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Executive Perspectives

EXECUTIVE PERSPECTIVE: A view from Europe on corporate accountability

Caroline Kaeb

03 Mar 2014

It is no exaggeration to say that, in one way or another, all multinational corporations (MNCs) are struggling to make sense out of the patchwork of laws and regulations among the various countries in which they operate. The conduct of foreign subsidiaries and vendors is a particularly thorny issue, and one on which Europe and North America are sharply divided.

While the Europeans defy traditional ownership structures and recognize an enterprise-wide concept of responsibility, the North American attitude confirms the status quo, where a parent company assumes liability for its own conduct and goes no further. These contrasting approaches are exemplified in corporate responses to the Rana Plaza tragedy: major European retailers took unprecedented legal responsibility for the safety of their contracted supplier factories overseas, while their North American counterparts took a more traditional “soft law” approach to self regulation, by simply making a voluntary commitment, refusing to source from noncompliant supplier factories.

As companies seek to manage the sometimes opaque legal risks of global commerce, they face an added wrinkle: the public increasingly expects companies to go above and beyond regulations to demonstrate that they are being good corporate citizens. Raised expectations with regard to corporate social responsibility (CSR) have deep implications that extend beyond legal departments, into strategy and operations. Therefore, global executives must take steps now to adopt a global mind-set on regulation and understand the role that CSR strategies can play in safeguarding their company’s reputation and addressing public concerns that fall beyond the letter of the law.

Those who succeed in both adhering to laws and conforming to society’s heightened expectations will better distinguish themselves from competitors, build a strong consumer brand, and bolster the resilience of their income streams in the global economy.

Mind the Accountability Gap

When it comes to differences in corporate thinking between North America and Europe, the roots run deep—the dissonance is systemic and engrained in the DNA of their respective legal systems, societal norms, and history.

North American firms hold fast to traditional corporate philosophy that, however tragic the situation in Bangladesh, legal and financial responsibility for ensuring safety standards lies primarily with the direct owners of local supplier factories. Though many subtleties exist, the decisive difference is that they assume no direct legal responsibility for the actions of their contracted suppliers. This traditional corporate thinking is in line with the current state of the law, specifically the doctrine of “corporate separateness,” which considers the different entities of multinational corporate groups as legally separate in terms of their liabilities and responsibilities.

In contrast, many European countries have a long tradition of corporate models and governance structures that are more attuned to the needs of stakeholders, including workers and society in general. Further, the recent rise of the “enterprise entity” theory in European circles has reinforced corporations’ responsibilities to their stakeholders. Under that doctrine, which was first employed by the European Court in an antitrust context, MNCs are treated as economically integrated enterprises that comprise a complex, worldwide network of subsidiaries, affiliate entities, and business relationships. The European reaction to the Rana Plaza tragedy closely reflects this doctrine—and the North American reaction very much sticks to its corporate separatist roots.

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