The vast majority of organizations are ethically responsible, as well as are their employees, managers and shareholders. Worldwide, there are countless examples of ethically responsible companies. And this also applies to the – always depicted as – “bad guys in town”: the multinational enterprises (MNEs). For instance, PepsiCo is employing sustainable agricultural practices to sequester carbon, prevent soil damage, reduce water usage, and improve recycling. Kellogg’s is achieving the ambitious sustainable goal of using 100% reusable, recyclable, or compostable packaging by 2025. Moreover, up in the value chain, Kellogg’s trains and provides technical support to farmers, so as to preserve soil, species and biodiversity.
However, some pundits call for a “quasi-ontological” impossibility for MNEs to generate societal value, or more precisely a positive balance between societal value and societal costs. Such an impossibility is attributed to shareholders and their goal to maximize profits. By joining public markets, the “bad shareholders” – in the form of investment funds, global banks et similia – destroy the MNEs’ potential societal value. This idea is theoretically and factually wrong. First and foremost, if a company’s ethical values are “diluted by money,” it means that those values are not authentic, but just a strategic way to get support from the local community through some type of “x-washing”. Second, shareholders are quite heterogeneous and a company can choose to associate with the type of shareholder who best represents its values. For instance, a recent phenomenon is the one of activist shareholders, that is, stakeholders who become shareholders to propose ideas in the board of directors or at the annual shareholders’ meeting. Third, shareholders are about capital and capital is essential for companies to scale up and help governments address societal challenges: states alone are not capable of doing that, we know it.
A more general argument calling for the corporate social irresponsibility of MNEs is that their focus on profitability does not translate into societal welfare. For instance, some pundits point at the decoupling between stock market growth and GDP that happened after the 1980s, with a profit shift towards listed firms. But, if we want MNEs to contribute to society, we want them profitable and, as suggested by Hart and Zingales serving shareholders is not only compatible with sustainability, but make it profitable and possible. What we should avoid is statements like those appeared in a recent 2023 Point article published in the Journal of International Business Studies: “All business contributes to environmental crises because of its focus on profit.” This statement is wrong for several reasons. First, as also highlighted in the 2020 World Economic Forum Annual Meeting, some firms make profits from offering solutions that mitigate environmental crises. Put simply, profits and sustainability can co-exist. Second, markets reflect consumer choices, and when consumers reward environmentally responsible practices, as they increasingly do across the world, firms adapt. Third, profitability, size and generation of cash flows is correlated with the possibility to contribute to sustainability.
Another argument against MNEs is the so called “going global phenomenon,” with the idea that the further the MNEs go beyond their home country the less they care about the impact of their decisions. Put simply, MNEs that are respectable and sustainable in their home country, misbehave in foreign countries. Translated in the language of the actual debate: Western MNEs do bad things in non-Western economies. It cannot be denied that there are many examples of it. However, let’s answer this question: “are slavery, child labor, violence, bribery and corruption, among others, created by MNEs once they go there, or were those things already there?” Is an ethical solution for MNEs to exclude countries with those conditions from their business relationships and global value chain expansion strategies? This seems to me very egoistic in the sense that forcing MNEs not to even try to change things in those countries means leaving those countries to their destiny in terms of rights and welfare. A second issue to remark is that globalization, despite creating unemployment in some cases (i.e., in specific industries, in specific regions), has given developing and poor countries chances to access global value chains and improve the human conditions of their citizens. Globalization has allowed emerging economies to attract foreign capital and FDI, improve their technological and organizational capabilities, and start catching up with the advanced economies, which were instead the ones partially displaced by globalization. As regards this latter point, we see what is happening in the West with populist parties and nationalist movements calling for a resurgence of local jobs and the protection of middle class citizens.
The role of the government
A fundamental confusion in the policy discussion is on why MNEs should be held responsible for all the bad things in the world. It is governments that make the laws; it is governments that decide to invade countries and declare wars; it is governments that close their eyes in front of violence and misbehaviors, or that exclude Afghan women from UN meetings, and so on and so forth. Governments need to implement better policies and build better institutions, but the problem is that governments cannot agree between themselves about almost anything. Governments do not trust each other, and a moral hazard problem prevents them to cooperate. The example of the global corporate tax is emblematic, not to say embarrassing. A much better solution would be to zeroing corporate taxes as Nicolai Foss, Ram Mudambi and I proposed in an article published on the Journal of International Business Studies. This piece was provocative on purpose but a uniform corporate tax (where the unique possible equilibrium is zero) would allow MNEs to optimize global value chains, thus again creating more chances for emerging economies to join global value chains and enhance their welfare. By contrast, governments prefer to back and protect national MNEs by creating corporatism or crony capitalism that is the opposite of capitalism, as I proposed in two IREF opinion pieces with Nicolai Foss and Peter Klein, and with Ram Mudambi. The bad MNE is not the product of capitalism, but rather the product of bad capitalism, the one entrenched with politics.
Even assuming that MNEs are not able to self-regulate themselves, we need to reflect on the limits of current regulations of MNEs. MNEs are playing a game. The game is not capitalism, the game is the system of rules imposed by governments. So why should we blame MNEs? MNEs play a game that is not decided by themselves! If we are unsatisfied about the game, let’s reason about the mistakes made by governments, and avoid falling in moral and absurd arguments like the beauty of degrowth or that having fewer children would be the most effective way to save the planet.
Photo by Haithem Ferdi
