HEC Paris Leaders of Tomorrow Series

Acting Together – The Role of Regulation

When India wanted companies to do more in terms of Corporate Social Responsibility (CSR), it acted decisively, passing a law requiring them to contribute 2% of pre-tax profits to social causes.

It was the archetypal command-and-control approach by a state. Evasion and even corruption, however, have led to mixed results. According to KPMG, 37 of the largest 100 companies managed to avoid paying this tax in 2017.

France is trying an even more ambitious approach, with the Notat-Sénard report on transforming the corporate purpose of companies. One of its aims is to modify corporate law to its very roots and ensure that profit and maximizing shareholder value are no longer an organization’s unique goal. All companies would be enticed to consider social and environmental objectives in their corporate strategy.

“Major corporations are now seen differently by governments and by people,” says David Restrepo Amariles, Assistant Professor of Law at HEC Paris. “These corporations now have not only to pursue a social agenda but to show it is an integral part of their DNA.”

For Professor Restrepo Amariles, addressing these issues through national laws is a limited approach. In a globalized world, corporations can escape burdensome regulation simply by moving their operations to another jurisdiction.

“I think that the approach of focusing on the corporation alone is too limited. We need to focus more on the flows – contractual flows, supply chains, the flows of services and labor,” he states.

Regulating the behavior of multinational businesses is a major challenge for the effectiveness of the Paris agreement. The UN-brokered deal is an ambitious attempt to tackle humanity’s biggest challenge: reducing carbon emissions to keep global warming below 2 degrees centigrade. However, the Paris agreement is an inter-state legal instrument, and it is therefore not binding for corporations.

Moreover, states are expected to produce national plans to reduce carbon emissions. However, this “methodological nationalism”, as Professor Restrepo Amariles puts it, is insufficient to address truly global issues. It will inevitably lead to some states submitting very ambitious plans, and others not submitting any plans at all.

It will create a market of national legal systems in relation to carbon emissions,” he says, with some states choosing to ignore polluters in return for the economic benefits. The question now is what will companies choose to do.

“There are jurisdictional limitations on the scope of state regulation. Corporations don’t like to operate in a legal vacuum, so they end up issuing their own rules.” Professor David Restrepo Amariles

THE CO-REGULATORY MODEL

Companies that operate in complex global environments, run increasing risks of being drawn into legal battles over their social and environmental impact.

In 2003, Nike was sued by a Californian activist, Marc Kasky, who said the company had falsely claimed it did not use sweatshop labor. Kasky used state laws against false advertising to challenge what he saw as global misconduct. The case was settled with a $1.5m payment to labor organizations monitoring factory conditions worldwide.

Since then monitoring and reporting, often under voluntary initiatives, has become the norm. The EU has guidelines on non-financial reporting covering environmental, social and ethical issues, while the UN has its Global Compact and the OECD has its own guidelines.

In addition, companies are increasingly adopting legal indicators and benchmarks to assess their performance in terms of human rights and environmental responsibility, often as a result of pressure from external indicators such as the CSR Hub or Corporate Human Rights Benchmarks.

“These are by no means command-and-control devices,” states Professor Restrepo Amariles. “There is a multiplication of these international indicators and guidelines, but nobody has the authority to enforce them directly.”

These measures, however, do expose corporations to public scrutiny and oblige them to carefully monitor their subsidiaries and partners worldwide to maintain their good standing, and avoid any potential reputational risks. They are also increasingly used in state regulation, contractual agreements and business associations as instruments to supervise and enforce CSR commitments.

For Professor Restrepo Amariles, all of these different approaches combine in an emerging co-regulatory model, which bring together states, transnational bodies and industry organizations.

“We no longer think of the state as being only a sovereign body that imposes its rules within its own territory. From a global perspective, the state is also a strategic actor in the arena of regulation,” he adds. “It has to think strategically about how and with who it should cooperate to foster and impose its own regulatory standards in a crowded global playing field.”

The major challenge now is who can succeed where states alone have so far failed, and help coordinate the production of common, worldwide standards for corporate social responsibility.

“Individual nations need to think with a wider scope about how they can regulate the behavior of corporations, not only in their own jurisdiction, but globally.” Professor David Restrepo Amariles


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HEC Paris specializes in education and research in management sciences. As a leading academic institution in Europe and worldwide, HEC Paris offers a complete and unique range of education programs for students and executive education programs for leaders.