards in global value chains. The modern business has changed dramatically and has "gone global" in order to court foreign markets and secure resources, including labor. Familiar household names, such as Nike and Apple, have "outsourced" many of their functions to suppliers overseas. As multinational buyers, they dominate one end of the global value chain. At the opposite end of the value chain are the local managers and owners of the factories and workhouses where tablets are assembled, running shoes are made, and gowns are sown. These facilities are often the sites of serious human rights violations, such as forced labor and child labor.

Some actors have attempted to rein in transnational corporate misconduct through litigation in domestic courts regarding the corporation's actions abroad. However, after Kiobel v. Royal Dutch Petroleum, it is unclear how successful such strategies will prove in the future. This Article takes a different approach and focuses on preventing these human rights violations by improving labor practices in global value chains. Unfortunately, current approaches focus on encouraging better due diligence regarding the behavior of their suppliers. These approaches rely on auditing, monitoring, and disclosures and have dominated international (UN's Protect, Respect, and Remedy Framework), national (Danish Act on Financial Statement), and sub-state (California's Transparency in Supply Chains Act of 2010) efforts to combat human rights violations. However, this Article explains that these and similar efforts will have limited effects because of the problem of misaligned incentives between buyers and suppliers in global value chains. Suppliers have different business profiles, interests, and constraints compared to their multinational buyers. Therefore, conventional drivers for better labor practices that rely on reputational risks and consumer boycotts will not work for suppliers. Instead, public actors and other stakeholders must identify incentives that are appropriate for suppliers. Second, they must also adopt a reflexive law governance approach in order to transmit these incentives effectively in global value chains. This Article concludes by offering examples of strategies that public actors should adopt in order to prevent another Foxconn or Rana Plaza tragedy.

INTRODUCTION ................................................................................ 749

I. THE AGE OF OUTSOURCING ................................................. 756

A. Rise of the Fragmented Firm .............................................. 756

1. Spatial Dispersion ......................................................... 759

2. Functional Specialization and Value Added ................. 762

3. Separation of Ownership and Control .......................... 764

B. The Tragedy at Foxconn ..................................................... 767

II. IDENTIFYING THE PROBLEM: TWO COMPETING TALES OF CAUSATION ........................................................... 769

A. Explaining Foxconn-The Buyer's Tale: Asymmetriesin Information ..................................................................... 770

1. Addressing the Agency-Cost Problem: Monitoring ..... 771

2. The Limits of Monitoring: Resistance and Tension Along the Value Chain ................................................. 774

B. Explaining Foxconn-The Supplier's Tale: Asymmetries in Rent and Risk ........................................... 779

1. Caught in the Middle: The Tension Between Corporate Social Responsibility Policies and Procurement Practices .................................................. 779

2. Addressing Asymmetries in Rent and Risk .................. 782

III. ADDRESSING THE PROBLEM: DIMENSIONS OF DECENTRALIZATION .............................................................. 784

A. Incentives Dimension: Designing Incentives for the Fragmented Firm ................................................................ 787

1. Sanctioning Audit Manipulation ................................... 787

2. Rewarding Compliance ................................................ 790

B. Governance Dimension: Transmitting Incentives in a Global Value Chain ............................................................ 791

1. The Limits of Command and Control Regulation ........ 791

2. The Limits of Network Coordination ........................... 793

3. Toward Reflexive Coordination ................................... 798

IV. GOVERNING AMIDST THE FRAGMENTS: A CHAIN SOLUTION TO A CHAIN PROBLEM ...................................... 802

A. Due Diligence Requirements Regarding Counter-Manipulation ...................................................................... 803

B. Disclosures Beyond the Audit: Changing Governance in Global Value Chains .......................................................... 805

C. Shifting From Unilateral to Bilateral CSR Strategies ........ 808

D. Summary ............................................................................ 815

CONCLUSION .................................................................................... 817

INTRODUCTION

The key problem for international business law in this new millennium is the effective regulation of the global, fragmented firm.(fn1) Globalization has enabled corporate entities to span continents and establish dominions previously reserved for kings and statesmen. But whereas rules of international law evolved to curb the excesses of these latter types of actors, there is today a lack of similar rules to contend with this century's new titans. This is the reason that many global firms operate in this unregulated space between national borders.

Although a variety of national laws and corporate policies may speak to environmental and labor standards that businesses should abide by, these businesses enjoy a multitude of options regarding the structure of their operations. Their functions-from product concept, development, manufacturing, sales, shipping, and customer service-can be distributed across a variety of actors and several continents so that no two functions occur in the same place. This freedom allows businesses to escape the dictates of national regulation in favor of a less regulated space. As a result, headlines are filled with stories of corporate wrongdoing, including the tragedies at Rana Plaza in Bangladesh and Foxconn in China. According to the U.N. Special Representative for Business and Human Rights John Ruggie,The root cause of the business and human rights predicament today lies in the governance gaps created by globalization -between the scope and impact of economic forces and actors, and the capacity of societies to manage their adverse consequences. These governance gaps provide the permissive environment for wrongful acts by companies of all kinds without adequate sanctioning or reparation.(fn2) As a result, public actors and other stakeholders around the world have been confounded as to how to respond when the causes and effects of such crises are separated by an ocean.

This Article argues that the solution to the "governance gap" is for stakeholders to adopt the very strategy at the root of the transnational governance challenge: outsource. The advantage of outsourcing for the business sector is that it allows companies to delegate and distribute roles among several actors in a manner that avoids duplication of efforts, capitalizes on the functional advantages of the actors, and adds value through a progression of steps. Firms like Nike and Apple chose to focus on a narrower set of core competencies that better reflected their specialized skills and the activities they believed would garner the most value. This outsourcing also made it more difficult for government actors to control giants like Nike and Apple because of geographic constraints, jurisdictional limitations, capacity, resources, and proximity. The solution, therefore, may be for government actors and other stakeholders to adopt the approach that businesses followed when faced with similar constraints: fragmentation according to functional specialization where the efforts of stakeholders are sequentially aligned in a series of value-adding activities.

The effective governance of transnational business activities requires that actors match the outsourced structure of the modern firm with an outsourced approach to regulating the fragmented firm. "Outsourced regulation" requires decentralization along two key dimensions: incentives and governance. The first dimension of decentralization relates to the model of the firm that stakeholders aim to regulate: unitary-actor model or fragmented-firm model. Decentralization along this dimension requires acknowledging that not all the actors in the global value chain are the same. In fact, these actors have different interests, business profiles, and constraints. Incentives for cooperation, therefore, must speak to this diversity in the value chain.(fn3)

However, designing incentives for all the actors in the value chain is not enough. Stakeholders must also have an effective way of transmitting those incentives...